FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011.
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.
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 14, 2011, there were 29,384,488 outstanding shares of the Registrant's Common Stock, $.01 par value.
Lattice Incorporated and Subsidiaries Notes to Condensed Consolidated Financial Statements
September 30, 2011
(Unaudited)
Note 1 - Organization and summary of significant accounting policies
a) Organization
Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc, (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated.
b) Basis of Presentation going concern
At September 30, 2011 the Company has a working capital deficiency of $2,292,481 including non-cash derivative liabilities of $132,000. This compared to a working capital deficiency of $1,417,449 at December 31. 2010. For the nine months ended September 30, 2011, the Company had a loss from operations of $3,424,000 of which $412,000 was from non-cash amortization and $1,575,000 was from the impairment of goodwill. During the quarter, we raised $227,000 through the issuance of a note with an investor to be used for working capital and to fund the growth of our communication services segment. The Company’s working capital deficiency in conjunction with the Company’s history of operating losses raises doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s ability to increase operating cashflows (ii), maintain continued availability on its line of credit and the ability to obtain alternative financing to fund capital requirements and/or debt repayments coming due in the next twelve months. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty.
c) Interim Condensed Consolidated Financial Statements
The condensed consolidated financial statements as of September 30, 2011 and for the nine months ended September 30, 2011 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year end December 31, 2010 appearing in Form 10-K filed on March 31, 2011.
d) Principles of consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis.
e) Use of estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.
f) Share-based payments
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting for Share-based payments, to account for compensation costs under its stock option plans and other share-based arrangements. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. At September 30, 2011, there was no unrecognized compensation cost related to unvested share-based compensation awards granted. For the nine months ended September 30, 2011 share-based compensation was $194,750 compared to $393,825 in the prior year period.
g) Reclassifications
Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the period ended September 30, 2010. The reclassification had no effect on previously reported Net income.
Such reclassifications were limited to the statement of Operations presentation and did not impact the Net (Loss). Specially, the Company reclassified revenues from “Revenue – Technology Services and Revenue – Technology Products to “Revenue”, with prior periods updated to conform to this presentation.
h) Revenue Recognition
Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.
Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,800,000 as of September 30, 2011. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts are not expected to be realized within one year.
Additional revenue recognition policies are stated in our 10K filed March 31, 2011.
i) Segment Reporting
FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company operates in two segments for the six months ended September 30, 2011.
j) Depreciation, amortization and long-lived assets:
Long-lived assets include:
Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets' estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.
Goodwill - Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value computed by this method is arrived at using a number of factors, including projected future operating results, economic projections and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this method provides a reasonable approach to estimate the fair value of the Company’s reporting units.
The income approach, which is used for the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit's industry. The income approach is based on a reporting unit's five year projection of operating results and cash flows that is discounted using a build up approach. The projection is based upon management's best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital requirements based on management projections.
In May 2011 the Company determined that the loss of prime status on the SPAWAR government contract coupled with the curtailment of funding of the direct labor during the quarter and going forward may have an impact on the carrying amount of goodwill and other intangibles. Accordingly, the Company performed an impairment test of goodwill and other intangibles and determined that goodwill was impaired and has recorded an impairment loss during the second quarter of $1,575,000.
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.
k) Recent accounting pronouncements
No new accounting pronouncements issued or effective during the period has had or is expected to have a material impact on the financial statements.
Note 2- Segment reporting
Management views its business as two reportable segments: Government Services and Communication Services. The Company evaluates performance based on profit or loss before intercompany charges.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Government Services | | $ | 1,367,065 | | | $ | 2,206,321 | | | $ | 5,620,297 | | | $ | 7,637,274 | |
| Communication Serivices | | | 1,178,364 | | | | 916,549 | | | | 3,386,570 | | | | 2,600,347 | |
| Total Consolidated Revenues | | $ | 2,545,429 | | | $ | 3,122,870 | | | $ | 9,006,867 | | | $ | 10,237,621 | |
| | | | | | | | | | | | | | | | | |
| Gross Profit: | | | | | | | | | | | | | | | | |
| Government Services | | $ | 570,246 | | | $ | 924,438 | | | $ | 2,121,297 | | | $ | 3,028,680 | |
| Communication Serivices | | | 297,950 | | | | 370,077 | | | | 1,112,468 | | | | 845,966 | |
| Total Consolidated | | $ | 868,196 | | | $ | 1,294,515 | | | $ | 3,233,765 | | | $ | 3,874,646 | |
| | | | | | | | | |
| | | September 30, 2011 | | | December 31, 2010 | |
| Total Assets: | | | | | | | | |
| Government Services | | $ | 6,291,739 | | | $ | 7,061,465 | |
| Communication Services | | | 2,437,332 | | | | 2,083,732 | |
| Total Consolidated Assets | | $ | 8,729,071 | | | $ | 9,145,197 | |
Note 3 - Notes payable
Notes payable consists of the following as of September 30, 2011 and December 31, 2010:
| | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | |
| Bank line-of-credit (a) | | $ | 687,238 | | | $ | 259,826 | |
| Note Payable – (b) | | | - | | | | 531,000 | |
| Notes payable to Stockholder/director (c) | | | 134,824 | | | | 159,260 | |
| Capital lease payable (d) | | | 66,772. | | | | 53,054 | |
| Notes Payable (e) | | | 1,677,272 | | | | 1,250,000 | |
| Notes payable Cummings Creek/CLR (f) | | | 564,221 | | | | - | |
| | | | | | | | - | |
| Total notes payable | | | 3,130,327 | | | | 2,253,140 | |
| Less current maturities | | | (2,256,227 | ) | | | (885,592 | ) |
| Long-term debt | | $ | 874,101 | | | $ | 1,367,548 | |
(a) Bank Line-of-Credit
On July 17, 2009, the Company and its wholly-owned subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action Agreement”) with Action Capital Corporation (“Action Capital”).
Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”). The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000. The Company will pay Action Capital interest on the advances outstanding under the Action Agreement equal to the prime rate of Wachovia Bank, N.A. in effect on the last business day of the prior month plus 1%. In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.
In addition, pursuant to the Action Agreement, the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital and I. Wistar Morris entered into an agreement under which $1,250,000 of the collateral otherwise securing advances covered by the Action Agreement are subordinated to a new security interest securing an additional loan from Morris.
The outstanding balance owed on the line at September 30, 2011 and December 31, 2010 was $687,238 and $259,826 respectively. At September 30, 2011 our interest rate was approximately 13.25%.
(b) Note Payable
In February 2010 (“effective date”) the former RTI shareholders assigned their interest in the note to a third party, at which time the Company amended the terms of the note to pay interest only and extend the maturity for 18 months with a balloon payment on August 19, 2012. The holder has a call option on the principal balance of $531,000 which includes $31,000 in deferred financing fees after twelve months from the effective date upon written notification 45 days in advance. The call option was exercised and the note was paid in full during the quarter ended March 31, 2011. The balance at September 30, 2011 and December 31, 2010 was $0 and $531,000 respectively.
(c) Notes Payable Stockholders/Director
The Company has a term note payable with a director of the Company totaling $145,514 and $159,260 at June 30, 2011 and December 31, 2010, respectively. The note bears interest at 21.5% per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December 31, 2013, at which time any remaining interest and or principal will be paid.
(d) Capital Lease Payable
On June 16, 2009 Lattice entered an equipment lease financing agreement with Royal Bank America Leasing to purchase approximately $130,000 in equipment for our communication services. The terms of which included monthly payments of $5,196 per month over 32 months and a $1.00 buy-out at end of the lease term. On July 15, 2011 we signed an addendum to this lease and received additional equipment financing for $58,122 payable over 30 months at $2,211 per month. As of September 30, 2011 and December 31, 2010, the outstanding balance was $66,772 and $53,054, respectively.
(e) Note Payable
On June 11, 2010, Lattice closed on a Note Payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 is being amortized over the life of the note as additional interest expense. The note matures June 30, 2012 and payment of principal will be due at that time in the lump sum value of $1,250,000 including any unpaid interest. Until maturity, Lattice is required to make quarterly interest payments (calculated in arrears) at 12% stated interest with the first quarter interest payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment comes due June 30, 2012 totaling $1,287,500 including the final interest payment. The note is secured by certain receivables totaling $1,250,000. 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 $1,250,000. As of the date of this filing, the Company is current with all interest payments.
During the quarter ended June 30, 2011, we issued a two year promissory note payable for $200,000 to a shareholder of the Company. The Note bear s interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on June 30, 2011. On May 15, 2013 the maturity date, the principal amount of $200,000 will be due along with any unpaid and accrued interest.
During the current quarter ended September 30, 2011, we issued a two year promissory note payable for $227,272 to an investor. The Note bear s interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011. On August 3, 2013 the maturity date, the principal amount of the note will be due along with any unpaid and accrued interest.
(f) Notes payable Cummings Creek / CLR
In conjunction with the Cumming Creek Capital / CLR acquisition, Lattice assumed notes totaling $699,300 comprised of three notes each with the former principles of CLR Group. The notes bear interest on the unpaid principal amount until paid in full, at a rate of four percent (4.0%) per annum payable quarterly. The Company will pay the unpaid principal amount as follows: beginning on May 31, 2011, the Company will make equal payments of principal on the first day of each calendar quarter totaling $58,275 (i.e., January 1, April 1, July 1 and October 1), until February 15, 2014. The Company paid the initial quarterly principal payments totaling $58,275 on May 31, 2011. Accordingly, the unpaid balance of the notes totaled $564,221 at September 30, 2011.
Note 4 - Derivative financial instruments
The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 2,158,333 and 2,358,333 shares of the Company’s common stock as of September 30, 2011 and December 31, 2010 and are carried at fair value. The balance at September 30, 2011 and December 31, 2010 was $131,958 and $228,108 respectively.
Note 5 - Major Customers and Concentrations
Our government service segment’s primary “end-user” customer is the U.S. Department of Defense (DoD). For the nine months ended September 30, 2011 and 2010 our government services revenues, contractually based, accounted for 62% and 75% of the Company’s total revenue. Accounts receivable for these contracts at September 30, 2011 and December 31, 2010 was $2,965,607 and $2,755,000 respectively.
Included in the government segment are two contract vehicles with the Navy Space and Navel Warfare Command (SPAWAR) in San Diego that account for 40% and 61% of its revenues in the nine months ended September 30, 2011 and 2010 respectively and 0% and 66% of its revenues for the three months ended September 30, 2011 and 2010 respectively. Accounts receivable for these contracts at September 30, 2011 and 2010 was $1,411,000 and $1,973,000 respectively. In May 2011, the SPAWAR contract vehicles were awarded to another prime contractor with whom we have a teaming agreement.
Note 6 –Common and Preferred Stock
| | | Sale of Series D convertible preferred stock: |
On February 14, 2011, we entered into a securities purchase agreement with Barron Partners LP in which Barron Partners LP purchased 454,546 shares of par value $0.01 Series D Convertible Preferred Stock (“Series D Preferred”) for proceeds of $1,000,000.
Each Series D Preferred share is convertible into 20 common shares of the Company’s common stock at a price of $0.11 per share. The conversion price is subject to anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations and (ii) anti-dilution for sales of common shares and common linked contracts below the initial conversion price.
Holders of the Company’s Series D Preferred are not entitled to dividends and the Holder has no voting rights. However, so long as any shares of Series D Preferred Stock are outstanding, the Company is subject to limitations on certain actions unless pre-approved by holders of 75% of the shares of the Series D Preferred stock then outstanding. Upon liquidation, dissolution or windup, each share of Series D Preferred Stock shall entitle its holder to receive $2.20 out of the assets of the Company, prior to any distribution to any class of junior securities.
We evaluated the Series D Preferred for classification. The Preferred Stock is redeemable, at the holder’s option, upon a liquidation event. The redemption features do not rise to the level of “unconditionally” redeemable for purposes of liability classification.
In considering the application of ASC 815, we identified those specific terms and features embedded in the contract that possess the characteristics of derivative financial instruments. Those features included the conversion option, anti-dilution protection, and buy-in and non-delivery puts. Generally, embedded terms and features that both (i) meet the definition of derivatives and (ii) are clearly and closely related to the host contract in terms of risks, do not require bifurcation and separate measurement. In order to develop these conclusions, we first evaluated the Preferred Stock to determine if the hybrid contract, with all features included, was more akin to an equity instrument or a debt instrument. Significant indicators of equity were the non-existence of a fixed and determinable redemption provision and the non-existence of any dividend feature. The preponderance and weight of these indicators led us to the conclusion that the hybrid contract was more akin to an equity instrument. Accordingly, the conversion option does not require bifurcation because its risks and the risks of the hybrid are clearly and closely related. The non-delivery and buy-in put, conversely, do require bifurcation because their risks and the risks of the host are not clearly and closely related. The value of these puts was deminimus at inception but will be re-evaluated each reporting period.
Further consideration of the classification of the Series D Preferred as either equity or mezzanine was required. Generally, redeemable instruments, where redemption is either stated or outside the control of management, require classification outside of stockholders’ equity. The Series D Preferred is classified as equity because it is redeemable only upon ordinary liquidation events and the occurrence of events that are solely within management’s control.
ASC 470-20-25 provides that embedded beneficial conversion features present in convertible securities (including preferred stock) should be valued separately at issuance. The conversion price of the Preferred Stock is $0.11 which gave rise to a beneficial conversion feature. The beneficial conversion feature, which is recorded a component of paid-in capital, was calculated by multiplying the linked common shares (9,090,909 common shares) times the spread between the trading market price of $0.20 and the conversion price of $0.11, or $818,182. ASC 480 provides for redeemable preferred stock to be accreted to its redemption value over the longer of the term to maturity, which is not present in the Series D Preferred, or the date of the first conversion. Since the Series D Preferred is convertible on the issuance date, the financial instrument was accreted to its redemption amount at inception.
The following table illustrates (i) how the proceeds arising from the Series D Preferred financing were allocated on the financing inception: Classification | | | |
| Series D preferred stock (equity) | | $ | 181,818 | |
| Beneficial conversion feature | | | 818,182 | |
| Derivative liabilities | | | -- | |
| Gross proceeds | | $ | 1,000,000 | |
| | | | | |
The following table illustrates the activity with respect to the Series D Preferred from the inception dates to June 30, 2011:
| | | | |
| Initial allocation of Series D Preferred (equity) | | $ | 181,818 | |
| Accretion to redemption value | | | 818,182 | |
| Series D preferred stock | | $ | 1,000,000 | |
The Company incurred approximately $48,000 in cost associated with the sale of the preferred stock for net proceeds of approximately $952,000.
On March 28, 2011, the Company entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 90,910 shares of Series D Convertible Preferred Stock for $200,000. Each Series D Share is convertible into 20 common shares of Company’s common stock at $0.11 per share, subject to adjustment and limitations. Since these shares were not designated until April 12, 2011, the $200,000 was classified as other current liability in the Balance Sheet at March 31, 2011 and has been reclassified to equity in the quarter ended June 30, 2011.
On May 16, 2011, the Company entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 45,455 shares of Series D Convertible Preferred Stock for $100,000. Each Series D Share is convertible into 20 common shares of company’s common stock at $0.11 per share, subject to adjustment and limitations. $100,000 was classified as equity.
During March and April 2011, the Company entered into several stock purchase agreements with investors for private placements of 4,632,727 shares of restricted common stock. These private placements raised $509,600 from thirteen accredited investors for issuances of restricted common shares at $.11 per share,.
During March 2011 Laurus exercised 200,000 cashless warrants for 123.077 shares of the Company’s common stock. These warrants were previously carried as a derivative liability.
Note 7 – Cummings Creek / CLR Acquisition
On May 16, 2011, we entered into a Contribution and Exchange Agreement (“Contribution Agreement”) with Ralph Alexander (“Alexander”) pursuant to which Alexander, as sole stockholder, contributed all the outstanding shares of Cummings Creek Capital, Inc. (“Cummings Creek”), a Delaware corporation, to Lattice in exchange for 2,500,000 shares of restricted common stock and the Company’s assumption of certain promissory notes totaling $699,300 included in liabilities assumed. Cummings Creek holds 100% of the outstanding shares of CLR Group Ltd., (“CLR Group”) a government service contractor, with a principal place of business located in O'Fallon, Illinois.
Lattice Government Services (“LGS”), entered into an Employment Agreement with Alexander. Alexander will serve as chief executive officer of LGS for initial annual compensation of $210,000, as well as other benefits. He may be entitled to additional bonus compensation based upon performance.
The transaction was accounted for under the purchase method of accounting. The Company purchased $739,656 in assets including $59,518 in cash and assumed $1,100,773 in liabilities and recorded goodwill of $847,552. This is a preliminary purchase price allocation, which is subject to adjustment. The following unaudited pro-forma information for the nine months ended September 30, 2011 is presented as if the acquisition took place as of January 1, 2011:
| | Nine Months Ended September 30, 2011 |
| | | |
| | | |
| | | |
| NET SALES | $ | 10,208,170 |
| | | |
| Net (Loss) | $ | (3,462,470) |
| | | |
| Net Income (loss) per common share Basic and |
| | | |
| Diluted | $ | (0.13) |
| | | |
| Weighted average shares outstanding Basic |
| | | |
| And Diluted | 25,976,950 |
Note 8- Litigation
From time to time, lawsuits are threatened or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party. Although there can be no assurance as to the ultimate disposition of these matters, it is our management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of our company. There were no liabilities of this type at September 30, 2011.
Note 9 - Subsequent Events
Pursuant to Financial Accounting Standards Board Accounting Standards Codification 855-10, we have evaluated all events or transactions that occurred from October 1, 2011 through the filing with the SEC.
During October 2011, we entered into a stock purchase agreements with an accredited investor for the private placements of 454,545 shares of restricted common stock at $0.22 per share for $100,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report and with our annual report on Form 10-K for the fiscal year ended December 31, 2010. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
GENERAL OVERVIEW
We derive a substantial portion of our revenues from government contracts under which we act as both a prime contractor and indirectly as a subcontractor to Federal DoD agencies. Revenues in the quarter ended September 30, 2011 from government contracts accounted for $1,367,065 or 54% of our overall revenues.. Although we should continue to see government contracts accounting for a large portion of our revenue we expect to see the percentage to continue to trend downward based on continued expected growth in our telecom services segment. For the three months ended September 30, 2011, revenues from our communication segment increased to 46% of total revenues from 29% in the quarter ending September 30, 2010.
We operate in two principal business segments: Government Services and Telecom Services. We organize our business segments based on the nature of the services offered and end-user markets served.
Telecom Services :
Historically, our revenue from the telecom services has been derived from wholesaling product and services to service providers providing telecom services to correctional facilities. In the latter part of 2009 we expanded our offering to include direct services to end-user correctional facilities either providing directly to correctional 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 correctional telecommunications market. The transition to the new services model was completed late in 2009 and enabled us to move into a segment that has an addressable market of over $1.5 billion per year. This is based on the size of the correctional population in the United States and the telecommunications traffic derived by this population and does not take into account any additional products we may offer or foreign markets we may be able to pursue. With the transition to the direct service based model, our telecom services revenues for the quarter ending September 30, 2011 increased 83% from prior year quarter. These revenues are exclusive of wholesale equipment revenues. 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.
The new direct services model will continue to require the company to make upfront capital investments in equipment with each new contract win. To date, we have secured equipment financing and raised alternative financings to support our contract wins. The change in strategy to a direct service based model should not require significant R&D investments in developing our call platform technology since our call control technology has been deployed and is currently operating in this market from our legacy wholesaling business.
Government Services :
Our Government services segment revenues decreased 38% in the quarter ended September 30, 2011 compared with the prior year quarter. Included in total revenues were revenues from the Cummings Creek/CLR acquisition of $834,000, not present in the year ago quarter. The revenue decrease excluding CLR was mainly due to our prime SPAWAR contract vehicles which ended on May 15, 2011. The SPAWAR contract was rebid and awarded to another prime contractor with whom we serve as a sub-contractor. As we anticipated, we lost the lower margin subcontracted or pass through revenue otherwise associated with having prime status on the contract. However, to date we have not received the funding under the teaming arrangement with the new prime for our in-house or direct labor staffing at the levels anticipated. This has had a material impact to our revenues and cash flows since May 2011. Due to the loss of the prime contract vehicle and the uncertainty of funding on this subcontract going forward we had taken a charge to the carrying value of Goodwill of $1,575,000 during the second quarter reflecting the potential impact to prospective revenues and operating cashflows. If we do not recover the funding which we historically had under the SPAWAR vehicle for our direct labor, we estimated the potential annual impact to be approximately $5,000,000 loss in revenues and $800,000 loss in operating cash flows. As a result, we have initiated several measures to offset the SPAWAR loss. These include steps which reduce our costs, increase our revenues and add to our operating cash flow. We estimate annual cost savings of approximately $600,000 resulting from cost reductions and cost synergies from integrating CLR. The Cumming Creek/CLR acquisition, will add approximately $4,000,000 in revenues and $400,000 in cashflows on an annual basis,. We have also obtained wins for direct labor position task orders, which are expected to result in additional annual revenues of $1,000,000 and $300,000 in operating cash flows. We believe that with the CLR acquisition and the new management team of Lattice Government Services we are well positioned to see growth in the government services segment going forward.
On May 16, 2011 we acquired all of the outstanding shares of Cummings Creek Capital for 2,500,000 shares of the Company’s common stock. Cummings Creek Capital is a holding company and holds 100% of the outstanding shares of CLR Group, a government service contractor. In connection with the acquisition agreement we also signed a three year employment contract with Ralph Alexander, the previous owner of Cummings Creek Capital, that provides Mr. Alexander with yearly compensation of $210,000 plus bonus based on performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2010
The following tables set forth income and certain expense items as a percentage of total revenue:
| | | For the Three Months Ending September 30, | |
| | | | | | | |
| REVENUE | | $ | 2,545,429 | | | $ | 3,122,870 | |
| | | | | | | | | |
| Net (loss) | | $ | (929,170 | ) | | $ | (142,988 | ) |
| | | | | | | | | |
| Net (loss) per common share – Basic & Diluted | | $ | (.03 | ) | | $ | (0.01 | ) |
| | | | | | | |
| | | THREE MONTHS ENDED September 30, 2011 | | THREE MONTHS ENDED September 30, 2010 | | THREE MONTHS ENDED September 30, 2011 | | THREE MONTHS ENDED September 30, 2010 | | |
| | | | | | | | | | | |
| Research & Development | | | 192,930 | | 134,331 | | | 7.6 | % | 4.3 | % | |
| | | | | | | | | | | | | |
| Selling, General & Administrative | | | 1,565,445 | | 1,158,344 | | | 61.5 | % | 37.1 | % | |
REVENUES:
Total revenues for the three months ended September 30, 2011 decreased by $577,441 or 18.5% to $2,545,429 compared to $3,122,870 for the three months ended September 30, 2010. A decrease in our government segment revenues of $839,256 or 38% from prior year quarter was partially offset by an increase in our telecom segment of $261,815 or 28.6% from prior year. Our Government Services segment which represents revenues from professional engineering services to Federal government Dept of Defense (DoD) agencies accounted for 54% of total revenues compared to 71% in the year ago quarter.
Our Government services revenues decreased by $839,256 or 38% to $1,367,065 from $2,206,321 in the year ago quarter. Included in revenues for the current quarter were revenues of $834,343 from the Cummings Creek /CLR (“CLR”) acquisition which closed in May 2011. Excluding CLR revenues, our legacy government segment revenues decreased $1,673,599 or 76%. The decrease was mainly attributable to a decline in revenues under our main SPAWAR contract vehicle which was rebid and awarded on May 15, 2011 to a new prime contractor, who we have teamed with. As anticipated, approximately 38% of the legacy decrease was from losing lower margin subcontracted or pass-through revenues otherwise previously derived from prime contractor status.
Our communications segment revenues increased by $261,818 or 28.6% to $1,178,364 from $916,549 in the prior year. The increase was comprised of an increase in recurring service revenues of $510,280 or 82.6% partially offset by a decrease of $248,465 in technology equipment sales. The recurring services increase is attributable to volume growth from the continuing ramp in the number of customer contracts where we provide direct telecom service provisioning to end-user correctional facilities. The decrease in technology equipment revenues where we wholesale technology equipment and software to other services providers was mainly timing related and not indicative of a trend.
GROSS MARGIN:
Gross profit for the three months ended September 30, 2011 was 868,196, a decrease of $426,319 or 32.9% compared to the $1,294,515 for three months ended September 30, 2010. Gross margin, as a percentage of revenues, decreased to 34.1% from 41.5% for the same period in 2010. The decrease in percentage was primarily due to a decrease in margin in our telecom segment due to lower volume of higher margin wholesaled technology revenues relative to recurring telecom service revenues.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products segment. For the three months ended September 30, 2011, research and development expenses increased to $192,930 as compared to $134,331 for the three months ended September 30, 2010. 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, fringe benefits, indirect overhead, labor costs of billable technical staff not charged to a project or contract, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the three months ended September 30, 2011, SG&A expenses increased to $1,565,445 from $1,158,344 in the comparable period prior year. As a percentage of revenues, SG&A was 61.5% for the three months ended September 30, 2011 versus 37.1% in the comparable period a year ago. The increase in SG&A was due to higher sales and marketing build out costs supporting our Telecom services growth strategy, the inclusion of operating expenses from the Cummings Creek/CLR acquisition, not present in the year ago quarter and higher “one-time” corporate expenses mainly due to legal expenses incurred associated with our telecom intellectual property.
AMORTIZATION EXPENSES:
Non-cash amortization expenses related mainly to intangible assets acquired in the acquisitions of LGS (formerly RTI) and SMEI are stated separately in our statement of operations. Amortization expense for the three months ended September 30, 2011 was $104,728 compared to $139,636 for the three months ended September 30, 2010. The decrease is attributed to certain intangibles being fully amortized in prior periods.
INTEREST EXPENSE:
Interest Expense increased slightly to $105,274 for the three months ended September 30, 2011 compared to $139,636 for the three months ended September 30, 2010.
NET LOSS:
The Company’s net loss for the three months ended September 30, 2011 was $929,170 compared to a net loss of $142,988 for the three months ended September 30, 2010.
NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2010
The following tables set forth income and certain expense items as a percentage of total revenue:
| | | For the Nine Months Ending September 30, | |
| | | | | | | |
| REVENUE | | $ | 9,006,867 | | | $ | 10,237,621 | |
| | | | | | | | | |
| Net (loss) | | $ | (3,436,402) | | | $ | (734,408 | ) |
| | | | | | | | | |
| Net (loss) per common share – Basic & Diluted | | $ | (0.13 | ) | | $ | (0.03 | ) |
| | | | | | | |
| | | NINE MONTHS ENDED September 30, 2011 | | | NINE MONTHS ENDED September 30, 2010 | | | NINE MONTHS ENDED September 30, 2011 | | | NINE MONTHS ENDED September 30, 2010 | |
| | | | | | | | | | | | | |
| Research & Development | | | 513,160 | | | | 417,706 | | | | 5.7 | % | | | 4.1 | % |
| | | | | | | | | | | | | | | | | |
| Selling, General & Administrative | | | 4,255,532 | | | | 3,480,887 | | | | 47.2 | % | | | 34.0 | % |
REVENUES:
Total revenues for the nine months ended September 30, 2011 decreased by $1,230,754 or 12% to $9,006,867 compared to $10,237,621 for the nine months ended September 30, 2010. A decrease in our government segment revenues of $2,016,977 or 26.4% was partially offset by an increase in our telecom segment of $786,223 or 30.2%. Our Government Services segment which represents revenues from professional engineering services to Federal government Dept of Defense (DoD) agencies accounted for 62% of total revenues compared to 75% in the year ago period.
Our Government services revenues decreased by $2,016,977 or 26% to $5,620,297 from $7,637,274 in the year ago period. Included in revenues for the nine months ended September 30, 2011 were revenues of $1,406,235 from the acquisition of Cumming Creek /CLR which closed in May 2011. Excluding the CLR, the decrease in legacy or baseline revenues adjusts to $3,423,212 or 44.8%. The baseline decrease was mainly attributable to our main prime SPAWAR contract ending mid second quarter (May 15, 2011) which was awarded to a new prime contractor who we have teamed with. As anticipated, approximately 35% of the decrease was from losing lower margin subcontracted or pass-through revenues otherwise previously derived from prime contractor status. The remaining decrease in baseline revenues was mainly attributable to an unanticipated contraction of funding for our direct or in-house labor revenues on the SPAWAR contract after transitioning to the new prime contractor.
Our telecom communications segment revenues increased by $786,223 or 30% to $3,386,570 from $2,600,347 in the prior year. The increase in revenues is mainly attributable to volume growth from the continuing ramp in the number of end-user correctional facilities contracted where we provide direct telecommunication services.
GROSS PROFIT:
Gross profit for the nine months ended September 30, 2011 was $3,233,765, a decrease of $640,881 or 16.5% compared to the $3,874,646 for the nine months ended September 30, 2010. Gross margin, as a percentage of revenues, decreased to 35.9% from 37.8% for the same period in 2010. The decrease in percentage was primarily the relative mix of business segment revenues as our telecom revenues increased to 37.6% of overall revenues compared to 25.4% in the prior year period.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products segment. For the nine months ended September 30, 2011, research and development expenses increased to $513,160 as compared to $417,706 for the nine months ended September 30, 2010. 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, fringe benefits, indirect overhead, labor costs of billable technical staff not charged to a project or contract, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the nine months ended September 30, 2011, SG&A expenses increased to $4,255,532 from $3,480,887 in the comparable period prior year. As a percentage of revenues, SG&A was 47.2% for the nine months ended September 30, 2011 versus 34% in the comparable period a year ago. The increase in SG&A was due to higher sales and marketing build out costs supporting our Telecom services growth strategy combined with the inclusion of operating expenses from the Cumming Creek/CLR acquisition not present in the year ago period and higher corporate expenses related to “one-time” acquisition expenses to purchase Cummings Creek/CLR and higher professional fees associated with supporting our intellectual property.
AMORTIZATION EXPENSES:
Non-cash amortization expenses related mainly to intangible assets acquired in the acquisitions of LGS (formerly RTI) and SMEI are stated separately in our statement of operations. Amortization expense for the nine months ended September 30, 2011 was $314,181 compared to $418,906 for the nine months ended September 30, 2010. The decrease is attributed to certain intangibles being fully amortized in 2010.
INTEREST EXPENSE:
Interest Expense increased to $342,397 for the nine months ended September 30, 2011 compared to $280,694 for the nine months ended September 30, 2010. Interest expense was comprised primarily of interest charges on increased indebtedness. The increase is primarily due to the $1,250,000 loan obtained in June 2010 for the purchase of intangibles related to our telecom segment.
NET LOSS:
The Company’s net loss for the nine months ended September 30, 2011 was $3,436,402 compared to a net loss of $734,438 for the nine months ended September 30, 2010. Net loss in the current period included a non-cash impairment loss of $1,575,000 relating to the decrease in revenues under our main SPAWAR contract which was rebid and awarded to another prime contractor, and the decrease in sales from the SPAWAR contract.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents decreased to $309,240 at September 30, 2011 from $324,149 at December 31, 2010. Net cash used by operating activities was $1,523,216 for the nine months ended September 30, 2011 compared to net cash provided by operating activities of $847,888 in the corresponding nine months ended September 30, 2010. The decrease in the current period is mainly due to a decrease in cash flows caused by the loss of our prime SPAWAR contract which was rebid and awarded to another prime contractor May 15, 2011.
Net cash used in investment activities was $371,293 for the nine months ended September 30, 2011 compared to $1,344,354 in the corresponding period ended September 30, 2010. Purchase of property, plant and equipment, primarily central office hardware and premise equipment supporting our direct telecom services growth, totaled $430,811 compared to $44,354 in the prior year same period. Included in investments in the year ago period was a one-time patent licensing payment of $1,300,000 related to direct services telecom business. The $430,811 cash outlay for network equipment was partially offset by the cash acquired as part of the Cummings Creek/CLR acquisition of $59,518. We expect to continue to have a requirement for capital on a project by project basis as we are awarded service contracts. To date, we have financed these equipment purchases with equipment based financing and alternative debt and equity financings. The capital requirement for our Government services business is minimal and mainly driven by the level of new hirings of billable staff, which requires the purchase of personal computers, in-house servers and network infrastructure.
Net cash provided by financing activities was $1,879,600 for the nine months ended September 30, 2011 compared to net cash provided by financing activities of $584,998 in the corresponding nine months ended September 30, 2010. The $1,879,600 consisted of: proceeds of 2,164,733 from debt, equity and equipment financings closed in the nine months ended September 30, 2011 partially offset by net debt repayments of $285,133.
During the current quarter ended September 30, 2011, we issued a two year promissory note payable for $227,272 to an investor. The Note bears s interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011. On August 3, 2013 the maturity date, the principal amount of the note will be due along with any unpaid and accrued interest.
Also during the current quarter, we amended our equipment financing line with Royal Bank Leasing for additional financing of $58,122 which was used primarily for network equipment in our telecom business. The additional financing, secured by first lien on the equipment financed, is payable monthly over 30 months at $2,211 per month.
Going concern considerations:
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The going concern basis was due to the Company’s historical negative operating cash flow and losses. The Company’s working capital deficiency at September 30, 2011 was $2,322,782 including non-cash derivative liabilities of $131,958. This condition raises doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon its ability to improve its operating cashflows, maintain continued availability under its line of credit financing and the ability to obtain additional alternative financing.
Financing activities:
On February 14, 2011, we entered into a securities purchase agreement with Barron Partners LP (“Barron”) pursuant to which Barron purchased 454,546 shares of Series D Convertible Preferred Stock for $1,000,000. Each Series D Share is convertible into 20 common shares of the Company’s common stock at $0.11 per share, subject to adjustment and limitations. In advance of the transaction, the Board of Directors approved and the Company filed a certificate of designation for Series D Convertible Preferred Stock.
The Purchase Agreement also contains covenants concerning listing of its common stock, its periodic reporting status and auditors. Failure by the Company to fulfill these and other covenants could require payment of liquidated damages, payable in Series D Stock or cash, at Purchaser's option.
We incurred approximated $48,000 in costs associated with the February 14, 2011 security purchase agreement.
On March 28, 2011, we entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 90,910 shares of Series D Convertible Preferred Stock for $200,000. Each Series D Share is convertible into 20 common shares of Company’s common stock at $0.11 per share, such to adjustment and limitations. Under the terms of the Purchase Agreement, as approved by the Company’s board of directors, Lattice subsequently filed an amended certificate of designation for Series D Convertible Preferred Stock. The terms and provisions of the March 28, 2011 Purchase Agreement are materially similar or identical of the February 14, 2011 securities purchase agreement with Barron.
During March and April 2011, we entered into several stock purchase agreements with investors for private placements of 4,632,727 shares of restricted common stock. These private placements raised $509,600 from thirteen accredited investors for issuances of restricted common shares at $.11 per share in conjunction with the Barron financings.
On May 16, 2011, we entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased 45,455 shares of Series D Convertible Preferred Stock for $100,000. Each Series D Share is convertible into 20 common shares of Company’s common stock at $0.11 per share, subject to adjustment and limitations.
On May 16, 2011 we acquired all of the outstanding shares of Cummings Creek Capital for 2,500,000 shares of the Company’s common stock. Cummings Creek Capital is a holding company and holds 100% of the outstanding shares of CLR Group, a government service contractor.
To date, we have incurred a material decrease in revenues under our SPAWAR contract which ended May15, 2011. The SPAWAR contract was rebid and awarded to a new prime contractor who we have teamed. We did lose the lower margin subcontracted or pass-through revenues otherwise previously derived from prime contractor status as anticipated however, we also incurred an unanticipated decline in funding for our in-house or direct labor staffing. This has had a material impact to our revenues and operating cashflow since May 2011.
We did not receive the funding as anticipated for our direct labor staffing under the new subcontract arrangement with the new prime contractor for SPAWAR. We have estimated the annualized impact to our revenues and operating cash flows to be approximately $5,000,000 and $800,000 respectively. Activities undertaken to offset the loss of cashflow from the SPAWAR contract included; restructuring or realignment of costs in our government segment in conjunction with integrating the Cummings Creek/ CLR acquisition expected to yield cost savings of approximately $600,000 annually. We have also recently been awarded contract task orders to increase our direct labor staffing by six FTE’s starting in August 2011 which would yield approximately $1.0 million in revenues and $300,000 in operating cashflows. Additionally, we expect the growth in revenues and cashflows from our telecom business to continue based on recent contract wins and projected wins based on our sales pipeline.
Our current cash position together with the availability on our line of credit is not sufficient to fund (i) our current working capital needs (ii) additional outlays for capital equipment needed to support continued growth in our telecom segment and, (iii) obligations coming due in the next twelve months. Accordingly, we remain highly dependent on realizing the savings from the cost restructuring initiatives undertaken, improvements in our operating cash flows, maintaining continued availability on our line of credit facility and the ability to raise additional alternative financing. If the Company is not successful in achieving these measures and raising the alternative financing needed in the near term, then the Company could be required to reduce or curtail operations.
OFF BALANCE SHEET ARRANGEMENTS:
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue, results of operations, liquidity or capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A.
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud if any, within a company have been detected.
Management has determined that there were material weaknesses in our internal controls as of September 30, 2011. A material weakness in the Company’s internal controls exists in that, beyond the Company’s Chief Financial Officer there is a limited financial background amongst other executive officers or the board of directors. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP. In making this assessment, our management used the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of the material weaknesses described above, our management concluded that as of September 30, 2011, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the COSO.
Changes in internal control
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the 2011 Quarter ended September 30, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no change occurred in the Company’s internal controls over financial reporting during the 2011 Quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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. 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 1A. RISK FACTORS
There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During October 2011, we entered into a stock purchase agreement with an accredited investor for private placements of 454,545 shares of restricted common stock at $.11 per share for $100,000. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5 - OTHER INFORMATION
None.
Item 6. Exhibits
Exhibit Number | | Description |
| | | |
| | | |
| | | |
| | 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 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | LATTICE INCORPORATED |
| | |
| BY: | /s/ PAUL BURGESS |
| | PAUL BURGESS |
| | CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER), SECRETARY AND DIRECTOR |
DATE: November 15, 2011
| /s/ JOE NOTO |
| | |
| | CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) |
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