10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2014

COMMISSION FILE NUMBER 000-10690

LATTICE INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Delaware	22-2011859
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7150 N. Park Drive, Pennsauken, New Jersey	08109
(Address of principal executive offices)	(Zip code)

Issuer's telephone number: (856) 910-1166

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 14, 2014, there were 46,652,707 outstanding shares of the Registrant's Common Stock, $.01 par value.

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q is being filed solely to furnish the Interactive Data files as Exhibit 101, in accordance with Rule 405 of Regulation S-T. No other changes have been made to the Form 10-Q, as originally filed on May 15, 2014.

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 PART II

OTHER INFORMATION

ITEM 6. EXHIBITS.

Exhibit Number	Description
101.INS*	XBRL Instance Document
101.SCH*	XBRL Schema Document
101.CAL*	XBRL Calculation Linkbase Document
101.DEF*	XBRL Definition Linkbase Document
101.LAB*	XBRL Label Linkbase Document
101.PRE*	XBRL Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: May 23, 2014

	LATTICE INCORPORATED
BY:	/S/ PAUL BURGESS
	PAUL BURGESS
	CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER), SECRETARY AND DIRECTOR

DATE: May 23, 2014

BY:	/S/ JOE NOTO
	JOE NOTO
	CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER)

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8. Issuance of Common Shares (Details Narrative) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Equity [Abstract]
Stock issued during period, shares issued	8,860,489
Stock issued during period, value	$ 1,063,259
Proceeds from issuance of common stock	$ 796,441	$ 0
Options issued during period	0
Warrants issued during period	0

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4. Litigation

3 Months Ended

Mar. 31, 2014

Litigation

4. Litigation

From time to time, lawsuits are threatened or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party. Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2) the amount of the loss can be reasonably estimated. There were no liabilities of this type at March 31, 2014 and December 31, 2013. In June 2013, the Company was served a writ of Garnishment with respect to our note receivable from the sale of our Governmental services segment due to a default on the December 13, 2011 note payable (see footnote 2(c). In October 2013, the Company reached a settlement arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows; $240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10, 2013. $280,000 was paid by the Company as of the date of this filing. However, the holder has asserted that the payments were late, and that the holder is entitled to an additional $80,000 payment. The Company is defending.

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3. Derivative financial instruments

3 Months Ended

Mar. 31, 2014

Derivative Instrument Detail [Abstract]

3. Derivative financial instruments

The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 758,333 shares of the Company’s common stock as of March 31, 2014 and December 31, 2013 and are carried at fair value. The balance at March 31, 2014 was $135,741 compared to $122,698 at December 31, 2013.

The valuation of the derivative warrant liabilities is determined using a Black Scholes Merton Model. Freestanding derivative instruments, consisting of warrants and options that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black Scholes models as of March 31, 2014 included conversion or strike price of $0.10; historical volatility factor of 181% based upon forward terms of instruments, and a risk free rate of 2.72% and remaining life 8.48 years.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 712,306	$ 312,703
Accounts receivable	1,975,266	1,897,856
Inventories	1,064	9,330
Note receivable - current	466,667	350,000
Costs and estimated earnings in excess of billings	8,393	0
Other current assets	124,269	73,940
Total current assets	3,287,965	2,643,829
Property and equipment, net	780,159	861,712
Other intangibles, net	813,471	895,439
Note receivable - long term	233,333	350,000
Other assets	12,812	12,812
Total assets	5,127,740	4,763,792
Current liabilities:
Accounts payable	1,130,915	1,075,651
Accrued expenses	2,422,071	2,264,260
Customer advances	986,646	1,023,966
Notes payable - current, net of debt discount	2,224,441	2,601,724
Derivative liability	135,741	122,698
Billings in excess of costs and estimated earned profits on uncompleted	0	45,797
Total current liabilities	6,899,814	7,134,096
Long term liabilities:
Notes Payable - long term	0	100,000
Total long term liabilities	0	100,000
Total liabilities	6,899,814	7,234,096
Shareholders' equity
Common stock - .01 par value, 200,000,000 authorized, 46,652,707 and 35,304,714 issued and outstanding respectively	471,652	353,047
Additional paid-in capital	44,784,071	43,714,377
Accumulated deficit	(46,549,568)	(46,066,499)
Stockholders' Equity before Treasury Stock	(1,213,978)	(1,912,208)
Stock held in treasury, at cost	(558,096)	(558,096)
Equity Attributable to shareowners of Lattice Incorporated	(1,772,074)	(2,470,304)
Equity Attributable to noncontrolling interest	0	0
Total liabilities and shareholders' equity	5,127,740	4,763,792
Series A Preferred Stock
Shareholders' equity
Preferred Stock, Value, Issued	58,758	65,758
Series B Preferred Stock
Shareholders' equity
Preferred Stock, Value, Issued	10,000	10,000
Series C Preferred Stock
Shareholders' equity
Preferred Stock, Value, Issued	5,200	5,200
Series D Preferred Stock
Shareholders' equity
Preferred Stock, Value, Issued	$ 5,909	$ 5,909

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1. Organization and summary of significant accounting policies

3 Months Ended

Mar. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

1. Organization and summary of significant accounting policies

(a) Organization

Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding Company which itself owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements our Government Services business by expanding markets and service offerings. Together the SMEI, RTI and CLR acquisitions formed our federal government services business unit. Through 2013 we operated in two segments, our federal government services unit and our telecommunication services business.

As part of the Company’s strategy to focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the Government services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially comprised our Federal Government services segment operations. The Company retained the residual assets and liabilities of Lattice Government services, Inc. We ceased operations of the federal government business back in April, 2013 coinciding with the sale of assets to Blackwatch. For the period ended March 31, 2013 the financial results of the government services business are being reported as discontinued operations.

On November 1, 2013 we purchased certain of assets with Innovisit, LLC. The assets mainly acquired included; awarded contracts, customer lists, and its intellectual property rights to the Video Visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complimented the product offering of our telecom services business.

(b) Basis of Presentation going concern

At March 31, 2014, our working capital deficiency was $3,612,000 which improved from a working capital deficiency of $4,490,000 at December 31, 2013. Cash from operations and available capacity on current credit facilities are insufficient to cover liabilities currently due and the liabilities which will mature over the next twelve months. Additionally, we are past due on payables with trade creditors. We have several payment arrangements in place but face continuing pressures with negotiating payment arrangements with trade creditors regarding overdue payables. These conditions raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is highly dependent upon our ability to improve our operating cash flow, maintain our credit lines and secure the full financing objective currently underway. Management is currently engaged in raising capital with a goal of raising approximately $3,600,000, the proceeds of which to be used to improve working capital and strengthen our balance sheet. Securing sufficient capital for our growth strategy may also reduce doubts about our ability to operate as a going concern. During the quarter ended March 31,2014, we have closed on approximately $1,063,000 of equity financing by issuing restricted common stock to accredited investors, have solicited interests for an additional $2,600,000 investment from various investors anticipated to close by June 2014 timeframe. There is no assurance, however, that we will succeed in raising this additional financing and obtain the capital sufficient to provide for all of our liquidity needs. In the event we fail to obtain the additional capital needed and/or restructure our existing debts with current creditors, we may be required to curtail our operations significantly.

Our current cash position, availability on our lines of credit and current level of operating cash flow is insufficient to support (i) current working capital requirements (ii) pay the interest costs and principal payments on maturing liabilities, and (iii) provide the additional capital for equipment purchases necessary to support our growth plans. In this regard, we are highly dependent on obtaining the remainder of the targeted financing investment for which we have has been soliciting interest. Also, we remain dependent upon maintaining and increasing our cash flow from operations and maintaining the continuing availability on our lines of credit. There can be no assurances that our businesses will generate sufficient forward operating cash flows, we will be able to obtain the balance of the financing sought, or that future borrowings under our line of credit facilities will be available in an amount sufficient to service our current indebtedness or to fund other liquidity needs.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”).

(c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements for the three months ended March 31, 2014 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.  The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year end December 31, 2013 appearing in Form 10-K filed on March 31, 2014.

(d) Principles of consolidation

The condensed financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis.

(e) Use of estimates

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.  

(f) Share-based payments

On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting for Share-based payment , to account for compensation costs under its stock option plans and other share-based arrangements.  ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. For the three months ended March 31, 2014 and twelve months ended December 31, 2013, there was approximately $648,000 and $706,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans which do not include the effect of future grants of equity compensation, if any. The $648,000 will be amortized over the weighted average remaining service period.

(g) Revenue Recognition

Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.

Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,244,000 and $1,244,000 as of March 31, 2014 and December 31, 2013. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts may not be realized within one year.

Revenues recognition for Innovisit

Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.

Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at December 31, 2013 will be billed in 2014. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

Service Revenues are recorded when the service is provided and when collection can be reasonably assured

(h) Segment Reporting

FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company had operated in two segments prior to 2013 but with the decision to focus on the communications business and exit the federal government services business, the Company now operates in one segment for the three months ended March 31, 2014.

(i) Depreciation, amortization and long-lived assets:

Long-lived assets include:

Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Identifiable intangible assets - The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value as required.

(j) Fair Value Disclosures

Management believes that the carrying values of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. As discussed in Note 1(m), below, derivative financial instruments are carried at fair value.

The carrying values of the Company’s long term debts approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates and terms of debt currently available to the Company.

(k) Recent accounting pronouncements

In July, 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), or ASU 2013-11. The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in ASU No. 2013-11 do not require new recurring disclosures. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have a material impact on our consolidated financial statements.

We do not believe there would have been a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

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3. Derivative financial instruments (Details Narrative) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Derivative Instrument Detail [Abstract]
Derivative financial instruments indexed shares	758,333	758,333
Derivative liability	$ 135,741	$ 122,698
Conversion strike price range	10.00%
Volatility rate	181.00%
Risk free rate	2.72%

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7. Conversion of Preferred Stock (Details Narrative)	3 Months Ended
	Mar. 31, 2014
January 14, 2014
Common stock issued upon exercise of conversion of preferred stock, common stock issued	1,178,562
Common stock issued upon exercise of conversion of preferred stock, preferred shares converted	330,000
March 18, 2014
Common stock issued upon exercise of conversion of preferred stock, common stock issued	1,321,418
Common stock issued upon exercise of conversion of preferred stock, preferred shares converted	370,000

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2. Notes payable

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

2. Notes payable

Notes payable consists of the following as of March 31, 2014 and December 31, 2013:

	March 31,  2014		December 31, 2013
Bank line-of-credit (a)	$	–	$	–
Notes payable to Stockholder/director (b)		192,048		192,048
Notes Payable (c)		1,752,393		1,999,676
Note Payable, Innovisit (d)		280,000		510,000
Total notes payable		2,224,441		2,701,724
Less current maturities		2,224,441		(2,601,724	)
Long-term debt	$	–	$	100,000

(a) Bank Line-of-Credit

On July 17, 2009, the Company and its wholly-owned subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action Agreement”) with Action Capital Corporation (“Action Capital”). 

Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”). The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000. The Company will pay Action Capital interest on the advances outstanding under the Action Agreement equal to the prime rate in effect on the last business day of the prior month plus 1%.  In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.

In addition, pursuant to the Action Agreement, the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital and an accredited investor entered into an agreement under which $1,250,000 of the collateral otherwise securing advances covered by the Action Agreement are subordinated to a new security interest securing an additional loan from the accredited investor. During November 2011, $268,345 of the collateral was collected by Action, escrowed and paid directly to the accredited investor reducing the collateral and outstanding balance on the loan to $981,655 at September 30, 2013. See (c) below.

The outstanding balance owed on the line at March 31, 2014 and December 31, 2013 was $0 and $0 respectively.  At March 31, 2014 and December 31, 2013 our interest rate was approximately 13.25%.

(b) Notes Payable Stockholders/Director

The first note bears interest at 21.5% per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December 31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $24,048 and $75,315 as of December 31, 2013 and December 31, 2012, respectively. Payment of the note is past due however the note holder has not invoked his rights under the default provisions of the note.

The second note dated October 14, 2011 has a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800 is being amortized to interest expense over the term of the note. The note carries an annual interest rate of 10% payable quarterly at the rate of $4,200 per quarter. The entire principal on the note of $168,000 is due at maturity on October 14, 2014. The Company is in arrears on interest payments that were due but has accrued the interest costs on the note. The holder has not as of the date of this filing invoked his rights under the default provisions of the note related to the past due interest payments.

(c) Note Payable

On June 11, 2010, Lattice closed on a Note Payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 was amortized over the life of the note as additional interest expense. The note matured June 30, 2012 and payment of principal was due at that time in the lump sum value of $981,655 including any unpaid interest. On June 30, 2012 the holder of the note agreed to an extension for payment in full of the note to October 31, 2012. In addition to the maturity extension the Company agreed to increase the collateral by $250,000 the note was secured by certain receivables totaling $981,655, the new secured total is approximately $1,232,000. Until maturity, Lattice is required to make quarterly interest payments (calculated in arrears) at 12% stated interest with the first quarter interest payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment comes due October 31, 2012 totaling $1,019,155 including the final interest payment. Concurrent with the note, an intercreditor agreement was signed between Action Capital and Holder where Action Capital has agreed to subordinate the Action Lien on certain government contracts, task orders and accounts receivable totaling $981,655. During November 2011, $268,345 of the original $1,250,000 accounts receivable securing the note was collected, escrowed and paid directly to the note holder by Action Capital thereby reducing the outstanding balance on the note and the collateral to $981,655 at December 31, 2013 and 2012. As of the date of this filing, the Company is currently in violation under this note agreement from not paying the principal due at the October 31, 2012 maturity date. The Company is current with quarterly interest payments. The holder has not as of the date of this filing invoked his rights under the default provisions of the note.

During the quarter ended June 30, 2011, we issued a two year promissory note payable for $200,000 to a shareholder of the Company.  The Note bears interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on June 30, 2011. On May 15, 2013 the maturity date, the principal amount of $200,000 became due along with any unpaid and accrued interest. The Company is not in compliance with the terms of the note. We have accrued interest at current rate; no default provision has been invoked.

During the quarter ended September 30, 2011, we issued a two year promissory note payable for $227,272 to an investor. The Note bears interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011. In conjunction with the Company’s private placement of common stock during the quarter ended March 31, 2014, the Company issued 2,223,484 common shares thereby paying the principal of $227,272 and accrued interest of $39,546.

On December 13, 2011, we converted outstanding invoices that we owed a vendor by converting the liability to a promissory note in the amount of $416,533. The note is payable quarterly over a two year term with principal payments due as follows: December 31, 2011 of $10,000, January 15, 2012 of $50,000, March 31, 2012 of $20,000, June 30, 2012 of $30,000, September 30, 2012 of $30,000, December 31, 2012 of $45,000, March 31, 2013 of $45,000, June 30, 2013 of $55,000, September 30, 2013 of $55,000 and December 31, 2013 of $76,533. The note carries a 12% annual interest rate calculated on the outstanding principal balance payable monthly. As of December 31, 2013, the outstanding balance of the note is $20,000. The Company was in default under this note agreement in that it did not pay certain principal payments when due. In June 2013, the Company was served a writ of Garnishment against the note receivable of $700,000 from Blackwatch International Inc. for the outstanding balance due for which we are in default. In October 2013, the Company reached a settlement arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows; $240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10, 2013. The January and February payments totaling $20,000 were paid as of March 31, 2014 leaving a remaining balance of $0 under the settlement arrangement at March 31, 2014.

On January 23, 2012, we issued several promissory notes to private investors with face values totaling $198,000. The proceeds from the notes totaled $175,000 used for working capital. The discount of $23,000 has been recorded as a deferred financing fee and amortized over the life of the note. The Notes bear interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on March 31, 2012. During the quarter ended March 31, 2014, the Company paid in cash the principal owed on two of the notes totaling $113,636 leaving a remaining balance owed of $84,364 at March 31, 2014. On January 23, 2014 the maturity date, the principal amount of the notes were due along with any unpaid and accrued interest. As a result, Company is not in compliance with the terms of the note. We are current with interest payments; no default provision has been invoked.

On February 26, 2013, the Company issued a note to an investor for $600,000 for which $580,400 of net proceeds were received. The note bears interest of 12% payable monthly and is due in full to investor by the earlier of (i) September 1, 2013 or (ii) the date the customer pays for the system.  The note was issued to finance the costs associated with a purchase order transaction with a large telecommunications customer. In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 800,000 shares of common stock at an exercise price of $0.08 per share, with anti-dilution provisions covering capital stock changes affecting all stockholders, exercisable for four years from the date of issuance. A debt discount of $64,547 was recorded representing the fair value of the warrants issued and was fully amortized to interest expense during the nine months ended September 30, 2013. The fair value of the warrants was determined using the Black Scholes pricing model with the following assumptions; No dividend yield, expected volatility of 159%, a risk free rate of 0.73% and an expected life of 4 years. The Company also recorded amortization of deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The Company paid this note in full on July 27, 2013.

On October 7, 2013, we issued a promissory note with a face value of $110,000 and 150,000 warrants to an investor. The net proceeds from the note totaled $94,700 and were used for working capital. A debt discount totaling $27,185 had been recorded comprised of an original issue discount of 10% or $11,000 and the fair value of the warrants issued of $16,185. Also being deducted from proceeds were $4,300 in placement agent fees and expenses which was expensed as financing fees. The Notes bear interest of 12% per year, however no interest charged if paid off before January 1, 2014.  On December 31, 2013, the principal amount of the note was paid in full from the December 31, 2013 financing with the same investor (See paragraph below). Accordingly, the unamortized debt discount of $27,185 was recorded as interest expense.

On December 31, 2013, the Company issued a note to an investor for $600,000 for which $411,000 of net proceeds were received. Of the 600,000; $60,000 was an original issue discount of 10% or $60,000, $110,000 was used to pay-off the October 2013 note held by the same investor and $19,000 was used for placement fees and legal expenses. Zero interest payable if $600,000 principal is paid within three months from the date of this Note; 12% annual interest accrues on the principal sum beginning March 30, 2014 if the principal remains outstanding, with interest paid monthly, in arrears, on the last day of the month, $6000 per month with first cash payment due April 30, 2014, and will continue until the Amount Due is paid. The net proceeds of $411,000 were used for working capital purposes. In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 1,000,000 shares of common stock at an exercise price of $0.11 per share, with anti-dilution provisions covering capital stock changes affecting all stockholders, exercisable for four years from the date of issuance. In addition, the Company issued 145,000 shares of common stock. A debt discount of $162,093 was recorded representing the fair value of the warrants and the common stock issued and is being amortized over the term of the note which matures June 30, 2014. The fair value of the warrants was determined using the Black Scholes pricing model with the following assumptions; No dividend yield, expected volatility of 176.04%, a risk free rate of 1.72% and an expected life of 4 years. The Company also recorded amortization of deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The carrying values at March 31 2014 and December 31, 2013 were $488,953 and $377,907 respectively, comprised of the face value of the loan of $600,000 less original issue discount of $30,000 (March 2014) and $60,000 (December 2013); less the debt discount of $70,172 (March 2013) and $140,343 (December 2013) and $10,875 (March 2014) and $21,750 (December 2013) representing the fair values of the warrants and stock issued respectively.

(d) Notes payable - Innovisit

In conjunction with the purchase of intellectual property and certain other assets of Innovisit (See Note #6) on November 1, 2013, Lattice issued a promissory note for $590,000 to Icotech LLC, the owner of Innovisit.  Lattice agreed to pay to Icotech; (a) $250,000 on November 30, 2013, and four payments of $60,000 on each of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014; and final Payment of $100,000 due and payable on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual property acquired. . The Company had paid $170,000 during the quarter ended March 31, 2014. Additionally, the Company issued 500,000 common shares in lieu of the January 31, 2014 $60,000 installment payment under the note leaving a balance outstanding of $280,000 at March 31, 2014. The April 30, 2014 $60,000 installment was paid in cash.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Shareholders' equity
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	46,652,707	35,304,714
Common stock, shares outstanding	46,652,707	35,304,714
Series A Preferred Stock
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	9,000,000	9,000,000
Preferred stock, shares issued	5,875,815	5,875,815
Preferred stock, shares outstanding	5,875,815	5,875,815
Series B Preferred Stock
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	1,000,000	502,160
Preferred stock, shares outstanding	1,000,000	502,160
Series C Preferred Stock
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	520,000	520,000
Preferred stock, shares issued	520,000	520,000
Preferred stock, shares outstanding	520,000	520,000
Series D Preferred Stock
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	636,400	636,400
Preferred stock, shares issued	590,910	590,910
Preferred stock, shares outstanding	590,910	590,910

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5. Discontinued Operations (Tables)

3 Months Ended

Mar. 31, 2014

Discontinued Operations and Disposal Groups [Abstract]

Discontinued operations results of operations

	Three Months Ended March 31,
	2014		2013
Revenue	$	–	$	631,074
Cost of Revenue		–		324,836
Gross Profit		–		306,238
		–		48.5%
Selling, general and administrative expenses		–		191,111
Amortization expense		–		80,448
Income (loss) from operations		–		34,679
Interest expense		–		(19,196	)
Gain on sale of discontinue operation
Income (Loss) before taxes		–		15,483
Income taxes (benefit)		–		(32,397	)
Net income (loss) from Discontinued operations	$	–	$	47,880

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 14, 2014
Document And Entity Information
Entity Registrant Name	Lattice INC
Entity Central Index Key	0000350644
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		46,652,707
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2014

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9. Commitments (Tables)

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

Future minimum lease payments operating leases

	Operating
	Leases
2014	$	67,413
2015		51,211
2016		–
Total minimum lease payments	$	118,624

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATION (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Statement [Abstract]
Revenue	$ 2,333,841	$ 2,183,786
Cost of Revenue	1,440,871	1,501,993
Gross Profit	892,970	681,793
Operating expenses:
Selling, general and administrative	968,002	613,679
Research and development	216,782	149,805
Total operating expenses	1,184,784	763,484
Income (loss) from operations	(291,814)	(81,691)
Other income (expense):
Derivative expense	(13,043)	(6,825)
Financing Fees	(7,820)	(3,267)
Interest expense	(164,115)	(72,923)
Total other income	(184,978)	(83,015)
Income (Loss) before taxes	(476,792)	(164,706)
Income taxes	0	0
Net income (loss) from continuing operations	(476,792)	(164,706)
Net income (loss) from operations of discontinued component	0	47,880
Net income (loss)	$ (476,792)	$ (116,826)
Income (loss) per common share
Basic	$ (0.01)	$ 0.00
Diluted	$ (0.01)	$ 0.00
Weighted average shares:
Basic	36,740,854	32,316,509
Diluted	36,740,854	32,316,509

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7. Conversion of Preferred Stock

3 Months Ended

Mar. 31, 2014

Equity [Abstract]

7. Conversion of Preferred Stock

On January 14, 2014, we issued 1,178,562 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 330,000 shares of Series A Preferred Stock owned by Barron Partners.

On March 18, 2014, we issued 1,321,418 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 370,000 shares of Series A Preferred Stock owned by Barron Partners 

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6. Note Receivable

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

6. Note Receivable

As part of sale of Lattice Government assets on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable in  12 equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each successive payment being on the 15th day of the month following close each calendar quarter. The note is secured by personal guarantee by the principal owner of Purchaser. As of the filing date, the Company has not received any of the installments due to the writ of garnishment issued with regards to the default on the December 13, 2011 note (see footnote 2(c)). As of May 15, 2014, the Company has not received any installment due to the writ of garnishment issued with respect to the default, See Note 4.

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5. Discontinued Operations (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Discontinued Operations Details
Revenue	$ 0	$ 631,074
Cost of Revenue	0	324,836
Gross Profit	0	306,238
Gross Profit-Percentage	0.00%	48.50%
Selling, general and administrative expenses	0	191,111
Amortization expense	0	80,448
Income (loss) from operations	0	34,679
Interest expense	0	(19,196)
Income (Loss) before taxes	0	15,483
Income taxes (benefit)	0	(32,397)
Net income (loss) from Discontinued operations	$ 0	$ 47,880

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1. Organization and summary of significant accounting policies (Details Narrative) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Working capital	$ (3,612,000)	$ (4,490,000)
Unrecognized compensation cost	648,000	706,000
Unapproved claims
Unproved claims included in accounts receivable	$ 1,244,000	$ 1,244,000

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1. Organization and summary of significant accounting policies (Policies)

3 Months Ended

Mar. 31, 2014

Notes to Financial Statements

Organization

Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding Company which itself owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements our Government Services business by expanding markets and service offerings. Together the SMEI, RTI and CLR acquisitions formed our federal government services business unit. Through 2013 we operated in two segments, our federal government services unit and our telecommunication services business.

As part of the Company’s strategy to focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the Government services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially comprised our Federal Government services segment operations. The Company retained the residual assets and liabilities of Lattice Government services, Inc. We ceased operations of the federal government business back in April, 2013 coinciding with the sale of assets to Blackwatch. For the period ended March 31, 2013 the financial results of the government services business are being reported as discontinued operations.

On November 1, 2013 we purchased certain of assets with Innovisit, LLC. The assets mainly acquired included; awarded contracts, customer lists, and its intellectual property rights to the Video Visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complimented the product offering of our telecom services business.

Basis of Presentation going concern

At March 31, 2014, our working capital deficiency was $3,612,000 which improved from a working capital deficiency of $4,490,000 at December 31, 2013. Cash from operations and available capacity on current credit facilities are insufficient to cover liabilities currently due and the liabilities which will mature over the next twelve months. Additionally, we are past due on payables with trade creditors. We have several payment arrangements in place but face continuing pressures with negotiating payment arrangements with trade creditors regarding overdue payables. These conditions raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is highly dependent upon our ability to improve our operating cash flow, maintain our credit lines and secure the full financing objective currently underway. Management is currently engaged in raising capital with a goal of raising approximately $3,600,000, the proceeds of which to be used to improve working capital and strengthen our balance sheet. Securing sufficient capital for our growth strategy may also reduce doubts about our ability to operate as a going concern. During the quarter ended March 31,2014, we have closed on approximately $1,063,000 of equity financing by issuing restricted common stock to accredited investors, have solicited interests for an additional $2,600,000 investment from various investors anticipated to close by June 2014 timeframe. There is no assurance, however, that we will succeed in raising this additional financing and obtain the capital sufficient to provide for all of our liquidity needs. In the event we fail to obtain the additional capital needed and/or restructure our existing debts with current creditors, we may be required to curtail our operations significantly.

Our current cash position, availability on our lines of credit and current level of operating cash flow is insufficient to support (i) current working capital requirements (ii) pay the interest costs and principal payments on maturing liabilities, and (iii) provide the additional capital for equipment purchases necessary to support our growth plans. In this regard, we are highly dependent on obtaining the remainder of the targeted financing investment for which we have has been soliciting interest. Also, we remain dependent upon maintaining and increasing our cash flow from operations and maintaining the continuing availability on our lines of credit. There can be no assurances that our businesses will generate sufficient forward operating cash flows, we will be able to obtain the balance of the financing sought, or that future borrowings under our line of credit facilities will be available in an amount sufficient to service our current indebtedness or to fund other liquidity needs.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”).

Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements for the three months ended March 31, 2014 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.  The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year end December 31, 2013 appearing in Form 10-K filed on March 31, 2014.

Principles of consolidation

The condensed financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis.

Use of estimates

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.  

Share-based payments

On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting for Share-based payment , to account for compensation costs under its stock option plans and other share-based arrangements.  ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. For the three months ended March 31, 2014 and twelve months ended December 31, 2013, there was approximately $648,000 and $706,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans which do not include the effect of future grants of equity compensation, if any. The $648,000 will be amortized over the weighted average remaining service period.

Revenue Recognition

Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.

Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,244,000 and $1,244,000 as of March 31, 2014 and December 31, 2013. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts may not be realized within one year.

Revenues recognition for Innovisit

Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.

Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at December 31, 2013 will be billed in 2014. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

Service Revenues are recorded when the service is provided and when collection can be reasonably assured

Segment Reporting

FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company had operated in two segments prior to 2013 but with the decision to focus on the communications business and exit the federal government services business, the Company now operates in one segment for the three months ended March 31, 2014.

Depreciation, amortization and long-lived assets

Long-lived assets include:

Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Identifiable intangible assets - The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value as required.

Fair value disclosures

Management believes that the carrying values of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. As discussed in Note 1(m), below, derivative financial instruments are carried at fair value.

The carrying values of the Company’s long term debts approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates and terms of debt currently available to the Company.

Recent accounting pronouncements

In July, 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), or ASU 2013-11. The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in ASU No. 2013-11 do not require new recurring disclosures. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have a material impact on our consolidated financial statements.

We do not believe there would have been a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

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8. Issuance of Common Shares

3 Months Ended

Mar. 31, 2014

Equity [Abstract]

8. Issuance of Common Shares

During the quarter ended March 31, 2014, the Company issued 8,860,489 restricted common shares at a price of $0.12 per share in a series of private placements for a gross financing amount of $1,063,259. Of which, net cash proceeds of $796,441 were received and $266,818 was derived from the conversion of principal and accrued interest on existing notes with several investors.

We did not issue any employee options during the three months ended March 31, 2104.

During the three months ended March 31, 2014, we did not issue any common stock warrants.

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9. Commitments

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

9. Commitments

(a) Operating Leases

The Company leases its office, sales and manufacturing facilities under non-cancelable operating leases with varying terms expiring through 2015. The leases generally provide that the Company pay the taxes, maintenance and insurance expenses related to the leased assets.

We currently have two leases for office facilities located in the United States with lease expirations occurring through March 31, 2015. The total average monthly rent for these leases during the quarter ended March 31 2014 is approximately $9,000 per month.

Future minimum lease commitments as of March 31, 2014 as follows:

	Operating
	Leases
2014	$	67,413
2015		51,211
2016		–
Total minimum lease payments	$	118,624

Total rent expense was $29,403 for the quarter ended March 31, 2014.

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2. Notes payable (Tables)

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

Notes payable

	March 31,  2014		December 31, 2013
Bank line-of-credit (a)	$	–	$	–
Notes payable to Stockholder/director (b)		192,048		192,048
Notes Payable (c)		1,752,393		1,999,676
Note Payable, Innovisit (d)		280,000		510,000
Total notes payable		2,224,441		2,701,724
Less current maturities		2,224,441		(2,601,724	)
Long-term debt	$	–	$	100,000

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2. Notes Payable (Details Narrative) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Credit line interest rate	13.25%
Balance of notes payable to stockholder/director	$ 192,048	$ 192,048
Stock issued in settlement of debt, shares issued	2,223,484
Stock issued in settlement of debt, principal paid	227,272
Stock issued in settlement of debt, accrued interest paid	39,546
Note payable stockholder/director 1
Interest rate on note	21.50%
Balance of notes payable to stockholder/director	24,048	24,048
Note payable stockholder/director 2
Face value of note	168,000
Interest rate on note	10.00%
Balance of notes payable to stockholder/director	$ 168,000	$ 168,000

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9. Commitments (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Commitments and Contingencies Disclosure [Abstract]
2014	$ 67,413
2015	51,211
2016	0
Total minimum lease payments	118,624
Rent expense	$ 29,403

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flow from operating activities:
Net Loss	$ (476,792)	$ (81,085)
Adjustments to reconcile net income to net cash provided by operating activities:
Operating activities discontinued operations	0	(35,741)
Gain on disposition of Government segment assets	0	0
Derivative (income) expense	13,043	6,825
Amortization of intangible assets	81,968	32,499
Amortization of debt discount	113,625	10,758
Gain on extinguishment of debt	0	3,267
Financing fees	6,921	0
Share-based compensation	58,039	2,319
Depreciation	91,905	56,672
(Increase) decrease in:
Accounts receivable	(77,410)	(568,500)
Other current assets	(42,063)	4,447
Costs and estimated earnings in excess of billings	(8,393)	0
Increase (decrease) in:
Accounts payable and accrued liabilities	239,425	23,896
Billings in excess of costs and estimated earnings	(45,796)	0
Customer advances	(37,320)	128,305
Total adjustments	393,944	(299,512)
Net cash provided by (used in) operating activities	(82,848)	(380,597)
Net cash provided by - Discontinued operations	0	48,063
Cash Used in investing activities:
Purchase of equipment	(10,352)	(63,467)
Net cash used in investing activities	(10,352)	(63,467)
Cash flows from financing activities:
Revolving credit facility (payments) borrowings, net	0	22,292
Payments on capital equipment lease	0	(6,027)
Payments on Notes Payable - discontinued operations	0	(56,352)
Payments on notes payable	(303,636)	0
Proceeds from the issuance of common stock issued, net	796,441	0
Proceeds from the issuance of note payable, net of discount	0	580,400
Payments on director loans	0	(4,651)
Net cash used in financing activities	492,805	535,662
Net increase (decrease) in cash and cash equivalents	399,605	103,919
Cash and cash equivalents - beginning of period	312,703	30,368
Cash and cash equivalents - end of period	712,306	134,287
Supplemental cash flow information
Interest paid in cash	35,413	61,488
Summary of Non cash Investing and Financing activities
Conversion of Notes Payable and Accrued Interest into Common Stock	$ 312,818	$ 0

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5. Discontinued Operations

3 Months Ended

Mar. 31, 2014

Discontinued Operations and Disposal Groups [Abstract]

5. Discontinued Operations

On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially comprised our Government services segment operations.

The following table shows the results of operations of Lattice Government Services segment for the three months ended March 31, 2013 which are included in the net income (loss) from discontinued operations:

	Three Months Ended March 31,
	2014		2013
Revenue	$	–	$	631,074
Cost of Revenue		–		324,836
Gross Profit		–		306,238
		–		48.5%
Selling, general and administrative expenses		–		191,111
Amortization expense		–		80,448
Income (loss) from operations		–		34,679
Interest expense		–		(19,196	)
Gain on sale of discontinue operation
Income (Loss) before taxes		–		15,483
Income taxes (benefit)		–		(32,397	)
Net income (loss) from Discontinued operations	$	–	$	47,880

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2. Notes payable (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Debt Disclosure [Abstract]
Bank line-of-credit	$ 0	$ 0
Notes payable to Stockholder/director	192,048	192,048
Notes Payable	1,752,393	1,999,676
Note Payable, Innovisit	280,000	510,000
Total notes payable	2,224,441	2,701,724
Less current maturities	(2,224,441)	(2,601,724)
Long-term debt	$ 0	$ 100,000