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EX-32.2 - EXHIBIT 32.2 - MABWE MINERALS INC.v309297_ex32-2.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2011

 

OR

 

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

For the transition period from                  to             

 

Commission file number: 000-51443

 

 

RAPTOR NETWORKS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Colorado 84-1573852
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

41 Howe Lane, Freehold, N.J. 07728
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (732) 252-5146

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x

 

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

 

  Large accelerated filer £ Accelerated filer ¨
     
  Non-accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

 

The aggregate market value of the voting and non-voting stock held by non-affiliates computed by reference to the price at which the common equity was sold as of the last business day of the registrant’s second quarter of 2011 (June 30, 2011) of $0.28 per share was $23,106,368. For the purpose of this calculation, shares owned by officers, directors and 10% stockholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not a determination for other purposes.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.                                                                                                                                                                 Yes ¨ No ¨

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each registrant’s classes of common stock, as of the latest practicable date: 198,009,290 shares of common stock $0.001 par value as of April 10, 2012.

  

 
 

 

TABLE OF CONTENTS

    Page
  PART I  
     
Item 1. Business 2
Item 1A. Risk Factors 2
Item 1B. Unresolved Staff Comments 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Mine Safety Disclosures 3
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 3
Item 6. Selected Financial Data 4
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  
Item 9A(T). Controls and Procedures 8
Item 9B. Other Information 10
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 10
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 19
Item 13. Certain Relationships and Related Transactions and Director Independence 21
Item 14. Principal Accountant Fees and Services 22
     
  PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 23
Signatures  
Index to Financial Statements F-1

 

i
 

 

PART I

 

Cautionary statement regarding forward-looking statements.

 

When used in this report on Form 10-K (this “Report”), the words “plan,” “estimate,” “expect,” “believe,” “should,” “would,” “could,” “anticipate,” “may,” “forecast,” “project,” “pro forma,” “goal,” “continues,” “intend,” “seek” and other expressions that convey uncertainty of future events or outcomes are intended to identify “forward-looking statements.” We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date of this Report. While forward-looking statements represent our management's best judgment as to what may occur in the future, they are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events as well as those presently anticipated or projected. These factors include, but are not limited to, adverse economic conditions, entry of new and stronger competitors, capital availability, unexpected costs and failure to establish relationships with and capitalize upon access to new customers. We disclaim any obligations subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

 

-1-
 

 

Item 1. Business.

  

Our Strategy

 

We intend to explore for gold and other industrial minerals and to acquire companies involved in such activities. We are not yet engaged in any exploration of gold or other industrial minerals.

 

Competition

 

We operate in a competitive industry with many established and well-recognized competitors. There is aggressive competition within the minerals industry to discover and acquire mineral properties considered to have commercial potential. We compete for the opportunity to participate in promising exploration projects with other entities, many of which have greater resources than us. In addition, we compete with others in efforts to obtain financing to acquire and explore mineral properties, acquire and utilize mineral exploration equipment and hire qualified mineral exploration personnel.

 

Employees

 

As of March 31, 2012 we had 1 full-time employee, our President and CEO, Al Pietrangelo.

 

Item 1A. Risk Factors.

 

Not Applicable

 

-2-
 

 

Item 1B. Unresolved Staff Comments.

 

Not applicable

 

Item 2. Properties.

 

None

 

Item 3. Legal Proceedings

 

From time to time, we may be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the operation of our business. However, we are not currently involved in any litigation which we believe could have a materially adverse effect on our financial condition or results of operations.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our $0.001 par value common stock trades under the symbol “RPTN” on the OTC Bulletin Board. The following table sets forth, for the quarters indicated, the high and low bid information for our common stock as reported by Pink Sheets, LLC, a research service that compiles quote information reported on the National Association of Securities Dealers composite feed or other qualified inter-dealer quotation medium. The quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions.

 

    2011 
Fiscal Quarter Ended   High   Low 
 December 31   $0.13   $0.03 
 September 30   $0.05   $0.006 
 June 30   $0.08   $0.002 
 March 31   $0.015   $0.002 

 

    2010 
Fiscal Quarter Ended   High   Low 
 December 31   $0.16   $0.09 
 September 30   $0.24   $0.13 
 June 30   $0.28   $0.17 
 March 31   $0.24   $0.15 

 

On April 4, 2012, the high and low sale prices for a share of our common stock as reported by Pink Sheets, LLC, were $0.0031 and $0.0035, respectively.

 

Holders

 

On April 4, 2012, we had 198,009,290 shares of our common stock outstanding held by 384 record shareholders. This number of shareholders does not include beneficial owners, including holders whose shares are held in nominee or “street” name.

 

-3-
 

 

Dividends

 

We have never paid a cash dividend with respect to our common stock, and do not expect to be able to pay cash dividends in the foreseeable future as the terms of our senior convertible notes prohibit us from paying cash dividends for the term of the loan arrangement.

 

Recent Sales of Unregistered Securities

 

On December 5, 2011, we issued 109,928,311 shares of common stock to Lantis in connection with the Stock Purchase Agreement in exchange for 5,000,000 shares of Lantis restricted common stock issued to the owner of our assets, California Capital Equity, LLC.

 

These issuances were made in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, among others, as transactions not involving a public offering. This exemption was claimed on the basis that these transactions did not involve any public offering and the purchasers in each offering were accredited or sophisticated and had sufficient access to the kind of information registration would provide. In each case, appropriate investment representations were obtained and certificates representing the securities were issued with restrictive legends.

 

Item 6. Selected Financial Data.

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition for the fiscal years ended December 31, 2011 and 2010. This discussion should be read in conjunction with our consolidated financial statements and related notes thereto beginning on page F-1 of this Report. This Report contains trend analysis and other forward-looking statements that involve risks and uncertainties, such as statements concerning future operating results; developments in markets and strategic focus; and future economic, business and regulatory conditions. Such forward-looking statements are generally accompanied by words such as “plan,” “estimate,” “expect,” “believe,” “should,” “would,” “could,” “anticipate,” “may,” “forecast,” “project,” “pro forma,” “goal,” “continues,” “intend,” “seek” and other words that convey uncertainty of future events or outcomes. The cautionary statements included in the “Risk Factors” section under Item 1A above or elsewhere in this Report should be read as being applicable to all forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein. We disclaim any obligations subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

 

Overview

 

We were organized under the laws of the State of Colorado on January 22, 2001 under the name Pacific InterMedia, Inc. We originally were engaged in the business of offering EDGAR filing services to companies outsourcing the formatting and electronic filing of registration statements, periodic reports and other forms with the U. S. Securities and Exchange Commission (“SEC” or the “Commission”), but generated minimal revenues from these operations. On October 17, 2003, we completed a business combination transaction with Raptor Networks Technology, Inc., a California corporation (“Raptor”), whereby we acquired all of the issued and outstanding capital stock of Raptor in a cashless common stock share-for-share exchange in which Raptor became our wholly-owned subsidiary. Upon the completion of this acquisition transaction, we changed our name to Raptor Networks Technology, Inc. (the “Company”), terminated our EDGAR filing services operations and, by and through our subsidiary Raptor, became engaged in the data network switching industry.

 

On December 5, 2011, we entered into a Stock Purchase Agreement, dated effective as of December 2, 2011 (“Stock Purchase Agreement”), with Lantis Laser Inc. (LLSR.QB) (“Lantis”) pursuant to which we agreed to issue Lantis 109,928,311 shares of our common stock or 55% of our issued and outstanding shares of common stock in exchange for 5,000,000 shares of unregistered Lantis common stock. All officers and directors of Raptor resigned at the time of execution of the Stock Purchase Agreement. Lantis intends to effect a 1:10 reverse stock split, own 80% of the fully diluted shares of Raptor's common stock on a post-split basis, change the name of Raptor to Mabwe Minerals Inc. and have the company engaged in the exploration and mining of gold and other industrial minerals and will not have any involvement with the historical business of Raptor. We are a majority owned subsidiary of Lantis.

  

-4-
 

 

CRITICAL ACCOUNTING POLICIES

 

Critical Accounting Estimates and Judgments

 

 Derivative Financial Instruments

 

 Our senior convertible notes are classified as non-conventional convertible debt.  In the case of non-conventional convertible debt, we bifurcate our embedded derivative instruments and record them at their fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.  Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge.  If the fair value of the derivative is lower at the subsequent balance sheet date, we will record non-operating, non-cash income.

 

To determine the fair value of the derivative instruments, we make certain assumptions regarding the expected term of exercise.  Because the expected term of the warrants impacts the volatility and risk-free interest rates used in the Black-Scholes calculations, these must be selected for the same time period as the expected term of the warrants.

 

 Stock-based Compensation

 

 We calculate stock-based compensation by estimating the fair value of each option using the Black-Scholes option pricing model. Our determination of fair value of share-based payment awards are made as of their respective dates of grant using that option pricing model and is affected by our stock price as well as assumptions regarding a number of subjective variables.  These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behavior.  The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.  Because our employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options.  Although the fair value of employee stock options is determined in accordance with applicable accounting standards using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.  The calculated compensation cost is recognized on a straight-line basis over the vesting period of the option.

 

 Deferred Income Taxes

 

 We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income an ongoing tax planning strategies in assessing the amount needed for the valuation allowance.

 

 Selected Financial Data

 

 The following table sets forth selected financial data regarding our financial position and operating results for discontinued operations. This data should be read in conjunction with our consolidated financial statements and related notes thereto beginning on page F-1 of this Report.

 

 

-5-
 

 

Statement of Discontinued Operations for the Fiscal Year Ended December 31, 2011

 

Compared to Fiscal Year Ended December 31, 2010

   For the Years Ended 
     
   December 31, 
     
   2011   2010 
REVENUE, NET  $367,012   $1,785,327 
COST OF SALES   222,288    1,1,061,189 
GROSS PROFIT   1144,724    724,138 
OPERATING EXPENSES          
Salary expense and salary related costs   353,198    639,744 
Research and development   5,537    22,336 
Marketing and selling   -    60,808 
General and administrative   158,435    291,801 
Total operating expenses   517,170    1,014,689 
Loss from operations   (372,446)   (290,551)
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS          
Loss on foreclosure   (431,034)   - 
Gain on sale of intellectual property   384,000    - 
Loss on sale of property and equipment   (1,697)   - 
Miscellaneous income   532,887    91,350 
Total gain (loss) on disposal of discontinued operations   484,156    91,350 
Income (loss) before income taxes   111,710    (199,201)
Income tax benefit   -    - 
NET INCOME (LOSS)  $111,710   $(199,201)
           
Net Revenues          

 

 

 

-6-
 

 

 In 2011, total revenues amounted to $367,012 compared to $1,785,327 in 2010, a decrease of $1,418,315. On June 17, 2011, Raptor Acquisition, LLC, a wholly-owned subsidiary of California Capital Equity, LLC (“CCE”) purchased all of the convertible notes that we had issued and that were payable from the previous note holders in an outside transaction.  On July 6, 2011, CCE provided the Company with notice of default on the notes payable and demanded repayment in full.  They also informed of their intent to exercise their rights and remedies against our assets.  On August 1, 2011, CCE, in its capacity as a secured lender, held a public foreclosure sale of substantially all of our assets.  CCE was the only bidder and our assets were acquired for $100,000. On July 1, 2011, we sold an exclusive, worldwide, perpetual, irrevocable, fully paid, transferable and sublicensable right and license in all of our registered patent and patent applications for $384,000.  We lost any rights to our intellectual property.  Since our carrying value of the intellectual property was $0, we recorded a gain on its sale of $384,000.

 

 Gross Profit

 

 Gross profit decreased from $724,138 in 2010 to $144,724, a decrease of $579,414.   Higher margin product revenues were replaced by lower margin service revenues.  Design services carry a substantially lower margin (35%-45%) than product revenues (60%-65%). The sale of all our assets in June 2011 resulted on our inability to generate any revenues and any profits.

 

  Operating Expenses

 

 The decrease in operating expenses in 2011 resulted primarily because the Company changed from a product development to a service-related model.  This change of model resulted in significant decreases of salary expenses, research and development and G&A, as further explained below.

 

    Salary Expense

 

 Employee costs amounted to $353,198 in 2011 compared to $639,744 in 2010, a decrease of $286,546 or 55%.  The change in salary expenses resulted from the failure of the business to generate revenues and the resulting inability to pay full salaries.

 

  Liquidity and Capital Resources

 

Our independent registered public accounting firm has qualified their opinion with respect to our consolidated financial statements to include an explanatory paragraph related to our ability to continue as a going concern in their reports for each of our fiscal years ended December 31, 2011 and 2010.  Reports of independent registered public accounting firms questioning a company's ability to continue as a going concern generally are viewed very unfavorably by analysts and investors.  There are a number of risks and challenges associated with such a qualified report including, but not limited to, a significant impediment to our ability to raise additional capital or seek financing from entities that will not conduct such transactions in the face of such increased level of risk of insolvency and loss, increased difficulty in attracting talent and the diversion of the attention of executive officers and other key employees to raising capital or financing rather than devoting time to the day-to-day operations of our business.  We urge potential investors to review the report of our independent registered public accounting firm and our consolidated financial statements and related notes beginning on page F-1 of this Report, the cautionary statements included in the “Risk Factors” section under Item 1A of this Report and to seek independent advice concerning the substantial risks related thereto before making a decision to invest in us, or to maintain an investment in us.

 

For the years ended December 31, 2011 and 2010, we incurred net losses of $6,439,166 and $468,871, respectively.  Since our inception, including the year ended December 31, 2011, we have realized negligible revenues and have financed our operations almost exclusively from cash on hand raised through the sale of our securities and borrowings.  As of December 31, 2011 we had a stockholders deficit of $24,236,767 compared to a stockholders deficit in 2010 of $17,797,60. .

 

Since inception, the Company has incurred losses and realized negligible revenues from product sales.  Our government design services contract, which funded a major portion of the Company's operating expenses, expired in April 2011 and all funds generated from this contract were depleted as of September 2011.

 

-7-
 

 

  As disclosed in previous filings, the Company shifted its principal operating model from product sales to licensing, enabling a substantial reduction in headcount, footprint and infrastructure that reduced operating expense run rates substantially.  This shift in business model has not been successful as the Company has not generated any revenues from licensing agreements until July 5, 2011, at which time the Company entered into an agreement with California Capital Equity, LLC (“CCE”) granting CCE an exclusive license (even as to the Company) leaving the Company without any continuing rights in or to its intellectual property. 

 

As of July 31, 2011, all of our convertible notes payable had fully matured, representing a total principal amount outstanding of $11,112,854 and accrued interest of $779,242 as of September 30, 2011.  We did not repay these amounts.  Consequently, the note holders exercised their right as a secured lender against substantially all of our assets and held a public foreclosure sale of substantially all of the Company’s assets and acquired all of these assets at a price of $100,000, which was credited against the outstanding notes on August 1, 2011.  As a result of the public sale on August 1, 2011 and the sale of our intellectual property, we retained no material assets with which to continue our operations.  We were seeking companies or businesses with an interest in utilizing us as a public shell vehicle and in August 2011 signed a non-binding “Letter of Intent” with Lantis for a merger that we consummated on December 5, 2011. Lantis did not generate any revenues in 2011.  

 

These conditions, among others, raise substantial doubt about our ability to continue as a going concern and our independent registered public accounting firm has qualified their opinions with respect to our consolidated financial statements to include an explanatory paragraph related to our ability to continue as a going concern in their reports for each of our fiscal years ended December 31, 2003 through December 31, 2011.

 

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  The accompanying financial statements do not reflect any adjustments which might be necessary if we are unable to continue as a going concern.  

 

Item 8. Financial Statements and Supplementary Data.

 

The financial statements and corresponding notes to the financial statements called for by this item appear under the caption “Index to Financial Statements” beginning on Page F-1 of this Report.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer are Al Pietrangelo) have concluded, based on their evaluation as of December 31, 2011, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are not effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding whether or not disclosure is required, since we do not have separate persons performing the functions of CEO and CFO.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2011, since we do not have separate persons performing the functions of CEO and CFO.

 

-8-
 

 

Our internal control over financial reporting is supported by written policies and procedures, that:

 

(1)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and
(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Report.

 

-9-
 

Changes in Internal Control over Financial Reporting

 

During the year ended December 31, 2011, there was a change in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9B. Other Information

 

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

Set forth below is certain information with respect to our directors and executive officers.

 

Name   Age   Position with Company
Al Pietrangelo   54   Chief Executive Officer, President, Director and Chairman of the Board(1)
Thomas M. Wittenschlaeger   54   Chief Executive Officer, President, Director and Chairman of the Board
Bob van Leyen   68   Chief Financial Officer and Secretary
Ken Bramlett   52   Director (2) (3) (5)
Larry L. Enterline   59   Director (2) (4)

 

 
(1)Member of the Audit, Nominating and Governance, and Compensation Committees. He assumed his executive and Board positions on December 5, 2011 under the terms of the Stock Purchase Agreement between us and Lantis.
(2)Former Member of the Audit, Nominating and Governance, and Compensation Committees.
(3)Former Chairperson of the Nominating and Governance Committee.
(4)Former Chairperson of the Audit Committee.
(5)Former Chairperson of the Compensation Committee.

 

Al Pietrangelo, (age 54), is our Chief Executive Officer, President and Chairman of the Board since December 5, 2011 pursuant to the Stock Purchase Agreement with Lantis. Mr. Pietrangelo has served as President, CEO and Chairman of the Board of Directors of TAG Minerals Inc., an affiliate of Raptor, since 2010. From 2006 to 2010 Mr. Pietrangelo was CEO and Director of Rock of Angels Capital Corp., Rock of Angels Acquisition Corp. and Rock of Angels Holdings Inc. From 2005 to 2006 Mr. Pietrangelo was President and a Director of 4 Star Capital Management Inc. From 2002 to 2004 Mr. Pietrangelo served as Secretary and Director of Hypervelocity, Inc. We believe that Mr. Pietrangelo has the management background to assist Raptor in its growth and the expertise to assist it in the public markets. Mr. Pietrangelo obtained a B.S. in Business Administration from the University of South Florida.

 

Thomas M. Wittenschlaeger, (age 53), was our Chief Executive Officer, President, a director and Chairman of the Board until December 5, 2011 when he resigned pursuant to the Stock Purchase Agreement with Lantis. Mr. Wittenschlaeger has accumulated more than twenty-five years of experience in the high technology products and services area, much of it in general management with leadership positions in operating units ranging in size from $3 million to $500 million in annual revenues. From 2002 to 2004, he was Senior Vice President of Corporate Development and Chief Technical Officer at Venturi Partners, Inc., a leading provider of information technology and professional staffing services nationwide. From 2000 to 2002, he was Senior Vice President and General Manager of ViaSat Satellite Networks, the commercial arm of ViaSat, Inc. He is a 1979 graduate of the U.S. Naval Academy in Annapolis, Maryland with a B.S. in electrical engineering and post-graduate work in nuclear engineering. He is also a graduate of the UCLA Executive Program in Business and co-founder of UCLA's Executive Program in Marketing. Mr. Wittenschlaeger has authored and has been granted 4 core patents and is pending on 8 additional Raptor patents related to hybrid fabric transport, communications, computing and security architectures. Mr. Wittenschlaeger serves on the board of directors of Lantronix, Inc. as Chairman of the Nominating and Governance Committee. Mr. Wittenschlaeger has been our Chairman of the Board, President and Chief Executive Officer since March 15, 2004. Mr. Wittenschlaeger’s (CEO) qualifications to serve on the Board include more than twenty-eight years of experience in the high technology products and services arena, much of it in general management with leadership positions in operating units ranging in size from $3 million to $500 million in annual revenues. Earlier positions, in roles ranging from senior systems engineer to chief corporate strategist at the Hughes Aircraft Company, are relevant towards providing entrepreneurial vision to this emerging technologies company. These roles offer the Company necessary expertise in addressing the governmental marketplace with a particular focus on the Department of Defense.

 

-10-
 

 

Larry L. Enterline, (age 58), was one of our directors and Chairperson of the Audit Committee until December 5, 2011 when he resigned pursuant to the Stock Purchase Agreement with Lantis. In February 2006, Mr. Enterline was reappointed as the Chief Executive Officer of COMSYS IT Partners, Inc., a leading provider of information technology services, having previously served from December 2000 to September 2004 as the Chief Executive Officer of Venturi Partners, Inc. (the predecessor to COMSYS IT Partners prior to the September 2004 merger between Venturi Partners and COMSYS Holding, Inc.). Mr. Enterline has also served as a director of COMSYS IT Partners since the 2004 merger, previously having served as a director of Venturi Partners from December 2000 to March 2003 and as chairman of the board of Venturi Partners from April 2003 until the date of the merger. From 1989 to November 2000, Mr. Enterline served in various management roles with Scientific Atlanta, Inc., a leading national global manufacturer and supplier of cable network products, the last of which was Corporate Senior Vice President for Worldwide Sales and Service. He also held management positions in the marketing, sales, engineering and products areas with Bailey Controls Company and Reliance Electric Company from 1974 to 1989. Mr. Enterline is also a member of the board of directors of Concurrent Computer Corp. Mr. Enterline has been one of our directors since October 18, 2004. Mr. Enterline has served as a Director and Chairman of the Audit Committee, since October 18, 2004. In February 2006, he was appointed as the CEO of COMSYS IT Partners, Inc. From September 2004 to February 2006, he acted as a private investor. From 2000 to September 2004, he served as CEO and Director of Venturi Partners, Inc., a leading provider of information technology and professional staffing services. From 1989 to 2000, he served in various management roles with Scientific Atlanta, Inc. He brought decades of market-defining successes in publicly traded, technology-centric companies to our Board, as well as demonstrated expertise in corporate restructurings, repositioning, and mergers and acquisitions. He is also a member of the Board of Directors of COMSYS IT Partners, Inc. and Concurrent Computers Corporation.

 

Ken Bramlett, (age 51), was one of our directors and Chairperson of the Nominating and Governance Committee and the Compensation Committee until December 5, 2011 when he resigned pursuant to the Stock Purchase Agreement with Lantis. Bramlett has served as Senior Vice President and General Counsel of COMSYS IT Partners, Inc., since January 2006. Prior to that he served as a partner with the Charlotte, North Carolina law firm of Kennedy Covington Lobdell & Hickman, L.L.P. from March 2005 to December 2005. Mr. Bramlett is also a director of World Acceptance Corporation, where he has served on the board of directors since 1994. From 1996 to 2004, Mr. Bramlett served as Senior Vice President and General Counsel of Venturi Partners, Inc., a leading national provider of information technology and professional staffing services and from 1990 to 1996 as a partner with the law firm of Robinson, Bradshaw and Hinson, P.A. Mr. Bramlett has been one of our directors since December 2, 2004. Mr. Bramlett has served as one of our Directors and Chairman of the Nominating and Governance Committee since December 2, 2004. He is a member on the Board of Directors of World Acceptance Corporation since 1994. He brings 20 years of experience in corporate law and governance, public and private equity, and mergers and acquisitions to our Board.

 

Bob Van Leyen, (age 67), was our Chief Financial Officer and Secretary until December 5, 2011 when he resigned pursuant to the Stock Purchase Agreement with Lantis. Mr. Van Leyen has more than twenty-five years of experience working in the high-tech industry, holding various executive positions in finance, operations and general management. From 2002 to 2003, Mr. Van Leyen served as a partner with Tatum CFO, L.L.C. where he provided financial and operational support to start-up companies in the high-tech industry. From 1999 to 2001, he was a divisional Chief Financial Officer at Wyle Electronics. During his twenty-four years of employment, Mr. Van Leyen has managed extensive financial operations organizations in Europe, Asia and the United States, providing financial support to operations. Mr. Van Leyen attended the Dutch Institute of Chartered Auditors and holds a Dutch degree equivalent to a U.S. Bachelor's degree in Business Administration. Mr. Van Leyen has served as our Chief Financial Officer and Secretary since September 29, 2003.

 

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Term of Office and Family Relationships

 

All directors hold office until the next annual meeting of shareholders or until their respective successors are elected or until their earlier death, resignation or removal. Executive officers are appointed by and serve at the discretion of our Board of Directors. There are no family relationships among our executive officers and directors.

 

Board Leadership Structure

 

The Board believes that the Company’s Chief Executive Officer is best situated to serve as Chairman because he is the director most familiar with the Company’s business and industry, and most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy. The Company’s Chief Executive Officer brings company-specific experience and segment-specific expertise. The Board believes that the combined role of Chairman and Chief Executive Officer promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance.

 

Board’s Role in Risk Oversight

 

The Board has an active role, as a whole and also at the committee level, in overseeing management of the Company’s risks. The Board regularly reviews information regarding the Company’s credit, liquidity and operations, as well as the risks associated with each. The Company’s Compensation Committee is responsible for overseeing the management of risks relating to the Company’s executive compensation plans and arrangements. The Audit Committee oversees management of financial risks. The Nominating and Corporate Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks.

 

Board Committees

 

Our Board of Directors currently has an Audit Committee, a Nominating and Governance Committee and a Compensation Committee. Our Board of Directors had determined that our former directors, Larry L. Enterline and Ken Bramlett each qualified as an “independent director” as defined in Rule 5605(a)(2) of the NASDAQ Listing Rules and that Messrs. Enterline and Bramlett met the applicable NASDAQ listing standards for designation as an “Audit Committee Financial Expert.”

 

Audit Committee

 

The Audit Committee after December 5, 2011 is the Board, which now has only Al Pietrangelo as the sole member, and until December 5, 2011 consisted of two Board members, Larry L. Enterline, and Ken Bramlett. Mr. Enterline was the chairperson of the Audit Committee. The duties of the Audit Committee include meeting with our independent registered public accounting firm to review the scope of the annual audit and to review our quarterly and annual financial statements before the statements are released to our shareholders. The Audit Committee also evaluates the independent registered public accounting firm’s performance and has sole authority to appoint or replace the independent registered public accounting firm (subject, if applicable, to shareholder ratification) and to determine whether the independent registered public accounting firm should be retained for the ensuing fiscal year. In addition, the Audit Committee reviews our internal accounting and financial controls and reporting systems practices. A copy of the Audit Committee’s current charter may be found at our website at www.raptor-networks.com.

 

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Nominating and Governance Committee

 

The Nominating and Governance Committee after December 5, 2011 has Al Pietrangelo as the sole member and until December 5, 2011 consisted of two former Board members, Larry L. Enterline and Ken Bramlett. Mr. Bramlett was the chairperson of the Nominating and Governance Committee. The Nominating and Governance Committee identifies and reviews the qualifications of candidate nominees to the Board of Directors. The Nominating and Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director, including candidates that may be referred by stockholders. Stockholders that desire to recommend candidates for the board for evaluation may do so by contacting our Secretary in writing, including the candidate’s name and qualifications and a statement from the candidate that he or she consents to being named in our proxy statement and will serve as a director if elected. Candidates may also come to the attention of the Nominating and Governance Committee through current board members, professional search firms and other persons. A copy of the Nominating and Governance Committee’s current charter may be found at our website at www.raptor-networks.com. The Governance Committee follows the guidelines of the Company and examines, among other things, the following qualifications and skills of director candidates—their business or professional experience, their integrity and judgment, their records of public service, their ability to devote sufficient time to the affairs of the Company, the diversity of backgrounds and experience they will bring to the Board, and the needs of the Company. The Governance Committee also believes that all nominees should be individuals of substantial accomplishment with demonstrated leadership capabilities. The Governance Committee does not have a formal policy with regard to the consideration of diversity in identifying nominees for Director.

 

Compensation Committee

 

The Compensation Committee after December 5, 2011 has Al Pietrangelo as the sole member and until December 5, 2011 consisted of two former Board members, Larry L. Enterline and Ken Bramlett. Mr. Bramlett was the chairperson of the Compensation Committee. The Compensation Committee is responsible for advising the Board of Directors regarding our responsibilities relating to compensation of our executive officers and Board members. The Compensation Committee is also responsible for evaluating and recommending to the Board of Directors our executive compensation plans, policies and programs. A copy of the Compensation Committee’s current charter may be found at our website at www.raptor-networks.com.

 

Code of Ethics

 

Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees and an additional Code of Ethics that applies to our Chief Executive Officer and our senior financial officers.

 

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from provisions of these codes that relate to one or more of the items set forth in Item 406(b) of Regulation S-B by describing on our Internet website, located at www.raptor-networks.com, within four business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver and the name of the person to whom the waiver was granted.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. These officers, directors and shareholders are required by SEC regulations to furnish us with copies of all such reports that they file.

 

Based solely upon a review of copies of these reports furnished to us during 2011 and thereafter, or written representations received by us from reporting persons that no other reports were required, we believe that all Section 16(a) filing requirements applicable to our reporting persons during 2011 were complied with.

 

Item 11. Executive Compensation

 

Compensation of Executive Officers

 

The following section contains information about the compensation paid to our executive officers and directors during the years ended December 31, 2011 and 2010.

 

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Summary Compensation Table

 

The following table provides information concerning the compensation for the years ended December 31, 2010 and 2011 for our principal executive officer and our principal financial officer, who were the only persons that served as executive officers during 2011 (collectively, the “named executive officers”).

 

Summary Compensation Table

 

                           Nonqualified         
                     Non-Equity   Deferred   All Other     
               Stock   Option   Incentive Plan   Compensation   Compensation     
Name and Principal Positions  Year   Salary   Bonus   Awards (1)    Awards   Compensation   Earnings   (3)   Total 
Thomas M. Wittenschlaeger   2011   $162,460.00   $-   $-   $-   $-   $-   $-   $162,460.00 
Thomas M. Wittenschlaeger,   2010   $192,000.00   $-   $-   $-   $-   $-   $19,094.00   $211,094.00 
Chief Executive Officer & President   2009   $145,679.00   $-   $-   $-   $-   $-   $11,862.00   $157,541.00 
Bob Van Leyen   2011   $142,051.00   $-   $-   $-   $-   $-   $-   $142,051.00 
Bob Van Leyen   2010   $160,000.00   $-   $-   $-   $-   $-   $23,015.00   $183,015.00 
Chief Financial Officer   2009   $128,711.00   $-   $-   $-   $-   $-   $12,060.00   $140,771.00 

  

(1)These amounts are equal to the aggregate grant date fair value, computed in accordance with ASC 718, but without giving effect to estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to these option grants, refer to Note 1 of our financial statements and related notes beginning on page F-1 of this Report. See our “Outstanding Equity Awards at December 31, 2010” table below for more information on options held by the named executive officers.
(2)Effective January 1, 2008, our compensation committee approved an increase to Mr. Wittenschlaeger’s annual salary from $180,000 to $192,000. Effective November 1, 2008, Mr. Wittenschlaeger’s annual salary was, on a temporary basis, decreased from $192,000 to $152,000 in connection with the cash flow constraints of the Company. Effective September 15, 2009, Mr. Wittenschlaeger’s annual salary was reinstated at $192,000.
(3)Mainly consists of life and health insurance premiums which are, for the executive officers, fully paid by the company.
(4)Effective January 1, 2008, our compensation committee approved an increase to Mr. van Leyen’s annual salary from $150,000 to $160,000. Effective November 1, 2008, Mr. van Leyen’s annual salary was on a temporary basis decreased from $160,000 to $120,000 in connection with the cash flow constraints of the Company. Effective September 15, 2009, Mr. van Leyen’s annual salary was reinstated at $160,000.

 

Employment Agreements and Executive Compensation

 

On July 26, 2010, Messrs. Thomas M. Wittenschlaeger and Bob van Leyen, our former CEO and CFO of the Company, respectively, who both resigned on December 5, 2011 pursuant to the Stock Purchase Agreement with Lantis, entered into retention agreements with the Company in recognition of, and as part of an interim financing of $176,471. The significant terms of the agreement are as follows:

 

·A six month retention period with the Company effective July 26, 2010;
·No direct or indirect competition with the business of the Company during their periods of employment and for a six month period following any termination of employment;
·In the event of termination, their cooperation in the winding up of any pending work; and
·All right, title and interest in any and all ideas conceived are assigned to the Company.

 

For additional details, please refer to Exhibits 10.2 and 10.3 to the Company’s current report on Form 8-K filed with the SEC on July 28, 2010.

 

Other than those mentioned above, there are no employment contracts, termination agreements or change-in-control arrangements between us and any of our named executive officers. The Compensation Committee reviews and, if deemed appropriate, adjusts the annual salaries of our named executive officers on at least an annual basis. The Compensation Committee may from time to time grant performance or similar cash bonuses to our named executive officers at its discretion. The Compensation Committee may also periodically award options or warrants to our named executive officers under our existing option and incentive plans at its discretion.

  

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Outstanding Equity Awards At Fiscal Year End

 

The following table sets forth information about outstanding equity awards held by our named executive officers as of December 31, 2011.

 

Outstanding Equity Awards at December 31, 2011

 

                       Stock Awards   
                                   Equity  
                               Equity   Incentive  
                               Incentive   Plan  
   Option Awards           Plan   Awards:  
           Equity                   Awards:   Market or  
           Incentive           Number   Market   Number   Payout  
           Plan           of   Value of   of   Value of  
   Number   Number   Awards:           Shares   Shares or   Unearned   Unearned  
   of   of   Number of           or Units   Units of   Shares,   Shares,  
   Securities   Securities   Securities           Of       Units   Units or  
   Underlying   Underlying   Underlying           Stock   Stock   or Other   Other  
   Unexercised   Unexercised   Unexercised   Option       That Have   That Have   Rights That   Rights That  
   Options   Options   Unearned   Exercise   Option   Not   Not   Have Not   Have Not  
   (#)   (#)   Options   Price   Expiration   Vested   Vested   Vested   Vested  
Name  Exercisable   Unexercised   (#)   ($)   Date   (#)   ($)   (#)   ($)  
                                               
Thomas M. Wittenschlaeger   350,000    -    -    1.00    7/15/2012    -    -    -   -  
Thomas M. Wittenschlaeger   60,000    30,000    -    0.67    1/02/2016    -    -    -   -  
Bob van Leyen   300,000    -    -    1.00    9/29/2011                      
Bob van Leyen   40,667    23,333    -    0.67    1/02/2016    -    -    -   -  

  

Compensation of Directors

 

Through June 30, 2008, each of our non-employee directors was entitled to receive cash compensation in the amount of $15,000 per year for service on our board of directors. Effective July 1, 2008, the Board waived payment of Director’s Fees in connection with the current cash flow constraints the Company is experiencing. This situation will continue until the Company is able to improve its cash flow position. We reimburse all directors for out-of-pocket expenses incurred in connection with attendance at board and committee meetings. We currently have a policy in place to grant each non-employee director an option to purchase shares of our common stock on the date of his or her commencement of service as a director. We may also periodically award options or warrants to our directors under our existing option and incentive plans.

 

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The following table provides information concerning the compensation of our directors for the year ended December 31, 2011.

 

Director Compensation

 

 
 
 
 
 
 
 
Name
   

 

 

 

Fees Earned
or Paid
in Cash
($)

    

 

 

 

 

 

 

Stock Awards
($)

    

 

 

 

 

 

Option Awards
($)(1)

    

 

 

 

 

Non-Equity
Incentive Plan
Compensation
($)

    

Change
in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings

($)

    

 

 

 

 

 

All Other
Compensation
($)

    

 

 

 

 

 

 

Total
($)

 
Larry L. Enterline(2)   -    -    -    -    -    -    - 
Ken Bramlett(3)   -    -    -    -    -    -    - 

 

(1)These amounts are equal to the aggregate grant date fair value, computed in accordance with ASC 718, but without giving effect to estimated forfeitures related to service−based vesting conditions. For additional information on the valuation assumptions with respect to these option grants, refer to Note 1 of our financial statements and related notes beginning on page F-1 of this Report.
(2)At December 31, 2011, Mr. Enterline held options to purchase an aggregate of 10,000 shares of common stock at an exercise price of $1.00 per share, of which 100,000 options were vested at December 31, 2010. In addition, Mr. Enterline held an additional 90,000 options to purchase common stock at an exercise price of $0.67. Two-thirds of these options (60,000) have vested as of December 31, 2010.
(3)At December 31, 2011, Mr. Bramlett held options to purchase an aggregate of 100,000 shares of common stock at an exercise price of $1.00 per share, of which all 100,000 options were vested at December 31, 2010. In addition, Mr. Bramlett held an additional 90,000 options to purchase common stock at an exercise price of $0.67. Two-thirds of these options (60,000) have vested as of December 31, 2010.

 

Stock Option Plan

 

General

 

Our 2005 Stock Plan was approved by our Board of Directors on April 7, 2005, approved by our shareholders on June 9, 2005 and amended and restated as the First Amended and Restated 2005 Stock Plan (“2005 Plan”) by our Board of Directors on June, 29, 2007. We filed a registration statement on Form S-8 with the SEC in May 2007 to cover the issuance of up to 3,000,000 shares of common stock underlying options and stock purchase rights authorized for issuance under the 2005 Plan and qualified for issuance the underlying securities with the California Department of Corporations in July 2007.

 

All stock options issued prior to shareholder approval of our 2005 Plan were granted outside of a formal stock option plan (“Non-Plan Options”). As of April 4, 2012, there were 612,000 outstanding options to purchase common stock under the 2005 Plan. Excluding these 612,000 outstanding options, 2,388,000 shares will remain available for issuance under the 2005 Plan, subject to the limitations of authorized common stock. We anticipate that future stock options will be issued pursuant to our 2005 Plan or other stock option plans as may be approved by our Board and shareholders in the future.

 

Shares Subject to the Plan

 

A total of 3,000,000 shares of common stock are authorized for issuance under the 2005 Plan. Any shares of common stock that are subject to an award but are not used because the terms and conditions of the award are not met, or any shares that are used by participants to pay all or part of the purchase price of any option, may again be used for awards under the 2005 Plan.

 

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Administration

 

The 2005 Plan is to be administered by our Board of Directors or an appropriate committee of our Board of Directors. It is the intent of the 2005 Plan that it be administered in a manner such that option grants and exercises would be “exempt” under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Our Board of Directors or an appropriate committee is empowered to select those eligible persons to whom options shall be granted under the 2005 Plan, to determine the time or times at which each option or stock purchase right shall be granted, whether options will be incentive stock options (“ISOs”) or nonqualified stock options (“NQOs”), the number of shares to be subject to each option, and to fix the time and manner in which each such option may be exercised, including the exercise price and option period, and other terms and conditions of such options, all subject to the terms and conditions of the 2005 Plan. Our Board of Directors or an appropriate committee has sole discretion to interpret and administer the 2005 Plan and our decisions regarding the 2005 Plan are final.

 

The 2005 Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time and from time to time by our Board of Directors. Neither our Board of Directors nor any committee may materially impair any outstanding options without the express consent of the optionee or increase the number of shares subject to the 2005 Plan, materially increase the benefits to optionees under the 2005 Plan, materially modify the requirements as to eligibility to participate in the 2005 Plan or alter the method of determining the option exercise price without shareholder approval. No option may be granted under the 2005 Plan after April 7, 2015.

 

Option Terms

 

ISOs granted under the 2005 Plan must have an exercise price of not less than 100% of the fair market value of the common stock on the date the ISO is granted and must be exercised, if at all, within ten years from the date of grant. In the case of an ISO granted to an optionee who owns more than 10% of our total voting securities on the date of grant, the exercise price may not be less than 110% of the fair market value of the common stock on the date of grant and the option period may not exceed five years. NQOs granted under the 2005 Plan must have an exercise price of not less than 85% of the fair market value of the common stock on the date the NQO is granted.

 

Options may be exercised during a period of time fixed by our Board of Directors or an appropriate committee, except that no option may be exercised more than ten years after the date of grant. In the discretion of our Board of Directors or an appropriate committee, payment of the purchase price for the shares of stock acquired through the exercise of an option may be made in the manner and for the type of consideration determined by our Board of Directors or an appropriate committee, which may include cash, check, one or more promissory notes, shares of our common stock, consideration received under a cashless exercise program implemented in connection with the 2005 Plan or any combination of the foregoing.

 

Federal Income Tax Consequences

 

Holders of NQOs do not realize income as a result of a grant of the option, but normally realize compensation income upon exercise of an NQO to the extent that the fair market value of the shares of common stock on the date of exercise of the NQO exceeds the exercise price paid. We are required to withhold taxes on ordinary income realized by an optionee upon the exercise of a NQO. In the case of an optionee subject to the “short-swing” profit recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes income only upon the lapse of the six-month period under Section 16(b), unless the optionee elects to recognize income immediately upon exercise of his or her option.

 

Holders of ISOs will not be considered to have received taxable income upon either the grant or the exercise of the option. Upon the sale or other taxable disposition of the shares, long-term capital gain will normally be recognized on the full amount of the difference between the amount realized and the option exercise price paid if no disposition of the shares has taken place within either two years from the date of grant of the option or one year from the date of exercise. If the shares are sold or otherwise disposed of before the end of the one-year or two-year periods, the holder of the ISO must include the gain realized as ordinary income to the extent of the lesser of the fair market value of the option stock minus the option price, or the amount realized minus the option price. Any gain in excess of these amounts, presumably, will be treated as capital gain. We are entitled to a tax deduction in regard to an ISO only to the extent the optionee has ordinary income upon the sale or other disposition of the option shares.

 

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Upon the exercise of an ISO, the amount by which the fair market value of the purchased shares at the time of exercise exceeds the option price will be an “item of tax preference” for purposes of computing the optionee’s alternative minimum tax for the year of exercise. If the shares so acquired are disposed of prior to the expiration of the one-year and two-year periods described above, there should be no “item of tax preference” arising from the option exercise.

 

The tax discussion set forth above is included for general information only and is based upon present law. Each holder of options under the 2005 Plan should consult his or her own tax advisor as to the specific tax consequences of the transaction to him or her, including application and effect of federal, state, local and other tax laws and the possible effects of changes in federal or other laws.

 

Indemnification of Directors and Officers

 

Section 7-109-102 of the Colorado Business Corporations Act (the “Colorado Act”) authorizes a Colorado corporation to indemnify any director against liability incurred in any proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.

 

Unless limited by a corporation’s articles of incorporation, Section 7-109-105 of the Colorado Act authorizes a director to apply for indemnification to the court conducting the proceeding or another court of competent jurisdiction. Unless limited by the articles of incorporation, Section 7-109-107 of the Colorado Act extends this same right to officers of a corporation as well.

 

Unless limited by a corporation’s articles of incorporation, Section 7-109-103 of the Colorado Act requires that a Colorado corporation indemnify a director who was wholly successful in defending any proceeding to which he or she was a party against reasonable expenses incurred in connection therewith. Unless limited by the articles of incorporation, Section 7-109-107 of the Colorado Act extends this same protection to officers of a corporation as well.

 

Pursuant to Section 7-109-104 of the Colorado Act, a Colorado corporation may advance a director’s expenses incurred in defending any action or proceeding upon receipt of an undertaking and a written affirmation of his or her good faith belief that he or she has met the standard of conduct specified in Section 7-109-102 described above. Unless limited by the articles of incorporation, Section 7-109-107 of the Colorado Act extends this same protection to officers of a corporation as well.

 

Regardless of whether a director or officer has the right to indemnity, Section 7-109-108 of the Colorado Act allows a Colorado corporation to purchase and maintain insurance on such directors or officers behalf against liability resulting from his or her role as director or officer.

 

Our Articles of Incorporation do not limit any of the rights afforded to our directors and officers under the Colorado Act and Article VI of our Bylaws states that any director or officer who is involved in litigation by reason of his or her position with us as a director or officer shall be indemnified and held harmless by us to the fullest extent authorized by law as it now exists or may subsequently be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights). Our directors and officers are also presently covered by an insurance policy indemnifying them against certain liabilities, including certain liabilities arising under the Securities Act, which might be incurred by them in such capacities and against which they may not be indemnified by us. We believe that the indemnification and insurance provided to our directors and officers is necessary to attract and retain qualified persons as directors and officers.

 

To the extent indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons under the above provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth, as of April 4, 2012, certain information with respect to the beneficial ownership of our stock by (i) each of our named executive officers, (ii) each of our directors, (iii) each person known to us to be the beneficial owner of more than 5% of each class of our outstanding voting securities, and (iv) all of our directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares of common stock underlying derivative securities, if any, that currently are exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership is based on 198,009,929 shares of common stock outstanding as of April 4, 2012.

 

 

Name of Beneficial Owner(1)

  Number of Shares of Common Stock
Beneficially Owned
   Percent of Common Stock
Beneficially Owned
 
Lantis Laser   109,928,311(1)   55.52%
Thomas M. Wittenschlaeger   3,440,000(2)   1.74%
Bob van Leyen   770,000(3)    *
Ken Bramlett   190,000(4)    
Larry L. Enterline   190,000(5)    
All executive officers and directors as a group (4 persons)   4,590,000(6)   2.32%

 

* Less than 0.5%.

 

(1)Unless otherwise indicated, the address is c/o Raptor Networks Technology, Inc., 41 Howe Lane, Freehold, New Jersey 07728.
(2)Thomas M. Wittenschlaeger was our former President, Chief Executive Officer and Chairman of the Board who resigned on December 5, 2011 pursuant to the Securities Purchase Agreement entered with Lantis.
(3)Bob Van Leyen was our Chief Financial Officer and Secretary who resigned on December 5, 2011 pursuant to the Securities Purchase Agreement entered with Lantis .
(4)Ken Bramlett was one of our directors who resigned on December 5, 2011 pursuant to the Securities Purchase Agreement entered with Lantis.
(5)Larry L. Enterline was one of our directors who resigned on December 5, 2011 pursuant to the Securities Purchase Agreement entered with Lantis.
(6)Represents 3,000,000 shares of common stock and 440,000 shares issuable upon the exercise of options held by Thomas M. Wittenschlaeger; 400,000 shares of common stock and 370,000 shares on a post-split basis issuable upon the exercise of options held by Bob van Leyen; 190,000 shares issuable upon the exercise of options held by Ken Bramlett; and 190,000 shares issuable upon the exercise of options held by Larry L. Enterline.

 

Equity Compensation Plan Information

 

The following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2011.

 

-19-
 

 

Plan Category  Number of Shares to be
Issued Upon Exercise
   Weighted Average
Exercise Price
   Number of Securities
Available for Issuance
 
Plans Approved by Stockholders 2005 Stock Plan(1)   612,000   $0.76    2,938,800 
Plans Not Approved by Stockholders               
Non-Plan Stock Options(2)   0    N/A    N/A 
Warrants for Services(3)   366,380   $0.58    N/A 
Total   978,380   $0.93    2,938,800 

 

 

(1)Our 2005 Stock Plan was approved by our Board of Directors on April 7, 2005 and approved by our shareholders on June 9, 2005 at our 2005 Annual Meeting of Shareholders. Under the 2005 Stock Plan, options to purchase up to 3,000,000 shares of our Common Stock may be granted. As of December 31, 2011, there were 61,200 outstanding options to purchase common stock.
(2)Consists of stock options to purchase shares of our common stock granted to our employees, executive officers and directors outside of a formal stock option plan. These stock options vest at the rate of 33⅓% on each of the first, second and third anniversaries of the date of grant and expire on the eight-year anniversary of the date of grant.
(3)Consists of warrants to purchase shares of our common stock granted in consideration for consulting services, advisory services, placement agent services and similar services rendered to us by third parties.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

Certain Relationships and Related Transactions

 

There were no related party transactions in 2011 that require disclosure. The Board as a whole reviews any transactions that would require disclosure under this item 13.

 

Director Independence

 

Our Board of Directors has only one member, Al Pietrangelo, who is President and CEO, and, therefore, does not qualify as an “independent director” as defined in Rule 5605(a)(2) of the NASDAQ Listing Rules.

 

-21-
 

 

Item 14. Principal Accounting Fees and Services

 

The following table sets forth the aggregate fees billed to us for the fiscal years ended December 31, 2011 and 2010 by our auditors, Mendoza Berger & Company, LLP and the independent auditing firm, KBL, LLP, that replaced Mendoza Berger & Company, LLP on September 28, 2011.

 

   Fiscal 2011   Fiscal 2010 
Audit Fees(1)  $27,500   $51,143 
Audit-Related Fees(2)  $16,020   $- 
Tax Fees(3)  $-   $8,470 
All Other Fees(4)  $-   $- 

 

(1)Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by our accountants in connection with statutory and regulatory filings or engagements.

 

(2)Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” This category includes fees related to due diligence services pertaining to potential business acquisitions/disposition; and consultation regarding accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standard or interpretation by the SEC, FASB or other regulatory or standard-setting bodies as well as general assistance with implementation of the requirements of SEC rules or listing standards promulgated pursuant to the Sarbanes-Oxley Act of 2002.

 

(3)Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance, planning and advice.

 

(4)All Other Fees consist of fees for products and services other than the services reported above.

 

Our Audit Committee is responsible for approving all Audit, Audit-Related, Tax and Other Services. The Audit Committee pre-approves all auditing services and permitted non-audit services, including all fees and terms to be performed for us by our independent registered public accounting firm at the beginning of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal year. Any additional non-audit services contemplated by our company after the beginning of the fiscal year are submitted to the Audit Committee chairman for pre-approval prior to engaging the independent auditor for such services. Such interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification.

 

-22-
 

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedules

 

Exhibit

Number

  Description
2.1   Agreement and Plan of Merger dated August 23, 2003 between Pacific InterMedia, Inc., and Raptor Networks Technology, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on October 22, 2003)
2.2   Amendment to Agreement and Plan of Merger dated October 15, 2003 between Pacific InterMedia, Inc., and Raptor Networks Technology, Inc. (incorporated herein by reference to Exhibit 2.2 to the Company’s Form 8-K filed with the SEC on October 22, 2003)
3.1   Articles of Incorporation, as amended as of June 8, 2005 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 10-KSB for fiscal year ended December 31, 2004, filed with the SEC on April 15, 2005)
3.2   Articles of Amendment to Articles of Incorporation increasing Company’s authorized common stock to 75,000,000 shares, effective June 9, 2005 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on June 15, 2005)
3.3   Articles of Amendment to Articles of Incorporation increasing authorized common stock to 110,000,000 shares, effective May 31, 2006 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on June 5, 2006)
3.4   Articles of Amendment to Articles of Incorporation (Profit) of Raptor Networks Technology, Inc. as filed with the Colorado Secretary of State on April 30, 2007 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 4, 2007)
3.5   Bylaws (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 333-74846, filed with the SEC on December 10, 2001)
3.6   Amendment to Bylaws – Article II, Section 1 (incorporated herein by reference to Exhibit 3.3 to the Company’s Form 10-KSB for fiscal year ended December 31, 2004, filed with the SEC on April 15, 2005)
3.7   Action with Respect to Bylaws certified by the Secretary of Raptor Networks Technology, Inc. on May 2, 2007 (incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on May 4, 2007)
10.1   Stock Purchase Agreement between Lantis Laser Inc. and Raptor Networks Technology, Inc. dated December 2, 2011 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on December 8, 2011)
10.2   First Amended and Restated 2005 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-QSB for fiscal quarter ended June 30, 2007, filed with the SEC on August 21, 2007)
10.3   Form of 2005 Stock Plan Stock Option Agreement (incorporated herein by reference to Exhibit 10.19 to the Company’s Form 10-KSB for fiscal year ended December 31, 2005, filed with the SEC on April 3, 2006)
10.4   Form of 2005 Stock Plan Stock Option Agreement (incorporated herein by reference to Exhibit 10.19 to the Company’s Form 10-KSB for fiscal year ended December 31, 2005, filed with the SEC on April 3, 2006)
21   Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21 to the Company’s Form 10-KSB for fiscal year ended December 31, 2005, filed with the SEC on April 3, 2006)
31.1x   Certification of the Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2x   Certification of the Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1x   Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

-23-
 

 

Exhibit

Number

  Description
     
32.2x   Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
    x Filed herewith.
    ** This exhibit is a management contract or a compensatory plan or arrangement.

 

-24-
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated:  April 16, 2012 RAPTOR NETWORKS TECHNOLOGY, INC.
   
  By: /s/ Al Pietrangelo
    Al Pietrangelo
    Chief Executive Officer
    (principal executive officer)
   
Dated:  April 16, 2012 RAPTOR NETWORKS TECHNOLOGY, INC.
   
  By: /s/ Al Pietrangelo
    Al Pietrangelo
    Chief Financial Officer
    (principal financial officer)

 

Pursuant to requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature   Capacity   Date
         
/s/ Al Pietrangelo   Director   April 16, 2012
Al Pietrangelo        

 

-25-
 

 

Raptor Networks Technology, Inc.

 

Index to Financial Statements

  

Report of Independent Registered Public Accounting Firm F-2 – F-3
   
Financial Statements  
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Operations F-5
   
Consolidated Statements of Stockholders’ Deficit F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-8

 

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Raptor Networks Technology, Inc.

 

We have audited the accompanying consolidated balance sheets of Raptor Networks Technology, Inc. (the “Company”) as of December 31, 2011 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2011. 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 consolidated 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 Raptor Networks Technology, Inc. as of December 31, 2011, and the results of its consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained significant operating losses and needs to obtain additional financing or restructure its current obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ KBL, LLP

New York, NY

April 16, 2012

 

F-2
 

 

To the Board of Directors and Stockholders

Raptor Networks Technology, Inc. and Subsidiary

 

We have audited the accompanying consolidated balance sheet of Raptor Networks Technology, Inc. and Subsidiary (a Colorado corporation) (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audit provides 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 Raptor Networks Technology, Inc. as of December 31 2010, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements are presented assuming the Company will continue as a going concern.  As more fully described in Note 1 to the consolidated financial statements, the Company has sustained accumulated losses from operations totaling approximately $84 million at December 31, 2010.  This condition and the Company’s lack of significant sales of its products to date, raise substantial doubt about its ability to continue as a going concern.  Management's plans to address these conditions are also set forth in Note 1 to the consolidated financial statements.  The accompanying consolidated financial statements do not include any adjustments which might be necessary if the Company is unable to continue as a going concern.

 

 

Mendoza Berger & Company, LLP

 

Irvine, California

March 15, 2011

 

F-3
 

 

RAPTOR NETWORKS TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2011   December 31, 2010 
           
ASSETS
CURRENT ASSETS          
Cash  $2,323   $82,777 
Assets of discontinued operations   -    737,747 
           
Total current assets   2,323    820,524 
           
ASSETS OF DISCONTINUED OPERATIONS   -    42,087 
           
TOTAL ASSETS  $2,323   $862,611 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $1,044,056   $253,106 
Detachable warrant liabilities   392,310    993,852 
Conversion option liabilities   11,789,870    5,808,201 
Senior convertible notes payable, net of debt discount of $0 and $57,151 at December 31, 2011 and December 31, 2010, respectively   11,012,854    10,803,195 
Liabilities of discontinued operations   -    786,927 
Total current liabilities   24,239,090    18,645,281 
LIABILITIES OF DISCONTINUED OPERATIONS   -    14,931 
           
TOTAL LIABILITIES   24,239,090    18,660,212 
           
COMMITMENTS AND CONTINGENCIES   -    - 
           
STOCKHOLDERS' DEFICIT          
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, $0.001 par; 200,000,000 shares authorized; 198,009,290 and 88,080,979 shares issued and outstanding at December 31, 2011 and 2010   198,009    88,081 
Additional paid-in capital   66,396,438    66,506,366 
Accumulated deficit   (90,831,214)   (84,392,048)
Total stockholders' deficit   (24,236,767)   (17,797,601)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $2,323   $862,611 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

 

RAPTOR NETWORKS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Years Ended 
   December 31, 
   2011   2010 
         
Continuing Operations:          
OPERATING EXPENSES          
General and administrative  $51,398   $65,320 
           
Total operating expenses   51,398    65,320 
           
#REF!   (51,398)   (65,320)
           
OTHER INCOME (EXPENSE)          
Interest income   3    6 
Change in fair value of conversion option and warrant liabilities   (5,245,032)   2,930,077 
Amortization of discount on convertible debt   (192,246)   (2,103,114)
Interest expense   (1,062,203)   (1,031,319)
           
Total other income (expense)   (6,499,478)   (204,350)
           
Income (loss) before income taxes   (6,550,876)   (269,670)
           
Income tax benefit   -    - 
           
Net income (loss) from continuing operations   (6,550,876)   (269,670)
           
Discontinued operations:          
Gain on disposal of discontinued operations   484,156    91,350 
Loss from discontinued operations   (372,446)   (290,551)
           
Loss from discontinued operations, net of tax   111,710    (199,201)
           
NET INCOME (LOSS)  $(6,439,166)  $(468,871)
           
Income (loss) per share - basic          
Continuing operations  $(0.07)  $- 
Discontinued operations  $-   $- 
Weighted average number of shares outstanding - basic   88,080,979    86,612,794 
           
Income (loss) per share - diluted          
Continuing operations  $(0.07)  $- 
Discontinued operations  $-   $- 
Weighted average number of shares outstanding - basic   88,080,979    86,612,794 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

RAPTOR NETWORKS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

 

           Additional         
   Common Stock   Paid in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
                     
Balance, January 1, 2010   85,922,744   $85,923   $65,859,347   $(83,923,177)  $(17,977,907)
                          
Common stock issued upon conversion of note payable   1,958,235    1,958    298,042    -    300,000 
                          
Reduction of conversion option liability upon conversion of note payable   -    -    195,982    -    195,982 
                          
Common stock issued for services   200,000    200    41,800    -    42,000 
                          
Stock-based compensation   -    -    111,195    -    111,195 
                          
Net loss   -    -    -    (468,871)   (468,871)
                          
Balance, January 1, 2011   88,080,979    88,081    66,506,366    (84,392,048)   (17,797,601)
                          
Shares of stock issued to Lantis Laser Inc. in the acquisition of 55% ownership   109,928,311    109,928    (109,928)   -    - 
                          
Net loss   -    -    -    (6,439,166)   (6,439,166)
                          
Balance, December 31, 2011   198,009,290  198,009  66,396,438  (90,831,214)  (24,236,767)

 

The accompanying notes are an integral part of these consolidated financial statements.

  

F-6
 

 

RAPTOR NETWORKS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

   2011  2010
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(6,439,166)  $(468,871)
Adjustments to reconcile net loss to net cash used in          
operating activities:          
Depreciation   6,728    10,103 
Amortization of discount on convertible debt and debt issuance          
costs   192,247    2,108,129 
Stock-based compensation   -    111,195 
Common stock issued for services   -    42,000 
Change in fair value of conversion option and warrant liabilities   5,245,032    (2,930,077)
Gain on disposal of discontinued operations   (523,980)   - 
Change in inventory reserve   (90,367)   43,812 
Changes in operating assets and liabilities:          
Accounts receivable   143,568    (91,292)
Inventories   106,247    84,054 
Prepaid expenses and other assets   78,517    166,846 
Deposits   1,560    - 
Accounts payable and accrued liabilities   825,418    698,305 
Deferred revenue   (11,108)   (3,669)
Net cash used in operating activities   (465,304)   (229,465)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of intellectual property   384,000    - 
Proceeds from sale of property and equipment   850    - 
Net cash provided by investing activities   384,850    - 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net proceeds from issuance of note payable   -    150,000 
Net cash provided by financing activities   -    150,000 
Net decrease in cash and cash equivalents   (80,454)   (79,465)
CASH AT BEGINNING OF PERIOD   82,777    162,242 
CASH AT END OF PERIOD  $2,323   $82,777 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for interest  $-   $43,428 
Cash paid for income taxes  $1,600   $1,685 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:

 

   2011  2010
Accrued interest payable added to principal balance  $252,508   $808,126 
Increase in debt discount for conversion option liabilities resulting          
from accrued interest added to principal balance  $135,096   $388,925 
Conversion of notes payable to common stock  $-  $300,000 
Reduction of conversion option liabilities upon conversion  $-   $203,302 
Increase in accrued payables from reduction of          
conversion option liabilities  $-   $(7,320)
Prepaid interest deducted from gross proceeds of note payable  $-   $26,471 
Discount on note payable  $-   $97,973 
Reduction in note payable as a result of foreclosure  $100,000   $- 
Inventory transferred to fixed assets  $-   $27,687 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

F-7
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Summary of Significant Accounting Policies

 

Description

 

The Company was a provider of integrated high-speed Ethernet switching systems which enable new emerging high bandwidth critical applications.  The data network market areas that the Company is targeting include video, storage, Internet Protocol telephony and technology refresh.  The Company is currently focusing on the United States market.  Principal operations had commenced, although minimal revenues had been recognized to date.

 

The Company was incorporated under the laws of the state of Colorado on January 22, 2001 under the name Pacific InterMedia, Inc. (“Pacific”).  The principal office of the corporation is 1508 South Grand Avenue, Suite 150, Santa Ana, California  92705.

 

On October 17, 2003, Pacific completed a business combination transaction with Raptor Networks Technology, Inc. (“Raptor”), a closely-held California corporation, through acquisition of all of the issued and outstanding common stock of Raptor in exchange for authorized but previously unissued restricted common stock of Pacific.  Immediately prior to completion of the acquisition transaction, Pacific had a total of 4,034,000 shares of its common stock issued and outstanding comprised of 1,034,000 registered shares held by approximately 25 stockholders and 3,000,000 shares of restricted stock held by Pacific’s founder and sole officer and director.

 

As a material aspect of the acquisition, Pacific re-acquired and cancelled the 3,000,000 restricted shares as consideration for transfer of its remaining assets consisting of cash and office equipment to the officer and director, leaving only the registered common stock, 1,034,000 shares, as all of its issued and outstanding capital stock prior to completion of the Raptor acquisition.

 

Pursuant to terms of the acquisition agreement, all of the issued and outstanding common stock of Raptor, 19,161,256 shares, was acquired by Pacific, share-for-share, in exchange for its authorized but previously unissued common stock.  Upon completion of the acquisition, Raptor became a wholly owned subsidiary of Pacific and the Raptor shareholders became shareholders of Pacific.  Unless otherwise indicated, all references in these financial statements to “the Company” include Pacific and its wholly owned subsidiary, Raptor.  All intercompany transactions have been eliminated in consolidation.  On December 3, 2003, Pacific changed its name to Raptor Networks Technology, Inc.

 

The acquisition transaction had been treated as a reverse merger, with Raptor considered the accounting acquirer.

 

The Company’s service contract with a Government prime contractor was almost depleted as of March 31, 2011 and consequently, revenues for the quarter under review amounted to close to zero.  Taking into account the current status of the U.S. Government budget and the fact that the Company no longer has any rights in or to its intellectual property, the Company was no longer able to generate future revenue in that line of business.

 

In September 2008, the Company shifted its principal operating model from product sales to licensing enabling a reduction in headcount, footprint and infrastructure that reduced operating expense run rates substantially.  This shift in business model had not been successful as the Company had not generated any revenues from licensing agreements until July 5, 2011, at which time the Company entered into an agreement with California Capital Equity, LLC (“CCE”) granting CCE an exclusive license (even as to the Company) leaving the Company without any continuing rights in or to its intellectual property.  In addition, on August 1, 2011, all of the Company’s remaining assets were sold during a public foreclosure sale.  For further details on these transactions, see the disclosures in the Forms 8-K filed by the Company on July 11, 2011 and August 4, 2011.  As a result of the above transactions, the Company classified all of its operations as discontinued operations, except certain general and administrative expenses related to the public shell company, such as EDGAR fees, audit fees and legal expenses related to review of public filings and amounts related to the Company’s convertible debt (see Note 2).

 

F-8
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All of our convertible notes payable (see Note 6) have matured and the Company did not pay the principal balances and accrued interest at maturity or thereafter (see Note 2).  The note holders exercised their right as a secured lender against the Company’s assets and held a public foreclosure sale of substantially all of the Company’s assets and acquired all of these assets at a price of $100,000, which price was credited against the outstanding notes on August 1, 2011.  As a result of the public sale on August 1, 2011, the Company retains no material assets with which to continue its operations.  The Company is seeking companies or businesses with an interest in utilizing the Company as a public shell vehicle and in August 2011 signed a non binding “Letter of Intent” with an interested party for a possible merger.  This transaction was completed in December 2011, when Lantis Laser Inc. (OTCQB: LLSR) acquired an 80% controlling equity stake in the Company. In addition to Lantis Laser Inc. issuing 5 million shares of their common stock to CCE, they were issued 109,928,311 shares in the Company to attain a 55% ownership as of December 31, 2011. The Company has filed a Form 14C to amend its charter to increase the authorized shares of common stock of the Company to 500,000,000 shares, and then issue an additional, 79,078,817 shares of common stock to Lantis Laser Inc. to bring the total percentage equity owned by Lantis Laser Inc. to 80%, and issue 13,510,752 shares of stock to CCE in consideration of the conversion of the convertible notes outstanding to CCE. The 14C has not been approved by the SEC as of December 31, 2011. As a result of the 14C not being approved as of December 31, 2011, the convertible notes remain outstanding and will be outstanding until the shares of common stock have been issued.

 

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.  These reclassifications had no impact on net earnings, financial position or cash flows.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates made by management include the collectability of accounts receivable, the realization of inventories, the recoverability of long-lived assets, the valuation of stock-based compensation and the valuation allowance of the deferred tax asset.  Actual results could differ from those estimates.

 

Concentrations of Credit Risk

During 2010, 91% of our revenues were generated by two customers.  One customer accounted for 79% and the other accounted for 12%.  As of December 31, 2010, 100% of the accounts receivable was owed by the customer accounting for 79% of the revenues.  

 

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.  The Company establishes provisions for losses on accounts receivable when it is probable that all or part of the outstanding balance will not be collected.  The Company regularly reviews collectability and establishes or adjusts the allowance as necessary using the specific identification method.  All receivables as of December 31, 2010 have been collected.  Therefore, there is no allowance for doubtful accounts is included in the accompanying consolidated balance sheets.

   

Inventories

Inventories are recorded at the lower of cost or market with cost being determined on the average cost method.  When required, a provision is made to reduce excess and obsolete inventory to estimated net realizable value.  Inventories consist of raw materials, work-in-process and finished goods.

 

License Fees

The Company capitalizes software license fees of third party software which is included in its systems.  These costs are amortized and charged to cost of sales over the projected number of systems expected to be sold incorporating the capitalized software.  Amortization of the license fees included in cost of sales for the year ended December 31, 2010 totaled $25,920.

 

F-9
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation.  In certain circumstances, the Company loans inventory to its distributors to be used as a demonstration product to potential customers.  Such equipment is removed from inventory and recorded as test equipment at its book value on the date of transfer.  When the equipment is returned to the Company, it is removed from test equipment and recorded as inventory at the lower of its net book value or its net realizable value.  Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows:  computer equipment, furniture and fixtures and testing equipment are depreciated over three years and office equipment is depreciated over seven years.  Repairs and maintenance of a routine nature are charged as incurred.  Significant renewals and betterments are capitalized.  At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.

 

Debt Issuance Costs

Debt issuance costs reflect fees incurred to obtain financing.  Debt issuance costs are amortized to interest expense using the straight-line method over the life of the related debt.  Amortization expense for the year ended December 31, 2010 was $5,015.

 

Convertible Debenture and Beneficial Conversion Feature

If the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”).  A BCF is recorded by the Company as a debt discount.  In those circumstances, the convertible debt will be recorded net of the discount related to the BCF.  The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest method.

 

Derivative Financial Instruments

In accounting for non-conventional convertible debt, the Company bifurcates its embedded derivative instruments.  The Company’s derivative financial instruments consist of embedded derivatives related to non-conventional debentures entered into with certain investors.  These embedded instruments related to the debenture include the conversion feature, liquidated damages related to registration rights and default provisions.  The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.  Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting period.  If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge.  If the fair value of the derivative is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.

 

Revenue Recognition

Prior to the change in business, the Company recorded revenues when the following criteria were met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured.  Delivery occurs when goods are shipped and title and risk of loss have passed to the customer.  Revenue is deferred in all instances where the earnings process is incomplete.  The Company recognized revenue from distribution sales when all contingencies were satisfied and upon persuasive evidence of a sale to end users until such time that historical sell through ratios had been developed.  Payments received before all of the relevant criteria for revenue recognition were satisfied were recorded as deferred revenue in the accompanying consolidated balance sheets.  Revenues and costs of revenues from consulting contracts were recognized during the period in which the service was performed.  All revenues were reported net of any sales discounts or taxes.

 

The Company had contracts with various governments and governmental agencies.  Government contracts were subject to audit by the applicable governmental agency.  Such audits could lead to inquiries from the government regarding the allowability of costs under applicable government regulations and potential adjustments of contract revenues.  To date, the Company has not been involved in any such audits.

 

F-10
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Research and Development Costs

Research and development (R&D) costs consist of labor, product design costs including rental of design tools, consumables, and costs of prototypes and are expensed as incurred.

    

Compensated Absences

The Company maintains a personal time off policy.  Employees of the Company are entitled to compensated absences depending on their length of service to a maximum of 25 days per calendar year.  As of December 31, 2010, the balance owed for compensated absences was $46,337. As of December 31, 2011, the Company has no employees.

 

Impairment or Disposal of Long-Lived Assets

The Company reviews its long-lived assets and certain related intangibles for impairment periodically, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.  When necessary, impaired assets are written down to estimated fair value based on the best information available.  Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows.  Considerable management judgment is necessary to estimate discounted future cash flows.  Accordingly, actual results could vary significantly from such estimates.  There were no assets that were considered to be impaired as of December 31, 2011 and 2010.

 

Income Taxes

The Company   accounts for income taxes in accordance with the asset and liability method.   Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company records a valuation allowance if based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.  In determining the possible realization of deferred tax assets, the Company considers future taxable income from the following sources: (i) the reversal of taxable temporary differences, (ii) taxable income from future operations and (iii) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.

 

The Company also recognizes the income tax effect of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.  If recognized, the tax portion of the adjustment would affect the effective tax rate.

  

Fair Value of Financial Instruments

Unless otherwise indicated, the fair value of all reported assets and liabilities which represent financial instruments (none of which are held for trading purposes) approximate the carrying values of such instruments.

 

Stock-Based Compensation

The Company accounts for stock-based compensation at fair value using the Black-Scholes Option pricing model. All stock-based compensation cost is measured at the grant date using the Black-Sholes Option Pricing Model, based on the fair value of the award.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations.

 

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The forfeiture rate that the Company presently uses is 10%.

 

F-11
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows.  Due to the Company’s loss position, there were no such tax benefits for the years ended December 31, 2011 and 2010.

 

No options were granted during the years ended December 31, 2011 or 2010.

 

Loss per Common Share

Basic loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period.  The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.  For the years ended December 31, 2011 and December 31, 2010, basic and diluted earnings per share were the same.

 

Recent Accounting Pronouncements

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”).  ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASUs”).  The FASB will not consider ASUs as authoritative in their own right.  ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been updated for the Codification.

 

In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.

 

In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.

 

In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.

 

F-12
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Presentation as a Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has sustained net losses of $6,439,166 and $468,871 for the years ended December 31, 2011 and December 31, 2010, respectively.  The Company also has an accumulated deficit of $90,831,214 and a working capital deficit of $24,236,767 at December 31, 2011, of which $12,182,180 relates to the fair value of derivative financial instruments.  The Company’s service contract with a Government prime contractor was almost depleted as of March 31, 2011 and consequently, revenues for the quarter under review amounted to close to zero.  Taking into account the current status of the U.S. Government budget and the fact that the Company no longer has any rights in or to its intellectual property, the Company is no longer able to generate future revenue in its current line of business.

 

In September 2008, the Company shifted its principal operating model from product sales to licensing enabling a reduction in headcount, footprint and infrastructure that reduced operating expense run rates substantially.  This shift in business model has not been successful as the Company had not generated any revenues from licensing agreements until July 5, 2011, at which time the Company entered into an agreement with California Capital Equity, LLC (“CCE”) granting CCE an exclusive license (even as to the Company) leaving the Company without any continuing rights in or to its intellectual property.

 

All of our convertible notes payable (see Note 6) have matured and the Company did not pay the principal balances and accrued interest at maturity or thereafter (see Note 2).  The note holders exercised their right as a secured lender against the Company’s assets and held a public foreclosure sale of substantially all of the Company’s assets and acquired all of these assets at a price of $100,000, which price was credited against the outstanding notes on August 1, 2011.  As a result of the public sale on August 1, 2011, the Company retains no material assets with which to continue its operations.  The Company is seeking companies or businesses with an interest in utilizing the Company as a public shell vehicle and in August 2011 signed a non binding “Letter of Intent” with an interested party for a possible merger.  There can be no assurance, however, that such a transaction will ultimately be consummated. This transaction was completed in December 2011, when Lantis Laser Inc. (OTCQB: LLSR) acquired an 80% controlling equity stake in the Company. In addition to Lantis Laser Inc. issuing 5 million shares of their common stock to CCE, they were issued 109,928,311 shares in the Company to attain a 55% ownership as of December 31, 2011. The Company has filed a Form 14C to amend its charter to increase the authorized shares of common stock of the Company to 500,000,000 shares, and then issue an additional 79,078,817 shares of common stock to Lantis Laser Inc. to bring the total percentage equity owned by Lantis Laser Inc. to 80%, and issue 13,510,752 shares of stock to CCE n consideration of the conversion of the convertible notes outstanding to CCE. The 14C has not been approved by the SEC as of December 31, 2011. As a result of the 14C not being approved as of December 31, 2011, the convertible notes remain outstanding and will be outstanding until the shares of common stock have been issued.

 

The items discussed above raise substantial doubts about the Company's ability to continue as a going concern.  In light of these factors, management believes that a comprehensive financial restructuring with the utilization of the public shell entity as a reverse merger vehicle for a new entity is the only way to preserve any value for the public shareholders.  Should such a transaction be consummated, the resultant debt for equity exchange will most likely result in a near total loss of shareholder value.  Should a restructuring be unachievable, Raptor will permanently cease operations resulting in a total loss of shareholder value.

 

The financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

   

F-13
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. Discontinued Operations

 

On July 5, 2011, the Company entered into an agreement with California Capital Equity, LLC (“CCE”) granting CCE an exclusive license (even as to the Company) leaving the Company without any continuing rights in or to its intellectual property.  Additionally, as of July 31, 2011, the Company had defaulted on all of its secured and unsecured notes payable.  On August 1, 2011 all of the Company’s remaining assets were sold during a public foreclosure sale pursuant to remedies available under the terms of the secured notes.  For further details on these transactions, see the disclosures in the Forms 8-K filed by the Company on July 11, 2011 and August 4, 2011.  As a result of the above transactions, the Company classified all of its operations as discontinued operations, except certain general and administrative expenses related to the public shell company, such as EDGAR fees, audit fees and legal expenses related to review of public filings and expenses related to the convertible debt.

 

Following is a summary of assets and liabilities included in discontinued operations as of:

 

   December 31,
2011
   December 31,
2010
 
         
ASSETS          
CURRENT ASSETS          
Accounts receivable, net of allowance for doubtful accounts of $0  $-    143,568 
Inventories, net   -    515,662 
Prepaid interest   -    15,441 
Prepaid insurance   -    16,133 
License fees   -    32,850 
Other current assets   -    14,093 
Total current assets   -    737,747 
PROPERTY AND EQUIPMENT, NET   -    40,527 
DEPOSITS   -    1,560 
TOTAL ASSETS  $-   $779,834 
LIABILITIES          
CURRENT LIABILITIES          
Accounts payable  $-   $95,615 
Current portion of legal settlement payable   -    100,955 
Deferred revenue   -    11,108 
Accrued liabilities   -    579,249 
Total current liabilities   -    786,927 
LEGAL SETTLEMENT PAYABLE, NET OF CURRENT PORTION   -    14,931 
TOTAL LIABILITIES  $-   $801,858 

 

F-14
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Following are operating results included in discontinued operations for the three and nine months ended:

 

   For the Years Ended 
   December 31, 
   2011   2010 
REVENUE, NET   $367,012   $1,785,327 
COST OF SALES    222,288    1,061,189 
GROSS PROFIT    144,724    724,138 
OPERATING EXPENSES           
Salary expense and salary related costs    353,198    639,744 
Research and development    5,537    22,336 
Marketing and selling    -    60,808 
General and administrative    158,435    291,801 
Total operating expenses    517,170    1,014,689 
Loss from operations    (372,446)   (290,551)
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS           
Loss on foreclosure    (431,034)   - 
Gain on sale of intellectual property    384,000    - 
Loss on sale of property and equipment    (1,697)   - 
Miscellaneous income    532,887    91,350 
Total gain (loss) on disposal of discontinued operations    484,156    91,350 
Income (loss) before income taxes    111,710    (199,201)
Income tax benefit    -    - 
NET INCOME (LOSS)     $111,710   $(199,201)

 

Loss on Foreclosure

 

On June 17, 2011, Raptor Acquisition, LLC, a wholly-owned subsidiary of California Capital Equity, LLC (“CCE”) purchased all of the convertible notes payable from the previous note holders in an outside transaction.  On July 6, 2011, CCE provided the Company with notice of default on the notes payable and demanded repayment in full.  They also informed of their intent to exercise their rights and remedies against the Company’s assets.  On August 1, 2011, CCE, in its capacity as a secured lender, held a public foreclosure sale of substantially all of the Company’s assets.  CCE was the only bidder and the assets of the Company were acquired for $100,000.

 

The following assets were acquired by CCE, resulting in a loss on foreclosure of $431,034 for the year ended December 31, 2011.

 

Net proceeds  $100,000 
Net book value of assets acquired:     
Inventories   510,083 
Property and equipment   20,951 
    531,034 
Loss on foreclosure  $(431,034)

 

F-15
 

 

 RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Gain on Sale of Intellectual Property

 

Effective July 1, 2011, the Company sold an exclusive, worldwide, perpetual, irrevocable, fully paid, transferable and sublicensable right and license in all of the Company’s registered patent and patent applications for $384,000.  The license is exclusive even to the Company, such that the Company no longer has any rights to its intellectual property.  Since the Company’s carrying value of its intellectual property was $0, the Company recorded a gain on the sale of intellectual property of $384,000 for the year ended December 31, 2011. 

  

3.    Fair Value of Financial Instruments

 

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical  unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy.  Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The table below sets forth a summary of the fair values of the Company’s financial assets and liabilities as of December 31, 2011:

 

   Total   Level 1   Level 2   Level 3 
                 
LIABILITIES:                    
Conversion option liabilities  $11,789,870   $-   $-   $11,789,870 
Detachable warrant liabilities   392,310    -    -    392,310 
                     
   $12,182,180   $-   $-   $12,182,180 

 

The table below sets forth a summary of the fair values of the Company’s financial assets and liabilities as of December 31, 2010:

 

   Total   Level 1   Level 2   Level 3 
                 
LIABILITIES:                    
Conversion option liabilities  $5,808,201   $-   $-   $5,808,201 
Detachable warrant liabilities   993,852    -    -    993,852 
                     
   $6,802,053   $-   $-   $6,802,053 

 

F-16
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s detachable warrant and conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments.  Where possible, the Company verifies the values produced by its pricing models to market prices.  Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs.  These financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment.  Such instruments are typically classified within Level 3 of the fair value hierarchy.  See Note 6 for the rollforward of Level 3 liabilities.

 

4.    Inventories

 

Inventories consisted of the following at December 31, 2010 and are included in the current assets of discontinued operations :

   2010 
     
Raw materials  $503,459 
Work in process   - 
Finished goods   257,709 
      
    761,168 
Allowance for obsolescence   (245,506)
      
   $515,662 

 

5.    Property and Equipment

 

Property and equipment consisted of the following at December 31, 2010 and are included in the assets of discontinued operations : 

   2010 
     
Furniture and office equipment  $67,388 
Computer equipment   183,689 
Testing equipment   506,036 
      
    757,113 
Accumulated depreciation   (716,586)
      
   $40,527 

   

For the year ended December 31, 2010, $27,687 of inventory was loaned to distributors and consequently was transferred from inventories to test equipment.  

    

6.    Securities Purchase Agreements

  

The Company entered into four separate securities purchase agreements (the “2006 SPA,” the “2007 SPA,” the “April 2008 SPA” and the “July 2008 SPA,” collectively the “SPAs”) with three institutional investors in connection with private placement transactions that provided for, among other things, the issuance of senior convertible notes (the “2006 Notes,” the “2007 Notes,” the “April 2008 Notes” and the “July 2008 Notes,” collectively the “Notes”), warrants to purchase shares of common stock (the “2006 Warrants,” the “2007 Warrants,” “the April 2008 Warrants,” the “July 2008 Warrants” and the “Replacement Warrants,” collectively the “Warrants”) and the issuance of common stock (the “March 2008 Stock” and the “July 2008 Stock”).  Following is a summary of the securities issued pursuant to the terms of the SPAs.

 

F-17
 

 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

Transaction  

Date of

Financing

   

Initial Principal

Amount of

Notes

   

Series of

Warrants Issued

   

Initial Number of
Warrants Issued
to the Investors

   

Shares of

Common

Stock

Issued

 
                               
2006 SPA   July 30, 2006 (1)   $ 8,804,909     L and M       39,797,031       -  
2007 SPA   July 31, 2007       3,500,000     N, O and P       6,047,886       -  
April 2008 SPA   April 1, 2008       3,125,000     Q       6,250,000       3,125,000  
July 2008 SPA   July 28, 2008       1,250,000     R       8,750,000 (2)     1,250,000  
                                       
          $ 16,679,909               60,844,917       4,375,000  

 

(1) The information presented reflects the January 22, 2007 amendment.

(2) Includes 2,500,000 Series R warrants and 6,250,000 Replacement Warrants.

   

On July 27, 2010, the Company issued an unsecured convertible note payable (the “July 2010 Note”) to one of the investors from the previous financings in the principal amount of $176,471.  All outstanding notes payable are collectively referred to as (the “Notes”).

 

The Company allocated the proceeds of the April 2008, July 2008 and July 2010 Notes to the individual financial instruments included in the transactions based on their relative estimated fair values as follows:

   

    April 2008 Notes     July 2008 Notes     July 2010 Notes  
                   
Total proceeds   $ 3,125,000     $ 1,250,000     $ 176,471  
                         
Allocated to:                        
Common stock     2,531,250       675,000       -  
Warrants     2,993,750       856,750       -  
Conversion option     1,002,813       142,500       97,973  
                         
      6,527,813       1,674,250       97,973  
Debt discount     (3,125,000 )     (1,250,000 )     (97,973 )
                         
Cost of financing convertible notes   $ 3,402,813     $ 424,250     $ -  

 

The fair value of the common stock was based on the closing market price of the Company’s common stock on the date of the transactions.  The fair values of the warrants and conversion options were based on the Black-Scholes Option pricing model.  All of the SPAs require the Company to maintain authorized shares of at least 130% of the sum of the maximum number of common shares issuable upon conversion of the Notes and upon exercise of the Warrants.

  

All of the SPAs contain registration rights agreements which require the Company to file registration statements with the SEC for the resale of the shares of common stock underlying all of the Notes, Warrants and common stock issued.  The Company is required to maintain the effectiveness of the registration statements through the latest date at which the Notes can be converted or the Warrants can be exercised.  Notwithstanding other remedies available under the SPAs, the Company will be required to pay liquidated damages equal to 2% of the principal amount of the Notes on the date of failure and 2% of the principal amount of the Notes every 30th day thereafter (or for a pro rated period if less than 30 days) for failure to timely file the registration statements or have them declared effective by the SEC and failure to maintain the effectiveness of the registration statements, subject to certain grace periods.  Any liquidated damages not paid timely will accrue interest at the rate of 2% per month.  Registration penalties under SPAs are capped at 12.5% of the principal amount of the respective Notes.  The maximum registration penalties under the Notes are as follows:

 

F-18
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

Transaction  Maximum Registration
Penalty
 
     
2006 SPA  $1,100,614 
2007 SPA   437,500 
April 2008 SPA   390,625 
July 2008 SPA   156,250 
      
   $2,084,989 

   

The Company is required to assess its potential liability with respect to registration rights agreements.  On May 29, 2008, the investors agreed to delay payments in connection with the registration rights agreement contained in the April 2008 SPA and the registration of the shares underlying the L-1 and L-2 warrants.  The deadline has been indefinitely extended by the investors.  As such, no liability related to the registration rights agreements has been recorded in the accompanying consolidated financial statements.

 

Significant events of default under the SPAs include:

 

·□□The failure of any registration statement to be declared effective by the SEC within 60 days after the date required by the applicable registration rights agreement or the lapse or unavailability of such registration statement for more than 10 consecutive days or more than an aggregate of 30 days in any 365-day period (other than certain allowable grace periods).
·□□The failure to issue unlegended certificates within 3 trading days after the Company receives documents necessary for the removal of the legend.

    

In January 2007, the Company amended the 2006 SPA (the “2006 Amended SPA”).  The amendments included, but were not limited to, a waiver of all fees, penalties and defaults as of January 19, 2007 which related to registration statement filing failures and/or effectiveness failures, as described in the 2006 SPA, an increase in the principal amount of the 2006 Notes from an aggregate of $5 million to an aggregate of $7.2 million, issuance of an additional 5,688,540 of 2006 Warrants which increased the aggregate number of shares of common stock issuable upon exercise of the Series L-1 Warrants from an aggregate of 17,065,623 shares to an aggregate of 22,754,163 shares, and a reduction in the exercise price of the Series L-1 Warrants and the Series M-1 Warrants from $0.5054 per share to $0.43948 per share.  The Company did not receive any additional cash consideration for these amendments.

 

Additionally, pursuant to the terms of the 2006 Amended SPA, the Company entered into a Securities Purchase Agreement with one of the existing institutional investors in a private placement transaction providing for, among other things, the issuance of senior convertible notes (the “2006 Amended Notes) in the principal amount of $1.6 million, Series L-2 Warrants to purchase up to 7,281,332 shares of common stock and Series M-2 Warrants to purchase up to 2,366,433 shares of common stock.  The Series L-2 Warrants were immediately exercisable.  The Series M-2 warrants were to become exercisable only upon a mandatory conversion of the 2006 Notes, as defined in the 2006 Notes.  Both the Series L-2 Warrants and Series M-2 Warrants have an exercise price of $0.43948 per share and expire on July 31, 2013.

     

The April 2008 SPA amended the 2007 Notes and the 2007 Warrants.  Pursuant to the 2008 SPA, the conversion price of the 2007 Notes and the exercise price of the 2007 Warrants were reduced from $1.20 to $0.50.  The April 2008 SPA had no effect on the 2006 Notes.  The July 2008 SPA amended the exercise price of the Series Q warrants from $1.00 to $0.50.

   

F-19
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The April 2008 SPA also amended the terms of the Series M-1 and M-2 warrants to eliminate the contingency provisions and therefore, the Series M-1 and Series M-2 warrants became immediately exercisable upon the effective date of the 2008 SPA.

 

The conversion price of the Notes and the exercise price of the Warrants are subject to customary anti-dilution provisions for stock splits and the like, and are also subject to full-ratchet anti-dilution protection such that if the Company issues or is deemed to have issued certain securities at a price lower than the then applicable conversion or exercise price, then the conversion or exercise price will immediately be reduced to such lower price.

 

The Notes and the Warrants contain certain limitations on conversion or exercise, including that a holder of those securities cannot convert or exercise those securities to the extent that upon such conversion or exercise, that holder, together with the holder’s affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase or decrease, upon at least 61-days’ notice, by the investor to the Company, of up to 9.99%).

 

Notes

 

Information relating to the Notes is as follows:

 

                       As of December 31, 2011 
Transaction  Initial
Principal
Amount
   Interest
Rate (4),
(5), (6)
   Maturity
Date
   Initial Fixed
Conversion
Price
   Current
Fixed
Conversion
Price
   Principal
Balance
   Unamortized
Discount
   Carrying
Value
 
                                 
2006 Notes (1),(8)  $8,804,909    9.25%   7/31/2008   $0.44   $0.44   $4,987,137   $-   $4,987,137 
2007 Notes (2),(8)   3,500,000    9.25%   8/1/2010   $1.21   $0.50    3,084,046    -    3,084,046 
April 2008 Notes (7),(8)   3,125,000    10.00%   3/31/2010   $1.00   $1.00    2,288,392    -    2,288,392 
July 2008 Notes (7),(8)   1,250,000    10.00%   7/28/2010   $1.00   $1.00    476,808    -    476,808 
July 2010 Note (7)   176,471    15.00%   7/27/2011   $1.00   $1.00    176,471    -    176,471 
                                         
   $16,856,380                       $11,012,854   $-   $11,012,854 

 

(1) All information presented reflects amendments made in January 2007.

(2)   Fixed conversion price reflects the effect of anti-dilution provision as a result of the April 2008 SPA.

(3) The interest rate may be reduced to 7% at the beginning of each quarter if certain conditions are met.  No such conditions have been met to date.

(4) The interest rates for the 2006, 2007, April and July 2008 Notes increase to 15% upon the occurrence of an event of default.

(5) The interest rate on the July 2010 Note increases to 21% upon the occurrence of an event of default.

(6) Interest is calculated on the basis of a 360 day year.

(7) Interest for the first two years of the April 2008 Notes and July 2008 Notes was deducted from the proceeds.  Interest for the first year of the July 2010 Note was deducted from the proceeds.  

(8) On August 2, 2011, the principal balance was reduced by $100,000 from the proceeds of the foreclosure sale.

 

The maturity date of the Notes may be extended at the option of the investors so long as there is not an event of default.

 

F-20
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All of our convertible notes payable have matured and the Company did not pay the principal balances and accrued interest at maturity or thereafter.  The note holders exercised their right as a secured lender against the Company’s assets and held a public foreclosure sale of substantially all of the Company’s assets and acquired all of these assets at a price of $100,000, which price was credited against the outstanding notes on August 1, 2011.  As a result of the public sale on August 1, 2011, the Company retains no material assets with which to continue its operations.

 

The 2006 and 2007 Notes are convertible into shares of common stock at the option of the holder at the lower of the fixed conversion price or the optional conversion price, defined as 90% of the arithmetic average of the weighted-average price of the common stock for the 5 consecutive trading days immediately preceding the conversion date.  However, if the weighted average price for the 20 trading days preceding the date of conversion exceeds $1.00, the conversion price is computed as 92.5% of the weighted average price of the common stock for the 5 consecutive trading days immediately preceding the conversion date.  However, the Company may, at its option, redeem in cash, up to an amount equal to 20% of the aggregate dollar trading volume of the Company’s common stock over the prior 20-trading day period on the 2007 Notes.

 

Subject to certain conditions, the Company may require the investors to convert up to 50% of the 2006 Notes after the SEC has declared effective the initial registration statement at any time when the shares of the Company’s common stock are trading at or above 150% of the initial conversion price or convert up to 100% of the 2006 Notes after the SEC has declared effective the initial registration statement at any time when the shares of the Company’s common stock are trading at or above 175% of the initial conversion price. The 2006 Notes contain certain limitations on optional and mandatory conversion.

 

The entire outstanding principal balance of the 2007 Notes and any outstanding fees or interest shall be due and payable in full on the maturity date.  Interest is payable quarterly, beginning October 1, 2007.  Under certain conditions, the Company may require investors to convert up to either 50% or 100% of the outstanding balances of the 2007 Notes at any time the Company shares are trading at or above $1.80 or $2.11, respectively

 

The April 2008 Notes are convertible into shares of common stock at the lower of the fixed conversion price or the optional conversion price, defined as 85% of the arithmetic average of the weighted-average price of the common stock for the 5 consecutive trading days immediately preceding the conversion date.  However, following the disclosure of an SEC event, as defined in the April 2008 Notes, the conversion price will be computed using the lowest of (i) 50% of arithmetic average of the weighted average price for the 30 trading days preceding the date of conversion; (ii) 50% of the closing price of the common stock on the trading day preceding the date of conversion; or (iii) 50% of the closing price of the common stock on the date preceding the SEC event.

 

The July 2008 and July 2010 Notes are convertible into shares of common stock at the lower of the fixed conversion price or the optional conversion price, defined as the lesser of (i) 85% of the arithmetic average of the weighted-average price of the common stock for the 30 consecutive trading days immediately preceding the conversion date and (ii) 85% of the arithmetic average of the weighted-average price of the common stock for the 3 lowest trading days during the 30 consecutive trading days immediately preceding the conversion date.  However, following the disclosure of an SEC event, as defined in the April 2008 Notes, the conversion price of the 2008 Notes will be computed using the lowest of (i) 50% of the amounts determined as above; (ii) 50% of the closing price of the common stock on the trading day preceding the date of conversion; or (iii) 50% of the closing price of the common stock on the date preceding the SEC event.     

 

The Notes, excluding the July 2010 Note which is unsecured, are secured by a first priority perfected security interest in all of the Company's assets and the common stock of the Company’s subsidiary.  Additionally, the Notes, excluding the July 2010 Note, are guaranteed by the Company’s subsidiary.

 

F-21
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Significant events of default under the Notes include:

 

·□□The failure of any registration statement to be declared effective by the SEC within 60 days after the date required by the applicable registration rights agreement or the lapse or unavailability of such registration statement for more than 10 consecutive days or more than an aggregate of 30 days in any 365-day period (other than certain allowable grace periods).

 

·□□The suspension from trading or failure of the common stock to be listed for trading on the OTC Bulletin Board or another eligible market for more than 5 consecutive trading days or more than an aggregate of 10 trading days in any 365-day period.

 

·□□The failure to issue shares upon conversion of the Notes or for more than 10 business days after the relevant conversion date or a notice of the Company's intention not to comply with a request for conversion.

 

·□□The Company's failure to pay any amount of principal, interest, late charges or other amounts when due.

 

If there is an event of default, the investors have the right to redeem all or any portion of the Notes, at the greater of (i) up to 125% of the sum of the outstanding principal, interest and late fees, depending on the nature of the default, and (ii) the product of (a) the greater of (1) the closing sale price for the Company’s common stock on the date immediately preceding the event of

 

default, (2) the closing sale price for the Company’s common stock on the date immediately after the event of default and (3) the closing sale price for the Company’s common stock on the date an investor delivers its redemption notice for such event of default, multiplied by (b) 130% of the number of shares into which the notes (including all principal, interest and late fees) may be converted.

 

In the event of a default or upon the occurrence of certain fundamental transactions as defined in the 2007 Notes, the investors will have the right to require the Company to redeem the 2007 Notes at a premium.  In addition, at any time on or after August 1, 2010, the investors may accelerate the partial payment of the 2007 Notes by requiring that the Company convert at the lower of the then conversion price or a 7.5% or 10.0% discount to the recent volume weighted average price of the Company’s common stock, or at the option of the Company, redeem in cash, up to an amount equal to 20% of the aggregate dollar trading volume of the Company’s common stock over the prior 20-trading day period.

 

F-22
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Warrants

 

In connection with the SPAs, the Company issued detachable warrants as follows:

Series of
Warrants
  Initial Number
of Warrants
Issued
   Initial
Exercise
Price
   Current
Exercise
Price
   Term
(4)
   Additional
Warrant
Grants (6)
   Warrants
Outstanding
at
December 31,
2011
   Fair Value of
Warrant
Liability
as of
December
31, 2011
   Fair Value of
Warrant Liability
as of December 31,
2010
 
                                 
L-1 (1)   22,754,163   $0.505   $0.439    7 years    -    22,754,163   $146,748   $170,656 
L-2 (1)   7,281,332   $0.505   $0.439    7 years    -    7,281,332    46,959    54,610 
M-1 (1), (3)   7,395,103   $0.505   $0.439    7 years    -    7,395,103    47,693    55,463 
M-2 (1), (3)   2,366,433   $0.505   $0.439    7 years    -    2,366,433    15,262    17,748 
N (2)   2,909,636   $1.203   $0.500    7 years    4,090,364    7,000,000    48,320    130,900 
O (2),(5)   1,891,263   $1.203   $0.500    7 years    2,658,737    4,550,000    N/A    N/A 
P (2)   1,246,987   $1.203   $0.500    7 years    1,753,013    3,000,000    20,709    56,100 
Q (7),(8)   6,250,000   $1.000   $0.500    7 years    -    6,250,000    47,585    363,125 
R   2,500,000   $0.500   $0.500    7 years    -    2,500,000    19,034    145,250 
Replacement (9)   6,250,000   $1.000   $1.000    7 years    -    6,250,000    N/A    N/A 
                                         
    60,844,917                   8,502,114    69,347,031   $392,310   $993,852 

 

(1)      All information presented reflects amendments made in January 2007.

(2)      Current exercise price reflects the effect of anti-dilution provision as a result of the April 2008 SPA.

(3)      The April 2008 SPA modified the warrants to eliminate the contingency provision.

(4)      The term begins as of the effective date of the registration statement.

(5)      The fair value of the Series O warrants has not yet been recorded since the contingency provisions have not been met.

(6)      Additional warrants were granted due to the anti-dilution provisions in the 2007 SPA.

(7)      Exercise price is the lesser of $0.50 or 75% of the lowest of the following:

(i)    The average of the dollar volume-weighted average price of the stock for the 15 consecutive trading days immediately following the public disclosure of an event of default;

(ii)   The lowest of the dollar volume-weighted average price of the stock during the 30 consecutive trading days ending on the date of exercise;

(iii)  The average of the dollar volume-weighted average price of the stock for the 3 consecutive trading days immediately preceding the date of exercise; or

(iv)  The average of the dollar volume-weighted average price of the stock for the 3 consecutive trading days immediately following the date of exercise.

(8)       Exercise price was amended by July 2008 SPA.

(9)      The Replacement Warrants are exercisable on a one-to-one basis as the Series Q warrants are exercised.  The    exercise price is the lowest of $0.50 or 75% of the lowest of the following:

(i)   The average of the dollar volume-weighted average price of the stock for the 30 consecutive trading days immediately following the public disclosure of an event of default;

(ii)  The average of the dollar volume-weighted average price of the stock for the 30 consecutive trading days immediately preceding the public disclosure of an event of default;

(iii)  The average of 3 lowest volume-weighted average prices of the stock during either (i) or (ii) above.

 

F-23
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The holders’ rights to exercise the 9,761,536 Series M warrants was contingent on a mandatory conversion of the 2006 Notes at the option of the Company.  A mandatory conversion for a portion of the 2006 Notes took place on July 30, 2007 entitling investors to exercise up to 7,646,361 M warrant shares.  The April 2008 SPA contained a provision which removed the contingency on the remaining M warrants such that they are immediately exercisable.  The Company recognized $1,146,063 of expense related to the M warrants for the year ended December 31, 2008.  The value of the M warrants was measured at fair value on January 18, 2007 using the Black-Scholes option pricing model.  The Replacement Warrants are exercisable on a one-for-one basis for every Series Q warrant exercised.

   

Since conversion of the Series O warrants is contingent on a mandatory conversion of the 2007 Notes and since the exercise of the Replacement Warrants is contingent on the exercise of the Series Q warrants, the total charge was measured as of the date of issuance of the Series O warrants and the Replacement Warrants.  This charge will not be recognized until the mandatory conversion “contingency” has been satisfied.  The fair values of the Series O warrants and Replacement Warrants at inception were $1,493,341 and $2,725,625, respectively.

 

The fair value of the conversion options and the detachable warrant liabilities were calculated using the Black-Scholes Option Pricing Model with the following assumptions for the year ended:

 

   December 31, 2011   December 31, 2010 
   2006
Notes
   2007
Notes
   April 2008
July 2008
Notes
   July 2010
Notes
   2006
Notes
   2007
Notes
   April 2008,
July 2008, &
July 2010
Notes
 
Stock price  $0.009   $0.009   $0.009   $0.009   $0.10   $0.10   $0.10 
Exercise price  $0.0081   $0.0081   $0.0077   $0.0077   $0.09   $0.09   $0.09 
Expected life (in years)   0. 50    1.00    0.75    0.75    0.75    1.25    1.00 
Volatility   533%   395%   447%   447%   123%   117%   118%
Risk-free rate of return   0.00%   0.00%   0.00%   0.00%   0.24%   0.37%   0.29%
Expected dividend yield   0.00%   0.00%   0.00%   0.00%   0.00%   0.00%   0.00%

 

   2006
Warrants
   2007
Warrants
   April 2008
July 2008 Warrants
   2006
Warrants
   2007
Warrants
   April 2008 &
July 2008 Warrants
 
Stock price  $0.009   $0.009   $0.009   $0.10   $0.10   $0.10 
Exercise price  $0.44   $0.50   $0.50   $0.44   $0.50   $0.50 
Expected life (in years)   0.50    1.25    2.50    0.75    1.50    2.76 
Volatility   533%   358%   277%   123%   119%   150%
Risk-free rate of return   0.00%   0.00%   0.00%   0.24%   0.45%   0.92%
Expected dividend yield   0.00%   0.00%   0.00%   0.00%   0.00%   0.00%

 

F-24
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Activity in the 2006 Notes and 2006 Warrants was as follows:

 

    **Principal Balance    

Discount on

Notes

Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
Balance, January 1, 2010   $ 4,448,440     $ -     $ 2,584,949     $ 2,145,060  
                                 
Accrued interest added to principal balance     425,976       -       211,242       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       (429,391     (1,846,583  )
                                 
Balance, December 31, 2010     4,874,416       -       2,366,800       298,477  
                                 
Accrued interest added to principal balance     112,721       -       54,766       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       2,806,972       (41,815 )
                                 
Balance, December 31, 2011   $ 4,987,137     $ -     $ 5,228,538     $ 256,662  

 

*

Since the 2006 Notes are due on demand, the additional debt discount related to the accrued interest added to

principal was immediately amortized.

** The entire outstanding principal balance of this note as per December 31, 2010 is currently due and payable  in full since the original maturity date of the Notes was July 31, 2008.

   

Activity in the 2007 Notes and 2007 Warrants is as follows:

   

    **Principal
Balance
   

Discount on

Notes Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
Balance, January 1, 2010   $ 2,752,309     $ (877,592 )   $ 519,085     $ 943,000  
                                 
Accrued interest added to principal balance     262,322       (110,088 )     110,088       -  
                                 
Amortization of debt discount     -       987,680       -       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       1,095,866       (756,000  )
                                 
Balance, December 31, 2010     3,014,631       -       1,725,039       187,000  
                                 
Accrued interest added to principal balance     69,415       -       39,686       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       1,505,121       (117,971 )
                                 
Balance, December 31, 2011   $ 3,084,046     $ -     $ 3,269,846     $ 69,029  

 

F-25
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**

The entire outstanding principal balance of this note as per December 31, 2010 is currently due and payable in full

since the original maturity date of the Notes was August 1, 2010.

 

Activity in the April 2008 Notes and 2008 Warrants is as follows:

 

    **Principal Balance    

Discount on

Notes

Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
Balance, January 1, 2010   $ 2,125,000     $ (431,192 )   $ 1,670,404     $ 655,625  
                                 
Accrued interest added to principal balance     107,578       (60,686 )     60,686       -  
                                 
Amortization of debt discount     -       491,878       -       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       (441,448     (292,500)  
                                 
Balance, December 31, 2010     2,232,578       -       1,289,642       363,125  
                                 
Accrued interest added to principal balance     55,814       -       32,235       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       1,238,644       (315,540 )
                                 
Balance, December 31, 2011   $ 2,288,392     $ -     $ 2,560,521     $ 47,585  

  

** The entire outstanding principal balance of this note as per December 31, 2010 is currently due and payable in full since the original maturity date of the Notes was March 31, 2010.

 

Activity in the July 2008 Notes and July 2008 Warrants is as follows:

 

F-26
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

    **Principal Balance    

Discount on

Notes

Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
Balance, January 1, 2010   $ 850,000     $ (364,583 )   $ 668,161     $ 262,250  
                                 
Conversion of notes to common stock     (300,000 )     -       (203,302 )     -  
                                 
Accrued interest added to principal     12,250       (6,909 )     6,909       -  
                                 
Amortization of debt discount     -       371,492       -       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       (146,986     (117,000
                                 
Balance, December 31, 2010     562,250       -       324,782       145,250  
                                 
Accrued interest added to principal     14,558       -       8,408       -  
                                 
Reduction of principal from foreclosure proceeds     (100,000 )     -       -       -  
                                 
Change in fair value of conversion option and detachable warrant liabilities     -       -       200,319       (126,216 )
                                 
 Balance, December 31, 2011   $ 476,808     $ -     $ 533,509     $ 19,034  

 

**

The entire outstanding principal balance of this note as per December 31, 2010 is currently due and payable in full since the original maturity date of the Notes was July 28, 2010.

 

Activity in the July 2010 Notes as follows:

   

Principal

Balance

   

Discount on

Notes

Payable

   

Conversion

Option

Liability

 
Balance, July 27, 2010 (Inception)   $ 176,471     $ (97,973 )   $ 97,973  
                         
Amortization of debt discount     -       40,822       -  
                         
Change in fair value of conversion option liability     -       -         3,965  
                         
Balance, December 31, 2010     176,471       (57,151 )     101,938  
                         
Amortization of debt discount     -       57,151       -  
                         
Change in fair value of conversion option liability     -       -         95,518  
Balance, December 31, 2011   $ 176,471     $ -     $ 197,456  

 

F-27
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the balances as of December 31, 2011 and 2010 follows:

 

   

Principal

Balance

   

Discount on

Notes Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
2006 Notes   $ 4,987,137     $ -     $ 5,228,538     $ 256,662  
                                 
2007 Notes     3,084,046       -       3,269,846       69,029  
                                 
April 2008 Notes     2,288,392       -       2,560,521       47,585  
                                 
July 2008 Notes     476,808       -       533,509       19,034  
                                 
July 2010 Notes     176,471       -       197,456       -  
                                 
Balance, December 31, 2011   $ 11,012,854     $ -     $ 11,789,870     $ 392,310  

 

   

Principal

Balance

   

Discount on

Notes

Payable

   

Conversion

Option

Liability

   

Detachable

Warrant

Liability

 
2006 Notes   $ 4,874,416     $ -     $ 2,366,800     $ 298,477  
                                 
2007 Notes     3,014,631       -       1,725,039       187,000  
                                 
April 2008 Notes     2,232,578       -       1,289,642       363,125  
                                 
July 2008 Notes     562,250       -       324,782       145,250  
                                 
July 2010 Notes     176,471       (57,151 )     101,938       -  
                                 
Balance, December 31, 2010   $ 10,860,346     $ (57,151 )   $ 5,808,201     $ 993,852  

 

F-28
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.    Stockholders’ Equity

 

The Company’s authorized capital consists of 200,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of preferred stock, no par value per share.

 

During 2011, the Company issued 109,928,311 shares of common stock to Lantis Laser Inc. in Lantis’ acquisition of 55% of the Company. The transaction was treated as an equity transaction, and Lantis Laser Inc. issued 5,000,000 shares of their own stock to pay CCE a fee so they would guarantee the conversion of their debt to common stock of the Company upon the Company’s successful amendment to their charter enabling them to increase the authorized shares to 500,000,000 shares and issue them an additional shares of the Company’s stock.

 

During 2010, the Company issued 200,000 shares of common stock for consulting services valued at $42,000.

 

During 2010, the Company issued 1,958,235 shares of common stock for the conversion of $300,000 of the principal balance of the July 2008 Notes.  Additionally, the Company increased additional paid-in capital by $195,982 for the reduction in the conversion option liability as a result of the conversion.

    

8.    Stock Options

 

2005 Stock Plan

 

The Company’s 2005 Stock Plan was approved by the Company’s Board of Directors on April 7, 2005, approved by the Company’s shareholders on June 9, 2005, and amended and restated as the First Amended and Restated 2005 Stock Plan (“2005 Plan”) by the Company’s Board of Directors on June, 29, 2007.  The Company filed a registration statement on Form S-8 with the Securities and Exchange Commission (“SEC”) in May 2007 to cover the issuance of up to 3,000,000 shares of common stock underlying options and stock purchase rights authorized for issuance under the 2005 Plan and qualified for issuance the underlying securities with the California Department of Corporations in July, 2007.  Prior to that time, the Company issued only non-plan stock options.  The 2005 Plan is now the Company’s only formal plan for providing stock-based incentive compensation to the Company’s eligible employees, non-employee directors and certain consultants.  The Board of Directors or committee of the Board of Directors administering the 2005 Plan has discretion to set vesting, expiration and other terms of awards under the 2005 Plan.  As of December 31, 2010, the 2005 Plan had a total of 612,000 options outstanding and 2,288,000 shares reserved for future grants.

    
Non-Plan Options

 

Prior to approval of the 2005 Plan, the Company granted stock options out-of-plan.  These non-plan options provided for the periodic issuance of stock options to our employees and non-employee board of directors.  The vesting period for the non-plan stock options is three equal annual installments commencing on the first anniversary of the date of grant.  The maximum contractual term of stock options granted under these out-of-plan options was eight years.  As of December 31, 2011 and 2010, there were 850,000 non-plan options outstanding.

 

A summary of the activity of the Company’s stock options for the years ended December 31, 2010 and 2011 is presented below:

 

F-29
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Options  Shares   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contract Term
   Aggregate
Intrinsic Value
 
Outstanding, January 1, 2011   1,758,667   $0.78           
Granted   -    -           
Forfeited / Expired   (296,667)   0.16           
Exercised   -    -           
Outstanding, December 31, 2010   1,462,000   $1.21    2.79   $- 
Granted   -    -           
Forfeited / Expired   (272,000)  $0.88           
Exercised   -    -           
Outstanding, December 31, 2011   1,190,000   $0.91    1.67    - 
Exercisable, December 31, 2011   1,190,000   $0.91    1.67   $- 

 

As of December 31, 2011 and 2010, there is no unrecognized stock-based compensation cost related to unvested stock options.

 

A summary of the status of the Company’s unvested stock options as of December 31, 2011 and 2010 is presented below:

 

   Number of
Shares
   Weighted-
Average Grant-
Date Fair Value
 
Non-vested at January 1, 2011   510,834      
Granted   -    - 
Vested   (339,667)  $0.55 
Non-vested shares forfeited   (171,167)  $0.20 
Non-vested at December 31, 2010   -      
Granted   -      
Vested   -      
Non-vested shares forfeited   -      
Non-vested at December 31, 2011          

   

For the years ended December 31, 2011 and 2010, the Company recognized $0 and $111,195, respectively, in stock-based compensation costs related to the issuance of options to employees.  These costs were calculated using the Black-Scholes Option Pricing Model and are reflected in operating expenses.

 

F-30
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9.    Warrants

 

Warrants granted to investors, brokers and other service providers are summarized as follows:

 

   Shares   Weighted Average
Exercise Price
 
Outstanding at January 1, 2010   75,624,943   $0.64 
Granted   -    - 
Cancelled/Forfeited   (5,110,817)   2.48 
Exercised   -    - 
Outstanding at December 31, 2010   70,514,126   $0.51 
Granted   -    - 
Cancelled/forfeited   (366,385)   0.72 
Exercised   -    - 
Outstanding at December 31, 2011   70,147,741   $0.51 

 

F-31
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     

Series  Issue 
Date
  Outstanding 
at January 1,
2010
   Granted   Exercised /
Forfeited
   Outstanding
at December
31, 2010
   Granted   Exercised /
Forfeited
   Outstanding at 
December 31, 
2011
 
F  April 2005   14,385    -    (14,385)   -    -    -    - 
G  April 2005   3,564,188    -    (3,564,188)   -    -    -    - 
G-BH  April 2005   1,505,989    -    (1,505,989)   -    -    -    - 
I  February 2005   10,000    -    (10,000)   -    -    -    - 
J  August 2005   16,255    -    (16,255)   -    -    -    - 
L-1  July 2006 & January 2007   22,754,163    -    -    22,754,163    -    -    22,754,163 
L-2  July 2006 & January 2007   7,281,332    -    -    7,281,332    -    -    7,281,332 
M-1  July 2006 & January 2007   7,395,103    -    -    7,395,103    -    -    7,395,103 
M-2  July 2006 & January 2007   2,366,433    -    -    2,366,433    -    -    2,366,433 
N  July 2007   7,000,000    -    -    7,000,000    -    -    7,000,000 
O  July 2007   4,550,000    -    -    4,550,000    -    -    4,550,000 
P  July 2007   3,000,000    -    -    3,000,000    -    -    3,000,000 
Q  April 2008   6,250,000    -    -    6,250,000    -    -    6,250,000 
Replacement  July 2008   6,250,000    -    -    6,250,000    -    -    6,250,000 
R  July 2008   2,500,000    -    -    2,500,000    -    -    2,500,000 
Miscellaneous  2003 - 2007   1,167,095    -    -    1,167,095    -    (366,385)   800,710 
                                       
       75,624,943    -    (5,110,817)   70,514,126    -    (5,110,817)   70,147,741 

 

F-32
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes warrants outstanding at December 31, 2011:

   

Range of
Exercise Prices
  Number
Outstanding
   Wtd. Ave. Life   Wtd. Ave. Price   Number
Exercisable
 
                 
$.43-1.20   70,147,741    2.10   $0.51    59,347,741 

 

10.    Commitments and Leases

 

In October 2008, the Company rendered possession of its prior operating facility to the landlord.  In November 2009, the Company settled the matter for $216,000 plus simple interest at 10 percent per annum.  The Company paid $7,000 on the date of the agreement.  Beginning January 15, 2010 and continuing through January 15, 2012, the Company was to make monthly payments of $9,000.  A final payment of $6,106 was due on February 15, 2012.  On July 25, 2011, the Company entered into another settlement agreement with the landlord for one final payment of $40,000.  The balance due on the lease on the settlement date was $75,040.  Accordingly, the Company recorded a gain on the settlement of the lease of $35,040 in the third quarter of 2011, which is included in gain on disposal of discontinued operations.

 

On August 1, 2011, the Company terminated the lease of its existing facility effective August 31, 2011.

 

11.    Income Taxes

 

The Company computes and records taxes payable based upon determination of taxable income which is different from pre-tax financial statement income.  Such differences arise from the reporting of financial statement amounts in different periods for tax purposes.  The timing differences are a result of different accounting methods being used for financial and tax reporting.

 

The Company’s total deferred tax assets and deferred tax liabilities were as follows at December 31:

 

   2011   2010 
Deferred tax assets:          
Non-benefited  tax losses and credits   37,712,000    37,510,000 
Total deferred tax assets   37,712,000    37,510,000 
Deferred tax liabilities   -    - 
Net book value of assets   -    - 
Total deferred tax liabilities   -    - 
Total net deferred tax assets   37,712,000    37,510,000 
Valuation allowance   (37,712,000)   (37,510,000)
Net deferred tax assets  $-   $- 

 

A valuation allowance has been established against the realization of the deferred tax assets since the Company has determined that the operating loss carryforwards may not be realized.

 

F-33
 

 

RAPTOR NETWORKS TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has federal and state net operating loss carryforwards of approximately $88,140,000 and $87,516,000, respectively expiring between 2031 and 2025, respectively.  Should the Company move out of the enterprise zone, approximately $32,400,000 of the state net operating loss will be suspended leaving approximately $31,000,000 of the general state net operating loss remaining.

 

Internal Revenue Code Section 382 imposes limitation on our ability to utilize net operating losses if we experience an ownership change and for the NOL’s acquired in the acquisitions of subsidiaries.  An ownership change may result from transactions increasing the ownership percentage of 5% or greater stockholders in the stock of the corporation by more than 50 percentage points over a three-year period.  The value of the stock at the time of an ownership change is multiplied by the applicable long-term tax exempt interest rate to calculate the annual limitation.  Any unused annual limitation may be carried over to later years.

 

At December 31, 2011 and 2010, the amount of gross unrecognized tax benefits before valuation allowances and the amount that would favorably affect the effective income tax rate in future periods after valuation allowances were zero.

 

The Company files income tax returns in U.S. federal and various state jurisdictions.  The Company is beyond the statute of limitations subjecting it to U.S. federal and state income tax examinations by tax authorities for years before 2008 and 2007, respectively.  The Company is not currently subject to any income tax examinations by any tax authority.  Should a tax examination be opened, management does not anticipate any tax adjustments, if accepted, that would result in a material change to its financial position.  

  

F-34