UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 005-34249
LATTICE INCORPORATED
(Exact name of registrant as specified in
charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
22-2011859
(I.R.S. Employer
Identification No.)
7150 N. Park Drive, Suite 500, Pennsauken,
New Jersey 08109
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone Number: (856)
910-1166
Securities registered under Section 12(b)
of the Exchange Act: None.
Securities registered under Section 12(g)
of the Exchange Act: Common Stock,
$.01 par value
Check whether the issuer is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act Yes o No x
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes x No o
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common
stock held by non-affiliates, based on the closing price of such common stock as reported on the OTC Bulletin Board as of
June 30, 2014 was approximately $6,750,326.
As of March 31, 2015, the issuer had 53,879,348 outstanding
shares of Common Stock.
TABLE OF CONTENTS
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Page |
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PART I |
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Item 1. |
Description of Business |
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1 |
Item 1A |
Risk Factors |
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3 |
Item 1B |
Unresolved Staff Comments |
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8 |
Item 2. |
Reserved |
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8 |
Item 3. |
Legal Proceedings |
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8 |
Item 4. |
Reserved |
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8 |
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PART II |
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities |
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8 |
Item 6 |
Selected Financial Data |
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10 |
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
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11 |
Item 7A. |
Quantitative And Qualitative Disclosures About Market
Risk
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18 |
Item 8. |
Financial Statements and Supplementary Data |
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18 |
Item 9. |
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
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18 |
Item 9A |
Controls and Procedures |
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18 |
Item 9B. |
Other Information |
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18 |
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PART III |
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Item 10. |
Directors, Executive Officers, Promoters and Corporate Governance |
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19 |
Item 11. |
Executive Compensation |
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21 |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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22 |
Item 13. |
Certain Relationship and Related Transactions, and Director Independence |
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23 |
Item 14. |
Principal Accountant Fees and Services |
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23 |
Item 15. |
Exhibits |
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24 |
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SIGNATURES |
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28 |
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
ORGANIZATIONAL HISTORY
We were formed under the name Science Dynamics
Corporation, incorporated in the State of Delaware in May 1973 and began operations in July 1977. We have been developing and delivering
secure telecommunication solutions for over 30 years. We changed our name to Lattice Incorporated in February 2007. Lattice incorporated
is referred to herein as the “Company,” “we,” “us,” and “our”.
The Company derives revenue from three primary sources:
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1. |
Providing telecommunications services to correctional facilities and specialized service providers who provide telecommunication services within the industry. |
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2. |
Selling or licensing our proprietary technology. |
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3. |
Providing highly specialized engineering services to other technology companies.. |
During the second quarter
of 2013 we sold our Federal Government contracts and discontinued our Government Services business. This enabled management to
focus on our rapidly growing Communications Services business. Accordingly, the financial results for the Government Services operations
in 2013 are shown as income (loss) from discontinued operations. With the focus solely on the communications business, the company
has been able to grow revenues from $1.1 million in 2009 to approximately $9.0M in 2014.
We operate as a Communication
Services Company, directly providing telecom services to inmate facilities. We continue to organize our business segments based
on the nature of the services offered and end-user markets served.
Historically, our revenue from the telecom
services have been derived from wholesaling product and services to service providers providing telecom services to inmate facilities.
In the latter part of 2009 we expanded our offering to include direct services to end-user inmate facilities either providing directly
to inmate facilities or via a partnering arrangement with other service providers. This decision was made based on our insight
to the growth opportunities with the company’s current customer base and within the inmate telecommunications market.
Our new services model has enabled us to
direct our activities toward a market of over $1.5 billion per year in the United States alone, based on the size of the inmate
population in the United States and the telecommunications traffic derived by this population. Based upon successful testing of
our technology, we similarly are implementing our technology and services model in Canada, Europe, and Asia. We also are responding
to inquiries from international technology companies looking to implement our technology. We will continue to partner with
companies established in international markets to implement our technology and expand our technology footprint. With the recent
interest from international markets we have retained a consulting firm to assist the company in developing strategic plan to capitalize
on the international opportunity.
We completed installation
of our product in 2013 with Telus Canada that is being used in part to provide services to British Columbia Corrections. As part
of the installation, we opened a Canadian call center which began operations in the fourth quarter of 2013. The call center contributed
toward revenues in 2014 and we anticipate revenues from this source will increase during 2015 as we continue to work with Telus
and other service providers in the Canadian market. The Canadian call center also provides us with the ability to serve other international
markets and act as a backup facility for our U.S. based call center, in addition to its principal purpose of servicing Canadian
markets.
We currently operate
in 16 states where over 50,000 inmates are either using our service or being provided a service by other companies utilizing our
technology. We plan to continue our growth by expanding our direct services within the states we serve, expanding to other
states, continuing to offer our services to other providers on a wholesale basis, and continuing to sell our technology to strategic
partners both in the U.S. and internationally. Our technology is currently operating in Canada, U.K., Japan, Singapore and
the Caribbean. We plan on expanding our installations in these countries as well as continuing to pursue other partners with
the goal of expanding our global footprint. We currently have a number of projects we are pursuing internationally.
During the 4th
quarter of 2013, we acquired the assets of Innovisit LLC, a provider of video visitation technology to the corrections market.
Our acquisition was based, in part, upon our successful past usages of Innovisit’s technology and our expectation that the
acquisition will expand our product offerings. The acquisition was accretive to revenues and cash flows in 2014.
Building upon improving
financial conditions and opportunities for growth, we are also improving our capital base as well as our balance sheet. Our improvement
has been aided by improved income and opportunities to sustain growth in our core business. We divested our government business
in 2013 and continue to recapitalize so as to accelerate our growth with additional investments in product development, sales and
marketing.
Our Products and Services
ICON (Integrated Corrections Operations Network)
The system includes
a full suite of services and products available in modules, enabling service providers and correctional facilities to choose from
a number of services that best fits their needs. The technology includes modules for:
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· |
Products and Services management, this includes fully integrated video, kiosk, and inmate tablet based services. |
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· |
Customer Information Database. |
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Investigative Tool Sets. |
Nexus Call Control System
The Nexus Call Control System is built on
our proprietary BubbleLink software architecture. BubbleLink is a versatile and feature rich transaction processing platform that
is used to develop and enhance a variety of customizable communications applications. This open source platform is a combination
of integrated computer telephony hardware and software. The Nexus Call Control System is capable of handling thousands of call
transactions per hour and provides telecom service providers with effective tools to manage telephone calls. The Nexus Call Control
System can manage small to large facilities without sacrificing features or performance. Nexus provides technologically
advanced call control and management tools targeted at investigation and law enforcement in the inmate telephone control industry.
Nexus includes live monitoring, debit, video visitation, kiosk integration, and recording features. The Nexus system can be structured
to use pre-paid collect and pre-paid debit cards that support specialized tariffs and call timing. With pre-paid services, Nexus
provides complete control and security. Nexus call control systems are supported by an integrated array of administrative and investigative
programs that provide a management solution suite. All programs interact in real-time with Nexus calls and databases via an Ethernet
Local Area Network (LAN) or a Wide Area Network (WAN).
Wholesale Services
We provide transaction based services to
other service providers based on the feature set of the Nexus platform. Service providers utilize our services to provide telecommunication
services to facilities that require a secure call management solution. The features we offer vary based on the specific needs of
the service provider. With the scalability of the Nexus system we are able to provide services across the country without
requiring a large capital deployment for new facilities. This enables our customers to provide a unique solution with
little upfront capital investment. In addition, customers are able to deploy a reliable and industry proven platform to their customers
without having to focus on technology development.
Direct Services
Our Nexus platform allows us to provide
correctional facilities with a feature rich secure call control service that enables inmates to make phone calls while providing
the security and investigative features required in correctional facilities. In addition to telecommunications services the Nexus
based system provides enhanced capabilities to provide services such as video visitation, kiosk management, e-mail, and other advanced
inmate services not readily available through less advanced systems. Traditionally, feature rich systems, because of cost, were
only available to larger facilities. With the Nexus-based platform, because it is centrally located, we are able to provide a full
suite of features to smaller facilities, enabling us to provide services traditionally unavailable to this section of the market.
Our services provide correctional facilities with three unique advantages:
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1. |
Increased revenue as a result of a highly reliable system. |
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2. |
Operational efficiencies that ease the administrative burden on the correctional facility. |
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3. |
Superior investigative tools that also enable information to readily be shared with outside agencies. |
We continue to enhance our system and service
offerings based on our 35 years of industry experience and the unique requirements of our customers. In addition, we work with
other large communications providers to engineer new unique solutions that we are able to integrate back into our product and service
offering.
Government Regulation
Recently, the Federal Communication Commission
(the “FCC”) has been investigating certain of our competitors in connection with the rates charged for their services.
Although no final determination has yet been made by the FCC, it is possible that the FCC will take action to regulate the amount
that we and our competitors can charge for our services. If the FCC does choose to regulate our services, it could limit the amount
that we are able to charge for our services and our revenues could be reduced.
Employees
As of December 31, 2014, we had 23 full
time employees and no part time employees. We supplement full time employees with subcontractors and part time individuals,
consistent with workload requirements. None of our employees are covered by a collective bargaining agreement. We consider
relations with our employees to be satisfactory.
ITEM 1A. RISK FACTORS
There are numerous and varied risks, known
and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition
or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline
and investors could lose all or part of their investment.
We may not be able to continue as a going concern without
additional financing. If such financing is not available to us or is not available to us on acceptable terms, we may be forced
to cease operations.
Our current financial position does not
provide sufficient operating cash flow to support our activities and our business requires constant additional investment and adaptation.
For the year ended December 31, 2104, we had a net loss of approximately $1,802,000 and net cash used in operating activities
of approximately $859,000. In addition, we had a working capital deficiency of approximately $3,099,000 and an accumulated deficit
of $2,345,000 as of December 31, 2014. The foregoing raises substantial doubt about our ability to continue as a going concern.
Our current financial position does not
provide sufficient operating cash flow to support our activities and our business requires constant additional investment and adaptation.
Our operations of have been funded primarily
through sales of stock to private investors, debt financing, and exchange of common stock for services received by us. We cannot
be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds
by issuing equity securities, our shareholders may experience significant dilution. Any debt financing, if available, may involve
restrictive covenants that impact our ability to conduct business. If we are not able to raise additional capital when required
or on acceptable terms, we may have to significantly delay, scale back or discontinue the development of our Commercial Services
business or cease operations entirely.
We need to maintain current sources of funding and obtain
new sources of funding in order to continue our operations.
We currently do not have enough cash to
continue our operations without additional sources of funding. Our ability to continue operations is highly dependent on our; (i)
continued access to our credit lines with Action Capital and Cantone Asset Management, LLC, (ii) increasing cash flows generated
from operations, and (iii) ability to obtain alternative financing. In the event there is an unexpected downturn in our business
or we are unable to obtain additional financing, we would need to modify our debt agreements, and/or curtail operations. We cannot
give any assurance that we will be able to achieve our planned operating goals nor give any assurance of our ability to obtain
an adequate level of alternative financing. Moreover, any issuance of equity or equity-linked securities could result in significant
dilution to our existing shareholders.
We currently have a number of on-demand liabilities that
could be called at any time.
We currently have a significant amount of
on-demand liabilities outstanding comprised of principal balances on notes which remain outstanding beyond maturity dates and past-due
general unsecured payables. If any significant amount of such liabilities were called, we would not be able to repay them and we
would be in default. IF a sufficient number of liabilities were called concurrently, we could be forced to cease operations.
If we are not able to continue to innovate or if we fail
to adapt to changes in our industry, may not be able to increase or maintain market share, revenues or profitability.
The market for our products is characterized
by rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands.
Although we have developed new products and services in order to meet customer demand, new technologies and evolving business models
continue to develop at a fast pace and we may not be able to keep up with all of the changes. Several competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources
than we do. The changes and developments taking place in our industry may also require us to re-evaluate our business model and
adopt significant changes to our long-term strategies and business plan. If we are unable to successfully or profitably compete
with current and new competitors, programs and technologies, our business will be adversely affected, and we may not be able to
increase or maintain market share, revenues or profitability.
We rely upon third parties to host certain aspects of our
service and any disruption of or interference with our use of such third party services would impact our operations and our business
would be adversely impacted.
We make use of a number of services provided
by third parties, including distributed computing infrastructure platform for business operations, or what is commonly referred
to as a cloud computing service. We have architected our software and computer systems so as to utilize data processing, storage
capabilities and other services provided by such third parties. Given this, along with the fact that we cannot easily switch our
operations to other providers, any disruption of or interference with our use of current service providers would impact our operations
and our business would be adversely impacted.
Our reputation and relationships with members would be harmed
if our data were to be accessed by unauthorized persons.
We maintain personal data regarding users
of our services, including names and, in many cases, mailing addresses. With respect to billing data, such as credit card numbers,
we rely on licensed encryption and authentication technology to secure such information. We take measures to protect against unauthorized
intrusion into our data. If, despite these measures, we, or our payment processing services, experience any unauthorized intrusion
into our data, we could face legal claims, and our business could be adversely affected.
We may not be able to protect our intellectual property rights.
We rely on a combination of trademark,
fair trade practice, patent, copyright and trade secret protection laws, as well as confidentiality procedures and contractual
provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any
third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information.
Intellectual property protection may not
be sufficient and confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available
to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce
our contractual rights. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and
costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event
that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and
a diversion of our managerial and financial resources. We can provide no assurance that we would prevail in such litigation. In
addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors.
Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial
condition and results of operations.
Intellectual property claims against us could be costly and
result in the loss of significant rights related to, among other things, our Web site, technology, title selection processes and
marketing activities.
Trademark, copyright, patent and other
intellectual property rights are important to us and other companies. Our intellectual property rights extend to our technology,
business processes and the content. We use the intellectual property of third-parties in our products through contractual and other
rights. If we are unable to obtain sufficient rights, successfully defend our use, or develop non-infringing technology or otherwise
alter our business practices on a timely basis in response to claims against us for infringement, misappropriation, misuse or other
violation of third-party intellectual property rights, our business and competitive position may be adversely affected. Many companies
are devoting significant resources to developing patents that could potentially affect many aspects of our business. There are
numerous patents that broadly claim means and methods of conducting business. We have not searched all the patents relative to
our technology. Defending ourselves against intellectual property claims, whether they are with or without merit or are determined
in our favor, results in costly litigation and diversion of technical and management personnel. It also may result in our inability
to use our current technology. As a result of a dispute, we may have to develop non-infringing technology, enter into royalty or
licensing agreements, or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on
terms acceptable to us.
If we make any acquisitions, they may disrupt or have a negative
impact on our business.
We may make additional acquisitions in the
future. If we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with
our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect
expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described
above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
● |
the difficulty of integrating acquired products, services or operations; |
● |
the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
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the difficulty of incorporating acquired rights or products into our existing business; |
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difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; |
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difficulties in maintaining uniform standards, controls, procedures and policies; |
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the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; |
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the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers; |
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the effect of any government regulations which relate to the business acquired; and |
● |
potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely impaired
if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely affect our results of operations.
If the FCC puts regulation in place
to limit the amount that we can charge for our services, our revenues could be reduced.
Recently, the Federal Communication Commission
(the “FCC”) has been investigating certain of our competitors in connection with the rates charged for their services.
Although no final determination has yet been made by the FCC, it is possible that the FCC will take action to regulate the amount
that we and our competitors can charge for our services. If the FCC does choose to regulate our services, it could limit the amount
that we are able to charge for our services and our revenues could be reduced.
If we are not able to manage our growth, our business could
be adversely affected.
We are currently engaged in an effort to
grow our service by introducing new products and services and expanding the areas we conduct business. As we undertake all these
changes, if we are not able to manage the growing complexity of our business, including improving, refining or revising our systems
and operational practices, our business may be adversely affected.
The market price
of our common stock may be volatile, which could cause the value of your investment to decline.
Securities markets
worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some
of which are beyond our control, could affect the market price of our common stock:
| · | trading volumes; |
| · | our failure to achieve actual operating results that meet or exceed guidance that we may have provided
due to factors beyond our control, such as currency volatility; |
| · | future announcements concerning us or our competitors, including the announcement of acquisitions; |
| · | changes in government regulations or in the status of our regulatory approvals or licensure; |
| · | public perceptions of risks associated with our services or operations; |
| · | developments in our industry; and |
| · | general economic, market and political conditions and other factors that may be unrelated to our
operating performance or the operating performance of our competitors. |
Because we do not
intend to pay dividends on our common stock for the foreseeable future, investors will benefit from their investment in our common
stock only if our common stock appreciates in value.
We currently intend
to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends
on our common stock in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any
future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in
this offering have purchased their shares.
We may not be able to enhance our existing products to address
the needs of other markets.
The first step on realizing our business
development strategy requires us to enhance current products so they can meet the needs of other markets. If we are unable to do
this, we may not be able to increase our sales and further develop our business.
If we fail to maintain an effective system of internal control
over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result stockholders
could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common
stock.
In the past, we have had weaknesses in our internal control
over financial reporting relating to lack of executive officers or directors other than the Company’s Chief Financial
Officer with significant experience in accounting, auditing and the preparation of financial statements. Our Chief Executive Officer
and Chief Financial Officer believe that such weaknesses have been substantially remediated through, among other things, Richard
Stewart, who has an accounting background, being appointed to our Board of Directors.
In addition, we may in the future need to undertake various
actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing
and maintaining internal control can divert our management’s attention from other matters that are important to the operation
of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses
that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements
of Section 404 of the Sarbanes Oxley Act. If we identify material weaknesses in our internal control over financial reporting
or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial
reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness
of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by
the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional
financial and management resources.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We are a smaller reporting company as defined
by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 2. PROPERTIES.
We lease approximately 4,000 square feet of
office space in Pennsauken, NJ as our main office. We also lease approximately 2,000 square feet of space in Alabama, where we
mainly host the operations supporting our video conferencing product, under a sublet arrangement with the former principal owner
of Innovisit.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending legal
proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise
material to the financial condition of our business. We expect to resolve these and any similar suits within the ordinary course
of business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material
interest adverse to our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock is currently quoted on
the OTC Bulletin Board under the symbol “LTTC.” For the periods indicated, the following table sets forth the high
and low closing sales prices per share of common stock for the years ended December 31, 2014 and 2013 and the interim periods
through March 26, 2015. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may
not necessarily represent actual transactions.
Year Ended December 31, 2015 |
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High |
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Low |
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First Quarter ended March 31, 2015 (through March 26, 2014) |
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$ |
0.11 |
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$ |
0.06 |
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Year Ended December 31, 2014 |
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High |
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Low |
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First Quarter ended March 31, 2014 |
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$ |
0.23 |
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$ |
0.14 |
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Second Quarter ended June 30, 2014 |
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$ |
0.18 |
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$ |
0.11 |
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Third Quarter ended September 30, 2014 |
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$ |
0.12 |
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$ |
0.07 |
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Fourth Quarter ended December 31, 2014 |
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$ |
0.10 |
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$ |
0.06 |
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Year Ended December 31, 2013 |
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High |
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Low |
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First Quarter ended March 31, 2013 |
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$ |
0.10 |
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$ |
0.07 |
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Second Quarter ended June 30, 2013 |
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$ |
0.14 |
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$ |
0.07 |
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Third Quarter ended September 30, 2013 |
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$ |
0.13 |
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$ |
0.09 |
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Fourth Quarter ended December 31, 2013 |
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$ |
0.17 |
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|
$ |
0.10 |
|
The market price of our common stock, like
that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results,
announcements of technological innovations or new products, or other events or factors. In addition, our common stock is highly
illiquid, which could also result in significant fluctuations in our stock price. Our stock price may also be affected by broader
market trends unrelated to our performance.
HOLDERS
As of March 26, 2015, we had 53,879,348
outstanding shares of common stock held by approximately 125 stockholders of record. The transfer agent of our common stock is
Continental Stock Transfer and Trust Company.
DIVIDENDS
The Company has recorded dividends on 502,160
shares of 5% Series B Preferred Stock. In 2013, the Company recorded and accrued $25,108 of dividends payable. In 2014, the Company
recorded and accrued $25,108 of dividends payable. Dividends have not been declared and cannot be paid as long as the Company has
outstanding debt. The Company does not anticipate paying dividends on its common stock for the foreseeable future.
Equity Compensation Plan Information
The following table sets forth the information
indicated with respect to our compensation plans under which our common stock is authorized for issuance as of the year ended December
31, 2014.
Plan category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | | |
Weighted average exercise price of outstanding options, warrants and rights | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |
| |
(a) | | |
(b) | | |
(c) | |
Equity compensation plans approved by security holders* | |
| 16,516,000 | | |
$ | 0.10 | | |
| -0- | |
Equity compensation plans not approved by security holders | |
| 0 | | |
| 0 | | |
| 0 | |
Total | |
| | | |
| | | |
| | |
* Of the options listed here, 7,106,500
were issued under our equity compensation plan, subject to the approval of an increase in the shares authorized under the plan
by our shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
On January 14, 2014,
we issued 1,178,562 shares of our common stock to Barron Partners L.P. upon the exercise of conversion rights associated with 330,000
shares of Series A Preferred Stock owned by Barron Partners. The shares were issued pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
On March 18, 2014,
we issued 1,321,418 shares of our common stock to Barron Partners L.P. upon the exercise of conversion rights associated with 370,000
shares of Series A Preferred Stock owned by Barron Partners. The shares were issued pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
On May 30, 2014, we
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. We 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 at a price of $0.1333 per share.
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. Each $10,000 of note principal is convertible
into 75,000 common shares at an exercise price of $0.1333 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. The note was issued pursuant to the exemption from registration contained in Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public offering.
On August 28, 2014,
we issued 1,678,558 of our common stock to Barron Partners L.P. upon the exercise of conversion rights associated with 470,000
shares of Series A Preferred Stock owned by Barron Partners. The shares were issued pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
During the quarter
ended March 31, 2014, we issued 8,860,489 restricted shares of our common stock at a price of $0.12 per share in a series of private
placements for a gross financing amount of $1,063,259. Of such amount, we received cash proceeds of $796,441 and the cancellation
of $266,818 of liabilities. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
During 2014, we sold
500,000 shares of our common stock at a price of $0.12 per share in a private placement with an investor for a gross amount of
$60,000. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as
a transaction by an issuer not involving a public offering.
During 2014, we issued
1,000,000 restricted common shares of our common stock 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 was amortized ratably over the service period ending December
31, 2014. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as
a transaction by an issuer not involving a public offering.
During
the quarter ended March 31, 2014, the Company issued 500,000 shares to Icotech in exchange for a $60,000 cash installment on the
seller note payable in conjunction with the purchase of the Innovisit assets. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities
Act as a transaction by an issuer not involving a public offering.
During the quarter ended
December 31, 2014, Lattice entered into a consulting services agreement with Mr. Stewart and his affiliate, Blairsden Resources
LLC and Mr. Wurwarg and his affiliate, Roxen Advisors LLC. Messrs. Stewart and Wurwarg, newly appointed directors of Lattice Incorporated,
each received 1,000,000 restricted common shares as compensation for services rendered to Lattice over a twelve month period.
The stock was valued at $0.08 per share or a total of $160,000 under Generally Accepted Accounting Principles (GAAP) and is being
amortized ratably over the twelve month period ending November 30, 2015. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities
Act as a transaction by an issuer not involving a public offering.
During 2014, we issued
227,272 shares of our common stock to Paul Burgess, the company’s Chief Executive Officer, for an investment of $25,000 or
$0.11 per share. The shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities
Act as a transaction by an issuer not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting
company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this annual report contains
forward-looking statements. All statements other than statements of historical fact made in this annual report are forward looking.
In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking
statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results
may differ significantly from management's expectations.
The following discussion and analysis should
be read in conjunction with the consolidated financial statements, included herewith. This discussion should not be construed to
imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Business Overview:
Our target domestic market for our communication
services business is small to mid-sized correctional facilities. The company first launched its direct service business in the
state of Oklahoma. With a target market of 69 correctional facilities in Oklahoma the company finished 2014 with contracts in 35
of the targeted 69 facilities, or approximately 50% of the targeted facilities. During 2014 the company hired CMA (Communication
Media Advisors) to review its domestic business plan. As a result, we identified 8 additional markets in which the company would
be best positioned to replicate the successful market penetration of Oklahoma. In addition, we identified key products and services
that would enable the company to maximize revenue generation in each account. By the end of 2014, we gained certification in 6
of the 8 new states and anticipate receiving certification in the remaining two shortly. Heading into 2015, the company had repositioned
our sales and marketing efforts to focus primarily on these 8 key markets.
For the year ended December 31, 2014, revenues
from our business increased by 8% compared to the prior year period. Recurring revenue for call processing services accounted for
approximately 61% of total revenues. The two core components of our revenue, namely direct services and wholesale technology products,
collectively increased by 24%, while our wholesale services, which we began to wind down in 2014, decreased 54%. We will have only
nominal revenues from wholesale services in 2015.
In 2013 we introduced our next generation cloud
based technology platform ICON Integrated Corrections Operations Network. The first version of the system was released in the second
quarter of 2013, we upgraded the platform throughout 2014, and we anticipate subsequent releases next year. We also integrated
video visitation into the ICON platform in 2013 as a result of the Innovisit acquisition and saw a contribution to sales of approximately
$1.7 million in 2014. In 2015 we anticipate a number of product upgrades and the commercial release of our tablet technology. The
launch of the new product and the integration of our new call center with the ICON platform has enabled the company to provide
a full suite of services that have not been traditionally made available to small and mid-sized correctional facilities. As we
continue to add functionality to the ICON platform and enhance our service offering to customers, we have been able to increase
revenue opportunities. Currently our average revenue per inmate is over $800 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 as we continue to deploy a full suite of services across our installation base.
We have had success in introducing our products
to international markets. We currently have customers in U.K., Canada, Singapore, Japan, and Bermuda. The Canadian market is currently
our largest international market. We are currently working with 3 telecommunication providers including Bell Canada and Telus.
We have a number of partners in the international market that we are working with on opportunities in several additional markets
There are risk factors such as contracts being
cancelled or a drop in network usage that could cause a decline in our telecom services revenue. However, based on our current
operations, we do not anticipate any factors that would cause a disruption.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2014 COMPARED
TO THE YEAR ENDED DECEMBER 21, 2013
The
following tables set forth revenue, net loss, and certain expense items as a percentage of total revenue:
| |
For the Years Ending December 31, | |
| |
2014 | | |
2013 | |
Revenue | |
$ | 8,941,000 | | |
$ | 8,270,000 | |
| |
| | | |
| | |
Net loss | |
$ | (1,802,000 | ) | |
$ | (1,002,000 | ) |
| |
| | | |
| | |
Net loss per common share – Basic and Diluted | |
$ | (0.04 | ) | |
$ | (0.03 | ) |
| |
OPERATING EXPENSES | | |
PERCENT OF SALES | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Research & Development | |
$ | 886,000 | | |
| 659,000 | | |
| 9.9 | % | |
| 8.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Selling, General & Administrative | |
$ | 4,204,000 | | |
| 2,771,000 | | |
| 47.0 | % | |
| 33.5 | % |
REVENUES:
We break our revenue into two components; recurring
services and wholesaled technology products. Revenue for recurring services includes phone service revenue and other ancillary
revenue mainly comprised of deposit fees, voicemail and validation services revenue. Total revenues for the twelve months ended
December 31, 2014 increased by approximately $671,000, or 8.1%, to approximately $8,941,000, compared to approximately $8,270,000
for the twelve months ended December 31, 2013.
Recurring services:
Recurring services breaks down into
wholesaled services and direct services. Wholesaled service is where we provide our technology as a platform to be used by
another service provider to provide phone services to correctional facilities. Our wholesaled service revenue decreased to
$785,000 from $1,702,000 in 2013 due to the termination of service contracts during 2014 with a large Tier 1 telecom provider
in the industry as our focus shifted away from wholesale to direct services. Our direct phone service revenue is where we provide call provisioning and ancillary services direct to
correctional facilities which increased by 9.4% to $4,686,000 from $4,283,000 in 2013. The direct services increase is mainly
attributable to volume growth from an increase in the number of customer contracts where we provide direct telecom service
provisioning to end-user correctional facilities. Recurring revenues were $5,471,000, or 61% of total revenues, for the
year.
Wholesaled technology products:
Our technology product revenues, where we provide
wholesaled technology systems and software to other service providers, increased by 52%, to $3,470,000 from $2,284,000 in the
year ago period. The increase in wholesaled technology products was mainly due to the full year effect of the Innovisit acquisition,
which took place in November 2013.
GROSS PROFIT:
Gross profit for the twelve months ended December
31, 2014 was $3,605,000 compared to $2,809,000 in 2013. Gross margin, as a percentage of revenues, increased to 40.3% from 34.0%
for the same period in 2013. Gross margin as a percentage of revenues for recurring revenues was consistent with prior year
levels, with both being between 25% and 30%. The gross margin percentage on our wholesaled technology product revenues was consistent
with prior year levels, with both being between 60% and 65%. 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 products mainly resulting
from the full year effects of the Innovisit acquisition. The gross margin for wholesaled technology products 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 twelve months ended December 31, 2014, research and development expenses increased to $886,000, as compared to $659,000
for the prior year period. 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 year ended December 31, 2014,
SG&A expenses increased by $1,433,000, to $4,204,000 from $2,771,000 in the comparable prior year period. As a percentage
of revenues, SG&A was 47.0% for the year ended December 31, 2014 versus 33.5% in the comparable period a year ago. The increase
included; (i) the full year effects of operating expenses associated with the Innnovisit acquisition (which took place in November
2013) of approximately $650,000, (ii) non-recurring corporate expenses for marketing research and legal expenses totaling approximately
$300,000 and (iii) and an increase in non-cash share based compensation expenses of approximately $157,000 related to employee
option issuances. The remaining increase in SG&A was driven by investments in our selling and marketing infrastructure as
the Company continues to expand its foot print into new geographic markets.
AMORTIZATION & IMPAIRMENT:
Non-cash amortization expense for 2014 and
2013 related to intangible assets recognized in the purchase accounting of Innovisit acquired in November 2013 and intellectual
property rights acquired in 2011 amounted to $245,000 and $163,000, respectively. The increase in 2014 was attributable to the
full year effect on year on year comparisons of the Innovisit acquisition (which took place in November 2013).
INTEREST EXPENSE:
Interest expense increased to $619,000
for the year ended December 31, 2014, compared to $357,000 for the year ended December 31, 2013. Included in the current period
interest was approximately $330,000 of the amortized debt discount related to debt financings.
NET LOSS:
The Company’s net loss from continuing
operations for the year ended December 31, 2014 was $1,802,000 compared to a net loss of $1,020,000 for the year ended December
31, 2013. The increase in loss was mainly attributable to higher operating expenses as discussed above, partially offset by an
increase in gross profit contribution on higher wholesaled technology product revenues.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to
$256,000 at December 31, 2014 from $313,000 at December 31, 2013.
Net cash used by operating activities was $859,000
for the year ended December 31, 2014, compared to net cash provided by operating activities of $575,000 in 2013. The items
comprising net cash used in the current period included: a net loss of $764,000 (after adding back non-cash items totaling $1,038,000);
an increase in accounts receivable of $351,000, which is related to increase in technology product shipments; an increase in costs
in excess of billings and estimated gross profit of $449,000 on projects accounted for using the percentage of completion accounting
method; and an increase in other current assets of $25,000. Such amounts were partially offset by: a decrease in deferred revenue
of $37,000; a decrease in inventory of $8,000; and an increase of $715,000 in accrued liabilities and customer advances. The increase
in accrued liabilities and customer advances was mainly attributable to past due amounts under a wholesale agreement owed a large
Tier 1 telecom provider which had terminated during 2014. Management is currently in discussions to restructure this liability.
Net cash used in investing activities was $178,000
for the year ended December 31, 2014, compared to net cash used of $73,000 in 2013. The prior year included cash proceeds of $232,000
from the sale of our 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 need 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 and debt
and equity financings.
Net cash provided by financing activities was
$978,000 for the year ended December 31, 2014 compared to net cash used in financing activities of $221,000 in 2013. The $978,000
was comprised of cash proceeds of $2,356,000 from the issuance of common stock and notes, partially offset by cash paid for financing
fees of $155,000 and the repayment of debt totaling $1,224,000.
GOING CONCERN CONSIDERATIONS:
At December 31, 2014, our working capital deficiency
was $3,099,000 which compared to a working capital deficiency of $4,524,000 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 a large wholesale
arrangement with a large Tier 1 telecom provider had terminated during 2014. 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 product revenues derived in part from
the Innovist acquisition. As direct sites are added to our network, revenue and cash flow will increase accordingly.
The working capital deficiency and 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 is not, in aggregate, adequate to: (i) support our current working
capital requirements; (ii) support the interest costs and principal payments either due or coming due; and (iii) support the increased
capital requirements for equipment purchases supporting the growth planned in our telecommunications segment. Management has closed
a bridge financing of $500,000 during March 2015 as a part of current financing activities; however, the source of the additional
financing that will be needed 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 additional capital.
Financing activities 2014 and 2015:
During 2014,
we issued 8,860,489 restricted shares of our common stock at a price of $0.12 per share in a series of private placements for a
gross financing amount of $1,063,259. Of such amount, we received cash proceeds of $796,441 and the cancellation of $266,818 of
liabilities.
During 2014, we
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. We delivered a secured promissory convertible 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.
During 2014, we sold
500,000 shares of our common stock at a price of $0.12 per share in a private placement with an investor for a gross amount of
$60,000.
During March, 2015,
the Company issued a secured note (bridge financing) to an investor for $500,000 for which $422,000 of net proceeds were received.
The note is secured with accounts receivable related to service contracts. The net proceeds of $422,000 are to be used for working
capital purposes. In addition to the interest, we agreed to deliver 625,000 restricted common shares to the lender.
OFF-BALANCE SHEET ARRANGEMENTS:
We do not have any off balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, revenues, operating results, liquidity
or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:
Use Estimates
The preparation of these financial statements
in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis
for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates
and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under
the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment.
US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments,
revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment,
the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results
could differ from the estimates and assumptions used.
Basis of Financial Statement Presentation
At December 31, 2014, we had a working capital
deficiency of $3,099,000. During 2014, we had a loss from operations of $1,486,000 which included non-cash items totaling $1,010,000.
The non-cash items consisting of intangibles amortization, depreciation and share-based compensation expense. This working capital
deficit condition raises substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon management’s continuing and successful execution on its business plan to achieve profitability
and increased operating cash flows and the ability to obtain additional financing to support the working capital deficit, debt
coming due in the next twelve months and support the capital requirement of growing our business. The accompanying financial statements
do not include any adjustments that may result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements included
the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when all significant
contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product
sales is recognized when the goods are shipped and title passes to the customer.
Direct Call Provisioning 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.
Wholesaled technology:
We sell telephony systems with embedded proprietary software
to other service providers. We recognize revenue when the equipment is shipped to the customer.
Breakage:
In compliance with regulatory tariffs, we recognize as income
prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.
Prepaid Cards:
We also sell prepaid phone cards to end user facilities on a
wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user
facilities.
Software Maintenance:
We offer software maintenance and support contracts to customers
who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life
of the contract.
Revenues recognition for Construction contracts
Revenues from construction contracts are
included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion
accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project.
This method is used as management considers expended cost to be the best available measure of progress on these contracts, the
majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating
costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as
incurred.
Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result
in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to
contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can
be reliably estimated.
Costs and estimated earnings in excess of
billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings
had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In
accordance with the contract terms, the unbilled receivables at December 31, 2014 will be billed in 2015. Amounts are billed based
on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.
Fair Value Disclosures
Management believes that the carrying values
of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value
as a result of the short-term maturities of these instruments. As discussed in Note 1(m) of our financial statements, derivative
financial instruments are carried at fair value.
The carrying values of the Company’s
long term debts and capital lease obligations approximates their fair values based upon a comparison of the interest rates and
terms of such debt to the rates and terms of debt currently available to the Company
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are a smaller reporting
company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this
Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There are not and have
not been any disagreements between us and our accountants on any matter of accounting principles, practices or financial statement
disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation of the effectiveness of our
disclosure controls and procedures as of December 31, 2014 was made under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered
by this report for the reasons described under “Management’s Report on Internal Control over Financial Reporting”.
Disclosure controls and procedures are designed
to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules
and forms.
Management’s Report on Internal Control over Financial
Reporting
Our internal control over financial reporting
is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by
our board of directors to provide reasonable assurance regarding the reliability of our financial reporting and the preparation
of our financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable
detail accurately reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded
as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management;
and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this assessment and on
those criteria, the Company concluded that our internal control over financial reporting was not effective as of December 31, 2014
due to the presence of a material weakness exists in our internal controls.
The material weakness identified related
to the lack of executive officers or directors other than the in the Company’s Chief Financial Officer with significant
experience in accounting, auditing and the preparation of financial statements. This material weakness may affect management’s
ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements
in accordance with U.S. GAAP.
Changes in internal control
In March 2015, in order to remediate
that material weakness, the Board of Directors appointed Richard Stewart to the Audit Committee of the Board of Directors.
Mr. Stewart is a Certified Public Accountant and has an MBA in Finance and a BBA in Marketing and Finance from the University
of Michigan.
There were no changes in our internal control
over financial reporting during 2014 that materially affected or is reasonably likely to materially affect our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names
and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family
relationships among any of our Directors and Executive Officers.
Name |
|
Age |
|
Position |
Paul Burgess |
|
49 |
|
President, CEO and director |
Joe Noto |
|
55 |
|
CFO and secretary |
John Boyd |
|
74 |
|
Director |
Mark V. Rosenker |
|
68 |
|
Director |
Robert Wurwarg |
|
65 |
|
Director |
Richard Stewart |
|
71 |
|
Director |
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Paul Burgess, President, Chief Executive
Officer and Director. From March 1, 2003 until February 14, 2005, Mr. Burgess was our Chief Operating Officer. As of February
9, 2005, Mr. Burgess was appointed our President and Chief Executive Officer. On February 14, 2005, Mr. Burgess was appointed a
member of our Board of Directors. From January 2000 to December 2002, Mr. Burgess was President and Chief Financial Officer of
Plan B Communications. Prior to Plan B Communications, Mr. Burgess spent three years with MetroNet Communications, where he was
responsible for the development of MetroNet’s coast to coast intra and inter city networks. Mr. Burgess was also influential
in developing the operations of MetroNet during the company’s early growth stage. Prior to joining MetroNet, Mr. Burgess
was with ISM, a company subsequently acquired by IBM Global Services, where he was responsible for developing and deploying the
company’s distributed computing strategy.
Joe Noto, Chief Financial Officer
and Secretary. Mr. Noto joined Lattice in March 2005 as Vice President of Finance and served in that position until May
2005 when he accepted the position of Chief Financial Officer. Prior to joining the Company, from 2002 to 2005, Mr. Noto was VP
of Finance/Controller heading financial operations at Spectrotel Inc. (formerly Plan B Communications), a communications service
provider. From 2000 to 2002, Mr. Noto was the Finance Director at Pivotech Systems, a communications software start-up Company
backed by a leading venture capital firm, Optical Capital Group. Mr. Noto holds a B.A. degree from Rutgers College and is a Certified
Public Accountant of New Jersey and is a member of the American Institute of CPA’s and the New Jersey Society of CPA’s.
John Boyd, Director.
John Boyd, as part of his business advisory practice, Boyd Operating Alliances, provides strategic growth and profit
acceleration guidance for expansion stage businesses. Including 33 years at AT&T, Mr. Boyd’s experience spans
decades in the communications, technology, media, energy, and business services industries. He has been president/CEO of a
business process outsourcing provider to the telecommunications industry, president/CEO of an energy services company,
president of AT&T’s international computer business, and a senior adviser to CKX. Mr. Boyd also has served on
multiple advisory and corporate boards, including businesses in global wireless distribution, retail technology, and
media/entertainment. A graduate of Iona College, he holds a Masters degree from Pace University in Advanced Management and
certificates from Wharton in Advanced Marketing Management and Mergers and Acquisitions.
Mark V. Rosenker, Director. Mark
Rosenker was chairman and acting chairman of the National Transportation Safety Board (NTSB) from 2005-2009. He retired as a Major
General in the U.S. Air Force Reserve in December 2006 after 37 years of combined active and reserve service. During his Air Force
career, Mark served as Deputy Assistant to the President and Director of the White House Military Office, where he was responsible
for managing the military assets and personnel supporting the President and Vice President. Prior to his NTSB role,
Mark was Managing Director of the Washington Office of the United Network for Organ Sharing. Earlier, he served 23 years as Vice
President, Public Affairs for the Electronic Industries Association. His government service spans the Department of the Interior,
the Federal Trade Commission, and the Commodity Futures Trading Commission. Mark’s Air Force awards and decorations
include the Air Force Distinguished Service Medal with One Oak Leaf Cluster and the Legion of Merit. He is a former member of the
Board of Visitors to the Community College of the Air Force. In addition to graduating from the University of Maryland, Mark is
a graduate of the Air Command and Staff College and the Air War College.
Robert Wurwarg has been a director since
December 2014. Mr. Wurwarg is an attorney and business advisor with more than 35 years of experience in the tax and corporate
law aspects of a broad range of sophisticated business transactions including mergers, acquisitions, dispositions, restructurings,
joint ventures and other investments. Most recently, he was a senior tax principal in Deloitte & Touche LLP's Mergers and
Acquisitions Practice in New York. He was previously a tax partner at Dechert. Mr. Wurwarg received an LL.M in Taxation from New
York University's School of Law, a J.D. from the Georgetown University Law Center, and an M.A. from Johns Hopkins University's
Paul H. Nitze School of Advanced International Studies.
Richard Stewart has been a director
since December 2014. Mr. Stewart was a former Vice Chairman of Lehman Brothers. Mr. Stewart is the Chairman Emeritus of Heritage
Capital Resources, LLC, a $1.5 billion joint venture REO fund. Over the course of his 40+ year career, he has led, privately invested,
and consulted in financial services, technology, real estate, nonprofits, and large multinationals. In addition to Lehman Brothers,
Stewart has held senior executive positions at Citicorp, Kidder Peabody, and Merrill Lynch. Stewart is a Certified Public Accountant
and has an MBA in Finance and a BBA in Marketing and Finance from the University of Michigan.
Oversight
We have not adopted a formal policy on whether
the Chairman and Chief Executive Officer positions should be separate or combined. Paul Burgess currently serves as Chairman and
Chief Executive Officer of the Company. Due to our small size and limited resources, we believe it is currently most effective
to have the Chairman and Chief Executive Officer positions combined.
Board Independence and Committees
Our Board of Directors has determined that
John Boyd, Mark V. Rosenker, Robert Wurwarg and Richard Stewart qualify as independent directors under the rules of the Nasdaq
Stock Market because they are not currently employed by us, and do not fall into any of the enumerated categories of people who
cannot be considered independent in the Nasdaq Stock Market Rules.
Our board of directors has established
an audit committee, a compensation committee and a nominating committee and a corporate governance committee. New committee members
were appointed by the Board of Directors in March 2015.
Audit Committee. The audit committee
currently consists of John Boyd, Robert Wurwarg and Richard Stewart. The board of directors believes that Mr. Stewart qualifies
as an “audit committee financial expert”, as such term is defined in the rules of the Securities and Exchange Commission.
The board of directors intends to adopt an audit committee charter in the near future.
Compensation Committee. The compensation
committee currently consists of Mark V. Rosenker, Robert Wurwarg and Richard Stewart. Our board of directors intends to adopt a
compensation committee charter in the near future.
Nominating Committee. The nominating
committee currently consists of John Boyd, Mark V. Rosenker and Richard Stewart. Our board of directors intends to adopt a nominating
committee charter in the near future.
In making nominations,
the nominating committee is required to submit candidates who have the highest personal and professional integrity, who have demonstrated
exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the board, in collectively
serving the long-term interests of the shareholders. In evaluating nominees, the nominating committee is required to take into
consideration the following attributes, which are desirable for a member of the board: leadership, independence, interpersonal
skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.
Governance Committee. The governance
committee consists of John Boyd, Mark V. Rosenker and Robert Wurwarg. Messrs. Boyd, Rosenker and Wurwarg do not have any direct
or indirect material relationship with us other than as a director. Our board of directors intends to adopt a governance committee
charter in the near future.
CODE OF ETHICS
We have adopted a Code of Ethics and Business
Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees. The Code of Ethics
is filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2003, which was filed with
the Securities and Exchange Commission on April 9, 2004. Upon request, we will provide to any person without charge a copy of our
Code of Ethics. Any such request should be made to Attn: Paul Burgess, Lattice Incorporated, 7150 N. Park Drive, Suite 500, Pennsauken,
N.J. 08109. Our telephone number is (856) 910-1166.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange
Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered
class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock
and other of our equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations
to furnish us with copies of all Section 16(a) forms they file. Except for Paul Burgess, who failed to file a Form 4 related to
the one transaction relating to the purchase of shares of our common stock, to our knowledge, no persons have failed to file, on
a timely basis, the identified reports required by Section 16(a) of the Exchange Act during the most recent fiscal year ended December
31, 2014.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation
earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year,
collectively referred to as the named executive officers, for our last two completed fiscal years.
SUMMARY COMPENSATION TABLE
Name and
Principal Position |
|
Year |
|
Salary
$ |
|
Bonus
$ (1) |
|
Stock
Awards
$ |
|
Option
Awards
$ (2) |
|
Non-Equity
Incentive Plan
Compensation
$ |
|
Nonqualified
Deferred
Compensation
Earnings
$ |
|
All Other
Compensation
$ |
|
Total
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Burgess |
|
|
2014 |
|
$ |
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,000 |
|
President, CEO |
|
|
2013 |
|
$ |
250,000 |
|
|
|
|
|
|
|
$ |
217,890 |
|
|
|
|
|
|
|
|
|
|
$ |
467,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joe Noto |
|
|
2014 |
|
$ |
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
175,000 |
|
Chief Financial |
|
|
2013 |
|
$ |
175,000 |
|
|
|
|
|
|
|
$ |
108,945 |
|
|
|
|
|
|
|
|
|
|
$ |
283,945 |
|
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents performance bonus earned in the year when paid. |
(2) |
These amounts represent the estimated present value of stock options or warrants at the date of grant, calculated using the Black-Scholes options pricing model. The options vest annually on the anniversary date over 3 years. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR
END
The following table sets forth with respect to grants of options
to purchase our common stock to the name executive officers as of December 31, 2014:
Name |
|
|
Number of Securities Underlying Unexercised Options
#
Exercisable |
|
|
|
Number of Securities Underlying Unexercised Options
#
Unexercisable |
|
|
|
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
# |
|
|
Option Exercise Price
$ |
|
|
Option Expiration Date |
|
|
|
Number of Shares or Units of Stock That Have Not Vested
# |
|
|
|
Market Value of Shares or Units of Stock That Have Not Vested
$ |
|
|
|
Equity Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That Have not Vested
# |
|
|
|
Equity Incentive Plan Awards Market or Payout Value of Unearned Shares Units or Other Rights That Have not Vested
$ |
|
Joe Noto |
|
|
– |
|
|
|
200,000 |
(a) |
|
|
– |
|
|
$ |
0.08 |
|
|
|
July, 2015 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
1,400,000 |
(a) |
|
|
|
|
|
$ |
0.08 |
|
|
|
May, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000 |
(c) |
|
|
|
|
|
$ |
0.12 |
|
|
|
Dec, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Burgess |
|
|
|
|
|
|
200,000 |
(b) |
|
|
|
|
|
$ |
0.08 |
|
|
|
May, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000 |
(b) |
|
|
|
|
|
$ |
0.08 |
|
|
|
Oct, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000 |
(b) |
|
|
|
|
|
$ |
0.08 |
|
|
|
Feb, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800,000 |
(b) |
|
|
|
|
|
$ |
0.08 |
|
|
|
May, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800,000 |
(d) |
|
|
|
|
|
$ |
0.12 |
|
|
|
Dec, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________
|
(a) |
Vests as of December 31, 2011. |
|
(b) |
Vests as of December 31, 2010. |
|
(c) |
Vests as of December 31, 2016. |
|
(d) |
Vests as of December 31, 2016. |
EMPLOYMENT AGREEMENTS
On March 24, 2009, the Company renewed its
Executive Employment Agreement with Paul Burgess. Under the Executive Employment Agreement, Mr. Burgess was employed as our Chief
Executive Officer for an initial term of three years. Thereafter, the Executive Employment Agreement has been automatically be
extended for successive terms of one year each. Mr. Burgess is paid a base salary of $250,000 per year under the Executive Employment
Agreement Amendment. Mr. Burgess is also eligible for an incentive bonus of not less than 40% of his base salary based on achieving
certain goals established annually by the Compensation Committee of the Board. As part of the agreement he will receive medical,
vacation and profit sharing benefits consistent with our current policies. The agreement may be terminated by Mr. Burgess upon
at least 60 days prior notice to us.
On March 24, 2009, the Company renewed its
executive employment agreement with Joe Noto. Under the Executive Employment agreement, Mr. Noto was employed as our Chief Financial
Officer for a term of three years at an annual base salary of $175,000. Thereafter, the Executive Employment Agreement has been
automatically extended for successive terms of one year each. Mr. Noto is also eligible for an incentive bonus of not less than
40% of his base salary based on achieving certain goals established annually by the Compensation Committee of the Board. As part
of the agreement he will receive medical, vacation and profit sharing benefits consistent with our current policies. The agreement
may be terminated by Mr. Noto upon at least 60 days prior notice to us.
DIRECTOR COMPENSATION
The following table sets
forth certain information concerning compensation paid or accrued to our non-executive directors during the year ended December
31, 2014.
Name |
|
Fees Earned
or Paid
in Cash |
|
|
Option
Awards |
|
|
Total |
|
Mark Rosenker |
|
|
$6,000 |
|
|
|
– |
|
|
|
$6,000 |
|
Don Upson (1) |
|
|
$6,000 |
|
|
|
– |
|
|
|
$6,000 |
|
John Boyd |
|
|
$6,000 |
|
|
|
– |
|
|
|
$6,000 |
|
| (1) | No longer a member of the Board of Directors. |
All of our directors presently
receive annual compensation of $6,000 in cash. No options were granted in 2014.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information
about shares of common stock beneficially owned as of March 28, 2014 by:
|
● |
each director; |
|
● |
each officer named in the summary compensation table; |
|
● |
each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and |
|
● |
all directors and executive officers as a group. |
Name of Beneficial Owner (1) | |
Common Stock Beneficially Owned (2) | | |
Percentage of Common Stock Beneficially Owned (2) | |
Paul Burgess (3) | |
| 5,678,272 | | |
| 9.69 | % |
Joe Noto (4) | |
| 2,062,000 | | |
| 3.69 | % |
John Boyd (5) | |
| 289,500 | | |
| * | |
Mark V. Rosenker (5) | |
| 289,500 | | |
| * | |
Robert Wurwarg | |
| 1,000,000 | | |
| 1.8 | % |
Richard Stewart | |
| 1,000,000 | | |
| 1.8 | % |
All named executive officers and directors as a group (6 persons) | |
| 10,319,272 | | |
| 16.85 | % |
Bard Associates, Inc.(6) | |
| 4,251,000 | | |
| 7.89 | % |
(1) |
Except as otherwise indicated, the address of each beneficial owner is c/o Lattice Incorporated, 7150 N. Park Drive, Suite 500, Pennsauken, NJ 08109 |
(2) |
Applicable percentage ownership is based on 53,866,872 shares of common stock outstanding as of March 26, 2015, together with securities exercisable or convertible into shares of common stock within 60 days of March 26, 2015 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 26, 2015 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
(3) |
Represents 4,724,000 shares issuable upon exercise of options and 954,272 restricted shares. |
(4) |
Represents 2,062,000 shares issuable upon exercise of options. |
(5) |
Represents 289,500 shares issuable upon exercise of options. |
(6) |
The address of Bard Associates, Inc. is 135 South LaSalle Street, Suite 3700, Chicago, IL 60603. Timothy B. Johnson is the President of Bard Associates, Inc. This information is derived from a Schedule 13G filed by Bard Associates, Inc. on February 17, 2015. |
No Director, executive officer, affiliate or any owner of record
or beneficial owner of more than 5% of any class of our voting securities is a party adverse to our business or has a material
interest adverse to us.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Director Independence
Incorporated by reference to Item 10, “Directors,
Executive Officers and Corporate Governance”.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our independent
auditors, for professional services rendered for the audit of our annual financial statements for the years ended December 31,
2014 and 2013, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during the fiscal
years were $73,000 and $73,000, respectively.
Tax Fees
There were no
tax fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2014
and 2013.
Audit Related Fees
There were no audit related fees billed
for products or services provided by our principal accountant for the fiscal years ended December 31, 2014 and 2013.
All Other Fees
There were no other fees billed for products
or services provided by our principal accountant for the fiscal years ended December 31, 2014 and 2013.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee’s policy is to
pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The
independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The
Board of Directors may also pre-approve particular services on a case-by-case basis.
All members of the Company’s audit committee
at the time of initial engagement approved the engagement of Rosenberg Rich Baker Berman & Company as the Company’s
independent registered public accountants.
ITEM 15. 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) |
|
|
|
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) |
|
|
|
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) |
|
|
|
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) |
|
|
|
10.36 |
|
Asset Purchase Agreement by and among the Company and Innovisit LLC, dated as of November 1, 2013. (8) |
|
|
|
10.37 |
|
Consulting Agreement with Blairsden Resources LLC |
|
|
|
10.38 |
|
Consulting Agreement with Roxen Advisors LLC |
|
|
|
14.1 |
|
Code of Ethics (Incorporated by reference to the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on April 9, 2004) |
|
|
|
21.1 |
|
Subsidiaries of the Company (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007). |
|
|
|
31.1 |
|
Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act |
|
|
|
31.2 |
|
Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act |
|
|
|
32.1 |
|
Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code |
|
|
|
32.2 |
|
Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code |
|
|
|
99.1 |
|
Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1) |
|
|
|
99.10 |
|
Lockup Agreement from Laurus Master Fund, LTD.(1) |
|
|
|
99.11 |
|
Irrevocable Proxy.(1) |
|
|
|
99.2 |
|
Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1) |
|
|
|
99.3 |
|
Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1) |
|
|
|
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 |
(8) |
Incorporated by reference to the 8-K filed by the
Company on November 18, 2013 |
* |
To be filed by amendment |
SIGNATURES
In accordance with Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
LATTICE INCORPORATED |
|
|
|
Date: March 31, 2015 |
|
By: /s/ Paul Burgess |
|
|
Paul Burgess |
|
|
President, Chief Executive Officer |
|
|
and Director |
|
|
|
Date: March 31, 2015 |
|
By: /s/ Joe Noto |
|
|
Joe Noto |
|
|
Chief Financial Officer and Principal |
|
|
Accounting Officer |
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Paul Burgess |
|
|
|
|
Paul Burgess |
|
President, Chief Executive Officer and Director |
|
March 31, 2015 |
|
|
|
|
|
/s/ Joe Noto |
|
|
|
|
Joe Noto |
|
Chief Financial Officer and Secretary |
|
March 31, 2015 |
|
|
|
|
|
/s/ John
Boyd |
|
|
|
|
John Boyd |
|
Director |
|
March 31, 2015 |
|
|
|
|
|
/s/ Mark V. Rosenker |
|
|
|
|
Mark V. Rosenker |
|
Director |
|
March 31, 2015 |
|
|
|
|
|
/s/ Robert Wurwarg |
|
|
|
|
Robert Wurwarg |
|
Director |
|
March 31, 2015 |
|
|
|
|
|
/s/ Richard Stewart |
|
|
|
|
Richard Stewart |
|
Director |
|
March 31, 2015 |
Lattice Incorporated Index to Consolidated
Financial Statements
Report of Independent Registered Public Accounting Firms |
F-2 |
|
|
Consolidated Balance Sheets as of December 31, 2014 and 2013 |
F-3 |
|
|
Consolidated Statements of Operations, two years ended December 31, 2014 and 2013 |
F-4 |
|
|
Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2014 |
F-5 |
|
|
Consolidated Statements of Cash Flows, two years ended December 31, 2014 and 2013 |
F-6 |
|
|
Notes to Consolidated Financial Statements |
F-7 - F-25 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors
and
Shareholders of Lattice
Incorporated and Subsidiaries
We have audited the
accompanying consolidated balance sheets of Lattice Incorporated and Subsidiaries as of December 31, 2014 and 2013, and the
related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the years in the
two-year period ended December 31, 2014. The management of Lattice Incorporated and Subsidiaries is responsible for these
consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lattice
Incorporated and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 2014 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to
the consolidated financial statements, the Company has a working capital deficit and requires additional working capital to meet
its current liabilities. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1b. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker
Berman & Company
Somerset, New Jersey
March 31, 2015
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS: | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 255,954 | | |
$ | 312,703 | |
Accounts receivable | |
| 2,248,931 | | |
| 1,897,856 | |
Inventories | |
| 1,531 | | |
| 9,330 | |
Note receivable - current | |
| 90,000 | | |
| 350,000 | |
Costs and gross profit in excess of billings | |
| 449,129 | | |
| – | |
Other current assets | |
| 465,654 | | |
| 40,681 | |
Total current assets | |
| 3,511,199 | | |
| 2,610,570 | |
| |
| | | |
| | |
Property and equipment, net | |
| 692,198 | | |
| 861,712 | |
Other intangibles, net | |
| 650,012 | | |
| 895,439 | |
Note receivable - long-term | |
| 485,000 | | |
| 350,000 | |
Other assets | |
| 76,071 | | |
| 46,071 | |
Total assets | |
$ | 5,414,480 | | |
$ | 4,763,792 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' EQUITY (Deficit) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 1,377,187 | | |
$ | 1,075,651 | |
Accrued expenses | |
| 2,475,140 | | |
| 2,264,260 | |
Customer advances | |
| 1,187,225 | | |
| 1,023,966 | |
Notes payable – current, net of discount | |
| 1,418,067 | | |
| 2,601,724 | |
Derivative liability | |
| 69,765 | | |
| 122,698 | |
Deferred revenue | |
| 82,628 | | |
| 45,797 | |
Total current liabilities | |
| 6,610,012 | | |
| 7,134,096 | |
Long-term liabilities: | |
| | | |
| | |
Derivative liability | |
| 771,198 | | |
| – | |
Convertible note payable, net of debt discount | |
| 378,364 | | |
| – | |
Note payable | |
| – | | |
| 100,000 | |
Total long term liabilities | |
| 1,149,562 | | |
| 100,000 | |
Total liabilities | |
| 7,759,574 | | |
| 7,234,096 | |
| |
| | | |
| | |
Shareholders' equity (deficit) | |
| | | |
| | |
Preferred stock - .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 - .01 par value, 200,000,000 authorized, 53,879,348 and 35,304,714 issued and outstanding respectively | |
| 538,794 | | |
| 353,047 | |
Common stock subscribed - 500,000 shares | |
| 5,000 | | |
| | |
Additional paid-in capital | |
| 45,485,245 | | |
| 43,714,377 | |
Accumulated deficit | |
| (47,893,655 | ) | |
| (46,066,499 | ) |
Accumulated other comprehensive income | |
| 2,451 | | |
| – | |
| |
| (1,786,998 | ) | |
| (1,912,208 | ) |
Stock held in treasury, at cost | |
| (558,096 | ) | |
| (558,096 | ) |
Total shareholders' equity (deficit) | |
| (2,345,094 | ) | |
| (2,470,304 | ) |
Total liabilities and shareholders' equity (deficit) | |
$ | 5,414,480 | | |
$ | 4,763,792 | |
See accompanying
notes to the consolidated financial statements.
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014
AND 2013
| |
2014 | | |
2013 | |
Revenue | |
$ | 8,941,060 | | |
$ | 8,269,834 | |
| |
| | | |
| | |
Cost of Revenue | |
| 5,335,888 | | |
| 5,460,873 | |
| |
| | | |
| | |
Gross Profit | |
| 3,605,172 | | |
| 2,808,961 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Selling, general and administrative | |
| 4,204,421 | | |
| 2,771,176 | |
Research and development | |
| 886,410 | | |
| 659,178 | |
Total operating expenses | |
| 5,090,831 | | |
| 3,430,354 | |
| |
| | | |
| | |
Loss from operations | |
| (1,485,659 | ) | |
| (621,393 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Derivative income (expense) | |
| 505,658 | | |
| (65,064 | ) |
Financing Fees | |
| (80,018 | ) | |
| (53,035 | ) |
Gain on extinguishment of debt | |
| – | | |
| 29,658 | |
Other income (expense) | |
| 2,090 | | |
| 46,713 | |
Write-off of note receivable | |
| (125,000 | ) | |
| | |
Interest expense | |
| (619,119 | ) | |
| (356,915 | ) |
Total other income (expense) | |
| (316,389 | ) | |
| (398,643 | ) |
| |
| | | |
| | |
Loss before taxes | |
| (1,802,048 | ) | |
| (1,020,036 | ) |
| |
| | | |
| | |
Income taxes | |
| – | | |
| – | |
| |
| | | |
| | |
Net Loss from continuing operations | |
| (1,802,048 | ) | |
| (1,020,036 | ) |
| |
| | | |
| | |
Net Loss from Operations of Discontinued Component | |
| – | | |
| (503,733 | ) |
Gain on Sale of Assets Discontinued Component | |
| – | | |
| 521,443 | |
Net Income from operations of discontinued component | |
| – | | |
| 17,710 | |
| |
| | | |
| | |
Net Loss | |
| (1,802,048 | ) | |
| (1,002,326 | ) |
Preferred Stock Dividend | |
| (25,108 | ) | |
| (25,108 | ) |
Net Loss Available to Common Shareholders | |
| (1,827,156 | ) | |
| (1,027,434 | ) |
| |
| | | |
| | |
Basic net income (loss) per common share | |
| | | |
| | |
From continuing operations | |
$ | (0.04 | ) | |
$ | (0.03 | ) |
From discontinued operations | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Diluted (Loss) per common share | |
| | | |
| | |
From continuing operations | |
| (0.04 | ) | |
| (0.03 | ) |
From discontinued operations | |
| – | | |
| – | |
| |
| | | |
| | |
Weighted average shares | |
| | | |
| | |
Basic | |
| 46,068,220 | | |
| 33,582,936 | |
Diluted | |
| 46,068,220 | | |
| 33,582,936 | |
| |
| | | |
| | |
Comprehensive Income (Loss)
| |
| | | |
| | |
Net Loss | |
| (1,802,048 | ) | |
| (1,002,326 | ) |
Foreign Currency Translation Gain (Loss) | |
| 2,451 | | |
| – | |
Comprehensive Income (Loss) | |
| (1,799,597 | ) | |
| (1,002,326 | ) |
See accompanying notes to the consolidated financial statements
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHARHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
| |
Preferred Stock | | |
Common Stock | | |
Common Stock Subscriptions | | |
Additional Paid-In | | |
Accumulated Comprehensive | | |
Accumulated | | |
Treasury Stock | | |
Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Income | | |
Deficit | | |
Shares | | |
Amount | | |
Deficit | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Shareholders' deficit, December 31, 2012 | |
| 9,006,726 | | |
$ | 90,067 | | |
| 32,616,509 | | |
$ | 326,166 | | |
| | | |
| | | |
$ | 43,338,352 | | |
| | | |
$ | (45,039,065 | ) | |
| 302,987 | | |
$ | (558,096 | ) | |
$ | (1,842,576 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| – | | |
| | | |
| (1,002,326 | ) | |
| | | |
| | | |
| (1,002,326 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for services | |
| | | |
| | | |
| 578,333 | | |
| 5,783 | | |
| | | |
| | | |
| 68,617 | | |
| | | |
| | | |
| | | |
| | | |
| 74,400 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for financing fees | |
| – | | |
| – | | |
| 145,000 | | |
| 1,450 | | |
| | | |
| | | |
| 20,300 | | |
| | | |
| | | |
| | | |
| | | |
| 21,750 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for conversion of 320,000 SHS of
Series A Preferred | |
| (320,000 | ) | |
| (3,200 | ) | |
| 1,142,848 | | |
| 11,428 | | |
| | | |
| | | |
| (8,228 | ) | |
| | | |
| | | |
| | | |
| | | |
| (0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for exchange of 950,000 warrants | |
| – | | |
| – | | |
| 822,024 | | |
| 8,220 | | |
| | | |
| | | |
| (8,220 | ) | |
| | | |
| | | |
| | | |
| | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock warrants issued with debt financing (1,950,000 warrants issued) | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| 221,075 | | |
| | | |
| | | |
| | | |
| | | |
| 221,075 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| 82,481 | | |
| | | |
| | | |
| | | |
| | | |
| 82,481 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Dividends - Series B Preferred | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (25,108 | ) | |
| | | |
| | | |
| (25,108 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shareholders’ deficit,
December 31, 2013 | |
| 8,686,726 | | |
$ | 86,867 | | |
| 35,304,714 | | |
$ | 353,047 | | |
| | | |
| | | |
$ | 43,714,377 | | |
| | | |
$ | (46,066,499 | ) | |
| 302,987 | | |
$ | (558,096 | ) | |
$ | (2,470,304 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| – | | |
| | | |
| (1,802,048 | ) | |
| | | |
| | | |
| (1,802,048 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for vendor services | |
| | | |
| | | |
| 1,458,334 | | |
| 14,583 | | |
| | | |
| | | |
| 152,917 | | |
| | | |
| | | |
| | | |
| | | |
| 167,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock subscribed | |
| | | |
| | | |
| | | |
| | | |
| 500,000 | | |
$ | 5,000 | | |
$ | 55,000 | | |
| | | |
| | | |
| | | |
| | | |
| 60,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for financing fees | |
| – | | |
| – | | |
| 1,350,000 | | |
| 13,500 | | |
| | | |
| | | |
| 148,500 | | |
| | | |
| | | |
| | | |
| | | |
| 162,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for conversion of 1,170,000 SHS of Series A Preferred | |
| (1,170,000 | ) | |
| (11,700 | ) | |
| 4,178,538 | | |
| 41,786 | | |
| | | |
| | | |
| (30,086 | ) | |
| | | |
| | | |
| | | |
| | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for exchange for principal payment on note | |
| – | | |
| – | | |
| 500,000 | | |
| 5,000 | | |
| | | |
| | | |
| 55,000 | | |
| | | |
| | | |
| | | |
| | | |
| 60,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in private placement in exchange for debt | |
| – | | |
| – | | |
| 2,223,484 | | |
| 22,235 | | |
| | | |
| | | |
| 244,583 | | |
| | | |
| | | |
| | | |
| | | |
| 266,818 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued in private placement | |
| – | | |
| – | | |
| 6,864,278 | | |
| 68,643 | | |
| | | |
| | | |
| 752,798 | | |
| | | |
| | | |
| | | |
| | | |
| 821,441 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued to Directors for services | |
| – | | |
| – | | |
| 2,000,000 | | |
| 20,000 | | |
| | | |
| | | |
| 160,000 | | |
| | | |
| | | |
| | | |
| | | |
| 180,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| 232,156 | | |
| | | |
| | | |
| | | |
| | | |
| 232,156 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,451 | | |
| | | |
| | | |
| | | |
| 2,451 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Dividends - Series B Preferred | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (25,108 | ) | |
| | | |
| | | |
| (25,108 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shareholders' deficit, December 31, 2014 | |
| 7,516,726 | | |
$ | 75,167 | | |
| 53,879,348 | | |
$ | 538,794 | | |
| 500,000 | | |
$ | 5,000 | | |
$ | 45,485,245 | | |
$ | 2,451 | | |
$ | (47,893,655 | ) | |
| 302,987 | | |
$ | (558,096 | ) | |
$ | (2,345,094 | ) |
See accompanying notes to the consolidated financial statements.
LATTICE INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014
and 2013
| |
2014 | | |
2013 | |
Cash flow from operating activities: | |
| | | |
| | |
Net Loss | |
$ | (1,802,048 | ) | |
$ | (1,002,326 | ) |
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 | ) |
Write-off of Note Receivable | |
| 125,000 | | |
| – | |
Derivative (income) expense | |
| (505,658 | ) | |
| 65,064 | |
Amortization of intangible assets | |
| 245,427 | | |
| 162,963 | |
Stock issued for service | |
| 184,762 | | |
| 74,400 | |
Amortization of debt discount | |
| 329,538 | | |
| 64,547 | |
Gain on extinguishment of debt | |
| – | | |
| (76,371 | ) |
Amortization of deferred financing fees | |
| 80,018 | | |
| 53,035 | |
Share-based compensation | |
| 232,156 | | |
| 84,799 | |
Depreciation | |
| 347,625 | | |
| 263,511 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Accounts receivable | |
| (351,075 | ) | |
| 518,936 | |
Inventories | |
| 7,799 | | |
| – | |
Costs in excess of billings | |
| (449,129 | ) | |
| 45,797 | |
Deposits | |
| (30,000 | ) | |
| – | |
Other current assets | |
| (25,251 | ) | |
| 183,581 | |
Increase (decrease) in: | |
| – | | |
| – | |
Accounts payable and accrued liabilities | |
| 551,852 | | |
| 43,784 | |
Deferred revenue | |
| 36,831 | | |
| – | |
Customer advances | |
| 163,259 | | |
| 567,036 | |
Total adjustments | |
| 943,154 | | |
| 1,577,689 | |
Net cash (used in) provided by operating activities | |
| (858,894 | ) | |
| 575,363 | |
Net cash provided by - discontinued operations | |
| – | | |
| – | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Cash paid for equipment | |
| (178,111 | ) | |
| (304,184 | ) |
Proceeds from sale of discontinued operations | |
| – | | |
| 231,670 | |
Net cash used in investing activities | |
| (178,111 | ) | |
| (72,514 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Net borrowings (payments) on revolving credit facility | |
| – | | |
| (232,807 | ) |
Cash paid for financing fees | |
| (155,000 | ) | |
| – | |
Payments on capital equipment lease | |
| – | | |
| (25,371 | ) |
Payments on notes payable - discontinued operations | |
| – | | |
| (56,352 | ) |
Payments on notes payable | |
| (1,223,636 | ) | |
| (940,000 | ) |
Proceeds from the issuance of common stock issued, net | |
| 796,441 | | |
| – | |
Proceeds from notes payable | |
| 1,500,000 | | |
| 1,085,000 | |
Proceeds from common stock subscribed | |
| 60,000 | | |
| – | |
Payments on director loans | |
| – | | |
| (50,984 | ) |
Net cash provided by (used in) financing activities | |
| 977,805 | | |
| (220,514 | ) |
| |
| | | |
| | |
Effect of exchange rate changes on cash | |
| 2,451 | | |
| – | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (56,749 | ) | |
| 282,335 | |
Cash and cash equivalents - beginning of period | |
| 312,703 | | |
| 30,368 | |
Cash and cash equivalents - end of period | |
$ | 255,954 | | |
$ | 312,703 | |
| |
| | | |
| | |
Supplemental cash flow information | |
| | | |
| | |
Interest paid in cash | |
$ | 202,002 | | |
$ | 311,826 | |
| |
| | | |
| | |
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 | |
$ | 25,108 | | |
| – | |
Common stock issued for principal payment on note payable | |
$ | 60,000 | | |
| – | |
Recording of derivative activity | |
$ | 1,223,923 | | |
| – | |
Common stock issued as prepayment for services | |
$ | 162,740 | | |
| – | |
Common stock issued for deferred financing fees | |
$ | 162,000 | | |
| – | |
Common stock issued to settle liability | |
$ | 25,000 | | |
| – | |
See accompanying notes to the consolidated financial statements.
LATTICE INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting
Policies:
a) Organization
Lattice Incorporated (the “Company”)
was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized
solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself
to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today.
Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from
being a component manufacturer to a solution provider focused on developing applications through software on its core platform
technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI”
in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice
Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992
and provides software consulting and development services for the command and control of biological sensors and other Department
of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental
agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and
monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed
RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to
Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding Company which itself
owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements our Government
Services business by expanding markets and service offerings. Together the SMEI, RTI and CLR acquisitions formed our federal government
services business unit. Through 2012 we operated in two segments, our federal government services unit and our telecommunication
services business.
As part of the Company’s strategy
to focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the
Government services segment, which derived its revenues mainly from contracts with federal government Dept of Defense agencies
either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement
(“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant
to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets
essentially comprised our federal government services segment operations. The Company retained the residual assets and liabilities
of Lattice Government Services, Inc. We ceased operations of the federal government business back in April, 2013 coinciding with
the sale of assets to Blackwatch. For the years ended 2014 and 2013 the financial results of the government services business are
being reported as discontinued operations.
On November 1, 2013 we closed on the purchase
of certain of assets with Innovisit, LLC. The assets mainly acquired included; awarded contracts, customer lists, and its intellectual
property rights to the video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting
Innovisit’s business operations are being transferred to Lattice, including but not limited to certain employees, and leases.
This acquisition complimented the product offering of our telecom services business.
In 2013, we set up a wholly owned subsidiary,
Lattice Communications Inc. to enable us to do business in Canada. During 2014, we started operating a call center and collecting
fee income for processing prepaid deposits for a large Canadian telecom provider who previously purchased Lattice technology systems
used to provide call provisioning services to correctional facilities located in Canada.
b) Basis
of Presentation Going Concern
At December 31, 2014,
our working capital deficiency was approximately $3,099,000 which compared to a working capital deficiency of $4,524,000 at December
31, 2013. The decrease in deficiency for 2014 was mainly due to; (i) the reduction of notes payable classified as current either
through cash payments or by exchange issuance of common and (ii) the paydown of a $600,000 debt facility maturing June 2014 with
the proceeds from the $1.5 million convertible note maturing May 15, 2017, which closed in May 2014. Cash from operations and
available capacity on current credit facilities are insufficient to cover liabilities currently due and the liabilities which
will mature over the next twelve months. Additionally, we are extended on payables with trade creditors. We have several payment
arrangements in place but face continuing pressures with 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 capital. Management is currently
engaged in raising capital with a goal of raising approximately $4,000,000, the proceeds of which to be used to improve working
capital and strengthen our balance sheet. Securing sufficient capital for our growth strategy may also reduce doubts about our
ability to operate as a going concern. There is no assurance, however, that we will succeed in raising this additional financing
and obtain the capital sufficient to provide for all of our liquidity needs. In the event we fail to obtain the additional capital
needed and/or restructure our existing debts with current creditors, we may be required to curtail our operations significantly.
The consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal
and recurring adjustments that are necessary for a fair presentation of the Company’s consolidated financial position and
operating results.
c) Principles
of Consolidation
The consolidated financial statements include
the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company
accounts and transactions have been eliminated in consolidation.
d) Use
of Estimates
The preparation of these financial statements
in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates
form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other
sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes
are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely
require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill
and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long-lived assets such
as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate
outcome and actual results could differ from the estimates and assumptions used.
e) Fair
Value Disclosures
Management believes that the carrying values
of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value
as a result of the short-term maturities of these instruments. As discussed in Note 1(m), 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.
f) Cash
and Cash Equivalents
The Company maintains its cash balances
with various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation
limits.
g) Inventories
Inventories are stated at the lower of
cost or market, with cost determined on a first-in, first-out basis.
h) Income
Taxes
We account for uncertain tax positions
using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, based on the technical merits. The second step requires us to estimate and measure the tax benefit
as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective
to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain
tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement
would result in the recognition of a tax benefit or an additional charge to the tax provision. We did not recognize any additional
tax benefit or additional charges to our tax provision during 2014 and 2013. As of December 31, 2014 and 2013, the Company has
no liability related to uncertain tax positions.
The Company’s 2011, 2012, 2013 and
2014 federal and state tax returns remain subject to examination by the respective taxing authorities. In addition, net operating
losses and research tax credits arising from prior years are also subject to examination at the time that they are utilized in
future years. Neither the Company’s federal or state tax returns are currently under examination.
i) Revenue
Recognition
Revenue is recognized when all significant
contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product
sales is recognized when the goods are shipped and title passes to the customer.
Direct Call Provisioning Services:
Revenues related to collect and prepaid
calling services generated by communication services 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.
Wholesaled technology:
We sell telephony systems with embedded proprietary software
to other service providers. We recognize revenue when the equipment is shipped to the customer.
Breakage:
In compliance with regulatory tariffs, we recognize as income
prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.
Prepaid Cards:
We also sell prepaid phone cards to end user facilities on a
wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user
facilities.
Software Maintenance:
We offer software maintenance and support contracts to customers
who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life
of the contract.
Revenues Recognition for Construction Projects:
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.
j) Share-based
payments
On January 1, 2006, the Company adopted
the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting
for Share-based payment, to account for compensation costs under its stock option plans and other share-based arrangements. ASC
718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated
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 years ended December 31, 2014 and 2013, there was approximately
$453,000 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 $453,000 will
be amortized over the weighted average remaining service period.
k) Depreciation,
Amortization and Long-Lived Assets:
Long-lived assets include:
Property, plant and equipment - These assets
are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes,
accelerated depreciation methods are used as allowed by tax laws.
Identifiable intangible assets - The Company
amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible
assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either
discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested
annually for impairment and written down to fair value as required.
At least annually, The Company reviews all long-lived assets
for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which the fair value
is less than the carrying value of these assets.
l) Fair
Value of Financial Instruments
In accordance with FASB ASC 820, fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company
uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs
be used when available. Observable inputs are those that market participants would use in pricing the asset or liability
based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions
about the inputs market participants would use in pricing the asset or liability developed based on the best information available
in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
|
● |
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
● |
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
|
● |
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value. |
As of December 31, 2014 and December 31,
2013, the derivative liabilities amounted to $840,963 and $122,698. In accordance with the accounting standards the
Company determined that the carrying value of these derivatives approximated the fair value using the level 3 inputs.
m) Derivative
Financial Instruments and Registration Payment Arrangements
Derivative financial instruments, as defined
in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and one or
more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial
instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency
risks. However, the Company has entered into various types of financing arrangements to fund its business capital requirements,
including convertible debt and other financial instruments indexed to the Company’s own stock. These contracts require careful
evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or,
in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved.
In instances where derivative financial instruments require liability classification, the Company is required to initially and
subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components
at each reporting period through a charge to income until such time as the instruments require classification in stockholders’
equity (deficit). See Note 9 for additional information.
As previously stated, derivative financial
instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that
are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers,
among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For
less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option
valuation technique because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated
terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion
options, the Company generally uses the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions
(including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex
instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of
our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently
carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.
n) Segment
Reporting
FASB ASC 280-10-50, “Disclosure about
Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment
reporting. The “management approach” model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. Reportable segments are based on products and services,
geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company
exited its government services business in April 2013 and is reporting the operating results of that unit as discontinued operations
in the consolidated financial reports. Accordingly, the Company operates in one segment during the year ended December 31, 2014
(Telecom services).
o) Basic
and Diluted Income (Loss) Per Common Share:
The Company calculates income (loss) per
common share in accordance with ASC Topic 260, “Earnings Per Share”. Basic and diluted income (loss) per common share
is computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible
preferred stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive.
Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the
computation of diluted loss per share, totaled approximately 69 million shares and 58 million shares at December 31, 2014
and 2013, respectively.
p) Recent
accounting pronouncements
In August 2014, the FASB
issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in this Update
provide guidance in accounting principles generally accepted in the United States of America about management's responsibility
to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related
footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. Early application is permitted. This ASU is not expected to have
a significant impact on the Company's consolidated financial statements.
In May 2014, the FASB issued
ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update's core principle is that a
company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting
for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition.
This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. The Company is evaluating the effect of adopting this new accounting Update.
We do not believe there would have been
a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting
standards been adopted in the current period.
q) Reclassifications
Certain prior years amounts have been reclassified
to conform to current year presentation.
Note 2 - Accounts Receivable
The Company evaluates its accounts receivable
on a customer-by-customer basis and has determined that an allowance for doubtful accounts of approximately $15,000 was necessary
at December 31, 2014 related to its trade receivables.
The Company determined that an allowance
for doubtful accounts was necessary at December 31, 2013 related to its incurred cost claim receivables attributable to the Company’s
discontinued Federal government operations. These claims with Federal Dept. of Defense agencies relate to prior year contracts
where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles.
Unapproved claims included as a component of our accounts receivable totaled approximately $1,555,000 before a reserve allowance
of $311,000 as of December 31, 2013. As of December 31, 2014, there was no further basis to increase the reserve for these claims.
Accordingly, the reserve allowance for these claims remained at $311,000. These unapproved claims represent the additional costs
recoverable on our cost recoverable type contract vehicles as supported by our actual incurred cost submissions or actual rate
filings with the DCAA (Defense Contract Audit Agency) compared to the provisional (budgetary) rates used for billing under these
contracts. We are in the final stages with the Defense Contract Audit Agency (DCAA) in the review of these claims. Based on evaluations
by management and information and recent communications with DCAA, management believed that a reserve allowance estimate of 20%
of these receivables was appropriate in 2014. Accordingly, the Company recorded bad debt expense of $311,000 in 2013 which is included
as a component of loss from discontinued operations in the Consolidated Statement of Operations.
Consistent with industry practice and
since we are currently engaged in the closing out these claims with DCAA, we have classified the remaining $1,244,000 of receivables
as current assets.
Note 3 - Property and Equipment
A summary of the major components of property
and equipment is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
Computers, fixtures and equipment | |
$ | 3,335,840 | | |
$ | 3,157,730 | |
Less: accumulated depreciation | |
| (2,643,642 | ) | |
| (2,296,018 | ) |
| |
| | | |
| | |
Total | |
$ | 692,198 | | |
$ | 861,712 | |
Depreciation expense for December 31, 2014 and 2013 was $347,625
and $263,511 respectively.
Note 4 - Notes Payable
Notes payable consists of the following
as of December 31, 2014 and December 31, 2013:
| |
December 31, 2014 | | |
December 31, 2013 | |
Bank line-of-credit (a) | |
$ | – | | |
$ | – | |
Notes payable to shareholder/director (b) | |
| 192,048 | | |
| 192,048 | |
Notes payable (c) | |
| 1,066,019 | | |
| 1,999,676 | |
Note payable, Innovisit (d) | |
| 160,000 | | |
| 510,000 | |
Total notes payable | |
| 1,418,067 | | |
| 2,701,724 | |
Less current maturities | |
| (1,418,067 | ) | |
| (2,601,724 | ) |
Long-term debt | |
$ | – | | |
$ | 100,000 | |
(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.
The outstanding balance owed on the line
at December 31, 2014 and December 31, 2013 was $0 and $0 respectively. At December 31, 2014 and December 31,
2013 the 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 was to be paid. This note has an outstanding balance of $24,048 and
$75,315 as of December 31, 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
had a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800
was 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 was 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 and 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 2014 the Company paid $100,000 each in April and
July reducing the principal on this note to $781,655. As of December 31, 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.
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. As of December 31, 2014, there is $200,000 of unpaid
principal remaining on this note. The holder has not as of the date of this filing invoked his rights under the default provisions
of the note.
During the quarter ended 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. 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 December 31, 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.
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. 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 December 31, 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.
(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 December 31, 2014.
Note 5 – 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.
The 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 December 31, 2014 the derivative was valued at $771,198 which
resulted in derivative income of $452,725 for the year ended December 31, 2014. The debt discount was amortized using the effective
interest method and was $1,121,636 at December 31, 2014 resulting in a finance charge of $102,287 for the year ended December 31,
2014 included in the consolidated 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.
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
| |
December 31, 2014 | | |
Inception | |
Closing stock price | |
$ | 0.10 | | |
$ | 0.13 | |
Conversion price | |
$ | 0.13 | | |
$ | 0.13 | |
Expected volatility | |
| 125 | % | |
| 135 | % |
Remaining term (years) | |
| 2.38 | | |
| 2.96 | |
Risk-free rate | |
| 0.90 | % | |
| 0.77 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
Convertible note consisted of the following at December 31,
2014 and December 31, 2013:
| |
December 31, 2014 | | |
December 31, 2013 | |
Convertible notes | |
$ | 1,500,000 | | |
$ | – | |
Discount on convertible notes | |
| (1,223,923 | ) | |
| – | |
Accumulated amortization of discount | |
| 102,287 | | |
| – | |
Total convertible notes | |
$ | 378,364 | | |
$ | – | |
Note 6 - Stockholders’ Deficit
Common Stock
General
The preferred shares have a par value of
$.01 per share, and the Company is authorized to issue 11,156,400 shares. The preferred stock of the Company shall be issued by
the board of directors of the Company in one or more classes or one or more series within an class, and such classes or Series
shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations or restrictions
as the board of directors of the Company may determine, from time to time. Currently issued and outstanding are designated Series
A, B, C and D.
The common stock shares have a par value
of $.01 per share and the Company is authorized to issue 200,000,000 shares, each share shall be entitled to cast one vote for
each share held at all stockholders’ meeting for all purposes, including the election of directors. The common stock does
not have cumulative voting rights.
2013 Issuances:
On April 24, 2013,
we issued 1,142,848 common shares to Barron Partners L.P. Such shares were issuable upon the March 20, 2013 exercise of conversion
rights associated with 320,000 shares of Series A Preferred Stock owned by Barron Partners.
During fiscal year
2013 we issued 578,333 Common shares for services valued at $74,400.
On December 30, 2013,
we issued 145,000 Common shares as compensation to placement agent for financing fees
On December 30, 2013,
we issued 822,024 Common shares in exchange and cancelation of 950,000 warrants outstanding, the fair value of the exchanged warrants
was less than the fair value of stock issued.
2014 Issuances:
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.
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 March 31, 2014, the Company issued 500,000 shares to Icotech in exchange for a $60,000 cash installment on the seller note
payable in conjunction with the purchase of the Innovisit assets.
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 December 31, 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 $0.12 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 227,273 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.
During the
quarter ended December 31, 2014, Lattice entered into a consulting services agreement with Mr. Stewart and his affiliate,
Blairsden Resources LLC and Mr. Wurwarg and his affiliate, Roxen Advisors LLC. Messrs. Stewart and Wurwarg, newly appointed
directors of Lattice Incorporated, each received 1,000,000 restricted common shares as compensation for services rendered to
Lattice over a twelve month period. The stock was valued at $0.08 per share or a total of $160,000 under Generally Accepted
Accounting Principles (GAAP) and is being amortized ratably over the twelve month period ending November 30, 2015.
During the quarter
ended December 31, 2014, Lattice issued 458,334 shares of common stock valued at $47,500 as compensation for services to a marketing
consulting firm (“CMA”).
We did not issue any employee options
or warrants during the year ended December 31, 2014.
2013 Warrant Issuances:
In February 2013 we
issued 800,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $600,000 debt financing with
an investor. These warrants were canceled in exchange for common shares issued December 2013 (see 2013 issuances above). These
warrants had a fair value of $64,547.
In October 2013, we
issued 150,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $110,000 debt financing with
an investor. These warrants had a fair value of $16,185. These warrants were canceled in exchange for common shares issued December
2013 (see 2013 issuances above).
In December 2013, we
issued 1,000,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $600,000 debt financing
with an investor. These warrants had a fair value of $140,343.
2014 Warrant Issuances:
No issuances.
Summary of our warrant activity and related information for
2014 and 2013
|
|
Number of shares under warrants |
|
Weighted Average Exercise price |
|
|
Weighted Average Remaining Contractual term in Years |
|
Aggregate Intrinsic Value |
|
Outstanding at December 31, 2012 |
|
3,778,233 |
|
$ |
0.81 |
|
|
3 |
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
1,950,000 |
|
$ |
0.11 |
|
|
4 |
|
|
– |
|
Exercised |
|
- |
|
|
|
|
|
|
|
|
– |
|
Cancelled/expired |
|
(950,000) |
|
$ |
0.10 |
|
|
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013 |
|
4,778,233 |
|
$ |
0.67 |
|
|
3.5 |
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
- |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
- |
|
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014 |
|
4,778,233 |
|
$ |
0.67 |
|
|
2.5 |
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2014 |
|
4,778,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2013 |
|
4,778,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
Weighted average fair value |
|
$0.08 - $0.14 |
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
73% - 1.72% |
|
|
. |
|
|
|
|
|
|
|
Volatility |
|
159.1% - 179.2% |
|
|
|
|
|
|
|
|
|
|
Terms in years |
|
4 - 4.2 |
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
0% |
|
|
|
|
|
|
|
|
|
|
Note 7 - Asset Purchase - Innovisit
On November 1, 2013, we acquired certain
assets which included; awarded contracts, customer lists, and intellectual property rights to Video Visitation software from Innovisit
LLC (“Innovisit”), an Alabama limited liability company. Under the asset purchase agreement, the workforce and operating
infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including but not limited to
certain employees, and leases.
As part of the consideration, we delivered
a $590,000 secured promissory note, payable in several installments between November 30, 2013 and January 31, 2015. We have paid
$430,000 of the note leaving $160,000 remaining at December 31, 2104. We also entered an employment agreement with Scott Pritchett,
who has joined our organization as a manager. Under his three year employment contract, Mr. Pritchett is compensated at a base
salary of $100,000 as well as commissions based upon realization of agreed upon revenue targets.
The total purchase price of $590,000 was
allocated to Innovisit’s net tangible and intangible assets based upon their estimated fair values as of November 1, 2013.
The table below summarizes the
preliminary allocation of the purchase price to the acquired net assets based on their estimated fair values as of November
1, 2013 and the associated estimated useful lives at that date.
| |
Amount | |
Purchase price: | |
| | |
Note Payable | |
$ | 590,000 | |
| |
| | |
Preliminary Allocation of Purchase Price: | |
| | |
Intangible assets: | |
| | |
Software (Video conferencing) | |
$ | 302,794 | |
Contract backlog | |
| 148,406 | |
| |
| | |
Tangible assets: | |
| | |
Cash | |
| 5 | |
Inventory | |
| 138,795 | |
Total purchase price allocation | |
$ | 590,000 | |
Note 8 - Intangible assets:
In accordance with The Goodwill and
Other Intangibles Topic of the ASC 350, goodwill and indefinite-lived intangible assets are tested for impairment annually, and
interim impairment tests are performed whenever an event occurs or circumstances change that indicate that it is more likely
than not that an impairment has occurred. December 31 has been established for the annual impairment review.
Determining the fair value of intangible
assets is judgmental in nature and requires the use of significant estimates and assumptions including, but not limited to, revenue
growth rates, future market conditions and strategic plans. The Company cannot predict the occurrence of certain events or changes
in circumstances that might adversely affect the carrying value of goodwill. Such events may include, but are not limited to, the
impact of the economic environment, a material negative change in relationships with significant customers; or strategic decisions
made in response to economic and competitive conditions.
The tables below present amortizable intangible assets as of
December 31, 2014 and 2013:
|
|
Gross
Carrying |
|
|
Accumulated |
|
|
Impairment |
|
|
Net
Carrying |
|
|
Weighted
average
remaining
amortization |
|
|
Amount |
|
|
Amortization |
|
|
charge |
|
|
Amount |
|
|
period |
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP Rights Agreement |
|
|
1,300,000 |
|
|
|
(649,988 |
) |
|
|
– |
|
|
|
650,012 |
|
|
2.86 years |
Customer contracts |
|
|
148,406 |
|
|
|
(148,406 |
) |
|
|
– |
|
|
|
-- |
|
|
-- |
|
|
$ |
1,448,406 |
|
|
$ |
(798,394 |
) |
|
$ |
– |
|
|
$ |
650,012 |
|
|
|
|
|
Gross
Carrying |
|
|
Accumulated |
|
|
Impairment |
|
|
Net
Carrying |
|
|
Weighted
average
remaining
amortization |
|
|
Amount |
|
|
Amortization |
|
|
charge |
|
|
Amount |
|
|
period |
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP Rights Agreement |
|
|
1,300,000 |
|
|
|
(519,988 |
) |
|
|
– |
|
|
|
780,012 |
|
|
3.86 years |
Customer contracts |
|
|
148,406 |
|
|
|
(32,979 |
) |
|
|
– |
|
|
|
115,427 |
|
|
0.58 years |
|
|
$ |
1,448,406 |
|
|
$ |
(552,967 |
) |
|
$ |
– |
|
|
$ |
895,439 |
|
|
|
Total intangible amortization expense was $245,427 and $162,979
for the years ended December 31, 2014 and 2013, respectively.
Future estimated annual intangibles amortization expense as
of December 31, is as follows:
2015 |
|
|
130,000 |
|
2016 |
|
|
130,000 |
|
2017 |
|
|
130,000 |
|
2018 |
|
|
130,000 |
|
Thereafter |
|
|
130,012 |
|
Total |
|
$ |
650,012 |
|
Note 9 - Fair Value of Derivative Instruments
Warrants:
The consolidated balance sheet
caption derivative liabilities include warrants and convertible note, the warrants issued in connection with the 2005 Laurus
Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial
instruments are indexed to an aggregate of 758,333 shares of the Company’s common stock as of December 31, 2014 and
December 31, 2013 and are carried at fair value. The balance at December 31, 2014 was $69,765 compared to $122,698 at
December 31, 2013. The convertible note issued May 30, 2104 (See Note 5) is indexed to 11,250,028 shares of the
Company’s common stock and is carried at fair value of $771,198 at December 31, 2014.
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 December 31, 2014 included conversion or strike price of $0.10; historical volatility factor of 123.01% based
upon forward terms of instruments, and a risk free rate of 2.17% and remaining life 7.72 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 December 31, 2014 and December 31, 2013:
Derivatives:
| |
Level 3 | | |
Total | |
December 31, 2014: | |
| | |
| |
| |
| | |
| |
Warrants | |
$ | 69,765 | | |
$ | 69,765 | |
Convertible Note | |
$ | 771,198 | | |
$ | 771,198 | |
| |
Level 3 | | |
Total | |
December 31, 2013: | |
| | |
| |
| |
| | | |
| | |
Warrants | |
$ | 122,698 | | |
$ | 122,698 | |
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 year ended December 31, 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 December 31, 2014.
|
|
December 31, 2014 |
|
Beginning Balance |
|
$ |
122,698 |
|
Initial recognition - Derivative liability of embedded conversion feature of the Convertible Notes |
|
|
1,223,923 |
|
|
|
|
|
|
Change in fair value |
|
|
(505,658 |
) |
|
|
|
|
|
Ending Balance |
|
$ |
840,963 |
|
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 10 - Dividends
The Company accrued and recorded dividends
payable on the 520,160 shares of 5% Series B Preferred Stock for the years ended December 31, 2014 and 2013. Dividends have not
been declared and cannot be paid as long as the Company has an outstanding balance on its revolving line of credit.
Note 11 - Income Taxes
The tax provision (benefit) for the years
ended December 31, 2014 and 2013 consists of the following:
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Current | |
| – | | |
| – | |
Deferred | |
| – | | |
| – | |
| |
| | | |
| | |
The components of the deferred tax assets (liability) as of: | |
| | | |
| | |
| |
| | | |
| | |
Net operating loss carryforward | |
$ | 8,231,803 | | |
$ | 7,721,735 | |
Stock base compensation | |
| 534,917 | | |
| 455,984 | |
Executive compensation | |
| 13,000 | | |
| 40,200 | |
| |
| | | |
| | |
Total Deferred tax Asset | |
| 8,779,720 | | |
| 8,217,919 | |
Valuation allowance for Deferred tax asset | |
| (8,779,720 | ) | |
| (8,217,919 | ) |
Deferred tax asset | |
| – | | |
| – | |
As of December 31, 2014 and 2013, the Company
generated a net operating loss carry forwards of approximately $25,000,000 available expiring 2018-2030.
Note 12 - 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 May 31, 2015. The total average monthly rent for
these leases during the year ended December 31, 2014 is approximately $8,304 per month.
Future minimum lease commitments as of
December 31, 2014 as follows:
| |
Operating | |
| |
Leases | |
2015 | |
| 32,140 | |
Total minimum lease payments | |
$ | 32,140 | |
Total rent expense was $99,652 and
$110,826 for the year ended December 31, 2014 and 2013 respectively.
Note 13 - Share-Based Payments
a) 2002 Employee Stock Option
Plan
On November 6, 2002 the stockholders approved
the adoption of The Company’s 2002 Employee Stock Option Plan. Under the Plan, options may be granted which are intended
to qualify as Incentive Stock Options (“ISOs”) under Section 422 of the Internal Revenue Code of 1986 (the “Code”)
or which are not (“Non-ISOs”) intended to qualify as Incentive Stock Options thereunder. The maximum number of options
made available for issuance under the Plan are two million (2,000,000) options. The options may be granted to officers, directors,
employees or consultants of the Company and its subsidiaries at not less than 100% of the fair market value of the date on which
options are granted. The term of each Option granted under the Plan shall be contained in a stock option agreement between the
Optionee and the Company.
b) 2008
Employee Stock Option Plan
The Company’s board of
directors approved the adoption of the Company’s 2008 incentive stock option Plan. The maximum number of shares
available for issuance under the Plan is 10,000,000. The options may be granted to officers, directors, employees or
consultants of the Company and its subsidiaries at not less than 100% of the fair market value of the date on which options
are granted. The term of each option granted under the Plan shall be contained in a stock option agreement between the
optionee and the Company.
The board approved the issuance of options
to purchase an aggregate 9,670,000 shares of the Company’s common stock to various employees, officers and directors of the
company during December 31, 2013. No options were approved or issued in 2014. The Company recorded stock base compensation expense
of $232,156 and $77,877 for the year ended December 31, 2014 and 2013, respectively under both plans.
We use the Black-Scholes option pricing
model to estimate on the grant date the fair value of share-based awards in determining our share-based compensation. The following
weighted-average assumptions were used for grants made under the stock options plans for the years ended December 31, 2013. No
options were issued in 2014.
| |
2013 |
Expected Volatility | |
| 174 | % |
Expected term | |
| 10 years | |
Fisk-Free interest rate | |
| 2.86 | % |
Dividend yield | |
| 0 | % |
Annual forfeiture rate | |
| 10 | % |
Weighted-average estimated fair value of options granted | |
$ | 0.1094 | |
Transactions involving stock options awarded under the Plan
described above during the years ended December 31, 2014 and 2013
| |
Number of shares | | |
Weighted Average Exercise price | | |
Weighted Average Remaining Contractual term in Years | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2012 | |
| 7,366,500 | | |
$ | 0.08 | | |
| 4.7 | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| 9,670,000 | | |
$ | 0.12 | | |
| 10.0 | | |
| | |
Exercised | |
| | | |
| | | |
| | | |
| | |
Cancelled/expired | |
| (92,000 | ) | |
$ | 0.08 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2013 | |
| 16,944,500 | | |
$ | 0.10 | | |
| 2.1 | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| – | | |
| | | |
| | | |
| | |
Exercised | |
| – | | |
| | | |
| | | |
| | |
Cancelled/expired | |
| (428,500 | ) | |
$ | 0.08 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2014 | |
| 16,516,000 | | |
$ | 0.10 | | |
| 3.3 | | |
$ | 142,330 | |
| |
| | | |
| | | |
| | | |
| | |
Vested and exercisable at December 31, 2014 | |
| 10,519,500 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Vested and exercisable at December 31, 2013 | |
| 7,994,500 | | |
| | | |
| | | |
| | |
c) Employee
Stock Purchase Plan
In 2002 the Company established an Employee
Stock Purchase Plan. The Plan is to provide eligible employees of the Company and its designated subsidiaries with an opportunity
to purchase common stock of the Company through accumulated payroll deductions and to enhance such employees’ sense of participation
in the affairs of the Company and its designated subsidiaries. It is the intention of the Company to have the Plan qualify as an
“Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section
of the Code. The maximum number of shares of the Company’s common stock which shall be made available for sale under the
Plan shall be two million (2,000,000) shares. There were no shares issued under the Plan in 2014 or 2013.
Note 14 - Benefit Plan
The Company has 401K plan which covers
all eligible employees. The Company has a discretionary match of employee contributions. The Company made no contribution during
the year ended December 31 2014 or 2013.
Note 15 - Major Customers and Concentrations
The company’s telecom service revenues
for 2013 included approximately $1.6 million or 19% of total revenues derived from a wholesale contractual relationship with a
large Tier 1 telecom provider serving several end-user correctional facilities. This contractual relationship terminated during
2014 with the main facility ending May 2014.
Note 16 - Patent Licensing Agreement
On January 4, 2010 the Company entered
into a patent licensing agreement for $1,300,000 supporting its communication services products. The $1,300,000 was paid in full
as of June 30, 2010. The $1,300,000 was accounted for as intangible property and is being amortized over 120 months. Accordingly
$130,000 of amortization expense was included as a component of the communication segment’s cost of sales for the years ended
December 31, 2014 and December 31, 2013, respectively.
Note 17 – Litigation
From time to time, lawsuits are threatened
or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current
employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims
by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims
may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution
in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party.
Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2) the amount of the
loss can be reasonably estimated. There were no liabilities of this type at December 31, 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. As part of the sale
of Lattice Government assets on April 2, 2103, the Company received a promissory note from Balckwatch International, Inc. for $700,000
which carried a 3% annum interest rate payable in 12 equal quarterly installments 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 of each quarter.
This promissory note was secured by a personal guarantee of James Dramby, the principal owner of Blackwatch International, Inc.
As of December 31, 2014 , these payments have not been made and the Company had filed a lawsuit in the Superior Court of New Jersey
to collect same. While the defendants in this lawsuit threatened litigation counter claims, none was ever filed and the Company
has, as of this date, reached a settlement of this case for $575,000 payable over three years that is in the course of being documented.
Note 18 - Sale of Assets of Discontinued
Operation:
As part of the Company’s strategy
to focus on its higher growth potential communications business, the Company decided during the first quarter to exit the Government
Services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime
contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase
Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we
primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially
comprised our Government Services segment operations. The Company retained the residual assets and liabilities of Lattice Government
services, Inc. The Company recorded a gain of to $521,443 on the sale of these assets during the quarter ended June 30 2013, which
represents the excess of the sales price over the book or carrying value of the assets sold detailed in tabular form below:
On April 2, 2013 Company entered into an
Asset Purchase agreement With Blackwatch International, Inc. as follows:
Consideration received from sale of Government assets: |
Cash |
|
$ |
200,000 |
|
Seller notes assumed by buyer |
|
|
282,456 |
|
Note receivable from buyer** |
|
|
700,000 |
|
Total consideration |
|
$ |
1,182,456 |
|
Other Contingencies considerations: |
|
|
|
|
3% of gross revenues on Phase II of an SBIR contract for 24 months if awarded. |
|
|
– |
|
Pay up to $100,000 for each of the next two years in the event that certain contract are rebid and funded |
|
|
– |
|
Total consideration received on sale of assets |
|
|
1,182,456 |
|
Carrying value of Lattice Government assets sold (see below) |
|
|
661,013 |
|
Gain (loss) on sale of Government segment assets |
|
$ |
521,443 |
|
|
|
|
|
|
Carrying value of assets disposed of: |
|
|
|
|
Goodwill and intangibles |
|
$ |
842,933 |
|
Non-controlling interest |
|
|
(120,133 |
) |
Deferred tax liability |
|
|
(61,787 |
) |
|
|
$ |
661,013 |
|
** 3% annum interest rate, 12 equal quarterly
installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each successive payment being on
the 15th day of the month following close each calendar quarter.
With the Company’s decision to exit
the Government services business, the results of operations and cash flows from this business have been classified as discontinued
operations.
The following table shows the
results of operations of Lattice Government Services segment for the twelve months ended December 31, 2014 and 2013 which are
included in the net income (loss) from discontinued operations:
| |
Twelve Months Ended December 31, | |
| |
2014 | | |
2013 | |
Revenue | |
$ | – | | |
$ | 603,616 | |
Cost of Revenue | |
| – | | |
| 300,033 | |
Gross Profit | |
| – | | |
| 303,583 | |
| |
| – | | |
| 50.3 | % |
Selling, general and administrative expenses | |
| – | | |
| 749,086 | |
Amortization expense | |
| – | | |
| 80,448 | |
Income (loss) from operations | |
| – | | |
| (525,951 | ) |
Interest expense | |
| – | | |
| (10,179 | ) |
Gain on sale of discontinue operation | |
| – | | |
| 521,443 | |
Income (Loss) before taxes | |
| – | | |
| (14,687 | ) |
Income taxes (benefit) | |
| – | | |
| (32,397 | ) |
Net income (loss) from Discontinued operations | |
$ | – | | |
$ | (17,710 | ) |
Note 19 - Note Receivable
As part of sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable
in 12 equal quarterly installments payments of $61,216 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. As of December 31, 2014, these payments have not been made and the Company had filed a lawsuit
in the Superior Court of New Jersey to collect same. While the defendants in this lawsuit threatened litigation counter claims,
none was ever filed and the Company has, as of this date, reached a settlement of this case for $575,000 payable over three years
that is in the course of being finalized.
Note 20 - Foreign Currency Translation
The Company’s reporting currency is U.S. Dollars. The
functional currency of the Company’s subsidiary in Canada is the Canadian dollar. The translation from the Canadian dollar
to U.S. dollars is performed for the consolidated balance sheet accounts using exchange rates in effect at the consolidated balance
sheet date and for the consolidated statement of operations using the average exchange rate in effect during the period. The resulting
translation adjustments are recorded as a component of Accumulated Other Comprehensive Income (Loss). Foreign currency translation
gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency
are included in the consolidated statements of operations.
Note 21 - Subsequent Events
Management is currently engaged in financing activities to properly
capitalize and position the Company to execute its strategic growth plans. As part of these activities, during March, 2015, the
Company issued a secured note to an investor for $500,000 for which $422,000 of net proceeds were received. Of the $500,000; $50,000
was an original issue discount or 10% and $28,000 was used for placement fees and legal expenses. Zero interest payable if $500,000
principal is paid within three months from the date of this Note; 14% annual interest accrues on the principal sum beginning June
19, 2015 if the principal remains outstanding, with interest paid monthly, in arrears, on the last day of the month, $5,833 per
month with first cash payment due July 19, 2015, and will continue until the amount due is paid. The note is secured with accounts
receivable related to service contracts. The net proceeds of $422,000 are to be used for working capital purposes. In addition
to the interest, we agreed to deliver 625,000 restricted common shares to the lender.
Exhibit 10.37
BLAIRSDEN RESOURCES, LLC.
P.O. Box 588
New Vernon, NJ 07976
Tel: 201.787.0112
November 26, 2014
Paul Burgess
Chief Executive Officer, President Lattice Incorporated
7150 North Park Drive Suite 500
Pennsauken, NJ 08109
Dear Paul,
We continue to be enthusiastic about the prospects
for Lattice Incorporated (the "Company") and working with you in developing and executing strategic options that may
be available to the Company.
1. Services.
(a) | | In connection
with the engagement by the Company of Blairsden Resources, LLC ("Consultant") as an independent contractor under this
letter agreement as of the date hereof (the ''.Agreement"), Consultant agrees to provide advisory services to the Company's
C Suite including the following activities: (i) assisting in developing a business plan to assess domestic and global market opportunities
for its existing lines of business as well as for new products, services, and adjacent markets, (ii) assisting the Company in
developing an execution strategy for the implementation of the business plan; (iii) assisting the Company in pursuing merger,
acquisition and joint venture opportunities; (iv)
advising the Company with regard to relationships with significant vendors and restructuring relationships with creditors; (v)
assisting the Company in evaluating its interim and longer term capital requirements necessary for operational expansion;
(vi) assisting the Company in various operational matters which arise in course of conducting the Company's business; and (vi)
assisting the Company in other corporate development matters that senior management deems necessary. It is anticipated that Consultant
will provide approximately 400 hours of services during the term of this Agreement The services that Consultant has already provided
to the Company in connection with the development of its domestic and global business plan will be taken into account in determining
services rendered under this Agreement. Further, Consultant represents and warrants that the services provided hereunder will
be provided in a good and workman like manner. |
(b) | | On a regularly scheduled basis Consultant and the chief executive officer of the Company
(the "CEO") shall confer to determine specific advisory services to be performed by Consultant and the timing for the
performance of such services. On no less than a quarterly basis, Consultant and the CEO shall confer to review the status the
advisory relationship and quality of services performed. |
2. Compensation.
Concurrently with the execution of this Agreement
and at the direction of Consultant, the Company hereby grants to Richard Stewart, the sole member of the Consultant/an affiliated
Stewart Family Trust, in full compensation for the services of Consultant one million ( 1,000,000 ) shares of common stock that
shall be subject to the transferability restrictions of Rule 144 promulgated by the U.S. Securities and Exchange Commission pursuant
to the Securities Act of 1933 ("Rule 144") for the six (6) month period beginning the date hereof and ending on June
1, 2015, at which time the Company agrees to fully comply with procedures required by its transfer agent to remove the legend from
the securities. Ownership of these shares shall be vested upon the date hereof and are not subject to forfeiture. The value of
the shares issued to Consultant shall be calculated based upon 85% (Eighty-Five Percent) of the weighted average price per share
(based upon the volume of trading of such stock) within the thirty (30) trading days preceding the date hereof. In connection with
the issuance of shares of common stock, the Company agrees to be bound by the representations, warranties and covenants in the
exhibit attached hereto and made apart hereof (the "Exhibit''). Consultant also agrees to be bound by the covenants provided
in Section 3 of the Exhibit The Company recognizes that Consultant may choose to make a protective Internal Revenue Code Section
83(b) election ("Section 83(b) Election) with respect to these shares, in which event, a copy of such election shall be provided
to the Company.
3. Term
of Agreement This Agreement shall commence on the date of the Company's execution and delivery
of same and be for a term of twelve (12) months; provided, however, either party shall have
the right to terminate this Agreement upon written notice (providing a thirty (30) day right to cure) should the other party
materially breach this Agreement. No less than sixty (60) days prior to the end of the term of this Agreement, the parties hereto
agree to discuss the terms for the renewal of the advisory relationship between the Consultant and the Company.
4. Confidentiality.
All financial and business information furnished by the Company or its
affiliates to Consultant shall be retained by Consultant and its officers, directors, employees and members on a confidential basis,
and shall be used only in connection with the performance of the services contemplated by this Agreement or as specifically authorized
by the Company. Consultant shall, upon submission, execute such confidentiality and/or non-disclosure agreements as are customary
in engagements of this type. Further, Consultant agrees that the copyrights and all
other intellectual property rights in the product of Consultant's services performed hereunder, whether oral or tangible, and ownership
of Consultant's work papers, shall be deemed works-for-hire and shall be sole property of the Company. Consultant agrees and acknowledges
that any breach of this paragraph shall be considered a material breach of this Agreement.
5. Indemnification.
The Company shall indemnify, defend and hold harmless Consultant, its officers, directors,
members, employees, and agents from and against any cost, expense, liability or obligation in respect of any claim made by third
parties.
6. Expenses and Costs. Company shall
reimburse Consultant for all reasonable out-of-pocket expenses incurred by Consultant in performing its services hereunder.
7. General.
(a) | | This Agreement has been entered into and shall be interpreted under and governed by
the laws of the State of New Jersey, without regard to its conflict of laws and principles. |
(b) | | This Agreement has been duly authorized by the Company's Board of Directors and the
Consultant and shall constitute a binding obligation upon each of Consultant and the Company enforceable in accordance with its
terms. |
(c) | | This Agreement calls for the professional services of Consultant and its affiliates
and, therefore, may not be assigned by Consultant to any third person, firm, or corporation without the prior written consent
of the Company. |
(d) | | This Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the respective parties hereto. |
(e) | | Notwithstanding anything to the contrary, expressed or implied, contained herein,
it is expressly understood and agreed that Consultant is acting as an independent contractor and solely in its capacity as advisor
to the Company. It is not authorized to enter into any agreement or understanding on behalf of the Company, or otherwise binding
upon it, without, in each case, the prior written consent of the Company. |
(f) | | Any controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration
Rules. The number of arbitrators shall be one. The place of Arbitration shall be Camden, New Jersey. Judgment on the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof. |
(g) | | No action nor claim (whether brought in arbitration, court, or any other proceeding
or forum) based on breach of contract, tort (including, without limitation, negligence), strict liability, breach of warranty,
failure of essential purpose, or otherwise arising out of the performance of this agreement may be brought by any party more than
one (1) year after the party knew or should have known of the breach or damage, except that any action or claim by Consultant
against the Company for payment of money or other consideration owed under the Agreement may be brought within three (3) years
of the date of the breach or the last payment to Consultant, whichever is later. |
(h) | | If any term, provision, covenant or restriction of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect. |
(i) | | The Company
recognizes that none of the services to be provided under this Agreement will include accounting advice and that any accounting
advice required in connection such services will be provided by an accounting firm retained by the Company. |
(j) | | In no event shall Consultant be liable to the Company for consequential, incidental,
special, indirect, multiple or punitive damages (including, without limitation, lost profits, savings, or revenues of any kind,
business interruption, down time, or loss of information) or attorney's fees, regardless of whether such damages or attorney's
fees are based on breach of contract, tort (including without limitation, negligence), strict liability, breach of warranty, failure
of essential purpose or otherwise. Under no circumstances shall Consultant's aggregate liability under this Agreement, whether
in contract, tort (including without limitation negligence), strict liability, breach of warranty, failure of essential purpose
or otherwise, exceed the total value of the shares (on the date hereof and agreed to by the parties under Section 2 of this Agreement)
received for services by Consultant pursuant to this agreement. |
(k) | | This Agreement may be executed in counterparts. |
We are enthusiastic about working together and see
the potential for a mutually profitable association. If the above terms and conditions are acceptable, please so indicate by executing
and returning a copy of the Agreement.
Very truly yours,
Blairsden Resources,
LLC
|
Company: Lattice Incorporated |
|
|
By: /s/ Richard Stewart |
By: /s/ Paul Burgess |
|
|
Name: Richard Stewart |
Name: Paul Burgess |
|
|
Title: Managing Member |
Title: Chief Executive Officer, President |
|
|
Date: November 26, 2014 |
Date: 11/26/14 |
|
|
Exhibit 10.38
ROXEN ADVISORS LLC
61 Roxen Road |
|
Rockville Centre, NY 11570 |
Telephone: 516-678-5654 |
|
|
November 26, 2014
Paul Burgess
Chief Executive Officer, President Lattice Incorporated
7150 North Park Drive Suite 500
Pennsauken, NJ 08109
Dear Paul,
We continue to be enthusiastic about the prospects
for Lattice Incorporated (the "Company") and working with you in developing and
executing strategic options that may be available to the Company.
1. Services.
(a) | | In connection with the engagement by the Company of Roxen Advisors LLC ("Consultant'')
as an independent contractor under this letter agreement as of the date hereof (the "Agreement"), Consultant agrees
to provide advisory services to the Company's C Suite including the following activities: (i) assisting in developing a business
plan to assess domestic and global market opportunities for its existing lines of business
as well as for new products, services, and adjacent markets, (ii) assisting the Company in developing an execution strategy for
the implementation of the business plan; (iii) assisting the Company in pursuing merger,
acquisition and joint venture opportunities; (iv) advising the Company with regard to relationships with significant vendors and
restructuring relationships with creditors; (v) assisting the Company in evaluating its interim and longer term capital requirements
necessary for operational expansion; (vi) assisting the Company in various
operational matters which arise in course of conducting the Company's
business; and (vi) assisting the Company in other corporate development matters that senior management deems necessary. It
is anticipated that Consultant will provide approximately 400 hours of services during the term of this Agreement. The
services that Consultant has already provided to the Company in connection
with the development of its domestic and global business plan will be taken into account in determining services rendered under
this Agreement. Further, Consultant represents and warrants that the services provided hereunder will be provided in a good and
workman like manner. |
(b) | | On a regularly scheduled basis Consultant and the chief executive officer of the Company
(the "CEO") shall confer to determine specific advisory services to be performed by Consultant and the timing for the
performance of such services. On no less than a quarterly basis, Consultant and the CEO shall confer to review the status the
advisory relationship and quality of services performed. |
2. Compensation.
Concurrently with the execution of this Agreement
and at the direction of Consultant, the Company hereby grants to Robert Wurwarg, the sole member of the Consultant, in full compensation
for the services of Consultant on e m i 11i on ( 1,000, 0 0 0 ) shares of common stock that shall be subject to the transferability
restrictions of Rule 144 promulgated by the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933 ("Rule
144") for the six (6) month period beginning the date hereof and ending on June l, 2015, at which time the Company agrees
to fully comply with procedures required by its transfer agent to remove the legend from the securities. Ownership of these shares
shall be vested upon the date hereof and are not subject to forfeiture. The value of the shares issued to Consultant shall be
calculated based upon 85% (Eighty-Five Percent) of the weighted average price per share (based upon the volume of trading
of such stock) within the thirty (30) trading days preceding the date hereof. ln connection with the issuance of shares of common
stock, the Company agrees to be bound by the representations, warranties and covenants in the exhibit attached hereto and made
apart hereof (the "Exhibit"). Consultant also agrees to be bound by the covenants provided in Section 3 of the Exhibit.
The Company recognizes that Consultant may choose to make a protective Internal Revenue Code Section 83(b) election ("Section
83(b) Election) with respect to these shares, in which event, a copy of such election shall be provided to the Company.
3. Term
of Agreement. This Agreement shall commence on the date of the Company's execution and delivery
of same and be for a term of twelve (12) months; provided, however, either party shall have the right to terminate this Agreement
upon written notice (providing a thirty (30) day right to cure) should the other party materially breach this Agreement. No less
than sixty (60) days prior to the end of the term of this Agreement, the parties hereto agree to discuss the terms for the renewal
of the advisory relationship between the Consultant and the Company.
4. Confidentiality.
All financial and business information furnished by the Company or its affiliates to Consultant
shall be retained by Consultant and its officers, directors. employees and members on a confidential basis, and shall be used
only in connection with the performance of the services contemplated by this Agreement or as specifically authorized by the Company.
Consultant shall, upon submission, execute such confidentiality and/or non-disclosure agreements as are customary in engagements
of this type. Further, Consultant agrees that the copyrights and all other intellectual property rights in the product of Consultant's
services performed hereunder, whether oral or tangible, and ownership of Consultant's
work papers, shall be deemed works-for-hire and shall be sole property of the Company. Consultant agrees and acknowledges that
any breach of this paragraph shall be considered a material breach of this Agreement.
5. Indemnification.
The Company shall indemnify, defend and hold harmless Consultant, its officers, directors, members,
employees, and agents from and against any cost, expense, liability or obligation in respect of any claim made by third parties.
6. Expenses
and Costs. Company shall reimburse Consultant for all reasonable out-of-pocket expenses incurred
by Consultant in performing its service hereunder.
7. General.
(a) This Agreement has been entered into and
shall be interpreted under and governed by the laws of the State of New Jersey, without regard to its conflict of laws principles.
(b) This Agreement has been duly authorized by
the Company's Board of Directors and the Consultant and shall constitute a binding obligation upon each of Consultant and the Company
enforceable in accordance with its terms.
(c) This Agreement calls for the
professional services of Consultant and its affiliates and, therefore, may not be assigned by Consultant to any third person, firm,
or corporation without the prior written consent of the Company .
(d) This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of the respective parties hereto.
(e) Notwithstanding anything to the contrary,
expressed or implied, contained herein, it is expressly understood and agreed that Consultant is acting as an independent contractor
and solely in its capacity as advisor to the Company. It is not authorized to enter into any agreement or understanding on behalf
of the Company, or otherwise binding upon it, without, in each case, the prior written consent of the Company.
(t) Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association
under its Commercial Arbitration Rules. The number of arbitrators shall be one. The place of Arbitration shall be Camden, New Jersey.
Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.
(g) No action nor claim (whether brought in arbitration,
court, or any other proceeding or forum) based on breach of contract, tort (including, without limitation, negligence), strict
liability, breach of warranty, failure of essential purpose, or otherwise arising out of the performance of this agreement may
be brought by any party more than one (1) year after the party knew or should have known of the breach or damage, except that
any action or claim by Consultant against the Company for payment of money or other consideration owed under the Agreement may
be brought within three (3) years of the date of the breach or the last payment to Consultant, whichever is later.
(h) If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect.
(i) The Company recognizes that none of the services
to be provided under this Agreement will include legal advice and that any legal advice required in connection such services will
be provided by an attorney(s) retained by the Company.
(j) In no event shall Consultant be liable to the
Company for consequential, incidental, special, indirect, multiple or punitive damages (including, without limitation, lost profits,
savings, or revenues of any kind, business interruption, down time, or loss of information) or attorney's fees, regardless of whether
such damages or attorney's fees are based on breach of contract, tort (including without limitation, negligence), strict liability,
breach of warranty, failure of essential purpose or otherwise. Under no circumstances shall Consultant's aggregate liability under
this Agreement, whether in contract, tort (including without limitation negligence), strict liability, breach of warranty, failure
of essential purpose or otherwise, exceed the total value of the shares (on the date hereof and agreed to by the parties under
Section 2 of this Agreement) received for services by Consultant pursuant to this agreement.
(k) This Agreement may be executed in counterparts.
We are enthusiastic about working together and see
the potential for a mutually profitable association. If the above terms and conditions are acceptable, please so indicate by executing
and returning a copy of the Agreement.
Sincerely,
Roxen Advisors LLC
|
Company: Lattice Incorporated |
|
|
By: /s/ Robert Wurwarg |
By: /s/ Paul Burgess |
|
|
Name: Robert Wurwarg |
Name: Paul Burgess |
|
|
Title: Managing Member |
Title: Chief Executive Officer, President |
|
|
Date: 11/26/14 |
Date: 11/26/14 |
|
|
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Paul Burgess, certify that:
1. I have reviewed
this annual report on Form 10-K of Lattice, Inc.;
2. Based on my knowledge,
this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge,
the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies
in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal controls over
financial reporting.
Dated: March
31, 2015 |
By: |
/s/ Paul Burgess |
|
|
|
Paul Burgess |
|
|
|
Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Joe Noto, certify that:
1. I have reviewed
this annual report on Form 10-K of Lattice, Inc.;
2. Based on my knowledge,
this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge,
the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all
significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability
to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses
in internal controls; and
b) any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting.
Dated: March 31, 2015 |
By: |
/s/ Joseph Noto |
|
|
|
Joseph Noto |
|
|
|
Chief Financial Officer |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report of
Lattice, Inc. (the “Company”) on Form 10-K for the period ended December 31, 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: March 31, 2015 |
By: |
/s/ Paul Burgess |
|
|
|
Paul Burgess |
|
|
|
Chief Executive Officer |
|
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report of
Lattice, Inc. (the “Company”) on Form 10-K for the period ended December 31, 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: March 31, 2015 |
By: |
/s/ Joe Noto |
|
|
|
Joe Noto |
|
|
|
Chief Financial Officer |
|
|
|
|
|
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