Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10Q
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(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 000-54194
LATITUDE SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 26-1284382
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(State of Incorporation) (IRS Employer ID Number)
2595 NW BOCA RATON BLVD., SUITE 100, BOCA RATON, FL 33431
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(Address of principal executive offices)
(561)417-0644
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(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 14, 2012, there were 68,166,277 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements ----
Condensed Consolidated Balance Sheets - March 31, 2012 (Unaudited)
and December 31, 2011 (Audited) 1
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2012 and 2011 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2012 and 2011 (Unaudited) 3
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- NOT APPLICABLE 20
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -NOT APPLICABLE 22
Item 1A. Risk Factors - NOT APPLICABLE 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
-NOT APPLICABLE
Item 3. Defaults Upon Senior Securities - NOT APPLICABLE 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information - NOT APPLICABLE 23
Item 6. Exhibits 23
SIGNATURES 24
PART I
ITEM 1. FINANCIAL STATEMENTS
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LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
March 31, December 31,
2012 2011
(unaudited) (audited)
--------------------- ---------------------
CURRENT ASSETS
Cash and cash equivalents $ 846,251 $ 668,664
Accounts receivable, net 524,940 44,850
Prepaid expenses 340,734 202,245
--------------------- ---------------------
Total Current Assets 1,711,925 915,759
--------------------- ---------------------
Equity investment - 225,000
Prepaid licensing fee, net 85,000 86,667
Property and equipment, net 11,789,513 10,956,558
Intangible assets, net 161,228 182,140
Other assets 46,229 44,121
--------------------- ---------------------
TOTAL ASSETS $ 13,793,895 $ 12,410,245
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,993,128 $ 4,382,966
Current portion of long term debt 119,332 175,196
Convertible debt, net 369,795 66,261
Liability to issue stock 1,499,363 451,646
--------------------- ---------------------
Total Current Liabilities 5,981,618 5,076,069
Long-term debt, net of current portion 78,515 116,244
--------------------- ---------------------
Total Liabilities 6,060,133 5,192,313
--------------------- ---------------------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 250,000,000
shares authorized, 65,657,885 and 59,836,052
shares issued and outstanding, respectively 65,658 59,836
Additional paid-in capital 39,549,660 34,192,134
Accumulated deficit (31,869,139) (27,021,621)
Accumulated other comprehensive loss (12,417) (12,417)
--------------------- ---------------------
Total Stockholders' Equity 7,733,762 7,217,932
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,793,895 $ 12,410,245
===================== =====================
See accompanying notes to the condensed consolidated financial statements.
1
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Condensed Consolidated Statements of Operations
(UNAUDITED)
For the Three Months Ended
March 31,
2012 2011
----------------------- ---------------------
REVENUES $ 522,788 $ -
COST OF SALES 310,001 -
----------------------- ---------------------
GROSS PROFIT 212,787 -
OPERATING EXPENSES
Consulting fees 2,228,781 641,393
General and administrative 1,832,248 503,381
Salaries expense 760,315 459,633
Research and development 87,294 -
----------------------- ---------------------
Total Operating Expenses 4,908,638 1,604,407
----------------------- ---------------------
LOSS FROM OPERATIONS (4,695,851) (1,604,407)
OTHER INCOME (EXPENSE)
Finance costs pursuant to debt issuance (173,043) (408,482)
Gain on settlement of accrued expenses 26,273 150,000
Other income 5,904 -
Interest expense (10,801) (40,157)
Equity in losses of investee - (246,257)
----------------------- ---------------------
Total Other Expense (151,667) (544,896)
----------------------- ---------------------
LOSS BEFORE INCOME TAXES (4,847,518) (2,149,303)
INCOME TAXES - -
----------------------- ---------------------
NET LOSS $ (4,847,518) $ (2,149,303)
======================= =====================
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.08) $ (0.07)
======================= =====================
WEIGHTED AVERAGE OUTSTANDING SHARES
BASIC AND DILUTED 61,003,175 30,823,728
======================= =====================
See accompanying notes to the condensed consolidated financial statements.
2
LATITUDE SOLUTIONS INC. & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
For the Three Months Ended March 31,
2012 2011
-------------------- --------------------
OPERATING ACTIVITIES
Net loss $ (4,847,518) $ (2,149,303)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on settlement of accrued expenses (26,273) (150,000)
Financing costs 173,043 408,482
Common stock issued or
to be issued for services 1,387,741 445,000
Warrants issued for services 1,223,839 -
Depreciation and amortization expense 119,368 8,875
Equity in losses of investee - 246,257
Changes in operating assets and liabilities:
Increase in accounts receivable (480,090) -
Increase in prepaid expenses (138,489) -
Decrease (increase) in other assets (2,108) 99,597
Increase (decrease) in accounts payable
and accrued expenses (389,838) 75,196
-------------------- --------------------
Net Cash Used by
Operating Activities (2,980,325) (1,015,896)
-------------------- --------------------
INVESTING ACTIVITIES
Capital contributions to investee - (4,579)
Purchase of property and equipment (929,745) (262,097)
Proceeds from sale of investee 225,000 -
Payments to investee - (271,643)
-------------------- --------------------
Net Cash Used by
Investing Activities (704,745) (538,319)
-------------------- --------------------
FINANCING ACTIVITIES
Proceeds from short term debt - 100,000
Repayment of short term debt - (100,000)
Repayment of related party payable - (25,073)
Decrease in advance to consultant - (20,000)
Proceeds from convertible debt 2,125,000 691,000
Exercise of common stock warrants 2,500 -
Repayment of long term debt (93,593) -
Repayment of convertible debt - (40,000)
Sale of common stock and warrants, net 1,828,750 4,015,000
-------------------- --------------------
Net Cash Provided by
Financing Activities 3,862,657 4,620,927
-------------------- --------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 177,587 3,066,712
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 668,664 216,200
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 846,251 $ 3,282,912
==================== ====================
See accompanying notes to the condensed consolidated financial statements.
3
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
BUSINESS AND ORGANIZATION
Latitude Solutions, Inc. ("the Company") is a Nevada Corporation
incorporated on June 3, 1983. The Company owns intellectual property which
is incorporated in the manufacture of water remediation plants. The
Company's business plan is to lease the remediation plants to customers who
need a solution for contaminated matter resulting from their business
operations.
The Company began its plans on July 14, 2009 after exchanging a majority of
its' shares for all the outstanding shares of GMMT Merger, Inc., a company
controlled by common stockholders. As a result of the exchange, the Company
acquired companies owned by GMMT Merger, Inc. ("Trinity Solutions, Inc."
and "Latitude Clean Tech Group, Inc.") with plans to enter wireless
live-video technology and the contaminated water remediation business.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements include the accounts of Latitude Solutions, Inc. and its wholly
owned subsidiaries, Latitude Clean Tech Group, Inc., Latitude Energy
Services, LLC, Trinity Solutions, Inc., Latitude Resource Group, Inc., and
GMMT Merger, Inc., and its 70% owned subsidiary, Latitude Worldwide, LLC
(collectively the "Company"). All intercompany balances and transactions
have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared using generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Regulation S-X.
Accordingly, these financial statements do not include all information or
notes required by generally accepted accounting principles for annual
financial statements and should be read together with the Company's 2011
Annual Report on Form 10-K.
The preparation of financial statements in conformity with these accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements;
and the reported amounts of expenses during the reported period. Ultimate
results could differ from the estimates of management.
In the opinion of management, the unaudited condensed consolidated
financial statements included herein contain all adjustments necessary to
present fairly the Company's financial position as of March 31, 2012 and
the results of its operations and cash flows for the three months ended
March 31, 2012 and 2011. Such adjustments are of a normal recurring nature.
The results of operations for the three months ended March 31, 2012 may not
be indicative of results for the full year.
DEVELOPMENT STAGE COMPANY
As of December 31, 2011, the Company was a development stage company as
defined by Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 915-10, "DEVELOPMENT STAGE ENTITIES." During
the first quarter of 2012, the Company commenced operations with the
execution of a commercial contract and is no longer deemed to be a
development stage company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments, with an initial
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are stated at costs and consist of bank deposits and money
market funds.
-4-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
--------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for probable uncollectible
amounts through a charge to operations and a credit to an allowance for
doubtful accounts based on historical experience and management's
assessment of the current status of individual accounts. Balances that are
still outstanding after management has used reasonable collection efforts
are written off through a charge to the allowance for doubtful accounts and
a credit to accounts receivable. At March 31, 2012 and December 31, 2011,
the Company had an allowance of $48,524 and $48,524, respectively, for
accounts receivable deemed as uncollectible.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided for on the straight line method over the estimated
useful lives of the related assets as follows:
Equipment 5 years
Computers 5 years
Remediation plants and chambers 5 years
Vehicles 5 years
Leasehold improvements 3 years
The cost of maintenance and repairs is charged to expense in the period
incurred. Expenditures that increase the useful lives of assets are
capitalized and depreciated over the remaining useful lives of the assets.
When items are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is included
in operations.
INTANGIBLE ASSETS
In accordance with ASC 350-25, "INTANGIBLES - GOODWILL AND OTHER", the
Company acquired a patent that is being amortized over its useful life of
fifteen years. The Company purchased the patent through the issuance of
600,000 shares of common stock with a fair value of $120,000 and a cash
payment of $100,000. Additionally, the Company capitalized patent fees of
$2,000. The Company's balance of intangible assets on the balance sheet net
of accumulated amortization was $161,228 and $182,140 at March 31, 2012 and
December 31, 2011, respectively. Amortization expense related to the
intangible assets was $3,700 and $3,700 for the three months ended March
31, 2012 and 2011, respectively. Amortization expense related to the
intangible assets is expected to be approximately $14,800 each year for
2012 through 2023.
-5-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
--------------------------------------------------------------------------------
LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment in accordance
with the guidance of ASC 360-10, "PROPERTY, PLANT, AND EQUIPMENT", whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Recoverability of an asset to be held and
used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the asset. If
such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds
its fair value. Through March 31, 2012, the Company had not experienced
impairment losses on its long-lived assets.
EQUITY INVESTMENTS
The Company followed ASC 323-10, "INVESTMENTS" to account for an investment
in an entity in which the Company had a 20% to 50% interest or otherwise
exercised significant influence. The investment was carried at cost and
adjusted for the Company's proportionate share of undistributed earnings or
losses of Investee.
REVENUE RECOGNITION AND COST OF REVENUES
The Company's leasing and processing revenues pertaining to remediation
plants are recognized when there is pervasive evidence of the arrangement,
delivery has occurred, the price is fixed and determinable and
collectability is reasonably assured.
Leasing and processing revenues include revenues from the leasing of the
plants, and a per gallon processing fee. These services are provided to
customers ongoing and are billed on a monthly basis and recognized as
revenue as the services are provided during the term of the arrangement in
accordance with ASC 605-25, "MULTIPLE ELEMENT ARRANGEMENTS."
Costs of sales consist primarily of repairs and maintenance and
depreciation on leased plants and any other related servicing costs.
NET LOSS PER SHARE
The Company follows ASC 260-10, "EARNINGS PER SHARE" in calculating the
basic and diluted loss per share. The Company computes basic loss per share
by dividing net loss and net loss attributable to common shareholders by
the weighted average number of common shares outstanding. Diluted loss per
share considers the effect of common equivalent shares.
The Company's computation of basic and diluted loss per share for the three
months ended March 31, 2012 and 2011, respectively, excludes the following
potentially dilutive securities because the effect of their inclusion would
be anti-dilutive.
2012 2011
------------------- -------------------
Convertible debt 4,216,261 1,866,899
Stock warrants 29,987,747 16,918,982
------------------- -------------------
34,204,008 18,785,881
=================== ===================
-6-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
--------------------------------------------------------------------------------
INCOME TAXES
Income taxes are accounted for under the asset and liability method as
stipulated by ASC 740, "ACCOUNTING FOR INCOME TAXES". Deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in operations in the period that
includes the enactment date. Deferred tax assets are reduced to estimated
amounts to be realized by the use of the valuation allowance. A valuation
allowance is applied when in management's view it is more likely than not
(50%) that such deferred tax will not be utilized.
ASC 740 provides interpretative guidance for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. In the unlikely event that an uncertain tax position
exists in which the Company could incur income taxes, the Company would
evaluate whether there is a probability that the uncertain tax position
taken would be sustained upon examination by the taxing authorities. A
liability for uncertain tax positions would then be recorded if the Company
determined it is more likely than not that a position would not be
sustained upon examination or if a payment would have to be made to a
taxing authority and the amount is reasonably estimable.
As of March 31, 2012, the Company does not believe any uncertain tax
positions exist that would result in the Company having a liability to the
taxing authorities. The Company's policy is to classify interest and
penalties related to unrecognized tax benefits, if and when required, as
part of interest expense and general and administrative expense,
respectively, in the consolidated statement of operations. The Company's
tax returns for the years ended 2008 through 2011 are subject to
examination by the federal and state tax authorities.
DERIVATIVE INSTRUMENTS
The Company does not enter into derivative contracts for purposes of risk
management or speculation. However, from time to time, the Company enters
into contracts, namely convertible notes payable, that are not considered
derivative financial instruments in their entirety, but that include
embedded derivative features.
In accordance with FASB ASC Topic 815-15, "EMBEDDED DERIVATIVES," and
guidance provided by the SEC Staff, the Company accounts for these embedded
features as equity at fair value.
The recognition of the fair value of the derivative instrument at the date
of issuance is applied first to the debt proceeds. The excess fair value,
if any, over the proceeds from a debt instrument, is recognized immediately
in the statement of operations as interest expense. The value of
derivatives associated with a debt instrument is recognized at inception as
a discount to the debt instrument and amortized to interest expense over
the life of the debt instrument. A determination is made upon settlement,
exchange, or modification of the debt instruments to determine if a gain or
loss on the extinguishment has been incurred based on the terms of the
settlement, exchange, or modification and on the value allocated to the
debt instrument at such date.
FINANCIAL INSTRUMENTS
The Company's short-term financial instruments consist primarily of cash,
accounts receivable, accounts payable and accrued expenses. The carrying
amount of debt, approximates fair value because current interest rates
available to the Company for debt with similar terms and maturities are
substantially the same. The other aforementioned financial instruments
approximate fair value due to their short-term maturities.
-7-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
--------------------------------------------------------------------------------
COMPREHENSIVE INCOME
ASC 220, "COMPREHENSIVE INCOME" establishes standards for the reporting and
presentation of comprehensive income and its components in the financial
statements. As of March 31, 2012 and December 31, 2011, the Company's
accumulated other comprehensive loss of $12,417 and $12,417, respectively,
is comprised of the accumulated foreign currency translation adjustments
related to the Company's previous equity investment.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows ASC 718, "COMPENSATION - STOCK COMPENSATION", in
accounting for its stock based compensation. This standard states that
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the
vesting period.
The Company accounts for transactions in which services are received in
exchange for equity instruments based on the fair value of such services
received from non-employees, in accordance with ASC 505-50 "EQUITY BASED
PAYMENTS TO NON-EMPLOYEES."
COMMON STOCK PURCHASE WARRANTS
The Company accounts for common stock purchase warrants at fair value in
accordance with ASC 815-40 "DERIVATIVES AND HEDGING." The Black-Scholes
option pricing valuation method is used to determine fair value of these
warrants consistent with ASC 718, "COMPENSATION - STOCK COMPENSATION." Use
of this method requires that the Company make assumptions regarding stock
volatility, dividend yields, expected term of the warrants and risk-free
interest rates.
CONCENTRATION OF RISK
The Company does not have any off-balance-sheet concentrations of credit
risk. The Company expects cash and accounts receivable to be the two assets
most likely to subject the Company to concentrations of credit risk. The
Company's policy is to maintain its cash with high credit quality financial
institutions to limit its risk of loss exposure. The Company minimizes its
accounts receivable credit risk by transacting contractual arrangements
with customers that have been subjected to stringent credit evaluations and
structuring the contracts in a manner that lessens inherent credit risks.
As of March 31, 2012, the Company maintained its cash in four financial
institutions. The Company's cash balances at March 31, 2012 and December
31, 2011 were fully insured. The Company has not experienced any losses in
its bank accounts through March 31, 2012.
The Company is largely dependent upon two vendors for the manufacturing of
its remediation plants and components. These vendors comprise a significant
balance of the consolidated accounts payable balance at March 31, 2012.
These two vendors represent balances due of approximately $1,700,000 and
$1,300,000 as of March 31, 2012.
RECLASSIFICATIONS
Certain prior year account balances within the financial statements have
been reclassified for presentation purposes.
-8-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
--------------------------------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued a new accounting standard update (ASU No.
2011-04), which amends the fair value measurement guidance and includes
some enhanced disclosure requirements. The most significant change in
disclosures is an expansion of the information required for Level 3
measurements based on unobservable inputs. The standard is effective for
fiscal years beginning after December 15, 2011. The Company adopted this
standard in the first quarter of 2012 and determined that it does not
significantly impact the financial statements and disclosures.
In June 2011, the FASB issued a new accounting standard (ASU No. 2011-05),
which eliminates the current option to report other comprehensive income
and its components in the statement of stockholders' equity. Instead, an
entity will be required to present items of net income and other
comprehensive income in one continuous statement or in two separate, but
consecutive, statements. The standard is effective for fiscal years
beginning after December 15, 2011. The Company adopted this standard in the
first quarter of 2012 and determined that it does not have any impact on
the financial statements.
In January 2012, the FASB issued a new accounting standard (ASU No.
2011-11), which modifies the disclosures of offsetting assets and
liabilities. The standard is effective for reporting periods beginning
after January 1, 2013. The Company will adopt this standard in the first
quarter of 2013 and is currently evaluating its impact on the Company's
financial statements and disclosures.
NOTE 2- GOING CONCERN
---------------------
The financial statements have been prepared on a going concern basis, and
do not reflect any adjustments related to the uncertainty surrounding the
Company's recurring losses or accumulated deficit.
The Company currently has limited revenues and is incurring losses. These
factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company is in the process of deploying its
technologies and securing service contracts. Additionally, management plans
to finance the Company's operations through the issuance of debt and equity
securities. However, management cannot provide any assurances that the
Company will be successful in accomplishing its plan.
The ability of the Company to continue as a going concern is dependent upon
its ability to successfully accomplish the plan described in the preceding
paragraph and eventually secure other sources of financing and attain
profitable operations. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to
continue as a going concern.
NOTE 3 - EQUITY INVESTMENT
--------------------------
In July 2009, the Company acquired a 50% ownership interest in
VideoLatitude Inc., a Canadian Company with plans to enter the wireless
live-video technology business. The remaining 50% of the interest was owned
by four Canadian citizens and a Canadian corporation. The Company accounted
for this investment under the equity method of accounting.
In December 2011, the Company reached an agreement with the management of
VideoLatitude, whereby VideoLatitude's management agreed to reacquire the
Company's interest in VideoLatitude for $225,000. As a result of this
agreement, the Company recorded an impairment charge of $873,029 to record
the investment at the amount received for the interest in February 2012.
During the three months ended March 31, 2011, the Company recognized
$246,257 of pro-rata share of losses associated with this investment. The
latter amount was reported in other expense in the accompanying 2011
statements of operations.
-9-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 3 - EQUITY INVESTMENT (CONTINUED)
--------------------------------------
The Company has not presented the components of the investment as of
December 31, 2011 as the investment was adjusted to its net realizable
value based upon the agreement for sale reached with VideoLatitude's
management December 31, 2011.
VideoLatitude's functional currency is the Canadian Dollar. VideoLatitude
accounts for currency translation in accordance with ASC 830-10, "FOREIGN
CURRENCY MATTERS." Income and expenses related to its operations are
translated at weighted average exchange rates during the year. Assets and
liabilities are translated to US dollars at the exchange rate in effect at
the balance sheet date.
NOTE 4 - PREPAID LICENSING FEES
-------------------------------
Prepaid licensing fees represents the unamortized costs for the use of
certain technology related to water remediation. In consideration for this
technology, the Company issued 500,000 shares of common stock valued at
$.20 per share in 2009. This amount is being amortized over the term of the
licensing agreement, which is 15 years. The Company's balance of prepaid
licensing fees on the balance sheets, net of accumulated amortization, was
$85,000 and $86,667 at March 31, 2012 and December 31, 2011, respectively.
Amortization expense related to these fees was $1,667 and $1,666 for the
three months ended March 31, 2012 and 2011, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
-------------------------------
At March 31, 2012 and December 31, 2011, property and equipment consisted
of the following:
March 31, December 31,
2012 2011
------------------- ---------------
Computers $ 30,685 $ 28,103
Equipment 336,598 319,990
Remediation plants and chambers 10,595,768 9,688,974
Leasehold improvements 198,926 195,165
Vehicles 817,228 817,228
------------------- ---------------
11,979,205 11,049,460
Less accumulated Depreciation 189,692 92,902
------------------- ---------------
$ 11,789,513 $ 10,956,558
=================== ===============
The Company's vehicles and a portion of its equipment serve as collateral
on notes payable pursuant to the financing agreements mentioned in note 8
to the condensed consolidated financial statements.
Depreciation expense for the three months ended March 31, 2012 and 2011 was
$96,790 and $3,508, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS AND BALANCES
------------------------------------------------
In January 2011, the Company purchased a vehicle from an officer. The
purchase price of $33,846 was based on the estimated fair value of the
vehicle and is included in fixed assets under the vehicles category as
shown in Note 5.
-10-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 7 - CONVERTIBLE DEBT
-------------------------
At March 31, 2012 and December 31, 2011, the Company had convertible notes
outstanding of $369,795 and $66,261, respectively, net of a discount of
$1,821,466 and $0, respectively. These convertible notes matured at various
times within six to twelve months from date of issuance, have interest
rates of 7.0% - 10.0% and allow the holder to convert the notes into common
stock at conversion prices of $0.50 - $1.00 per share. As of March 31,
2012, $66,261 of the outstanding debt had become due and was in default and
had not been converted. In connection with the convertible notes issued
prior to January 1, 2012, the Company issued warrants expiring five years
from date of issuance which allow the holders to purchase shares of common
stock at $1.25 per share and issued a share of common stock for every
dollar borrowed. No warrants were issued along with the convertible debt
issued during 2012. Subsequent to March 31, 2012, $10,350 of the debt and
related accrued interest was converted into 10,350 shares of the Company's
common stock.
NOTE 8- LONG TERM DEBT
----------------------
Long term debt is comprised of vehicle financing arrangements and a capital
lease pertaining to laboratory equipment. The payment terms of long term
debt ranges from one to three years and bears interest at rates ranging
from 6.79% to 29.80%. The following table sets forth the composition of
long term debt at March 31, 2012.
2012
-------------------
Vehicle loans $ 176,413
Capital leases 21,434
-------------------
197,847
Less: current portion 119,332
-------------------
$ 78,515
===================
Future repayments of long term debt are as follows:
YEAR AMOUNT
---- --------
2012 $ 81,602
2013 89,591
2014 26,654
--------
$197,847
========
NOTE 9- STOCKHOLDERS' EQUITY
----------------------------
COMMON STOCK
For the three months ended March 31, 2012, the Company issued common stock
as follows:
(a) 5,284,333 shares with 2,642,167 warrants for cash pursuant to a
private placement stock offering.
(b) 5,000 shares for the exercise of stock warrants.
(c) 50,000 shares pursuant to an employment agreement.
(d) 482,500 pursuant to consulting agreements.
At March 31, 2012, the Company had a liability to issue stock for a value
of $1,499,363. The balance was comprised of shares to be issued in 2012
from proceeds received from a private placement offering, shares to be
issued to a former employee and shares to be issued to employees as the
Company's 401(k) Safe Harbor contribution. At December 31, 2011, the
Company had a liability to issue stock for a value of $451,646. The balance
was comprised of shares to be issued in 2012 from proceeds received from a
private placement offering.
-11-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 10 - STOCK PURCHASE WARRANTS
---------------------------------
During the three months ended March 31, 2012, the Company issued warrants
(each warrant is exercisable into one share of Company restricted common
stock) in connection with the issuance of stock for cash as discussed in
Note 9 and for services rendered by consultants.
A summary of the change in stock purchase warrants for the three months
ended March 31, 2012 and 2011 is as follows:
Weighted
Weighted Average
Number of Average Remaining
Warrants Exercise Contractual
Outstanding Price Life (Years)
----------------- ------------ -------------
1st Quarter - 2012:
Balance, December 31, 2011 27,907,516 $ 1.27 3.75
Warrants issued 2,210,231 1.75 5.15
Warrants exercised (5,000) 0.50 -
Warrants cancelled (125,000) 1.25 -
----------------- ------------ -------------
Balance, March 31, 2012 29,987,747 $ 1.27 3.67
================= ============ =============
1st Quarter - 2011:
Balance, December 31, 2010 7,348,895 $ 1.25 2.38
Warrants issued 9,570,087 1.25 2.96
----------------- ------------ -------------
Balance, March 31, 2011 16,918,982 $ 1.25 2.59
================= ============ =============
The balance of outstanding and exercisable common stock warrants at March
31, 2012 is as follows:
Remaining
Exercise Price Contractual
Number of Warrants Outstanding Range Life (Years)
------------------------------- ---------------- ----------------
23,674,183 $1.01 - 1.25 3.50
150,000 $1.26 - 1.50 4.99
5,603,564 $1.51 - 1.75 4.90
500,000 $1.76 - 2.00 4.59
60,000 $2.26 - 2.50 4.63
-12-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 10 - STOCK PURCHASE WARRANTS (CONTINUED)
---------------------------------------------
The fair value of stock purchase warrants granted were calculated using the
Black-Scholes option pricing model using the following assumptions:
Three Months Ended
March 31, March 31,
2012 2011
------------- -------------
Risk free interest rate .27% - .34% .62% - .78%
Expected volatility 201% - 217% 218% - 220%
Expected term of stock warrant in years 2.5 2.5
Expected dividend yield 0% 0%
Average value per warrant $1.10 - $1.51 $0.16 - $0.44
Expected volatility is based on historical volatility of the Company and
other comparable companies. Short Term U.S. Treasury rates were utilized.
The expected term of the options was calculated using the alternative
simplified method permitted by SAB 107, which defines the expected life as
the average of the contractual term of the options and the weighted average
vesting period for all option tranches. Since trading volumes and the
number of unrestricted shares are very small compared to total outstanding
shares, the value of the warrants was decreased for lack of marketability.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
LEASE AGREEMENTS
The Company has entered into various leases for its offices and other
operational facilities. The leases are for varying periods of time ranging
from 1 to 5 year periods of time.
Future minimum lease payments for these leases are as follows:
YEAR AMOUNT
---- ------------
2012 $ 194,844
2013 202,998
2014 128,391
2015 22,041
2016 9,370
------------
$ 557,644
============
-13-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
---------------------------------------------------
INTELLECTUAL PROPERTY AGREEMENTS
In 2010, the Company entered into a Patented Technology and Services
Purchase Agreement upon its acquisition of certain proprietary intellectual
properties pertaining to the treatment of water by the use of
electro-precipitation. The Company is obligated to pay a five percent
royalty on the first $6,000,000 of gross revenues resulting from the use of
the technology or on the sale of any equipment using the patented
technology transferred to the Company pursuant to this agreement.
LEGAL MATTERS
The Company is subject to several legal actions arising during the normal
course of business. Although these actions are in the preliminary stages,
the Company intends to vigorously defend its position.
There is a harassment claim by a former employee against one of the
Company's officers. The Company believes that its insurance policy will
cover a significant portion of any potential costs resulting from this
claim.
NOTE 12 - INCOME TAXES
----------------------
A reconciliation of the differences between the effective income tax rate
and the statutory federal tax rate for the three months ended March 31,
2012 and 2011 are as follows:
2012 2011
-------------- --------------
Tax benefit at U.S. statutory rate 34.00 % 34.00 %
State taxes, net of federal benefit 3.63 3.63
Change in valuation allowance (37.63) (37.63)
-------------- --------------
- % - %
============== ==============
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at March 31, 2012 and December 31, 2011
consisted of the following:
Deferred Tax Assets 2012 2011
-------------- --------------
Net Operating Losses Carryforward $ 6,941,000 $ 6,136,000
Depreciation 71,000 35,000
Bad debts 18,000 18,000
-------------- --------------
Net Non-current Deferred Tax Asset 7,030,000 6,189,000
Valuation Allowance (7,030,000) (6,189,000)
-------------- --------------
Total Net Deferred Tax Asset $ - $ -
============== ==============
-14-
LATITUDE SOLUTIONS, INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(UNAUDITED)
NOTE 12 - INCOME TAXES (CONTINUED)
----------------------------------
As of March 31, 2012, the Company had a net operating loss carry forward
for income tax reporting purposes of approximately $18,683,000 that may be
offset against future taxable income through 2032. Current tax laws limit
the amount of losses available to be offset against future taxable income
when a substantial change in ownership occurs. Therefore, the amount
available to offset future taxable income may be limited. No tax asset has
been reported in the financial statements because the Company believes that
there is a 50% or greater chance that short-term profitability will not be
attained. Accordingly, the deferred tax assets have been offset by a
valuation allowance of the same amount as of March 31, 2012 and December
31, 2011.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------
Three Months Ended
March 31,
-------------------------------
2012 2011
------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 10,801 $ 10
============= =============
Changes in non-cash financing and investing activities:
Common stock issued for notes payable
(bonus shares) $ - $ 478,740
============= =============
Common stock issued for conversion of notes
payable and accrued interest $ - $ 1,036,964
============= =============
NOTE 14 - LINE OF CREDIT
------------------------
During the three months ended March 31, 2012, the Company entered into a
$5,000,000 revolving accounts receivable based line of credit with a
finance company. The line of credit is for a two year period with one year
automatic renewals. As of March 31, 2012, the Company had not drawn any
funds against the line of credit, and no amounts were due. Subsequent to
March 31, 2012, the Company drew $610,000 on the credit line based on
invoices outstanding.
NOTE 15 - SUBSEQUENT EVENTS
---------------------------
Management has evaluated subsequent events through the date the financial
statements were issued.
From April 1, 2012 through the issuance of the financial statements, the
Company raised $1,261,500 through the issuance of 1,682,000 shares of
common stock and 841,000 stock warrants via a private placement memorandum.
The warrants have a term of 5 years and an exercise price of $1.75.
In May 2012, the Company entered into a 50/50 Joint Venture agreement with
an oil field service company. The agreement includes the acquisition of a
192 acre site which has three fresh water wells producing over 1,000,000
gallons per day. The Company will establish on the Joint Venture's land a
water retention and remediation facility to process and reclaim high
volumes of produced and flowback water.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN. IN CONNECTION WITH, AND
BECAUSE WE DESIRE TO TAKE ADVANTAGE OF, THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WE CAUTION READERS REGARDING
CERTAIN FORWARD LOOKING STATEMENTS IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN
THIS REPORT AND IN ANY OTHER STATEMENT MADE BY, OR ON OUR BEHALF, WHETHER OR NOT
IN FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. FORWARD-LOOKING
STATEMENTS ARE STATEMENTS NOT BASED ON HISTORICAL INFORMATION AND WHICH RELATE
TO FUTURE OPERATIONS, STRATEGIES, FINANCIAL RESULTS OR OTHER DEVELOPMENTS.
FORWARD LOOKING STATEMENTS ARE NECESSARILY BASED UPON ESTIMATES AND ASSUMPTIONS
THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR CONTROL AND MANY
OF WHICH, WITH RESPECT TO FUTURE BUSINESS DECISIONS, ARE SUBJECT TO CHANGE.
THESE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT ACTUAL RESULTS AND COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD LOOKING
STATEMENTS MADE BY, OR ON OUR BEHALF. WE DISCLAIM ANY OBLIGATION TO UPDATE
FORWARD-LOOKING STATEMENTS.
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON THE COMPANY'S
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND FOR EACH OF THE YEARS IN THE
TWO-YEAR PERIOD THEN ENDED, INCLUDES A "GOING CONCERN" EXPLANATORY PARAGRAPH,
THAT DESCRIBES SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN.
Latitude Solutions, Inc. (hereafter "LSI" or "the Company" or "we" or "us") is a
water remediation company and through its subsidiaries, licenses and operates
its patented technology. The Company's patented technology provides for
sustainable treatment of high volumes of industrially produced waste waters for
reuse and environmentally safe discharge. LSI, through its subsidiaries, owns
and operates remediation equipment sets and intends to provide services to its
clients through monthly and annual operating leases. LSI's revenues are derived
from a combination of monthly lease payments and processed quantity payments
based on the volume of treated water. This model is intended to create a
recurring revenue stream for LSI.
Latitude Clean Tech Group, Inc., ("LCTG") a wholly-owned subsidiary, provides
products, processes and solutions for contaminated water applications. LCTG
provides products, processes and solutions for contaminated water issues
resulting from various oil/gas drilling operations including water used in
hydraulic fracturing of wells, industrial produced waste water, and mining
operations producing contaminated water. In light of the increasing issues
related to major industrial produced water pollution, mining, oil/ natural gas
(hydraulic fracturing), contaminated water related issues there is a growing
market for the Company's technologies, both domestically and possibly
internationally.
On February 3, 2012, the Company converted its subsidiary, Latitude Energy
Services, LLC, which had been dissolved in the State of Nevada, into and
organized a new limited liability company in the State of Florida, called
Latitude Energy Services, LLC. Latitude Energy Services provides water
remediation services to the oil, gas and energy industries worldwide, along with
a variety of industries the produce industrial waste water, utilizing innovative
and patented technologies developed by the Company. Latitude Energy Services
markets, owns and operates the remediation/processing units for its clients
under strict licensing and leasing agreements to insure quality of service,
protect the integrity and efficacy of the technology and to maximize financial
benefits to the Company
Based on our current cash reserves as of March 31, 2012 of $846,251 we have an
operational budget of approximately two months. We have generated limited
revenues during the three months ended March 31, 2012 of approximately $522,788
to date. During the first quarter, we raised $1,828,750 from the sale of our
common stock and $2,125,000 from the issuance of convertible debt. If we are
unable to generate enough revenue, through our other subsidiaries, to cover our
operational costs, we will need to seek additional sources of funds. Currently,
we have NO committed source for any funds as of date hereof. No representation
is made that any funds will be available when needed. In the event funds cannot
be raised if and when needed, we may not be able to carry out our business plan
and could fail in business as a result of these uncertainties.
-16-
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2012 WITH THE THREE MONTHS ENDED MARCH 31, 2011
For the Three Months Ended Change
March 31,
2012 2011 $ %
--------------------- ----------------------- --------------------- ---------------
REVENUES $ 522,788 $ - $ 522,788 - %
COST OF REVENUES - -
310,001 310,001
--------------------- ----------------------- --------------------- ---------------
GROSS PROFIT (LOSS) - -
212,787 212,787
--------------------- ----------------------- --------------------- ---------------
OPERATING EXPENSES
Consulting fees 2,228,781 641,393 1,587,388 247
General and
administrative 1,832,248 503,381 1,328,867 264
Research and
development expense 87,294 - 87,294 -
Salaries expense 760,315 459,633 300,682 65
--------------------- ----------------------- --------------------- ---------------
Total operating expenses 4,908,638 1,604,407 3,304,231 206
--------------------- ----------------------- --------------------- ---------------
LOSS FROM OPERATIONS (4,695,851) (1,604,407) (3,091,444) 193
--------------------- ----------------------- --------------------- ---------------
OTHER EXPENSES
Finance costs (173,043) (408,482) 235,439 (58)
Gain on settlement of debt 26,273 150,000 (123,727) (82)
Other income 5,904 - 5,904 -
Interest expense (10,801) (40,157) 29,356 (73)
Equity in losses
of investee - (246,257) 246,257 (100)
--------------------- ----------------------- --------------------- ---------------
Total other expense (151,667) (544,896) 393,229 (72)
--------------------- ----------------------- --------------------- ---------------
NET LOSS $ (4,847,518) $ (2,149,303) $ (2,698,215) 126%
--------------------- ----------------------- --------------------- ---------------
--------------------- ----------------------- --------------------- ---------------
LOSS PER SHARE $ (0.08) $ (0.07)
===================== =======================
WEIGHTED AVERAGE OUTSTANDING
SHARES
BASIC AND DILUTED 61,003,175 30,823,728
===================== =======================
REVENUES
The Company did not recognize any revenue from its operations during the three
months ended March 31, 2011. During the three months ended March 31, 2012, the
Company commenced commercial operations with the deployment of its water
remediation units resulting in revenues of $522,788. Coinciding with commercial
operations, the Company incurred $310,001 in costs of generating the revenues.
These costs are comprised of reaction chamber plate costs and labor costs.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2012 were $4,908,638 as
compared to $1,604,407 for the three months ended March 31, 2011, an increase of
$3,304,231 or 206%. The increase was primarily caused by an increase of
$1,587,388 in consulting fees, an increase of $1,328,867 in general and
administrative expenses and an increase of $300,682 in salary expenses related
to the deployment of staff to supervise and operate our equipment in the field.
-17-
INTEREST EXPENSE
Interest expense was $10,801 for the three months ended March 31, 2012 as
compared to $40,157 for the three months ended March 31, 2011, a decrease of
$29,356 or 73%. This amount is a result of the Company's convertible notes
payable that were issued with a significant discount due to the beneficial
conversion feature associated with the notes. The original discount of
approximately $1,800,000 is recognized as interest expense over the life of the
respective notes.
GAIN ON SETTLEMENT OF ACCRUED EXPENSES
During the three months ended March 31, 2012, the Company terminated certain
individuals as part of the Company's restructure. As part of the separation
agreements with certain individuals, amounts that had been accrued for as
liabilities due to the individuals were settled for amounts lower than the
liabilities and the Company recorded a gain of $26,273 for the difference
between the liability and the amount agreed to under the separation agreements.
The gain recognized of $150,000 for the three months ended March 31, 2011 is
attributable to the settlement of accrued expenses.
NET LOSSES
During the three months ended March 31, 2012, the Company recognized a net loss
of $4,847,518 compared to $2,149,303 for the three months ended March 31, 2012.
The Company's net loss increased $2,698,215 during the three months ended March
31, 2012 when compared to the three months ended March 31, 2011. The primary
reasons for this increase was an increase in operating expenses of $3,304,231
and an increase of $212,787 gross profit and decrease in the other expenses of
$393,228.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2012, the Company had total current assets of $1,711,925,
consisting of $846,251 in cash on hand, $524,940 in accounts receivable net of
an allowance for doubtful accounts of $48,524 and $340,734 in prepaid expenses.
At March 31, 2012, we had total current liabilities of $5,981,618 consisting of
$3,993,128 in accounts payable and accrued liabilities, the current portion of
long term debt of $119,332, convertible debt of $369,795 net of a discount of
$1,821,466 and a liability to issue common stock of $1,499,363. At March 31,
2012, the Company has a working capital deficit of $4,269,693.
Net cash used in operating activities was $2,980,325 for the three months ended
March 31, 2012, compared to $1,015,896 for the three months ended March 31,
2011. This increase in cash used relates to the significantly higher cash
expenses during the three months ended March 31, 2012 due to an increase in
operating activities including increase in consulting and travel expenses as the
Company has begun commercial operations. During the three months ended March 31,
2012 net losses of $4,847,518 were offset by non-cash items of $119,368 in
depreciation and amortization expense, $1,387,741 in common stock for services,
$1,223,839 in warrants issued for services, $173,043 in non-cash financing cost
and a gain on the settlement of liabilities of $26,273.
The Company's net cash used in investing activities was $704,745 for the three
months ended March 31, 2012 compared to net cash used in investing activities of
$538,319 for the three months ended March 31, 2012. In the three months ended
March 31, 2012, the Company invested $929,745 in plant and equipment and
received $225,000 from the sale of its investment.
The Company's net cash provided by financing activities was $3,862,657 for the
three months ended March 31, 2012 compared to net cash provided by financing
activities of $4,620,927 for the three months ended March 31, 2011. During the
three months ended March 31, 2012, the Company received $1,828,750 in proceeds
from the issuance of shares of common stock, $2,500 from the exercise of common
stock warrants and $2,125,000 in proceeds from the issuance of convertible debt.
At March 31, 2012 and December 31, 2011, the Company had convertible notes
payable outstanding of $369,795 and $66,261, respectively, which was net of a
discount of $1,821,466 and $0, respectively. These convertible notes matured at
various times within six to twelve months from date of issuance, have an
-18-
interest rate of 7 to 10% and allows the holder to convert the notes into common
stock at a conversion price of between $0.50 and $1.00 per share. As of March
31, 2012 $66,261 of the outstanding debt had become due and was in default. Of
the $66,261 of debt in default, $10,350 was converted into common stock
subsequent to March 31, 2012 with no additional penalties related to the
default. In connection with the debt outstanding at December 31, 2011, the
Company issued warrants expiring five years from date of issuance which allow
the holders to purchase shares of common stock at $1.25 per share and issued a
share of common stock for every dollar borrowed. The debt issued during the
three months ended March 31, 2012 was issued without any warrants.
The Company's Long Term Debt is comprised of third party financing arrangements
for vehicles and capital leased lab equipment. The payment terms of the debt
ranges from one to three years and bears interest rate ranging from 6.79% to
29.80%.
NEED FOR ADDITIONAL FINANCING
The Company anticipates the need for an additional $6 to $10 million in
financing over the next twelve months in order to fund the building of
additional equipment sets which is marketed under the Companies trade mark brand
named Integrated Water Systems(TM). Management is currently exploring several
financing alternatives including both debt and equity financing. However there
can be no assurances that these alternatives will come to fruition or that if
the Company needs to raise capital for working capital purposes, it will be
successful.
CRITICAL ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments, with an initial maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided for on the
straight line method over the estimated useful lives of the related assets as
follows:
Equipment 5 years
Computers 5 years
Remediation plants and chambers 5 years
Vehicles 5 years
Leasehold improvements 3 years
The cost of maintenance and repairs is charged to expense in the period
incurred. Expenditures that increase the useful lives of assets are capitalized
and depreciated over the remaining useful lives of the assets. When items are
retires or disposed of, the cost and accumulated depreciation are removed from
the accounts and any gain or loss is included in income.
INTANGIBLE ASSETS
In accordance with the Financial Accounting Standards Board (FASB) Accounting
Standards Codification ("ASC") 350-25, "INTANGIBLES - GOODWILL AND OTHER", the
Company acquired a patent that is being amortized over its useful life of
fifteen years. The Company purchased the patent through the issuance of 600,000
shares of common stock with a fair value of $120,000 and a cash payment of
$100,000. Additionally, the Company capitalized patent fees of $2,000. The
Company's balance of intangible assets on the balance sheet net of accumulated
amortization was $161,228 and $182,140 at March 31, 2012 and December 31, 2011,
respectively. Amortization expense related to the intangible assets was $3,700
and $3,700 for the three months ended March 31, 2012 and 2011, respectively.
Amortization expense related to the intangible assets is expected to be
approximately $14,800 each year for 2012 through 2023.
-19-
EQUITY INVESTMENTS
The Company follows ASC 323-10, "INVESTMENTS" to account for investments in
entities in which the Company has a 20% to 50% interest or otherwise exercises
significant influence. These investments are carried at cost, adjusted for the
Company's proportionate share of undistributed earnings or losses of Investee.
REVENUE RECOGNITION AND COST OF REVENUES
The Company's leased plants and processing revenues are recognized when there is
pervasive evidence of the arrangement, delivery has occurred, the price is fixed
and determinable and collectability is reasonably assured.
Leasing and processing revenues includes revenues from the leasing of the
plants, and a per gallon processing fee. These services are provided to
customers ongoing and are billed on a monthly basis and recognized as revenue as
the services are provided.
Costs of revenues will consist primarily of repairs and maintenance and
depreciation on leased plants and any other related servicing costs.
FINANCIAL INSTRUMENTS
The Company adopted the provisions of ASC 820, "FAIR VALUE MEASUREMENTS AND
DISCLOSURES", effective January 1, 2008. ASC 820 defines fair value, establishes
a framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Valuation techniques used to measure fair
value, as required by ASC 820, must maximize the use of observable inputs and
minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last unobservable, that
may be used to measure fair value. The Company's assessment of the significance
of a particular input to the fair value measurements requires judgment, and may
affect the valuation of the assets and liabilities being measured and their
placement within the fair value hierarchy.
o Level 1 - Quoted prices in active markets for identical assets or
liabilities.
o Level 2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
o Level 3 - Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
------------------------------------------------------------------
NOT APPLICABLE
-20-
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) and that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer has concluded that the Company identified two material weaknesses in the
internal controls over financial reporting within our annual evaluation as
reported within the Form 10-K for the year ended December 31, 2011.
As our current financial condition allows, we are in the process of analyzing
and developing our processes for the establishment of formal policies and
procedures with necessary segregation of duties, which will establish mitigating
controls to compensate for the risk due to lack of segregation of duties. The
Company is currently in the process of implementing a new Enterprise Resource
Planning (ERP) system that would prevent erroneous or unauthorized changes to
the financial records and provide for an adequate audit trail of changes made
within the system.
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------
The Company is subject to several legal actions arising during the normal course
of business. Although these actions are in the preliminary stages, the Company
intends to vigorously defend its position.
On March 19, 2012, a former employee of the Company filed a sexual harassment
law suit against the Company and one of the Company's Officers and Directors, in
the United States District Court for the Southern District of Florida. The
Company has investigated and is defending the lawsuit. The Company's insurance
coverage may reduce financial exposure to damages, if any, in this action
however, there is not an assurance thereof.
On November 11, 2011, a service provider filed suit against the Company in the
Supreme Court of the State of New York, County of Nassau alleging entitlement to
100,000 shares of the common stock of LSI or $350,000. The Company has asserted
defenses, including non-performance and intends to defend the case vigorously.
It is not feasible to predict the outcome of any such proceedings and LSI cannot
assure that their ultimate disposition will not have a materially adverse effect
on LSI's business, financial condition, cash flows or results of operations.
ITEM 1A. RISK FACTORS
----------------------
Not Applicable to Smaller Reporting Companies.
ITEM 2. CHANGES IN SECURITIES
------------------------------
During the period of January 1, 2012 through March 31, 2012, the Company issued
the following unregistered securities.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------------------------------- -------------------- ----------------- ------------------------ -----------------------------
February 8, 2012 Common Stock 125,000 $93,750 Accredited Investor
February 22, 2012 Common Stock 466,667 $350,000 Accredited Investor
March 5, 2012 Common Stock 530,000 $397,500 Accredited Investor
March 12, 2012 Common Stock 1,116,667 $837,500 Accredited Investor
March 27, 2012 Common Stock 318,000 $238,500 Accredited Investor
EXEMPTION FROM REGISTRATION CLAIMED
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Regulation D and Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"). All of the individuals and/or entities
that purchased the unregistered securities were primarily existing shareholders,
known to the Company and its management, through pre-existing business
relationships, as long standing business associates. All purchasers were
provided access to all material information, which they requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with their purchases. All purchasers of
the unregistered securities acquired such securities for investment and not with
a view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
NONE.
ITEM 4. MINE SAFETY DISCLOSURE
-------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION
--------------------------
NONE.
ITEM 6. EXHIBITS
-----------------
EXHIBITS. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
101.INS XBRL Instance Document (1)
101.SCH XBRL Taxonomy Extension Schema Document (1)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)
-----------------
(1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is
not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LATITUDE SOLUTIONS, INC.
-----------------------------------------------
(REGISTRANT)
Dated: May 14, 2012 By: /s/Jeffrey A. Wohler
-------------------------------------------
Jeffrey A. Wohler (Chief Executive Officer/
Principal Executive Officer)
Dated: May 14, 2012 By: /s/Matthew J. Cohen
-------------------------------------------
Matthew J. Cohen, (Chief Financial Officer/
Principal Accounting Officer/ Secretary /
Treasurer)
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