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

 

 

 

 

 

 

 

 

 

Ricciardi Technologies, Inc. (“RTI”)

 

About Ricciardi Technologies Inc.

 

RTI was formed in 1992 with the goal of providing a cost-effective method for customers in both the private and public sector to meet their growing needs for dependable systems and software solutions. RTI provides turn-key solutions, as well as on-site consulting and engineering support. RTI has a diverse group of software and hardware engineers who practice proven design, development and implementation processes and standards. RTI is organized into four distinct divisions to better serve our clients’ focus and needs:

·	RTI’s E-Solutions Divisioncombines its experience in mission critical systems, distributed systems, web development, and knowledge environments to provide our customers with cutting-edge IT solutions for distributed e-business and web infrastructure.

·

RTI’s Mobile Solutions Division works closely with the other RTI divisions to provide support in the areas of wireless communication and portable device data management. MSD solutions deal with real-time data management as well as mission critical solutions to government/military and commercial customers.

·

RTI’s Professional Services Division provides both on-site and off-site consulting and engineering support. PSD has formed long-term and on-going relationships with companies such as Lockheed Martin, Motorola, Logistics Management Institute, BAE Systems, and Hughes Network Systems, to support their continuing engineering and consulting needs.

·	RTI’s Software Systems Division (SSD) provides hard core and/or real-time embedded and mission critical solutions to government, military and commercial customers.

·	RTI is headquartered in Manassas Virginia, with additional on-site personnel at client locations in Virginia, Maryland, and California.

Research and Development

Our research efforts are focused on adapting new technologies to current and potential products. Efforts in research cover new techniques in software development and component technologies. We are continuously redesigning and updating our existing products to integrate the latest technologies. As we expand our products in existing markets and make initial steps into new markets, increases in research expenditures will become necessary.

Intellectual Property

In June 1998, we were granted a patent (Patent No. 5,768,355) from the U.S. Patent and Trademark Office on a three-way call detection system.

On December 21, 2004 the United States Patent and Trademark Office issued trademark serial number 78326540 for the name “Aquifer.” SMEI has not yet received the Certificate of Registration.

 

No assurance can be given as to the scope of any patent protection. We believe that rapid technological developments in the communications and IT industries may limit the protection afforded by its patents. Since our patents precisely define the parameters of their technology, that information may allow competitors to modify the technology in order to circumvent the original patent. Accordingly, we believe that our success is dependent on its engineering competence, service, and the quality and economic value of products.

 

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Customer Support

 

Lattice Incorporated

Our technical support staff provides telephone support to customers using a computerized call tracking and problem reporting system. We also provide initial installation and training services for our products. We have instituted an annual maintenance contract which entitles customers to software updates, technical support and technical bulletins.

SMEI

The SMEI team includes in-house experts in GIS supporting technologies such as ESRI’s ArcSDE, Oracle Spatial, UNIX and Windows to ensure a stable architecture and operating environment for enterprise applications. As current customers of this service, the Naval Information Technology Center (NITC) receives architectural and database support, systems integration analysis, and technical support from SMEI.

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RTI leases a facility located at 8306 Rugby Road, Manassas VA. The facility is comprised of 3,166 square feet of space. The lease expires on May 31, 2010. . The Company does not utilize the space since it combined operations of SMEI and RTI at our Herndon facility. We have engaged a broker to market the space as a sublet.  RTI pays rent of $6,229.17 a month for the RTI facility.

ITEM 3. LEGAL PROCEEDINGS.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

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 sales prices per share of common stock for the years ended December 31, 2008 and 2007 and the interim periods through April 8, 2009.. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. The prices below have been adjusted to reflect the one-for-ten reverse split.  

Year Ended December 31, 2009

		High				Low
First Quarter ended March 31, 2009		$	.15			$	.065
Second Quarter ended June 30, 2009 (through April 8, 2009)		$	.12			$	.12

Year Ended December 31, 2008

		High				Low
First Quarter ended March 31, 2008		$	.65			$	.28
Second Quarter ended June 30, 2008		$	.42			$	.25
Third Quarter ended September 30, 2008		$	.32			$	.20
Fourth Quarter ended December 31, 2008		$	.27			$	.06

Year Ended December 31, 2007

		High				Low
First Quarter ended March 31, 2007		$	.90			$	.36
Second Quarter ended June 30, 2007		$	.51			$	.30
Third Quarter ended September 30, 2007		$	.51			$	.36
Fourth Quarter ended December 31, 2007		$	.53			$	.20

 

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. Our stock price may also be affected by broader market trends unrelated to our performance.

 

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HOLDERS

 

As of April 8, 2009, we had 16,929,850 outstanding shares of common stock held by approximately 291 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 2008, the Company recorded $25,108 of dividends payable. Dividends cannot be paid as long as the Company has an outstanding balance on its revolving line of credit.

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ITEM 6. SELECTED FINANCIAL DATA

N/A

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 herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

GENERAL OVERVIEW

 

Lattice Incorporated (formerly Science Dynamics) was incorporated in the State of Delaware in May 1973 and commenced operations in July 1977. We have been developing and delivering secure technologically advanced communication solutions for over thirty years.

  

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Business Overview

We began as a provider of specialized solutions to the telecom industry. Currently we provide advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solutions provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, we acquired a majority interest in “SMEI” in February 2005 and acquired “RTI” in September 2006.

On September 19, 2006, pursuant to a securities purchase agreement, we issued to Barron Partners LP, for $4,500,000 (a) a note in the principal amount of $4,500,000, and (b) common stock purchase warrants to purchase up to 12,500,000 shares of common stock at $0.50 per share and 12,500,000 shares of common stock at $1.25 per share.

Pursuant to the purchase agreement, our board of directors approved, subject to stockholder approval, a restated certificate of incorporation which, among other provisions, affects a one-for-ten reverse split in our common stock, and agreed to submit the restated certificate of incorporation to the stockholders for their approval. The restated certificate of amendment was approved by the stockholders on December 18, 2006 and became effective on February 2, 2007.

Upon the effectiveness of the restated certificate of incorporation, principal and interest due on the Note automatically converted into 7,826,087 shares of our series A preferred stock.

Each share of series A preferred stock is convertible into 2.5 shares of common stock subject to adjustment in certain instances, including the issuance by us of common stock at a price which is less than the conversion price applicable to the series A preferred stock (the “Series A Conversion Price”), which is $.23 per share, subject to adjustment. In connection with this purchase, we paid brokerage fees of $234,000 to Dragonfly Capital Partners, LLC $125,000 to Colebrook Capital and $20,000 to Crescent Fund LLC. In addition, we issued to Dragonfly warrants to purchase 489,100 share of common stock at $.50 per share, and 489,100 shares of common stock at an exercise price of $1.25 per share

In September 2006, using the proceeds from the Barron financing, we acquired all of the issued and outstanding common stock of Ricciardi Technologies Inc. (“RTI”). Pursuant to the acquisition agreement with RTI, the consideration for stock of RTI consisted of (a) $3,500,000, which was paid from the proceeds of the sale of the Note and warrants to Barron, (b) 5,000,000 shares of common stock, (c) a $500,000 promissory note (the “RTI Note”), which if not paid sooner must be paid in full on the earlier of (i) twelve months from the closing date, or (ii) the consummation of a transfer of all or substantially all of our assets or equity securities to a third party, and (b) 1,000,000 shares of our Series B Convertible Preferred Stock. To secure the indemnification obligations of the former RTI stockholders, a portion of the purchase price, consisting of $350,000 and 583,333 shares of common stock was placed in escrow for a period of 18 months, subject to any claims that may arise under the agreement during the 18-month warranty survival period. Pursuant to a registration rights agreement between us and the shareholders of RTI, the RTI shareholders were given certain registration rights.

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		For the Years Ending  December 31,
		2008				2007
Sales		$	16,268,481			$	15,217,827
Net income		$	934,237			$	3,726,213
Net income (loss) per common share – Diluted		$	(0.04	)		$	0.01

 

		OPERATING EXPENSES								PERCENT OF SALES
		2008				2007				2008				2007
Research & Development			518,342				432,069				3.2				2.8	%
Selling, General & Administrative			4,667,374				6,113,338				28.7	%			37.6	%

 

 

COST OF SALES:

Cost of Sales for the fiscal year ended December 31, 2008 increased 33.5% to $11,245,484 from $8,423,090 for the prior year ended December 31, 2007. The increase in cost of sales was attributable to a higher component of our 2008 revenues being provided by subcontractors as opposed to in-house or direct labor. Cost of sales in our  Goverment Services segment consists of direct labor and other direct costs (ODCs), which include, among other costs, subcontractor labor and materials along with equipment purchases and travel expenses. ODCs, which are common in the government contracting industry, typically are incurred in response to specific client tasks and may vary from period to period. As a percentage of revenues, cost of sales increased  to 69.1% from 55.4% for the same period in 2007. The increase was mainly due to a higher component of our costs of sales attributable to an increased use of subcontractors in support of our government contracts, primarily the JPMIS Seaport-e and SSA contract vehicles which were awarded late in the 3rd quarter of 2007.  Revenues supported by subcontractors accounted for approximately 50% of our overall revenues versus approximately 25% for 2007.  

RESEARCH AND DEVELOPMENT:

Research and Development Expenses increased slightly to $518,342 for the fiscal year ended December 31, 2008 from $432,069 in the year ended December 31, 2007. Engineering staffing levels are comparable to 2007 levels. Management believes that continual enhancements of the Company's products will be required to enable  us to maintain its competitive position. We  will have to focus its principal future product development and resources on developing new, innovative, technical products and updating existing products.

 

SELLING, GENERAL AND ADMINISTRATIVE:

 

Selling, General and Administrative Expenses ("SG&A") consist primarily of expenses for management, finance and administrative personnel, legal, fringe costs, indirect overhead costs, accounting, consulting fees, sales commissions, non-cash depreciation and amortization expenses, marketing, and facilities costs. For the year ended December 31, 2008, SG&A decreased to $4,667,374from $6,113,338 for the comparable year ended December 31, 2007, representing a decrease of $1,445,964 or 23.7%. As a percentage of revenues, SG&A costs for 2008 decreased to 28.7% from 40.1.6% for the year ended December 31, 2007. The decrease in SG&A was mainly attributable to lower fringe and indirect overhead costs, which decreased proportionately to the decline in our direct labor costs combined with cost reductions in general and administrative expenses. Also, in the prior year period, the company incurred non-recurring corporate expenses of approximately $500,000 related to “one-time” business development fees and executive hiring efforts.

AMORTIZATION & IMPAIRMENT

Non-cash amortization expense for 2008 and 2007 related to intangible assets recognized in the purchase accounting of SMEI and RTI amounted to $1,488,228 and $1,990,164 respectively.  The decrease in 2008 is attributable to intangibles being fully amortized in 2007. In addition, the Company recorded an impairment charge in the 4th quarter of 2008 totaling $5,486,342 related to the valuation of intangibles and goodwill recorded in conjunction with the SMEI and RTI acquisitions (See Note 9 for a full discussion)

 

INTEREST EXPENSE

Interest Expense consists of interest paid and accrued on our notes payable and outstanding balance on our credit facility. Interest expense decreased to $230,839 for the year ended December 31, 2008 from $494,414 for the prior year ended December 31, 2007. Included in interest expense for 2007 was $110,618 related to the amortization of debt discount on the 2006 Barron Convertible Note which was converted to Preferred Stock in February 2007. Excluding the effects of the derivative expense, interest costs decreased to $230,839 from $383,796 in 2007. The decrease in interest year on year was attributed to lower interest rates incurred on our line of credit versus the prior year rate.  We expect interest to increase in the future due to our loan agreement with the former RTI Shareholders and the factoring agreement with Republic Capital closed on March 20, 2009.

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FINANCE EXPENSE:

Finance Expense for the year ended December 31, 2008 amounted to $0, compared to $99,279 for the year ended December 31, 2007. Finance expense in 2007 represents our amortization of deferred financing fees that were incurred with the September 2006 Barron financing amounting. to $99,279. Financing expense for 2007 also included damages under registration payment arrangements that we paid for delays in the meeting registration effectiveness dates. Subsequent to December 31, 2007, the Company and the investors settled these liquidated damages.

 

DERIVATIVE INCOME (EXPENSE):

The following table is derived from Note 10 in the accompanying financial statements.

 

		Year ended December 31, 2008				Year ended December 31, 2007
Derivative income		$	3,147,958			$	(467,120	)
Conversion features and day-one derivative loss		$	--			$	5,438,051
Warrant derivative		$	3,147,958			$	4,970,931

As provided in the discussion of the Company’s accounting policies in Note 1, derivative financial instruments are recorded initially and subsequently at fair value. 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, 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. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts future cash flows applying probability-weightage to multiple possible outcomes. 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, the Company’s income (loss) will reflect the volatility in these estimate and assumption changes.

It should be noted that during February 2007, the Company was able to reclassify the conversion feature in the above table to stockholders’ equity. Accordingly, no further fair value adjustments will arise from this feature. However, the warrants continue to require liability classification and fair value measurement. As noted in the preceding paragraph, the effects on our future income will be affected, possibly significantly, by the changes in the assumptions underlying our valuation techniques.

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EXTINGUISHMENT INCOME (LOSS):

In 2008, the Company recorded $2,695,025 as a gain on extinguishment for the issuance of 520,000 shares of newly issued Series C Convertible Preferred Stock in exchange (See Note 6 the “Barron Exchange”) for the  return of Barron’s unregistered warrants to the Company for cancellation in exchange

In 2007, the Company entered into a letter agreement with Barron which provided for (i) the waiver of all accrued and unpaid liquidated damages for not filing the registration statement and (ii) the extension to a later date of certain mandated events, such as the re-composition of the Board. This waiver required compensation in the form of warrants to purchase 1,900,000 shares of common stock which were valued at approximately $1,031,000 using the Black-Scholes-Merton technique. The accrued liability settled amounted to $874,000 and, accordingly, the difference between the fair value of the warrants and the carrying amount of the liability was recognized as a loss on extinguishment of approximately $157,000.

NET INCOME :

The Company's net income for the year ended December 31, 2008 was $934,237 which compared to net income of $3,726,213 for the year ended December 31, 2007. Net income  is influenced by the matters discussed in the other sections of this MDA However, it should be noted that our 2008 net income included $3,147,958 compared to $4,970,932 in 2007 of derivative income which represents the decrease in fair value of derivative liabilities (principally compound derivatives that were bifurcated from hybrid convertible securities and non-exempt warrants). See Derivative Income above where we discuss the material assumptions underlying fair value adjustments and their potential effect on income. Also included in our 2008 income was a non-cash extinguishment gain of $2,695,025 recorded on the exchange with Barron of Preferred Series C Stock for outstanding warrants.

INCOME  APPLICABLE TO COMMON STOCKHOLDERS:

Income  applicable to common stock gives effect to our net income , cumulative undeclared dividends on our Series B Preferred Stock amounting to $25,108 and $50,000 for the year ended December 31, 2008 and 2007, respectively. Income applicable to common stockholders’ serves as the numerator in our basic earnings per share calculation. We will continue to reflect cumulative preferred stock dividends until the preferred stock is converted into common, if ever. In connection with our adjustment to the conversion price of the Series A Convertible Preferred Stock on December 31, 2007, we recorded deemed dividends of $2,954,507. These deemed dividends are reflected as an adjustment to net income for year ended 2007 to arrive at net loss applicable to common stockholders on the consolidated statement of operations and for purposes of calculating basic and diluted earnings per shares.

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On March 11, 2009, Lattice Incorporated (the “Company”) entered into an Accounts Receivable Purchase Agreement (the “Agreement”) with Republic Capital Access, LLC (“Republic Capital”).  The Agreement shall terminate on December 31, 2009 unless otherwise extended by the parties.  The maximum amount of receivables purchased under the Agreement shall not exceed $2,500,000.

Pursuant to the terms of the Agreement, Republic Capital agreed to purchase certain eligible receivables of the Company (the “Eligible Receivables”) at an initial purchase price equal to 90% of the face amount of the Eligible Receivables (the “Initial Purchase Price”). Within 2 days of the collection of the Eligible Accounts (the “Residual Payment Date”), Republic Capital shall pay the Company an amount equal to the total amount collected less the sum of (i) the Initial Purchase Price; (ii) the Discount Factor (as defined below) owed with respect to the purchased receivable; and (iii) the total of all accrued and unpaid Program Access Fees.  On each Residual Payment Date, Republic Capital is entitled to deduct from any collections an amount equal to 0.35% of the face amount of the purchased receivable (the “Discount Factor”).  Upon execution of the Agreement, the Company paid Republic Capital an enrollment fee of $12,500.  Further, on each Residual Payment Date, an amount equal to the sum of 0.0226% of the daily ending account balance for each day during the applicable period shall be deducted from the amount collected (the “Program Access Fee”).  In addition, pursuant to the terms of the Agreement, the Company shall pay Republic Capital a quarterly fee equal to $2,500 if the average account balance for each day is less than $1,500,000.On March 20, 2008, Lattice Incorporated (the “Company”) paid off the outstanding balance on its line of credit of $1,465,076 with Private Bank with $800,000 from its cash reserves and the remaining $665,076 advanced by Republic Capital Access. (“RCA”)

 

Liquidity is our ability to maintain a sufficient cash position, generate cash flows from operating activities and have availability on our Accounts Receivable credit facilities to meet our future obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing. Currently, our financing requirements are primarily driven by working capital requirements and debt repayments. At December 31, 2008, we had  $1,363,130 in cash and cash equivalents. We have approximately $300,000 of principal payments on our outstanding debt coming due in the next twelve months.  Additionally, our interest costs will be approximately $300,000 annually assuming we maintain the outstanding balance on our Accounts Receivable credit facility at current levels. The Company is highly dependent on its planned cash flows from operations and availability on its credit facility which is supported by the level of its trade receivables. The Company’s ability to achieve its planned operating cash flows is highly dependent on the continued issuance of periodic funding task orders under its main contract vehicles  with JPMIS (Seaport-e and SSA) which accounted for approximately 70% of the Company’s 2008 revenues. In the event that there is a disruption in these contract vehicles it could materially impact the Company’s ability to continue to operate as a going concern.

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, results of operations, liquidity or capital expenditures.

 

CRITICAL ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:

Use of Estimates  

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP). The preparation of these financial statements 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.

 

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Basis of Financial Statement Presentation  

At December 31, 2008 the Company has a working capital deficiency of $401,614 including non-cash derivative liabilities of $201,000.  During 2008 the Company had a loss from operations of $7,137,288 of which $5,486,341 was in impairment charge on intangibles, the balance of the loss was $1,650,947. This condition raises substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon management’s continuing and successful execution on its business plan to achieve profitability. 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. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interests are shown as minority interests.

Derivative Financial Instruments  

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, 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. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts future cash flows applying probability-weightage to multiple possible outcomes. 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.

 

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.

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The Company provides IT and business process outsourcing services under cost reimbursable, time-and-material, fixed-price contracts, which may extend up to 5 years. Services provided over the term of these arrangements may include, network engineering, architectural guidance, database management, expert programming and functional area expert analysis   Revenue is generally recognized when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability of the contract price is considered probable and can be reasonably estimated.

·

Under cost reimbursable contracts, the Company is reimbursed for allowable costs, and paid a fee. Revenues on cost reimbursable contracts are recognized as costs are incurred plus an estimate of applicable fees earned. The Company considers fixed fees under cost reimbursable contracts to be earned in proportion of the allowable costs incurred in performance of the contract.  Certain cost under government contracts are subject to audit by the government.  Indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits.  Management believes that any adjustment by the government will not be material to the financial statements.

 

·

Revenue on time and materials contracts are recognized based on direct labor hours expended at contract billing rates and adding other billable direct costs.  For fixed price contracts that are based on unit pricing or level of effort, the Company recognizes revenue for the number of units delivered in any given fiscal period.  For fixed price contracts in which the Company is paid a specific amount to provide a particular service for a stated period of time, revenue is recognized ratably over the service period.

 

·

The Company’s contracts with agencies of the government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided.  In evaluating the probability of funding for purposes of assessing collectability of the contract price, the Company considers its previous experiences with its customers, communications with its customers regarding funding status, and the Company’s knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is deemed probable.

 

Impairments of long-lived assets

At least annually, the Company reviews all long-lived assets with determinate lives for impairment. Long-lives assets subject to this evaluation include property and equipment and intangible assets that amount to $6,030,224 (or 54.3%) of total assets at December 31, 2008. The Company considers the possibility that impairments may be present when indicators of impairment are present. In the event that indicators are identified or, if within management’s normal evaluation cycle, the Company establishes the presence of possible impairment by comparing asset carrying values to undiscounted projected cash flows. The preparation of cash flow projections requires management to develop many, often subjective, estimates about the Company’s performance. These estimates include consideration of revenue streams from existing customer bases, the potential increase and decrease in customer sales activity and potential changes in the Company’s direct and indirect costs. In addition, if the carry values of long-lived assets exceed undiscounted cash flow, the Company would estimate the impairment based upon discounted cash flow. The development of discount rates necessary to develop this cash flows information requires additional assumptions including the development of market and risk adjusted rates for discounting cash flows. While management utilizes all available information in developing these estimates, actual results are likely to be different than those estimates.

Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets of businesses the Company has acquired. Goodwill is not amortized. Rather, the Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value of the reporting unit to determine if there is an indication that potential impairment may exist. One of the most significant assumptions underlying this process is the projection of future sales. The Company reviews its assumptions when goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. While management utilizes all available information in developing these estimates, actual results are likely to be different than those estimates.

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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 9B. OTHER INFORMATION.

 

None.

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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		43		President, chief executive officer and director
Joe Noto		49		Chief financial officer and secretary
Jeannemarie Devolites Davis		52		Director
Robert E. Galbraith		64		Director
Donald Upson		54		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 inter city 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/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 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.

Robert E. Galbraith, Director. Mr. Galbraith is currently a consultant to firms seeking innovative technical solutions in the security marketplace. Areas in which Mr. Galbraith has consulted include: data encryption, internet telephony (VoIP), intelligent data recording, secure local and wide area network solutions, physical security and biometric security. Prior to consulting, Mr. Galbraith was President, owner and technical administrator of Secure Engineering Services, Inc. (“SESI”) from its inception in 1979 until the firm was sold in 1996. During this period, SESI provided services and equipment to the U.S. Forces and NATO component Forces in Europe. Clients included the U.S. Army, Navy and Air Force, the SHAPE Technical Center, Euro Fighter Program, Sandia Labs, JPL, MITRE and NATO programs.

    Jeannemarie Devolites Davis, Director. Ms. Davis has been a member of our board of directors since January 2007. Ms. Davis is a member of the Virginia State Senate. Ms. Davis served in the Virginia House of Delegates for three terms, before being elected to the State Senate. Ms. Devolites is also a partner with ICG Government, a technology consulting group. Ms. Davis earned a BA in Mathematics from the University of Virginia in 1978.

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Donald Upson, Director. Mr. Upson has been a member of our board of directors since January 2007 . Mr. Upson recently retired as the Commonwealth of Virginia’s first Secretary of Technology. Mr. Upson has more than two decades of government, corporate, and high technology experience. Mr. Upson is a graduate of California State University Chico.

 

BOARD COMPOSITION

 

At each annual meeting of stockholders, all of our directors are elected to serve from the time of election and qualification until the next annual meeting of stockholders following election. The exact number of directors is to be determined from time to time by resolution of the board of directors.

 

COMMITTEES

 

We have an audit committee. The members of our audit committee are Donald Upson, Jeannemarie Devolites, and Robert E. Galbraith, all of whom are independent. We do not have an audit committee financial expert, as that term is defined in Item 401 of Regulation S-B, but expect to designate one in the near future. We have not yet adopted an audit committee charter but expect to do so in the near future.

 

We have a compensation committee. The members of the compensation committee are Paul Burgess, Jeannemarie Devolites Davis, Robert Galbraith, and Donald Upson.

 

We do not have a nominating committee because of our limited resources. The full board will take part in the consideration of director nominees.

 

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

 

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 three completed fiscal years.

      

(1)	Represents performance bonus earned in the year when paid.

 

(2)	These amounts represent the estimated present value of stock options or warrants at the date of grant, calculated using the Black-Scholes options pricing model. The options vest annually on the anniversary date over 3 years.

(3)	Mr. Burgess waived $112,500 of his salary in the first half 2006. His annual base salary is $225,000 per his employment agreement.

 

(4)

Mr. Ricciardi’s 2006 salary is for part of the year since his hire date was September 19, 2006 coinciding with the acquisition of RTI. Additionally Mr. Ricciardi received 125,000 options with a strike price of $0.60 per share which vest annually over three years from date of hire. Mr. Ricciardi ceased working for the Company on October 16, 2007. On October 16, 2007 the Company entered into a severance agreement with Michael Ricciardi the former COO of the Company, which supersedes his September 19, 2006 employment agreement. Per the agreement the Company paid $210,000 as follows: $20,000 upon signing of the agreement and $190,000 paid in equal bi-monthly payment for 12 months. For such consideration the employee agreed to a non compete agreement which ended October 16, 2008.

 

(5)	Included in other compensation is $15,000 pursuant to a consulting arrangement with Mr. Ricciardi’s spouse. This arrangement expired March 30, 2007.

(6)	Effective July 31, 2008 , Mr Zelsdorf’s empolymet termintated. He currently serves as a consultant to the Company.

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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, 2008

 

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		Number of Shares or Units of Stock That Have Not Vested #				Market Value of Shares or Units of Stock That have not vested   $				Equity Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That Have Not Vested #				Equity Incentive Plan Awards Market or Payout Value of Unearned Shares Units or Other Rights That have not Vested   $
Joe Noto			200,000				—				—			$	1.00		July,2015			—				—				—				—
			—				1,400,000	(a)			—			$	0.33		May,2018			—				—				—				—
Paul Burgess			200,000				—				—			$	0.30		May 2014			—				—				—				—
			200,000				—				—			$	0.50		Oct 2014			—				—				—				—
			600,000				—				—			$	1.00		Feb 2015			—				—				—				—
			—				2,800,000	(b)			—			$	0.33		May, 2018			—				—				—				—

 

(a)	466,666 vest May 2009, 2010 and 2011

 

(b)	933,333 vest May 2009, 2010 and 2011

 

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COMPENSATION OF DIRECTORS

 

Directors are compensated $1,000 per in-person Director’s meeting. In addition, directors will receive $10,000 each in annual compensation.Each director was also awarded 28,000 stock options on May 15, 2008 which vests over 3 years at a strike price of $0.33 per share.  $18,642 represents the estimated fair value of stock options granted.  All directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to us.  

 

EMPLOYMENT AGREEMENTS

 

On March 24, 2009 the Company renewed its Executive Employment Agreement with Paul Burgess. Under the Executive Employment Agreement, Mr. Burgess is employed as our Chief Executive Officer for an initial term of three years. Thereafter, the Executive Employment Agreement shall automatically be extended for successive terms of one year each. Mr. Burgess will be 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 is 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 will shall be 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.

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

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table provides information about shares of common stock beneficially owned as of April 8, 2009 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)			1,933,333				10.3	%
Robert Galbraith (4)			319,333				1.9	%
Michael Ricciardi (5)			3,080,000				18.3	%
Marie Ricciardi (5)			3,080,000				18.3	%
Burlington Assembly of God (6) 2035 Columbus Road Burlington, New Jersey 08016			1,333,333				7.9	%
Joe Noto (3)			666,667				3.8	%
Dragonfly Capital Partners, LLC (7) 420 Lexington Avenue Suite 2620 New York, New York 10170			978,200				5.8	%
Jeannemarie Devolites Davis			28,637				*
Donald Upson			28,637				*
Alan Bashforth (9)			2,324,836				12.6	%
All named executive officers and directors as a group (5 persons)			2,925,273				15.4	%

 

(3)	Represents shares issuable upon exercise of options.

(4)	Includes 5,000 shares owned by Mr. Galbraith’s wife, as to which Mr. Galbraith disclaims beneficial interest

(5)

Mr. and Mrs. Ricciardi are husband and wife. The number of shares beneficially owned by each of them includes (a) 710,000 shares owned by Michael Ricciardi, (b) 1,460,000 shares owned by Marie Ricciardi, and (c) 910,000 shares owned by them as custodian for their minor child. Mr. and Mrs. Ricciardi disclaim beneficial interest in the shares owned by the other and their minor child.

 

(6)	Represents 666,667 shares of common stock and 333,333 shares of common stock issuable upon exercise of warrants.
(7)	Warrants issued to Dragonfly as placement fees for the Barron financing. These warrants were issued in 2 traunches of 489,100 each with a strike price of $0.50 and $1.25 per share respectively with a five year term.

 

(9)

Includes: (a) 16,500 shares owned by Mr. Bashforth; (b) 152,000 shares owned by Innovative Communications Technology, Ltd., which is controlled by Mr. Bashforth; (c) 436,336 shares owned by Calabash Holdings Ltd., which is controlled by Mr. Bashforth; and (d) 600,000 warrants exercisable at $1.00 per share which expire 2012 and (f) 170,000 shares and 850,000 warrants issued in connection with the private placement of common stock between April 14 th and May 11, 2006. The warrants are five year warrants and have a strike price of $1.20 per share. We issued 100,000 shares of common stock in December 2007 related to consulting services rendered.

Barron Partners holds  preferred stock and warrants which, if fully converted and exercised, would result in the ownership of more than 5% of our outstanding common stock. However, the note and warrant, by their terms, may not be converted or exercised if such conversion or exercise would result in Barron Partners or its affiliates owning more than 4.9% of our outstanding common stock. This limitation may not be waived.

 

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.

 

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Director Independence

 

Of the members of the Company’s board of directors, Jeannemarie Devolites Davis, and Donald Upson are considered to be independent under the listing standards of the Rules of NASDAQ setforth in the NASDAQ Manual independent as that term is set forth in the listing standards of the National Association of Securities Dealers.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2008 and 2007 were $100,000 and $75,000, respectively. In addition $32,500 of fees were paid to our former auditor Peter C. Cosmas CPA in connection our 2007 quarterly reviews.

 

Tax Fees

 

The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2008 and 2007 were $13,500 and $7,500, respectively. These fees related to the preparation of federal income and state franchise tax returns.

 

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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, 2008 and 2007.

 

Audit Committee Pre-Approval Policies and Procedures

 

All members of the Company’s audit committee approved the engagement of Demetrius & Company LLC as the Company’s independent registered public accountants.

 

ITEM 13. EXHIBITS.

Exhibit
Number		Description
2.1
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.**

 

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

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Lattice Incorporated

 

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2008 and 2007		F-3
Consolidated Statements of Operations, two years ended December 31, 2008		F-4
Consolidated Statements of Cash Flows, two years ended December 31, 2008		F-5
Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2008		F-6
Notes to Consolidated Financial Statements		F-7 - F-25

 

F-1

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Report of Independent Registered Public Accounting Firm

To The Board of Directors and

Shareholders of Lattice Incorporated

We have audited the accompanying consolidated balance sheets of Lattice Incorporated and its subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2008.  These consolidated financial statements are the responsibility of the Company's management.  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 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 audit 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 financial statements.  An audit also includes 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 financial position of Lattice Incorporated and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Lattice Incorporated and subsidiaries will continue as a going concern.  As discussed in Note1b to the financial statements, the Company requires additional working capital to meet its current liabilities.  This condition raises substantial doubt about its ability to continue as a going concern.   Management’s plans in regard to this matter are more fully described in Note 1b.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Demetrius & Company,  L.L.C.

Wayne, New Jersey 07470

April 13, 2009

 

F-2

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LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		December 31,				December 31,
		2008				2007
ASSETS:
Current assets:
Cash and cash equivalents		$	1,363,130			$	769,915
Accounts receivable			3,560,690				3,839,744
Inventories			30,704				65,846
Other current assets			51,008				127,801
Total current assets			5,005,532				4,803,306
Property and equipmen, net			21,090				27,530
Goodwill			3,599,386				7,629,632
Other intangibles, net			2,409,748				5,354,071
Other assetes			54,459				118,623
Total assets		$	11,090,215			$	17,933,162
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,698,551			$	2,716,411
Accrued expenses			1,726,891				1,252,916
Due to former Stockholder's per Sept 19, 2006 purchase agreement							1,500,000
Customer deposits			15,000				15,000
Notes payable			1,766,098				1,050,254
Derivative liability			200,606				7,217,099
Total current liabilities			5,407,146				13,751,680
Long term liabilities:
Long term debt			666,515				-
Deferred tax liabilities			1,200,283				2,661,954
Total long term liabilities			1,866,798				2,661,954
Minority interest			193,280				214,599
Shareholders' equity
Preferred Stock - .01 par value
Series A 9,000,000 shares authorized 7,838,686 issued			78,387				78,387
Series B 1,000,000 shares authorized 502,160 issued			10,000				10,000
Serise C 520,000 shares authorized  520,000 issued			5,200				-
Common stock - .01 par value, 200,000,000 authorized,			168,425				168,425
16,842,428 and 16,842,428 issued, 16,539,441 and 16,829,848 outstanding respectively
Additional paid-in capital			38,418,897				36,854,901
Accumulated deficit			(34,499,822	)			(35,408,951	)
			4,181,087				1,702,762
Common stock held in treasury, at cost			(558,096	)			(397,833	)
Shareholders' equity			3,622,991				1,304,929
Total liabilities and shareholders' equity		$	11,090,215			$	17,933,162

 

See accompanying notes to the consolidated financial statements.