Item 1 - Description of Business
Overview
LocatePLUS Holdings Corporation
The Company owns and operates subsidiary companies that provide various types of public and private data to business and credentialed clients throughout the United States. The Company provides accounting, finance, legal, risk management, information technology, strategy analysis, sales and marketing, operations and management services in various forms to its subsidiary companies. LPHC, through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Entersect Corporation, Dataphant, Inc., Metrigenics, Inc., and Employment Screening Profiles, Inc. d/b/a TruBackgrounds are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions.
In 2010 LPHC developed and commenced implementation of a company and subsidiary wide restructuring plan including:
- Reducing employee count by 36% (19 employees) in total among all of its subsidiaries and the holding company.
- Consolidated accounting functions to its Beverly MA headquarters.
- Commenced the deployment of new accounting systems for cash management & forecasting, budgeting & monthly reforecasting and Balance Sheet / P&L review.
- Commenced an ISO 27000 series standard compliance plan to be deployed across all its subsidiaries.
- Deployed risk management procedures and processes across all subsidiaries and continue to do so.
- Commenced the process of deploying current technology platforms to reduce risk, downtime and costs at the holding company and subsidiary company level.
- Working diligently and will continue to work with our data providers and debt holders to structure payment plans that the Company can meet within current cash flow.
The Company's Board of Directors and its senior management have developed a comprehensive strategic plan to enhance shareholder and stakeholder value. There are great obstacles and challenges ahead for the Company and its subsidiary companies on the accounting, finance, legal, operations, technical, sales and product delivery fronts. The Company works diligently with its subsidiary companies to acquire the best of market data; to enhance operating processes and procedures; to manage the payables, billing and cash flow hurdles; to develop sales and marketing strategies as well as hiring and training the sales staff; keeping the current technology platforms working and bringing them to current day technology standards as well as handling the public relation aspects of the many legal issues pending against the Company and its past management.
LocatePLUS Corporation
LocatePLUS Corporation provides web-based investigative search and background screening products for credentialed corporate, government and law enforcement clients as well as private investigators, legal professionals, bail bondsmen, collection and security agencies. The LocatePLUS flagship products - LocatePLUS Pay-per-click (PPC) and LP Police - empower businesses and government agencies with real-time web access to a wide range of public and proprietary databases to verify personally identifiable information on the US adult population.
LocatePLUS Corporations provides access to information that includes credit header data, telephone numbers, address histories, dates of birth, social security numbers, civil and criminal records, corporation records, real property information and email addresses. LocatePLUS Corporation is an online provider of public information to credentialed users. These users include law enforcement, other government agencies, law firms, investigation companies, private investigators and insurance companies. Information is used by those users for various activities ranging from legal discovery to the detection of fraud and the prevention of crime and terrorism. Commercial businesses have increasingly availed themselves of our information services in connection with their identity validation and other business decisions.
Our Target Markets and Screening of Users
Our products are primarily marketed and sold to federal, state and local government agencies (including law enforcement agencies), private investigators, human resource professionals and the legal profession. Our products have been used in:
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crime and terrorism investigation
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detection of fraud
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“skip tracing”
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background checks
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legal due diligence
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Identity self-certification
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Private security
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Risk-management
We require commercial customers to provide background information about their business need for data and about themselves, such as business licenses, bar admission cards or private investigator licenses. Individuals involved in law enforcement must provide similar evidence of their authority.
To prevent the misuse of our data, we have adopted a three-tier security schema for our LocatePLUS Corporation products. With challenges in the industry relating to data access, we use a schema that restricts the most sensitive data. Our groups are classified in the following manner:
Level
Industry Users
Sample Datasets Available to Users
I
General Business
Names, Addresses and Phone Numbers
Past Residences, Neighbors and Affiliates
Real Property
II
Private Investigators
Insurance
Attorneys/Law Firms
Government
Corporate Security
Level I Data, plus:
Liens and Judgments
Drivers’ Records
Certain Motor Vehicle Records
III
Law Enforcement
Level I and II Data, plus:
Comprehensive Criminal Records
Restricted Motor Vehicle Records
Certain Credit Reporting Data
Entersect Corporation
Entersect Corporation (aka Certifion Corporation), is a provider of web-based and off-line public information databases that allow investigative professionals to verify the authenticity of a subject’s background. Entersect’s products include Entersect Police Online (EPO) and Entersect HR.
Entersect Police Online (EPO) delivers telephone and address information to empower local and state police as well as federal agents to conduct more thorough investigations resulting in swift actions in the field. Access to EPO is restricted to law enforcement agencies.
Entersect HR provides tools for the recruiter, employer, and hiring consultant who are charged with the duty to screen candidates. We empower human resource professionals to make better, more informed decisions based on the verified backgrounds of potential and existing associates.
Among other services Entersect HR can:
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Positively Identify our clients candidate
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Validate the SSN#
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Determine if the candidate has been involved in litigation, bankruptcy, or have tax liens
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Scan for any criminal records or sex offender listings
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Education Verification
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Employment References
We require commercial customers to provide background information about their business need for data and about themselves, such as business licenses, bar admission cards or private investigator licenses. Individuals involved in law enforcement must provide similar evidence of their authority.
Entersect Police uses the exact same credentialing process as LocatePlus Corporation for their customers as it has the same type of customer base as LP Police. With respect to Entersect HR, there is currently no credentialing process in place. However, a credentialing process similar to the one used at LocatePlus Corporation is being developed for future deployment.
Worldwide Information, Inc.
Worldwide Information provides CD-ROM and DVD products for effectively identifying motor vehicle, driver’s license, harbor records and unlisted cell phone records. The company distributes software products containing statewide motor vehicle records that provide identity validation services to law enforcement, law offices and other accredited businesses.
Worldwide’s search products increase the success rate of identifying or locating critical persons when only a minimal amount of information is available. The ability to search partial data is a valuable tool in circumstances in which incomplete information is available, as is often the case in criminal investigations. Unlike web-based search products, Worldwide’s CD/DVD-based software can be accessed from anywhere without the need for an internet connection or phone signal. Worldwide products are useful in solving police cases involving missing persons associated with partial vehicle information.
Worldwide uses the exact same credentialing process as LocatePlus Corporation for their customers. Worldwide has a similar customer base with respect to levels II and III, but is a little different with respect to tier I. Worldwide only sells to certain types of businesses in tier I , such as towing companies and asset recovery companies.
Dataphant, Inc.
Dataphant is a provider of information on land and mobile phone numbers in the United States. Dataphant leverages a proprietary process to gather and analyze phone numbers from mobile and landline sources and map those numbers to phone owners and addresses.
Dataphant phone information is used by credentialed investigative and law enforcement customers throughout the U.S and Canada. The information is available to all business and consumer markets, but the primary markets for this information remains in the government and law enforcement arena.
Metrigenics, Inc.
Metrigenics was formed to develop new ways to integrate biometrics with data. In March, 2009, management made the decision to suspend funding of this subsidiary which consisted primarily of research and development costs, and is presently exploring strategic options with respect to this entity.
Employment Screening Profiles, Inc. (d/b/a TruBackgrounds)
Employment Screening Profiles, Inc. (d/b/a TruBackgrounds) develops and markets integrated, customized, web-enabled background verification solutions designed to aid in the verification, applicant management and human resource collaboration processes. The company serves large and small businesses with systems and information that enable better decisions and reduced costs via automation of the screening process.
TruBackgrounds products empower clients to reduce risk, cost and workload while improving productivity by delivering accurate, timely nationwide background information right to the desktop. Designed to utilize the latest Internet technologies, TruBackgrounds products are easy-to-use, secure, reliable and industry standards compliant. Solutions are sold to all businesses that are in need of background screening products, including education and employment verification, criminal and civil records, motor vehicle records, SSN verifications, and professional license checks.
With respect to Employment Screening Profiles, Inc. (d/b/a TruBackgrounds), there is currently no credentialing process in place. However, a credentialing process similar to the one utilized in LocatePlus Corporation is being developed for future deployment.
On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(ESP)(d/b/a TruBackgrounds), a Florida corporation (“TruBackgrounds”), located in Oldsmar, Florida. TruBackgrounds serves large and small businesses with systems and information designed to enable intelligent decisions and reduce costs through automation. TruBackgrounds will continue to be operated as a wholly-owned subsidiary of the Company and will collaborate in providing enhanced service capability to the Company’s customers.
The following table summarizes the consideration paid for Employment Screening Profiles, Inc. (d/b/a TruBackgrounds), and the amounts of the assets acquired and liabilities assumed on the acquisition date.
The fair value of the 9,000,000 shares of Common Stock of the Company paid for ESP (TruBackgrounds) ($900,000) was determined on the basis of the closing market price of the Company’s Common Stock on the acquisition date.
The goodwill of $998,413 arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and TruBackgrounds. All of the goodwill was assigned to TruBackgrounds.
The fair value of the financial assets acquired includes accounts receivable with a fair value of $13,628 and prepaid expenses of $950.
The amount of TruBackgrounds’ revenue and earnings included in the Company’s consolidated income statement for the quarter ended December 31, 2009, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2009 or January 1, 2008, are as follows:
Sources of Our Data
LocatePlus Holdings Corporation subsidiary operations depend upon information derived from a wide variety of automated and manual sources. External sources of data include public records that are acquired from aggregators as well as directly from the agency capturing those records such as courts, county clerks, motor vehicle departments, and the like. In the event that any of our primary sources of data became unavailable to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as there are currently a number of providers of such data.
Regulatory Restrictions on our Business
Both Federal and State laws regulate the sale of data. Recently, consumer advocates and Federal regulators have voiced concerns regarding public access to, or commercial use of, personal information. As a result, increased pressure has been placed upon Federal and State legislators to regulate the dissemination or commercial use of personal information.
One such legislative enactment that has had an effect on our business was the Financial Services Modernization Act of 2000, also known as the “Gramm-Leach-Bliley Act”. Among other things, this law restricts the collection, use, and transfer of certain data that includes “credit header” information, which had historically functioned as the backbone of our data resources. Implementation of this law’s restrictions by the Federal Trade Commission significantly limited the availability of certain data for our database, but we have subsequently developed datasets that function independently of “credit header” information. Although we have not engaged counsel to review this matter or the conduct of our operations generally, we believe that our operations are currently unaffected by the Gramm-Leach-Bliley Act or any law specifically applicable to the dissemination of data concerning individuals. More recently, Congress has
been addressing the access to public data such as ours. The Fair Credit Reporting Act (“FCRA”) (15 U.S.C. §§ 1681-1681u). Rules were adopted implementing the Act by the Federal Trade Commission. These rules became effective on November 1, 2009. See 16 C.F.R. § 681. The final rules require each financial institution and creditor that holds any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an Identity Theft Prevention Program (ITPP) for combating identity theft in connection with new and existing accounts. The Program must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft. These and other potential restrictions on our use of personal information, however, could limit the usefulness and have a material adverse effect on any and all of the Company subsidiary companies operations and products. Federal and state law prohibits us from selling information about minors. Our products have been designed to prevent the dissemination of such data.
Distribution of Our Products
LocatePlus Holdings Corporation subsidiaries distribute their services and products both directly through in-house sales representatives, by word of mouth referrals; through outside sales agents and through wholesale channel partner arrangements. The business constraints of each subsidiary may allow or disallow some of these sales models. In addition we market via our web sites using SEO technologies.
Competition
Current competitors for our LocatePLUS Corporation and Entersect Police products include IRB, MerlinData, and Lexis-Nexis. Many of the companies that currently compete with this product, as well as other companies with whom we may compete in the future, are national or international in scope and have greater resources than we do. Those resources could enable those companies to initiate price cuts or take other measures in an effort to gain market share in our target markets.
Our Worldwide Information product primarily competes with the registries of motor vehicles of various states that sell their data to screened users. These state agencies generally provide data in “raw form” without the search capabilities that we provide in our Worldwide Information product.
Employment Screening Profiles, Inc. (d/b/a TruBackgrounds) and Entersect HR are in the human resources screening industry which is a multi-billion dollar market consisting of over 3,000 vendors providing background check services to staffing agencies and businesses nationwide. The majority of competitors are typically small providers that serve a select clientele either regionally or by industry type. More significant competitors such as First Advantage and HireRight are large organizations that offer a vast array of products that include drug screening, biometric validation, and much more. Prominent trade associations along with government resources show that the pre-employment screening market is continuing to grow significantly.
Employees
As of December 31, 2010, the Company and its subsidiary companies had 34 employees. We believe that our relations with our employees are good.
Item 1A.
Item 1A. Risk Factors
The Company operates in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that the Company cannot control or predict. The following discussion, as well as the "Critical Accounting Policies and Estimates" discussion in Item 6 of this Annual Report on Form 10-K highlight some of these risks.
You should carefully consider the risks described below before buying shares of the Company's common stock, as well as other information provided to you in this document, including information in the section of this document entitled "Forward Looking Statements". An investment in the Company's common stock is highly speculative. The risks and uncertainties described below are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company
currently deems immaterial, may impair the Company's business operations. If any of the adverse events described in this Item 1A actually occur, the Company's business, results of operations and financial condition could be materially adversely affected, the trading price of the Company's common stock could decline, and you might lose all or part of your investment.
THE COMPANY HAS A HISTORY OF OPERATING LOSSES, AND IF THE COMPANY CONTINUES TO INCUR OPERATING LOSSES, IT MAY BE UNABLE TO CONTINUE OPERATIONS.
The Company had net losses of $1,607,168, and $2,845,570 for the years ended December 31, 2010 and 2009, respectively. The Company had an accumulated deficit of $54,818,970, and a net stockholders' deficit of $9,945,683 and had negative working capital as of December 31, 2010. The Company may never be profitable. If the Company continues to incur operating losses and fails to become a profitable company, it may be unable to continue its operations. The extent of the Company's future losses and the timing of its potential profitability are highly uncertain. The Company's future growth and profitability depends solely on its ability to successfully market its products. The Company must continue to enhance the features and functionality of its products to meet customer requirements and competitive demands. In addition, the failure of future product enhancements to operate as expected could delay or prevent future sales of its products. If future customers do not adopt, purchase and successfully deploy the Company's products and its planned product enhancements, the Company's revenues could be adversely impacted.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN, AND IF THE COMPANY IS UNABLE TO GENERATE INCREASED BUSINESS VOLUME OR OBTAIN ADDITIONAL FINANCING, THE COMPANY MAY BE REQUIRED TO CEASE OR CURTAIL ITS OPERATIONS.
In their report prepared in conjunction with the Company's December 31, 2010 financial statements, the Company's auditors included an explanatory paragraph stating that, because the Company has incurred recurring net losses, has an accumulated deficit and has minimal working capital as of December 31, 2010, there is substantial doubt about the Company's ability to continue as a going concern.
THE COMPANY'S OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
The Company's revenues in any particular period may be lower than revenues in a preceding or comparable period. Factors contributing to fluctuations, some of which are beyond the Company's control, include:
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fluctuations in its customers' businesses;
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timing and market acceptance of new products or enhancements introduced by the Company or its competitors;
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timing and level of expenditures for sales, marketing and product development; changes in the prices of the Company's or its competitors' products; and general industry trends;
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fluctuations in overall economic activity
In addition, the Company has historically operated with no significant backlog. Any significant deferral of orders for its products would cause a shortfall in revenues for any given fiscal period. As a result, the Company's revenues may vary significantly from quarter to quarter. If the Company's quarterly revenue or operating results fall below the expectations of investors or public market, its stock price could be adversely impacted.
THE COMPANY MAY BE UNABLE TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS OPERATIONS.
Management believes that it has a need to raise additional capital through debt or equity financing to fund operations. As of December 31, 2010, the Company had $207,912 in cash available to fund its operations, and had a working capital deficit of $6,891,710. In 2011, it will need to raise additional capital or obtain additional debt financing in order to be able to fund its operations. The Company may not get funding when it needs it or on favorable terms. In addition, the amount of capital that a firm such as the Company is able to raise often depends on variables that are beyond its control, such as the share price of its stock and its trading volume, or the amount of litigation the company has to manage, including the Company’s obligations to comply with SEC regulations. As a result, the Company may not be able to secure financing on terms attractive to it, or at all. If the Company is able to consummate a financing arrangement, the amount raised may not be sufficient to meet its future needs and may be highly dilutive. If the Company cannot raise adequate funds to satisfy its capital requirements, it may have to scale-back or eliminate operations.
THE COMPANY NEEDS TO INCREASE ITS AUTHORIZED STOCK.
The terms of the Company’s indebtedness, options, and other obligations require the Company to issue common stock upon conversions, exercise, or other requests. The Company does not have enough common stock authorized to permit full issuance.
THE COMPANY HAS A HISTORY OF LOSSES, AND SUCH LOSSES MAY CONTINUE IN THE FUTURE IF THE COMPANY IS UNABLE TO SECURE SUFFICIENT BUSINESS TO COVER ITS OVERHEAD AND OPERATING EXPENSES.
The Company has not been profitable and will continue to generate losses, and potentially require additional external funding, until sales of its products can be increased to sufficient levels for the Company to generate a profit and positive cash flow, of which there can be no assurance that such levels can be attained.
THE COMPANY OPERATES IN HIGHLY COMPETITIVE INDUSTRIES WITH MANY PARTICIPANTS.
The Company operates in a highly competitive environment, competing on the basis of product offerings, quality, service and pricing. Competition is particularly intense and is increasing. The Company has a number of existing competitors, some of which are very large, with significantly greater technological and financial resources, brand recognition, and established relationships with the major customers in each market. In addition, new competitors may enter the industry as a result of shifts in technology. The Company does not offer any assurances that it will be able to compete successfully against existing or future competitors.
THE COMPANY MAY BE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL.
The Company's future success is dependent on its ability to attract and retain talented personnel. There is intense competition for qualified personnel, and the Company may not be able to attract and retain qualified personnel necessary for the development and introduction of new products or to replace qualified personnel that may leave its employ. Part of the Company's compensation program includes stock options and stock grants, but there is currently insufficient authorized common stock for this program. Accordingly additional stock needs to be authorized. If the Company's stock price continues to perform poorly it may adversely affect its ability to retain or attract key employees.
THE COMPANY’S DATA MAY BECOME OUT OF DATE OR INACCESSIBLE
The Company depends for its success on access to a continuous supply of accurate and timely data. Data sources may become too expensive or providers may become unable to provide accessibility for a variety of physical, technical or legal reasons. Inability to supply timely and accurate data can cause a rapid deterioration in the Company’s customer base or force it to discount its services to the point where they cannot produce an operating profit. Furthermore management believes that the existing legacy network does not meet contemporary standards and that the data and technology need to be moved to a more efficient platform in a new location.
THE COMPANY MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE IT TO INCUR SIGNIFICANT EXPENSES OR PREVENT THE COMPANY FROM SELLING ITS PRODUCTS.
Intellectual property litigation can be costly and time-consuming and can divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. A successful claim by a third party of patent or other intellectual property infringement by the Company could compel it to enter into costly royalty or license agreements or force it to pay significant damages and could even require it to stop selling certain products.
CHANGES IN ACCOUNTING MAY AFFECT THE COMPANY'S REPORTED EARNINGS AND OPERATING INCOME.
U. S. generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations for many aspects of the Company's business, such as revenue recognition, accounting for investments, and treatment of goodwill or amortizable intangible assets, are highly complex and involve subjective judgments. Changes in these rules or their interpretation or changes in the Company's products or business could significantly change the Company's reported earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations. See “Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of this report.
THE COMPANY IS EXPOSED TO RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TO EVALUATE INTERNAL CONTROL OVER FINANCIAL REPORTING.
Section 404 of the Sarbanes-Oxley Act of 2002 required the Company's management to report on the operating effectiveness of the Company's internal controls over financial reporting as of December 31, 2010. The 2010 financial reform legislation (Dodd Frank Act) excluded smaller companies like the Company from this requirement. The Company intends to establish an ongoing program to perform system and process evaluation with testing including the use of outside evaluation firms.
With the introduction passage of The Dodd-Frank legislation in 2010, the auditors no longer need to review Internal Controls in a 404 environment for smaller companies such as the Company. The management of the Company remains committed to the introduction of better, more effective company-wide controls. However, it is difficult for the Company to predict how long it will take to complete the reviews of internal control over financial reporting for each year and to remediate any deficiencies. As a result, we may not be able to complete the assessment and process on a timely basis.
THE CONTROL AND DISSEMINATION OF DATA VARIES FROM STATE TO STATE.
The Company is subject to rules which vary from state to state and is subject to change at any time. Management believes that the Company cannot provide assurances that it is in compliance at any given time.
ACQUISITIONS AND JOINT VENTURES MAY HAVE AN ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company may make acquisitions or enter into joint ventures as part of its long-term business strategy. Any such transaction involves significant challenges and risks including that the transaction does not advance the Company's business strategy, that the Company doesn't realize a satisfactory return on the investment it makes, or that the Company may experience difficulty in the integration of new employees, business systems, and technology, or diversion of management's attention from its other business activities. These factors could adversely affect the Company's operating results or financial condition.
Item 2
Item 2 - Description of Property
Facilities
LocatePLUS Holdings Corporation, LocatePLUS Corporation, Metrigenics Inc., and Worldwide Information, Inc. are headquartered in Beverly, Massachusetts, where we lease 22,116 square feet. The lease on that facility expires on March 30, 2015, and our annual lease obligation is approximately $374,168.
Dataphant, Inc. is located in Austin, Texas, where it leases approximately 3,000 square feet pursuant to a month-to-month lease (which includes the use of office equipment, with current monthly rent of $3,680).
Entersect Corporation is located in Santa Ana, California, where it leases approximately 1,120 square feet. The current rent is $1,600 per month. This lease will not be renewed when it expires April 30, 2011 and we are currently looking for a replacement in smaller, less expensive office space.
Employment Screening Profiles, Inc. (d/b/a TruBackgrounds), is located in Oldsmar, Florida, where it leases approximately 1,400 square feet with a current monthly rent of $2,156. The lease on this location expires on August 31, 2011
Intellectual Property
Publicly available data concerning individuals is generally non-proprietary. As a result, our intellectual property consists largely of certain trade secrets and know-how associated with the integration of databases and our ability to link diverse datasets. We rely on a combination of confidentiality agreements, restrictions on access to our proprietary systems, and contractual provisions (such as in our user agreements) to protect our intellectual property.
We have registered LOCATEPLUS.COM ® as a trademark with the United States Patent and Trademark Office. We maintain LOCATEPLUS ® , WORLDWIDE INFORMATION™, ENTERSECT™, CareerScan™, and TrustmeID™ as unregistered trademarks relating to our products. We may, from time to time, claim certain other rights under trademark law, however, we currently have no other marks registered or pending with the United States Patent and Trademark Office or the equivalent agency of any other country.
In 2003, we filed for patent protection covering certain aspects of two of our products. We have filed for patent protection covering certain aspects of our unique search product, "Bull's Eye," that electronically matches database information with current public phone and utility information to identify current information. We also filed, through our Entersect Corporation, for patent protection covering certain aspects of our self-validation products Career Screen™ and TrustmeID™.
Item 3
Item 3 - Legal Proceedings
A claim was filed in Essex County Superior Court in Massachusetts on June 17, 2010 in the matter of Dun & Bradstreet v. LocatePLUS Holdings Corporation C.A.NO.ESCV2009-02421-D for $100,000. This suit involved the balance due for services rendered, plus interest from June 2006. The Company is in the process of completing discovery and is in discussions with the plaintiffs as to the settlement of this litigation.
As a result of a Litigation filed in Dallas County, Texas on May 22, 2009 in the matter of E -Backgroundchecks.com, Inc. (BGC) v. LocatePLUS Holdings Corporation C.A.NO.CC-09-03539-E a judgment for $55,158.75 was entered. The suit involved the failure of LocatePLUS to make payments for services provided by BGC. The Company has settled on this judgment and begun the process of paying down the remaining balance of $20,286.04.
As a result of the settlement over the Company’s indebtedness to Dutchess Private Equities Fund, Ltd. (”Dutchess”) as of December 31, 2009, Dutchess agreed to place 19,866,461 shares of Common Stock of the Company issued to it by the Company in early 2009 in conversion of indebtedness (the “Dutchess Shares”) into escrow, pending the resolution of ongoing litigation between the Company and its former CEO James Fields (“Fields”) over the Shares. Fields had claimed an ownership interest in the Shares by purchase. Fields renounced his claims to all the Dutchess Shares (except for 250,000 Shares retained in the escrow) on May 17, 2010 as part of a settlement of this litigation. The vast majority of the Dutchess Shares have been re-allocated after being released from escrow in order to satisfy pre-existing obligations. An amount remains to continue to satisfy other pre-existing obligations.
“On November 16, 2009, an execution was obtained against LocatePlus Holdings Corporation in a lawsuit styled Thomas Nolan v. LocatePlus Holdings Corporation, in the Essex County Superior Court in Massachusetts, C.A. No. ESCV2006-02125, in the amount of $160,269. The execution was in connection with a default judgment entered against the Company on January 11, 2007. The default judgment was appealed by the Company on or about April 1, 2009, and the appeal was subsequently dismissed on June 25, 2009. A payment of $15,000 was made in 2010 reducing the principal balance by that amount. On May 7, 2010, Thomas Nolan filed a second complaint styled as, Thomas Nolan v. LocatePlus Holdings Corporation in the Essex Superior Court in Massachusetts, C.A. No. ESCU 2010-00961 seeking the appointment of a receiver. The motion seeking appointment of a receiver was denied. The Company is actively engaged in payment discussions on the underlying judgment.
A class action suit, Sharon Taylor, et al. v. Biometric Access Company, et al., was brought in the US District Court for the Eastern District of Texas, C.A. No. 2:07-CV-00018. The matter is styled as a suit brought by the plaintiff class against a group of defendant companies, including the Company, under the Driver Privacy Protection Act, 18 USC §2721 et seq. The defendants filed a joint Motion to Dismiss which was granted by the Court. The plaintiff class filed an appeal of the dismissal of the case, which was denied.
A similar class action suit, Sam Wiles, Carol Watkins, Jackson Wills and Sarah Smith, Individually and on behalf of all others Similarly Situated, is pending in the US District Court for the Western District of Missouri, C.A. No. 09-4164-CV-C-NKL. The matter is styled as a class action suit brought by the plaintiff class against the Company, alleging a violation of the Driver Privacy Protection Act, 18 USC §2721, et. seq., and is one of several similar actions brought by the class against a number of companies in the same industry as the Company. The defendants filed a joint Motion to Dismiss which was granted by the Court. The plaintiff class has not yet filed an appeal of the dismissal.
On June 7, 2007 Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P. obtained a judgment in the amount of $1,948,631.18 (including interest and costs) against the Company in the Supreme Court of the State of New York, Index No. 06/6039989, based on amounts owing by the Company under notes issued to the plaintiffs. On October 24, 2007 the plaintiffs obtained a judgment for this amount in the Massachusetts Superior Court, Essex County, Index No. CIV- ESCV2007-01152. On February 6, 2008 the plaintiffs obtained in the same Court an ex-parte trustee process attachment against all assets of the Company held at TD Bank North, Index No CIV-08-268. This litigation has not been dismissed, satisfied or resolved. Upon payment in full of all principal and accrued interest due pursuant to the notes issued as part of the settlement on August 23, 2010, Special Situations will execute and file a satisfaction of judgment. Currently we are in default under the notes and renegotiations are ongoing.
On September 2, 2010 an Employment Discrimination civil lawsuit was filed against the Company and certain officers, Sonia Bejjani v LocatePlus Holdings Corporation et al, Mass. Superior Court, Essex County, Docket No. ESCV2010-01870-B.. On November 3, 2010 the Company answered denying any liability. To date, a Court appearance has not been scheduled.
On October 14, 2010 the U.S. Securities and Exchange Commission filed a civil action against the Company in the United States District Court for the District of Massachusetts, Securities and Exchange Commission v. LocatePlus Holdings Corporation. The Complaint alleges violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint alleges that the Company filed financial statements for the fiscal years 2005 and 2006 which were false and misleading. The action seeks the entry of a permanent injunction prohibiting the Company from engaging in future violations of the cited sections and rules; disgorgement and pre-judgment interest and civil monetary penalties. A motion to stay further proceedings has been filed by one of the parties and is currently pending.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
On December 15, 2009, the Company filed a definitive proxy statement asking shareholders for their written consent (a) to increase our authorized shares by adding a new authorization of Preferred Shares and (b) to authorize action by our officers to carry out the foregoing tasks. The purpose of this authorization was to successfully complete an agreed-upon exchange of approximately $1,817,828 of Convertible Debentures owned by Dutchess Private Equities Fund, Ltd. into 72,000 shares of new Series A Preferred Shares.
On December 29, 2009 the Company obtained the consent of a majority of the record holders of its Common Stock to the foregoing actions.
PART II
Item 5
Item 5 - Market for Common Equity and Related Stockholder Matters
Market Information
The following tables set forth the high and low closing sales prices per share for our Common Stock, each quarter during fiscal years 2008, 2009 and 2010 as reported by the Pink Sheets under the symbol LPHC.PK.
Holders
As of December 31, 2010 there were approximately 451 holders of record of our Common Stock and 1 holder of record of our Preferred Stock.
Common Stock
We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends or distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business and to fund future growth.
Preferred Stock
On December 31, 2009 the Company issued 72,000 shares of its Series A Preferred Stock $1 par value to a major creditor, Dutchess Private Equities Fund, Ltd. (“Dutchess”) in exchange for $1,817,828 of indebtedness held by Dutchess plus a Warrant to purchase up to 1,125,000 shares of the Company’s Common Stock. The 72,000 shares of new Series A Preferred Stock pay a dividend of 1% per annum of the par value per share in cash or in Series A Preferred Stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table reflects equity compensation granted or issued by us as of December 31, 2010, to employees and non-employees (such as directors, consultants, advisors, vendors, customers, suppliers and lenders) in exchange for consideration in the form of goods or services.
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of Outstanding options, Warrants and rights
Number of securities remaining available for future issuance under equity compensation plans(1)
Equity Compensation Plans approved by security holders:
Common Stock
226,987
$38.83
964,210
Recent Sales of Unregistered Securities
The following is a list of our securities sold within the past three years without registration under the Securities Act of 1933, as amended.
Effective December 30, 2009, all indebtness of the Company to Dutchess Private Equities Fund, Ltd. was satisfied through the issuance of 72,000 shares of Preferred Class Common Stock that was authorized by a majority of shareholders of Common Stock through a Written Consent process.
Purchases of Equity Securities
In November, 2009, the Company repurchased 2,000,000 shares of its Common Stock at $0.125 from an independent investor. This purchase was done in the form of a two year, 5.5% convertible note in the amount of $250,000. This note is convertible into shares of the Company’s Common Stock at a conversion price of twelve and one half cents ($0.125). All interest payable in relation to this note was prepaid.
Item 6
Item 6 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated financial condition and results of operations together with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements because of certain factors, including, but not limited to, those presented below.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues. Revenue increased 9% to $7,892,397 from $7,260,952 in the year ended December 31, 2009 . This increase is primarily attributable to the recognition of additional incremental revenue associated with the TruBackgrounds product of $831,414 offset by a decline in other product revenues.
Cost of Revenues . For the year ended December 31, 2010, our cost of revenue was $2,734,030 (35% of revenue) as opposed to $1,760,299 (24% of revenue) for the year ended December 31, 2009. This increase is primarily attributable to mix of data, use of different data providers, and increased third party data costs.
Selling and Marketing Expenses . Selling and marketing expenses for the year ended December 31, 2010 were $758,751 as compared to $1,179,221 for the year ended December 31, 2009, a decrease of 36%. The primary reason for the reduction is due to the elimination of non-essential marketing activities and also to a reduction in personnel related expenses.
General and administrative expenses . General and administrative expenses for the year ended December 31, 2010 were $4,951,159 as compared to $4,998,012 for the year ended December 31, 2009, a decrease of 1%.
Research and development expenses . Research and development expenses for the year ended December 31, 2010 were $0 as compared to $29,645 for the year ended December 31, 2009, a decrease of 100%. This decrease is attributable to management’s decision to suspend funding of the Metrigenics’ product development project and also a reduction in personnel related expenses.
Interest expense. Interest expense increased to $839,796 for the year ended December 31, 2010, from $514,714 for the year ended December 31, 2009, an increase of 63%. The increase is attributable to an adjustment made to the calculation of interest due to the Company’s senior debt holder.
Other Income . Other income increased to $4,698 for the year ended December 31, 2010, from $4,466 for the year ended December 31, 2009, an increase of 5%. Other income is derived from the collection of previously written off bad debts.
Finance Related Expenses. Finance Related Expenses decreased to $222,335 for the year ended December 31, 2010 from $294,765 for the year ended December 31, 2009, a decrease of 25%.
Gain or Loss on Fixed Assets. During 2010, the Company disposed of certain fixed assets resulting in a gain on fixed assets of $1,828.
Loss on termination of research and development project . This non-recurring expense in 2009 of $586,334 is attributable to the write off of costs associated with a discontinued product development project.
Gain on extinguishment of debt . This non-recurring item in 2009 of $127,000 is attributable to the extinguishment of certain payables pertaining to the loss on termination of research and development project.
Loss on permanent impairment of investment . The non-recurring expense in 2009 of $875,000 is attributable to the write off of an asset originally booked in 2004 that is now fully impaired in the opinion of management. Prior to the fourth quarter of fiscal year 2009, the asset had been evaluated on a quarterly basis with the evaluation reserve shown as “impairment of assets” in Stockholders’ (Deficit) Equity. This reserve totaled $873,500 at December 31, 2008.
Liquidity and Capital Resources
From our incorporation in 1996 through December 31, 2010, we raised approximately $43 million through a series of private placements and public offerings of equity and convertible debt to fund marketing and sales efforts and develop our products and services.
As of December 31, 2010, our cash and cash equivalents totaled $207,912.
The Company has taken a number of actions to reduce operating expenses, and to improve the salability of its products. The Company's major objective is to increase its order volume. Short and long-term liquidity needs require either significant improvement in operating results and/or the obtaining of additional capital. There can be no assurance that the Company's plans to achieve adequate liquidity will be successful. If the Company's operations continue to deteriorate due to increased competition, or other adverse events, it will be required to obtain additional sources of funds through asset sales, capital market transactions, financing from third parties or a combination thereof. The Company has not been able to attain operating profitability from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management's initiatives over the last two years, including cost reductions, securing debt financing and restructuring existing debt agreements have been designed to improve operating results and liquidity, and to better position the Company to compete under current market conditions. However, the Company may, in the future, be required to seek new sources of financing or additional accommodations from its existing lenders or other financial institutions, or it may seek equity infusions from private investors. The Company's ability to fund its operations is heavily dependent on the growth of its revenues over current levels in order to achieve profitable operations. The Company may be required to further reduce operating costs in order to meet its obligations. If the Company is unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about its ability to continue operations. No assurances can be given that management's initiatives will be successful, or that any such additional sources of financing, lender accommodations or equity infusions will be available.
The financial statements of the Company have been prepared on a "going concern" basis, which assumes the realization of assets and the liquidation of liabilities in the ordinary course of business. However, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. There are a number of factors that have negatively impacted the Company's liquidity, and may impact the Company's ability to function as a going concern. The Company has sustained net losses of $1,607,168 and $2,845,571 for the years ended December 31, 2010 and 2009, respectively. The Company has an accumulated deficit of $54,818,970, a stockholders' deficit of $9,945,683 and a working capital deficit of $6,891,710 at December 31, 2010. The above factors raise substantial doubt about the Company's ability to continue as a going concern.
During 2003, the Company issued subordinated promissory notes in the amount of $2.3 million, bearing simple interest ranging from 10% and 12% per annum. In 2007, the terms of these notes were re-negotiated and now bear interest ranging from 19% to 30%. As of December 31, 2010, the balance including interest on these notes of $112,000 remained unpaid and the notes are classified as demand.
On March 20, 2007, the Company issued a secured convertible debenture to Cornell Capital Partners (now YA Global Investments, L.P.) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement. The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission. The remaining $3,000,000 was not funded due to the Company failing to file the necessary Registration Statement. The Debentures matured on the third anniversary of the date of issuance and are now in default. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314, now $.057 per share due to the default. Under the Purchase Agreement the debentures are secured by substantially all of the Companys, and its wholly owned subsidiaries’ assets. The Company was engaged in negotiations toward a restructuring of this indebtedness.
At 12/31/2010 the balance of the debt on the Corporate books was $2,712,990.
Under the Purchase Agreement, we also issued to Cornell Partners (now YA Global Investments, L.P.) five-year warrants in six separate series as follows:
A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;
D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.
Simultaneously, with the sale and issuance of the Debentures to YA Global Investments, L.P. as mentioned in the preceding paragraph, the Company entered into a settlement agreement with Dutchess Private Equities Fund, Ltd. for the settlement of a dispute regarding the amount due under debt instruments issued by the Company to Dutchess during 2005 and 2006. Pursuant to the terms of the Settlement, the Company immediately paid a cash amount of $1,500,000 with two additional cash payments in the amount of $300,000 each to be made on the date that (i) the Company filed the Registration Statement (or, if earlier, within 45 days) and (ii) the Registration Statement is declared effective (or, if earlier, within 145 days), neither of which took place. The Company also issued a Note in the amount of $1,500,000 and agreed to reduce to $0.10 per share the exercise price of the warrants issued to Dutchess. Dutchess terminated its security interest in the Company’s assets upon the Initial Payment.
On December 11, 2007, the Company received a letter dated December 6, 2007 ( the "Notice Letter"), from YA Global Investments, L.P., (formerly known as Cornell Capital Partners, L.P.) notifying the Company of certain Events of Default under the Secured Convertible Debenture dated March 20, 2007 of the Company (the "Debenture"). As a result of this default, the entire note has been re-classified as short term. The Company was engaged in negotiations toward a restructuring of this indebtedness.
On March 21, 2011, YA Global Investments, L.P. notified the Company that it had agreed to assign the debenture to Gulabtech, LLC., an unrelated third party, subject to certain unspecified conditions. On March 30, 2011, YA Global Investments, L.P. advised the Company that it had completed the assignment to Gulabtech, LLC.
On June 1, 2010, the Company agreed to the cancellation of series A- E of the 5-year warrants held by YA Global Investments, L.P to purchase a total of 9,836,701 shares of the Company’s Common Stock. The cancellation was in exchange for 300,000 shares of Common Stock.
On December 30, 2009, all indebtedness to Dutchess Private Equities Fund, Ltd. (“Dutchess”) was settled through the issuance of 72,000 shares of Preferred Stock. The 72,000 shares of new Series A Preferred Stock issued to Dutchess have a par value of $1.00 per share and a $25 liquidation preference. The shares are restricted as to resale. The shares pay a dividend of 1% per annum of the par value per share in cash or in Series A Preferred Stock. Holders will have a vote on any matters affecting the Series A Preferred Stock. The shares are convertible at any time into the Company’s Common Stock at 41.66 shares of Common Stock per share of Preferred Stock (fully converted, 3,001,680 shares of Common Stock). The Company can force conversion of Preferred Stock not to exceed 4.99% of total Common Stock outstanding if the 10-day moving average closing price per share of the Company’s Common Stock shall exceed $.50 per share. Holders also had a right to “put” their shares to the Company. As of December 31, 2010, the Company has satisfied one of three requests to repurchase 600 shares of Preferred Stock and the balance of Preferred shares issued and outstanding to Dutchess is 71,400. On February 15, 2011 Dutchess agreed to a modification of the Debt Conversions Agreement changing the terms and conditions of the “put” as follows:
a)
Through the last quarter of 2010, during any calendar quarter not to exceed fifteen thousand dollars ($15,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
b)
Through the last quarter of 2011, during any calendar quarter not to exceed twenty five thousand dollars ($25,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
c)
After 2011, during any calendar quarter not to exceed thirty five thousand dollars ($35,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
“Net Operating Income” for purposes of this section shall mean the net operating income of the Company determined in accordance with generally accepted accounting principles and as reported on the Company filings with the U.S. Securities and Exchange Commission.
During 2009, the Company issued several one-year convertible promissory notes totaling $375,000, bearing simple interest of 8% per annum. The balance of this debt at December 31, 2010 is $200,000. These notes are currently in default.
In November, 2009, the Company repurchased 2,000,000 shares of its Common Stock at $0.125 from an independent investor. This purchase was done in exchange for a two year, 5.5% convertible note in the amount of $250,000. This note is convertible into shares of the Company’s Common Stock at a conversion price of twelve and one half cents ($0.125). All interest payable in relation to this note was prepaid.
As of April 10, 2010, the Company issued to Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P., a four-year promissory note in the amount of $2,750,000 bearing simple interest of 5% per annum (the "Substitute Note"). The Substitute Note was in substitution for previous existing indebtedness that was in default. The balance of principal and interest due on the Substitute Note at June 30, 2010 was $2,742,901. The Substitute Note was cancelled as of August 23, 2010 in favor of two separate notes, each in the principal amount of $1,375,000, payable separately to each of Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P. and due in full January 10, 2016. Each note contains an identical revised monthly principal repayment schedule in monthly installments of $7,500, beginning February, 2011, increasing to $10,000 April 10, 2011, $15,000 July 10, 2011 and $25,000 October 10, 2011. Interest is payable on the 10th day of each month at 5% per annum but any interest payment may be deferred until maturity at a 10% per annum rate.
Through June 30, 2010, the Company issued several one-year convertible promissory notes totaling $155,500, bearing simple interest of 8% per annum. The balance of this debt at December 31, 2010, is $30,000. This note is currently in default.
In 2010, the Company obtained options to purchase 2,228,952 shares of its Common Stock at $0.125 per share from two former Board members. The stock was to be used to satisfy other obligations of the Company to issue stock.. As of December 31, 2010, the Company has utilized 928,952 shares of the 2,228,952 available. The Company exercises the options and purchases the stock with two year, 5.5% convertible notes. At the stated maturity of the notes, the holders have the option to have their notes satisfied with cash or convert them back into common stock The two shareholders currently hold signed notes from the Company totaling $278,619 for the full value of the stock. The Company is not carrying the full balance of the notes on its books but rather a portion of this calculated based on the number of shares that have been used resulting in gross notes payable totaling $116,119 which are reflected on the Company’s balance sheet. Interest has been partially prepaid on the notes.
In connection with an offering that closed on August 15, 2005 the Company entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of an aggregate of $8,965,000 in convertible term notes. Per the agreement, a registration statement was to be filed registering the underlying shares which was not completed resulting in an additional $2,300,000 in penalty charges. The Company is currently in the process of negotiating with these note holders for a restructuring of this indebtedness and has accrued a charge of $477,000 to cover the anticipated costs.
Commitments and Contingencies
Operating Leases
We lease office space and equipment under various operating lease agreements which terminate on various dates through 2015. Rent expense amounted to $426,225 and $421,387 during 2010 and 2009, respectively.
Capital Leases
None
Contractual Obligations
The following represents the contractual obligation and commercial commitments as of December 31, 2010.
In 2010, the Company obtained options to purchase 2,228,952 shares of its Common Stock at $0.125 per share from two former Board members. The stock was to be used to satisfy other obligations of the Company to issue stock.. As of December 31, 2010, the Company has utilized 928,952 shares of the 2,228,952 available. The Company exercises the options and purchases the stock with two year, 5.5% convertible notes. At the stated maturity of the notes, the holders have the option to have their notes satisfied with cash or convert them back into common stock The two shareholders currently hold signed notes from the Company totaling $278,619 for the full value of the stock. The Company is not carrying the full balance of the notes on its books but rather a portion of this calculated based on the number of shares that have been used resulting in gross notes payable totaling $116,119 which are reflected on the Company’s balance sheet. Interest has been partially prepaid on the notes.
The Company has taken a number of actions to reduce operating expenses, and to improve the salability of its products. The Company's major objective is to increase its order volume. Short and long-term liquidity needs require either significant improvement in operating results and/or the obtaining of additional capital. There can be no assurance that the Company's plans to achieve adequate liquidity will be successful. If the Company's operations continue to deteriorate due to increased competition, or other adverse events, it will be required to obtain additional sources of funds through asset sales, capital market transactions, financing from third parties or a combination thereof. The Company has not been able to attain operating profitability from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management's initiatives over the last two years, including cost reductions, securing debt financing and restructuring existing debt agreements have been designed to improve operating results and liquidity, and to better position the Company to compete under current market conditions. However, the Company may, in the future, be required to seek new sources of financing or additional accommodations from its existing lenders or other financial institutions, or it may seek equity infusions from private investors. The Company's ability to fund its operations is heavily dependent on the growth of its revenues over current levels in order to achieve profitable operations. The Company may be required to further reduce operating costs in order to meet its obligations. If the Company is unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about its ability to continue operations. No assurances can be given that management's initiatives will be successful, or that any such additional sources of financing, lender accommodations or equity infusions will be available.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report. Note that our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Our accounting policies that are the most important to the portrayal of our financial condition and results, and which require the highest degree of management judgment relate to revenue recognition and the provision for uncollectible accounts receivable. We estimate the likelihood of customer payment based principally on a customer’s credit history and our general credit experience. To the extent our estimates differ materially from actual results, the timing and amount of revenues recognized or bad debt expense recorded may be materially misstated during a reporting period.
Certain Related Party Transactions
On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), engaged in the business of developing and delivering integrated, customized Web-enabled
solutions designed to aid in background verification, applicant management and human resource collaboration processes. Trubackgrounds was owned by Derrick Spatorico, who received 9,000,000 shares of the Company’s Common Stock in payment for Trubackgrounds.
On September 25, 2009 Mr. Spatorico became a Director of the Company and on February 25, 2010 he became acting President and Chief Executive Officer. Mr. Spatorico’s stock was subject to an escrow agreement by the terms of which he was to receive all of the stock out of escrow no later than September 1, 2011. On August 5, 2010 the escrow terminated in settlement of certain pending litigation and the 9,000,000 shares were transferred to The Spatorico Family Blind Trust established by Mr. Spatorico.
At December 31, 2010, the Company has outstanding notes payable totaling $378,000 to Derrick Spatorico that are in default.
In November, 2009 and January, 2010, the Company entered into two seperate notes with two former Board members and current shareholders. The company issued the notes in exchange for the pledged securities of LPHC common stock held by these shareholders to be used for settlement of debt with various note holders of the company as needed. The notes are not reflected on the Company's financial statements however would become effective
Use of Our Assets
None
Recently Issued Accounting Pronouncements
Codification
In June 2009, the FASB codified existing accounting standards. The FASB Accounting Standards Codification (ASC) is the source of authoritative accounting principles generally accepted in the United States of America (GAAP) recognized by the FASB and supersedes all existing non-SEC accounting and reporting standards. All ASC content carries the same level of authority and anything outside of the ASC is non-authoritative. The Company adopted the new guidance for the years ended December 31, 2010 and 2009, which changed the way the Company references accounting standards.
Off-Balance-Sheet Arrangements
The Company has no off-balance-sheet arrangements currently in effect or in effect during the year ended December 31, 2010, including but not limited to any guarantee contracts that has the characteristics defined in paragraph 3 of FASB Interpretation No. 45 (November 2002), as amended; any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, any obligation that could be accounted for as a derivative instrument, or any obligation arising out of a variable interest (as referenced in FASB Interpretation No. 46, as amended).
Item 7
Item 7 - Financial Statements
Our financial statements as of and for the twelve months ended December 31, 2010 and December 31, 2009 are set forth in the section of this Annual Report beginning on page.
Item 8
Item 8 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 8A - Controls and Procedures
Evaluation of disclosure controls and procedures.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
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 the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.
Our management, including the Chief Financial Officer and Chief Executive Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010, based on the standards and framework established by the Committee of Sponsoring Organizations of the Treadway Commission, COSO. Based upon the evaluation performed it was concluded that our disclosure controls and procedures were not effective as of December 31, 2010.
Based on our evaluation for the period ended December 31, 2010, our Chief Executive Officer has concluded that at the end of this reporting period we have identified matters that would constitute material weaknesses (as such term is defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal controls over financial reporting. It is concluded that because material weaknesses exist, internal controls over financial reporting are not effective at this time.
The material weakness relate to the financial closing process, a lack of segregation of financial responsibilities and the need for additional qualified financial accounting personnel. Based on the evaluation performed, disclosure controls and procedures were not effective for the twelve months ended December 31, 2010.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes In Internal Control Over Financial Reporting
There were no significant changes in our internal controls over financial reporting that occurred during the year ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Following the twelve months ended December 31, 2010, we will begin to take specific actions to remediate the reportable conditions and material weaknesses, including the devotion of additional resources to the quarterly closing process, and realignment of certain financial responsibilities to achieve stronger segregation of financial duties, and the engagement of a permanent Chief Financial Officer. We intend to continue to further strengthen our controls and procedures regarding the closing process over the next twelve months.
PART III
Item 9
Item 9 - Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
The following table sets forth specific information regarding our executive officers and directors as of April 13, 2011 .
Executive Officers and Directors
Age
Positions
Richard L. Pyle
Director, Governance Committee Chairman, Audit Committee Member
Patrick Murphy
Director and Secretary
James Ahern
Director, Compensation Committee Chairman
George Isaac
Director, Audit Committee Chairman, Compensation Committee Member
Anthony Spatorico
Director
Ronald Lifton Director, Chief Executive Officer, President
Brian McHugh Chief Financial Officer, Treasurer
Kenneth Kaiser Executive Vice President, Chief Risk Officer
Current Directors and Officers
Richard L. Pyle, Director, (66) is currently a commercial real estate investor and has held executive or management positions over the past thirty years at companies such as Spencer Products Inc, AMG Industries and Procter and Gamble. Mr. Pyle owned his own manufacturing business in Worcester, MA. He was a former Professor of Management at the University of Massachusetts-Boston, during which he also worked as a management consultant. In addition to his extensive career, Mr. Pyle continues to serve on the boards of the Worcester Salvation Army, Becker College (Vice Chair), the Worcester Youth Center, and previously the Boys and Girls Club of Worcester, the Manufacturing Assistance Center, and Jeremiah’s Inn. Mr. Pyle has a PhD in Business Administration from the University of Massachusetts, an MBA from the University of Michigan, and a BA in Physics from the University of Louisville. Mr. Pyle is currently a LocatePlus Holdings Board member who sits on the Audit Committee, and is Chairman of the Governance Committee and Nominating Committee.
Mr Pyle has the following degrees: University. of Louisville-BA Physics, 1962-1966 University. of Michigan-MBA, 1966-1968 Universiy. of Massachusetts-PHD, 1976-1980
Patrick F. Murphy, Secretary and Director, (57), has practiced law in Massachusetts for more than twenty years. He attended the University of Massachusetts at Boston from 1972 to 1976 where he earned his B.A. in Political Science and Sociology. He attended the Harvard Law School from 1984 to 1987 earning his J.D
James Ahearn, Director, (70) is currently serving as a Director and Compensation Committee Chairman. He is the Chairman and CEO of Phoenix Gaming and Entertainment, LLC, a casino management and development group. He was previously Chief Operating Officer of the company and its predecessor, The Tracy Group. The company focuses on work-out strategies, development of management and marketing strategies, and ground up development for a variety of clients. Prior to these positions Mr. Ahearn had extensive experience in executive management in a variety of areas including over 30 years experience with the Federal Bureau of Investigation, where he served as the highest level field executive for his last 17 years.
He holds an undergraduate degree in Management/Marketing from St. John’s University, Queens, N.Y. (1962) and completed a Masters level program with the University of Nevada, Reno in Executive Management.(1995)
He is a former member of the International Association of Chiefs of Police and is currently involved in numerous charitable organizations serving wounded veterans and the families of deceased members of the Armed Forces
George Isaac, Director and Audit Committee Chairman, (66) Director and Audit Committee Chairman, a Massachusetts Certified Public Accountant and is affiliated with the Massachusetts Board of Certified Public Accountants and the American Institute of Certified Public Accountants. He is experienced in all areas of financial management having practiced as a CPA for 25 years within a financial career that reaches back nearly 40 years. His experience includes management, business consulting, budgeting, managerial accounting, risk management, internal controls, tax advice and preparation, financial planning and reporting, audit functions, banking functions, and all treasury functions including SEC compliance. Specifically, his current practice involves services as a consulting CFO. In the past he has served as CFO for a publicly traded company, a managing partner of a public accounting firm, and has managed a commercial office building. As a board member of a community bank and a publicly traded company he has served as a member and is familiar with the functioning of board audit committees, executive committees, and compensation committees. His experience includes the negotiation of significant expansion and growth credit availability but also downsizing to maintain profitability where necessary. He is proficient in Russian and German. For the past five years Mr. Isaac has served as a consulting Chief Financial Officer for several closely held businesses in Massachusetts with responsibility for all financial planning and reporting, tax preparation, banking and related treasury functions for each of his clients.
BSBA Clark University, CPA
Anthony Spatorico, Director, (70) has over 30 years experience as a Senior Executive which include a variety of Technical and Management functions at Eastman Kodak as well as VP of Research and Development at Anchor Continental (Intertape, Inc.). Most recently, Mr. Spatorico was involved in directing revenue growth and software development of Employment Screening Profiles, Inc. (TruBackgrounds), a pre-employment screening company which was acquired by the Company in 2009. Mr. Spatorico is currently a member of the Board of Directors and sits on the Governance, Nomination, and Compensation Committees.
Ronald Lifton, President, Chief Executive Officer, and Director, (52) has had intensive experience in the analysis, development and negotiation of business ventures. Mr. Lifton was the Chief Executive Officer of TRI Holdings, Inc. a company with investments in a multitude of business segments globally. As President of Lex-Net One Communications, Inc, and Lex-Net One Communications Inc., Cornerpost Division, he built a backroom support system to interface with billing, customer service and accounting systems. Mr. Lifton was one of the key developers of the Cornerpost product, an e-Commerce solution for small and medium sized businesses. As the President and CEO of International Monetary Exchange System, he was a leading provider of new universal "Stored Value" and "Pre-Paid" payment solutions. He was a founder and Executive Vice President/Chief Operating Officer of Wireless Network Services, Inc. (American Roaming Network), a wholly-owned subsidiary of TRI Holdings, Inc., providing denied cellular roaming calls to the cellular industry and the founder and Executive Vice President/Chief Operating Officer of National Communications Network, Inc. a provider of automated and operator assisted telephone calls to the hospitality industry with services throughout the U.S., Mexico, Canada, the Caribbean and the Bahamas. Mr. Lifton is currently the Chief Executive Officer and President of LocatePlus Holdings Company and is a member of the Board of Directors. He holds a B.A. in Environmental Design and Urban Planning (1980) from the University of Buffalo. Mr. Lifton has also taken numerous seminars and classes in various business segments throughout the years and has served on the Board of Directors of other companies in the private and charitable sector.
Brian McHugh, CFO and Treasurer, (53) is a seasoned finance executive with 29 years of global operational, general and financial leadership, he is responsible for leading LocatePLUS’ financial strength. Prior to LocatePLUS, Mr. McHugh worked as a divisional and interim CFO at NEC, DEC and Bailey’s Irish Cream in Europe. He led teams at Lockheed Martin, Leer Automotive and Revlon as well as small to mid-size entrepreneurial companies in the telecommunications, ”Green” de-manufacturing, construction & development, realty, e-commerce, national retailers and multinational distribution business sectors.
Mr. McHugh holds a Bachelor’s and Master’s degree from Nottingham in England, (1980-82) and holds accounting qualifications with the CPA and FCCA designations.
Kenneth Kaiser, EVP and CRO, (55) As Executive Vice President and Chief Risk Officer, Kenneth Kaiser leads the risk, compliance and privacy functions of the Company and its subsidiaries. Prior to LocatePLUS, Mr. Kaiser enjoyed a distinguished 27-year career with the Federal Bureau of Investigation retiring from the position of Assistant Director. As Assistant Director of the Inspection Division Mr. Kaiser ensured compliance and facilitated performance by providing independent evaluations of all FBI divisions and programs both domestically and internationally. As the Assistant Director of the Criminal Investigative Division, Kenneth directed the efforts of over 4,900 special agent resources that provided strategic, operational, investigative, and infrastructure support to all criminal programs.
Each of the directors holds such his or her office until his or her successor is duly chosen and qualified, or until his or her earlier resignation or removal. The Company is not aware of any family relationships between any of the officers and any of the Company’s directors. Each of the officers holds such office until his or her successor shall have been duly chosen and shall have been qualified, or until his earlier resignation or removal. We have entered into severance agreements with a number of our employees the cost of which are not considered to be material.
Former Directors and Officers
Christian Williamson, Director and Chairman of the Board of Directors for LocatePlus Holdings Corporation resigned from his position on April 7, 2011.
Derrick Spatorico, a former member of the Board of Directors, ceased to be a member of the Board on May 28, 2010. He also resigned as Acting Chief Executive Officer on the same date.
Bart Valdez, a former member of the Board of Directors, ceased to be a member of the Board on May 28, 2010.
Geoffrey Lee, Interim Chief Executive Officer resigned from his position on February 26, 2010.
Section 16 Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% beneficial owners are required to furnish us with copies of all forms they file pursuant to Section 16(a).
Except as set forth in the preceding paragraph, and based solely on review of the copies of such reports furnished to us and written representations from reporting persons that no other reports were required, to our knowledge, all such persons complied with all of the Section 16(a) filing requirements applicable to them with respect to 2010.
Audit Committee
The Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of our independent auditors, reviews the scope of the audit services provided by our independent accountants, and reviews our accounting practices and internal accounting controls. George Isaac and Richard Pyle are members of the Audit Committee. George Isaac is the Chairman of the Audit Committee.
Compensation Committee
The Compensation Committee of the Board of Directors reviews and recommends to the Board of Directors the salaries, benefits and stock option grants of all employees, consultants, directors and other individuals compensated by us. The Compensation Committee also administers our equity compensation plan and other employee benefits plans that we may adopt from time to time. The Chairman of the Compensation Committee is James Ahearn. He is joined on the Committee by George Isaac.
Nominating and Corporate Governance Committee
Pursuant to its written charter, the Nominating and Corporate Governance Committee is responsible for identifying individuals qualified to become Board members, consistent with criteria approved by the Board, and recommending that the Board select the director nominees for election at each annual meeting of stockholders. The Nominating and Corporate Governance Committee is also responsible for developing and recommending to the Board a set of corporate governance guidelines applicable to the Company, periodically reviewing such guidelines and recommending any changes thereto, and overseeing the evaluation of the Board and management. The Chairman of the Nominating and Corporate Governance Committee is Richard Pyle. He is joined on the Committee by Christian Williamson and Anthony Spatorico.
Code of Ethics
The Company adopted a Code of Ethics in May 2004.
Item 10
Item 10 - Executive Compensation
Summary Compensation Table
The following table sets forth, for 2010, certain compensation paid by us, including and certain other compensation, to our Chief Executive Officer and all other executive officers whose annual compensation for the years ended December 31, 2010 and 2009.(the “Named Executive Officers”).
Notes:
1.
Salary amounts represent base salary only.
2.
Other compensation costs include consulting salary, and payment for vacation, holidays, and sick days.
3.
No bonuses were paid in the fiscal years in which services were provided.
4.
All Executives joined the Company during 2010 (July 2010 for Mr. Lifton and Mr. McHugh, March 2010 for Mr. Kaiser). Mr. Kaiser was engaged in 2009 as a consultant and his consulting fees are included in the 2009 other comp. number.
5.
Mr. McHugh and Mr. Kaiser deferred part of their salary for 2010. Mr. McHugh took in payment initially $85,000 of his $110,000 salary, and then increased the cash element in Q4 2010 to $100,000. Mr. Kaiser is accruing $45,500 of his agreed $127,500 annual salary. The deferred amount is non-interest bearing.
6.
Mr. Lifton did not receive cash or stock compensation for his services on the Company’s Board.
7.
Under the terms of his employment agreement, Mr. Lifton was to receive $5,400 in the form of an auto allowance in 2010 of which he used $680. In addition, Mr. Lifton was to receive a housing allowance of $5,400 for 2010, of which he used $0
8.
Under the terms of Mr. Lifton’s employment agreement, he is to be awarded stock options in the following fashion:
§
July 2010: 500,000 stock options on date of hire at the prevailing stock price ($0.07).
§
July 2011: 500,000 stock options with an option exercise price of $0.20 per unit of stock.
§
July 2012: 500,000 stock options with an option exercise price of $0.30 per unit of stock.
§
July 2013: 500,000 stock options with an option exercise price of $0.45 per unit of stock.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None
Director Compensation
Compensation to outside members of the Board for services rendered through December 31, 2010 has not yet been fully distributed. Director compensation for services rendered in 2010 totaled $204,333
Item 11
Item 11 - Security Ownership of Certain Beneficial Owners and Management
As of the close of business on March 25, 2011, there were 49,980,089 shares of Common Stock issued and outstanding. There were also unexercised options and warrants issued to purchase shares of Common Stock outstanding on that date. Of these, 2,991,067 issued shares and 4,613,712 options, warrants, and convertible shares were owned by officers, directors and over 5% stockholders.
The following table sets forth certain information known to us with respect to the beneficial ownership of our Common Stock as of the close of business on March 25, 2011, by:
-Each of our directors;
-Each of our executive officers;
-Each person known to us to beneficially own more than 5% of either class of our common stock; and
-All of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock underlying options or warrants held by that person that are currently exercisable or will become exercisable within 60 days of December 31, 2010 are deemed outstanding, while such shares are not deemed outstanding for computing percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table, each stockholder identified in the table possesses sole voting and investment power with respect to all shares shown as beneficially owned by such stockholder. Each of our directors and executive officers can be contacted at 100 Cummings Center, Suite 235M, Beverly, Massachusetts 01915.
*
Less than one percent of outstanding shares.
**
On April 8, 2011, we filed a Form 8-K and reported under item 5.02 that the Board of Directors accepted the resignation of Christian Williamson as Director and Chairman of the Board.
Item 12
Item 12 - Certain Relationships and Related Transactions
On June 17, 2002, the Board of Directors adopted our Interested Parties Transaction Policy, pursuant to which the Company will not enter into any agreement, arrangement or understanding with any director, officer, or 5% or greater stockholder of unless (i) the terms of such agreement, arrangement or understanding are consistent with the terms of equivalent agreements or arrangements that the Company could obtain from third parties; and (ii) the agreement, arrangement or understanding is fair to the Company.
Use of Company Cars.
None
Item 13
Item 13 - Exhibits and Reports on Form 8-K
Reports of Form 8-K - 2010 & 2009
On April 8, 2011, we filed a Form 8-K and reported under item 5.02 that the Board of Directors accepted the resignation of Christian Williamson as Director and Chairman of the Board.
On March 30, 2011, we filed a Form 8-K and reported under item 8.01 that the Company’s senior debt holder, YA Global notified the Company that it had completed the assignment of the Debenture to Gulabtech, LLC.
On March 24, 2011, we filed a Form 8-K and reported under item 8.01 that on March 22, 2011, the Company’s senior debt holder, YA Global notified the Company that it had agreed to assign the Debenture to Gulabtech, LLC, subject to certain unspecified conditions.
On October 15, 2010, we filed a Form 8-K and reported under item 8.01 that on October 14, 2010 the U.S. Securities and Exchange Commission filed a civil action against the Company in the United States District Court for the District of Massachusetts, Securities and Exchange Commission v. LocatePlus Holdings Corporation. The Complaint alleges violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint alleges that the Company filed financial statements for the fiscal years 2005 and 2006 which were false and misleading. The action seeks the entry of a permanent injunction prohibiting it from engaging in future violations of the cited sections and rules; disgorgement and pre-judgment interest and civil monetary penalties. The Company is in the process of reviewing the complaint and has not yet filed a formal response.
On August 31, 2010, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors held on August 30, 2010, the Board voted to extend an offer for the position of Director to Anthony Spatorico and Ronald Lifton to occupy the two vacant positions on the Board of Directors. On August 30, 2010, both Mr. Spatorico and Mr. Lifton accepted this offer.
On July 14, 2010, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors held on July 8, 2010, the Board voted to appoint Ronald Lifton as President and Chief Executive Officer. Additionally, the Board appointed Brian McHugh to the position of Chief Financial Officer and Treasurer and Kenneth Kaiser to Executive Vice President and Chief Risk Officer.
On June 1, 2010, we filed a Form 8-K and reported under item 8.01 that effective May 6, 2010, the Company agreed to the cancellation of a series of 5-year warrants held by YA Global Investments, L.P to purchase a total of 9,836,701 shares of the Company’s Common Stock. The cancellation was in exchange for 300,000 shares of Common Stock.
On June 1, 2010, we filed a Form 8-K and reported under item 5.02 that the Board of Directors, on May 28, 2010 had accepted the voluntary resignation of Derrick Spatorico as Director and Acting President, Chief Executive Officer, and Treasurer. Additionally reported was the resignation of Bart Valdez from the Board of Directors.
On February 26, 2010, we filed a Form 8-K and reported under item 5.02 the resignation of Geoffrey Lee as Interim President and Chief Executive Officer. Mr. Lee resumed his previous position as President of Entersect, a wholly owned subsidiary of LocatePlus Holdings. Following the resignation of Mr. Lee, the Board of Directors appointed current Board member, Derrick Spatorico to the position of Acting President and Chief Executive Officer.
On December 31, 2009, we filed a Form 8-K and reported under item 8.01 that the Company had received the consent of a majority of the shareholders of record to amend its Certificate of Incorporation, and on December 31, 2009 it had amended the Certificate of Incorporation to permit an increase in the number of authorized shares by adding 1,000,000 shares of Preferred Stock to the already authorized 50,000,000 shares of Common Stock. Furthermore, that Company announced that it had issued 72,000 shares of its Series A Preferred Stock to a major creditor, Dutchess Private Equities Fund, Ltd. (“Dutchess”) in exchange for $1,817,828 of indebtedness held by Dutchess plus a Warrant to purchase up to 1,125,000 shares of the Company’s Common Stock.
On September 25, 2009, we filed a Form 8-K and reported under items 1.01 and 5.02 that the Company had acquired all of the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), Oldsmar (Tampa) Florida, engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes. At this time, the Board of Directors accepted the voluntary resignation of David Skerrett and voted to appoint Derrick Spatorico, founder of TruBackgrounds, as a member of the Board of Directors.
On August 17, 2009, we filed a Form 8-K and reported under item 1.01 and announced a strategic alliance between the Company and the MindBreeeze Enterprise Search Division of Fabasoft Corporation, Needham, Massachusetts, a leading provider of enterprise content management solutions. The strategic alliance enables the two companies to market and deliver a sophisticated public records search solution - Mindbreeze PR (Mindbreeze Public Records) that seamlessly connects users to the critical background information they need - from sources both inside and outside the enterprise firewall.
On June 1, 2009, we filed a Form 8-K and reported under item 1.01 and announced a confidential settlement agreement with James Fields, former Chief Executive Officer and President. The agreement resolves all issues between the Company and Mr. Fields concerning previously disclosed litigation.
On May 29, 2009, we filed a Form 8-K and reported under items 8.01 and 9.01 that Christian Williamson, Chairman of the Board had issued a letter to shareholders.
On April 17, 2009, we filed a Form 8-K and reported under item 5.01 announcing that at a meeting of the Board of Directors held on April 15, 2009, the Board accepted the resignation of Director Ralph Caruso from the Board of Directors due to an increased demand from other business matters. Following the resignation of Mr. Caruso, the Board voted to extend the open seat on the Board of Directors to Bart Valdez.
On February 25, 2009, we filed a Form 8-K and reported under items 5.02 and 9.01 announcing that at a meeting of the Board of Directors held on February 18, 2009, the Board of Directors voted to terminate the employment of James C. Fields, the then current President, Chief Executive Officer, Acting Chief Financial Officer and Treasurer. Following this decision, the Board voted to appoint Geoffrey Lee, President of Entersect, a wholly owned subsidiary of LocatePLUS Holdings and Vice President of Online Services
for LocatePLUS as Interim Chief Executive Officer and President. At a Board meeting held on February 24, 2009, the Board elected Mr. Lee to the additional position of Acting Treasurer. Item 9.01 of this filing contained a Press Release to the effect of the announcement under 5.02 and is attached to this filing.
On January 30, 2009, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors held on January 29, 2009, the Board had voted to elect current Director, Patrick Murphy to the position of Corporate Secretary.
Exhibits
3.1
Second Amended and Restated Certificate of Incorporation of LocatePLUS Holdings Corporation, as filed with the Secretary of State of the State of Delaware on March 19, 2002.(1)
3.2
By-Laws of LocatePLUS Holdings Corporation.(1)
4.1
Warrant and Unit Agreement by and between LocatePLUS Holdings Corporation and Transfer Online, Inc., dated March 22, 2002.(1)
4.2
Form of Warrant Certificate.(2)
4.3
Form of Unit Certificate.(2)
4.4
Form of Class A Voting Common Stock Certificate.(2)
4.5
Form of Class B Non-voting Common Stock Certificate.(2)
4.6
Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class A Voting Common Stock).(1)
4.7
Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class B Non-voting Common Stock).(2)
4.8
$10,000 Convertible Promissory Note, dated March 9, 2001.(1)
4.9
Amended Form of Warrant Certificate.(3)
4.10
Amendment to $10,000 Convertible Promissory Note, dated July 23, 2002.(3)
5.1
Opinion of Geoffrey T. Chalmers, Esq. (5)
10.1
Master Lease Agreement between Cummings Properties, Inc. and Worldwide Information, Inc., dated November 20, 1999.(1)
10.2
Secured Note, dated June 1, 2001.(1)
10.3
Purchase Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005.(4)
10.4
Form of 3% Senior Convertible Note dated July 8, 2005 and August 15, 2005, by and between LocatePLUS Holdings Corporation and each of the Investors named in Exhibit 10.26. (4)
10.5
Registration Rights Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005. (4)
10.6
Form of Common Stock Purchase Warrant issued to the Investors named in Exhibit 10.26. (4)
10.7
Debenture, dated December 29, 2005, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P. (5)
10.8
Debenture Registration Rights Agreement, dated December 29, 2005 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P. (5)
10.9
Warrant Agreement Dated December 30, 2005(5)
10.10
Security Agreement Dated December 30, 2005(5)
10.11
Subscription Agreement Dated December 30, 2005(5)
10.12
Debenture, dated July 21, 2006, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund, L.P. (5)
10.13
Debenture Registration Rights Agreement, dated July 21, 2006 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund, L.P. (5)
10.14
Warrant Agreement Dated July 21, 2006 (5)
10.15
Security Agreement Dated July 21, 2006(5)
10.16
Subscription Agreement Dated July 21, 2006(5)
10.17
Addendum Dated October 18, 2006 to Debenture Dated December 29, 2005 and Debenture Dated July 21, 2006(5)
10.18
Debt Conversion Agreement dated As of November 4, 2009 by and between the Company and Dutchess Private Equities Fund, Ltd., (6)
10.19
Series A Convertible Stock Purchase Agreement dated as of November 4, 2009 by and between the Company and Dutchess Private Equities Fund, Ltd., (6)
10.20
Purchase and Sale Agreement dated September 25, 2009 by and among the Company, Employment Screening Profiles, Inc., (“Trubackgrounds”) and Derrick Spatorico. (6)
10.21
Escrow Agreement dated as of November 25, 2009 by and between the Company and Derrick Spatorico (6)
21.1
Subsidiaries of LocatePLUS Holdings Corporation.(1)
23.1
Consent of Geoffrey T. Chalmers, Esq. (filed with exhibit 5.1)
23.2
Consent of Livingston and Haynes P.C. (5)
23.5
Consent of Livingston & Haynes, P.C.
31.1
302 Certification of the Chief Executive Officer
31.2
302 Certification of the Chief Financial Officer
906 Certification of C.E.O. and C.F.O.
(1)
Filed as an Exhibit to Form SB-2, filed with the Securities and Exchange Commission on March 28, 2002 (Registration No. 333-85154).
(2)
Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on June 21, 2002 (Registration No. 333-85154).
(3)
Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on July 24, 2002 (Registration No. 333-85154).
(4)
Filed as Exhibit to Form 8-K, filed with the Securities and Exchange Commission on July 13, 2005.
(5)
Filed as Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on January 4, 2007, (Registration No. 333-138311
(6)
Filed herewith
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees
During 2010, our principal accountant, Livingston & Haynes, P.C. (L&H) billed $120,500 in connection with the audit of our annual financial statements and the review of our quarterly financial statements.
Tax Fees
During 2010, L&H billed us $15,250 for tax related services.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LOCATEPLUS HOLDINGS CORPORATION
/s/ Ronald Lifton
Ronald Lifton, President, Chief Executive Officer
April 14, 2011
Independent Auditors' Report
To the Stockholders and Board of Directors of
LocatePLUS Holdings Corporation
Beverly, Massachusetts
We have audited the accompanying consolidated balance sheet of LocatePLUS Holdings Corporation as of December 31. 2010, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 2010 and December 31, 2009, These 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.
Except as discussed in the following paragraph, 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 financial statements are free of material misstatement. 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 financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 19 to the financial statements, former officers of LocatePLUS Holdings Corporation and its subsidiaries have been indicted by the Department of Justice alleging the issuance of fraudulent financial statements for the years ended December 31, 2006 and 2005. The a11eged fraudulent transactions may have resulted in a misstatement of approximately $650,000 between retained earnings and additional paid-in capital that is reflected in the current consolidated balance sheets and consolidated statements of equity (deficit). LocatePLUS Holdings Corporation does not have reliable records of the related transactions and we have not been able to satisfy ourselves through other means as to the proper recording of certain transactions.
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding the
transactions referred to in the paragraph above, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LocatePLUS Holdings Corporation and its subsidiaries as of December 31,2010, and the results of its consolidated operations and its consolidated cash flows for the years ended December 31, 2010, and December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the financial statements, the Company has an accumulated deficit at December 31, 2010 and has suffered substantial net losses in each of the last two years, which raise substantial doubt about the company's ability to continue as a going concern. Management's plans in regard to these matters are disclosed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/LIVINGSTON & HAYNES, P.C.
Livingston & Haynes, P.C.
Wellesley, Massachusetts
April 13, 2011
The accompanying notes are an integral part of these audited consolidated financial statements.
See accompanying notes and independent auditor's report
The accompanying notes are an integral part of these audited consolidated financial statements.
See accompanying notes and independent auditor's report
The accompanying notes are an integral part of these audited consolidated financial statements.
See accompanying notes and independent auditor's report
The accompanying notes are an integral part of these audited consolidated financial statements.
See accompanying notes and independent auditor's report
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
Liquidity and Operations
1. Nature of Operations
LocatePLUS Holdings Corporation
The Company owns and operates subsidiary companies that provide various types of public and private data to business and credentialed clients throughout the United States. The Company provides accounting, finance, legal, risk management, information technology, strategy analysis, sales and marketing, operations and management services in various forms to its subsidiary companies. LPHC, through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Entersect Corporation, Dataphant, Inc., Metrigenics, Inc., and Employment Screening Profiles, Inc. d/b/a TruBackgrounds are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, LocatePLUS Corporation, Worldwide Information, Inc., Entersect Corporation, Dataphant, Inc., Metrigenics, Inc., and Employment Screening Profiles, Inc. d/b/a TruBackgrounds . All intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents
The Company considers all money market funds, bank certificates of deposit, and short term investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, accounts receivable and notes receivable. The risk with respect to cash and cash equivalents is minimized by the Company’s policies in which such investments are placed only with highly rated financial institutions and in instruments with relatively short maturities. The financial stability of these financial institutions is constantly reviewed by senior management. The carrying value of cash and cash equivalents approximates their fair value.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections, when deemed necessary.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation is removed from the accounts and any gain or loss is included in the results of operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets as follows:
The modified accelerated cost recovery system is used for federal income tax purposes.
Intangible Assets
Intangible assets consist of deferred financing and goodwill.
The Company had incurred costs when obtaining financing through Cornell Funding which are capitalized and are being amortized using the straight-line method over the three-year term of the related financing agreement. For tax purposes, these costs will be amortized over the same three-year term.
The Company acquired goodwill through the acquisition of the assets and liabilities of ESP (TruBackgrounds).
Goodwill
The Company has elected to account for goodwill resulting from the acquisition of assets, in accordance with FASB ASC 350-45 “Accounting for Goodwill and Intangible Assets”, which prohibits the amortization for goodwill since it has an indefinite life. The statement requires that goodwill be tested for impairment on an annual basis. If goodwill is impaired, an impairment loss will be recognized and charged against earnings in the year in which goodwill becomes impaired. There was no impairment for the years ended December 31, 2010 or 2009. However, for tax purposes, goodwill is being amortized ratably over a fifteen-year period.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes, as set forth in accounting principles generally accepted in the United States of America. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at currently enacted tax rates. These temporary differences primarily relate to the accumulating of net operating losses to offset future taxable income as well as tax to book differences between stock based compensation, reserves for bad debt, and investment losses and other timing differences in recognition of expenses for tax and book purposes. Valuation allowances are established, if necessary, to reduce a deferred tax asset to the amount that will more likely than not be realized.
The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. Any tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. There are no uncertain tax benefits that have been recognized in the accompanying financial statements. Each of the tax years in the three-year period ended December 31, 2010 remains subject to examination by the Internal Revenue Service. The Company’s policy is to recognize interest and penalties related to uncertain tax benefits (if any) in income tax expense. No such interest and penalties have been accrued as of December 31, 2010 and 2009.
Sales Tax
The sales taxes charged by the Company to customers are presented in the financial statements on a net basis and, accordingly, excluded from revenues and costs.
Revenue Recognition
The Company derives its revenue by providing access to public information such as names, addresses, phone number, bankruptcies, real estate transactions and motor vehicles and background check services. The Company recognizes revenue when all of the following conditions are met:
·
There is persuasive evidence of an arrangement;
·
The product or service has been provided to the customer;
·
The collection of the fees is reasonably assured; and
·
The amount of fees to be paid by the customer is fixed or determinable.
Throughout our various subsidiary product lines, the majority of revenue is recognized on a monthly basis for search results which are delivered over the internet under the terms of customer agreements. Some products are developed specifically for law enforcement which are typically billed and prepaid on an annual basis at a fixed rate. For these agreements, revenue is recognized appropriately throughout the term of the agreement per accepted GAAP procedures.
Advertising Expenses
It is the Company’s policy to expense advertising and marketing costs as incurred.
Costs of Revenues and Software Development Costs
Costs of revenues consist primarily of costs for data acquisition, materials and expenses associated with compact disks and costs for license agreements related to data acquisition, software development and maintenance costs.
Software development costs are charged to operations as incurred, as they relate to ongoing maintenance of data and the Company’s websites. The Company evaluates certain software development costs for capitalization in accordance with the FASB Accounting Standards Codification (ASC). Costs incurred relating to the Company’s own personnel and outside consultants who are directly associated with software developed for internal use may be capitalized. Costs eligible for capitalization under FASB Accounting Standards Codification (ASC) have been immaterial to date.
Stock Compensation Plans
The Company accounts for its stock-based compensation in conformity with accounting principles generally accepted in the United States of America which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. In connection with valuing stock options, the Company utilizes the Black-Scholes model, which requires certain subjective assumptions. The key assumptions include the expected volatility of the Company’s stock, term of the award and expected forfeiture rate. Valuation assumptions are reviewed periodically and, as a result, may lead to a significant change in the expense recognized in connection with share-based payments and may change the valuation assumptions used to value share-based awards granted in future periods. No stock-based compensation expense was recognized in the income statement for the years ended December 31, 2010 and 2009. There are currently no options granted under the Company’s stock-based employee compensation plans.
The Company has elected to use the Black-Scholes option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the years ended December 31, 2010 and 2009 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows:
The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2010 and 2009, expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its traded options, for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future.
Preferred Stock
The Company applies the guidance enumerated in ASC Topic No. 480, “Distinguishing Liabilities from Equity” and “Classification and Measurement of Redeemable Securities”, when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. The Company issued Series A Preferred Stock on November 4, 2009, which is mandatorily redeemable and therefore is classified as a liability as of December 31, 2010 and 2009.
Earnings Per Share
Basic earnings per share is based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume the issuance of potential common shares that have an anti-dilutive effect. Diluted per share computations are not presented since the effect would be anti-dilutive.
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. Actual results could differ from those estimates.
Fair Value
The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue, current portions of capital lease obligations, current portion of notes payable and convertible notes payable approximate fair value because the best valuation for them is the use in the business and the short maturity of those instruments.
Recent Pronouncements
Codification
In June 2009, the FASB codified existing accounting standards. The FASB Accounting Standards Codification (ASC) is the source of authoritative accounting principles generally accepted in the United States of America (GAAP) recognized by the FASB and supersedes all existing non-SEC accounting and reporting standards. All ASC content carries the same level of authority and anything outside of the ASC is non-authoritative. The Company adopted the new guidance for the years ended December 31, 2010 and 2009, which changed the way the Company references accounting standards.
3.
Accounts Receivable, Trade
Trade accounts receivable are presented net of an allowance for doubtful collections of $100,918 at December 31, 2010 and $95,000 at December 31, 2009. In determining this allowance, objective evidence that a single receivable is uncollectible as well as a historical pattern of collections of accounts receivable that indicate that the entire face amount of a portfolio of accounts receivable may not be collectible is considered at each balance sheet date.
4.
Property and Equipment
Property and equipment consist of the following at December 31, 2010 and 2009:
Depreciation and amortization expense was $39,786 and $101,613 for the years ended December 31, 2010 and 2009, respectively.
Note: Management determined that it no longer made sense from a strategic or economic perspective to continue to include in the Company’s future product plans a development project which was initiated in 2005 and which had subsequently been put on hold. Accordingly, the capitalized costs recorded to date were written off, resulting in a net loss on disposal of $586,334 which was recorded in the year ended December 31, 2009.
5.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following at December 31, 2010 and 2009:
6.
Intangible Assets
Intangible assets consist of the following at December 31,
Amortization expense for the years ended December 31, 2010 and 2009 were $24,584 and $101,613 respectively.
Future amortization expense for the next five years is:
$ 0
$ 0
$ 0
$ 0
$ 0
7.
Other Assets
Other assets consist of the following at December 31, 2010 and 2009:
8.
Accrued Expenses
Accrued expenses consist of the following at December 31, 2010 and 2009:
9.
Notes Payable
During 2003, the Company issued subordinated promissory notes in the amount of $2.3 million, bearing simple interest ranging from 10% and 12% per annum. In 2007, the terms of these notes were re-negotiated and now bear interest ranging from 19% to 30%. As of December 31, 2010 and 2009, the balance including interest on these notes of $112,000 remained unpaid and the notes are classified as demand.
On March 20, 2007, the Company issued a secured convertible debenture to Cornell Capital Partners (now YA Global Investments, L.P.) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement. The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission. The remaining $3,000,000 was not funded due to the Company failing to file the necessary Registration Statement. The Debentures matured on the third anniversary of the date of issuance and are now in default. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314, now $.057 per share due to the default. Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries’ assets. The Company was engaged in negotiations toward a restructuring of this indebtedness.
At December 31, 2010 and 2009, the balance of the debt on the Corporate books was $2,712,990 and $2,750,000 respectively.
Under the Purchase Agreement, we also issued to Cornell Partners (now YA Global Investments, L.P.) five-year warrants in six separate series as follows:
A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;
D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.
Simultaneously, with the sale and issuance of the Debentures to YA Global Investments, L.P. as mentioned in the preceding paragraph, the Company entered into a settlement agreement with Dutchess Private Equities Fund, Ltd. for the settlement of a dispute regarding the amount due under debt instruments issued by the Company to Dutchess during 2005 and 2006. Pursuant to the terms of the Settlement, the Company immediately paid a cash amount of $1,500,000 with two additional cash payments in the amount of $300,000 each to be made on the date that (i) the Company filed the Registration Statement (or, if earlier, within 45 days) and (ii) the Registration Statement is declared effective (or, if earlier, within 145 days), neither of which took place. The Company also issued a Note in the amount of $1,500,000 and agreed to reduce to $0.10 per share the exercise price of the warrants issued to Dutchess. Dutchess terminated its security interest in the Company’s assets upon the Initial Payment.
On December 11, 2007, the Company received a letter dated December 6, 2007 ( the "Notice Letter"), from YA Global Investments, L.P., (formerly known as Cornell Capital Partners, L.P.) notifying the Company of certain Events of Default under the Secured Convertible Debenture dated March 20, 2007 of the Company (the "Debenture"). As a result of this default, the entire note has been re-classified as short term. The Company was engaged in negotiations toward a restructuring of this indebtedness.
On March 21, 2011, YA Global Investments, L.P. notified the Company that it had agreed to assign the debenture to Gulabtech, LLC., an unrelated third party, subject to certain unspecified conditions. On March 30, 2011, YA Global Investments, L.P. advised the Company that it had completed the assignment to Gulabtech, LLC.
On June 1, 2010, the Company agreed to the cancellation of series A- E of the 5-year warrants held by YA Global Investments, L.P to purchase a total of 9,836,701 shares of the Company’s Common Stock. The cancellation was in exchange for 300,000 shares of Common Stock.
On December 30, 2009, all indebtedness to Dutchess Private Equities Fund, Ltd. (“Dutchess”) was settled through the issuance of 72,000 shares of Preferred Stock. The 72,000 shares of new Series A Preferred Stock issued to Dutchess have a par value of $1.00 per share and a $25 liquidation preference. The shares are restricted as to resale. The shares pay a dividend of 1% per annum of the par value per share in cash or in Series A Preferred Stock. Holders will have a vote on any matters affecting the Series A Preferred Stock. The shares are convertible at any time into the Company’s Common Stock at 41.66 shares of Common Stock per share of Preferred Stock (fully converted, 3,001,680 shares of Common Stock). The Company can force conversion of Preferred Stock not to exceed 4.99% of total Common Stock outstanding if the 10-day moving average closing price per share of the Company’s Common Stock shall exceed $.50 per share. Holders also had a right to “put” their shares to the Company. As of December 31, 2010, the Company has satisfied one of three requests to repurchase 600 shares of Preferred Stock and the balance of Preferred shares issued and outstanding to Dutchess is 71,400. On February 15, 2011 Dutchess agreed to a modification of the Debt Conversions Agreement changing the terms and conditions of the “put” as follows:
a)
Through the last quarter of 2010, during any calendar quarter not to exceed fifteen thousand dollars ($15,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
b)
Through the last quarter of 2011, during any calendar quarter not to exceed twenty five thousand dollars ($25,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
c)
After 2011, during any calendar quarter not to exceed thirty five thousand dollars ($35,000) per quarter payable monthly at the lesser of 1) $3,000 per month or 2) six percent (6%) of Net Operating Income;
“Net Operating Income” for purposes of this section shall mean the net operating income of the Company determined in accordance with generally accepted accounting principles and as reported on the Company filings with the U.S. Securities and Exchange Commission.
During 2009, the Company issued several one-year convertible promissory notes totaling $375,000, bearing simple interest of 8% per annum. The balance of this debt at December 31, 2010 is $200,000. These notes are currently in default.
In November, 2009, the Company repurchased 2,000,000 shares of its Common Stock at $0.125 from an independent investor. This purchase was done in exchange for a two year, 5.5% convertible note in the amount of $250,000. This note is convertible into shares of the Company’s Common Stock at a conversion price of twelve and one half cents ($0.125). All interest payable in relation to this note was prepaid.
As of April 10, 2010, the Company issued to Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P., a four-year promissory note in the amount of $2,750,000 bearing simple interest of 5% per annum (the "Substitute Note"). The Substitute Note was in substitution for previous existing indebtedness that was in default. The balance of principal and interest due on the Substitute Note at June 30, 2010 was $2,742,901. The Substitute Note was cancelled as of August 23, 2010 in favor of two separate notes, each in the principal amount of $1,375,000, payable separately to each of Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P. and due in full January 10, 2016. Each note contains an identical revised monthly principal repayment schedule in monthly installments of $7,500, beginning February, 2011, increasing to $10,000 April 10, 2011, $15,000 July 10, 2011 and $25,000 October 10, 2011. Interest is payable on the 10th day of each month at 5% per annum but any interest payment may be deferred until maturity at a 10% per annum rate.
Through June 30, 2010, the Company issued several one-year convertible promissory notes totaling $155,500, bearing simple interest of 8% per annum. The balance of this debt at December 31, 2010, is $30,000. This note is currently in default.
In 2010, the Company obtained options to purchase 2,228,952 shares of its Common Stock at $0.125 per share from two former Board members. The stock was to be used to satisfy other obligations of the Company to issue stock.. As of December 31, 2010, the Company has utilized 928,952 shares of the 2,228,952 available. The Company exercises the options and purchases the stock with two year, 5.5% convertible notes. At the stated maturity of the notes, the holders have the option to have their notes satisfied with cash or convert them back into common stock The two shareholders currently hold signed notes from the Company totaling $278,619 for the full value of the stock. The Company is not carrying the full balance of the notes on its books but rather a portion of this calculated based on the number of shares that have been used resulting in gross notes payable totaling $116,119 which are reflected on the Company’s balance sheet. Interest has been partially prepaid on the notes.
In connection with an offering that closed on August 15, 2005 the Company entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of an aggregate of $8,965,000 in convertible term notes. Per the agreement, a registration statement was to be filed registering the underlying shares which was not completed resulting in an additional $2,300,000 in penalty charges. The Company is currently in the process of negotiating with these note holders for a restructuring of this indebtedness and has accrued a charge of $477,000 to cover the anticipated costs.
The amounts of aggregate annual principal installments for each of the five years succeeding December 31, 2010 are as follows:
Year Ending December 31,
2011 $350,000
2012 600,000
2013 600,000
2014 600,000
2015 600,000
10.
Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under various non-cancelable operating lease agreements which terminate on various dates through 2015. Rent expense amounted to $426,225 and $421,387 during 2010 and 2009, respectively.
Future minimum payments under non-cancelable operating leases are as follows:
Capital Leases
As of December 31, 2010, no balance remained due on capital leases.
Contractual Obligations
The Company obtains its data from multiple sources and has entered into various license agreements with the related data providers. In 2010 and 2009, the Company recorded $2,326,925 and $1,760,299 respectively in costs related to these agreements. In the event that any of the primary sources of data are no longer available to the Company, management believes that it would be able to integrate alternate sources of data without significant disruption to the business or operations, as there are currently a number of providers of such data. The Company is required to make minimum payments under these agreements as follows:
The following represents the contractual obligation and commercial commitments as of December 31, 2010.
The Company’s operations depend upon information that includes public records. If material changes were to occur in federal or state laws regulating or prohibiting the distribution of public records, particularly credit header records, the Company’s financial condition and results of operations could be materially affected. In the event that such a termination occurred, management believes it could acquire replacement data from other sources; however, such termination might have an adverse effect on the Company’s operations.
Legal Proceedings
A claim was filed in Essex County Superior Court in Massachusetts on June 17, 2010 in the matter of Dun & Bradstreet v. LocatePLUS Holdings Corporation C.A.NO.ESCV2009-02421-D for $100,000. This suit involved the balance due for services rendered, plus interest from June 2006. The Company is in the process of completing discovery and is in discussions with the plaintiffs as to the settlement of this litigation.
As a result of a Litigation filed in Dallas County, Texas on May 22, 2009 in the matter of E -Backgroundchecks.com, Inc. (BGC) v. LocatePLUS Holdings Corporation C.A.NO.CC-09-03539-E a judgment for $55,158.75 was entered. The suit involved the failure of LocatePLUS to make payments for services provided by BGC. The Company has settled on this judgment and begun the process of paying down the remaining balance of $20,286.04.
As a result of the settlement over the Company’s indebtedness to Dutchess Private Equities Fund, Ltd. (”Dutchess”) as of December 31, 2009, Dutchess agreed to place 19,866,461 shares of Common Stock of the Company issued to it by the Company in early 2009 in conversion of indebtedness (the “Dutchess Shares”) into escrow, pending the resolution of ongoing litigation between the Company and its former CEO James Fields (“Fields”) over the Shares. Fields had claimed an ownership interest in the Shares by purchase. Fields renounced his claims to all the Dutchess Shares (except for 250,000 Shares retained in the escrow) on May 17, 2010 as part of a settlement of this litigation. The vast majority of the Dutchess Shares have been re-allocated after being released from escrow in order to satisfy pre-existing obligations. An amount remains to continue to satisfy other pre-existing obligations.
“On November 16, 2009, an execution was obtained against LocatePlus Holdings Corporation in a lawsuit styled Thomas Nolan v. LocatePlus Holdings Corporation, in the Essex County Superior Court in Massachusetts, C.A. No. ESCV2006-02125, in the amount of $160,269. The execution was in connection with a default judgment entered against the Company on January 11, 2007. The default judgment was appealed by the Company on or about April 1, 2009, and the appeal was subsequently dismissed on June 25, 2009. A payment of $15,000 was made in 2010 reducing the principal balance by that amount. On May 7, 2010, Thomas Nolan filed a second complaint styled as, Thomas Nolan v. LocatePlus Holdings Corporation in the Essex Superior Court in Massachusetts, C.A. No. ESCU 2010-00961 seeking the appointment of a receiver. The motion seeking appointment of a receiver was denied. The Company is actively engaged in payment discussions on the underlying judgment.
A class action suit, Sharon Taylor, et al. v. Biometric Access Company, et al., was brought in the US District Court for the Eastern District of Texas, C.A. No. 2:07-CV-00018. The matter is styled as a suit brought by the plaintiff class against a group of defendant companies, including the Company, under the Driver Privacy Protection Act, 18 USC §2721 et seq. The defendants filed a joint Motion to Dismiss which was granted by the Court. The plaintiff class filed an appeal of the dismissal of the case, which was denied.
A similar class action suit, Sam Wiles, Carol Watkins, Jackson Wills and Sarah Smith, Individually and on behalf of all others Similarly Situated, is pending in the US District Court for the Western District of Missouri, C.A. No. 09-4164-CV-C-NKL. The matter is styled as a class action suit brought by the plaintiff class against the Company, alleging a violation of the Driver Privacy Protection Act, 18 USC §2721, et. seq., and is one of several similar actions brought by the class against a number of companies in the same industry as the Company. The defendants filed a joint Motion to Dismiss which was granted by the Court. The plaintiff class has not yet filed an appeal of the dismissal.
On June 7, 2007 Special Situations Fund III, L.P and Special Situations Private Equity Fund, L.P. obtained a judgment in the amount of $1,948,631.18 (including interest and costs) against the Company in the Supreme Court of the State of New York, Index No. 06/6039989, based on amounts owing by the Company under notes issued to the plaintiffs. On October 24, 2007 the plaintiffs obtained a judgment for this amount in the Massachusetts Superior Court, Essex County, Index No. CIV- ESCV2007-01152. On February 6, 2008 the plaintiffs obtained in the same Court an ex-parte trustee process attachment against all assets of the Company held at TD Bank North, Index No CIV-08-268. This litigation has not been dismissed, satisfied or resolved. Upon payment in full of all principal and accrued interest due pursuant to the notes issued as part of the settlement on August 23, 2010, Special Situations will execute and file a satisfaction of judgment. Currently we are in default under the notes and renegotiations are ongoing.
On September 2, 2010 an Employment Discrimination civil lawsuit was filed against the Company and certain officers, Sonia Bejjani v LocatePlus Holdings Corporation et al, Mass. Superior Court, Essex County, Docket No. ESCV2010-01870-B.. On November 3, 2010 the Company answered denying any liability. To date, a Court appearance has not been scheduled.
On October 14, 2010 the U.S. Securities and Exchange Commission filed a civil action against the Company in the United States District Court for the District of Massachusetts, Securities and Exchange Commission v. LocatePlus Holdings Corporation. The Complaint alleges violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint alleges that the Company filed financial statements for the fiscal years 2005 and 2006 which were false and misleading. The action seeks the entry of a permanent injunction prohibiting the Company from engaging in future violations of the cited sections and rules; disgorgement and pre-judgment interest and civil monetary penalties. A motion to stay further proceedings has been filed by one of the parties and is currently pending.
11.
Certain Related Party Transactions
On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes. Trubackgrounds was owned by Derrick Spatorico, who received 9,000,000 shares of the Company’s Common Stock in payment for Trubackgrounds.
On September 25, 2009 Mr. Spatorico became a Director of the Company and on February 25, 2010 he became acting President and Chief Executive Officer. Mr. Spatorico’s stock was subject to an escrow agreement by the terms of which he was to receive all of the stock out of escrow no later than September 1, 2011. On August 5, 2010 the escrow terminated in settlement of certain pending litigation and the 9,000,000 shares were transferred to The Spatorico Family Blind Trust established by Mr. Spatorico.
In November, 2009 and January 2010, The Company entered into two separate notes with two former Board members and current shareholders. The company issued the notes in exchange for the pledged securities of LPHC common stock held by these shareholders to be used for settlement of debt with various note holders of the company as needed.
12.
Income Taxes
Deferred tax assets consist of the following at December 31:
The Company has provided a valuation allowance for the full amount of the deferred tax assets since realization of these future benefits is not sufficiently assured. When the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expenses.
The net increase in the valuation allowance was $1,257,000 for 2010 and $199,600 in 2009.
At December 31, 2010, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $40 million and $14 million respectively. The federal and state net operating loss carry forwards expire through 2030. Certain substantial changes in the Company’s ownership may occur. As a result, under the provisions of the Internal Revenue Code, the amount of net operating loss carryforwards available annually to offset future taxable income may be limited. The amount of this annual limitation is determined based upon the Company’s value prior to the ownership changes taking place. Subsequent ownership changes could further affect the limitation in future years.
12.
Common Stock and Preferred Stock
As of December 31, 2010, the Company has authorized capital stock of 50,000,000 shares of Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value $1.00 per share (“Preferred Stock”). As of the date hereof, there are outstanding 49,980,089 shares of Common Stock, 71,400 shares of Preferred Stock. In accordance with the FASB codification 480-10, the Preferred Stock has been classified on the balance sheet as shares subject to mandatory redemption.
Voting
The holders of Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which such shares of Preferred Stock be converted.
The holders of the Common Stock are entitled to one vote for each share held at all meetings of stockholders. There shall be no cumulative voting.
Dividends
Holders of shares of Preferred Stock shall be entitled to receive, cumulative dividends to be paid quarterly, in cash or in Preferred Stock, at the option of the Company, at the rate of twenty five cents ($.25) per share, prior and in preference to any declaration or payment of any dividend to the holders of shares of Common Stock.
Liquidation
As of December 31, 2010 and 2009, the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment will be made to the holders of the Common Stock or any other class or series of stock ranking on liquidation junior to the Preferred Stock, an amount in cash per share equal to the greater of: (i) the original purchase price paid with respect to each share of Preferred Stock held by such holder, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such share, plus any dividends declared but unpaid on such shares, or (ii) the amount such holder would receive if such shares of Preferred Stock are converted to Common Stock immediately prior to any such liquidation, dissolution or winding up of the Company.
After payment has been made in full to the Preferred Stock, any remaining assets available for distribution will be distributed among Common Stock holders.
Redemption Rights
On or after December 31, 2010, the Company shall redeem from the current holder (Dutchess Private Equity Fund) of the Preferred Shares, at the beginning of each quarter, those amounts of Preferred Shares at a price of $25.00 per share set forth below subject to a modification to the agreement as further detailed above in Note 9, Notes Payable.
Conversion Rights
At the option of the holders of Preferred Stock can convert at any time upon their Preferred Shares into 41.66 shares of the Company’s Common Stock, par value $0.01 per share.
13.
Stock Option Plans
On November 16, 1999, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan as amended (the “1999 Plan”). Under the terms of the 1999 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors.
The Board of Directors administers the Plan. A maximum of 15,000,000, shares, or 300,000 after adjusting for the reverse split, of Class A Voting Common Stock has been approved for issuance under the 1999 Plan of which 6,061 post split shares are available for grant at December 31, 2008. The options are not transferable except by will or domestic relations order. As of November 16, 2010, all options under this plan have expired.
On March 28, 2003, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan (the “2003 Plan”) which was approved by the stockholders at the May 29, 2003 annual meeting. Under the terms of the 2003 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors. The Board of Directors administers the 2003 Plan. A maximum of 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class A Voting Common Stock and 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class B Non-Voting Common Stock, or a combined total of 1,000,000 post split shares have been approved for issuance under the 2003 Plan of which 964,000 are available for grant at December 31, 2009. The options are not transferable except by will or domestic relations order.
The Board of Directors determines the exercise price and vesting period of the options at the date of grant. The exercise price for incentive stock options shall not be less than 100% of the fair market value of the Company’s stock on the date of grant. The option exercise period will not exceed ten years from the date of grant. The options are generally fully exercisable when issued to directors and consultants and exercisable 25% per year and continuing over four years for employees (based on continual employment). If a grantee owns stock representing more than 10% of the outstanding shares on the date such an incentive option is granted, the price shall be at least 110% of fair market value and the maximum term of the options will be five years.
The following table presents activity under the Plans adjusting for the reverse split for the years ended December 31, 2010 and 2009
The following summarizes information relating to options outstanding at December 31, 2010:
14.
Defined Contribution Retirement Plan
The Company sponsors a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers substantially all employees. The Company may make discretionary matching contributions up to 1% of employee contributions. Company contributions vest ratably over a six-year period. Company matching contributions amounted to $5,440 and $15,582 in 2010 and 2009, respectively.
15.
Segment Information
The Company operates in a single business segment
16.
Financial Statement Presentation
Certain amounts in the 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation.
17.
Subsequent Events
On March 30, 2011, YA Global Investments notified the Company that it had completed the assignment of its secured convertible debenture to another party. The principal amount of this note at December 31, 2010 was $2,712,990.
As of March 31, 2010, the Company is in default on the Special Situations Notes which required payments to be made in February 2011.
On April 8, 2011, we filed a Form 8-K reporting that the Board of Directors had accepted the resignation of Christian Williamson as Director and Chairman of the Board.
18.
Going Concern
The financial statements of the Company have been prepared on a "going concern" basis, which assumes the realization of assets and the liquidation of liabilities in the ordinary course of business. However, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. There are a number of factors that have negatively impacted the Company's liquidity, and may impact the Company's ability to function as a going concern. The Company has sustained net losses of $1,595,284 and $2,845,571 for the years ended December 31, 2010 and 2009, respectively. The Company has an accumulated deficit of $54,822,795, a stockholders' deficit of $9,854,080 and a working capital deficit of $7,472,326 at December 31, 2010. The above factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has taken a number of actions to reduce operating expenses, and to improve the salability of its products. The Company's major objective is to increase its order volume. Short and long-term liquidity needs require either significant improvement in operating results and/or the obtaining of additional capital. There can be no assurance that the Company's plans to achieve adequate liquidity will be successful.
19.
Other Legal Notes
Two former officers of the Company and its subsidiaries have been indicted by the U.S. Department of Justice. The indictment alleges that these individuals caused the issuance of fraudulent financial statements of the Company for the years ended December 31, 2006 and 2005. The alleged fraudulent transactions, if true, may have resulted in a misstatement of approximately $650,000 between retained earnings and additional paid-in capital as reflected in the consolidated balance sheets and consolidated statements of equity of the Company. The Company has been unable to produce documents which satisfy its auditing firm as to the nature of these transactions. The indictment alleges that the two former officers created a fictitious customer and then improperly recognized payments from this fictitious customer as revenue. The indictment alleges that as part of the transactions in questions, certain debt payments by the Company were mis-directed to appear as cash revenue receipts from the fictitious customer. These allegedly improper payments were reflected in the financial statement of the Company included in the quarterly and annual reports for the fiscal years 2005 and 2006 filed with the U.S. Securities and Exchange Commission. The payments were written off prior to the issuance and filing of financial statements for later periods.