UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

  

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

  

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM __________ TO __________

 

COMMISSION FILE NUMBER   005-34249

 

LATTICE INCORPORATED

(Exact name of registrant as specified in charter)

 

DELAWARE

(State or other jurisdiction of

incorporation or organization)

 

22-2011859

(I.R.S. Employer

Identification No.)

 

7150 N. Park Drive, Suite 500, Pennsauken, New Jersey 08109

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone Number: (856) 910-1166

 

Securities registered under Section 12(b) of the Exchange Act: None.

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock,

$.01 par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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.

 

TABLE OF CONTENTS

 

			Page
	PART I
Item 1.	Business		1
Item 1A	Risk Factors		4
Item 1B	Unresolved Staff Comments		7
Item 2.	Properties		7
Item 3.	Legal Proceedings		7
Item 4.	Mine Safety Disclosures		8
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities		9
Item 6	Selected Financial Data		11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 8.	Financial Statements and Supplementary Data		17
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		18
Item 9A	Controls and Procedures		18
Item 9B.	Other Information		18
	PART III
Item 10.	Directors, Executive Officers, Promoters and Corporate Governance		18
Item 11.	Executive Compensation		20
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		22
Item 13.	Certain Relationship and Related Transactions, and Director Independence		23
Item 14.	Principal Accountant Fees and Services		23
Item 15.	Exhibits, Financial Statement Schedules.		24
SIGNATURES			28

 

 

PART I

 

ITEM 1. BUSINESS.

 

 

ORGANIZATIONAL HISTORY

 

We were formed under the name Science Dynamics Corporation, incorporated in the State of Delaware in May 1973 and began operations in July 1977. We have been developing and delivering secure telecommunication solutions for over 30 years. We changed our name to Lattice Incorporated in February 2007. Lattice incorporated is referred to herein as the “Company,” “we,” “us,” and “our”.

  

We operate as a Communication Services Company, directly providing telecom services to correctional facilities. In addition, we provide technology and engineering services to other service providers in the corrections market. We continue to organize our business segments based on the nature of the services offered and end-user markets served.

 

Historically, our revenue from the telecom services have been derived from wholesaling product and services to service providers providing telecom services to inmate facilities. In the latter part of 2009 we expanded our offering to include direct services to end-user correctional facilities either providing directly to facilities or via a partnering arrangement with other service providers. This decision was made based on our insight to the growth opportunities with the company’s current customer base and within the inmate telecommunications market.

 

Our new services model has enabled us to direct our activities toward a market of over $1.5 billion per year in the United States alone, based on the size of the inmate population in the United States and the telecommunications traffic derived by this population. Based upon successful testing of our technology, we similarly are implementing our technology and services model in Canada, Europe, and Asia. We also are responding to inquiries from international technology companies looking to implement our technology.  We will continue to partner with companies established in international markets to implement our technology and expand our technology footprint.

  

We currently operate in 16 states where over 50,000 inmates are either using our service or being provided a service by other companies utilizing our technology.  We plan to continue our growth by expanding our direct services within the states we serve, expanding to other states, continuing to offer our services to other providers on a wholesale basis, and continuing to sell our technology to strategic partners both in the U.S. and internationally.  Our technology is currently operating in Canada, U.K., Japan, Singapore and the Caribbean.  We plan on expanding our installations in these countries as well as continuing to pursue other partners with the goal of expanding our global footprint. We currently have a number of projects we are pursuing internationally.

 

Our Products and Services

 

Corrections Operating Platform^TM (COP)

Lattice’s Corrections Operating Platform^TM (COP) comprises an innovative, robust suite of hardware and software solutions designed to deliver significant benefits to corrections facilities:

·

Provide greater efficiencies to facilities.

·

Reduce the administrative burden on corrections staff.

·

Deliver revenue opportunities to facilities to help recover system administration costs.

·

Connect their inmates to family and friends, to help promote inmate self-improvement and ultimately reduce recidivism upon release.

Nexus Inmate Telephone System

·

Highly Secure, Cloud-Based Call Processing and Recording; Industry-Leading System Reliability.

·

Lattice’s Nexus Inmate Telephone System (ITS) is widely-installed and well-known for industry-leading security and reliability.

·

Nexus is a complete solution that includes all hardware and software for secure inmate account management, call connection, monitoring, recording, and customer service/technical support.

CellMate^TM

 

Changing the Game In Inmate Communications

 

Lattice’s new CellMate^TM Mobile Inmate Communications Device is changing how inmates communicate with family and friends and access educational and entertainment content. It packages all of the latest communications and media tools, providing multiple new ways for inmates to connect with family and friends and access resources for self-improvement. This can increase inmate morale and reduce recidivism.

 

As a handheld device to be used in inmates’ cells, CellMate Mobile will reduce administrative burden on corrections staff and maximize the frequency of calls, text messages, and electronic messages. This will result in greater commission-based facility revenue and cost recovery for system administration.

 

Netvisit^TM Video Visitation

 

Secure Video Visitation Solution Significantly Reduces Corrections Staff Burden

 

Transporting inmates for live visitation sessions with family and friends is an extremely costly and time-consuming task for corrections staff, one that also involves security risks. Lattice’s NetVisit^TM Video Visitation solution significantly reduces these labor hours, costs, and security risks by minimizing inmate transport.

 

For inmates, there is the added benefit of seeing their spouses, children, parents, and friends over live video on a more frequent basis. Maintaining this connection and bond can promote inmate self-improvement during incarceration and help reduce recidivism upon release.

 

NetVisit is a complete solution that includes all hardware, software and support for scheduling, monitoring and recording secure video visitation sessions.

 

Netvisit^TM Video Arraingment

 

Increasing Efficiency In the Jail AND In the Courtroom

 

Transporting inmates to a courtroom for arraignment involves significant time, cost, and security risks for corrections staff.  Lattice’s NetVisit^TM Video Arraignment is an innovative technology that enables inmates to remain at the jail facility while a Judge conducts the arraignment over a secure, real-time video connection.  The process is extremely efficient, utilizing a video station at the Judge’s chambers and one at the jail facility.

 

Deposit Solutions

 

A highly-reliable and robust account deposit platform is the backbone of Lattice’s communication solution. It provides inmates and their families and friends with a variety of phone account types and multiple ways to deposit funds into these accounts.  

 

Direct Services

 

Our Nexus platform allows us to provide correctional facilities with a feature rich secure call control service that enables inmates to make phone calls while providing the security and investigative features required in correctional facilities. In addition to telecommunications services, the Nexus based system provides enhanced capabilities to provide services such as video visitation, kiosk management, e-mail, and other advanced inmate services not readily available through less advanced systems. Traditionally, feature rich systems, because of cost, were only available to larger facilities. With the Nexus-based platform, because it is centrally located, we are able to provide a full suite of features to smaller facilities, enabling us to provide services traditionally unavailable to this section of the market. Our services provide correctional facilities with three unique advantages:

  

	1.	Increased revenue as a result of a highly reliable system.
	2.	Operational efficiencies that ease the administrative burden on the correctional facility.
	3.	Superior investigative tools that also enable information to readily be shared with outside agencies.

 

 

We continue to enhance our system and service offerings based on our 35 years of industry experience and the unique requirements of our customers. In addition, we work with other large communications providers to engineer new unique solutions that we are able to integrate back into our product and service offering.

 

Government Regulation (FCC)

 

In November 2015, the FCC released the text of its Order adopting new caps on interstate and intrastate inmate calling services (ICS), including ancillary fees. They will apply to ICS offered in all correctional facilities, regardless of the technology used to deliver the service.  The FCC’s new rate caps will operate as a ceiling in states that have not enacted reforms with equal or lower caps on rates and ancillary fees.  The caps are set forth below.

 

Rate Caps- Jails

 

Size and type of facility	Debit/prepaid rate cap per MOU as of June 20, 2016	Collect rate cap per MOU as of June 20, 2016	Collect rate cap per MOU as of July 1, 2017	Collect rate cap per MOU as of July 1, 2018
0–349 Jail ADP	$0.22	$0.49	$0.36	$0.22
350–999 Jail ADP	0.16	0.49	0.33	0.16
1,000+ Jail ADP	0.14	0.49	0.32	0.14

 

Rate Caps – Prisons

 

All Prisons	Debit/prepaid rate cap per MOU as of March 17, 2016	Collect rate cap per MOU as of March 17, 2016	Collect rate cap per MOU as of July 1, 2017	Collect rate cap per MOU as of July 1, 2018
	$0.11	$0.14	$0.13	$0.11

 

 

 

Currently Lattice markets to facilities with 600 beds or less and the majority of our facilities are below 350 beds. We anticipate little or no impact on our revenues from the new rate caps. This is based on our past experience when interstate rate caps were applied in 2014.

 

 

Employees

 

As of December 31, 2015, we had 27 full time employees and no part time employees. We supplement full time employees with subcontractors and part time individuals, consistent with workload requirements. None of our employees are covered by a collective bargaining agreement. We consider relations with our employees to be satisfactory.

 

ITEM 1A. RISK FACTORS

 

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.

 

We may not be able to continue as a going concern without additional financing. If such financing is not available to us or is not available to us on acceptable terms, we may be forced to cease operations.

 

Our current financial position does not provide sufficient operating cash flow to support our activities and our business requires constant additional investment and adaptation. For the year ended December 31, 2015, we had a net loss of approximately $5,532,000 and net cash used in operating activities of approximately $783,000. In addition, we had a working capital deficiency of approximately $6,943,000 and a shareholder’s deficit of $7,369,847 as of December 31, 2015. The foregoing raises substantial doubt about our ability to continue as a going concern.

 

Our current financial position does not provide sufficient operating cash flow to support our activities and our business requires constant additional investment and adaptation.

 

Our operations have been funded primarily through sales of stock to private investors, debt financing, and exchange of common stock for services received by us. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are not able to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development of our Commercial Services business or cease operations entirely.

 

We need to maintain current sources of funding and obtain new sources of funding in order to continue our operations.

 

We currently do not have enough cash to continue our operations without additional sources of funding. Our ability to continue operations is highly dependent on our ability to raise capital and increase cash flows generated from operations. In the event there is an unexpected downturn in our business or we are unable to obtain additional financing, we would need to declare bankruptcy or curtail operations. We cannot give any assurance that we will be able to achieve our planned operating goals nor give any assurance of our ability to obtain an adequate level of alternative financing. Moreover, any issuance of equity or equity-linked securities could result in significant dilution to our existing shareholders.

 

We currently have a number of on-demand liabilities that could be called at any time.

 

We currently have a significant amount of on-demand liabilities outstanding of approximately $4.4 million comprised of principal balances on notes of $1.2 million which remain outstanding beyond maturity dates and past-due general unsecured payables (which includes the amounts subject to the claim described in Item 3 below). Such amount also includes commission owed to facilities we provide services to pursuant to contractual arrangements. If any significant amount of such liabilities were called, we would not be able to repay them and we would be in default. If a sufficient number of liabilities were called concurrently, we could be forced into bankruptcy or cease operations.

 

We have not paid all of the commissions owed to our customer facilities pursuant to contractual agreements, and such facilities could elect to terminate their agreements with us.

 

We have not paid all of the commissions owed to each of our customer facilities pursuant to contractual agreements. Such facilities account for a majority of our revenues. In addition, certain of the facilities have provided notice to us that we are in breach of such contractual agreements (although we are working with such facilities to come back into compliance with the terms of the agreements). The increase in these payables occurred mainly during the 4^th quarter of fiscal 2015. Unless the past due amounts are resolved and brought back into compliance with the terms and conditions of contractual arrangements, the Company risks termination of the respective contracts and a possible loss of the associated recurring revenue. If these contracts are terminated, it would have a material adverse impact to the Company’s revenue, borrowing ability and operating cashflows.

 

 

If we are not able to continue to innovate or if we fail to adapt to changes in our industry, may not be able to increase or maintain market share, revenues or profitability.

 

The market for our products is characterized by rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands. Although we have developed new products and services in order to meet customer demand, new technologies and evolving business models continue to develop at a fast pace and we may not be able to keep up with all of the changes. Several competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. The changes and developments taking place in our industry may also require us to re-evaluate our business model and adopt significant changes to our long-term strategies and business plan. If we are unable to successfully or profitably compete with current and new competitors, programs and technologies, our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.

 

We rely upon third parties to host certain aspects of our service and any disruption of or interference with our use of such third party services would impact our operations and our business would be adversely impacted.

 

We make use of a number of services provided by third parties, including distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities and other services provided by such third parties. Given this, along with the fact that we cannot easily switch our operations to other providers, any disruption of or interference with our use of current service providers would impact our operations and our business would be adversely impacted.

 

Our reputation and relationships with members would be harmed if our data were to be accessed by unauthorized persons.

 

We maintain personal data regarding users of our services, including names and, in many cases, mailing addresses. With respect to billing data, such as credit card numbers, we rely on licensed encryption and authentication technology to secure such information. We take measures to protect against unauthorized intrusion into our data. If, despite these measures, we, or our payment processing services, experience any unauthorized intrusion into our data, we could face legal claims, and our business could be adversely affected.

 

We may not be able to protect our intellectual property rights.

 

We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information.

 

Intellectual property protection may not be sufficient and confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we would prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our Web site, technology, title selection processes and marketing activities.

 

Trademark, copyright, patent and other intellectual property rights are important to us and other companies. Our intellectual property rights extend to our technology, business processes and the content. We use the intellectual property of third-parties in our products through contractual and other rights. If we are unable to obtain sufficient rights, successfully defend our use, or develop non-infringing technology or otherwise alter our business practices on a timely basis in response to claims against us for infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business and competitive position may be adversely affected. Many companies are devoting significant resources to developing patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business. We have not searched all the patents relative to our technology. Defending ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, results in costly litigation and diversion of technical and management personnel. It also may result in our inability to use our current technology. As a result of a dispute, we may have to develop non-infringing technology, enter into royalty or licensing agreements, or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us.

 

 

If we make any acquisitions, they may disrupt or have a negative impact on our business.

 

We may make acquisitions in the future. If we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

 

●	the difficulty of integrating acquired products, services or operations;

●	the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

●	the difficulty of incorporating acquired rights or products into our existing business;

●	difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;

●	difficulties in maintaining uniform standards, controls, procedures and policies;

●	the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;

●	the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;

●	the effect of any government regulations which relate to the business acquired; and

●

potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition.

 

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

 

The FCC regulates our business and may limit the amount that we can charge for our services.

 

On October 22, 2015 the FCC adopted a new order to cap call rates charged for inmate phone calls and eliminate most ancillary fees. We anticipate the new rates to go into effect in the first half of 2016. Although we don’t anticipate a material impact to our revenue or gross margins from these new regulations, new regulations may be adopted in the future that may affect our operations. If the FCC adopts regulations that regulate our services, it could limit the amount that we are able to charge for our services and our revenues could be reduced.

 

If we are not able to manage our growth, our business could be adversely affected.

 

We are currently engaged in an effort to grow our service by introducing new products and services, such as CellMate, and expanding the areas we conduct business. As we undertake all these changes, if we are not able to manage the growing complexity of our business, including improving, refining or revising our systems and operational practices, our business may be adversely affected.

 

The market price of our common stock may be volatile, which could cause the value of your investment to decline.

 

Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some of which are beyond our control, could affect the market price of our common stock:

 

	·	trading volumes;
	·	our failure to achieve actual operating results that meet or exceed guidance that we may have provided due to factors beyond our control, such as currency volatility;

·

future announcements concerning us or our competitors, including the announcement of acquisitions;

·

changes in government regulations or in the status of our regulatory approvals or licensure;

·

public perceptions of risks associated with our services or operations;

·

developments in our industry; and

·

general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors.

 

 

Because we do not intend to pay dividends on our common stock for the foreseeable future, investors will benefit from their investment in our common stock only if our common stock appreciates in value.

 

We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends on our common stock in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in this offering have purchased their shares.

 

We may not be able to enhance our existing products to address the needs of other markets.

 

The first step on realizing our business development strategy requires us to enhance current products so they can meet the needs of other markets. If we are unable to do this, we may not be able to increase our sales and further develop our business. 

 

We have a material weakness in our internal controls over financial reporting, and, therefore, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

 

We have a material weakness in our internal control over financial reporting relating to lack of executive officers other than the Company’s Chief Financial Officer with significant experience in accounting, auditing and the preparation of financial statements. As a result, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

In addition, we may in the future need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 2. PROPERTIES.

 

We lease approximately 4,000 square feet of office space in Pennsauken, NJ as our main office. We also lease approximately 2,000 square feet of space in Alabama, where we mainly host the operations supporting our video conferencing products, under a sublet arrangement with the former principal owner of Innovisit.

 

ITEM 3. LEGAL PROCEEDINGS.

 

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. 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.

 

MARKET INFORMATION

 

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “LTTC.” For the periods indicated, the following table sets forth the high and low closing sales prices per share of common stock for the years ended December 31, 2015 and 2014 and the interim periods through March 31, 2016. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

Year Ended December 31, 2016
		High				Low
First Quarter ended March 31, 2016			0.04				0.03
Year Ended December 31, 2015
			High				Low
First Quarter ended March 31, 2015		$	0.11			$	0.07
Second Quarter ended June 30, 2015		$	0.07			$	0.03
Third Quarter ended September 30, 2015		$	0.05			$	0.02
Fourth Quarter ended December 31, 2015		$	0.05			$	0.02
Year Ended December 31, 2014
			High				Low
First Quarter ended March 31, 2014		$	0.23			$	0.14
Second Quarter ended June 30, 2014		$	0.18			$	0.11
Third Quarter ended September 30, 2014		$	0.12			$	0.07
Fourth Quarter ended December 31, 2014		$	0.10			$	0.06

 

The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. In addition, our common stock is highly illiquid, which could also result in significant fluctuations in our stock price. Our stock price may also be affected by broader market trends unrelated to our performance.

 

HOLDERS

 

As of April 14, 2016, we had 94,729,081 outstanding shares of common stock held by approximately 317 stockholders of record. The transfer agent of our common stock is Continental Stock Transfer and Trust Company.

 

DIVIDENDS

 

The Company has recorded dividends on 502,160 shares of 5% Series B Preferred Stock. In each of 2014 and 2015, the Company recorded and accrued $25,108 of dividends payable. Dividends have not been declared and cannot be paid as long as the Company has outstanding debt. The Company does not anticipate paying dividends on its common stock for the foreseeable future.

 

Equity Compensation Plan Information

 

The following table sets forth the information indicated with respect to our 8 compensation plans under which our common stock is authorized for issuance as of the year ended December 31, 2015.

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
		(a)				(b)				(c)
Equity compensation plans approved by security holders			9,778,000			$	0.09				15,222,000
Equity compensation plans not approved by security holders			0				0				0
Total

 

 

RECENT SALES OF UNREGISTERED SECURITIES 

 

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 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 A

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 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 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 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.

ISSUER PURCHASES OF EQUITY SECURITIES

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.

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

 

Forward-Looking Statements

 

The information in this annual report contains forward-looking statements. All statements other than statements of historical fact made in this annual report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements, included. This discussion should not be construed to imply that the results discussed will necessarily continue into the future, or that any conclusion reached will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Business Overview:

 

Lattice’s target domestic market is small to mid-sized correctional facilities. The Company first launched its direct service business during 2011 in the state of Oklahoma. Previously, the Company served this market exclusively through other service providers. As of December 31, 2015, the Company has contracts in 35 of the 69 targeted correctional facilities in Oklahoma, approximately 50% of its target market. During 2014, Lattice identified 8 additional target market states. To date, Lattice has obtained certification to provide communications services in 5 of these 8 new states, and Lattice is actively engaged in sales and marketing activities in all five. In addition, Lattice identified key products and services that would enable the Company to maximize revenue generation in our accounts. These include key modules of Lattice’s Corrections Operating Network™ (COP) which incorporates an investigative tool set, secure communications, video visitation, payment and trust accounting, customer care and kiosk solutions. In the second quarter of 2015, Lattice introduced its Video Arraignment solution, which helps facilities reduce labor costs and security risks associated with transporting inmates for courtroom arraignments. Video arraignment is currently being installed in 3 facilities.

 

For the year ended December 31, 2015, total revenue decreased by 15% from the prior year period. Fiscal 2014 included revenue of approximately $1,034,000 derived from a wholesale relationship which terminated during that year. Excluding the effects of this termination in 2015, total revenue decreased approximately 4% compared to the prior year. Service revenue comprised of call provisioning and ancillary services accounted for approximately 66% of total revenues. Call provisioning revenue, a component of service revenue, increased by 26%, a key growth metric for our business strategy as Lattice increases the number of deposit touch points and end-user correctional facilities being serviced. The 13% decline from prior year included a decrease in technology sales of $965,000, or 28%, compared to the prior year. Technology sales fluctuate period to period and can have a material impact on our financial results. Accordingly, management believes the decline in technology sales this year should be viewed as the major component of the period to period variance.

 

In the late third 3^rd quarter of 2015, Lattice launched its CellMate™ Mobile platform, providing inmates with a new wireless communications device that encompasses the latest communications and media tools for inmates to maintain contact with friends and family and also access resources for self-improvement. Numerous studies have shown that more frequent contact with friends and family leads to increases in inmate moral and helps contribute to a reduction in recidivism. Lattice anticipates offering new CellMate applications and services in a number of institutions in 2016. The launch of this new product enables the Company to offer a full suite of services that have not traditionally been available to small and mid-sized correctional facilities. Currently, Lattice’s average revenue per inmate is over $800, compared to an industry average of $515 per inmate. The Company attributes this performance to quality and accessibility of service, as well as an innovative product mix. Lattice believes it can further enhance its revenue as it continues to deploy a full suite of phone, video, and mobile device services across its installed base. As Lattice rolls out the new CellMate™ platform, we believe adoption of the new technology will accelerate as new services and applications are added. Lattice anticipates beginning to realize revenues from the new platform by the end of the current year.

 

Additionally, Lattice has had success in launching its solutions globally. Currently, Lattice has customers in the U.K., Canada, Singapore, Japan, and Bermuda. Canada is Lattice’s largest international market. Lattice is currently working with multiple global partners, including telecommunication providers Bell Canada and Telus, to help develop new opportunities in current and new international markets.

 

 

On October 22, 2015 the FCC adopted a new order to cap call rates charged for inmate phone calls and eliminate most ancillary fees. Lattice anticipates the new rates will go into effect in the second quarter of 2016. Lattice has performed a preliminary review of the new rates and does not anticipate a material adverse impact on its revenue or gross margins.

  

During the 4^th quarter of 2015, the Company completed a capital raise, the proceeds from which were used to repurchase the outstanding preferred shares held by a major investor. The repurchase which took place in the 4^th quarter has simplified the company’s capital structure.

 

Results of Operations – Year Ended December 31, 2015 Compared To the Year Ended December 31, 2014

  

 

		For the Years Ending December 31
		2015				2014
Revenue		$	7,587,000			$	8,941,000
Net loss			(5,532,000	)		$	(1,802,000	)
Net loss per common share – Basic and Diluted			(0.09	)		$	(0.04	)

 

		OPERATING EXPENSES								PERCENT OF SALES
		2015				2014				2015				2014
Research & Development		$	1,160,000				1,086,000				15.3%				12.2%
Selling, General & Administrative		$	4,628,000				4,004,000				61.0%				44.8%

 

REVENUES:

 

Total revenue decreased 15% to approximately $7,587,000 from approximately $8,941,000 in the prior year period.

 

In 2014, Lattice chose to shift away from wholesaling its services in favor of a direct sales model. The prior year period included approximately $1,034,000 of revenue attributable to wholesale services under an agreement which terminated during 2014. Excluding the effects of this termination, total baseline revenue decreased by 4% to $7,587,000 from $7,907,000. The primary components of the change in revenues are provided below:

 

		For the Year Ended
		December 31,				December 31,
		2015				2014				Variance				% Change
(Dollars in thousands)
Direct call provisioning		$	3,676			$	2,917			$	759				26.0	%
Ancillary service revenue		$	1,406			$	1,430			$	24				1.7	%
Total direct service revenue		$	5,082			$	4,347			$	735				16.9	%
Technology revenue		$	2,505			$	3,560			$	(1,055	)			(24.6	)%
Total baseline revenue		$	7,587			$	7,907			$	(320	)			(4.0	)%
Wholesale service revenue		$	–			$	1,034			$	(1,034	)			(100.0	)%
Total revenue		$	7,587			$	8,941			$	(1,354	)			(15.1	)%

 

Service revenue:

 

Service revenue derives from recurring services provided to correctional facilities based on multi-year contractual relationships with local governments. Service revenue consists mainly of call provisioning revenue, fees charged for prepaid account management, voicemail, support, software maintenance and validation services. Service revenue accounted for 66% of total revenue in the current period compared to 60% in the prior year period. After adjusting for the terminated wholesale business in 2014, service revenue increased 17.2% to approximately $5,095,000 from approximately $4,347,000 in the prior year period. Call provisioning revenue, as a component of total direct service revenue, increased by 26% or $759,000 to $3,676,000 from $2,917,000. The rate of growth in call provisioning revenue is a key operating metric of Lattice’s growth strategy. The direct call provisioning increase is mainly attributable to adding touch points for collecting prepaid deposits either by installing kiosks or integrating with commissary systems at existing customer facilities, combined with an increase in the number of customer accounts where Lattice can provide direct telecom service provisioning to end-user correctional facilities.

 

 

Wholesaled Technology revenue:

 

Our technology product revenues, where we provide wholesaled technology systems embedded with our proprietary software to other service providers, decreased by $1,055,000, or 30%, to $2,505,000, from $3,560,000 in the prior period. This revenue stream varies period to period and with the timing of larger orders. We do not believe that the decline from 2014 to 2015 should be viewed as a trend.

 

GROSS PROFIT:

 

Gross profit decreased to $2,857,264, from $3,605,000 in the prior year period. Gross profit, as a percentage of revenues, decreased slightly to 37.7% from 40.3% prior year. The gross profit percentage for wholesaled technology revenue was comparable to the prior year at approximately 60% and the Company expects the percentage on average to remain in the 60% range. Gross profit as a percentage of revenues for service revenues increased to 28.8% from 25% prior year. The increase was driven by shifting to higher margin direct services and away from wholesaled services, our provision of which ended in 2014.

 

RESEARCH AND DEVELOPMENT EXPENSES:

 

Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in the technology products segment. Research and development expenses increased slightly to approximately $1,160,000 from approximately $1,086,000 in the prior year period.

  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:

 

Selling, general and administrative ("SG&A") expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. These expenses increased by approximately $625,000 to approximately $4,628,000 from approximately $4,004,000 in the prior year period. As a percentage of revenues, these expenses were 61% versus 44.8% in the prior year period. The increase consisted principally of pre-investments in our selling and marketing infrastructure as the Company expands its footprint into new geographic markets.

 

INTEREST EXPENSE:

 

Interest expense increased to approximately $711,000 from $619,000 in the prior year period. Included in the current period interest was approximately $306,000 of amortized debt discount related to debt financings compared to approximately $330,000 in the prior year period. Excluding the non-cash amortization of debt discount, interest expense increased to approximately $405,000 from approximately $290,000, resulting from a higher level of average borrowings.

 

LOSS FROM OPERATIONS:

 

The Company’s loss from operations increased to approximately $2,930,000 from $1,486,000 in the prior year period. The increased loss was largely from the reduction of wholesale service revenue on contracts terminated in 2014 and the decrease in wholesaled technology revenue, which were partially offset by the additional gross profit contribution from the growth in direct service revenue. Also factoring into the increased loss was an increase in selling and marketing expenses compared to prior year levels. The current period loss includes non-cash expenses for depreciation, amortization and share-based compensation totaling approximately $749,000 which compares to noncash totaling approximately $825,000 in the prior year period.

 

NET LOSS:

 

The Company’s net loss increased to approximately $5,532,000 from $1,802,000 in the prior year period. The net loss in the current year included onetime charges totaling approximately $2,055,000 which consisted of: (i) a write down of a note receivable from Blackwatch of approximately $522,000, (ii) a noncash loss on extinguishment of debt totaling approximately $1,033,000 resulting from the write-off of unamortized debt discount, deferred financing fees and derivative liabilities associated with the removal of the anti-dilutive feature of the May 2014 $1.5M convertible notes, (iii) a decrease of approximately $500,000 in the carrying value of receivables on cost recoverable contracts originating from Lattice’s Federal Government consulting business that was disposed of in April 2013 and (iv) a settlement charge of $228,000 based on negotiations with a former wholesale partner. Excluding these onetime charges, the increase in net loss resulted mainly from the increase in loss from operations as explained above. The debt extinguishment charge has a positive effect to the income statement prospectively in that it eliminates an expense overhang of approximately $1,101,000.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents decreased to approximately $187,000 at December 31, 2015 from approximately $256,000 at December 31, 2014.

 

Net cash used in operating activities:

 

Net cash used in operating activities was approximately $783,000 for the year ended December 31, 2015, compared to $859,000 in the prior year period. The net cash used in operating activities results mainly from an adjusted operating loss of $1,894,000 and cash interest paid of approximately $323,000, which was partially offset by an increase in operating liabilities of approximately $1,415,000. The adjusted operating loss of $1,894,000 derives from adding back non-cash expenses for depreciation, amortization, share-based compensation and bad debt expense totaling approximately $862,000 to a reported operating loss of $2,756,000. The increase in operating liabilities occurred mainly during the 4^th quarter and consisted mainly of an increase in facility commission payables due to customer facilities beyond contractual due dates. Also included in the increase was a customer advance on a large technology sales order which was fulfilled in 2016.

 

Net cash provided by financing activities:

 

Net cash provided by financing activities was approximately $695,000 for the year ended December 31, 2015. Net cash proceeds from the issuance of debt and common stock during 2015 totaled approximately $1,974,000 and consisted of the following transactions:

 

·

$422,000 of net cash proceeds from the issuance of a March 2015 bridge financing note in the amount of $500,000 (Lattice paid financing fees of $78,000 in connection with the issuance of the note) and

 

·

$454,000 of net cash proceeds from the issuance of a May 14, 2015 promissory note in the principal amount of $908,000 (Lattice repaid $363,200 on the $500,000 March 2015 bridge financing and paid cash placement fees of $90,800 in connection with the issuance of the note) and

 

·

$355,000 of net cash proceeds from the issuance of a November 2015 bridge financing note in the amount of $580,000 (Lattice repaid the remaining $136,800 outstanding on the March 2015 bridge note and paid financing fees of $87,000 in connection with the issuance of the note) and

 

·

Lattice received proceeds totaling approximately $743,000 during the 4th quarter through the sale of an aggregate of 20,645,000 shares of common stock under subscription agreements to accredited investors, net of stock issuance costs of $50,688.

 

The cash provided from the issuance of debt and common stock was partially offset by the repurchase and cancellation of all outstanding Preferred shares, Series A, C and D held by Barron Partners, LP for approximately $1,076,000, and repayments of principal on other debt totaling approximately $203,000.

 

GOING CONCERN CONSIDERATIONS

 

At December 31, 2015, the working capital deficit was approximately $6,943,000, compared to a working capital deficit of approximately $4,360,420 at December 31, 2014. There is approximately $1.9 million in principal due on notes during the next twelve months, of which, notes totaling approximately $1.2 million are past due. Additionally, Lattice is carrying a significant level of past due general unsecured trade payables which are included in the current liability section of our balance sheet. A significant component of these current liabilities relates to past due amounts owed to a former wholesale partner pursuant to a wholesale agreement that terminated in 2014. The amount owed is a general, unsecured, on-demand liability. On June 26, 2015, this former wholesale partner filed an arbitration claim against Lattice with JAMS pursuant to the wholesale agreement. The former wholesale partner alleges that Lattice breached the agreement by failing to pay commissions pursuant to the agreement and that Lattice owes approximately $2.9 million, including interest.  Lattice filed a reply to the claim on July 24, 2015 and is currently negotiating to settle the claim. However, there is no assurance that Lattice will be successful in these negotiations. Also included in past due payables are facility commissions owed to each of our customer facilities pursuant to contractual agreements. Such facilities account for a majority of our revenues. In addition, certain of the facilities have provided notice to us that we are in breach of such contractual agreements. We are working with such facilities to come back into compliance with the terms of the agreements. The increase in these payables occurred mainly during the 4^th quarter of fiscal 2015. Unless the past due amounts are resolved and brought back into compliance with the terms and conditions of contractual arrangements, the Company risks termination of the respective contracts and a possible disruption of the associated recurring revenue. If these contracts are terminated, it would have a material adverse impact to the Company’s revenue, borrowing ability, and operating cash flows.

 

During fiscal 2015, the Company met its liquidity needs primarily from financing activities. Lattice’s current cash position and projected operating cash flows are inadequate to cover payments that are either past due or coming due in the next twelve months and also support its working capital requirements. In that regard, Lattice is highly dependent on its ability to raise additional capital to fund its liquidity needs in 2016.

 

The working capital deficit and the debt coming due in the next twelve months raise substantial doubt regarding Lattice’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon its ability to raise additional alternative financing. Management is continuously engaged in obtaining the additional capital needed. Management estimates that it will need funds in the range of $4.0 to $5.0 million, consisting of either external financing or a combination of external financing and restructuring of current obligations with existing note holders, in order to support the Company’s liquidity, improve its balance sheet, and support its operating cash needs for the next twelve months. Of the $4.0 to $5.0 million financing targeted, management is currently engaged with investment bankers in raising up to $2.1 million to address the Company’s short term liquidity needs. There is no assurance that Lattice will be able to obtain the additional funding needed and/or restructure its existing debt to provide the necessary liquidity to continue operations and may be required to curtail or cease operations.

 

Financing activities:

 

During March 2015, the Company issued a secured note (bridge financing) to an investor for $500,000, of which $422,000 of net proceeds were received. The note is secured with accounts receivable related to service contracts. The net proceeds of $422,000 were to be used for working capital purposes. In addition to the interest, Lattice agreed to deliver 1,000,000 restricted common shares to the investor. A total of $363,200 of the principal amount of the note issued in this financing was repaid with the proceeds of the May 14, 2015 financing described below.

 

On May 14, 2015, the Company closed on funding totaling $908,000 through the issuance of a convertible note. The note is secured with a first priority security interest in the revenues from certain of the Company’s contracts and the equipment associated with such contracts. Net cash proceeds to the Company were $454,000 after paying $363,200 of the outstanding March 2015 bridge note of $500,000 and placement fees of $90,800.

 

On November 2, 2015, the Company entered into purchase agreements (the “Purchase Agreement”) with Barron Partners LP (“Barron”) pursuant to which the Company agreed to purchase from Barron, subject to their being financing available therefor, all of the securities of the Company owned by Barron, namely 2,239,395 shares of the Company’s common stock, 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 $74,466; $461,502; $188,577; and $425,455; respectively. The Company purchased all of the outstanding preferred stock held by Barron during the 4^th quarter. The Preferred stock purchased was then cancelled and added back to the Company’s authorized Preferred stock reserves.

 

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 incurred 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^thquarter, 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.

 

On November 2, 2015, the Company issued 5,000,000 shares of its common stock at a fair value of $150,000 to Lattice Funding, LLC, as lender/investor (no affiliation to Lattice Inc.) to amend the promissory note issued to it in May 2015 eliminating certain anti-dilution provisions.

 

On November 2, 2015, the Company entered into a Loan and Security Agreement with Cantone Asset Management, LLC (“Cantone”), pursuant to which the Company received the gross amount of $580,000, less an original issue discount of $58,000 (the “Loan”), of which, $136,800 (plus interest) was used to pay off an outstanding bridge loan to Cantone. The closing of the transactions contemplated by the Loan Agreement was contingent on the Company raising sufficient funds, when added with the net proceeds of the Loan, to repurchase all of the securities pursuant to the terms of the Barron Agreement. The Company also issued 1,862,500 shares of its common stock to Cantone pursuant to the Loan Agreement, and paid Cantone a 3% origination fee and a 2% non-accountable expense allowance. The Loan is secured by a first priority security interest in the revenues and proceeds from certain of the Company’s contracts. In connection with the Loan Agreement and the contemplated transactions, the Company issued a promissory note in the aggregate principal amount of $580,000 to Cantone (the “Note”). As of February 6, 2016, the Note began bearing interest at a rate of 14% per year. The Note will mature on May 2, 2016. The Note provides for customary events of default, including the failure to pay any amount due under the Note on the applicable due date (subject to a cure period), any default on any other indebtedness by the Company, the Company becoming insolvent, or the company filing for voluntary bankruptcy. In the event of a default, the interest rate on the Note would increase to 18% per year and the Company would be obligated to pay 10% of the total amount due as liquidated damages. Cantone received piggy-back registration rights for the shares issued in connection with the Loan.

 

On February 25, 2016, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Cantone Asset Management LLC ("Cantone"), an investor, pursuant to which the Company issued a promissory note in the aggregate principal amount $375,000 and received $356,250 in gross proceeds (equivalent to a 5% original issue discount) (the "Loan"). The Company issued 600,000 shares of its common stock to Cantone pursuant to the Loan Agreement, 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.

 

OFF-BALANCE SHEET ARRANGEMENTS:

 

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, operating results, liquidity or capital expenditures.

 

CRITICAL ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:

 

Use Estimates

 

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.  

 

Basis of Financial Statement Presentation

 

At December 31, 2015, we had a working capital deficiency of $6,943,000. During 2015, we had a loss from operations of $2,930,000 which included non-cash items totaling $932,000. The non-cash items consisting of intangibles amortization, depreciation and share-based compensation expense. This working capital deficit condition raises substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon management’s continuing and successful execution on its business plan to achieve profitability and increased operating cash flows and the ability to obtain additional financing to support the working capital deficit, debt coming due in the next twelve months and support the capital requirement of growing our business. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty.

  

Principles of Consolidation

 

The consolidated financial statements included the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation.

  

Revenue Recognition

 

Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.

 

Direct Call Provisioning Services:

 

Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.

 

Wholesaled technology:

 

We sell telephony systems with embedded proprietary software to other service providers.  We recognize revenue when the equipment is shipped to the customer.

 

Breakage:

 

In compliance with regulatory tariffs, we recognize as income prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.

 

Prepaid Cards:

 

We also sell prepaid phone cards to end user facilities on a wholesale basis.  We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user facilities.

 

 

Software Maintenance:

 

We offer software maintenance and support contracts to customers who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life of the contract.

 

Revenues recognition for Construction contracts

 

Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.

 

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.

 

Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at December 31, 2014 will be billed in 2015. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

 

Fair Value Disclosures

 

Management believes that the carrying values of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. As discussed in Note 1(m) of our financial statements, derivative financial instruments are carried at fair value.

 

The carrying values of the Company’s long term debts and capital lease obligations approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates and terms of debt currently available to the Company

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

There are not and have not been any disagreements between us and our accountants on any matter of accounting principles, practices or financial statement disclosure.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

An evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015 was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report for the reasons described under “Management’s Report on Internal Control over Financial Reporting”.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Management’s Report on Internal Control over Financial Reporting

 

Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this assessment and on those criteria, the Company concluded that our internal control over financial reporting was not effective as of December 31, 2015 due to the presence of a material weakness exists in our internal controls.

 

The material weakness identified related to the lack of executive officers other than the Company’s Chief Financial Officer with significant experience in accounting, auditing and the preparation of financial statements. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP.

 

Changes in internal control

 

There were no changes in our internal control over financial reporting during fourth quarter of 2015 that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

 

The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family relationships among any of our Directors and Executive Officers.

 

Name		Age		Position
Paul Burgess		50		President, CEO and director
Joe Noto		56		CFO and secretary
John Boyd		75		Director
Mark V. Rosenker		69		Director
Robert Wurwarg		66		Director
Richard Stewart		72		Director

 

 

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

 

Paul Burgess, President, Chief Executive Officer and Director. From March 1, 2003 until February 14, 2005, Mr. Burgess was our Chief Operating Officer. As of February 9, 2005, Mr. Burgess was appointed our President and Chief Executive Officer. On February 14, 2005, Mr. Burgess was appointed a member of our Board of Directors. From January 2000 to December 2002, Mr. Burgess was President and Chief Financial Officer of Plan B Communications. Prior to Plan B Communications, Mr. Burgess spent three years with MetroNet Communications, where he was responsible for the development of MetroNet’s coast to coast intra and intercity networks. Mr. Burgess was also influential in developing the operations of MetroNet during the company’s early growth stage. Prior to joining MetroNet, Mr. Burgess was with ISM, a company subsequently acquired by IBM Global Services, where he was responsible for developing and deploying the company’s distributed computing strategy.

 

Joe Noto, Chief Financial Officer and Secretary. Mr. Noto joined Lattice in March 2005 as Vice President of Finance and served in that position until May 2005 when he accepted the position of Chief Financial Officer. Prior to joining the Company, from 2002 to 2005, Mr. Noto was VP of Finance/Controller heading financial operations at Spectrotel Inc. (formerly Plan B Communications), a communications service provider. From 2000 to 2002, Mr. Noto was the Finance Director at Pivotech Systems, a communications software start-up Company backed by a leading venture capital firm, Optical Capital Group. Mr. Noto holds a B.A. degree from Rutgers College and is a Certified Public Accountant of New Jersey and is a member of the American Institute of CPA’s and the New Jersey Society of CPA’s.

 

John Boyd, Director. John Boyd, as part of his business advisory practice, Boyd Operating Alliances, provides strategic growth and profit acceleration guidance for expansion stage businesses. Including 33 years at AT&T, Mr. Boyd’s experience spans decades in the communications, technology, media, energy, and business services industries. He has been president/CEO of a business process outsourcing provider to the telecommunications industry, president/CEO of an energy services company, president of AT&T’s international computer business, and a senior adviser to CKX. Mr. Boyd also has served on multiple advisory and corporate boards, including businesses in global wireless distribution, retail technology, and media/entertainment. A graduate of Iona College, he holds a Masters degree from Pace University in Advanced Management and certificates from Wharton in Advanced Marketing Management and Mergers and Acquisitions.

 

Mark V. Rosenker, Director.  Mark Rosenker was chairman and acting chairman of the National Transportation Safety Board (NTSB) from 2005-2009. He retired as a Major General in the U.S. Air Force Reserve in December 2006 after 37 years of combined active and reserve service. During his Air Force career, Mark served as Deputy Assistant to the President and Director of the White House Military Office, where he was responsible for managing the military assets and personnel supporting the President and Vice President. Prior to his NTSB role, Mark was Managing Director of the Washington Office of the United Network for Organ Sharing. Earlier, he served 23 years as Vice President, Public Affairs for the Electronic Industries Association. His government service spans the Department of the Interior, the Federal Trade Commission, and the Commodity Futures Trading Commission. Mark’s Air Force awards and decorations include the Air Force Distinguished Service Medal with One Oak Leaf Cluster and the Legion of Merit. He is a former member of the Board of Visitors to the Community College of the Air Force. In addition to graduating from the University of Maryland, Mark is a graduate of the Air Command and Staff College and the Air War College.

 

Robert Wurwarg has been a director since December 2014. Mr. Wurwarg is an attorney and business advisor with more than 35 years of experience in the tax and corporate law aspects of a broad range of sophisticated business transactions including mergers, acquisitions, dispositions, restructurings, joint ventures and other investments. Most recently, he was a senior tax principal in Deloitte & Touche LLP's Mergers and Acquisitions Practice in New York. He was previously a tax partner at Dechert. Mr. Wurwarg received an LL.M in Taxation from New York University's School of Law, a J.D. from the Georgetown University Law Center, and an M.A. from Johns Hopkins University's Paul H. Nitze School of Advanced International Studies.

 

Richard Stewart has been a director since December 2014. Mr. Stewart was a former Vice Chairman of Lehman Brothers. Mr. Stewart is the Chairman Emeritus of Heritage Capital Resources, LLC, a $1.5 billion joint venture REO fund. Over the course of his 40+ year career, he has led, privately invested, and consulted in financial services, technology, real estate, nonprofits, and large multinationals. In addition to Lehman Brothers, Stewart has held senior executive positions at Citicorp, Kidder Peabody, and Merrill Lynch. Stewart is a Certified Public Accountant and has an MBA in Finance and a BBA in Marketing and Finance from the University of Michigan.

 

 

Oversight

 

We have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined. Paul Burgess currently serves as Chairman and Chief Executive Officer of the Company. Due to our small size and limited resources, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.

 

Board Independence and Committees

 

Our Board of Directors has determined that John Boyd, Mark V. Rosenker, Robert Wurwarg and Richard Stewart qualify as independent directors under the rules of the Nasdaq Stock Market because they are not currently employed by us, and do not fall into any of the enumerated categories of people who cannot be considered independent in the Nasdaq Stock Market Rules.

 

Our board of directors has established an audit committee, a compensation committee and a nominating committee and a corporate governance committee.

 

Audit Committee. The audit committee currently consists of John Boyd, Robert Wurwarg and Richard Stewart. The board of directors believes that Mr. Stewart qualifies as an “audit committee financial expert”, as such term is defined in the rules of the Securities and Exchange Commission. The board of directors intends to adopt an audit committee charter in the near future.

 

Compensation Committee. The compensation committee currently consists of Mark V. Rosenker, Robert Wurwarg and Richard Stewart. Our board of directors intends to adopt a compensation committee charter in the near future.

 

Nominating Committee. The nominating committee currently consists of John Boyd, Mark V. Rosenker and Richard Stewart. Our board of directors intends to adopt a nominating committee charter in the near future.

 

In making nominations, the nominating committee is required to submit candidates who have the highest personal and professional integrity, who have demonstrated exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the board, in collectively serving the long-term interests of the shareholders. In evaluating nominees, the nominating committee is required to take into consideration the following attributes, which are desirable for a member of the board: leadership, independence, interpersonal skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.

 

Governance Committee. The governance committee consists of John Boyd, Mark V. Rosenker and Robert Wurwarg. Our board of directors intends to adopt a governance committee charter in the near future.

 

CODE OF ETHICS

 

We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees. The Code of Ethics is filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2003, which was filed with the Securities and Exchange Commission on April 9, 2004. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Paul Burgess, Lattice Incorporated, 7150 N. Park Drive, Suite 500, Pennsauken, N.J. 08109. Our telephone number is (856) 910-1166.

 

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other of our equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Except for Mark Rosenker, who failed to file a Form 4 related to the two transaction relating to the acquisitions of shares of options to purchase to our common stock, and John Boyd, who also failed to file a Form 4 related to the two transaction relating to the acquisitions of shares of options to purchase to our common stock, to our knowledge, no persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during the most recent fiscal year ended December 31, 2015.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth all compensation earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year, collectively referred to as the named executive officers, for our last two completed fiscal years.

 

 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position		Year			Salary $																					Total $
Paul Burgess			2015		$	250,000																				$	250,000
President, CEO			2014		$	250,000																				$	250,000
Joe Noto			2015		$	175,000																				$	175,000
Chief Financial			2014		$	175,000																				$	175,000
Officer

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

The following table sets forth with respect to grants of options to purchase our common stock to the name executive officers as of December 31, 2015:

 

Name

Number of Securities Underlying Unexercised Options # Exercisable

Number of Securities Underlying Unexercised Options # Unexercisable

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options #

Option Exercise Price $

Option Expiration Date

Joe Noto

–

1,400,000

(a)

–

$

0.08

May, 2018

–

1,400,000

(c)

–

$

0.12

Dec, 2023

Paul Burgess

–

2,800,000

(b)

–

$

0.08

May, 2018

2,800,000

(d)

$

0.12

Dec, 2023

____________________

	(a)	Vests as of December 31, 2011.
	(b)	Vests as of December 31, 2010.
	(c)	Vests as of December 31, 2016.
	(d)	Vests as of December 31, 2016.

 

EMPLOYMENT AGREEMENTS

 

On March 24, 2009, the Company renewed its Executive Employment Agreement with Paul Burgess. Under the Executive Employment Agreement, Mr. Burgess was employed as our Chief Executive Officer for an initial term of three years. Thereafter, the Executive Employment Agreement has been automatically be extended for successive terms of one year each. Mr. Burgess is paid a base salary of $250,000 per year under the Executive Employment Agreement Amendment. Mr. Burgess is also eligible for an incentive bonus of not less than 40% of his base salary based on achieving certain goals established annually by the Compensation Committee of the Board. As part of the agreement he will receive medical, vacation and profit sharing benefits consistent with our current policies. The agreement may be terminated by Mr. Burgess upon at least 60 days prior notice to us.

 

 

On March 24, 2009, the Company renewed its executive employment agreement with Joe Noto. Under the Executive Employment agreement, Mr. Noto was employed as our Chief Financial Officer for a term of three years at an annual base salary of $175,000. Thereafter, the Executive Employment Agreement has been automatically extended for successive terms of one year each. Mr. Noto is also eligible for an incentive bonus of not less than 40% of his base salary based on achieving certain goals established annually by the Compensation Committee of the Board. As part of the agreement he will receive medical, vacation and profit sharing benefits consistent with our current policies. The agreement may be terminated by Mr. Noto upon at least 60 days prior notice to us.

 

DIRECTOR COMPENSATION

 

The following table sets forth certain information concerning compensation paid or accrued to our non-executive directors during the year ended December 31, 2015.

 

Name		Fees Earned or Paid in Cash				Option Awards				Total
Mark Rosenker			$6,000				$7,775				$13,775
Robert Wurwarg			$6,000				$7,775				$13,775
Dick Stewart			$6,000				$7,775				$13,775
John Boyd			$6,000				$7,775				$13,775

 

All of our directors presently receive annual compensation of $6,000 in cash.

 

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table provides information about shares of common stock beneficially owned as of April 1, 2016 by

 

	●	each director;
	●	each officer named in the summary compensation table;
	●	each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and
	●	all directors and executive officers as a group.

 

Name of Beneficial Owner (1)		Common Stock Beneficially Owned (2)				Percentage of Common Stock Beneficially Owned (2)
Paul Burgess (3)			6,620,939				6.64	%
Joe Noto (4)			2,333,333				2.40	%
John Boyd (5)			640,000				*
Mark V. Rosenker (5)			640,000				*
Robert Wurwarg			1,150,000				1.21	%
Richard Stewart			1,150,000				1.21	%
All named executive officers and directors as a group (6 persons)			12,534,272				12.12	%

 

* Less than 1%

 

(1)	Except as otherwise indicated, the address of each beneficial owner is c/o Lattice Incorporated, 7150 N. Park Drive, Suite 500, Pennsauken, NJ 08109
(2)	Applicable percentage ownership is based on 95,038,673shares of common stock outstanding as of April 11, 2016, together with securities exercisable or convertible into shares of common stock within 60 days of April 11, 2016 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of April 11, 2016 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)	Represents 4,666,667 shares issuable upon exercise of options and 1,954,272 restricted shares.
(4)	Represents 2,333,333 shares issuable upon exercise of options.
(5)	Represents 640,000 shares issuable upon exercise of options.

 

 

No Director, executive officer, affiliate or any owner of record or beneficial owner of more than 5% of any class of our voting securities is a party adverse to our business or has a material interest adverse to us.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Director Independence

 

Incorporated by reference to Item 10, “Directors, Executive Officers and Corporate Governance”.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2015 and 2014, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during the fiscal years were $75,000 and $73,000, respectively.

 

Tax Fees

 

There were no tax fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2015 and 2014.

 

Audit Related Fees

 

There were no audit related fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2015 and 2014.

 

All Other Fees

 

There were no other fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2015 and 2014.

 

Audit Committee Pre-Approval Policies and Procedures

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.

 

All members of the Company’s audit committee at the time of initial engagement approved the engagement of Rosenberg Rich Baker Berman & Company as the Company’s independent registered public accountants.

 

 

ITEM 15. EXHIBITS. [To be updated.]

  

Exhibit Number		Description
2.2		Stock Purchase Agreement dated December 16, 2004 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on December 22, 2004)
2.3		Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 11, 2005)
2.4		Stock purchase agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as the Owner Representative and Science Dynamics Corporation, dated as of September 12, 2006.(1)
3.1		Certificate of Incorporation (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)
3.2		Amendment to Certificate of Incorporation dated October 31, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)
3.3		Amendment to Certificate of Incorporation dated November 25, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)
3.4		Amendment to Certificate of Incorporation dated May 23, 1984 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)
3.5		Amendment to Certificate of Incorporation dated July 13, 1987 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)
3.6		Amendment to Certificate of Incorporation dated November 8, 1996 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)
3.7		Amendment to Certificate of Incorporation dated December 15, 1998 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)
3.8		Amendment to Certificate of Incorporation dated December 4, 2002 (Incorporated by reference to the Company’s information statement on Schedule 14C filed with the Securities and Exchange Commission on November 12, 2002)
3.9		By-laws (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)
3.10		Restated Certificate of Incorporation (Incorporated by reference to the Registration Statement On Form SB-2. file with the Securities and Exchange Commission on February 12, 2007)
4.1		Secured Convertible Term Note dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

 

 

4.2		Common Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
4.3		Second Omnibus Amendment to Convertible Notes and Related Subscription Agreements of Science Dynamics Corporation issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on March 2, 2005)
4.4		Form of warrant issued to Barron Partners LP.(1)
4.5		Promissory Note issued to Barron Partners LP.(1)
4.6		Form of warrant issued to Dragonfly Capital Partners LLC.(1)
4.7		Secured Promissory Note issued to Michael Ricciardi.(1)
4.8		Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund LTD to Purchase up to 3,000,000 share of Common Stock of Lattice Incorporated.(1)
4.9		Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice Incorporated**
4.10		Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase 14,583,333 Shares Of Common Stock of Lattice Incorporated.
4.11		Second Amended and Restated Secured Term Note from Lattice Incorporated to Laurus Master Fund, LTD.
10.1		Executive Employment Agreement Amendment made as of February 14, 2005 by and between Science Dynamics Corporation and Paul Burgess (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 2, 2005).(1)
10.2		Stock Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as Owner Representative and Lattice Incorporated, dated September 12, 2006.(1)
10.3		Omnibus Amendment and Waiver between Lattice Incorporated and Laurus Master Fund, LTD, dated September 18, 2006.(1)
10.3		Agreement dated December 30, 2004 between Science Dynamics Corporation and Calabash Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 25, 2005)
10.4		Employment Agreement dated January 1, 2005 between Science Dynamics Corporation, Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 25, 2005)
10.5		Executive Employment of dated March 7, 2005 by and between Science Dynamics Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on April 17, 2006)
10.7		Sub-Sublease Agreement made as of June 22, 2001 by and between Software AG and Systems Management Engineering, Inc. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.8		Securities Purchase Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

 

 

10.9		Master Security Agreement dated February 11, 2005 among Science Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.10		Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.11		Subsidiary Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.12		Registration Rights Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.13		Microsoft Partner Program Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.14		AmberPoint Software Partnership Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
10.15		Securities Agreement between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006.(1)
10.16		Employment Agreement between Science Dynamics Corporation and Michael Ricciardi.(1)
10.17		Amendment to Employment Agreement - Paul Burgess.(1)
10.18		Amendment to Employment Agreement - Joe Noto.(1)
10.19		Registration Rights Agreement by and among Science Dynamics Corporation and Barron Partners LLP, dated As of September 19, 2006.(1)
10.20		Amendment to Securities Purchase Agreement and Registration Rights Agreement (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).
10.21		Exchange Agreement between Lattice Incorporated and Barron Partners LP dated June 30, 2008.(2)
10.22		Certificate of Designations of Series C Preferred Stock.(2)
10.23		Accounts Receivable Purchase Agreement dated March 11, 2009.(3)
10.24		Securities Purchase Agreement dated February 1, 2010
10.25		Promissory Note issued to I. Wistar Morris. (4)
10.26		Security Agreement dated June 11, 2010 by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris.(4)
10.27		Inter-Creditor Agreement dated June 11, 2010 among Action Capital Corporation and I. Wistar Morris. (4)
10.28		Amendment Number One to Promissory Note issued to I. Wistar Morris dated July 21, 2010.(4)
10.29		Amendment Number One to Security Agreement by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris dated July 21, 2010.(4)
10.30		First Amendment to Intercreditor Agreement between Action Capital Corporation and I. Wistar Morris. (4)

 

10.31		Certificate of Designation, Series D Convertible Preferred Stock, dated February 10, 2011.(5)
10.32		Securities Purchase Agreement, between the Company and Barron Partners LP, dated February 14, 2011.(5)
10.33		Securities Purchase Agreement between Company and Barron Partners LP, dated March 28, 2011

 

 

10.34		Amended Certificate of Designation, Series D Convertible Preferred Stock, dated April 17, 2011.(6)
10.35		Asset Purchase Agreement by and among the Company and Blackwatch International, Inc., dated as of March 29, 2013. (7)
10.36		Asset Purchase Agreement by and among the Company and Innovisit LLC, dated as of November 1, 2013. (8)
10.37		Consulting Agreement with Blairsden Resources LLC
10.38		Consulting Agreement with Roxen Advisors LLC
10.39		Loan and Security Agreement dated May 14, 2015, between Lattice Funding, LLC and the Company (9)
10.40		Promissory Note dated May 14, 2015 made in favor of Lattice Funding, LLC (9)
10.41		2015 Omnibus Equity Incentive Plan (10)
10.42		Loan and Security Agreement dated November 2, 2015, between Cantone Asset Management, LLC and the Company(11)
10.43		Promissory Note dated November 2, 2015 made in favor of Cantone Asset Management, LLC(11)
10.44		Subscription Agreement dated November 2, 2015(11)
10.45		Loan and Security Agreement dated February 25, 2016, between Lattice Cantone, LLC and the Company (12)
10.46		Promissory Note dated February 26, 2016 made in favor of Cantone Asset Management LLC (12)
14.1		Code of Ethics (Incorporated by reference to the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on April 9, 2004)
21.1		Subsidiaries of the Company (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).
31.1		Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2		Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1		Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2		Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
99.1		Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1)
99.10		Lockup Agreement from Laurus Master Fund, LTD.(1)
99.11		Irrevocable Proxy.(1)
99.2		Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1)
99.3		Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1)
99.4		Press Release dated April 14, 2016
101.INS*		XBRL Instance Document
101.SCH*		XBRL Schema Document
101.CAL*		XBRL Calculation Linkbase Document
101.DEF*		XBRL Definition Linkbase Document
101.LAB*		XBRL Label Linkbase Document
101.PRE*		XBRL Presentation Linkbase Document

 

 

(1)	Incorporated by reference to the 8-K filed by the Company with the SEC on September 25, 2006

(2)	Incorporated by reference to the 8-K filed by the Company on July 8, 2008

(3)	Incorporated by reference to the 8-K filed by the Company on March 27, 2009

(4)	Incorporated by reference to the 10-Q for fiscal quarter ending June 30, 2010 and filed by the Company on August 20, 2010

(5)	Incorporated by reference to the 8-K filed by the Company on February 22, 2011

(6)	Incorporated by reference to the 8-K filed by the Company on March 13, 2011

(7)	Incorporated by reference to the 8-K filed by the Company on May 6, 2013
(8)	Incorporated by reference to the 8-K filed by the Company on November 18, 2013
(9)	Incorporated by reference to the 8-K filed by the Company on May 20, 2015
(10)	Incorporated by reference to Annex A to the Company’s Definitive Proxy Statement filed with the SEC on May 26, 2015
(11)	Incorporated by reference to the 8-K filed by the Company on December 16, 2015
(12)	Incorporated by reference to the 8-K filed by the Company on March 7, 2016

 

 

*	To be filed by amendment

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

		LATTICE INCORPORATED
Date: April 14, 2016		By: /s/ Paul Burgess
		Paul Burgess
		President, Chief Executive Officer
		and Director
Date: April 14, 2016		By: /s/ Joe Noto
		Joe Noto
		Chief Financial Officer and Principal
		Accounting Officer

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Paul Burgess
Paul Burgess		President, Chief Executive Officer and Director		April 14, 2016
/s/ Joe Noto
Joe Noto		Chief Financial Officer and Secretary		April 14, 2016
/s/ John Boyd
John Boyd		Director		April 14, 2016
/s/ Mark V. Rosenker
Mark V. Rosenker		Director		April 14, 2016
/s/ Robert Wurwarg
Robert Wurwarg		Director		April 14, 2016
/s/ Richard Stewart
Richard Stewart		Director		April 14, 2016

 

 

 

 

Lattice Incorporated Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firms	F-2
Consolidated Balance Sheets as of December 31, 2015 and 2014	F-3
Consolidated Statements of Operations, two years ended December 31, 2015 and 2014	F-4
Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2015	F-5-76
Consolidated Statements of Cash Flows, two years ended December 31, 2015 and 2014	F-7
Notes to Consolidated Financial Statements	F-8 - F-24

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and

Stockholders of Lattice Incorporated and Subsidiaries

 

 

We have audited the accompanying consolidated balance sheets of Lattice Incorporated and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2015. The management of Lattice Incorporated and Subsidiaries is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lattice Incorporated and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to the consolidated financial statements, the Company has a working capital deficit and requires additional working capital to meet its current liabilities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1b. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Rosenberg Rich Baker Berman & Company

 

 

Somerset, New Jersey

April 14, 2016

 

 

 

 

 

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

         

		December 31				December 31
		2015				2014
ASSETS:
Current assets:
Cash and cash equivalents		$	186,839			$	255,954
Accounts receivable, net			977,638				987,324
Inventories			50,711				1,531
Note receivable - current			–				90,000
Costs and gross profit in excess of billings			324,673				449,129
Other current assets			177,357				465,654
Total current assets			1,717,218				2,249,592
Property and equipment, net			515,668				692,198
Intangible assets, net			520,012				650,012
Note receivable - long term			–				485,000
Other receivable, net			761,607				1,261,607
Deposits			58,473				76,071
Total assets		$	3,572,978			$	5,414,480
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable		$	2,390,420			$	1,377,187
Accrued expenses			1,110,346				1,024,363
Accrued settlement			2,750,000				2,521,694
Customer advances			400,985				116,308
Notes payable - current, net of debt discount			1,806,981				1,418,067
Capital lease obligation			4,601				–
Derivative liability			30,154				69,765
Deferred revenue			166,883				82,628
Total current liabilities			8,660,370				6,610,012
Long-term liabilities:
Derivative liability			–				771,198
Capital lease obligation			7,192				–
Convertible notes payable, net of debt discount			2,205,466				–
Notes payable - long-term			69,797				378,364
Total long-term liabilities			2,282,455				1,149,562
Total liabilities			10,942,825				7,759,574
Shareholders' deficit
Preferred stock - $0.01 par value
Series A 9,000,000 shares authorized 0 and 6,575,815 issued and outstanding, respectively			–				54,058
Series B 1,000,000 shares authorized 1,000,000 issued and 502,160 outstanding			10,000				10,000
Series C 520,000 shares authorized 0 and 520,000 issued and outstanding, respectively			–				5,200
Series D 590,910 shares authorized 0 and 590,910 issued and outstanding, respectively			–				5,909
Common stock - $0.01 par value, 200,000,000 authorized, 94,741,557 and 53,879,348 issued and outstanding respectively			947,416				538,794
Common stock subscribed - 500,000 shares			5,000				5,000
Additional paid-in capital			45,673,848				45,485,245
Accumulated deficit			(53,451,081	)			(47,893,655	)
Accumulated other comprehensive income			3,066				2,451
			(6,811,751	)			(1,786,998	)
Stock held in treasury, at cost			(558,096	)			(558,096	)
Total shareholders' (deficit)			(7,369,847	)			(2,345,094	)
Total liabilities and shareholders' deficit		$	3,572,978			$	5,414,480

 

See accompanying notes to the consolidated financial statements.

 

 

 

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

       

		2015				2014
Revenue		$	7,587,150			$	8,941,060
Cost of Revenue			4,729,886				5,335,888
Gross Profit			2,857,264				3,605,172
Operating Expenses:
Selling, general and administrative			4,627,828				4,004,421
Research and development			1,159,632				1,086,410
Total operating expenses			5,787,460				5,090,831
Loss from Operations			(2,930,196	)			(1,485,659	)
Other Income (Expense):
Derivative income (expense)			591,990				505,658
Financing fees			(200,257	)			(80,018	)
Loss on extinguishment of debt			(1,032,580	)			–
Other income (expense)			–				2,090
Write-off of note receivable			(522,185	)			(125,000	)
Write-off of other receivable			(500,000	)			–
Settlement expense			(228,306	)			–
Interest income			73				280
Interest expense			(710,857	)			(619,399	)
Total other income (expense)			(2,602,122	)			(316,389	)
Loss before taxes			(5,532,318	)			(1,802,048	)
Income taxes			–				–
Net Loss			(5,532,318	)			(1,802,048	)
Preferred Stock Dividend			(25,108	)			(25,108	)
Net Loss Available to Common Shareholders			(5,557,426	)			(1,827,156	)
Net loss per common share
Basic		$	(0.09	)		$	(0.04	)
Diluted		$	(0.09	)		$	(0.04	)
Weighted average shares:
Basic			65,172,006				46,068,220
Diluted			65,172,006				46,068,220
Comprehensive Loss
Net Loss			(5,532,318	)			(1,802,048	)
Foreign Currency Translation Gain (Loss)			615				2,451
Comprehensive Loss			(5,531,703	)			(1,799,597	)

 

See accompanying notes to the consolidated financial statements.

  

 

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014

 

 

Preferred Series A

Preferred Series B

Preferred Series C

Preferred Series D

Common Stock

Common Stock Subscriptions

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Stockholders' deficit, December 31, 2013

6,575,815

$

65,758

1,000,000

$

10,000

520,000

$

5,200

590,910

$

5,909

35,304,714

$

353,047

Net income (loss)

–

–

–

–

–

–

–

–

–

–

Common stock issued for vendor services

1,458,334

14,583

Issuance of common stock subscribed

500,000

$

5,000

Common stock issued for financing fees

–

–

–

–

–

–

–

–

1,350,000

13,500

Common stock issued for conversion of 1,170,000 SHS of  Series A Preferred

(1,170,000

)

(11,700

)

–

–

–

–

–

–

4,178,538

41,786

Common stock issued for exchange for principal payment on note

–

–

–

–

–

–

–

–

500,000

5,000

Common stock  issued in private placement in exchange for debt

–

–

–

–

–

–

–

–

2,223,484

22,235

Common stock  issued in private placement

–

–

–

–

–

–

–

–

6,864,278

68,643

Common stock  issued to Directors for services

–

–

–

–

–

–

–

–

2,000,000

20,000

Share-based compensation

–

–

–

–

–

–

–

–

–

–

Foreign currency translation adjustment

Dividends - Series B Preferred

Stockholders' deficit, December 31, 2014

5,405,815

$

54,058

1,000,000

$

10,000

520,000

$

5,200

590,910

$

5,909

53,879,348

$

538,794

500,000

$

5,000

Net loss

–

–

–

–

–

–

–

–

–

–

Conversion of Preferred shares to common

(1,840,000

)

(18,400

)

–

–

–

–

–

–

6,571,376

65,714

–

–

Cash paid to re-purchase outstandiing Preferred stock

(3,565,815

)

(35,658

)

–

–

(520,000

)

(5,200

)

(590,910

)

(5,909

)

–

$

–

Common stock issued for services

–

–

–

–

–

–

–

–

1,000,000

10,000

Common shares issued for late payment of interest

–

–

–

–

–

–

–

–

1,000,000

10,000

Common shares issued for financing fees

–

–

–

–

–

–

–

–

6,645,833

66,458

Common shares  issued for extinguishment of debt

–

–

–

–

–

–

–

–

5,000,000

50,000

Common shares issued private placements

–

–

–

–

–

–

–

–

20,645,000

206,450

Commosn stock issued (stock issuance costs )

–

–

–

–

–

–

–

–

–

–

Share-based compensation

–

–

–

–

–

–

–

–

–

–

Foreign currency translation adjustment

Dividends - Series B Preferred

Stockholders' deficit, December 31, 2015

–

$

–

1,000,000

$

10,000

–

$

–

–

$

–

94,741,557

$

947,416

500,000

$

5,000

 

See accompanying notes to the consolidated financial statements.

 

 

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014

(continued)

 

 

	Additional Paid-In Capital				Accumulated Comprehensive Income		Accumulated deficit			Shares			Amount			Stockholders
																Deficit
Stockholders' deficit, December 31, 2013	$	43,714,377					$	(46,066,499	)		302,987		$	(558,096	)	$	(2,470,304	)
Net income (loss)		–						(1,802,048	)								(1,802,048	)
Common stock issued for vendor services		152,917															167,500
Issuance of common stock subscribed	$	55,000															60,000
Common stock issued for financing fees		148,500															162,000
Common stock issued for conversion of 1,170,000 SHS of  Series A Preferred		(30,086	)														–
Common stock issued for exchange for principal payment on note		55,000															60,000
Common stock  issued in private placement in exchange for debt		244,583															266,818
Common stock  issued in private placement		752,798															821,441
Common stock  issued to Directors for services		160,000															180,000
Share-based compensation		232,156															232,156
Foreign currency translation adjustment					2,451												2,451
Dividends - Series B Preferred								(25,108	)								(25,108	)
Stockholders' deficit, December 31, 2014	$	45,485,245		$	2,451		$	(47,893,655	)		302,987		$	(558,096	)	$	(2,345,094	)
Net loss		–						(5,532,318	)								(5,532,318	)
Conversion of Preferred shares to common		(47,314	)														–
Cash paid to re-purchase outstandiing Preferred stock	$	(1,028,767	)														(1,075,534	)
Common stock issued for services		80,000															90,000
Common shares issued for late payment of interest		10,000															20,000
Common shares issued for financing fees		324,250															390,708
Common shares  issued for extinguishment of debt		100,000															150,000
Common shares issued private placements		536,770															743,220
Common stock issued (stock issuance costs )		(50,688	)														(50,688	)
Share-based compensation		264,352															264,352
Foreign currency translation adjustment					615												615
Dividends - Series B Preferred								(25,108	)								(25,108	)
Stockholders' deficit, December 31, 2015	$	45,673,848		$	3,066		$	(53,451,081	)		302,987		$	(558,096	)	$	(7,369,847	)

 

 

See accompanying notes to the consolidated financial statements.

 

 

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

 

		2015				2014
Cash flows from operating activities:
Net loss		$	(5,532,318	)		$	(1,802,048	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write-off of note receivable			522,185				125,000
Write-off of other receivable			500,000				–
Derivative income			(591,990	)			(505,658	)
Stock issued for services			90,000				184,762
Stock issued for interest			20,000
Amortization of intangible assets			130,000				245,427
Amortization of debt discount			305,952				329,538
Loss on extinguishment of debt			1,032,580				–
Bad debt expense			182,898				–
Amortization of deferred financing fees			200,257				80,018
Share-based compensation			264,352				232,156
Depreciation			355,143				347,625
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable			(173,212	)			(351,075	)
Inventories			(49,180	)			7,799
Costs in excess of billings			124,456				(449,129	)
Other current assets			91,116				(25,251	)
Deposits			17,598				(30,000	)
Increase (decrease) in:
Accounts payable and accrued liabilities			1,129,983				551,852
Accrued settlement			228,306				–
Deferred revenue			84,255				36,831
Customer advances			284,677				163,259
Total adjustments			4,749,376				943,154
Net cash used in operating activities			(782,942	)			(858,894	)
Cash flows from investing activities:
Principal payments received on note receivable			52,815				–
Purchase of equipment			(34,970	)			(178,111	)
Net cash provided by (used in) investing activities			17,845				(178,111	)
Cash flows from financing activities:
Cash paid for financing fees			(255,800	)			(155,000	)
Payments on capital lease			(2,792	)			–
Payments on notes payable			(651,039	)			(1,223,636	)
Proceeds from the issuance of common stock, net			–				796,441
Proceeds from common stock subscribed			–				60,000
Proceeds from issuance of common stock			743,220				–
Stock issuance costs			(50,688	)			–
Cash paid to buyback preferred stock			(1,075,534	)			–
Proceeds from notes payable			1,080,000				1,500,000
Proceeds from convertible notes payable			908,000				–
Net cash provided by financing activities			695,367				977,805
Effect of exchange rate changes on cash			615				2,451
Net decrease in cash and cash equivalents			(69,115	)			(56,749	)
Cash and cash equivalents - beginning of period			255,954				312,703
Cash and cash equivalents - end  of period			186,839				255,954
Supplemental cash flow information
Interest paid in cash		$	225,669			$	202,002
Summary of non-cash investing and financing activities
Dividends declared but not paid		$	25,108			$	25,108
Conversion of notes payable into common stock		$	–			$	227,272
Conversion of accrued interest into common stock		$	–			$	39,546
Common stock issued for principle payment on note payable		$	–			$	60,000
Recording of derivative liability		$	–			$	1,223,923
Common stock issued to settle liability		$	–			$	25,000
Common stock issued as prepayment for services		$	–			$	162,740
Common stock issued for deferred financing fees		$	112,373			$	162,000
Recording of debt discount due to derivative liability		$	–			$	–
Stock issued for debt extinguishment		$	150,000			$	–
Stock issued for debt discount		$	278,335			$	–
Equipment purchased with a capital lease		$	14,585			$	–
Equipment purchased with note payable		$	129,058			$	–

 

See accompanying notes to the consolidated financial statements.

 

 

 

LATTICE INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 - Organization and Summary of Significant Accounting Policies:

 

a)         Organization

 

Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history, Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently, Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006, the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009, we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated. On May 16, 2011, we acquired 100% of the shares of Cummings Creek Capital, a holding company which 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			$	–

 

 

 

(a)

Bank Line of Credit

 

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

 

Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”). The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000. The Company 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.