DELAWARE
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22-2011859
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company x
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Page
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PART
I
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||
Item
1.
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Business
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1
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Item
1A
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Rick
Factors
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5
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Item
1B
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Unresolved
Staff Comments
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10
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Item
2.
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Propreties
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10
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Item
3.
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Legal
Proceedings
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11
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Item
4.
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Reserved
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11
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PART
II
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||
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
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11
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Item
6
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Selected
Financial Data
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14
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation
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14
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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26
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Item
9.
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Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
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26
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Item
9A(T).
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Controls
and Procedures
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26
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Item
9B.
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Other
Information
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26
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PART
III
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||
Item
10.
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Directors,
Executive Officers, Promoters and Corporate Governance
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28 |
Item
11.
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Executive
Compensation
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30
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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34
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Item
13.
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Certain
Relationship and Related Transactions, and Director
Independence
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36
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Item
13.
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Principal
Accountant Fees and Services
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36
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Item
14.
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Exhibits
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37
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SIGNATURES
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41
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Reduction
in application development time, cost and
risk;
|
|
Reduction
of desktop and PDA application deployment time and
cost;
|
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Increased
richness of user experience;
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|
Elimination
of security concerns inherent with Web browser
vulnerabilities;
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Decreased
server software and hardware costs;
and
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Optimization
of network resources for best
performance.
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·
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the
difficulty of integrating acquired products, services or
operations;
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·
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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·
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the
difficulty of incorporating acquired rights or products into our existing
business;
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·
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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·
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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·
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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·
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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·
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the
effect of any government regulations which relate to the business
acquired; and
|
·
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether of not successful, resulting from actions of the
acquired company prior to our
acquisition.
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High
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Low
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|||||||
First
Quarter ended March 31, 2010
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$ | .20 | $ | .055 | ||||
Second
Quarter ended June 30, 2009 (through April 13, 2010)
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$ | .08 | $ | .09 |
High
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Low
|
|||||||
First
Quarter ended March 31, 2009
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$ | .15 | $ | .065 | ||||
Second
Quarter ended June 30, 2009
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$ | .149 | $ | .06 | ||||
Third
Quarter ended September 30, 2009
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$ | .09 | $ | .07 | ||||
Fourth
Quarter ended December 31, 2009
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$ | .10 | $ | .05 |
High
|
Low
|
|||||||
First
Quarter ended March 31, 2008
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$ | .65 | $ | .28 | ||||
Second
Quarter ended June 30, 2008
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$ | .42 | $ | .25 | ||||
Third
Quarter ended September 30, 2008
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$ | .32 | $ | .20 | ||||
Fourth
Quarter ended December 31, 2008
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$ | .27 | $ | .06 |
Plan category
|
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants and
rights
|
Weighted average
exercise price of
outstanding options,
warrants and
rights
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)
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|||||||||
(a)
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(b)
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(c)
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||||||||||
Equity
compensation plans approved by security holders
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7,548,500 | $ | 0.08 | 3,758,000 | ||||||||
Equity
compensation plans not approved by security holders
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-0- | -0- | -0- | |||||||||
Total
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7,548,500 | $ | 0.08 | 3,758,000 |
For the Years Ending December 31,
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||||||||
2009
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2008
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|||||||
Sales
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$ | 15,595,433 | $ | 16,248,481 | ||||
Net
income (loss)
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$ | (1,326,967 | ) | $ | 934,237 | |||
Net
income (loss) per common share – Diluted
|
$ | (0.08 | ) | $ | (0.04 | ) |
OPERATING EXPENSES
|
PERCENT OF SALES
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|||||||||||||||
2009
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2008
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2009
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2008
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|||||||||||||
Research
& Development
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541,783 | 518,342 | 3.5 | % | 3.2 | % | ||||||||||
Selling,
General & Administrative
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5,189,848 | 4,667,374 | 33.3 | % | 28.7 | % |
Year ended
December 31,
2009
|
Year ended
December 31,
2008
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|||||||
Derivative
income
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$ | 39,036 | $ | 3,147,958 | ||||
Conversion
features and day-one derivative loss
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$ | $ | — | |||||
Warrant
derivative
|
$ | 39,036 | $ | 3,147,958 |
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·
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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.
|
|
·
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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.
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|
·
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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.
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Name
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Age
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Position
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||
Paul
Burgess
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44
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President,
chief executive officer and director
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||
Joe
Noto
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50
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Chief
financial officer and secretary
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||
Robert
E. Galbraith
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65
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Director
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||
Donald
Upson
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55
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Director
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Name and
Principal Position
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Year
|
Salary
$
|
Bonus
$ (1)
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Stock
Awards
$
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Option
Awards
$ (2)
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Non-Equity
Incentive Plan
Compensation
$
|
Nonqualified
Deferred
Compensation
Earnings
$
|
All Other
Compensation
$
|
Total
$
|
||||||||||||||||||||||
Paul
Burgess
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2009
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$ | 250,000 | $ | 75.000 | $ | 325,000 | ||||||||||||||||||||||||
President,
Chief
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2008
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$ | 225,000 | $ | 621,376 | $ | 845,376 | ||||||||||||||||||||||||
Executive
Officer and Director
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2007 | $ | 225,000 | ||||||||||||||||||||||||||||
Joe
Noto
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2009
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175,000 | $ | $30,000 | $ | 215,000 | |||||||||||||||||||||||||
Chief
Financial
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2008
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$ | 150,000 | $ | 30,000 | 310,688 | $ | 490,688 | |||||||||||||||||||||||
Officer
|
2007 | $ | 150,000 | $ | 30,000 |
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
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200,000 | (a) | $ | 0.08 |
July,2015
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||||||||||||||||||||||||||||
1,400,000 | (a) | $ | 0.08 |
May,
2018
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|||||||||||||||||||||||||||||
Paul
Burgess
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200,000 | (b) | $ | 0.08 |
May
,2014
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||||||||||||||||||||||||||||
200,000 | (b) | $ | 0.08 |
Oct
,2014
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|||||||||||||||||||||||||||||
600,00 | (b) | $ | 0.08 |
Feb
,2015
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|||||||||||||||||||||||||||||
2,800,000 | (b) | $ | 0.08 |
May,
2018
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(a)
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466,666
vest May 2010; 666,667 vest July 15, 2010; and 466,666 vest May
2011
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(b)
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933,333
vest May 2009, 2010; 1,933,333 vest July 15, 2010; 933,333 vest May
2011
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·
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each
director;
|
|
·
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each officer named in the summary
compensation table;
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|
·
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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
|
|
·
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all
directors and executive officers as a
group.
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Name of Beneficial Owner (1)
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Common Stock
Beneficially Owned
(2)
|
Percentage of
Common Stock
Beneficially Owned (2)
|
||||||
Paul
Burgess (3)
|
933,333 | 3.9 | % | |||||
Robert
Galbraith (4)
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319,333 | 1.4 | % | |||||
Michael
Ricciardi (5)
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3,080,000 | 13.4 | % | |||||
Marie
Ricciardi (5)
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3,080,000 | 13.4 | % | |||||
Burlington Assembly of God
(6)
2035 Columbus
Road
Burlington, New Jersey
08016
|
1,333,333 | 5.8 | % | |||||
Joe
Noto (3)
|
466,667 | 2.0 | % | |||||
Laurus
Master Fund, Ltd. And wholly owned subsidiaries (10)
|
1,879,015 | 7.6 | % | |||||
Donald
Upson
|
28,637 | * | ||||||
Alan
Bashforth (9)
|
2,324,836 | 9.5 | % | |||||
All
named executive officers and directors as a group (4
persons)
|
1,747,969 | 7.2 | % |
(1)
|
Except as otherwise indicated,
the address of each beneficial owner is c/o Lattice Incorporated , 7150 N.
Park Drive, Suite 500, Pennsauken, NJ
08109
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(2)
|
Applicable percentage ownership
is based on 22,917,329 shares of common stock outstanding as of April 13,
2010, together with securities exercisable or convertible into shares of
common stock within 60 days of April 13, 2010 for each stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that
are currently exercisable or exercisable within 60 days of April 13, 2010
are deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such person,
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other
person.
|
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.
|
(10)
|
Includes
warrants to purchase 600,000 shares of common stock at an exercise price
of $1.10; warrants to purchase an aggregate of 1,458,333 shares of common
stock at an exercise price of $0.10 per share; and warrants to purchase
25,000 shares at exercise prices ranging from $0.99 to $1.24 per
share. The warrants exercisable at $0.10 per share have certain
exercise limitations which prevent the holder from exercising such that
they would control in excess of 9.99% of the Company’s issued and
outstanding capital. The remaining warrants have certain
exercise limitations which prevent the holder from exercising such that
they would control in excess of 4.99% of the Company’s issued and
outstanding capital.
|
Exhibit
|
||
Number
|
Description
|
|
2.2
|
Stock
Purchase Agreement dated December 16, 2004 among Science Dynamics
Corporation, Systems Management Engineering, Inc. and the shareholders of
Systems Management Engineering, Inc. identified on the signature page
thereto (Incorporated by reference to Form 8-K, filed with the Securities
and Exchange Commission on December 22, 2004)
|
|
2.3
|
Amendment
No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science
Dynamics Corporation, Systems Management Engineering, Inc. and the
shareholders of Systems Management Engineering, Inc. identified on the
signature page thereto (Incorporated by reference to Form 8-K, filed with
the Securities and Exchange Commission on February 11,
2005)
|
|
2.4
|
Stock
purchase agreement by Ricciardi Technologies, Inc., its Owners, including
Michael Ricciardi as the Owner Representative and Science Dynamics
Corporation, dated as of September 12,
2006.**
|
3.1
|
Certificate
of Incorporation (Incorporated by reference to the Company's registration
statement on Form S-18 (File No. 33-20687), effective April 21,
1981)
|
|
3.2
|
Amendment
to Certificate of Incorporation dated October 31, 1980 (Incorporated by
reference to the Company's registration statement on Form S-18 (File No.
33-20687), effective April 21, 1981)
|
|
3.3
|
Amendment
to Certificate of Incorporation dated November 25, 1980 (Incorporated by
reference to the Company's registration statement on Form S-18 (File No.
33-20687), effective April 21, 1981)
|
|
3.4
|
Amendment
to Certificate of Incorporation dated May 23, 1984 (Incorporated by
reference to the Company's registration statement on Form SB-2 (File No.
333-62226) filed with the Securities and Exchange Commission on June 4,
2001)
|
|
3.5
|
Amendment
to Certificate of Incorporation dated July 13, 1987 (Incorporated by
reference to the Company's registration statement on Form SB-2 (File No.
333-62226) filed with the Securities and Exchange Commission on June 4,
2001)
|
|
3.6
|
Amendment
to Certificate of Incorporation dated November 8, 1996 (Incorporated by
reference to the Company's registration statement on Form SB-2 (File No.
333-62226) filed with the Securities and Exchange Commission on June 4,
2001)
|
|
3.7
|
Amendment
to Certificate of Incorporation dated December 15, 1998 (Incorporated by
reference to the Company's registration statement on Form SB-2 (File No.
333-62226) filed with the Securities and Exchange Commission on June 4,
2001)
|
|
3.8
|
Amendment
to Certificate of Incorporation dated December 4, 2002 (Incorporated by
reference to the Company's information statement on Schedule 14C filed
with the Securities and Exchange Commission on November 12,
2002)
|
|
3.9
|
By-laws
(Incorporated by reference to the Company's registration statement on Form
S-18 (File No. 33-20687), effective April 21, 1981)
|
|
3.10
|
Restated
Certificate of Incorporation (Incorporated by reference to the
Registration Statement On Form SB-2. file with the Securities and Exchange
Commission on February 12, 2007)
|
|
4.1
|
Secured
Convertible Term Note dated February 11, 2005 issued to Laurus Master
Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on February 18,
2005)
|
|
4.2
|
Common
Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master
Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on February 18,
2005)
|
|
4.3
|
Second
Omnibus Amendment to Convertible Notes and Related Subscription Agreements
of Science Dynamics Corporation issued to Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K, filed with the Securities and
Exchange Commission on March 2, 2005)
|
|
4.4
|
Form
of warrant issued to Barron Partners LP**
|
|
4.5
|
Promissory
Note issued to Barron Partners LP**
|
|
4.6
|
Form
of warrant issued to Dragonfly Capital Partners LLC**
|
|
4.7
|
Secured
Promissory Note issued to Michael Ricciardi**
|
|
4.8
|
Amended
and Restated Common Stock Purchase Warrant issued to Laurus Master Fund
LTD to Purchase up to 3,000,000 share of Common Stock of Lattice
Incorporated.**
|
4.9
|
Amended
and Restated Common Stock Purchase Warrant issued to Laurus Master Fund,
LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice
Incorporated**
|
|
4.10
|
Common
Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase
14,583,333 Shares Of Common Stock of Lattice
Incorporated.
|
|
4.11
|
Second
Amended and Restated Secured Term Note from Lattice Incorporated to Laurus
Master Fund, LTD.
|
|
10.1
|
Executive
Employment Agreement Amendment made as of February 14, 2005 by and between
Science Dynamics Corporation and Paul Burgess (Incorporated by reference
to Form 8-K filed with the Securities and Exchange Commission on March 2,
2005)**
|
|
10.2
|
Stock
Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including
Michael Ricciardi as Owner Representative and Lattice Incorporated, dated
September 12, 2006.**
|
|
10.3
|
Omnibus
Amendment and Waiver between Lattice Incorporated and Laurus Master Fund,
LTD, dated September 18, 2006.**
|
|
10.3
|
Agreement
dated December 30, 2004 between Science Dynamics Corporation and Calabash
Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the
Securities and Exchange Commission on February 25,
2005)
|
|
10.4
|
Employment
Agreement dated January 1, 2005 between Science Dynamics Corporation,
Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
February 25, 2005)
|
|
10.5
|
Executive
Employment of dated March 7, 2005 by and between Science Dynamics
Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on
April 17, 2006)
|
|
10.7
|
Sub-Sublease
Agreement made as of June 22, 2001 by and between Software AG and Systems
Management Engineering, Inc. (Incorporated by reference to Form 8-K filed
with the Securities and Exchange Commission on February 18,
2005)
|
|
10.8
|
Securities
Purchase Agreement dated February 11, 2005 by and between Science Dynamics
Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on February 18,
2005)
|
|
10.9
|
Master
Security Agreement dated February 11, 2005 among Science Dynamics
Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund,
Ltd. (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on February 18, 2005)
|
|
10.10
|
Stock
Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd.,
Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on February 18, 2005)
|
|
10.11
|
Subsidiary
Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and
SciDyn Corp. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on February 18,
2005)
|
|
10.12
|
Registration
Rights Agreement dated February 11, 2005 by and between Science Dynamics
Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on February 18,
2005)
|
|
10.13
|
Microsoft
Partner Program Agreement (Incorporated by reference to Form 8-K filed
with the Securities and Exchange Commission on February 18,
2005)
|
10.14
|
AmberPoint
Software Partnership Agreement (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on February 18,
2005)
|
|
10.15
|
Securities
Agreement between Science Dynamics Corporation and Barron Partners LP,
dated September 15, 2006**
|
|
10.16
|
Employment
Agreement between Science Dynamics Corporation and Michael
Ricciardi**.
|
|
10.17
|
Amendment
to Employment Agreement - Paul Burgess**
|
|
10.18
|
Amendment
to Employment Agreement - Joe Noto**
|
|
10.19
|
Registration
Rights Agreement by and among Science Dynamics Corporation and Barron
Partners LLP, dated As of September 19, 2006.**
|
|
10.20
|
Amendment
to Securities Purchase Agreement and Registration Rights Agreement
(Incorporated by Reference to the Registration Statement on Form SB-2
filed with the SEC on February 12, 2007).
|
|
10.21
|
Exchange
Agreement between Lattice Incorporated and Barron Partners LP dated June
30, 2008***
|
|
10.22
|
Certificate
of Designations of Series C Preferred Stock***
|
|
10.23
|
Accounts
Receivable Purchase Agreement dated March 11, 2009****
|
|
10.24
|
Securities
Purchase Agreement dated February 1, 2010
|
|
14.1
|
Code
of Ethics (Incorporated by reference to the Company's annual report on
Form 10-KSB for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on April 9, 2004)
|
|
21.1
|
Subsidiaries
of the Company(Incorporated by Reference to the Registration Statement on
Form SB-2 filed with the SEC on February 12, 2007).
|
|
31.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
31.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
32.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
|
32.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
|
99.1
|
Pledge
and Security Agreement made by and between Science Dynamics Corporation in
favor of and being delivered to Michael Ricciardi as Owner Representative,
dated September 19, 2006**
|
|
99.10
|
Lockup
Agreement from Laurus Master Fund, LTD.**
|
|
99.11
|
Irrevocable
Proxy**
|
|
99.2
|
Escrow
Agreement by and between Science Dynamics Corporation, Ricciardi
Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated
September 19, 2006**
|
|
99.3
|
Form
of Lock Up Agreement, executed pursuant to the Securities Purchase
Agreement between Science Dynamics Corporation and Barron Barron Partners,
dated September 15, 2006.**
|
Date:
April 15, 2010
|
By:
|
/s/ Paul
Burgess
|
Paul
Burgess
|
||
President,
Chief Executive Officer
and
Director
|
Date:
April 15, 2010
|
By:
|
/s/ Joe
Noto
|
Joe
Noto
|
||
Chief
Financial Officer and Principal
Accounting
Officer
|
Signature
|
Title
|
Date
|
||
/s/
Paul
Burgess
|
||||
Paul
Burgess
|
President,
Chief Executive Officer and Director
|
April
15, 2010
|
||
/s/ Joe Noto
|
||||
Joe
Noto
|
Chief
Financial Officer and Secretary
|
April
15, 2010
|
||
/s/ Robert
Galbraith
|
||||
Robert
Galbraith
|
Director
|
April
15, 2010
|
||
/s/
Donald Upson
|
||||
Donald
Upson
|
Director
|
April
15,
2010
|
Report
of Independent Accountants dated April 13, 2009
|
F-2
|
Report
of Independent Accountants dated April 15, 2010
|
F-3 |
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Operations, two years ended December 31,
2009
|
F-5
|
Consolidated
Statements of Cash Flows, two years ended December 31,
2009
|
F-6
|
Consolidated
Statements of Changes in Shareholders' Equity, two years ended December
31, 2009
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8
- F-27
|
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS:
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 212,616 | $ | 1,363,130 | ||||
Accounts
receivable, net
|
3,560,293 | 3,560,690 | ||||||
Inventories
|
29,402 | 30,704 | ||||||
Other
current assets
|
133,405 | 51,008 | ||||||
Total
current assets
|
3,935,716 | 5,005,532 | ||||||
Property
and equipmen, net
|
264,753 | 21,090 | ||||||
Goodwill
|
3,599,386 | 3,599,386 | ||||||
Other
intangibles, net
|
977,455 | 2,409,748 | ||||||
Other
assetes
|
54,259 | 54,459 | ||||||
Total
assets
|
$ | 8,831,569 | $ | 11,090,215 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 1,780,143 | $ | 1,698,551 | ||||
Accrued
expenses
|
1,719,831 | 1,726,891 | ||||||
Due
to former Stockholder's per Sept 19, 2006 purchase
agreement
|
||||||||
Customer
deposits
|
94,954 | 15,000 | ||||||
Notes
payable
|
1,503,742 | 1,766,098 | ||||||
Derivative
liability
|
161,570 | 200,606 | ||||||
Total
current liabilities
|
5,260,240 | 5,407,146 | ||||||
Long
term liabilities:
|
||||||||
Long
term debt
|
188,466 | 666,515 | ||||||
Deferred
tax liabilities
|
440,832 | 1,200,283 | ||||||
Total
long term liabilities
|
629,298 | 1,866,798 | ||||||
Total
liabilities
|
5,889,528 | 7,275,944 | ||||||
Shareholders'
equity
|
||||||||
Preferred
Stock - .01 par value
|
||||||||
Series
A 9,000,000 shares authorized 7,567,685 issued
|
75,677 | 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 | 5,200 | ||||||
Common
stock - .01 par value, 200,000,000 authorized,
|
178,104 | 168,425 | ||||||
17,810,281
and 16,842,428 issued, 17,507,294 and 16,539,441 outstanding
respectively
|
||||||||
Additional
paid-in capital
|
38,925,743 | 38,418,897 | ||||||
Accumulated
deficit
|
(35,851,892 | ) | (34,499,822 | ) | ||||
3,342,832 | 4,181,087 | |||||||
Common
stock held in treasury, at cost
|
(558,096 | ) | (558,096 | ) | ||||
Equity
Attributable to shareowners of Lattice IncorporatedShareholders'
equity
|
2,784,736 | 3,622,991 | ||||||
Equity
Attributable to noncontrolling interest
|
157,295 | 193,280 | ||||||
Total
liabilities and shareholders' equity
|
$ | 8,831,569 | $ | 11,090,215 |
2009
|
2008
|
|||||||
Revenue
- Technology Services
|
$ | 14,483,165 | $ | 15,149,944 | ||||
Revenue
- Technology Products
|
1,112,268 | 1,118,537 | ||||||
Total
Revenue
|
15,595,433 | 16,268,481 | ||||||
Cost
of Revenue - Technology Services
|
9,891,395 | 10,817,725 | ||||||
Cost
of Revenue - Technology Products
|
464,465 | 427,759 | ||||||
Total
cost of revenue
|
10,355,860 | 11,245,484 | ||||||
Gross
Profit
|
5,239,573 | 5,022,997 | ||||||
Operating expenses:
|
||||||||
Selling,
general and administrative
|
5,189,848 | 4,667,374 | ||||||
Research
and development
|
541,783 | 518,342 | ||||||
Impairment
loss (see Note 7)
|
235,301 | 5,486,341 | ||||||
Amortization
expense
|
1,196,992 | 1,488,228 | ||||||
Total
operating expenses
|
7,163,924 | 12,160,285 | ||||||
Loss
from operations
|
(1,924,351 | ) | (7,137,288 | ) | ||||
Other
income (expense):
|
||||||||
Derivative
income
|
39,036 | 3,147,958 | ||||||
Extinguishment
income ( loss)
|
- | 2,695,025 | ||||||
Other
income
|
- | 977,844 | ||||||
Interest
expense
|
(237,088 | ) | (230,839 | ) | ||||
Finance
expense
|
- | |||||||
Total
other income
|
(198,052 | ) | 6,589,988 | |||||
Noncontrolling
interest
|
35,985 | 21,319 | ||||||
(Loss)
before taxes
|
(2,086,418 | ) | (525,981 | ) | ||||
Income
taxes (benefit) (Note 13)
|
(759,451 | ) | (1,460,218 | ) | ||||
Net
income (loss)
|
$ | (1,326,967 | ) | $ | 934,237 | |||
Reconciliation
of net income (loss) to income applicable to common
shareholders:
|
||||||||
Net
income (loss)
|
$ | (1,326,967 | ) | $ | 934,237 | |||
Preferred
stock dividends
|
(25,108 | ) | (25,108 | ) | ||||
Income
(loss) applicable to common stockholders
|
$ | (1,352,075 | ) | $ | 909,129 | |||
Income
(loss) per common share
|
||||||||
Basic
|
$ | (0.08 | ) | $ | 0.05 | |||
Diluted
|
$ | (0.08 | ) | $ | (0.04 | ) | ||
Weighted
average shares:
|
||||||||
Basic
|
16,634,610 | 16,779,762 | ||||||
Diluted
|
16,634,610 | 55,453,783 |
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
Income (loss)
|
$ | (1,326,967 | ) | $ | 934,237 | |||
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities:
|
||||||||
Derivative
income
|
(39,036 | ) | (3,147,958 | ) | ||||
Amortization
of intangible assets
|
1,196,992 | 1,488,228 | ||||||
Impairment
|
235,301 | 5,486,341 | ||||||
Deferred
income taxes
|
(759,451 | ) | (1,460,218 | ) | ||||
Amortization
of debt discount (effective method)
|
- | - | ||||||
Amortization
of deferred financing
|
- | - | ||||||
Settlement
of contingent liability-former RTI shareholders
|
- | (970,150 | ) | |||||
Stock
issued for services
|
- | - | ||||||
Financing
expenses paid in stock
|
- | - | ||||||
Extinguishment
(gain) loss
|
- | (2,695,025 | ) | |||||
Noncontrolling
interest
|
(35,985 | ) | (21,319 | ) | ||||
Interest
derivative
|
- | - | ||||||
Share-based
compensation
|
513,816 | 308,096 | ||||||
Depreciation
|
40,797 | 22,000 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
(Increase)
decrease in:
|
||||||||
Accounts
receivable
|
397 | 279,054 | ||||||
Inventories
|
1,302 | 35,142 | ||||||
Other
current assets
|
(13,631 | ) | 182,713 | |||||
Other
assets
|
200 | 64,164 | ||||||
Increase
(decrease) in:
|
||||||||
Accounts
payable and accrued liabilities
|
(12,223 | ) | (528,888 | ) | ||||
Customer
advances
|
79,954 | - | ||||||
Total
adjustments
|
1,208,433 | (957,820 | ) | |||||
Net
cash provided by (used for) operating activities
|
(118,534 | ) | (23,583 | ) | ||||
Cash
Used in investing activities:
|
||||||||
Purchase
of equipment
|
(284,460 | ) | (15,560 | ) | ||||
Net
cash used for investing activities
|
(284,460 | ) | (15,560 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Financing
fees in connection with Barron financing and Revolving Line of
Credit
|
- | - | ||||||
Revolving
credit facility (payments) borrowings, net
|
(619,651 | ) | 717,928 | |||||
Net (Payments)
borrowings on captial equipment lease
|
94,297 | - | ||||||
Loans
paid Stockholders' & Officers
|
(222,166 | ) | (85,570 | ) | ||||
Net
cash provided by (used in) financing activities
|
(747,520 | ) | 632,358 | |||||
Net
increase (decrease) in cash and cash equivalents
|
(1,150,514 | ) | 593,215 | |||||
Cash
and cash equivalents - beginning of period
|
1,363,130 | 769,915 | ||||||
Cash
and cash equivalents - end of period
|
$ | 212,616 | $ | 1,363,130 | ||||
Supplemental
cash flow information
|
||||||||
Interest
paid in cash
|
$ | 223,258 | $ | 177,987 | ||||
Supplemental
disclosures of Non-Cash Investing & Financing
Activities
|
||||||||
Preferred
stock Series C
|
5,200 | |||||||
Additional
paid in capital
|
6,909 | 1,255,900 | ||||||
Derivative
liability
|
(1,261,100 | ) | ||||||
Conversion of 271,001 preferred share into 967,853 of common | 2,710 | |||||||
Conversion of 271,001 preferred share into 967,853 of common | (9,679 | ) |
|
|
Total Equity
Attributable to
|
Total Equity
Attributable to
|
|||||||||||||||||||||||||||||||||||||
Preferred Stock
|
Common Stock
|
Additional Paid In | Retained Earnings |
Treasury Stock
|
Shareowners of
|
Noncontrolling
|
||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Shares
|
Amount
|
Lattice Incorporated
|
Interest
|
|||||||||||||||||||||||||||||||
Stockholders'
equity, December 31, 2007
|
8,838,686 | $ | 88,387 | 16,842,428 | $ | 168,425 | $ | 36,854,901 | $ | (35,408,951 | ) | 12,580 | $ | (397,833 | ) | $ | 1,304,929 | 214,599 | ||||||||||||||||||||||
Net
Income
|
934,237 | 934,237 | ||||||||||||||||||||||||||||||||||||||
Loss
attributable to noncontrolling interest
|
(21,319 | ) | ||||||||||||||||||||||||||||||||||||||
Settlement
with former RTI - return of Preferred Series B SHS
|
497840 | (99,568 | ) | (99,568 | ) | |||||||||||||||||||||||||||||||||||
Settlement
with former RTI - return of Common SHS
|
290,407 | (60,695 | ) | (60,695 | ) | |||||||||||||||||||||||||||||||||||
Share-based
compensation
|
308,096 | 308,096 | ||||||||||||||||||||||||||||||||||||||
Barron
Exchange
|
520,000 | 5,200 | 1,255,900 | - | 1,261,100 | |||||||||||||||||||||||||||||||||||
Dividends
- Series B Preferred (1000000 less 497840)
|
(25,108 | ) | (25,108 | ) | ||||||||||||||||||||||||||||||||||||
Stockholders'
equity, December 31, 2008
|
9,358,686 | 93,587 | 16,842,428 | 168,425 | 38,418,897 | (34,499,822 | ) | 800,827 | (558,096 | ) | 3,622,991 | 193,280 | ||||||||||||||||||||||||||||
Net
Loss
|
(1,326,967 | ) | (1,326,967 | ) | ||||||||||||||||||||||||||||||||||||
Net
loss attributable o noncontrolling interest
|
(35,985 | ) | ||||||||||||||||||||||||||||||||||||||
Share-based
compensation
|
513,816 | 513,816 | ||||||||||||||||||||||||||||||||||||||
Conversions
of Series "A" Preferred Stock
|
(271,001 | ) | (2,710 | ) | 967,853 | 9,679 | (6,969 | ) | - | (0 | ) | |||||||||||||||||||||||||||||
Dividends
- Series B Preferred (1000000 less 497840)
|
(25,108 | ) | (25,108 | ) | ||||||||||||||||||||||||||||||||||||
Stockholders'
equity, December 31, 2009
|
9,087,685 | $ | 90,877 | 17,810,281 | $ | 178,104 | $ | 38,925,744 | $ | (35,851,897 | ) | 800,827 | $ | (558,096 | ) | $ | 2,784,732 | $ | 157,295 |
|
·
|
Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
Year Ended
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Goverment
Services
|
$ | 14,483,165 | $ | 15,149,944 | ||||
Corporate
and other
|
1,112,268 | 1,118,537 | ||||||
Total
Consolidated Revenues
|
$ | 15,595,433 | $ | 16,268,481 | ||||
Gross
Profit:
|
||||||||
Government
Services
|
$ | 4,591,770 | $ | 4,332,219 | ||||
Corporate
and other
|
647,803 | 690,778 | ||||||
Total
Consolidated
|
$ | 5,239,573 | $ | 5,022,997 | ||||
Total
Assets:
|
||||||||
Goverment
Services
|
$ | 8,270,589 | $ | 10,127,333 | ||||
Corporate
and Other
|
560,980 | 962,882 | ||||||
Total
Consolidated Assets
|
$ | 8,831,569 | $ | 11,090,215 |
December
31,
2009
|
December
31, 2008
|
|||||||
Computers,
fixtures and equipment
|
$ | 1,958,612 | $ | 1,674,152 | ||||
Less
: accumulated depreciation
|
(1,693,859 | ) | (1,653,062 | ) | ||||
Total
|
$ | 264,753 | $ | 21,090 |
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Bank
line-of-credit (a)
|
$ | 838,231 | $ | 1,458,183 | ||||
Note
Payble – former RTI owners (b)
|
562,500 | 750,000 | ||||||
Notes
payable to Stockholders/director (c )
|
197,180 | 224,430 | ||||||
Capital
lease payable (d)
|
94,297 | - | ||||||
Total
notes payable
|
1,692,208 | 2,432,613 | ||||||
Less
current maturities
|
(1,503,742 | ) | (1,766,098 | ) | ||||
Long-term
debt
|
$ | 188,466 | $ | 666,515 |
|
-
|
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.
|
December 31, 2009
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Impairment
charge
|
Net
Carrying
Amount
|
Weighted
average
remaining
amortization
period
|
|||||||||||||||
Amortizable
intangible assets:
|
||||||||||||||||||||
Customer
relationships
|
$ | 3,382,517 | $ | (1,998,343 | ) | (1,001,645 | ) | $ | 382,529 |
1
years
|
||||||||||
Know
how and processes
|
2,924,790 | (1,810,676 | ) | (687,265 | ) | 426,849 |
2
years
|
|||||||||||||
Customer
backlog
|
1,388,355 | (1,260,247 | ) | — | 128,108 |
.5
years
|
||||||||||||||
Customer
lists
|
279,717 | (237,262 | ) | (2,486 | ) | 39,969 |
1
years
|
|||||||||||||
Employment
contract
|
165,000 | (165,000 | ) | — | — | — | ||||||||||||||
$ | 8,140,379 | $ | (5,471,528 | ) | (1,691,396 | ) | $ | 977,455 |
December 31, 2008
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Impairment
charge
|
Net
Carrying
Amount
|
Weighted
Average
amortization
period
|
|||||||||||||||
Amortizable
intangible assets:
|
||||||||||||||||||||
Customer
relationships
|
$ | 3,382,517 | $ | (1,522,129 | ) | $ | (1,001,645 | ) | $ | 858,743 |
2
years
|
|||||||||
Know
how and processes
|
2,924,790 | (1,316,162 | ) | (451,964 | ) | 1,156,664 |
3
years
|
|||||||||||||
Customer
backlog
|
1,388,355 | (1,089,430 | ) | — | 298,925 |
1.5
years
|
||||||||||||||
Customer
lists
|
279,717 | (181,815 | ) | (2,486 | ) | 95,416 |
2
years
|
|||||||||||||
Employment
contract
|
165,000 | (165,000 | ) | — | — | — | ||||||||||||||
$ | 8,140,379 | $ | (4,274,536 | ) | $ | (1,456,095 | ) | $ | 2,409,748 |
2010
|
$ | 631,429 | ||
2011
|
346,026 | |||
Total
|
$ | 977,455 |
|
·
|
Customer
relationships and lists: The customer
relationships are considered to have value when they represent an
identifiable and predictable source of future cash flow to the reporting
unit. The Company has established long term relationships with certain
governmental agencies; however for relationships in place at the time of
the acquisitions, there was a 49% decline in revenue from December 31,
2007 to December 31, 2008. The fair value of customer relationships and
lists was calculated using the income approach and the fair value was less
than the current carrying value. Thus, an impairment charge of $1,001,645
and $2,486 was made against customer relationships and lists, respectively
for the period ended December 31,
2008.
|
|
·
|
Know-how
and processes: The Company acquired certain frameworks, monitoring
systems and know-how related to software and hardware design development,
implementation and analysis. The Company’s know-how and processes were
valued using the multi-period excess-earnings method, a form of the Income
approach and the fair value represents the present value of the profit
derived from the know-how and processes. The fair value was
less than the carrying value so an impairment charge of $235,301 and
$451,964 was recognized for the period ended December 31, 2009 and 2008,
respectively.
|
$ | 7,629,632 | |||
Goodwill
impairment charges
|
(4,030,246 | ) | ||
Balance
as of December 31, 2008
|
3,599,386 | |||
Goodwill
impairment charges
|
— | |||
Balance
as of December 31, 2009
|
$ | 3,599,386 |
December 31,
2009
|
December 31,
2008
|
|||||||
Derivative
liabilities:
|
||||||||
Warrant
derivative
|
$ | ( 161,570 | ) | $ | (200,606 | ) |
Year
Ended
|
||||||||
2009
|
2008
|
|||||||
Numerator:
|
||||||||
Net
income available for common stockholders
|
$ | (1,352,075 | ) | $ | 909,129 | |||
Adjusted
income on derivative warrants
|
- | (3,147,958 | ) | |||||
Adjusted
for dividends to convertible preferred stock
|
25,108 | 25,108 | ||||||
Net
income available for common stockholders adjusted
|
$ | (1,326,967 | ) | $ | (2,213,721 | ) | ||
Denominator:
|
||||||||
Weighed
average shares used to compute basic EPS
|
16,634,610 | 16,779,762 | ||||||
Dilutive
derivative warrants
|
- | 4,563,453 | ||||||
Shares
indexed to convertible preferred stock
|
- | 34,110,568 | ||||||
Weighted
aerage shares used to compute diluted EPS
|
16,634,610 | 55,453,783 | ||||||
$ | (0.08 | ) | $ | (0.04 | ) |
December
31,
|
||||||||
2009
|
2008
|
|||||||
Current
|
- | - | ||||||
Deferred
|
(759,451 | ) | (1,460,218 | ) | ||||
The
components of the deferred tax assets (liability) as of:
|
||||||||
Net
operating loss carry forward
|
6,555,880 | $ | 6,555,805 | |||||
Stock
base compensation
|
174,704 | - | ||||||
Executive compensation | 68,000 | - | ||||||
Total
Deferred tax Asset
|
6,798,509 | 6,555,805 | ||||||
Valuation
allowance for Deferred tax asset
|
6,798,509 | 6,555,805 | ||||||
Deferred
tax asset
|
- | - | ||||||
Deferred
tax liability:
|
||||||||
Intangible
Assets
|
441,014 | 1,086,979 | ||||||
Sec
481c
|
- | 113,486 | ||||||
Net
deferred tax long term
|
441,014 | 1,200,465 | ||||||
Net
deferred tax
|
$ | 441,014 | $ | 1,200,465 |
December
31,
|
||||||||
2009
|
2008
|
|||||||
Provision
(benefit) for taxes using statutory rate
|
$ | (709,382 | ) | $ | (178,834 | ) | ||
state
taxes, net of federal tax benefit
|
(125,185 | ) | (31,559 | ) | ||||
Permanent
differences:
|
||||||||
None
deductable expense
|
75,116 | (1,249,825 | ) | |||||
Provision
(Benefit) for income taxes
|
$ | (759,451 | ) | $ | (1,460,218 | ) |
Capital
|
Operating
|
|||||||
Leases
|
Leases
|
|||||||
2010
|
$ | 61,764 | $ | 304,019 | ||||
2011
|
61,764 | $ | 17,538 | |||||
2012
|
13,614 | |||||||
Total
minimum lease payments
|
$ | 123,528 | $ | 335,171 | ||||
Less
amounts representing interest
|
(29,232 | ) | ||||||
Present
value of net minimum lease payments
|
94,296 | |||||||
Less
current obligations
|
(40,800 | ) | ||||||
Long-Term
obligations
|
135,096 |
December 31,
|
||||||||
2009
|
2008
|
|||||||
Risk-Free
interest rate
|
2.91 | % | 2.91 | % | ||||
Expected
dividend yield
|
- | - | ||||||
Expected
stock price volatility
|
106.49 | % | 106.49 | % | ||||
Weighted
average contractual life
|
8
years
|
10
years
|
||||||
Weighted
average fair value of options granted
|
$ | .08 | $ | .30 |
Number
|
Number
|
Weighted
|
||||||||||
of
Options
|
of
Options
|
Average
|
||||||||||
Available
|
Outstanding
|
Exercise Price
|
||||||||||
Balance
January 1, 2008
|
467,000 | 1,372,000 | $ | 1.00 | ||||||||
2008
Plan
|
10,000,000 | |||||||||||
Options
granted under Plan in 2008
|
(6,309,000 | ) | 6,309,000 | 0.33 | ||||||||
Balance
December 31, 2008
|
4,158,000 | 7,681,000 | $ | 0.45 | ||||||||
Options
granted under plan in 2009
|
(400,000 | ) | 400,000 | 0.08 | ||||||||
Options
cancelled
|
(532,500 | ) | ||||||||||
Balance
December 31, 2009
|
3,758,000 | 7,548,500 | $ | 0.08 |