-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9KcfM5ZKkK5t31SxmOc9I9+v5YngEYF6Wyj4M1kH0irZbWYgMLlk3KoQRSRxuTb JQ0/EhmAIBoGldh3k9VlYg== 0001160084-08-000004.txt : 20080410 0001160084-08-000004.hdr.sgml : 20080410 20080410094954 ACCESSION NUMBER: 0001160084-08-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080410 DATE AS OF CHANGE: 20080410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOCATEPLUS HOLDINGS CORP CENTRAL INDEX KEY: 0001160084 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 043332304 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-49957 FILM NUMBER: 08748928 BUSINESS ADDRESS: STREET 1: 100 CUMMINGS CENTER STREET 2: SUITE 235M CITY: BEVERLY STATE: MA ZIP: 01915 BUSINESS PHONE: 978-921-2727 MAIL ADDRESS: STREET 1: 100 CUMMINGS CENTER STREET 2: SUITE 235M CITY: BEVERLY STATE: MA ZIP: 01915 10KSB 1 dec07k.txt LP 07 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission file number: 000-49957 LOCATEPLUS HOLDINGS CORPORATION (Name of small business issuer in its charter) DELAWARE 04-3332304 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 100 CUMMINGS CENTER, SUITE 235M, BEVERLY, MASSACHUSETTS 01915 (Address of principal executive offices) (Zip Code) (978) 921-2727 (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: NONE. Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.01 (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.[] Revenues for the most recent fiscal year are: $ 8,347,762. The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the average bid and ask price of such common equity on March 27, 2008, is $ 654,843 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of March 27, 2008 there were 11,906,203 shares of Common Stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes[ ] No [X] TABLE OF CONTENTS ----------------- PAGE ---- PART I ITEM 1 Description of Business 1 ITEM 2 Description of Property 6 ITEM 3 Legal Proceedings 7 ITEM 4 Submission of Matters to a Vote of Security Holders 7 PART II ITEM 5 Market for Common Equity and Related Stockholder Matters 7 ITEM 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 7 Financial Statements 19 ITEM 8 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 19 ITEM 8A Controls and Procedures 19 PART III ITEM 9 Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act 20 ITEM 10 Executive Compensation 22 ITEM 11 Security Ownership of Certain Beneficial Owners and Management 24 ITEM 12 Certain Relationships and Related Transactions 25 ITEM 13 Exhibits and Reports on Form 8-K 26 ITEM 14 Principal Accountant Fees and Services 28 * * * PART I ITEM 1 - DESCRIPTION OF BUSINESS OVERVIEW LocatePLUS Holdings Corporation, through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Certifion Corporation, Dataphant, Inc., and Metrigenics, Inc., (collectively, the "LocatePLUS Group"), are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , which enables users to search certain motor vehicle records and driver's license information in multiple states. Since March 1, 2000, we have maintained a database that is accessible through the Internet, known as LocatePLUS. Our LocatePLUS product contains searchable and cross-referenced public information on individuals throughout the United States, including individuals' names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers' license information and motor vehicle records. On September 1, 2003, our newly formed wholly-owned subsidiary, Certifion Corporation, acquired all of the assets of Project Entersect Corporation a provider of data technology. Certifion provides self-screening for both resume and online dating services and has filed for patent protection for both of these services. In October 2003, our newly formed wholly-owned subsidiary, Dataphant, Inc. acquired Voice Power Technology through a merger. Through this merger, Dataphant now has information on virtually every land-based phone number in the United States and approximately 30% of the cell phone numbers in the United States. On January 6, 2004, the Company formed a new wholly-owned subsidiary, Metrigenics, Inc., with operations located in New York State. Metrigenics was formed to develop new ways to integrate biometrics with data. Metrigenics has finished first stage testing on matching DNA to facial characteristics and expects to have first stage products within twelve months. INDUSTRY BACKGROUND We are a public information provider. Users of our information have historically included law enforcement, other government agencies, law firms, investigation companies, private investigators and insurance companies. Information is used by those entities for various activities ranging from legal discovery to the detection of fraud and the prevention of crime and terrorism. Additional users, such as large businesses, have increasingly availed themselves of our information services in connection with their identity validation and other business decisions. Non-traditional users, such as individuals using job search and on-line dating service sites, have also begun to avail themselves of background information in response to concerns about identity theft. The majority of the data in the database is publicly available and it is only through our proprietary matching and searching technology that creates significant value to the data. Examples of such public data include: - names and addresses - property ownership - aliases - bankruptcies - nationwide court records - certain criminal records The sources of these types of public data, however, are often fragmented and geographically dispersed. In addition, the reliability of this information and the data provided by various sources may not be consistent. In this environment, users that wish to use public information are faced with the time-consuming, costly and difficult task of gathering data from numerous locations and sources, verifying the information acquired and organizing it into a useful format. While services and technologies have developed to enable remote access to certain information sources, there have historically been few comprehensive access points for information 1 available about individuals. Traditional sources of information, including credit reporting services and other database services, make available only limited types of information for specific purposes, such as verifying credit worthiness. Such services may also be limited by applicable law to specified uses and users. Almost none of those sources are integrated in a manner that allows easy and rapid access to data. BUSINESS STRATEGY Our business plan is to provide an entire suite of information products and services for professionals in law enforcement agencies, law firms, insurance underwriting, fraud investigation, private equity funds, private investigation and financial institutions. We believe that we will be able to compete with comparable services based upon the pricing of our services and based upon certain technical advantages incorporated in our systems. We have proprietary matching and searching capabilities that give us an advantage over our competitors. In addition, we acquired the technology to gather virtually all the landline phone numbers and 30% of cell phone numbers through our VPT merger which no known competitors have. To date, our products have primarily focused on the United States market. With the recent formation of Metrigenics, a research and development company, we are expanding into products with worldwide applicability. Metrigenics is working on the development of matching DNA with facial characteristics. With the success of early trials, it is expected that first stage products could be seen as early as twelve months. OUR TARGET MARKET AND SCREENING OF USERS Our products have historically been 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: - crime and terrorism investigation (e.g., in conjunction with federal and state investigations in the aftermath of the September 11th terrorist attacks and the subsequent anthrax incidents); - detection of fraud; - "skip tracing" (i.e., the location of debtors and individuals in violation of parole or bail restrictions); - background checks; - legal due diligence; and - Identity self certification - Private security - Risk-management. Certifion offers data for self-certification purposes in connection with job search and Internet dating services and has provided an addition channel in which to distribute the same data developed by LocatePLUS. Our LocatePLUS and Worldwide Information products are generally marketed and sold only to pre-screened business and government end users. Before obtaining access to our LocatePLUS database or our Worldwide Information product, we generally 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 Group products. We believe that we lead the market in protecting access to our data. With recent challenges in the industry relating to data access, we have been ahead of the curve in adopting a schema that restricts the most sensitive data. Our groups are classified in the following manner. 2 LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS Names, Addresses and Phone Numbers I General Business Past Residences, Neighbors and Affiliates Real Property Private Investigators Level I Data, plus: Insurance Liens and Judgments II Attorneys/Law Firms Drivers' Records Government Certain Motor Vehicle Records Corporate Security Level I and II Data, plus: III Law Enforcement Comprehensive Criminal Records Restricted Motor Vehicle Records Certain Credit Reporting Data As we move forward, we expect to further define user groups and data available to those groups. We expect to roll out a new version of our search engine that allows us to do just that by year end. LOCATEPLUS We launched our LocatePLUS Internet site in March 2000. Our LocatePLUS database contains searchable and cross-referenced public information on individuals throughout the United States. Information is presented in a dynamic, hyper-linked fashion, permitting users to rapidly identify and obtain personal information relating to individuals and their associated residences, possible acquaintances, and a variety of other types of data. Our LocatePLUS database consists of approximately five billion individual data entries. According to our estimates, we have data entries relating to approximately 205 million adult individuals in the United States (or approximately 98% of the adult population of the United States, based on the 2000 United States Census). Datasets currently integrated in our LocatePLUS product include nationwide records relating to: - - names and addresses - real estate records - - aliases - prior residences - - dates of birth - recorded bankruptcies - - Social Security numbers - liens - - driver's license information - motor vehicle records - - residential address information - certain death records (including dates of residence) - - certain criminal arrest, conviction - phone numbers and incarceration records - vessel registrations We intend to continue integration of datasets into our LocatePLUS product, including - - certain hunting and fishing licenses - certain professional licenses - - certain facial image files - certain fingerprint files - - certain gun licenses - Federal Aviation Administration records We can currently give no assurance as to the timing of integration of such datasets, however, or whether these new datasets will be integrated with our LocatePLUS product at all. 3 We believe that one of the significant advantages of our LocatePLUS product, in comparison with many products with which we compete, is the ability of LocatePLUS to "tie" data associated with a given individual to produce a single report. Our LocatePLUS system uses a proprietary methodology to associate data in a manner that generally results in a matching of data entries across diverse data sources, allowing users to obtain a single, comprehensive data report about an individual, even when there is no single element that ties data entries together (such as a Social Security number). This comprehensive data report is itself linked to other data potentially relevant to a business or government agency researching an individual, such as names and addresses of possible acquaintances, relatives and neighbors of that individual. Another of the advantages that LocatePLUS Group has is its unlisted and cell phone data which we believe no other competitor has. LOCATEPLUS ANYWHERE We also offer a version of our LocatePLUS product that is accessible through wireless personal digital assistants and e-mail capable pagers, which we refer to as LocatePLUS AnyWhere. LocatePLUS AnyWhere was commercially launched in mid-December 2002. This product is being marketed primarily to law enforcement. The product is sold on a subscription fee basis, permitting unlimited access to our LocatePLUS database for a flat monthly fee provided that that the user agrees to a fixed term commitment. As of December 31, 2007, we had realized only nominal revenue from this product. WORLDWIDE INFORMATION Since 1996, we have produced CD-ROM products that enable users to quickly search motor vehicle records in multiple states through a dynamic search engine, known as Worldwide Information . Our Worldwide Information product enables users to search certain motor vehicle records and drivers' license information in multiple states through a dynamic search engine. Unlike many competing products, our Worldwide Information product enables users to rapidly identify vehicles or drivers using complete or partial search criteria. We believe that this 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 data provided by Internet-based services, searches on our CD-ROM product are confidential and unavailable to any person other than the user of our CD-ROM product. We believe that the confidential nature of this CD-ROM product makes it particularly attractive to law enforcement agencies, which must often conduct criminal investigations in strict secrecy. As of December 31, 2007, there were approximately 3,500 pre-screened purchasers of our Worldwide Information CD-ROM product. ENTERSECT On September 1, 2003, our newly formed wholly-owned subsidiary, Certifion Corporation, acquired all of the assets of Project Entersect Corporation a provider of data technology. Certifion operates under the trade name of "Entersect," and it provides self-screening for both resume and online dating services. DATAPHANT In October 2003, Voice Power Technology merged into our newly formed wholly-owned subsidiary, Dataphant, Inc. Through this merger, Dataphant now has information on virtually every land-based phone number in the United States and approximately 30% of the cell phone numbers in the United States. We believe that we are the only company that has this information. The Dataphant data has been integrated into both LocatePLUS and Worldwide Information products. Currently the only distribution of this data is through the other subsidiaries. 4 METRIGENICS On January 6, 2004, the Company formed a new wholly-owned subsidiary, Metrigenics, Inc., with operations located in New York State. Metrigenics was formed to develop new ways to integrate biometrics with data. Metrigenics has finished first stage testing on matching DNA to facial characteristics. SOURCES OF OUR DATA Our operations depend upon information derived from a wide variety of automated and manual sources. External sources of data include public records information companies, governmental authorities and on-line search systems. We license or otherwise obtain our data from five primary sources, as well as over twenty other ancillary sources (including both private and government sources). In the event that any of our primary sources of data were no longer available to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as we believe there are currently a number of equivalent 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. Any further restriction on our use of personal information, however, could limit the usefulness and have a material adverse affect on operations, our products, including our LocatePLUS product, and our operations. 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 We distribute our content both directly (though the Internet in the case of our LocatePLUS product and through the mail in the case of our Worldwide Information CD-ROM) and through "channel partner" arrangements, by which third parties access our databases in consideration for a royalty. We also, from time to time, provide certain consulting services to third party database providers on the integration and assimilation of public data. To date, our efforts to license data have resulted in several channel partnerships. For the year ending December 31, 2007, we have recognized revenue of $2,302,550 on these agreements. COMPETITION Current competitors for our LocatePLUS and Entersect include ChoicePoint, Confi-chek.com, 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. 5 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. EMPLOYEES As of December 31, 2007, the LocatePLUS Group had 68 employees. We believe that our relations with our employees are good. ITEM 2 - DESCRIPTION OF PROPERTY FACILITIES LocatePLUS Holdings Corporation and LocatePLUS Corporation, are presently headquartered in Beverly, Massachusetts, where we lease approximately 32,000 square feet. The lease on that facility expires on February 28, 2012, and our annual lease obligation is approximately $482,887. Worldwide Information, Inc., is presently located in Byfield, Massachusetts, where it leases approximately 2,700 square feet. In May of 2007, we downsized this office space by fifty percent. Our annual lease payments on that facility in 2007 were approximately $19,356. Annual lease payments for the upcoming year, 2008 are expected to be $15,000. 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). Certifion Corporation, (which does business under the name "Entersect"), is located in Santa Ana, California, where it leases approximately 1,900 square feet pursuant to a month-to-month lease with current monthly rent of $3,710. Metrigenics Inc., has access to University office and lab space with no lease or rental commitment. We believe that our facilities are sufficient for our projected needs. 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 Certifion subsidiary, for patent protection covering certain aspects of our self-validation products Career Screen and TrustmeID . 6 ITEM 3 - LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings, although claims may arise from time to time in the conduct of our operations. There can be no assurance at this time that any claims that may arise in connection with the conduct of our business will not materially adversely affect our business or operations, or divert our critical resources. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No items were submitted to shareholders for a vote during 2007. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Prior to December 5, 2005, the Company had outstanding two classes of stock, Class A Voting Common Stock of which there were 150,000,000 shares authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were 250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of the shareholders held on November 12, 2005, the shareholders approved a plan of recapitalization whereby 1) each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock combine into a single class of voting common stock with 400,000,000 authorized and 185,930,146 issued, 2) effect a one-for-fifty reverse split of this new class of common stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized from 8,000,000 to 25,000,000. The combination of the two classes of stock was completed on December 5, 2005. The reverse split and change in authorized shares was completed on December 12, 2005. In addition, the completion of the recapitalization triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new Common Stock. We had three securities that began trading on the Over-the-Counter Bulletin Board on December 12, 2002: - - shares of our Class A Voting Common Stock are quoted under the symbol "LPLHA"; - - shares of our Class B Non-Voting Common Stock are quoted under the symbol "LPLHB"; and - - our public warrants (redeemable warrants to purchase one share of our Class A Voting Common Stock with an exercise price of $0.50 per share) are quoted under the symbol "LPLHW". Post the plan of recapitalization, on December 12, 2005, we had two securities trading on the Over-the-Counter Bulletin Board as follows: - - shares of our Common Stock, quoted under the symbol "LPHC"; and - - our public warrants expired April 12, 2007. The following tables set forth the high and low closing sales prices per share (and per public warrant), for our Class A Voting Common Stock, Class B Non-Voting Common Stock, Common Stock, and public warrants for each quarter during fiscal years 2005, and 2006, as reported by the Over-the-Counter Bulletin Board and 2007 as reported by the Over-the-Counter. 7
2005 2006 THREE MONTHS ENDED THREE MONTHS ENDED ---------------------------------------------- ----------------------------------------------- MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- LPLHA 0.315 0.172 0.217 0.125 0.15 0.072 0.34 N/A N/A N/A N/A N/A N/A N/A - -------- ----- ----- ---- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- LPLHB 0.265 0.172 0.21 0.12 0.155 0.81 0.25 N/A N/A N/A N/A N/A N/A N/A - -------- ----- ----- ---- ----- ------ ----- ---- ---- ---- ---- ---- ---- ---- ---- LPLHW 0.08 0.04 0.055 0.03 0.055 0.007 0.09 N/A N/A N/A N/A N/A N/A N/A - -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- LPHC N/A N/A N/A N/A N/A N/A 2.89 .47 3.50 1.43 2.80 .45 1.70 .76 - -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- LPHCW N/A N/A N/A N/A N/A N/A .020 .006 .023 .012 .020 .006 .065 .003 - -------- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 2007 THREE MONTHS ENDED --------------------------------------------------- MAR 31 JUN 30 SEP 30 DEC 31 ---------- ---------- ---------- --------- HIGH LOW HIGH LOW HIGH LOW HIGH LOW ---- ---- ---- ---- ---- ---- ---- ---- LPHC .42 .18 .22 .09 .15 .08 .12 .04 - -------- ---- ---- ---- ---- ---- ---- ---- ----
HOLDERS As of December 31, 2007 there were: - - approximately 351 holders of record of our Common Stock, DIVIDENDS 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. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table reflects equity compensation granted or issued by us as of December 31, 2007, 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. 8 NUMBER OF WEIGHTED NUMBER OF SECURITIES TO AVERAGE SECURITIES BE ISSUED EXERCISE REMAINING UPON EXERCISE PRICE OF AVAILABLE FOR OF OUTSTANDING OUTSTANDING FUTURE OPTIONS, OPTIONS, ISSUANCE WARRANTS WARRANTS UNDER EQUITY AND RIGHTS AND RIGHTS COMPENSATION PLAN CATEGORY PLANS(1) - -------------------- -------------- ------------ -------------- EQUITY COMPENSATION. PLANS APPROVED . . . BY SECURITY HOLDERS: 699,976 $ 30.54 491,221 - -------------------- -------------- ------------ -------------- EQUITY COMPENSATION. PLANS NOT APPROVED . BY SECURITY HOLDERS: 3,088,342 $ 6.55 N/A - -------------------- -------------- ------------ -------------- TOTAL: . . . . . . . 3,788,318 $ 10.98 N/A - -------------------- -------------- ------------ -------------- (1) Excludes securities reflected in column titled "Number of securities to be issued upon exercise of outstanding options, warrants and rights". 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. - - From November 1999 to December 31, 2003, we granted options to purchase 28,347,716 shares of both classes of our Common Stock (Class A Voting Common Stock and Class B Non-Voting) to 79 employees and consultants under the terms of our Incentive and Non-qualified Stock Option Plan. These options have varying exercise prices. Of these options to purchase 28,347,716 shares, options to purchase 1,419,450 shares of Common Stock have been exercised by eleven employees and consultants and options to purchase 1,452,500 shares of Common Stock have been canceled by employees who terminated their employment. The offer and sale of these securities were exempt from registration under the Securities Act pursuant to Rules 701 and 506 promulgated thereunder. - - In April 2001, we made a non-transferable offer to our accredited stockholders to sell three shares of our Class B Non-voting Common Stock for $0.10 per share for each share of Class A Voting Common Stock held by each stockholder. Pursuant to that offer, we sold approximately 31.6 million shares of Class B Non-voting Common Stock to 270 of our stockholders. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. - - At various times from November 17, 2000 to March 12, 2002, we issued warrants to purchase an aggregate of 537,902 shares of Class A Voting Common Stock to 11 accredited investors serving as consultants and to members of our Advisory Board in consideration for services rendered. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 and 508 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - From August 2001 to April 2002, we issued warrants to purchase an aggregate of 3,272,455 shares of Class B Non-Voting Common Stock to 17 accredited consultants and to members of our Advisory 9 Board in consideration for services rendered. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 and 508 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manne - - From September 2001 through February 13, 2002, we sold 20,421,510 shares of Class B Non-voting Common Stock to 175 accredited investors (of which 82 were existing stockholders) for $0.15 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. - - On August 27, 2002, we issued warrants to purchase an aggregate of 70,000 shares of Class B Non-voting Common Stock to two members of our Board of Directors pursuant to our Non-employee Director Stock Option Policy. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as both recipients are accredited and no general solicitation was undertaken. - - In December 2002, we issued a one year term note with ten year, fully vested detachable warrants to an individual who, as a condition of his investment, required that he be appointed to the Board of Directors of the Company. The note bears interest at the rate of 10% per annum and is payable in one lump sum at maturity. The detachable warrants provide for the purchase of 250,000 shares of our Class B Non-Voting Common Stock with an exercise price of $0.22 per share. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as both recipients are accredited and no general solicitation was undertaken. - - On March 28, 2003, we issued warrants to purchase 105,000 shares of Class B Non-voting Common Stock to three members of our Board of Directors pursuant to our Non-employee Director Stock Option Policy. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During 2003, we issued various eighteen month term notes with proceeds to us of $1.6 million, net of issuance costs. These notes provided for simple interest ranging from 10% to 12% per annum. These notes included with ten year fully vested detatchable warrants to purchase an aggregate of 2,500,000 shares of Class B Non-Voting Common Stock with a weighted average exercise price of $0.14. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During 2003, we received $398,000 by issuing units at $0.16 per unit. Each unit consisted of one share of Class A Voting Common Stock and a warrant which is convertible into three shares of Class A Voting Common Stock with an exercise price at $0.16 per share. A price adjustment mechanism included in the warrants provides that, if the stock price decreases, the warrants will nevertheless permit the holder to receive, upon a cashless exercise of the warrants, at least one share of Class A Voting Common Stock per warrant without any cash payment. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. 10 - - During June 2003, we issued 2,500,000 shares of Class A Voting Common Stock to one investor and 125,000 shares of Class B Non-Voting Common Stock to three different investors. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During August 2004 we canceled a put we issued to one investor, which provided that the Company, subject to certain limitations, may sell up to $5 million in shares of Class A Voting Common Stock. We subsequently entered into a similar put with the same investor which provided that the Company, subject to certain limitations, may sell up to $5 million in shares of Class A Voting Common Stock. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During June 2004, we paid $500,000 to NFC Corporation, in the form of 4,000,000 restricted shares of the Company's Class A Voting Common Stock, for future investor relation services. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - On June 17, 2004 we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private placement of a convertible term note issued by the Company in the principal amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase warrant (the "Warrant"). We also entered into related security documents and a Registration Rights Agreement. On November 30, 2004, this note was amended to increase the principal amount to $4,000,000 and add an additional warrant. The terms, as amended, allow for this note to covert into 6,666,667 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.30 per share and 5,000,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.40 per share. One Warrant provides for the purchase of up to 1,320,000 shares of Class A Common Stock at a price of $0.45 each, subject to customary adjustments, until June 17, 2009, and the additional Warrant provides for the purchase of up to 650,000 shares of Class A Common Stock at a price of $0.35 each, subject to customary adjustments, until November 30, 2009. On March 31, 2005, the Company amended its convertible term note issued by the Company to Laurus Master Fund, Ltd., a Cayman Islands company. The terms, as amended, allow for this note to convert into 6,250,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.16 per share, 3,333,333 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.30 per share and 5,000,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.40 per share. In July, 2005, the company raised $9 million through the issuance of convertible debt. The net proceeds were used to pay down existing debt of $4 million and the remaining balance will be used to fund operations. As of July 8, 2005, the balance on this note was paid in full. - - In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders 11 approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. As there are currently no un-issued shares of our Class A Voting Common Stock that are not otherwise reserved for issuance, we anticipate that these notes and warrants will be exercisable for shares of either our Class B Non-Voting Common Stock or the newly created class of common stock, if approved. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject to adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On December 12, 2005, the we completed the plan of recapitalization which triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new common stock On December 29, 2005, the Company entered into an Investment Agreement with Dutchess Private Equities Fund II, L.P. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a twelve-month note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. The remaining balance of $892,226 of this Debenture as amended effective October 18, 2006 is convertible into shares of our Common Stock at the lesser of $.70 per share or 75% of the lowest closing bid price during the 20 trading days next preceding the date of conversion. On July 21, 2006 we issued a Debenture to Dutchess Private Equities Fund, LP , a related private equities fund and received proceeds of $750,000. The Debenture is due on July 21, 2011 and pays twelve per cent (12%) interest. Interest and principal are payable at such times and under such conditions are outlined in the Debenture. The Debenture is convertible into shares of our Common Stock at the lesser of $.70 per share or 75% of the lowest closing bid price during the 20 trading days next preceding the date of conversion (collectively, the two funds "Dutchess"). The holder may not convert if it would cause the holder to own more than 4.9% of the outstanding Common Stock of the Company. A discount to this note has been recorded for the warrants and founders shares in the amount of $622,107 and will be amortized over the life of the note and be recorded as interest expense. As of December 31, 2006, $455,448 has been amortized. On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 will 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 will be advanced immediately prior to the date the Registration Statement is declared effective by the Commission. The Debentures mature on the third anniversary of the date of issuance. 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. Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries' assets. Under the Purchase Agreement, we also issued to Cornell 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. 12 SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES We did not repurchase any of our securities during 2007 . 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. OVERVIEW The LocatePLUS Group is a business-to-business and business-to-government provider of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , that enables users to search certain motor vehicle records and driver's license information in multiple states through a dynamic search engine, using complete or partial information. Since March 1, 2000, we have maintained a database that is accessible through the Internet, known as LocatePLUS. Our LocatePLUS product contains searchable and cross-referenced public information on individuals throughout the United States, including individuals' names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers' license information and motor vehicle records. Since September 2003, our wholly-owned subsidiary, Certifion, has offered personal information for self-certification purposes through its Entersect product. We distribute our content both directly (through the Internet in the case of our LocatePLUS product and through the mail in the case of our Worldwide Information CD-ROM) and through "channel partner" arrangements, by which third-party database providers obtain access to our databases in consideration for a royalty (such as job search and on-line dating sites, in the case of our Entersect product). On September 1, 2003, through our newly formed wholly-owned subsidiary Certifion Corporation, we acquired all the assets of Project Entersect Corporation in consideration for $62,662. The acquisition was accounted for as a purchase and is recorded and reflected with our operations from the time of purchase. The subsidiary operates under the trade name Entersect. Entersect provides a self-identification and validation service for online job posting and dating sites. On October 17, 2003, through our newly formed wholly-owned subsidiary, Dataphant, Inc., we acquired Voice Power Technologies, Inc., a Texas-based provider of data technology. In connection with this acquisition, Voice Power Technologies, Inc. merged with and into Dataphant, Inc. As consideration for the merger, shareholders of Voice Power Technologies, Inc. received an aggregate of 2,500,000 shares of LocatePLUS Class B Non-voting Common Stock. Through this acquisition, we now have information concerning virtually all landline phone numbers in the United States and approximately 25% of United States cell phone numbers. This data has been integrated into our current product lines. Although our products generally consist primarily of publicly available - and therefore non-proprietary - information, we integrate data in our products in a proprietary manner that allows users to access data rapidly and efficiently. In addition, our LocatePLUS product utilizes proprietary methodologies to link data from different sources associated with a given individual to a single background report, even though the sources of data with respect to a given individual may be incomplete or contain only partial information with respect to that individual. We have also sought patent protection with respect to aspects of our marking and search 13 technology (referred to as our "Bull's Eye" feature) and aspects of our CareerScan and TrustmeID products.Revenue associated with our Worldwide Information product is recognized upon delivery to the customer of a CD-ROM, provided that no significant obligations remain, evidence of the arrangement exists, the fee is fixed or determinable and collectability is reasonably assured. Information in our Worldwide Information product is updated and released either quarterly or twice a year. In the case of our LocatePLUS product, we charge a fee to customers, which varies based upon the type and quantity of information requested. Capitalizing on the synergies gained through the Companies acquisitions, in 2004, Worldwide was able to utilize the technology acquired through Voicepower Technologies, when it merged into Dataphant, to develop the industry's first ever searchable non-published and cell phone CD-ROM. This product became Worldwide's fastest growing CD-ROM product to date. In addition, Worldwide, using the search capabilities built into the CD-ROM search engine, has expanded beyond CD-ROMs. Worldwide recently entered into an exclusive partnership with the State of New Hampshire's Department of Safety to implement its technology on the state's Intranet. Sonia Bejjani, Company co-founder and President of Worldwide, was profiled in "Women to Watch in 2005" by Women's Business Boston, January 2005 issue. Revenue from our LocatePLUS product is recognized when there is either an agreed upon royalty fee or the requested information is downloaded, there is evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. We charge our fees to customers' credit cards (approximately 60% of our current LocatePLUS customer base) or invoice customers for such fees on a monthly basis (approximately 40% of our LocatePLUS customer base). During 2005, our LocatePLUS online customer base exceeded 20,000 customers. Within this customer base, subscriptions for ChoicePlan billing plans, which are billing plans for committed revenue per customer ranging from $25 per month to $5,000 per month, increased to 1,200 customers. In addition, we made a significant change to our billing practice in 2004, with the implementation of a new minimum usage fee. We expect this change will increase annual billings by at least $1M per year. Revenue from our Entersect product is recognized when certifications are purchased online (and paid for via credit card) or the requested information is downloaded, there is evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. Revenue from Dataphant is generated exclusively through inter-company sales to our other wholly owned subsidiaries and eliminated on consolidation. Our costs of revenue consist primarily of our costs to obtain data and software maintenance expenses, which consist primarily of payroll and related expenses for information technology personnel, Internet access and hosting charges, and expenses relating to Web content and design. We obtain our data from multiple sources and we have entered into various license agreements with the related data providers. In 2007 and 2006, we recorded $1,577,157 and $2,815,529, respectively, in costs related to these agreements. 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. Our selling and marketing expenses consist of salaries and commissions paid to sales representatives for the products that we offer, as well as direct mail advertising campaigns and magazine and Internet-banner advertisements. General and administrative expenses consist of payroll and related expenses for non-sales, non-research and development and executive and administrative personnel, facilities expenses, insurance, professional services expenses, travel and other miscellaneous expenses. Interest income consists of earnings on our cash, cash equivalents and short term investments. Interest expense is primarily attributable to various notes issued through the year ended December 31, 2007. As of December 31, 2007, we had gross notes payable (current and long-term) totaling $5,233,610. 14 We have incurred significant net losses since our inception. We incurred net losses of approximately $7.2 million in 2007 and $6.0 million in 2006. Our accumulated deficit as of December 31, 2007 was approximately $49 million. Our ultimate success is still dependent upon our ability to secure additional financing to meet our working capital and ongoing project development needs. We anticipate that we will increase our sales and marketing, product development and general and administrative expenses during 2007 and for the foreseeable future. To achieve our business objectives, we must raise additional capital, which may consist of future debt or equity offerings. Any such financings may be dilutive to existing investors. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006 REVENUES. Revenue from our Worldwide Information TM CD-ROM product decreased to $498,366 for the year ended December 31, 2007 from $588,977 for the year ended December 31, 2006, a decrease of 15% Revenue from our LocatePLUS and Entersect online products, decreased to $5,537,453 for the year ended December 31, 2007 as compared to $6,182,251 for the year ended December 31, 2006, a decrease of 10%. Revenue from our channel partners decreased to $2,302,550 for the year ended December 31, 2007 as compared to $4,458,241 for the year ended December 31, 2006 a decrease of 48%. This decrease is attributed to the expiration of a major channel partner agreement. As part of deploying channel partner agreements, we occasionally provide engineering services. We recognized wireless revenue of $9,393 in 2007 as compared to $7,725 in 2006. We expect online, wireless, and channel revenue to increase and CD-ROM revenue to be stable during the next twelve months. COSTS OF REVENUES. For the year ended December 31, 2007, our costs of revenue for Worldwide Information TM were $48,219 as compared to $38,965 for the year ended December 31, 2006, an increase of 23%. Data cost are relatively fixed even as revenue from the product increases, no marked increase in costs is realized. For the year ended December 31, 2007, our costs of revenue associated with LocatePLUS and channel partner sales were $1,577,157, as compared to $2,815,529 for the year ended December 31, 2006, a decrease of 44%. Costs of revenues are expected to stabilize at about $3.5 million annually, as that amount represents the cost for the required data sets. As revenue increases, costs of revenue are not expected to increase proportionately. SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the year ended December 31, 2007 were $1,462,923, as compared to $1,714,502 for the year ended December 31, 2006, a decrease of approximately 15%. We expect selling and marketing expense to increase over the next twelve months as we focus greater efforts on the acquisition of new customers to increase revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended December 31, 2007 were $6,047,279 as compared to $7,539,311 for the year ended December 31, 2006, a decrease of less than 20%. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the year ended December 31, 2007 were $157,867 as compared to $196,600 for the year ended December 31, 2006, a decrease of 20%. These expenses are a result of investigation of new biometric data products through the creation of Metrigenics. We anticipate these expenses will stabilize for the foreseeable future. INTEREST INCOME. Interest income for the term ended December 31, 2007 was $48,383. This income is attributable to interest payments being made on notes receivable. No interest income was recorded in 2006. INTEREST EXPENSE. Interest expense decreased to $555,017 for the year ended December 31, 2007, from $1,320,934 for the year ended December 31, 2006, a decrease of 58%. The interest expense is attributable to the payoff of certain notes payable issued in 2004 and the interest expense associated with additional financing during 2006. 15 OTHER INCOME. Other income increased to $10,310 for the year ended December 31, 2007, from $4,523 for the year ended December 31, 2006, an increase of 128%. This increase is attributable to the collection of previously written off bad debt. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in 1996 through December 31, 2007, 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, 2007, our cash and cash equivalents totaled $96,142 In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. As there are currently no unissued shares of our Class A Voting Common Stock that are not otherwise reserved for issuance, we anticipate that these notes and warrants will be exercisable for shares of either our Class B Non-Voting Common Stock or the newly created class of common stock, if approved. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On November 14, 2005, at the annual meeting of the shareholders, the recapitalization was approved by a majority of the outstanding shares of both classes of stock. On December 12, 2005, we completed the plan of recapitalization which triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new common stock On December 29, 2005, we entered into an Investment Agreement with Dutchess Private Equities Fund II, L.P. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. We also entered into an agreement where we may, at our discretion, periodically "put" or require Dutchess to purchase shares of our Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares will not exceed $10.0 million. For each share of Common Stock purchased under the Investment Agreement, Dutchess will pay 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board (or other principal market on which our Common Stock is traded) during the ten day period immediately following the date on which we give notice to Dutchess of our intention to put such stock. Our ability to put the shares under the Investment Agreement is conditioned upon us registering the shares of Common Stock with the Securities and Exchange Commission and satisfaction of certain other customary closing conditions. 16 On July 21, 2006 we issued a Debenture to Dutchess Private Equities Fund, LP, a related private equities fund and received proceeds of $750,000. The Debenture is due on July 21, 2011 and pays twelve per cent (12%) interest. Interest and principal are payable at such times and under such conditions are outlined in the Debenture. The Debenture is convertible into shares of our Common Stock at the lesser of $.70 per share or 75% of the lowest closing bid price during the 20 trading days next preceding the date of conversion (collectively, the two funds "Dutchess"). The holder may not convert if it would cause the holder to own more than 4.9% of the outstanding Common Stock of the Company. On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 will 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 will be advanced immediately prior to the date the Registration Statement is declared effective by the Commission. The Debentures mature on the third anniversary of the date of issuance. 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. Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries' assets. Under the Purchase Agreement, we also issued to Cornell 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. COMMITMENTS AND CONTINGENCIES OPERATING LEASES We lease office space and equipment under various operating lease agreements which terminate on various dates through 2012. Rent expense amounted to $584,513 and $566,445 during 2007 and 2006, respectively. This increase is due to the rising of market rates. CAPITAL LEASES Through December 31, 2007, we entered into certain long-term equipment lease agreements. These agreements are classified as capital leases and expire in 2008. Future minimum lease payments under our non-cancelable capital leases total $38,800. LICENSE AGREEMENTS The following represents the contractual obligation and commercial commitments as of December 31, 2007.
LESS THAN 1-3 3-5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS Long-Term Debt. . . . . including current. . . $5,233,610 $1,327,079 $3,906,531 - Capital Leases. . . . . 37,878 37,878 49,536 - Operating Leases. . . . 2,115,721 586,577 1,448,663 80,481 License Agreements. . . 175,000 175,000 - - ---------- ---------- ----------- ------ Total . . . . . . . . . $7,562,209 $3,450,929 $5,355,194 $80,481 ---------- ---------- ----------- ------
17 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. Company policy for Research and Development is that all expenses are initially capitalized. Once a project reaches testing phases, all expenses will be amortized over the useful life of the item. CERTAIN RELATED PARTY TRANSACTIONS NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY On March 28, 2003, and pursuant to our Non-employee Directors' Stock Option Policy, we granted warrants to purchase an aggregate of 105,000 shares of Class B Non-voting Common Stock, with an exercise price of $0.15, to three of our Directors (Robert Kite, John Houlihan, and Thomas Garlock). On November 3, 2003, and pursuant to our Non-employee Directors' Stock Option Policy, we granted options to purchase an aggregate of 500,000 shares of Class B Non-voting Common Stock, with an exercise price of $0.20, and paid an aggregate of $50,000 to five of our Directors (Messrs. Kite, Houlihan and Garlock, Gerard Scalley and Thomas Murphy). In May 2004, and pursuant to our Non-employee Directors' Stock Option Policy, we granted options to purchase an aggregate of 5,000,000 shares of Class A Voting Common Stock, with an exercise price of $1.50 to five of our Directors (Messrs. Kite, Houlihan and Garlock, Gerard Scalley and Thomas Murphy). USE OF OUR ASSETS Certain of our executives are allowed use of company owned or leased vehicles for both business and personal purposes. The owned vehicles have been capitalized as assets of the Company, totaling $102,954 as of December 31, 2007. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments ("SFAS 155"), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows. 18 In March 2006, the FASB issued Statement of Financial Accounting Standard 156 - Accounting for Servicing of Financial Assets ("SFAS 156"), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair value accounting for non-monetary exchanges of similar productive assets and replaces it with a general exception to fair value accounting for non-monetary exchanges that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this statement to have a material impact on its financial statements. OFF-BALANCE-SHEET ARRANGEMENTS The Company has no off-balance-sheet arrangements currently in effect or in effect during the year ended December 31, 2007, 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 - FINANCIAL STATEMENTS Our financial statements as of and for the twelve months ended December 31, 2007 are set forth in the section of this Annual Report beginning on page F-1. 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. Disclosure controls are procedures that 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"), such as this quarterly report, 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 controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles. We are not an accelerated filer (as defined in the Exchange Act) and are not required to deliver management's report on internal controls over our financial reporting until our year ending December 31, 2008. During 2007, we identified certain matters that would constitute material weakness (as such term is defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal controls over financial reporting. The material weakness relates to the financial closing process, a lack of segregation of financial responsibilities and the need for additional qualified financial accounting personnel. 19 These weaknesses have lead management to conclude that disclosure controls and procedures are not effective for the twelve months ended December 31, 2007. To remediate the internal controls does not require additional material costs. During the twelve months ended December 31, 2007, we have taken specific actions to remediate the reportable conditions and material weakness, including the devotion of additional resources to the quarterly closing process, the hiring of additional qualified financial accounting personnel, and realignment of certain financial responsibilities to achieve stronger segregation of financial duties. We intend to continue to further strengthen our controls and procedures regarding the closing process. There were no changes in our internal controls over financial reporting that occurred during the quarter ending December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. There were no significant changes in our internal controls over financial reporting that occurred during the current quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting PART III 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 December 31, 2007. EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS -------------------------------- --- ------------------------ Jon R. Latorella 43 Chairman of the Board, Sonia P. Bejjani 38 Director; President- Worldwide Information James C. Fields 40 President, Chief Executive Officer, Treasurer and Secretary, Acting Chief Financial Officer David Skerrett(2) 57 Director, Audit Committee Member Ralph Caruso 57 Director (1) Member of our Compensation Committee. (2) Member of our Audit Committee. CURRENT DIRECTORS AND OFFICERS JON R. LATORELLA co-founded our business in 1991 and has been our Chief Executive Officer since we commenced our activities. Mr. Latorella is also the Chairman of our Board of Directors. Before founding our business, Mr. Latorella served as a consultant to various local and state law enforcement agencies. Mr. Latorella holds a Bachelor of Science/Bachelor of Arts from the University of Massachusetts, which he received in 1994. In March 2007, Mr. Latorella resigned as CEO and President. Mr. Latorella remains the Chairman of the Board. SONIA P. BEJJANI co-founded our business in 1991 and has been a member of our Board of Directors and employed by us in various capacities since we commenced our activities. For the five years ending August 1, 2001, Ms. Bejjani was our Vice President - Sales and Customer Service. Since August 1, 2001, Ms. Bejjani has been the President of Worldwide Information, Inc., our wholly-owned subsidiary. JAMES C. FIELDS was appointed our Vice President of Finance, Treasurer, Secretary and Acting Chief Financial Officer on March 31, 2003. Prior to that, Mr. Fields served as our Director of Finance since February 2001. Prior to joining us, Mr. Fields was the Controller and Vice President of operations at CO Space, a carrier neutral collocation company. Mr. Fields is a certified public accountant and holds a Bachelor of Arts in Accounting from the College of St. Scholastica, which he received in 1992, and a Masters of Business Administration from Babson College, which he received in 1999. In May 2007, Mr. Fields was appointed by the Board of Directors as the CEO and remains the Acting CFO. 20 DAVID SKERRETT has been Vice President of the Middlesex Corporation for 23 years. Middlesex Corporation is in the top 400 heavy civil construction companies in the nation with $140 million in revenue. Mr. Skerrett holds a Bachelor of Engineering from College of Technology. Mr. Skerrett was elected in 2005. David is also a member of the Audit Committee. RALPH CARUSO, is the founder and President of Caruso Companies, a conglomerate involved in many facets of industrial construction that has been in business for over 25 years. Mr. Caruso was elected to the Board of Directors in 2005. 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 do not have any employment agreements with any of our employees. FORMER DIRECTORS AND OFFICERS Dr. Richard B. Yules, a former member of our Board of Directors, resigned from the Board on March 12, 2003. Mr. Robert A. Goddard, our former Chief Financial Officer, Treasurer, and Secretary, ceased employment with us on March 31, 2003. Thomas E. Murphy a former member of our Board of Directors, resigned from the Board on March 10, 2006. John P. Houlihan a former member of our Board of Directors, resigned from the Board on March 12, 2006. Chris Romeo, a former member of our Board of Directors, resigned from the Board on June 21, 2007. Mike Ryan, a former member of our Board of Directors, resigned from the Board on June 21, 2007. 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 proceeding 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 2007. 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. Currently, the only member of the Audit Committee is Mr. Skerrett. There is one vacancy on the Audit Committee of the Board of Directors. - - 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 21 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. CODE OF ETHICS The Company adopted a Code of Ethics at the meeting of the Board of Directors held May 2004. ITEM 10 - EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth, for 2007, 2006, and 2005, certain compensation paid by us, including salary, bonuses and certain other compensation, to our Chief Executive Officer and all other executive officers whose annual compensation for the years ended December 31, 2007, 2006 and 2005 exceeded $100,000 (the "Named Executive Officers").
NAME AND OPTIONS ALL OTHER PRINCIPAL SALARY BONUS SEVERANCE AWARDS COMPENSATION POSITION YEAR ($) ($) ($) (shares) ($) TOTALS - ------------------------ ---- -------- -------- ----------- ----------- -------------- ---------- JON R. LATORELLA . . . . 2007 60,215 - - - 15,000(2) 321,215 ---- -------- -------- ----------- ----------- -------------- ---------- President and. . . . . . 2006 231,468 325,000 250,000 - 15,000(2) 571,468 Chief Executive Officer. 2005 232,727 - - - 13,200(2) 247,727 JAMES C. FIELDS(3) . . . 2007 212,631 - - 600,000(1) 13,200(5) 225,831 Acting Chief Financial . 2006 142,690 - - - 13,200(5) 155,890 Officer, Treasurer and . 2005 142,893 - - - 13,200(5) 156,093 Secretary
(1) On November 8, 2007, Mr. Fields was issued stock options to purchase 600,000 shares of our Common Stock with an exercise price of $0.11 per share. (2) Mr. Latorella and his family are allowed use of company vehicles, the value of which is approximately $1,100 per month to Mr. Latorella. (3) Mr. Fields commenced his employment with us in 2001. Mr. Fields became an executive officer with the Company on March 31, 2003. (4) On May 19, 2004, Mr. Fields was granted incentive stock options to purchase 600,000 shares of Common Stock with an exercise of $0.11 per share. (5) Beginning in April 2004, Mr. Fields was allowed the use of a company-leased vehicle, the value of which is approximately $1,100 per month. In March 2007, Mr. Latorella resigned from the position of President and CEO. Mr. Latorella remains the Chairman of the Board. In May 2007, Mr. Fields was elected by the Board of Directors to the position of President and CEO. Mr. Fields remains the Acting CFO. 22 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS Number Of Secu- rities Underlying Options/SARs Option Exercise Option Granted Price Expiration Name (#) ($/Sh) Date - ------------------------------------- ------------------- ---------------- ----------- Jon R. Latorella 35,000 12.50 12/18/08 Chairman of the Board 50,000 12.50 12/18/08 Former CEO 100,000 50.00 12/18/08 20,000 75.00 05/19/09 50,000 19.50 05/19/09 20,000 10.00 11/03/08 240,000 0.50 12/29/09 James C. Fields 600,000 0.11 11/08/17 President & CEO 20,000 0.50 12/29/14 Acting Chief Financial Officer Secretary
(1) All options issued to Mr. Latorella expire five years from issue date. As such, the issue date is five years prior to expiration and all options were immediately vested upon issue. (2) All options issued to Mr. Fields expire ten years from issue date. As such, the issue date is ten years prior to expiration. With the exception of the 10,000 share grant issued 6/1/2001 which vested 25% per year on its anniversary, all options were immediately vested upon issue. In March 2007, Mr. Latorella resigned from the position of President and CEO. Mr. Latorella remains the Chairman of the Board. In May 2007, Mr. Fields was elected by the Board of Directors to the position of President and CEO. Mr. Fields remains the Acting CFO. DIRECTOR COMPENSATION Fees Earned or Total Name Paid in Cash $ - ------------- ---------------- ------- Ralph Caruso 33,381 33,381 David Skerrett 33,381 33,381 Chris Romeo 33,381 33,381 Mike Ryan 33,381 33,381 Compensation to independent members of the Board for services rendered during 2006 and through 2007 have been distributed in 2007. 23 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of the close of business on December 31, 2007, there were 11,397,657 shares of Common Stock issued and outstanding. There were also unexercised options and warrants issued to purchase shares of Common Stock (including both vested and unvested options) outstanding on that date. Of these, 2,136,207 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 December 31, 2007, 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, 2007 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. NUMBER OF SHARES PERCENTAGE BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS - -------------------------- ------------------ -------- Directors JON R. LATORELLA 983,735(1) 8.3% SONIA P. BEJJANI 92,508(2) * RALPH CARUSO 22,944 * DAVID SKERRETT 1,995(3) * Officers JAMES C. FIELDS 374,267(4) 3.2% 5% or More Shareholders SPECIAL SITUATION FUNDS 153 E. 53rd Street 55th Floor New York, NY 10022 1,410,000(5) 12.0% All directors and executive officers as a group (10 persons) 1,668,474(6) 22.87% ___________________________ * Less than one percent of outstanding shares. (1) Includes 499,475 shares issuable upon exercise of a fully vested stock options, with a weighted average exercise price of $17.45 per share. (2) Includes 90,000 shares issuable upon exercise of a fully vested stock options, with an average exercise price of $26.16 per share. (3) Consists of 225 held in IRA and 1,770 in trusts for which he is the custodian. (4) Includes the vested portion of stock incentive stock options to purchase up to 220,000 shares with a weighted average exercise price of $0.15 per share. (5) Includes 505,000 shares and 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by Special Situations Fund III, L.P. and 505,000 shares 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by Special Situations Private Equity Fund, L.P. (6) Includes 1,216,975 shares issuable upon the exercise of warrants. 24 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. JON R. LATORELLA The Board of Directors accepted the resignation of its President and Chief Executive Officer, Jon Latorella, effective March 23, 2007. As part of his severance agreement, Mr. Latorella received $250,000. He also entered into a consulting agreement with the Company where he is to receive $20,000 per month during his term of service. Mr. Latorella will remain on as Chairman of the Board and will continue to advise new management now and into the foreseeable future. As Chairman of the Board, Mr. Latorella is allowed to remain under LocatePlus Holdings Corporations health insurance policies with a monthly value of $1,240. As of December 31, 2007 the Board of Directors has not yet finalized the severance agreement with Mr. Latorella. INCENTIVE STOCK OPTION In 2004, Mr. Latorella was granted fully vested incentive stock options to purchase 1,000,000 and 2,500,000 Class A Voting common with exercise prices of $1.50 and $0.39 per share respectively. USE OF COMPANY CARS. Mr. Latorella and his family are allowed use of two company cars, the value of which is approximately $15,000 annually. JAMES C. FIELDS Mr. Fields is our Chief Executive Officer and Acting Chief Financial Officer. The Board elected Mr. Fields into this position in May 2007. STOCK OPTION On December 18, 2003, Mr. Fields was issued incentive stock options to purchase 10,000 shares of our Class A Voting Common Stock with an exercise price of $12.50 per share on a post recapitalization basis. In 2004, Mr. Fields was issued incentive stock options to purchase 20,000 shares of our Class A Voting Common Stock with an exercise price of $19.50 per share on a post recapitalization basis. On November 8, 2007, Mr. Fields was issued stock options to purchase 600,000 shares of our Common Stock with an exercise price of $0.11 per share. USE OF COMPANY CARS. Mr. Fields is allowed use of a company car, the value of which is approximately $1,100 per month. THOMAS GARLOCK Mr. Garlock is a former member of our Board of Directors. 25 NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004, Mr. Garlock was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. GERARD SCALLEY Mr. Scalley is a former member of our Board of Directors. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004 Mr. Scalley was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share on a post recapitalization basis pursuant to our Non-employee Directors Stock Option and Compensation Policy. ROBERT KITE Mr. Kite is a former member of our Board of Directors. Mr. Kite was appointed to the Board in December 2002. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004 Mr. Kite was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. ITEM 13- EXHIBITS AND REPORTS ON FORM 8-K REPORTS OF FORM 8-K On June 21, 2007, we filed a Form 8-K and reported under item 5.02 that the Board of Directors had accepted the resignation of two of its members. This form also reported that on June 26, 2007, the Board of Directors elected James Fields as Chief Executive Officer following the acceptance of Paul Colangelo's resignation to amicably resolve a non-compete agreement that had been in place with a previous employer. On May 30, 2007, we filed a Form 8-K and reported under item 5.02 that the Board of Directors had elected Paul Colangelo as a Director and had also appointed him as President and Chief Executive Officer. On May 14, 2007, we filed a Form 8-K and reported under item 3.01 that we had received a notice from the Over the Counter Bulletin Board that due to delinquent filings, our securities were no longer eligible for quotation on the OTCBB for a period of one year and would now be quoted on the "Pink Sheets." On March 20, 2007, we filed a Form 8-K and reported under item 1.01 that we had consummated a Securities Purchase Agreement (the "Purchase Agreement") dated March 20, 2007 with Cornell Capital Partners L.P. ("Cornell") providing for the sale by the Company to Cornell of its 8.5% secured convertible debentures in the aggregate principal amount of $6,000,000. 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 26 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) 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 32 906 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 27 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES During 2007, our principal accountant, Livingston & Haynes, P.C. (L&H) billed $113,170 in connection with the audit of our annual financial statements and the review of our quarterly financial statements. TAX FEES During 2007, L&H billed us $12,375 for tax related services. ALL OTHER FEES. During 2007 L&H billed us $17,125 in fees relating to the registration of securities. 28 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/ James C. Fields James C. Fields, President and Chief Executive Officer April 1, 2008 29 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, 2007, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 2006 and December 31, 2006. 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. 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. In our opinion, 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, 2006, and the results of its consolidated operations and its consolidated cash flows for the years ended December 31, 2007, and December 31, 2006, 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, 2006 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 1, 2008 F-1 LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 2007 ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . $ 96,142 Accounts receivable, trade - net . . . . . . . 721,524 Prepaid expenses and other current assets. . . 392,609 ------------ Total current assets . . . . . . . . . . . 1,210,275 ------------ Property and equipment, net. . . . . . . . . . . 1,278,886 Other assets . . . . . . . . . . . . . . . . . . 284,188 ------------ Total assets . . . . . . . . . . . . . . . $ 2,773,349 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . 1,371,169 Accrued expenses . . . . . . . . . . . . . . . 3,426,840 Deferred revenue . . . . . . . . . . . . . . . 159,223 Current portion of capital lease obligation. . 37,878 Notes Payable. . . . . . . . . . . . . . . . . 717,080 Convertible notes payable. . . . . . . . . . . 365,107 ------------ Total current liabilities. . . . . . . . . 6,077,297 Long Term Notes payable 6,530 Long Term Convertible Notes payable. . . . . . . 3,573,477 ------------ Total liabilities. . . . . . . . . . . . . 9,657,304 ------------ Commitments and contingencies. . . . . . . . . . Stockholders' equity: Common stock, $0.01 par value; 25,000,000 shares authorized; 11,397,6570 shares issued and outstanding at December 31, 2007 . . . . . . 113,977 Additional paid-in capital . . . . . . . . . . 39,218,416 Warrants . . . . . . . . . . . . . . . . . . . 3,692,378 Impairment on assets . . . . . . . . . . . . . (861,350) Accumulated deficit. . . . . . . . . . . . . . (49,047,374) ------------ Total stockholders' equity . . . . . . . . (6,883,954) ------------ Total liabilities and stockholders' equity $ 2,773,349 ============ See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-2 LOCATEPLUS HOLDINGS CORPORATIONS CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 2006 Revenues Information sales - CD Rom . . . . $ 498,366 $ 588,977 Information sales - online . . . . 5,537,453 6,182,251 Information sales - channel. . . . 2,302,550 4,458,241 Information sales - wireless . . . 9,393 7,725 ------------ ----------- Total revenues . . . . . . . . . . 8,347,762 11,237,194 ------------ ----------- Costs and expenses: Costs of revenues CD Rom. . . . . . . . . . . . . 48,219 38,965 Online and channel. . . . . . . 1,577,157 2,815,529 Selling and marketing. . . . . . . 1,462,923 1,714,501 General and administrative . . . . 6,047,279 7,539,311 Research and Development . . . . . 157,867 196,600 Severance Expense . . . . . 250,000 - ------------ ----------- Total operating expenses. . . . 9,543,445 12,304,906 ------------ ----------- Operating loss. . . . . . . . . . . . (1,195,683) (1,067,712) Other income (expense): Interest income. . . . . . . . . . 48,383 - Interest expense . . . . . . . . . (555,017) (1,320,934) Other income . . . . . . . . . . . 10,310 4,523 Write Down of LT Receivable. . . . (2,365,997) (1,291,636) Finance Related Expenses. . . . . (3,189,413) (2,286,075) ------------ ----------- Net loss. . . . . . . . . . . . . . . $(7,247,417) $(5,961,834) ============ =========== Basic and diluted net loss per share. $ (.76) $ (.86) Shares used in computing basic and diluted net loss per share . . 9,536,248 6,907,321 See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-3
LOCATEPLUS HOLDINGS CORPORATIONS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ADDITIONAL TOTAL COMMON STOCK PAID-IN WARRANTS IMPAIRMENT ACCUM STOCKHOLDERS' SHARES AMOUNT CAPITAL ON ASSETS DEFICIT EQUITY (DEFICIT) Balance at December 31, 2005 . . . 5,693,789 56,938 37,421,621 2,805,892 (831,500) (35,838,123) 3,614,828 Issuance of shares. . . 1,670,068 16,701 1,535,804 301,810 1,854,314 Adjustment to Impairment. . . (10,500) (10,500) Net loss for the . . . . Year ended . . December 31, 2006 (5,961,834) (5,961,834) --------- ------- ----------- --------- --------- ------------ ---------- Balance at December 31, 2006 . . . 7,363,857 73,639 38,957,425 3,107,702 (842,000) (41,799,957) (503,191) Issuance of shares. . . 4,033,800 40,338 260,991 584,676 886,005 Adjustment to Impairment. . . (19,350) (19,350) Net loss for the . . . . Year ended . . December 31, 2007 (7,247,417) (7,247,417) --------- ------- ---------- --------- --------- ----------- ----------- Balance at December 31, 2007 . . . 11,397,657 113,977 39,218,416 3,692,378 (861,350) (49,047,374) (7,247,417) ========== ======= ========== ========= ========= ============ ===========
F-4
LOCATEPLUS HOLDINGS CORPORATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss . . . . . . . . . . . . . . . . . . . . . . ($7,247,417) ($5,961,834) Adjustments to reconcile net loss to net cash used in operating activities: . . . . . . - - Depreciation and amortization of property and equipment . . . . . . . . . . . 722,575 852,378 Provision for doubtful accounts. . . . . . . 23,219 (21,318) Interest expense related to warrants issued with debt. . . . . . . . . 2,475,910 496,015 Services performed and interest expense in exchange for stock. . . . . . . 224,761 214,650 Stock Based Compensation Expense. . . . . . 76,568 102,558 Value Allowance for Notes Receivable. . . . 2,365,997 2,099,986 Amortization of intangible assets. . . . . . - 9,108 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . 51,743 (547,315) Prepaid expenses and other assets . . . . (47,880) 394,284 Security Deposits. . . . . . . . . . . . . . .2,212,872 (114,375) Accounts payable. . . . . . . . . . . . . (539,498) 52,178 Accrued expenses. . . . . . . . . . . . . (153,125) (49,730) ------------- ------------ Net cash used in operating activities . . (1,039,334) (146,455) ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES:. . . . . . . . . - - Principal repayment of purchased note receivable. . . . . . . . . . . . . 41,617 - Purchases of property and equipment. . . . . . . . . (14,712) (190,644) ------------- ------------ Net cash provided by investing activities 26,905 (190,644) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES:. . . . . . . . . - - Repayment of debt. . . . . . . . . . . . . . . . . . (1,647,163) (1,306,935) Proceeds from issuance of debt . . . . . . . . . . . 2,780,000 1,250,000 Payments of obligations under capital lease. . . . . (54,088) (186,880) ------------- ------------ Net cash provided by financing activities 1,078,749 (243,815) ------------- ------------ Net (decrease) increase in cash and cash equivalents . (66,320) (580,914) Cash and cash equivalents, beginning of period . . . . 29,822 610,736 ------------- ------------ Cash and cash equivalents, end of period . . . . . . . 96,142 29,822 ============= ============ Supplemental disclosures of cash flows information: Cash paid for interest . . . . . . . . . . . . . . . . $ - $ 779,776 Supplemental disclosure of non-cash investing and Financing activities: Relative fair value of detachable warrants issued In conjunction with convertible debt: . . . . . . . . - 301,810
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-5 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION LocatePLUS Holdings Corporation (the "Company") was initially incorporated in Massachusetts in 1996 as Worldwide Information, Inc. In July 1999, the Company reincorporated in Delaware and changed its name to LocatePLUS.com, Inc. On August 1, 2001, the Company changed its name from LocatePLUS.com, Inc. to LocatePLUS Holdings Corporation as part of a corporate restructuring. Also, as part of the restructuring, the Company created two wholly-owned subsidiaries, LocatePLUS Corporation and Worldwide Information, Inc. The restructuring was completed by commonly-controlled entities and, accordingly, was accounted for based on historical cost. In September 2003, the Company, through its newly formed wholly owned subsidiary Certifion Corporation, acquired all of the assets of Project Entersect Corporation. The acquisition was accounted for as a purchase and is recorded with the Company's operations from the date of purchase through December 31, 2003. In October 2003, the Company merged Voice Power Technology into its newly formed wholly owned subsidiary Dataphant, Inc. There were no assets acquired in this acquisition and the Company issued 2,500,000 shares of its Class B Non-Voting common stock to the stock holders of Voice Power Technology in consideration for a two year non-competition agreement with these stock holders. All intercompany accounts and transactions have been eliminated in consolidation. The Company provides access to public information such as bankruptcies, real estate transactions, motor vehicles, and drivers' licenses to commercial, private sector and law enforcement entities in the United States. In 1999 and prior periods, this information was delivered to customers on compact disks. In March 2000, the Company began providing information through the Internet and in 2002 began providing information through the use of handheld wireless devices. LIQUIDITY AND OPERATIONS The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred substantial losses in each of the last two years, and has incurred an accumulated deficit of approximately $47 million through December 31, 2007. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company raised approximately $3 million and $1.3 million through the issuance of debt and equity during 2007 and 2006 respectively. The ultimate success of the Company is still dependent upon its ability to secure additional financing to meet its working capital and ongoing project development needs.. The ultimate success of the Company is still dependent upon its ability to secure additional financing to meet its working capital and ongoing project development needs. On December 29, 2005, the Company entered into an Investment Agreement where the Company received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share. The Company also issued a put to one investor through an equity agreement, which provides that the Company, subject to certain limitations, has the right to sell, at its discretion, up to $10 million in shares of the Company's Common Stock to the investor at a purchase price equal to 93% of the lowest closing bid price for the Company's Common Stock during a ten-day pricing period. The number of shares that the Company may sell to that F-6 investor is limited by the trading volume of the Company's Common Stock and certain customary closing conditions. No shares have yet been sold under this agreement On July 21, 2006 the Company entered into an Investment Agreement where the Company received proceeds of $750,000 by issuing a note payable convertible into shares of Common Stock at the lesser of $.70 per share or 75% of the lowest closing bid price during the 20 trading days next preceding the date of conversion. On March 20, 2007, the Company issued a secured convertible debenture to Cornell Capital Partners in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 will 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 will be advanced immediately prior to the date the Registration Statement is declared effective by the Commission. The Debentures mature on the third anniversary of the date of issuance. 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. Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries' assets. The second and third installments have not been advanced and both parties have agreed that they will not be. Under the Purchase Agreement, we also issued to Cornell 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. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 notes receivable are placed with unrelated companies that are also reviewed by management. Consequently, the carrying value of cash and cash equivalents, and notes receivable approximates their fair value based on the short-term maturities of these instruments. F-7 PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method at rates sufficient to write off the cost of the assets over their estimated useful lives. INTANGIBLE ASSETS Costs of acquiring businesses, such as customer lists and non-compete agreements, are being amortized on a straight-line basis over 2-3 years, while deferred financing costs are being amortized over the term of the related debt. INCOME TAXES The Company accounts for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The majority of the Company's deferred tax asset has been established for the expected future benefit of net operating tax loss and credit carryforwards. A valuation reserve against net deferred tax assets is required if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. REVENUE RECOGNITION The Company provides access to public information such as bankruptcies, real estate transactions and motor vehicles and drivers' licenses. The Company provides this information as an online service through its website, wirelessly to handheld wireless devices, via XML over the Internet to Channel Partners, or through licenses of the information on compact disks. The Company updates the information contained in compact disks (CD ROMs) either quarterly or semi-annually. Revenue is recognized upon delivery to the customer of a compact disk, provided that no significant obligations remain, evidence of the arrangement exists, the fees are fixed or determinable, and collectability is reasonably assured. In October 2002, the Company changed its method of selling compact disks. Prior to October, compact disks were sold with an upfront purchase of an annual supply of compact disks, with the purchase price allocated equally based on the number of compact disks to which the customer was entitled. Deferred revenue principally related to undelivered compact disks. Subsequent to October 2002, compact disks are sold individually. Customers may choose to have the disks automatically shipped and billed. Online customers are charged fees which vary based on the type of information requested. Revenue is recognized when the information requested is downloaded, there is evidence of an arrangement, the fees are fixed or determinable, and collectability is reasonably assured. Wireless customers using LocatePLUS Anywhere are charged a monthly subscription fee billed in arrears. Revenue is recognized on a monthly basis when there is evidence of an arrangement, the fees are fixed or determinable, and collectability is reasonably assured. Channel partners are charged royalty fees, which vary based on the type of information requested. Revenue is recognized when the information requested is downloaded, there is evidence of an arrangement, the fees are fixed or determinable, and collectability is reasonably assured. Engineering services relate to integration services provided to a third party database provider with whom the Company has an arrangement whereby the Company provides the third party access to the Company's database. Revenue is recognized over the term of the contract when there is F-8 evidence of an arrangement, the fees are fixed or determinable, and collectability is reasonably assured. COSTS OF REVENUES AND SOFTWARE DEVELOPMENT COSTS Costs of revenues relating to CD Rom sales consist primarily of costs for data acquisition, materials and costs associated with compilation of compact disks, such as labor. Costs of revenues relating to online sales consist primarily of costs for license agreements related to data acquisition, software development and maintenance costs and costs associated with delivery of such services that include labor and depreciation. Software development costs are generally charged to operations as incurred, as they relate to ongoing maintenance of data and the Company's website. The Company evaluates certain software development costs for capitalization in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." 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 SOP 98-1 have been immaterial to date STOCK COMPENSATION PLANS Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company applied the disclosure only provisions of the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition Disclosure" (SFAS 148") for employee stock option awards for the twelve months ended December 31, 2005. Had compensation cost for the Company's stock option plan been determined in accordance with the fair value-based method prescribed under SFAS 123, the Company's net loss and basic and diluted net loss per share would have approximated the pro forma amounts indicated below. YEAR ENDED DECEMBER 31 2005 ---------------------- Net loss - reported $ (5,600,176) Amortization of stock compensation expense (1,289,122) ---------------------- Pro forma net loss (6,889,298) ====================== Pro forma net loss per share - basic and diluted $(1.92) In 2005, the fair value of stock options used to compute pro forma net loss and net loss per share disclosures was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0%; expected volatility of 30%; average risk-free interest rate of 4.37%; and an expected option holding period of 6 years. Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share Based Payment" ("SFAS No. 123(R)") using the modified prospective transition method. No stock-based compensation expense was recognized in the income statement for the year ended December 31, 2005, as all options granted under the Company's stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As F-9 permitted by SFAS No. 123, stock-based compensation was included as a pro forma disclosure in the notes to the Company's financial statements for the year ended December 31, 2005. Under that transition method, compensation cost recognized in the year ended December 31, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated, as provided for under the modified-prospective method. Total stock-based compensation expense recognized in the income statement for the year ended December 31, 2006 was $102,558 Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options ("excess tax benefits") to be classified and reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon adoption. SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton ("BSM") option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the years ended December 31, 2007 and 2006 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows: FOR THE TWELVE MONTHS ENDED DECEMBER 31 2007 2006 ------- ------- Expected life 6 years 6 years ------- ------- Volatility 33% 31% Risk free interest rate 4.54% 4.86% Dividend yields - - Weighted-average fair value of options granted during the period - - 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 2006, 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. Prior to the adoption of SFAS 123R, expected stock price volatility was estimated using only historical volatility of the Company's stock. 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. ADVERTISING The Company charges advertising costs to operations when incurred. Advertising expense was $111,693 in 2007 and $269,749 in 2006. F-10 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. RECENT PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments ("SFAS 155"), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows. In March 2006, the FASB issued Statement of Financial Accounting Standard 156 - Accounting for Servicing of Financial Assets ("SFAS 156"), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair value accounting for non-monetary exchanges of similar productive assets and replaces it with a general exception to fair value accounting for non-monetary exchanges that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this statement to have a material impact on its financial statements. 3.ACCOUNTS RECEIVABLE, TRADE Trade accounts receivable are presented net of an allowance for doubtful collections of $174,164 at December 31, 2007. 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. F-11 4.PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consists of approximately $221,250 in fees for financing that are being amortized over the length of the term and $85,105 in R&D expenses that are being amortized through 2009. 5.NOTES RECEIVABLE Demand promissory note receivable from an unrelated leasing company, with interest at 11%. One million dollars was advanced to the leasing company near the end of 2002 as proceeds from the Company's initial public offering were collected. There is no business relationship between the Company and this leasing company or any officers or directors of either company. At December 31, 2004, substantial doubt existed on collectability of these balances. An allowance of $500,000 was recorded against the outstanding balance. The remaining principal balance at December 31, 2005 was $358,508. As of December 31, 2006, the Company fully allowed for the remaining principal balance. At December 31, 2007 there was no activity on this receivable and management chose to write the receivable off. 7.PROPERTY AND EQUIPMENT Property and equipment at December 31, 2007, consists of the following: Equipment $ 4,598,213 Vehicles 102,954 Software 918,920 Furniture and fixtures 389,783 Leasehold improvements 621,943 ----------- 6,631,813 Less accumulated depreciation and amortization 5,352,927 ----------- Property and equipment, net $ 1,278,886 =========== Depreciation and amortization expense was $722,575 and $852,378 for the years ended December 31, 2007 and 2006, respectively. 8.PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following at December 31, 2007: Deferred financing costs $ 221,250 R&D costs 85,105 Other 86,253 --------- Total $ 392,609 ========= 9.LONG -TERM RECEIVABLE At year-end, December 2006, under the terms of a negotiated agreement, the Company converted $4.2 million held by one customer that it was carrying in accounts receivable into a long term receivable with a net carrying value of $2.3 million. At December 31, 2007, based on payment history, the Company was unable to determine the likelihood of collecting on this receivable. As a result, the Company has written down the remaining balance to $0 expensing $2.3 million during 2007. Any future payments received by the Company under the terms of this receivable will be recognized as other income. F-12 10.OTHER ASSETS Other assets consist of the following at December 31, 2007 Restricted trading securities $ 13,650 Security deposits 92,964 Other Non-Current Assets 177,574 --------- Total $ 284,188 ========= Restricted trading securities consist of 200,000 restricted shares of common stock in Data Evolution Holdings, Inc. (DEH), which trades over the counter under the symbol DTEV. These shares were acquired as part of an agreement to provide service and data to DEH. The service and data was at valued at $875,000. At the time the service and data was valued, November 22, 2004, the trailing 10 day average closing price of DTEV was $5.96 per share, or $1,192,000. Due to the fact that these shares were restricted, a mutually agreed upon 25% liquidity discount was applied to the value, or $894,000, as such 200,000 shares were exchanged for the service. At December 31, 2007, the 10-day trailing average closing price was $.09 per share, or the value of the shares was $18,200. An impairment to the current value has been recorded to adjust the security carrying value to the original 25% discount. The company recorded an impairment of $861,350 and the adjusted carrying value is now $13,650 11.ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 2007: Payroll and related taxes $ 70,025 Accounting, legal and professional fees 80,000 Finance Related Expenses 3,227,400 Other 49,415 --------- Total $3,426,840 =========== 12.NOTES PAYABLE Convertible promissory note, due on demand that bears interest at the rate of 12% per annum. The note is convertible into 44,444 shares of Class A Voting Common Stock at the note holder's option. The note requires quarterly payment of interest until the principal is repaid or converted. During 2003, the Company received $2.3 million, by issuing subordinated promissory notes bearing simple interest ranging from 10% and 12% per annum. The balance of this debt at December 31, 2007, is $123,827. In 2007, the terms of these notes were re-negotiated and now bear interest ranging from 19% to 30%. The remaining debt is due in 2008. In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, F-13 par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. As there are currently no un-issued shares of our Class A Voting Common Stock that are not otherwise reserved for issuance, we anticipate that these notes and warrants will be exercisable for shares of either our Class B Non-Voting Common Stock or the newly created class of common stock, if approved. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On November 14, 2005, at the annual meeting of the shareholders, the recapitalization was approved by a majority of the outstanding shares of both classes of stock. Effective December 2005 that debt was converted to common stock. On March 20, 2007, the Company issued a secured convertible debenture to Cornell Capital Partners in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately. The second installment of $2,000,000 will be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission of the Registration Statement. The last installment of $1,000,000 will be advanced immediately prior to the date the Registration Statement is declared effective by the Commission. The Debentures mature on the third anniversary of the date of issuance. 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. Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries' assets. Under the Purchase Agreement, we also issued to Cornell 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. Also in connection with the sale and issuance of the Debentures, 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 files the Registration Statement (or, if earlier, within 45 days) and (ii) the Registration Statement is declared effective (or, if earlier, within 145 days). 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 agreed to terminate any security interest in the Company's assets upon the Initial Payment. F-14 13.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 2012. Rent expense amounted to $584,513 and $566,445 during 2007 and 2006, respectively. Future minimum payments under non-cancelable operating leases are as follows: YEAR ENDING DECEMBER 31, 2008 586,577 2009 482,887 2010 482,887 2011 482,887 2012 80,481 ----------- Total $ 2,115,721 =========== CAPITAL LEASES The Company acquired equipment under long-term capital leases. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases. The following is a schedule by years of future minimum lease payments under the capital leases, together with the net present value of the minimum lease payments at December 31, 2007. YEAR ENDING DECEMBER 31, 2007 38,800 --------- 38,800 Less: amounts representing interest and executory costs 922 --------- Present value of future minimum lease payments 37,878 Less: current portion of obligation under capital lease 37,878 Long-term obligation under capital lease $ - ========= LICENSE AGREEMENTS The Company obtains its data from multiple sources and has entered into various license agreements with the related data providers. In 2007 and 2006, the Company recorded $2,095,338 and $3,867,373 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: F-15 The following represents the contractual obligation and commercial commitments as of December 31, 2007.
LESS THAN 1-3 3-5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS Long-Term Debt. . . . . including current. . . $5,233,610 $1,327,079 $3,906,531 - Capital Leases. . . . . 37,878 37,878 49,536 - Operating Leases. . . . 2,115,721 586,577 1,448,663 80,481 License Agreements. . . 175,000 175,000 - - ---------- ---------- ----------- ------ Total . . . . . . . . . $7,562,209 $3,450,929 $5,355,194 $80,481 ========== ========== =========== ======
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 The Company is from time to time subject to legal proceedings and claims which arise in the normal course of its business. Management believes the outcome of any pending or known matters will not have a materially adverse effect on the Company's financial position or results of operations. DATA EVOLUTION HOLDINGS, INC. The Company has entered into a services agreement with Data Evolution Holdings, Inc. (DEH), which trades over the counter under the symbol DTEV. The agreement calls for the Company to purchase services from DEH that will expand our ability to distribute our product through DEH PowerSys products. The agreement calls for the Company to purchase access to PowerSys products, a feasibility study, a two-year support plan, and become a strategic alliance partner. The value of these services has not yet been determined by DEH, however, the payment of these services will be made in Company Class A Common Voting Stock that will have a four year lock up period. 14.INCOME TAXES Deferred tax assets consist of the following at December 31: 2007 ------ Net operating loss carry forwards $ 15,100,000 Stock based compensation 450,000 Bad debt reserve 300,000 Investment loss 400,000 Capitalized research and development 1,000,000 ------------ Gross deferred tax assets 17,250,000 Valuation allowance (17,250,000 ------------ $ - ============ F-16 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. As the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expenses. At December 31, 2007, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $37 million and $20 million respectively. The federal and state net operating loss carryforwards expire through 2026. 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. 15.COMMON STOCK DESCRIPTION OF COMMON STOCK On March 23, 2001, the Company amended its articles of incorporation wherein it renamed all of the authorized 150,000,000 shares of common stock, par value $0.01 per share, Class A Voting Common Stock and authorized the issuance of 250,000,000 shares of Class B Non-voting Common Stock. Each Class A Voting Common stockholder is entitled to one vote for each share held on all matters submitted to a vote of stockholders. The holders of both classes of common stock are entitled to dividends on a pro rata basis, when and if declared by the Company's board of directors. Through December 31, 2004, no dividends have been declared or paid. On August 12, 2002, the Company commenced its initial public offering of securities (Registration No. 333-85154, effective August 12, 2002), pursuant to which the Company offered up 12,000,000 units for $0.30 per unit. Each unit consisted of one share of Class B Non-voting Common Stock and a three year redeemable warrant to purchase one share of Class A Voting Common Stock with an exercise price of $0.50 per share. On December 5, 2005, the Company amended its articles of incorporation wherein it combined each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock with 400,000,000 authorized. On December 12, 2005, the Company amended its articles of incorporation to effect a one-for-fifty reverse split of the common stock and to increase the authorized from the resulting split of 8,000,000 to 25,000,000. As of December 31, 2006, a total of 4,279,539 shares of Common Stock were reserved for issuance upon exercise of outstanding stock option and warrant agreements. STOCK OPTIONS AND WARRANTS During 2005, the Company issued warrants to purchase 1,574,780 shares of Common Stock at an average exercise price of $6.31 per share to third parties in exchange for services. The Company recorded a discount to Note payable or expense of $413,321 associated with these warrants. During 2005, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 20% volatility, 3.9% average risk F-17 - -free interest rate, a ten-year life and an underlying Class A Voting Common Stock average value of $5.00 per share. During 2006, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 34% volatility, 4.1% average risk-free interest rate, a ten-year life and an underlying Common Stock. As of December 31, 2006, there were a total of 3,088,342 options and warrants outside the Stock Plans. 16.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, 2007. The options are not transferable except by will or domestic relations order. 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 486,000 are available for grant at December 31, 2007. 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. F-18 The following table presents activity under the Plans adjusting for the reverse split for the years ended December 31, 2006, 2005, and 2004: WEIGHTED AVERAGE EXERCISE SHARES PRICE ------- -------- Outstanding at December 31, 2004 693,290 30.96 Issued 10,200 17.00 Exercised - - Canceled (3,364) 11.00 ------- Outstanding at December 31, 2005 700,126 30.86 Issued - - Exercised - - Canceled (150) 10.00 ------- Outstanding at December 31, 2006 700,126 30.54 ======= The following summarizes information relating to options outstanding at December 31, 2007: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE $0.00-10.00 234,351 4.20 $ 9.66 207,076 $ 9.65 $10.00-15.00 109,625 5.85 $ 12.51 109,275 $ 12.51 $15.00-75.00 356,000 6.26 $ 49.88 344,000 $ 50.95 -------- -------- 699,976 5.51 $ 30.56 664,351 $ 31.56 ======== ======== 17.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 $6,214 and $9,721 in 2007 and 2006, respectively. F-19 18.SEGMENT INFORMATION The Company has two reportable segments which management operates as distinct sales organizations; these two segments are segregated by the nature of products and services provided. The Company measures and evaluates its two reportable segments based on revenues and costs of revenues. The CD ROM segment provides information on motor vehicles and drivers' licenses, contained on compact disks. The online segment provides information on individuals throughout the United States of America through the Company's website. No material operating costs, other than costs of revenues, or assets and liabilities relate to the CD ROM segment. FOR THE YEAR ENDED DECEMBER 31, 2007 2006 Information sales: CD Rom $ 498,366 $ 588,977 Online and Channel 7,840,003 10,640,492 ----------- ---------- Total information sales 8,338,369 11,229,469 =========== ========== Costs of Information sales: CD Rom 48,219 38,965 Online and Channel 1,577,157 2,815,529 ----------- ---------- Total costs of Information sales 1,625,376 2,854,494 =========== ========== 19.SUBSEQUENT EVENTS None See Independent Auditors Report F-20 EXHIBIT 23.5 We consent to the use in this Annual Report on Form 10-KSB of our report dated April 1, 2008 relating to the consolidated financial statement of LocatePLUS Holdings Corporation for the year ended December 31, 2006, which appear in such Annual Report. - -------------------------------- LIVINGSTON AND HAYNES, P.C Wellesley, Massachusetts April 1, 2007 F-21 EX-31.1 2 ceocert1207.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, JAMES C. FIELDS, certify that: 1. I have reviewed this annual report on Form 10-KSB of LocatePlus Holdings Corporation for the period ended December 31, 2007. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act of 1934, as amended, Rules 13a-14 and 15d-14) for the registrant and we have: (A) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (B) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (C) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (A) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ James C. Fields James C. Fields President and Chief Executive Officer April 1, 2008 EX-31.2 3 cfocert1207.txt Exhibit 31.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, JAMES C. FIELDS, certify that: 1. I have reviewed this annual report on Form 10-KSB of LocatePlus Holdings Corporation for the period ended December 31, 2007. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act of 1934, as amended, Rules 13a-14 and 15d-14) for the registrant and we have: (A) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (B) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (C) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (A) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ James C. Fields James C. Fields Acting Chief Financial Officer April 1, 2008 EX-32.1 4 ceocfosox1207.txt Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Annual Report of the Company on Form 10-KSB for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ James C. Fields James C. Fields President and Chief Executive Officer April 1, 2008 /s/ James C. Fields James C. Fields Acting Chief Financial Officer April 1, 2008 -----END PRIVACY-ENHANCED MESSAGE-----