Washington, D.C. 20549
(I.R.S. Employer
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.
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, 2015 was approximately $2,300,000.
As of April 11, 2016, the issuer had 95,038,673 outstanding shares
of Common Stock.
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 owned
100% of the shares of CLR Group Limited. (“CLR”), a government contractor. Together, the SMEI, RTI and CLR acquisitions
formed our federal government services business unit, Lattice Government Services (“LGS”). 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 Department of Defense agencies
either as a 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 sold the assets of LGS for approximately $1.2 million. These assets essentially comprised our federal government
services segment operations. The Company retained certain assets and liabilities of LGS. The residual assets includes approximately
$700,000 in incurred cost claims relative to cost recoverable type contract vehicles.
On November 1, 2013, the Company purchased
certain assets of Innovisit, LLC. The acquired assets mainly included: awarded contracts, customer lists, and its intellectual
property rights to video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting
Innovisit’s business operations have been transferred to Lattice, including but not limited to certain employees, and leases.
This acquisition complemented the product offering of our telecom services business.
In 2013, the Company established a wholly owned
subsidiary, Lattice Communications Inc., to enable us to operate in Canada. During 2014, we started operating a call center and
collecting fee income for processing prepaid deposits for a large Canadian telecom provider which operates Lattice technology systems
to provide call provisioning services to correctional facilities located in Canada.
b) Basis
of Presentation Going Concern
At December 31, 2015, our working capital deficiency
was approximately $6,943,000 compared to a working capital deficiency of approximately $4,360,000 at December 31, 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 beyond terms on payables with trade creditors. We
have several payment arrangements in place but face continuing pressure 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 has estimated that the Company will need alternative financing in the range of $4.0 to $5.0 million to support its liquidity
needs over the next twelve months. In that regard, management is currently engaged in capital raising activities to adequately
capitalize the Company. There is no assurance, however, that we will succeed in raising the additional financing needed to provide
for all of our liquidity needs. In the event we fail to obtain the additional capital needed and/or restructure our existing debts
with current creditors, we may be required to curtail our operations significantly.
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 2015 and 2014. As of December 31, 2015 and 2014, the Company has
no liability related to uncertain tax positions.
The Company’s 2012, 2013, 2014 and 2015
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. At December 31, 2015, there was $224,354 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. This amount will be amortized over the remaining vesting periods of the grants.
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, 2015 and December 31, 2014,
the derivative liabilities amounted to $30,154 and $840,963. 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 Standards, consist of financial instruments or other contracts that contain a notional amount
and one or more underlying variables (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 4 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, 2015
(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 39 million shares and 69 million shares at December 31, 2015
and 2014, 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, FASB issued Accounting Standards
Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have
contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific
revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition.
On July 9th the effective date was delayed one year by a vote by the FASB. Public business entities, certain not-for-profit entities,
and certain employee benefit plans would apply the guidance in ASU 2014-09 to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company
has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement, however it believes
that there will be no material effect on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03
(ASU 2015-03), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted. An entity should apply the new guidance on a retrospective basis, wherein the balance
sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
The adoption of ASU 2015-03 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company's financial
condition or results of operations.
We do not believe there would have been a material
effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting standards
been adopted in the current period.
q) Reclassifications
Certain 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 $182,000 and $15,000
was necessary at December 31, 2015 and 2014, respectively, related to its trade receivables.
The Company determined that an allowance for
doubtful accounts was necessary at December 31, 2015 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 had a carrying value of approximately $1,244,000 before a
reserve allowance of $500,000 as of December 31, 2015. 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 have completed
the audit of these claims pertaining to the periods 2005 to 2009 with the Defense Contract Audit Agency (DCAA) and have recalibrated
the amounts using the settled or final DCAA approved rates. Based on the audited and approved rates, management valued the claims
at approximately $744,000 and recorded a write-off of $500,000 at December 31, 2015. The $500,000 write-off is included as a component
of other income (expense) in the Consolidated Statement of Operations.
Based on the delays encountered in finalizing
the rate audits with DCAA and an uncertainty as to when the obligating agencies will allocate the required funding to process the
claims for payment, we have classified the remaining $744,000 of these receivables as a long term asset in the Balance Sheet at
December 31, 2015.
Note 3 - Property and Equipment
A summary of the major components of property
and equipment is as follows:
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
Computers, fixtures and equipment
|
|
$
|
3,514,453
|
|
|
$
|
3,335,840
|
|
|
Less: accumulated depreciation
|
|
|
(2,998,785
|
)
|
|
|
(2,643,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
515,668
|
|
|
$
|
692,198
|
|
Depreciation expense for December 31, 2015 and 2014 was $355,143
and $347,625 respectively.
Note 4 - Notes Payable
Notes payable consists of the following as
of December 31, 2015 and December 31, 2014:
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
Bank line of credit (a)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
Notes payable to shareholder/former director (b)
|
|
|
192,048
|
|
|
|
192,048
|
|
|
Notes payable (c)
|
|
|
1,656,996
|
|
|
|
1,066,019
|
|
|
Note payable, Innovisit (d)
|
|
|
27,734
|
|
|
|
160,000
|
|
|
Total notes payable
|
|
|
1,876,778
|
|
|
|
1,418,067
|
|
|
Less current maturities
|
|
|
(1,806,981
|
)
|
|
|
(1,418,067
|
)
|
|
Long term debt
|
|
$
|
69,797
|
|
|
$
|
–
|
|
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 is obligated to 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
is obligated to 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, 2015 and December 31, 2014 was $0 and $0 respectively. If the credit facility is drawn upon, the interest rate would
be 13.25%.
(b) Notes Payable to Shareholder/Former Director
There are two notes outstanding with a former
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 had
an outstanding balance of $24,048 as of December 31, 2015 and December 31, 2014, respectively. 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.
The second note is 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. This note had
an outstanding balance of $168,000 as of December 31, 2015 and December 31, 2014, respectively. 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 difference between the face amount of the
note and proceeds received 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. As of December 31, 2015, there was $781,655 of unpaid principal remaining on this note. As of the date
of this filing, the Company is currently in violation under terms of the note agreement requiring 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 and December 31, 2015, there was $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.
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 June 30, 2012.
During the quarter ended June 30, 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 as of December 31, 2015 and December 31, 2014. On January 23, 2014 the maturity date, the principal
amounts 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.
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 and $28,000 was used for placement fees and legal expenses. In addition, the Company was required to issue 1,000,000 shares
of common stock ($70,000 based on the closing price of the stock on the date of closing) to the Lender. The original issue discount
was recorded as a debt discount, while the placement and legal fees and the value of the 1,000,000 shares were recorded as deferred
financing fees and included in prepaid expenses on the balance sheet. The debt discount is amortized using the effective interest
method. The debt discount has been fully amortized as of December 31, 2015. We paid $363,200 of the principal balance on this note
from the proceeds of the $908,000 convertible note closed May 2015. Because the principal was not paid in full by June 17, 2015,
the Company was in default and was required to make monthly payments of $1,596 beginning July 17, 2015 at an annual interest rate
of 14%. In addition to the monthly payments, the Company was required to issue to the Lender 1,250,000 shares of common stock,
while still being responsible for the outstanding principal and interest. The lender accepted 1,000,000 shares instead to settle
the default. The value of the 1,000,000 shares issued was $20,000, which is included in interest expense. The remaining outstanding
principal of $136,800 and accrued interest was paid in full during November 2015.
During November 2015, the Company issued a
secured note to an investor for $580,000 for which $355,174 of net proceeds were received. Of the $580,000; $58,000 was an original
issue discount, $29,000 was used for placement fees and legal expenses and $137,826 was used to pay the remaining principal and
accrued interest outstanding on the March 2015 note. In addition, the Company was required to issue 1,862,500 shares of common
stock ($55,875 based on the closing price of the stock on the date of closing) to the Lender. The original issue discount was recorded
as a debt discount, as were the placement and legal fees and the value of the 1,862,500 shares were recorded as deferred financing
fees and included in prepaid expenses on the balance sheet. The debt discount is amortized using the effective interest method.
The unamortized debt discount as of December 31, 2015 was $99,308. The principal balance on this note as of December 31, 2015 was
$580,000.
During June 2015, we closed on an equipment
loan of $67,275 with Royal Bank America Leasing, L.P. The loan is payable monthly at $2,136 per month over a 36 month term with
the last payment due in May 2018. The principal balance on this loan as of December 31, 2015 was $53,454.
During October 2015, we closed on an equipment
loan of $61,783 with Royal Bank America Leasing, L.P. The loan is payable monthly at $1,941 per month over a 36 month term with
the last payment due in September 2018. The principal balance on this loan as of December 31, 2015 was $56,831.
(d) Note Payable - Innovisit
In conjunction with the purchase of intellectual
property and certain other assets of Innovisit 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, (b) four payments of $60,000 on each
of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014, and (c) final payment of $100,000 was 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 in 2014, leaving a balance outstanding of $160,000 as of December 31, 2014. In 2015, the Company made
cash payments on this note totaling $132,266 leaving $27,734 outstanding as of December 31, 2015.
Note 5 – Convertible Note
Convertible Note With Derivative Conversion
Feature
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 “LF1 Note”) in
the principal sum of $1,500,000, bearing interest at 8% per annum and maturing on May 15, 2017. Interest on the LF1 Note is payable
quarterly. Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements,
securing the LF1 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 stock 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 LF1 Note into common stock.
The LF1 Note contained 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 needed 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 November 2, 2015 the derivative was valued at $218,819.
The debt discount was amortized using the effective interest method and was $956,090 at November 2, 2015. The fair value of the
embedded conversion feature was estimated at the end of each quarterly reporting period using the Monte Carlo model.
On November 2, 2015, the Company issued 5,000,000
shares of its common stock to Lender to amend the promissory note issued to it in May 2015 to eliminate certain anti-dilution provisions.
Based on management’s review, the accounting for debt extinguishment applied. In accordance with the accounting for debt
extinguishment, the Company wrote-off the unamortized debt discount of $929,177 and unamortized deferred finance fees relating
to this note of $172,222. These charges were offset by the difference of the carrying value of the associated embedded derivative
liability of $218,819 and the fair value of $150,000 for the 5,000,000 shares issued resulting in a net gain of $68,819. The net
of these three items resulted in a loss on extinguishment of debt of $1,032,580.
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:
|
|
|
December 31,
2014
|
|
|
Closing stock price
|
|
$
|
0.10
|
|
|
Conversion price
|
|
$
|
0.13
|
|
|
Expected volatility
|
|
|
125%
|
|
|
Remaining term (years)
|
|
|
2.38
|
|
|
Risk-free rate
|
|
|
0.90%
|
|
|
Expected dividend yield
|
|
|
0%
|
|
The convertible note with a derivative conversion feature consists
of the following at December 31, 2015 and December 31, 2014:
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
Principal
|
|
$
|
1,500,000
|
|
|
$
|
1,500,000
|
|
|
Discount
|
|
|
–
|
|
|
|
(1,223,923
|
)
|
|
Accumulated amortization of discount
|
|
|
–
|
|
|
|
102,287
|
|
|
Total
|
|
$
|
1,500,000
|
|
|
$
|
378,364
|
|
Other Convertible Note
On May 13, 2015, 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 “LF2 Note”) in
the principal sum of $908,000, bearing interest at 8% per annum and maturing on April 30, 2020. Interest on the LF2 Note is payable
quarterly. After six months the Lender has the right to convert the principal amount of the note into conversion shares at any
time before maturity at a price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar corporate events
(anti-dilution provisions). The Company cannot prepay the amount due. The Company also executed UCC financing statements, securing
the LF2 Note with proceeds of certain agreements.
Each $1,000 of note principal is convertible
into 1,000 common shares at an exercise price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar
corporate events (anti-dilutive provisions). If the market price of Lattice common stock 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 in common stock.
The agreement contains a provision that for
every $1,000 borrowed, the Company would need to issue 2,500 common shares to holder. The Company borrowed $908,000 on the note
and issued 2,270,000 shares valued at $0.07 per share based on the closing price the day of the borrowings. This resulted in a
debt discount of $222,460, which is being amortized over the life of the loan using the effective interest method. Amortization
expense of the debt discount was $19,926 in the current year.
In addition, the Company incurred deferred
financing fees of $133,173 in connection with the notes which will be amortized over the life of the notes. Amortization expense
for these deferred financing fees for the year ended December 31, 2015 was $17,757. Included within the $133,173 is $42,373 relating
to 605,333 shares issued. The shares were valued at $0.07 per share, the market price of the stock at the closing date of the agreement.
The LF2 convertible note consists of the following at December 31,
2015:
|
|
|
December 31, 2015
|
|
|
Principal
|
|
$
|
908,000
|
|
|
Discount
|
|
|
(222,460
|
)
|
|
Accumulated amortization of discount
|
|
|
19,926
|
|
|
Total
|
|
$
|
705,466
|
|
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 11,110,910 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 502,160 designated
Series B shares.
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.
2015 Issuances:
On January 30, 2015 the Company entered into
an agreement for a term of one year with a service provider, requiring 1,000,000 shares to be issued to the service provider in
the form of compensation. The shares were valued at $90,000 based on the stock price on the date of the agreement. The stock compensation
expense recorded for the quarter ended September 30, 2015 was $22,500. The remaining $30,000 is recorded on the balance sheet in
prepaid expenses and will be expensed over the term of the agreement.
On March 27, 2015, we issued 714,280 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On April 7, 2015, we issued 1,571,416 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On April 29, 2015, we issued 1,303,561 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On May 14, 2015, the Company issued 1,000,000
shares as a finance fee for the March 2015 $500,000 bridge note. The shares were values at $0.07 per share and as a result $70,000
of deferred financing fees was accrued and recorded in the Balance Sheet at March 31, 2015 as accrued expense. The common shares
were later issued and the accrued expense was reclassified to capital. The deferred finance fee is being amortized to expense over
the term of the note.
On June 2, 2015, we issued 1,607,130 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On June 10, 2015, we issued 1,374,989 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On August 14, 2015, in conjunction with a $908,000
convertible note financing, we issued 908,000 shares of our common stock to investors and 605,333 shares of our common stock to
Cantone as placement agent. The note is convertible into 6,053,333 shares of our common stock. The note and shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.
On December 18 2015, the Company issued 1,862,500
shares as a finance fee for the November 2015 $580,000 bridge note. The shares were valued at $0.03 per share and as a result $55,875
was recorded as deferred finance fees. The deferred finance fees are being amortized to expense over the term of the note.
During December 2015, the Company issued 1,000,000
shares to a lender for a default in not making a principal payment when due. The shares were valued at $20,000 and included as
interest expense.
During December 2015, the Company issued 2,270,000
shares were issued to investors in conjunction with the $908,000 convertible notes. The shares were valued at $0.07 per share and
as a result $158,900 was recorded as debt discount. The debt discount is being amortized to expense over the term of the note.
During December 2015, the Company issued 5,000,000
shares to investors in exchange for the removal of an anti-dilutive feature of the $1.5M convertible notes issued in May 2014.
The shares were valued at $0.03 per share for an aggregate value of $150,000.
During the 4
th
quarter, pursuant
to the terms of a Securities Purchase Agreement dated November 2, 2015 (the “Placement Agreement”), the Company sold
an aggregate of 17,145,000 shares of its common stock under subscription agreements to accredited investors for aggregate gross
proceeds of $617,220. In connection with the sale of the shares, the Company paid a placement agent fee of $30,861 in cash to Boenning
& Scattergood, Inc. (“B&S”) and issued B&S warrants to purchase 514,350 shares of the Company’s common
stock at the price of $0.036 per share. The investors were granted piggyback registration rights in connection with the Placement
Agreement. The net proceeds of the transaction were used to purchase the securities owned by Barron pursuant to the Purchase Agreement.
Also during the 4
th
quarter,
the Company sold an aggregate of 3,500,000 shares of its common stock under subscription agreements directly to accredited
investors for aggregate gross proceeds of $126,000.
The Company issued 900,000 stock options at
an extended fair value of $36,000 and 514,350 warrants at an extended fair value of $19,827.
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”).
The Company did not issue any employee options
or warrants during the year ended December 31, 2014.
Repurchase of Preferred Stock
On November 2, 2015, the Company purchased
all of the outstanding Preferred Stock from an investor, namely, 3,589,488 shares of the Company’s Series A Convertible Preferred
Stock, 520,000 shares of the Company’s Series C Convertible Preferred Stock, and 590,910 shares of the Company’s Series
D Convertible Preferred Stock, for a total of $1,075,000. All of the Preferred stock was purchased during the 4
th
quarter,
cancelled and is to be added back to the Company’s authorized Preferred stock reserves.
Summary of our warrant activity and related information for 2015
and 2014
|
|
|
Number of shares under warrants
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contractual term in Years
|
|
Aggregate
Intrinsic Value
|
|
|
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
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
514,350
|
|
$
|
0.06
|
|
|
3.0
|
|
$
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
5,292,583
|
|
$
|
.61
|
|
|
1.81
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2015
|
|
5,292,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2014
|
|
5,292,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
|
$0.04
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.08%
|
|
|
.
|
|
|
|
|
|
|
|
|
Volatility
|
|
233.13%
|
|
|
|
|
|
|
|
|
|
|
|
Terms in years
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
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, 2015 and 2014:
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
Carrying
|
|
|
Weighted
average
remaining
amortization
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
charge
|
|
|
Amount
|
|
|
period
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP Rights Agreement
|
|
|
1,300,000
|
|
|
|
(779,988
|
)
|
|
|
–
|
|
|
|
520,012
|
|
|
1.86 years
|
|
Customer contracts
|
|
|
148,406
|
|
|
|
(148,406
|
)
|
|
|
–
|
|
|
|
–
|
|
|
–
|
|
|
|
$
|
1,448,406
|
|
|
$
|
(928,394
|
)
|
|
$
|
–
|
|
|
$
|
520,012
|
|
|
|
|
|
|
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
|
|
|
|
Total intangible amortization expense was $130,000
and $245,427 for the years ended December 31, 2015 and 2014, respectively.
Future estimated annual intangibles amortization expense as of December
31, is as follows:
|
|
|
|
|
|
|
2016
|
|
|
130,000
|
|
|
2017
|
|
|
130,000
|
|
|
2018
|
|
|
130,000
|
|
|
2019
|
|
|
130.000
|
|
|
2020
|
|
|
12
|
|
|
Total
|
|
$
|
520,012
|
|
Note 9 - Fair Value of Derivative Instruments
Warrants:
The consolidated balance sheet caption derivative
liability includes warrants and a convertible note. The warrants were 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, 2015 and December 31, 2014, and are carried at fair value.
The balance at December 31, 2015 was $30,154 compared to $69,765 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 at December 31, 2015 included the December 31, 2015 publicly traded stock price of the Company
of $0.04, the conversion or strike price of $0.10 per the agreement, a historical volatility factor of 221.77% based upon forward
terms of instruments, and a risk free rate of 2.090% and remaining life 6.72 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, 2015 and December 31, 2014:
Derivatives:
|
|
|
Level 3
|
|
|
Total
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
30,154
|
|
|
$
|
30,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
Total
|
|
|
December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
69,765
|
|
|
$
|
69,765
|
|
|
Convertible Note
|
|
$
|
771,198
|
|
|
$
|
771,198
|
|
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, 2015 and 2014. 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, 2015 and 2014 consists of the following:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
|
Deferred
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the deferred tax assets (liability) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
9,484,478
|
|
|
$
|
8,231,803
|
|
|
Stock base compensation
|
|
|
620,018
|
|
|
|
534,917
|
|
|
Executive compensation
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred tax Asset
|
|
|
10,117,496
|
|
|
|
8,779,720
|
|
|
Valuation allowance for Deferred tax asset
|
|
|
(10,117,496
|
)
|
|
|
(8,779,720
|
)
|
|
Deferred tax asset
|
|
|
–
|
|
|
|
–
|
|
As of December 31, 2015 and 2014, 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 2016. The leases generally provide that the
Company pay the taxes, maintenance and insurance expenses related to the leased assets.
Future minimum lease commitments as of December 31, 2015 are approximately
as follows:
|
For the Twelve Months Ending December 31, :
|
|
|
|
|
2016
|
|
$
|
19,918
|
|
|
|
|
|
|
|
Total rent expense was $89,331 for the year ended December 31, 2015
compared to $99,652 in the prior year.
(b) Capital Lease
During May 2015, we entered into a capital
lease financing obligation with Marlin Leasing Corporation in the amount of $14,585 which bears interest at 13% and is payable
monthly over a 3 year term at $497.00 per month. The lease includes an end of term purchase option of $1.00. The outstanding
principal balance on this lease at December 31, 2015 was $11,793.
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. Upon the adoption of the 2015, the
2008 plan became frozen. Accordingly, no new options shall be granted under the 2008 plan and outstanding awards thereunder shall
be governed by the terms and conditions of the 2008 plan and applicable award agreements.
c)
2015 Omnibus Equity Incentive Plan
The Company’s board of
directors and shareholders approved the adoption of the Company’s 2015 equity incentive Plan. The maximum number of
shares available for issuance under the Plan is 25,000,000 inclusive of the awards previously issued and outstanding under
the 2008 stock option plan. 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.
During 2015, the Company issued 900,000 under
the 2015 Equity Incentive Plan. No options were approved or issued 2014.
The Company recorded stock-based compensation
expense of $264,352 and $232,156 for the year ended December 31, 2015 and 2014, 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, 2015. No options were issued
in 2014.
|
|
|
2015
|
|
Expected Volatility
|
|
|
140
|
%
|
|
Expected term
|
|
|
5 years
|
|
|
Risk-Free interest rate
|
|
|
1.68
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
Annual forfeiture rate
|
|
|
10
|
%
|
|
Weighted-average estimated fair value of options granted
|
|
$
|
0.0355
|
|
Transactions involving stock options awarded under the Plan described
above during the years ended December 31, 2015 and 2014
|
|
|
Number of
shares
|
|
|
Weighted
Average
Exercise
price
|
|
|
Weighted
Average
Remaining Contractual
term in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2013
|
|
|
10,564,500
|
|
|
$
|
0.10
|
|
|
|
2.1
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(428,500
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
10,136,000
|
|
|
$
|
0.10
|
|
|
|
3.3
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
900,000
|
|
|
$
|
0.04
|
|
|
|
9.5
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(1,258,000
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
9,778,000
|
|
|
$
|
0.09
|
|
|
|
3.9
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2015
|
|
|
7,912,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2014
|
|
|
4,340,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d) 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 shares. There were no shares issued under the Plan in 2015 or 2014.
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, 2015 or 2014.
Note 15 - Major Customers and Concentrations
The Company’s revenues for 2015 included
approximately $1.1 million or 13.9% of total revenues derived from a wholesale relationship with a large inmate phone service provider
serving several end-user correctional facilities. There were no providers in 2014 comprising 10% or more of total revenues.
Note 16 – Litigation
On June 26, 2015, a former wholesale partner
filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement between, dated December 31, 2008 (the
“MSA”). They allege that we breached the MSA by failing to pay them commissions pursuant to the MSA and that we owe
them approximately $2.9 million, including interest. We filed a reply to the claim on July 24, 2015. We are currently negotiating
with the former wholesale partner to settle the claim. Based on negotiations, we expect the claim to settle in the amount of approximately
$2,750,000. Accordingly, we have recorded a charge to other income (expense) of approximately $228,000 at December 31, 2015 bringing
the accrued settlement liability to $2,750,000 recorded under current liabilities of consolidated balance sheet.
Except as disclosed above, 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.
Note 17 - Note Receivable
As part of the sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from Blackwatch International, Inc. for $700,000, which carried a 3% annual
interest rate payable in 12 equal quarterly installments of $61,216 over a 3 year period. The first installment was due July 31,
2013 and each successive payment was due on the 15th day of the month following close of each quarter. Blackwatch never made these
payments; therefore, the Company filed a lawsuit in the Superior Court of New Jersey to collect the monies. On April 7, 2015, a
settlement was signed and the note receivable was settled for $537,500. The agreement calls for 7 quarterly payments of $30,000
after the April 15, 2015 payment, with the remaining balance of $297,500 being due in full on January 15, 2017, with consent to
the entry of a final judgment upon default. The Company received the first and second payments on April 15, 2015 and July
15, 2015. Blackwatch failed to pay the amount that was due and payable under Paragraph 2a of the Agreement on October 15,
2015 and January 15, 2016. Written notice of default was sent to Blackwatch on November 4, 2015. On December 22, 2015, the
Company made an application for the entry of final judgment by consent. The Court entered a Final Judgment on January 8,
2016. Given the entry of a judgment, the Company engaged in negotiations with Blackwatch designed to obtain payment from
Blackwatch, which negotiations were unsuccessful. The Company thereafter obtained a required exemplified copy of the Final
Judgment and submitted the Final Judgment to the Superior Court of New Jersey to obtain lien status and to ready the Final Judgment
to be enforced against Blackwatch and the personal guarantor in their home state of Maryland. Based on the missed payments
and Blackwatch’s representation of its financial condition, the Company recorded a reserve allowance for the full amount
of the note receivable in the amount of $522,185 at December 31, 2015. Accordingly, included in other income (expense) of the 2015
statement of operations is a charge-off of $522,185.
The Company is in the process of enforcing
its rights to collect on the full amount of the Final Judgment, plus reasonable attorneys’ fees and costs, from both Blackwatch
and the personal guarantor.
Note 18 - 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 19 - Subsequent Events
On February 26, 2016, Lattice issued a promissory
note in the amount of $375,000 to Cantone Asset Management LLC (“Cantone”) and received $356,250 in gross proceeds,
after deducting a 5% original issue discount. The annual interest rate on the note is 14%. The Company issued 600,000 shares of
its common stock to Cantone and paid Cantone additional fees of approximately $3,000. The Loan is secured by a first priority
security interest in certain of the Company’s components and work-in progress relative to a sales order with a large customer.
The Note matures on the earlier of August 26, 2016 or the date that the Company receives payment from its customer for the equipment
purchased with the proceeds of the Note.
