FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.

 

COMMISSION FILE NUMBER 000-10690

 

LATTICE INCORPORATED

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(Exact Name of Registrant as Specified in its Charter)

Delaware		22-2011859
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7150 N. Park Drive, Pennsauken, New Jersey		08109
(Address of principal executive offices)		(Zip code)

 

Issuer's telephone number: (856) 910-1166

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes  o No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 14, 2008, there were 16,829,950 outstanding shares of the Registrant's Common Stock, $.01 par value.

 

 

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LATTICE INCORPORATED

SEPTEMBER 30, 2008 QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosure About Market Risks	20
Item 4T. Controls and Procedures	20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3. Defaults Upon Senior Securities	22
Item 4. Submission of Matters to a Vote of Security Holders	22
Item 5. Other Information	22
Item 6. Exhibits	22
SIGNATURES	23

2

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LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		September 30,			December 31,
		2008			2007
		(Unaudited)			(Audited)
ASSETS:
Current assets:
Cash and cash equivalents		$	732,265		$	769,915
Accounts receivable, net			3,275,266			3,839,744
Inventories			46,407			65,846
Other current assets			286,448			127,801
Total current assets			4,340,386			4,803,306
Property and equipment, net			39,295			27,530
Goodwill			7,629,632			7,629,632
Other intangibles, net			4,237,900			5,354,071
Other assetes			52,889			118,623
Total assets		$	16,300,102		$	17,933,162
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,182,292		$	2,716,411
Accrued expenses			1,109,505			1,252,916
Contingent Consideration - due former RTI owners			—			1,500,000
Customer deposits			15,000			15,000
Notes payable			1,606,972			1,050,254
Derivative liability			598,365			7,217,099
Total current liabilities			5,512,134			13,751,680
Long term liabilities:
Long Term Debt			750,000
Deferred tax liabilities			2,139,330			2,661,954
Total long term liabilities			2,889,330			2,661,954
Total liabilities			8,401,464			16,413,634
Minority interest			135,480			214,599
Shareholders' equity
Preferred Stock - .01 par value			78,387			78,387
Preferred Stock series A 9,000,000 shares authorized, 7,838,686 issued
Preferred Stock series B 1,000,000 shares authorized 502160 and 1,000 000 issued
respectively			5,022			10,000
Preferred Stock series C 575,000 shares authorized 520,000 issued			5,200			—
Common stock - .01 par value, 200,000,000 authorized,			165,520			168,425
16,552,021 and 16,842,428 issued, and 16,639,441 and 16,829,428 outstanding
Additional paid-in capital			38,158,180			36,854,901
Accumulated deficit			(30,251,318	)		(35,408,951	)
			8,160,991			1,702,762
Common stock held in treasury, at cost			(397,833	)		(397,833	)
Shareholders' equity			7,763,158			1,304,929
Total liabilities and shareholders' equity		$	16,300,102		$	17,933,162

See accompanying notes to the consolidated financial statements.

3

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LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		Nine Months Ended September 30,						Three Months Ended September 30,
		2008			2007			2008			2007
Revenue - Technology Services		$	10,656,897		$	10,242,162		$	3,775,213		$	3,976,275
Revenue - Technology Products			866,245			970,354			428,934			339,867
Total Revenue			11,523,142			11,212,516			4,204,147			4,316,142
Cost of Revenue - Technology Services			7,916,610			5,048,465			2,924,049			2,103,352
Cost of Revenue - Technology Products			335,386			337,991			167,370			125,821
Total cost of revenue			8,251,996			5,386,456			3,091,419			2,229,173
Gross Profit			3,271,146			5,826,060			1,112,728			2,086,969
Operating expenses:
Selling, general and administrative			3,359,768			4,094,165			1,024,628			1,527,018
Research and development			384,692			314,339			123,720			109,041
Amortization expense			1,116,171			1,561,284			372,057			520,428
Total operating expenses			4,860,631			5,969,788			1,520,405			2,156,487
Loss from operations			(1,589,485	)		(143,728	)		(407,677	)		(69,518	)
Other income (expense):
Derivative income (expense)			2,750,199			3,889,788			195,609			2,828,906
Extinguishment loss			2,607,525			(157,130	)		—			—
Other income			970,150						370,150
Interest expense			(140,910	)		(530,135	)		(32,703	)		(51,133	)
Finance expense			(2,636	)		(21,520	)		(1,170	)		(7,202	)
Total other income (expense)			6,184,328			3,181,003			531,886			2,770,571
Minority Interest			79,119			(188,781	)		23,700			(87,602	)
Income before taxes			4,673,962			2,848,494			147,909			2,613,451
Income taxes (benefit)			(521,171	)		—			(172,755	)		—
Net income		$	5,195,133		$	2,848,494		$	320,664		$	2,613,451
Reconciliation of net income loss
Income applicable to common shareholders:
Net income		$	5,195,133		$	2,848,494		$	320,664		$	2,613,451
Series B Preferred stock dividend			(37,500	)		(37,500	)		(12,500	)		(12,500	)
Income applicable to common stockholders		$	5,157,633		$	2,810,994		$	308,164		$	2,600,951
Income per common share
Basic		$	0.31		$	0.17		$	0.02		$	0.16
Diluted		$	0.04		$	(0.02	)	$	—		$	—
Weighted average shares:
Basic			16,829,428			16,642,428			16,829,428			16,642,428
Diluted			56,172,092			64,230,056			53,592,883			64,230,056

See accompanying notes to the consolidated financial statements.

4

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LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Nine Months ended September 30,
		2008			2007
Cash flow from operating activities:
Net income before preferred dividends		$	5,195,133		$	2,848,494
Adjustments to reconcile net loss to net used for operating activities:
Derivative income			(2,750,199	)		(3,772,263	)
Amortization of intangible assets			1,116,171			1,561,284
Amortization of debt discount (effective method)			—			205,809
Amortization of deferred financing			—			21,520
Settlement of Contingent Liability - former RTI shareholders			(1,057,650	)
Extinguishment (gain) loss			(2,607,525	)		157,130
Deferred income taxes			(521,171	)		—
Minority interest			(79,119	)		188,781
Share-based compensation			156,635			184,320
Depreciation			21,079			12,375
Changes in operating assets and liabilities:			—
(Increase) decrease in:			—
Accounts receivable			564,478			(1,773,718	)
Inventories			19,439			10,643
Other current assets			(6,998	)		(16,311	)
Other assets			65,734			(16,818	)
Increase (decrease) in:			—
Accounts payable and accrued liabilities			(677,530	)		986,837
Deferred revenue			—			(62,495	)
Total adjustments			(5,756,656	)		(2,312,906	)
Net cash provided by ( used in) operating activities			(561,523	)		535,588
Cash Used in investing activities:
Purchase of equipment			(32,844	)		(832	)
Net cash used for investing activities			(32,844	)		(832	)
Cash flows from financing activities:
Payments on notes payable			(131,000	)		(842,000	)
Bank line-of-credit borrowings (payments), net			687,717			25,315
Net cash provided by (used for) by financing activities			556,717			(816,685	)
Net decrease in cash and cash equivalents			(37,650	)		(281,929	)
Cash and cash equivalents - beginning of period			769,915			392,275
Cash and cash equivalents - end of period		$	732,265		$	110,346
			—
Supplemental cash flow information
Interest paid in cash		$	81,397		$	215,685
Supplemental disclosures of Non-Cash Investing & Financing Activities
Preferred stock Series B			(4,978	)		—
Preferred Stock Series C			5,200			—
Common Stock			(2,905	)		—
Additional paid in capital			1,257,883			—
Derivative liability			(1,261,010	)		—

See accompanying notes to the consolidated financial statements.

5

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Note 3- Segment reporting

Management views its business as one reportable segment: Government services. The Company evaluates performance based on profit or loss before intercompany charges.

 

		Nine Months Ended September 30,						Three Months Ended September 30,
		2008			2007			2008			2007
Revenues:
Goverment Services		$	10,656,897		$	10,242,162		$	3,775,213		$	3,976,275
Other			866,245			970,354			428,934			339,867
Total Consolidated Revenues			11,523,142			11,212,516			4,204,147			4,316,142
Gross Profit:
Government Services			2,740,287			5,193,697			851,164			1,872,923
Corporate and other			530,859			632,363			261,564			214,046
Total Consolidated			3,271,146			5,5826,060			1,112,728			2,086,969
Total Assets:
Goverment Services			15,683,314
Corporate and Other			616,788
Total Consolidated Assets			16,300,102

 

9

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Note 4 - Notes payable

Notes payable consists of the following as of September 30, 2008 and December 31, 2007:

		September 30, 2008			December 31, 2007
Bank line-of-credit (a)		$	1,427,972		$	740,254
Note Payble – former RTI owners (b)			750,000
Notes payable to Stockholders/Officers (c))			179,000			310,000
Total notes payable			2,356,972			1,050,254
Less current maturities			(1,606,972	)		(1,050,254	)
Long-term debt		$	750,000		$	—

(a) Bank line-of-credit:

 

On March 7, 2008, Lattice Incorporated (the “Company”) entered into a Loan and Security Agreement (the “Loan Agreement”) with the Private Bank of Peninsula (“Private Bank”) pursuant to which Private Bank agreed to extend a line of credit of up to $4.0 million to the Company. Pursuant to the Loan Agreement, the Company can request advances on the line-of-credit, which in the aggregate cannot exceed 85% of the Company’s eligible accounts receivable. The line-of-credit bears interest at 3% above the Prime Rate (8.25% at September 30, 2008). The outstanding balance at September 30, 2008 was $1,427,972. Pursuant to the Loan Agreement, the Company is required to maintain certain financial covenants including a minimum current ration of 0.75:1.00 and a minimum EBITDA of $200,000. As of September 30, 2008, the Company was not in compliance with the minimum EBITDA requirement which constitutes a default on the line of credit. As a result of the default and in accordance with the Loan Agreement, the interest rate on the line of credit shall be increased by 5%. In addition, Private Bank is entitled to declare all amounts due under the Loan Agreement to be immediately due and payable, which as of September 30, 2008 amount to $1,472,972. Private Bank is also entitled to cease advancing money or extending credit to the Company. Private Bank also has a right of set-off for any and all balances and deposits of the Company held by Private Bank. Further, Private Bank has the right to foreclose on the collateral, which includes all personal property of the Company.

(b) Note payable - former RTI owners:

In accordance with the Settlement Agreement with Michael Ricciard as owner representative of the former RTI shareholders (as described in Note 2), the Company issued a 24 month promissory note to the former RTI shareholders payable at 10% interest only in the initial 12 months starting October 2008 and paying principal of $62,500 plus interest per month starting with the 13th month.

(c) Notes payable stockholders/officers:

 

At September 30, 2008 the Company has a short-term loan payable to a former officer and stockholder of the Company totaling $9,000. This note bears interest of 8.0% per annum. The note is an unsecured demand note and payable in full by December 31, 2008.

At September 30, 2008 the Company has a term note payable of $170,000 with a director of the Company. The note bears interest at 20% per annum and is payable monthly at $ 9,368 with any residual balance maturing September 2009. 

Note 5 - Derivative financial instruments:

The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, the 2006 Omnibus Amendment and Waiver Agreement with Laurus, and the 2006 Barron Financing Arrangement. These derivative financial instruments are indexed to an aggregate of 17,438,465 and 40,483,333 shares of the Company’s common stock as of September 30, 2008 and December 31, 2007, respectively, and are carried at fair value. The following tabular presentations set forth information about the derivative instruments as of and for the periods September 30, 2008 and September 30, 2007:

		Nine months ended June 30, 2008			Nine months ended  September 30, 2007			Three months ended September 30, 2008			Three months ended September 30, 2007
Derivative income(expense):
Conversion features			—		$	(467,120	)		—			—
Warrant derivative		$	2,750,199		$	4,356,908		$	195,609		$	2,828,906

 

10

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		September 30,  2008			December 31  2007
Derivative liabilities:
Warrant derivative		$	( 598,365	)	$	(7,217,099	)

 

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 and Barron financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black Scholes models as of September 30, 2008 included conversion or strike prices ranging from $0.10 - $1.10; historical volatility factors ranging from 104.26% - 106.49% based upon forward terms of instruments; terms-remaining term for all instruments; and a risk free rate ranging from 2.91% - 4.29%.

Embedded derivative instruments consist of multiple individual features that were embedded in the convertible debt instruments. The Company evaluated all significant features of the hybrid instruments and, where required under current accounting standards, bifurcated features for separate report classification. These features were, as attributable to each convertible note, aggregated into one compound derivative financial instrument for financial reporting purposes. The compound embedded derivative instruments were valued using the Flexible Monte Carlo methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and Company-controlled redemption privileges) that are necessary to value these complex derivatives.  Since the conversion feature no longer required bifurcation as of February 2, 2007, there was no compound derivative recorded as of September 30, 2008. The expense recorded in the nine months ended September 30, 2007 related to the fair value adjustments on the embedded derivative instrument from the period from January 1, 2007 through February 2, 2007.

On June 30, 2008, the Company entered into an agreement with Barron Partners L.P., pursuant to which Barron Partners agreed to return their unregistered warrants to the Company for cancellation in exchange for 520,000 shares of newly issued Series C Convertible Preferred Stock (the “Exchange Agreement”). The following warrants were returned for cancellation pursuant to the Exchange Agreement:

 

	-	Series A Warrants indexed to 10,544,868 shares of common stock which were originally issued in conjunction with the September 19, 2006 Barron financing
	-	Series B Warrants indexed to 12,500,000 shares of common stock which were originally issued in conjunction with the September 19, 2006 Barron financing
	-	Additional Warrants indexed to 1,900,000 shares of common stock which were originally issued in February 2007 as consideration for a waiver on overdue payments due to Barron Partners, L.P.

The Series A and B warrants did not meet all the conditions of EITF 00-19 for equity classification so they had been recorded as derivative liabilities since inception. The fair value of the Series A and B warrants on the transaction date was determined to be $3,868,535 using the Black-Scholes option pricing model. Significant assumptions used in the Black Scholes model as of the date of the exchange included strike prices ranging from $0.275 to $0.25; a historical volatility factor of 106.49% based upon forward terms of instruments; a remaining term of 3.25 years; and a risk free rate of 2.91%

The Additional Warrants had achieved equity classification and they had been recorded in equity since inception. Their fair value at their inception (and thus their carrying value at the time of the exchange) was $1,031,130.

 

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In accordance with the Share Exchange Agreement, on June 30, 2008, we designated 575,000 shares of our preferred stock as Series C Convertible Preferred Stock (“Series C Preferred”). The Series C Preferred has a par value of $0.01 and each share of preferred stock is convertible into 10 shares of common stock at any time, at the option of the holder. The conversion prices are subject to anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations and (ii) sales or issuances of common shares or contracts to which common shares are indexed at less than the stated conversion prices. Holders of the Company’s Series C Preferred are not entitled to dividends and the Holder has no redemption privileges. In considering the application of Statement 133, we identified those specific terms and features embedded in the contract that possess the characteristics of derivative financial instruments. Those features included the conversion option and buy-in and non-delivery puts. In evaluating the respective classification of these embedded derivatives, we are required to determine whether the host contract (the Series C Preferred) is more akin to a debt or equity instrument in regards to the risks. This determination is subjective. However, in complying with the guidance provided in EITF D-109 Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under Statement No. 133 we concluded, based upon the preponderance and weight of all terms, conditions and features of the host contracts, that the Series C Preferred was more akin to an equity instrument for purposes of considering the clear and close relation of the embedded feature to the host contract. Based upon this conclusion, we further concluded that (i) embedded features did not require derivative liability classification and (ii) certain Non-delivery and Buy-in puts which require the Company to make-whole the investor for market fluctuation losses in the event of non-delivery of conversion shares meet the requisite criteria of a derivative financial instrument and should be bifurcated. Since share delivery is in the Company’s option and they have enough authorized shares to settle their share-settleable debt, it was determined that the value of these puts was deminimus.

The following table sets forth the computation of basic and diluted earnings per share:

 

Note 7 -Earnings per share

		Nine months ended September 30, 2008			Nine months ended  September 30, 2007			Three months  ended September 30, 2008			Three months  ended September 30, 2007
Income (loss) applicable to common stockholders, as reported		$	5,157,633		$	2,810,994		$	308,164		$	2,600,951
Reconciliation to numerator for diluted earnings per share:
Income on derivative warrants			(2,750,199	)		(3,889,788	)		(195,609	)		(2,828,906	)
Preferred stock dividends			37,500			37,500			12,500			12,500
Numerator for diluted earnings per share		$	2,444,934		$	(1,041,294	)	$	125,055		$	(227,955	)
Weighted average shares			16,829,428			16,642,428			16,829,428			16,642,428
Reconciliation to denominator for diluted earnings per share
Dilutive derivative warrants			5,379,707			27,011,111			5,739,670			27,011,111
Shares indexed to convertible preferred stock			34,110,568			20,398,517			34,110,568			20,398,517
Dilutive employee options			(147,615	)		178,000			(3,086,784	)		178,000
Denominator for diluted earnings per share			56,172,088			64,230,056			53,232,288			64,230,056
Earnings per common share:
Basic			0.31			0.17			0.02			0.16
Diluted			0.04			(0.02	)		0.00			(0.00	)

The above table includes only dilutive instruments and their effects on earnings per common share.

12

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Note 8 Stock Based Compensation:

On May 15, 2008 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.

In May 2008 and August 2008 the board issued options to purchase an aggregate of 6,309,000 shares of the Company’s common stock to various officers and directors of the company. The company recorded $146,807 in connection with the issuance of options plus $9,833 from prior grants, for a total stock base compensation expense of $156,640.

The weighted-average fair value per share of the options granted during 2008 was estimated on the date of grant using the Black-Scholes-Merton option pricing model; the following assumptions were used to estimate the fair value of the options at grant date based on the following:

		2008			2007
Risk-Free interest rate			4.91	%		4.27	%
Expected dividend yield			—			—
Expected stock price volatility			106.49	%		131	%
Expected option Life			5.5 years			10 years

		Number of			Number of			Weighted-
		Options			Options			Average
		Available			Outstanding			Exercise Price
Balance December 31, 2007			467,000			1,371,000		$	1.00
2008 Plan			10,000,000
Options granted under Plan in 2008			(6,309,000	)		6,309,000			.33
Balance September 30, 2008			4,158,000			7,680,000		$	.45

 

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ITEM 4T. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under the Exchange Act the Company carried out an evaluation with the participation of the Company’s management, including Paul Burgess, the Company’s Chief Executive Officer (“CEO”) and Joe Noto, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the nine months ended September 30, 2008. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. As disclosed in the Company’s 10-KSB for the year ended December 31, 2007, the Company’s CEO and CFO concluded that the limited financial backgrounds of certain members of the Company’s executive management team beyond its CFO are inhibiting its financial reporting process. The Company intends to hire additional personnel with more substantial financial backgrounds but has not done so to date.

 

Changes in internal controls

 

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting  occurred during the 2008 Quarter ended September 30, 2008.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the 2008 Quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

20

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PART II

 

OTHER INFORMATION 

ITEM 1 - LEGAL PROCEEDINGS

 

In June 2008, the Company filed suit in New Jersey Superior Court against Michael Ricciardi and Marie Ricciardi, former shareholders of Ricciardi Technologies, Inc. (“RTI”), along with the Domenix Corporation, a company owned by Marie Ricciardi and operated by her and Michael Riccardi. The defendants removed the case to the United States District Court for the district of New Jersey, where it was pending under the caption, Lattice, Inc. v.Marie Ricciardi, et al., Civil Action No. 08 cv 3208 (the “New Jersey Action”). The New Jersey Action sought to enforce the restrictive covenant contained in the September 12, 2006 Stock Purchase Agreement (the “SPA”), pursuant to which the Company purchased RTI from, inter alia, the Ricciardis. The restrictive covenant prohibited the former owners of RTI from (a) competing, directly or indirectly against Lattice and RTI and/or (b) soliciting employees or others engaged by RTI for a period of three years from the date of the SPA. The Company sought a preliminary injunction to prevent Marie Ricciardi, acting in concert with her husband and through Domenix, from continuing to breach the restrictive covenant and damages in an as yet undetermined amount for damages resulting from the breach. A hearing on Lattice’s motion for preliminary injunction occurred on August 7, 2008.

Michael Ricciardi also filed a suit against the Company in June, 2008, in the United States District Court for the Eastern District of Virginia under the caption Michael Ricciardi v. Lattice, Inc., Civil Action No. 1:08-cv-519 (the “Virginia Action”) In the Virginia Action, Michael Ricciardi (a) disputes the Company’s claim (the “Indemnity Claim”) that it is entitled to be paid approximately $308,000, plus fees and costs, from the escrow created pursuant to the SPA to cover its Indemnifiable Losses (a defined term under the SPA), claiming instead that the entire escrow should be dispersed to him as the representative of the RTI shareholders, as provided for in the SPA, and (b) asserts that a contingent $1.5 million Earn Out Payment (as such term is defined in the SPA) provided for in the SPA is due and payable by the Company to the former shareholders of RTI.

In September 2008, the Company and former RTI shareholders signed a settlement agreement (the “Settlement Agreement”) whereby $150,000 of the amount held in escrow pursuant to the SPA will be returned to the Company. As of September 30, 2008, we recorded a receivable for such amount in other current assets. In October 2008, we received the funds. In addition, pursuant to the Settlement Agreement, Michael Ricciardi and Marie Ricciardi agreed to return 497,840 shares of the Company’s preferred stock and 290,407 shares of the Company’s common stock. Pursuant to the Settlement Agreement, the Company agreed to pay the former shareholders of RTI the aggregate sum of $750,000 as settlement of the Earn Out Payment, which amount shall be paid over the next twenty-four months, consisting of interest only for the first twelve months and then twelve monthly installments of $62,500 plus interest. 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

On March 7, 2008, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with the Private Bank of Peninsula (“Private Bank”), pursuant to which Private Bank agreed to extend a lien of credit of up to $4.0 million to the Company. Pursuant to the Loan Agreement, the Company is required to maintain certain financial covenants including a minimum current ration of 0.75:1.00 and a minimum EBITDA of $200,000. As of September 30, 2008, the Company was not in compliance with the minimum EBITDA requirement which constitutes a default on the line of credit. As a result of the default and in accordance with the Loan Agreement, the interest rate on the line of credit shall be increased by 5%. In addition, Private Bank is entitled to declare all amounts due under the Loan Agreement to be immediately due and payable, which as of November 14, 2008 amount to approximately $1,442,000. Private Bank is also entitled to cease advancing money or extending credit to the Company. Private Bank also has a right of set-off for any and all balances and deposits of the Company held by Private Bank. Further, Private Bank has the right to foreclose on the collateral, which includes all personal property of the Company. As of November 14, 2008, Private Bank has not taken any of the aforementioned actions against the Company as a result of the default.

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

None.

ITEM 5 - OTHER INFORMATION

 

None.

 

There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.

Item 6. Exhibits

 

Exhibit Number		Description
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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.