Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - Latitude Solutions, Inc. | Financial_Report.xls |
| 8-K - Latitude Solutions, Inc. | latitudesolutions8k110712.htm |
Exhibit 99.1
Item 3. Interim financial statements.
Latitude Solutions, Inc.
Quarterly Report
For the Six Months Ended June 30, 2012
Item 1. The exact name of the issuer and the address of its principal executive offices:
From March 1, 2007 to July 22, 2009 GMMT, Inc.
From July 22, 2009 to present Latitude Solutions, Inc.
Latitude Solutions, Inc.
3500 West 7th Street
Fort Worth, TX 76107
Telephone: 817-335-3430
Fax: 817-335-3433
Investor Relations Dept: (as above)
Email address: info@latitudesolutions.net
Website address: www.latitudesolutions.net
Item 2. Shares outstanding.
Common Stock:
|
(i)
|
For the period ending June 30, 2012:
|
||||
|
Shares Authorized:
|
250,000,000 | ||||
|
Shares Outstanding:
|
66,300,757 | ||||
|
Public Float:
|
$ | 13,483,369 | |||
|
Number of Beneficial Shareholders:
|
355 | ||||
|
Number of Shareholders of Record:
|
374 | ||||
|
(ii)
|
For the period ending December 31, 2011:
|
||||
|
Shares Authorized:
|
250,000,000 | ||||
|
Shares Outstanding:
|
59,836,052 | ||||
|
Public Float:
|
$ | 16,555,284 | |||
|
Number of Beneficial Shareholders:
|
355 | ||||
|
Number of Shareholders of Record:
|
377 | ||||
|
(iii)
|
For the period ending December 31, 2010:
|
||||
|
Shares Authorized:
|
100,000,000 | ||||
|
Shares Outstanding:
|
28,710,656 | ||||
|
Public Float:
|
$ | 0 | |||
|
Number of Beneficial Shareholders:
|
260 | ||||
|
Number of Shareholders of Record:
|
274 | ||||
Item 3. Interim financial statements.
The interim financial statements for the Issuer’s applicable period ending June 30, 2012, are available at the end of this Quarterly Report as Exhibit 1.1 and contain the following financial statements:
Consolidated Statement of Net Assets – June 30, 2012 (Unaudited) and December 31, 2011 (Audited)
Consolidated Statements of Operations – Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)
Consolidated Statements of Cash Flows – Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)
Notes to the Consolidated Financial Statements (Unaudited)
Item 4. Management’s discussion and analysis or plan of operation.
The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements.
The independent registered public accounting firm’s report on the Company’s financial statements as of December 31, 2011 and for each of the years in the two-year period then ended, includes a “going concern” explanatory paragraph, that describes substantial doubt about the Company’s ability to continue as a going concern. Effective June 30, 2012, the Company has adopted the liquidation basis of accounting. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets are reasonably determinable. Under this basis of accounting, assets are valued at their net values and liabilities are stated at their estimated settlement amounts. The conversion from the going concern to the liquidation basis of accounting required management to make significant estimates and judgments to record assets at estimated net realizable value and liabilities at estimated settlement amounts. These estimates are subject to change based upon the timing of potential sales and further deterioration of the market.
Latitude Solutions, Inc. (hereafter “LSI” or “the Company” or “we” or “us”) is a water remediation company and through its subsidiaries, licenses and operates its proprietary technology. The Company’s proprietary technology provides for treatment of high volumes of industrially produced waste waters for reuse and/or environmentally safe discharge. LSI, through its subsidiaries, owns and operates remediation equipment sets and intends to provide services to its clients through monthly and annual operating leases. LSI’s revenues are derived from a combination of monthly lease payments and processed quantity payments based on the volume of treated water. This model is intended to create a recurring revenue stream for LSI.
Latitude Clean Tech Group, Inc., (“LCTG”) a wholly-owned subsidiary, provides products, processes and solutions for contaminated water applications. LCTG provides products, processes and solutions for contaminated water issues resulting from various oil/gas drilling operations including water used in hydraulic fracturing of wells, industrial produced waste water, and mining operations producing contaminated water. In light of the increasing issues related to major industrial produced water pollution, mining, oil and natural gas (hydraulic fracturing), and contaminated water related issues, there is a growing market for water remediation technologies, both domestically and possibly internationally.
On February 3, 2012, the Company converted its subsidiary, Latitude Energy Services, LLC,from a Nevada LLC into a Florida LLC by dissolving it in the State of Nevada and organizing a new limited liability company in the State of Florida also called Latitude Energy Services, LLC. Latitude Energy Services provides water remediation services to the oil, gas and energy industries worldwide, along with a variety of industries that produce industrial waste water, utilizing innovative and proprietary technologies developed by the Company. Latitude Energy Services markets, owns and operates the remediation/processing units for its clients under strict licensing and leasing agreements to insure quality of service, protect the integrity and efficacy of the technology and to maximize financial benefits to the Company.
Over the period from January 1, 2012 to immediately prior to the mid-February 2012 payroll, when current management began taking control of the Company, it was disclosed through discovery there were insufficient funds available for normal payroll and day-to-day operating expenses, which required multiple cash infusions from a number of sources, including the Company’s largest shareholder, to meet its obligations. Simultaneously with the cash infusions, significant staff reductions, coupled with other cost-saving measures, were enacted over the period to June 30, 2012 to reduce and minimize cash outlays against a backdrop of little to no revenue.
During this tumultuous period, the Company sought to establish various business relationships with oil and gas companies to process frack flowback water and produced water associated with normal oil and gas producing operations. In order to provide a field laboratory to showcase the Company’s capabilities to the oil and gas industry, an implied requirement by industry, the Company, in conjunction with affiliated entities (which provided funding on behalf of the Company given the Company’s inability to do so on its own) established a pilot installation with an aqua-culture company requiring water processing well-matched to the Company’s process train capabilities. While the pilot installation has been operating for several months with varying process configurations, it has not been able to do so profitably for the aqua-culture company or the Company itself. Nor has the pilot installation led to the establishment of any contractual master service agreements with oil and gas companies for water processing due to the long lead times for customer approval and the need to tailor process trains for various water compositions.
The probability of the Company continuing as a going concern is presently highly unlikely. This situation is due to the accumulation of a number of strategic and operational problems within the Company as well as significant debt. Current management and directors believe that there existed, prior to current management’s assumption of responsibility for the business, the following problems:
(1) significant errors of business judgment by certain former directors and officers of the Company in entering into a manufacturing services agreement and the subsequent placement of orders thereunder for the manufacture of twelve (12) additional water remediation units in 2011 without any executed contracts for the long-term deployment of such units at significant cost, the full $10 million debt for which is now due and payable; In short, the Company exploded its debt and capital investment without committed or potential revenue to service such debt;
(2) material misrepresentations by certain former directors, officers and management personnel of the Company to shareholders and others concerning contractual commitments with third parties for deployment of those units. In other words, the business was represented to be there and wasn’t;
(3) significant and material misrepresentations by certain former directors, officers, management and employees of the Company, to shareholders and others concerning the status of the Company’s intellectual property portfolio and the ability of the Company’s proprietary technologies to address problems of concern in particular customer markets; In effect, the Company’s intellectual property didn’t provide the Company with significant competitive advantages;
and
(4) possible violations of federal and state securities laws by certain former directors, officers, management employees of the Company.
The Company raised $4,117,443 from the sale of the Company’s common stock and $3,635,000 from the issuance of convertible debt early in the second quarter. Based on the Company’s cash burn rate, cash reserves as of June 30, 2012 only totaled $360,577 and current management was left at that time with the ability to operate the Company for approximately one month. Management sought to address the shortfall between the Company’s revenues and significant monthly operating costs by continuing to scale back employment and other operating costs, working to develop new business and to raise capital.
Management’s efforts to stem the Company’s cash shortfall has faced significant difficulties. Since June 30, 2012, the Company and its subsidiaries have only generated revenues of approximately $87,900 despite continuous efforts to market the Company’s water treatment units. The Company placed two of its units for testing purposes and evaluation. One of them has been placed with Natural Shrimp Holdings and it is actively treating water at Natural Shrimp’s breeding facility outside San Antonio. It is also serving as an important research and development center for the Company. Though this opportunity solely benefits the Company and no commissions or revenues from the opportunity are split with any other party, the revenues from this placement doesn’t cover the Company’s monthly cash shortfall. The other unit placed is being evaluated by the user and is not generating revenue.
Management’s efforts to source additional financing for the Company on acceptable commercial terms was also unsuccessful and handicapped due to the Company being a developmental stage company, the company’s lack of any technological advantage and the need to pair the Company’s equipment with other equipment to work effectively. Management solicited capital from third parties but deemed the offerings received commercially unacceptable. To keep the Company going, the Company received additional funding since June 30, 2012 for continued operations in the amount of $838,000 from our largest shareholder in the form of convertible debt issuances. This money source has indicated, however, that future significant funding will be unavailable. Without the continued funding from the Company’s largest shareholder, the Company currently lacks any other committed source of funding.
Since June 30, 2012, management undertook various cost saving actions. It reduced headcount significantly as the employee costs were not commensurate with current revenues or the generation of new business. It relocated its offices and also limited travel expenses, which were running over $50,000 per month. Certain members of management also avoided taking any salary from the Company. Though these costs savings have been significant, they have been unable in and of themselves to plug the gap between the Company’s revenues and expenses. They additionally have been unable to eliminate the Company’s need to accumulate additional debt to keep going.
During the third quarter the Company’s largest supplier cancelled its manufacturing service agreement with the Company. The Company’s significant debt exceeding $10 million owed to this supplier and the Company’s inability to pay the supplier was a principal factor in the cancellation of this contract. Management is concerned about the ability to service its water remediation units prospectively without the support of this supplier.
In view of the continued lack of credible funding sources, the lack of commercial contracts for the use of our existing water remediation units, the limited value of our intellectual property portfolio and usefulness of our water remediation units, and the large liabilities owed to third parties, the ability of the Company to remain a going concern is unlikely. Management continues to review all strategic options and has retained bankruptcy counsel.
Item 5. Legal proceedings.
The Company is subject to several legal actions arising during the normal course of business. Although these actions are in the preliminary stages, the Company intends to vigorously defend its position.
On March 19, 2012, a former employee of the Company filed a sexual harassment law suit against the Company and one of the Company's Officers and Directors in the United States District Court for the Southern District of Florida. The Company has investigated and is defending the lawsuit. The Company's insurance coverage may reduce financial exposure to damages, if any, in this action, however, there is no assurance thereof.
On November 11, 2011, a service provider, filed suit against the Company in the Supreme Court of the State of New York, County of Nassau alleging entitlement to 100,000 shares of the common stock of LSI or $350,000. The Company has asserted defenses, including non-performance and had defended the case vigorously. The service provider has agreed to settle the case for $30,000, however, no settlement agreement has been negotiated and signed.
On September 7, 2012, the Company was sued by its former landlord of its Boca Raton Office space for unpaid rent due on its lease In the Circuit Court of the 17th Judicial District of the State of Florida, Broward County, Florida. The Company challenged venue and asserted defenses and counterclaims. The case was transferred to the Circuit Court of the 15th Judicial District of the State of Florida in Palm Beach County and is currently in settlement negotiations.
On October 11, 2012, the Company was sued by one of its suppliers in the District Court of El Paso County, Colorado for monies owed to the supplier in excess of $1.3 million. The Company disagrees with the claim and intends to defend the case vigorously. The Company believes the supplier breached its contract and intends to file counter claims against the supplier. It is also reviewing counter claims against the supplier and others for certain intellectual property related claims.
It is not feasible to predict the outcome of any such proceedings and LSI cannot assure that their ultimate disposition will not have a materially adverse effect on LSI's business, financial condition, cash flows or results of operations.
The outcome of the lawsuits may affect the ability of the Company to stay in business and the ability of the Company to stay in business due to the problems described above may have an effect on the outcome of such lawsuits.
Item 6. Defaults upon senior securities.
None.
Item 7. Other information.
Material Impairments
As a result of the termination of the Company’s one existing commercial revenue generating contract along with other factors including a lack of additional prospective commercial operations, the termination of the Manufacturing Services Agreement between the Company and the major supplier of the Company’s remediation units and imminent insolvency, the Company adopted the liquidation basis of accounting effective June 30, 2012. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets are reasonably determinable. Under this basis of accounting, assets are valued at their net values and liabilities are stated at their estimated settlement amounts. The conversion from the going concern to the liquidation basis of accounting required management to make significant estimates and judgments to record assets at estimated net realizable value and liabilities at estimated settlement amounts. These estimates are subject to change based upon the timing of potential sales and further deterioration of the market.
As a result of this determination, the Company has recognized material impairments related to its assets. The various assets’ values were adjusted to represent their respective net realizable values. The net realizable values of the assets were determined based on the fair values of similar assets and/or the discounted cash flow projections of the assets, and/or the salvage values of the assets’ raw materials and components. As a result of the differences between the estimated net realizable values of the assets and the values that the assets were recorded at by the Company, the Company has recognized an impairment charge of approximately $11,044,000 during the six months ended June 30, 2012. This amount takes into consideration future cash expenditures by the Company for the disposition of the assets, of which no future cash expenditures are estimated.
Issuances of Equity Securities
Since the date of its Annual Report, December 31, 2011, through the six months ended June 30, 2012, the following events have resulted in changes in total shares outstanding of our securities:
Latitude Solutions, Inc. Common Stock Issuances
January 1, 2012 – June 30, 2012
|
Shareholder Name
|
Number of Shares
|
Date
|
Consideration
|
||||
|
FEQ Realty
|
120,000 |
1/19/2012
|
Services
|
||||
|
Banque Profil De Gestion S.A.
|
125,000 |
2/8/2012
|
Cash
|
||||
|
Virginia Dadey
|
50,000 |
2/12/2012
|
Employment
|
||||
|
Jose Lugo
|
25,000 |
2/12/2012
|
Services
|
||||
|
Darell R. Zerbe Revocable Trust
|
100,000 |
2/21/2012
|
Cash
|
||||
|
Charles Spungen
|
200,000 |
2/22/2012
|
Cash
|
||||
|
Deworth Williams
|
133,333 |
2/24/2012
|
Cash
|
||||
|
Joseph Nicolosi
|
33,333 |
2/27/2012
|
Cash
|
||||
|
Robert J. Kesceg SEP
|
100,000 |
2/28/2012
|
Cash
|
||||
|
Robert J. Kesceg SEP
|
100,000 |
2/28/2012
|
Cash
|
||||
|
Tredeo Prasad Jr
|
101,000 |
3/5/2012
|
Cash
|
||||
|
James K. Pilkenton
|
14,000 |
3/8/2012
|
Cash
|
||||
|
James R. Burr
|
15,000 |
3/9/2012
|
Cash
|
||||
|
R&K Ingle Family LP
|
400,000 |
3/9/2012
|
Cash
|
||||
|
Hyman Belzberg
|
100,000 |
3/12/2012
|
Cash
|
||||
|
William Belzberg Revocable Living Trust
|
100,000 |
3/12/2012
|
Cash
|
||||
|
Robert Griffiths
|
400,000 |
3/13/2012
|
Cash
|
||||
|
Dan McWhorther / Mary McWhorter JTWROS
|
466,667 |
3/14/2012
|
Cash
|
||||
|
John A. Wohler Trust
|
5,000 |
3/14/2012
|
Cash
|
||||
|
Leonard E. Neilson
|
50,000 |
3/19/2012
|
Cash
|
||||
|
Jeff Wohler
|
121,500 |
3/19/2012
|
Services
|
||||
|
Ken Link
|
81,000 |
3/19/2012
|
Services
|
||||
|
Mike Gustin
|
135,000 |
3/19/2012
|
Services
|
||||
|
Bibicoff Family Trust
|
68,000 |
3/27/2012
|
Cash
|
||||
|
Michael Garnick
|
200,000 |
3/29/2012
|
Cash
|
||||
|
LSI 401 K
|
66,047 |
3/29/2012
|
Employment
|
||||
|
Christopher Dainel Schmidt
|
50,000 |
3/30/2012
|
Cash
|
||||
|
Warren Blasland
|
(750,000 | ) |
3/31/2012
|
Employment
|
|||
|
Robbin Lee
|
10,350 |
4/19/2012
|
Debt conversion
|
||||
|
Janette Moskin
|
9,333 |
4/23/2012
|
Cash
|
||||
|
Ray Harlow
|
195,229 |
4/25/2012
|
Employment
|
||||
|
Gelband & Co. Inc.
|
40,000 |
5/11/2012
|
Cash
|
||||
|
Peter P. Smith
|
66,667 |
5/15/2012
|
Cash
|
||||
|
Frank Capital Co., LLC
|
133,334 |
5/17/2012
|
Cash
|
||||
|
Deworth Williams
|
133,333 |
5/22/2012
|
Cash
|
||||
|
Geoffrey Williams
|
66,667 |
5/22/2012
|
Cash
|
||||
|
Harvey Klebeanoff
|
(1,000,000 | ) |
5/22/2012
|
Employment
|
|||
|
Jerry Langdon
|
200,000 |
5/22/2012
|
Employment
|
||||
|
Jerry Langdon
|
(200,000 | ) |
5/22/2012
|
Employment
|
|||
|
Alfred Morris
|
50,000 |
5/23/2012
|
Cash
|
||||
|
Preferred Trust Company Custodian FBO Robert M. Griffiths SEP
|
400,000 |
5/23/2012
|
Cash
|
||||
|
James C. Mettitt
|
400,000 |
5/24/2012
|
Cash
|
||||
|
Matthew S. Cohen
|
10,000 |
6/6/2012
|
Employment
|
||||
|
Matthew J. Cohen
|
(550,000 | ) |
6/8/2012
|
Employment
|
|||
|
Warren Blasland
|
(320,083 | ) |
6/11/2012
|
Employment
|
|||
Latitude Solutions, Inc. Convertible Debt Issuances
January 1, 2012 – June 30, 2012
|
Creditor
|
Face Amount of Debt Issued
|
Date
|
Consideration
|
||||
|
Jeffrey Wohler
|
$ | 50,000.00 |
1/4/2012
|
Cash
|
|||
|
John Paul DeJoria
|
$ | 300,000.00 |
1/25/2012
|
Cash
|
|||
|
John Paul DeJoria
|
$ | 300,000.00 |
2/7/2012
|
Cash
|
|||
|
John Paul DeJoria
|
$ | 300,000.00 |
2/14/2012
|
Cash
|
|||
|
John Paul DeJoria
|
$ | 1,175,000.00 |
3/13/2012
|
Cash
|
|||
|
John Paul DeJoria
|
$ | 310,000.00 |
5/14/2012
|
Cash
|
|||
|
Capital Growth
|
$ | 250,000.00 |
5/14/2012
|
Cash
|
|||
|
FEQ Realty
|
$ | 100,000.00 |
5/15/2012
|
Cash
|
|||
|
Fiodalilso Ldt
|
$ | 250,000.00 |
5/16/2012
|
Cash
|
|||
|
Moonlight Enterprises
|
$ | 250,000.00 |
5/18/2012
|
Cash
|
|||
|
Discretionary Investment Trust
|
$ | 100,000.00 |
5/21/2012
|
Cash
|
|||
|
Discretionary Investment Trust
|
$ | 150,000.00 |
6/11/2012
|
Cash
|
|||
|
FEQ Realty
|
$ | 100,000.00 |
6/22/2012
|
Cash
|
|||
Item 8. Exhibits.
The interim financial statements for the period ended June 30, 2012 are attached as Exhibit 1.1. There are no other supplemental exhibits for this Quarterly Report in the form of material contracts, amendments to the articles of incorporation, or corporate bylaws, which have not been previously provided in prior disclosure statements.
Item 9. Certifications.
I, J.W. Rhea, IV, certify that:
1. I have reviewed this Quarterly Report of Latitudes Solutions, Inc.;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and
3. Based on my knowledge, the financial statements, and other financial information included or incorporated by reference in this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this disclosure statement.
November 8, 2012
___________________
J.W. Rhea, IV, Chief Executive Officer
I, James B. Smith, certify that:
1. I have reviewed this Quarterly Report of Latitudes Solutions, Inc.;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and
3. Based on my knowledge, the financial statements, and other financial information included or incorporated by reference in this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this disclosure statement.
November 8, 2012
___________________
James B. Smith
Chief Financial Officer
EXHIBIT 1.1
INTERIM FINANCIAL STATEMENTS
LATITUDE SOLUTIONS, INC.
Consolidated Financial Statements of Latitude Solutions, Inc. and Subsidiaries
For The Six Months Ended June 30, 2012
Table of Contents
|
Page
|
|
|
Consolidated Statement of Net Assets – June 30, 2012 (Unaudited) and December 31, 2011 (Audited)
|
1
|
|
Consolidated Statements of Operations - Three and six months ended June 30, 2012 and 2011 (Unaudited)
|
2
|
|
Consolidated Statements of Cash Flows – Three and six months ended June 30, 2012 and 2011 (Unaudited)
|
3
|
|
Notes to the Consolidated Financial Statements (Unaudited)
|
4
|
Latitude Solutions, Inc. & Subsidiaries (f/k/a GMMT, Inc.)
Consolidated Statement of Net Assets
|
June 30,
|
December 31,
|
|||||||
|
2012
|
2011
|
|||||||
|
(unaudited)
|
(audited)
|
|||||||
| ASSETS | ||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 360,577 | $ | 668,664 | ||||
|
Accounts receivable, net
|
234,508 | 44,850 | ||||||
|
Prepaid expenses
|
188,295 | 202,245 | ||||||
|
Total Current Assets
|
783,380 | 915,759 | ||||||
|
Equity investment
|
- | 225,000 | ||||||
|
Prepaid licensing fee, net
|
- | 86,667 | ||||||
|
Property and equipment, net
|
982,915 | 10,956,558 | ||||||
|
Intangible assets, net
|
- | 182,140 | ||||||
|
Other assets
|
31,900 | 44,121 | ||||||
|
TOTAL ASSETS
|
$ | 1,798,195 | $ | 12,410,245 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 12,083,603 | $ | 4,382,966 | ||||
|
Current portion of long term debt
|
153,284 | 175,196 | ||||||
|
Convertible debt, net
|
3,691,261 | 66,261 | ||||||
|
Liability to issue stock
|
330,396 | 451,646 | ||||||
|
Total Current Liabilities
|
16,258,545 | 5,076,069 | ||||||
|
Long-term debt, net of current portion
|
- | 116,244 | ||||||
|
Total Liabilities
|
16,258,545 | 5,192,313 | ||||||
|
Commitments and contingencies
|
- | |||||||
|
STOCKHOLDERS' EQUITY
|
||||||||
|
Common stock, $0.001 par value, 250,000,000
shares authorized, 66,300,757 and 59,836,052
shares issued and outstanding, respectively
|
66,301 | 59,836 | ||||||
|
Additional paid-in capital
|
44,488,396 | 34,192,134 | ||||||
|
Accumulated deficit
|
(59,002,630 | ) | (27,021,621 | ) | ||||
|
Accumulated other comprehensive loss
|
(12,417 | ) | (12,417 | ) | ||||
|
Total Stockholders' Equity
|
(14,460,350 | ) | 7,217,932 | |||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 1,798,195 | $ | 12,410,245 | ||||
See accompanying notes to the condensed consolidated financial statements.
1
Latitude Solutions, Inc. & Subsidiaries (f/k/a GMMT, Inc.)
Consolidated Statements of Operations (unaudited)
|
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
|
June 30,
|
June 30,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
REVENUES
|
$ | 439,027 | $ | - | $ | 961,815 | $ | - | ||||||||
|
COST OF SALES
|
282,258 | - | 592,259 | - | ||||||||||||
|
GROSS PROFIT
|
156,769 | - | 369,556 | - | ||||||||||||
|
OPERATING EXPENSES
|
||||||||||||||||
|
Consulting fees
|
1,184,424 | 13,026,697 | 3,413,205 | 13,668,090 | ||||||||||||
|
General and administrative
|
569,138 | 770,618 | 2,401,386 | 1,244,587 | ||||||||||||
|
Salaries expense
|
1,766,122 | 663,916 | 2,526,437 | 1,123,549 | ||||||||||||
|
Research and development
|
8,274,953 | 104,930 | 8,362,247 | 134,342 | ||||||||||||
|
Total Operating Expenses
|
11,794,637 | 14,566,161 | 16,703,275 | 16,170,568 | ||||||||||||
|
LOSS FROM OPERATIONS
|
(11,637,868 | ) | (14,566,161 | ) | (16,333,719 | ) | (16,170,568 | ) | ||||||||
|
OTHER INCOME (EXPENSE)
|
||||||||||||||||
|
Finance costs pursuant to debt issuance
|
(3,949,857 | ) | (405,768 | ) | (4,122,900 | ) | (814,250 | ) | ||||||||
|
Impairment loss
|
(11,310,374 | ) | - | (11,310,374 | ) | - | ||||||||||
|
Gain on settlement of accrued expenses
|
- | - | 26,273 | 150,000 | ||||||||||||
|
Loss on sale of asset
|
(6,752 | ) | - | (6,752 | ) | - | ||||||||||
|
Other income
|
2,254 | 913 | 8,158 | 936 | ||||||||||||
|
Interest expense
|
(230,894 | ) | (23,206 | ) | (241,695 | ) | (63,386 | ) | ||||||||
|
Equity in losses of investee
|
- | (136,758 | ) | - | (383,015 | ) | ||||||||||
|
Total Other Expense
|
(15,495,623 | ) | (564,819 | ) | (15,647,290 | ) | (1,109,715 | ) | ||||||||
|
LOSS BEFORE INCOME TAXES
|
(27,133,491 | ) | (15,130,980 | ) | (31,981,009 | ) | (17,280,283 | ) | ||||||||
|
INCOME TAXES
|
- | - | - | - | ||||||||||||
|
NET LOSS
|
$ | (27,133,491 | ) | $ | (15,130,980 | ) | $ | (31,981,009 | ) | $ | (17,280,283 | ) | ||||
|
NET LOSS PER SHARE - BASIC AND DILUTED
|
$ | (0.41 | ) | $ | (0.36 | ) | $ | (0.50 | ) | $ | (0.47 | ) | ||||
|
WEIGHTED AVERAGE OUTSTANDING SHARES - BASIC AND DILUTED
|
66,195,921 | 42,018,643 | 63,578,983 | 36,454,956 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
2
Latitude Solutions Inc. & Subsidiaries (f/k/a GMMT, Inc.)
Condensed Consolidated Statements of Cash Flows (unaudited)
|
For the Six Months Ended June 30,
|
||||||||
|
2012
|
2011
|
|||||||
|
OPERATING ACTIVITIES
|
||||||||
|
Net loss
|
$ | (31,981,009 | ) | $ | (17,280,283 | ) | ||
|
Adjustments to reconcile net loss to
net cash used by operating activities: |
||||||||
|
Gain on settlement of accrued expenses
|
(26,273 | ) | - | |||||
|
Financing costs
|
4,364,594 | 814,250 | ||||||
|
Loss on sale of asset
|
6,752 | - | ||||||
|
Common stock issued or to be issued for services
|
1,336,741 | 9,044,306 | ||||||
|
Warrants issued for services
|
372,221 | 4,286,055 | ||||||
|
Depreciation and amortization expense
|
462,526 | 26,397 | ||||||
|
Impairment expense
|
11,043,750 | - | ||||||
|
Equity in losses of investee
|
- | 383,015 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
(Increase) in accounts receivable
|
(189,658 | ) | - | |||||
|
Decrease (increase) in prepaid expenses
|
13,951 | (20,000 | ) | |||||
|
Decrease in other assets
|
12,221 | 121,937 | ||||||
|
(Decrease) in accounts payable and accrued expenses
|
7,700,637 | (156,393 | ) | |||||
|
Net Cash Used by Operating Activities
|
(6,883,546 | ) | (2,780,716 | ) | ||||
|
INVESTING ACTIVITIES
|
||||||||
|
Capital contributions to investee
|
- | (7,471 | ) | |||||
|
Purchase of plants and equipment
|
(1,270,580 | ) | (1,132,262 | ) | ||||
|
Proceeds from sale of investee
|
225,000 | - | ||||||
|
Proceeds from sale of equipment
|
6,752 | - | ||||||
|
Payments to investee
|
- | (405,783 | ) | |||||
|
Net Cash Used by Investing Activities
|
(1,038,828 | ) | (1,545,516 | ) | ||||
|
FINANCING ACTIVITIES
|
||||||||
|
Proceeds from short tern debt
|
- | 100,000 | ||||||
|
Repayment of short term debt
|
(138,156 | ) | (100,000 | ) | ||||
|
Repayment of long term debt
|
- | (6,508 | ) | |||||
|
Repayment of related party payable
|
- | (25,000 | ) | |||||
|
Proceeds from convertible debt
|
3,635,000 | 691,000 | ||||||
|
Exercise of common stock warrants
|
2,500 | - | ||||||
|
Repayment of convertible debt
|
- | (116,000 | ) | |||||
|
Sale of common stock and warrants, net
|
4,114,943 | 6,375,500 | ||||||
|
Net Cash Provided by Financing Activities
|
7,614,287 | 6,918,992 | ||||||
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
(308,087 | ) | 2,592,760 | |||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
668,664 | 216,200 | ||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 360,577 | $ | 2,808,960 | ||||
See accompanying notes to the condensed consolidated financial statements.
3
Latitude Solutions, Inc. & Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Latitude Solutions, Inc. (FKA GMMT, INC) (“the Company”) is a Nevada Corporation incorporated on June 3, 1983. The Company owns intellectual property which is incorporated in the manufacture of water remediation plants. The Company's business plan is to lease the remediation plants to customers who need a solution for contaminated matter resulting from their business operations.
The Company began its plans on July 14, 2009 after exchanging a majority of its' shares for all the outstanding shares of GMMT Merger, Inc., a company controlled by common stockholders. As a result of the exchange, the Company acquired companies owned by GMMT Merger, Inc. ("Trinity Solutions, Inc." and "Latitude Clean Tech Group, Inc.") with plans to enter wireless live-video technology and the contaminated water remediation business.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements include the accounts of Latitude Solutions, Inc. and its wholly owned subsidiaries, Latitude Clean Tech Group, Inc., Latitude Energy Services, LLC, Trinity Solutions, Inc., Latitude Resource Group, Inc., Latitude Worldwide, LLC, and GMMT Merger, Inc. (collectively the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements were prepared using the liquidation basis of accounting effective June 30, 2012. The Company has determined that the liquidation basis is appropriate due to the imminent insolvency of the Company as of June 30, 2012. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with the Company's 2011 Annual Report on Form 10-K.
The preparation of financial statements in conformity with these accounting principles 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 expenses during the reported period. Ultimate results could differ from the estimates of management.
In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly the Company's financial position as of June 30, 2012 and the results of its operations and cash flows for the three and six months ended June 30, 2012 and 2011. Such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2012 may not be indicative of results for the full year.
Development Stage Company
As of December 31, 2011, the Company was a development stage company as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915-10, “Development Stage Entities.” During the first quarter of 2012, the Company commenced operations with the execution of a commercial contract and Management then considered that the Company was no longer deemed to be a development stage company. The commercial contract that triggered this exiting from the development stage was terminated prior to June 30, 2012.
4
Liquidation Basis of Accounting
As a result of the termination of the commercial contract along with other factors including a lack of additional or prospective commercial operations, the termination of the Manufacturing Services Agreement between the Company and the major supplier of the Company’s remediation units and imminent insolvency , the Company adopted the liquidation basis of accounting effective June 30, 2012. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets are reasonably determinable. Under this basis of accounting, assets are valued at their net values and liabilities are stated at their estimated settlement amounts. The conversion from the going concern to the liquidation basis of accounting required management to make significant estimates and judgments to record assets at estimated net realizable value and liabilities at estimated settlement amounts. These estimates are subject to change based upon the timing of potential sales and further deterioration of the market.
Going Concern Basis of Accounting
The consolidated financial statements for the period of inception to June 30, 2012 were prepared on a going concern basis of accounting, and do not reflect any adjustments related to the uncertainty surrounding the Company’s recurring losses or its increasing accumulated deficit.
The Company had limited revenues and had been incurring losses. These factors raised substantial doubt about the Company’s ability to continue as a going concern. The Company was in the process of deploying its technologies and securing service contracts. Additionally, management planned to finance the Company’s operations through the issuance of debt and equity securities. However, management could not provide any assurances that the Company will be successful in accomplishing its plan.
The ability of the Company to continue as a going concern was dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements that are presented on the going concern basis of accounting do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid instruments, with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at costs and consist of bank deposits and money market funds.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to operations and a credit to an allowance for doubtful accounts based on historical experience and management’s assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable. At June 30, 2012 and December 31, 2011, the Company had an allowance of $48,524 and $48,524, respectively, for accounts receivable deemed as uncollectible.
5
Property and Equipment
Property and equipment are recorded at net realizable value based on the expected proceeds to be received upon liquidation of the assets.
The cost of maintenance and repairs incurred has been charged to expense in the period incurred.
When items are retired or disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
Intangible Assets
In accordance with ASC 350-25, “Intangibles - Goodwill and Other”, the Company acquired a patent that was being amortized over its useful life of fifteen years. The Company purchased the patent through the issuance of 600,000 shares of common stock with a fair value of $120,000 and a cash payment of $100,000. Additionally, the Company capitalized patent fees of $2,000. The Company's balance of intangible assets on the balance sheet net of accumulated amortization was $0 and $182,140 at June 30, 2012 and December 31, 2011, respectively. The value of the patent was completely impaired due to questions surrounding the validity of the patent and the ownership of the patent. Amortization expense, prior to the impairment, related to the intangible assets was $7,400 and $7,400 for the six months ended June 30, 2012 and 2011, respectively.
Long-Lived Assets
The Company’s long-lived assets were reviewed for impairment in accordance with the guidance of ASC 360-10, “Property, Plant, and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Through December 31, 2011, the Company had not experienced impairment losses on its long-lived assets. As of June 30, 2012, the values of the assets have been recorded based on their net realizable values in the liquidation of the assets, and the Company has recognized an impairment loss for the difference between the net book value of the assets and the net realizable value of the assets.
Equity Investments
The Company followed ASC 323-10, “Investments” to account for investments in entities in which the Company has a 20% to 50% interest or otherwise exercises significant influence. These investments were carried at cost and adjusted for the Company’s proportionate share of undistributed earnings or losses of Investee.
Revenue Recognition and Cost of Revenues
The Company’s leasing and processing revenues pertaining to remediation plants are recognized when there is pervasive evidence of the arrangement, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured.
Leasing and processing revenues include revenues from the leasing of the plants, and a per gallon processing fee. These services are provided to customers ongoing and are billed on a monthly basis and recognized as revenue as the services are provided during the term of the arrangement in accordance with ASC 605-25, “Multiple Element Arrangements.”
6
Costs of sales consist primarily of repairs and maintenance and depreciation on leased plants and any other related servicing costs.
Net Loss Per Share
The Company follows ASC 260-10, "Earnings Per Share" in calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share considers the effect of common equivalent shares.
The Company’s computation of basic and diluted loss per share for the six months ended June 30, 2012 and 2011, respectively, excludes the following potentially dilutive securities because the effect of their inclusion would be anti-dilutive.
|
2012
|
2011
|
|||||||
|
Convertible debt
|
3,691,261 | 1,374,461 | ||||||
|
Stock warrants
|
31,312,414 | 25,132,846 | ||||||
| 35,003,675 | 26,507,307 | |||||||
Income Taxes
Income taxes are accounted for under the asset and liability method as stipulated by ASC 740, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in operations in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of the valuation allowance. A valuation allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.
ASC 740 provides interpretative guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In the unlikely event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. A liability for uncertain tax positions would then be recorded if the Company determined it is more likely than not that a position would not be sustained upon examination or if a payment would have to be made to a taxing authority and the amount is reasonably estimable.
As of June 30, 2012, the Company does not believe any uncertain tax positions exist that would result in the Company having a liability to the taxing authorities. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expense and general and administrative expense, respectively, in the consolidated statement of operations. The Company’s tax returns for the years ended 2008 through 2011 are subject to examination by the federal and state tax authorities.
7
Fair Value Measurements
The Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value, must maximize the use of observable inputs and minimize the use of unobservable inputs.
This standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial Instruments
The Company’s short-term financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses. The carrying amount of debt approximates fair value because current interest rates available to the Company for debt with similar terms and maturities are substantially the same. The other aforementioned financial instruments approximate fair value due to their short-term maturities.
Comprehensive Income
ASC 220, "Comprehensive Income" establishes standards for the reporting and presentation of comprehensive income and its components in the financial statements. As of June 30, 2012 and December 31, 2011, the Company's accumulated other comprehensive loss of $12,417 and $12,417, respectively, is comprised of the accumulated foreign currency translation adjustments related to the Company's previous equity investment.
Accounting for Stock-based Compensation
The Company follows ASC 718, “Compensation – Stock Compensation”, in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.
The Company accounts for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with ASC 505-50 “Equity Based Payments to Non-employees."
8
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40 “Derivatives and Hedging.” The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, “Compensation – Stock Compensation." Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates.
Concentration of Risk
The Company does not have any off-balance-sheet concentrations of credit risk. The Company expects cash and accounts receivable to be the two assets most likely to subject the Company to concentrations of credit risk. The Company’s policy is to maintain its cash with high credit quality financial institutions to limit its risk of loss exposure. The Company minimizes its accounts receivable credit risk by transacting contractual arrangements with customers that have been subjected to stringent credit evaluations and structuring the contracts in a manner that lessens inherent credit risks.
As of June 30, 2012, the Company maintained its cash in two financial institutions. The Company’s cash balances at June 30, 2012 and December 31, 2011 were fully insured. The Company has not experienced any losses in its bank accounts through June 30, 2012.
The Company is largely dependent upon two vendors for the manufacturing of its remediation plants and components. These vendors comprise a significant balance of the consolidated accounts payable balance at June 30, 2012. These two vendors represent balances due of approximately $10,165,000 and $1,103,000 as of June 30, 2012.
Reclassifications
Certain prior year account balances within the financial statements have been reclassified for presentation purposes.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued a new accounting standard update (ASU No. 2011-04), which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and determined that it does not significantly impact the financial statements and disclosures.
In June 2011, the FASB issued a new accounting standard (ASU No. 2011-05), which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and determined that it does not have any impact on the financial statements.
In January 2012, the FASB issued a new accounting standard (ASU No. 2011-11), which modifies the disclosures of offsetting assets and liabilities. The standard is effective for reporting periods beginning after January 1, 2013. The Company will adopt this standard in the first quarter of 2013 and is currently evaluating its impact on the Company’s financial statements and disclosures.
9
NOTE 2 - EQUITY INVESTMENT
In July 2009, the Company acquired a 50% ownership interest in VideoLatitude Inc., a Canadian Company with plans to enter the wireless live-video technology business. The remaining 50% of the interest was owned by four Canadian citizens and a Canadian corporation. The Company accounted for this investment under the equity method of accounting.
In December 2011, the Company reached an agreement with the management of VideoLatitude, whereby VideoLatitude’s management agreed to reacquire the Company’s interest in VideoLatitude for $225,000. As a result of this agreement, the Company recorded an impairment charge of $873,029 to record the investment at the amount received for the interest in February 2012. During the six months ended June 30, 2011, the Company recognized $746,636 of pro-rata share of losses associated with this investment. The latter amount was reported in other expense in the accompanying 2011 statements of operations.
The Company has not presented the components of the investment as of December 31, 2011 as the investment was adjusted to its net realizable value based upon the agreement for sale reached with VideoLatitude's management December 31, 2011.
VideoLatitude’s functional currency is the Canadian Dollar. VideoLatitude accounts for currency translation in accordance with ASC 830-10, “Foreign Currency Matters.” Income and expenses related to its operations are translated at weighted average exchange rates during the year. Assets and liabilities are translated to US dollars at the exchange rate in effect at the balance sheet date.
NOTE 3 - PREPAID LICENSING FEES
Prepaid licensing fees represents the unamortized costs for the use of certain technology related to water remediation. In consideration for this technology, the Company issued 500,000 shares of common stock valued at $.20 per share in 2009. This amount was being amortized over the 15 year term of the licensing agreement, until the liquidation basis of accounting was adopted on June 30, 2012. The Company's balance of prepaid licensing fees on the balance sheets, net of accumulated amortization, was $0 and $86,667 at June 30, 2012 and December 31, 2011, respectively. Amortization expense, prior to the recognition of the impairment of the asset, related to these fees was $3,333 and $3,333 for the six months ended June 30, 2012 and 2011, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT
At June 30, 2012 and December 31, 2011, property and equipment consisted of the following:
|
June 30, 2012
|
December 31, 2011
|
|||||||
|
Computers
|
$ | - | $ | 28,103 | ||||
|
Equipment
|
147,362 | 319,990 | ||||||
|
Remediation plants and chambers
|
390,000 | 9,688,974 | ||||||
|
Leasehold improvements
|
- | 195,165 | ||||||
|
Vehicles
|
445,553 | 817,228 | ||||||
| 982,915 | 11,049,460 | |||||||
|
Less accumulated Depreciation
|
- | 92,902 | ||||||
| $ | 982,915 | $ | 10,956,558 | |||||
10
The Company's vehicles and a portion of its equipment serve as collateral on notes payable pursuant to the financing agreements mentioned in note 7 to the consolidated financial statements.
Depreciation expense, prior to the recognition of the fair value impairment adjustment, for the six months ended June 30, 2012 and 2011 was $193,720 and $15,664, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS AND BALANCES
In January 2011, the Company purchased a vehicle from an officer. The purchase price of $33,846 was based on the estimated fair value of the vehicle and is included in fixed assets under the vehicles category as shown in Note 4.
NOTE 6 - CONVERTIBLE DEBT
At June 30, 2012 and December 31, 2011, the Company had convertible notes payable outstanding of $1,020,384 and $66,261, respectively, net of a discount of $2,670,877 and $0, respectively. These convertible notes matured at various times within six to twelve months from date of issuance, have an interest rate of 7.0% - 10.0% and allow the holder to convert the notes into common stock at a conversion price of $0.50 - $1.00 per share. As of June 30, 2012, $56,261 of the outstanding debt had become due and was in default and had not been converted. In connection with the convertible notes issued prior to January 1, 2012, the Company issued warrants expiring five years from date of issuance which allow the holders to purchase shares of common stock at $1.25 per share and issued a share of common stock for every dollar borrowed. No warrants were issued along with the convertible debt issued during 2012.
NOTE 7- LONG TERM DEBT
Long term debt is comprised of vehicle financing arrangements and a capital lease pertaining to laboratory equipment. The payment terms of long term debt ranges from one to three years and bears interest at rates ranging from 6.79% to 29.80%. The following table sets forth the composition of long term debt at June 30, 2012.
|
2012
|
||||
|
Vehicle loans
|
$ | 146,261 | ||
|
Capital leases
|
7,023 | |||
| $ | 153,284 | |||
NOTE 8- STOCKHOLDERS' EQUITY
Common Stock
For the six months ended June 30, 2012, the Company issued and cancelled common stock as follows:
|
(a)
|
8,265,667 shares with 4,132,833 warrants issued for cash pursuant to a private placement stock offering.
|
|
(b)
|
5,000 shares issued for the exercise stock warrants.
|
|
(c)
|
255,229 shares issued pursuant to employment agreements.
|
|
(d)
|
482,500 shares issued pursuant to consulting agreements.
|
|
(e)
|
66,047 shares issued as 401K Safe Harbor match.
|
|
(f)
|
10,350 shares issued as conversion of convertible notes payable.
|
|
(g)
|
2,620,083 shares cancelled in accordance with separation agreements with former officers and directors.
|
11
At June 30, 2012, the Company had a liability to issue stock for a value of $330,396. The balance was comprised of shares to be issued from proceeds received from a private placement offering. At December 31, 2011, the Company had a liability to issue stock for a value of $451,646. The balance was comprised of shares to be issued in 2012 from proceeds received from a private placement offering.
NOTE 9 - STOCK PURCHASE WARRANTS
During the six months ended June 30, 2012, the Company issued warrants (each warrant is exercisable into one share of Company restricted common stock) in connection the issuance of stock for cash as discussed in Note 8 and for services rendered by consultants and employees.
A summary of the change in stock purchase warrants for the six months ended June 30, 2012 and 2011 is as follows:
|
Number of Warrants Outstanding
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
||||||||||
|
1st Quarter – 2012:
|
||||||||||||
|
Balance, December 31, 2011
|
27,907,516 | 1.27 | 3.75 | |||||||||
|
Warrants issued
|
3,534,898 | 1.75 | 5.15 | |||||||||
|
Warrants exercised
|
(5,000 | ) | 0.50 | - | ||||||||
|
Warrants cancelled
|
(125,000 | ) | 1.25 | - | ||||||||
|
Balance, June 30, 2012
|
31,312,414 | $ | 1.27 | 3.67 | ||||||||
|
1st Quarter – 2011:
|
||||||||||||
|
Balance, December 31, 2010
|
7,348,895 | $ | 1.25 | 3.25 | ||||||||
|
Warrants issued
|
17,783,951 | 1.26 | 3.78 | |||||||||
|
Balance, June 30, 2011
|
25,132,846 | 1.25 | 3.55 | |||||||||
The balance of outstanding and exercisable common stock warrants at June 30, 2012 is as follows:
|
Number of Warrants Outstanding
|
Exercise Price Range
|
Remaining Contractual Life (Years)
|
||||||||
| 24,998,850 | $ | 1.01 - 1.25 | 3.25 | |||||||
| 150,000 | $ | 1.26 - 1.50 | 4.74 | |||||||
| 5,603,564 | $ | 1.51 - 1.75 | 4.56 | |||||||
| 500,000 | $ | 1.76 - 2.00 | 4.34 | |||||||
| - | $ | 2.01 - 2.25 | - | |||||||
| 60,000 | $ | 2.26 - 2.50 | 4.38 | |||||||
12
The fair value of stock purchase warrants granted were calculated using the Black-Scholes option pricing model using the following assumptions:
|
Six Months Ended
|
||||||||
|
June 30, 2012
|
June 30, 2011
|
|||||||
|
Risk free interest rate
|
.27% - .37 | % | .43% - .85 | % | ||||
|
Expected volatility
|
201% - 223 | % | 218% - 223 | % | ||||
|
Expected term of stock warrant in years
|
2.5 | 2.5 | ||||||
|
Expected dividend yield
|
0 | % | 0 | % | ||||
|
Average value per warrant
|
$ | 1.10 - $1.57 | $ | 0.16 - $1.92 | ||||
Expected volatility is based on historical volatility of the Company and other comparable companies. Short Term U.S. Treasury rates were utilized. The expected term of the options was calculated using the alternative simplified method permitted by SAB 107, which defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Since trading volumes and the number of unrestricted shares are very small compared to total outstanding shares, the value of the warrants was decreased for lack of marketability.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company has entered into various leases for its offices and other operational facilities. The leases are for varying periods of time ranging from 1 to 5 year periods of time.
Future minimum lease payments for these leases are as follows:
|
Year
|
Amount
|
|||
|
2012
|
$ | 129,896 | ||
|
2013
|
202,998 | |||
|
2014
|
128,391 | |||
|
2015
|
22,041 | |||
|
2016
|
9,370 | |||
| $ | 492,696 | |||
The Company is in negotiations with the various lessors regarding exiting costs and costs of early termination of the respective leases.
13
Intellectual Property Agreements
In 2010, the Company entered into a Patented Technology and Services Purchase Agreement upon its acquisition of certain proprietary intellectual properties pertaining to the treatment of water by the use of electro-precipitation. The Company is obligated to pay a five percent royalty on the first $6,000,000 of gross revenues resulting from the use of the technology or on the sale of any equipment using the patented technology transferred to the Company pursuant to this agreement.
Legal Matters
The Company is subject to several legal actions arising during the normal course of business. The Company has and intends to vigorously defend its position in all of them.
On March 19, 2012, a former employee of the Company filed a sexual harassment law suit against the Company and one of the Company's Officers and Directors in the United States District Court for the Southern District of Florida. The Company has investigated and is defending the lawsuit. The Company's insurance coverage may reduce financial exposure to damages, if any, in this action, however, there is no assurance thereof.
On November 11, 2011, a service provider, filed suit against the Company in the Supreme Court of the State of New York, County of Nassau alleging entitlement to 100,000 shares of the common stock of LSI or $350,000. The Company has asserted defenses, including non-performance and had defended the case vigorously. The service provider has agreed to settle the case for $30,000, however, no settlement agreement has been negotiated and signed.
On September 7, 2012, the Company was sued by its former landlord of its Boca Raton Office space for unpaid rent due on its lease In the Circuit Court of the 17th Judicial District of the State of Florida, Broward County, Florida. The Company challenged venue and asserted defenses and counterclaims. The case was transferred to the Circuit Court of the 15th Judicial District of the State of Florida in Palm Beach County and is currently in settlement negotiations.
On October 11, 2012, the Company was sued by one of its suppliers in the District Court of El Paso County, Colorado for monies owed to the supplier in excess of $1.3 million. The Company disagrees with the claim and intends to defend the case vigorously. The Company believes the supplier breached its contract and intends to file counter claims against the supplier. It is also reviewing counter claims against the supplier and others for certain intellectual property related claims.
It is not feasible to predict the outcome of any such proceedings and LSI cannot assure that their ultimate disposition will not have a materially adverse effect on LSI's business, financial condition, cash flows or results of operations.
The outcome of the lawsuits may affect the ability of the Company to stay in business and the ability of the Company to stay in business due to the problems described above may have an effect on the outcome of such lawsuits.
14
NOTE 11 - INCOME TAXES
A reconciliation of the differences between the effective income tax rate and the statutory federal tax rate for the six months ended June 30, 2012 and 2011 are as follows:
|
2012
|
2011
|
|||||||
|
Tax benefit at U.S. statutory rate
|
34.00 | % | 34.00 | % | ||||
|
State taxes, net of federal benefit
|
3.63 | 3.63 | ||||||
|
Change in valuation allowance
|
(37.63 | ) | (37.63 | ) | ||||
| - | % | - | % | |||||
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 2012 and December 31, 2011 consisted of the following:
|
Deferred Tax Assets
|
2012
|
2011
|
||||||
|
Net Operating Losses Carryforward
|
$ | 17,134,000 | $ | 6,136,000 | ||||
|
Depreciation
|
108,000 | 35,000 | ||||||
|
Bad debts
|
18,000 | 18,000 | ||||||
|
Net Non-current Deferred Tax Asset
|
17,260,000 | 6,189,000 | ||||||
|
Valuation Allowance
|
(17,260,000 | ) | (6,189,000 | ) | ||||
|
Total Net Deferred Tax Asset
|
$ | - | $ | - | ||||
As of June 30, 2012, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $17,260,000 that may be offset against future taxable income through 2032. Current tax laws limit the amount of losses available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax asset has been reported in the financial statements because the Company believes that there is a 50% or greater chance that short-term profitability will not be attained. Accordingly, the deferred tax assets have been offset by a valuation allowance of the same amount as of June 30, 2012 and December 31, 2011.
NOTE 12 – LINE OF CREDIT
During the six months ended June 30, 2012, the Company entered into a $5,000,000 revolving accounts receivable based line of credit with a finance company. The line of credit is for a two year period with one year automatic renewals. As of June 30, 2012, the Company had drawn $680,000 against the line of credit, and $70,000 remained outstanding. Subsequent to June 30, 2012, the Company all amounts were repaid and no additional advances were made.
15
NOTE 13 - SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date the financial statements were issued.
In the period subsequent to June 30, 2012 and prior to the issuance of these financial statements, the Company’s Board of Directors has experienced membership changes. The Company has also had significant changes to its officers. Since June 30, 2012 the following individuals have resigned from the Board and/or Company: Matthew Cohen (Board and Chief Financial Officer), John Paul DeJoria (Board), Jeffrey Wohler (Chief Executive Officer), Lynden Rose (Board), Jerry Langdon (Board and Chief Executive Officer). Since June 30, 2012, the following individuals were added to the Board and/or Company: Bill Rhea (Board, Chief Executive Officer and Chief Operations Officer), Jeffrey Wohler (Chief Executive Officer), James Smith (Chief Financial Officer), Ken Link (Board).
In September 2012, the Company’s stock was moved from the Over The Counter Bulletin Board to the Pink Sheets.
The Company has moved its corporate office from Boca Raton, Florida to Fort Worth, Texas, and has closed its office in Florida.
16