2. Notes payable

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

2. Notes payable

Notes payable consists of the following as of June 30, 2014 and December 31, 2013:

	June 30, 2014		December 31, 2013
Bank line-of-credit (a)	$	–	$	–
Notes payable to shareholder/director (b)		192,048		192,048
Notes payable (c)		2,666,019		1,999,676
Note payable, Innovisit (d)		220,000		510,000
Total notes payable		3,078,067		2,701,724
Less current maturities		1,578,067		(2,601,724	)
Long-term debt	$	1,500,000	$	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 June 30, 2014 and December 31, 2013 was $0 and $0 respectively.  At June 30, 2014 and December 31, 2013 our interest rate was approximately 13.25%.

(b) Notes Payable Shareholder/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 June 30, 2014 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) Notes 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. During quarter ended March 31, 2014 we paid $100,000 reducing the principal on this note to $881,655. As of June 30, 2014, there is $881,655 of unpaid principal remaining on this note. 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. As of June 30, 2014, there is $200,000 of unpaid principal remaining on this note

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 was $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. During the quarter ended June 30, 2014 the note holder contended that the Company was not in compliance with the timing of payments of the settlement arrangement. As a result, the Company agreed to settle the note in full for a payment of $32,500 during the quarter ended June 30, 2014. This note was paid in full with cash during June 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 June 30, 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 shareholders, 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; dividend yield of 0%, 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 note bears 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. No interest is payable if the $600,000 of principal is paid within three months from the date of this note. If the principal is not paid within that time frame, the note will bear 12% annual interest which accrues on the principal sum beginning March 30, 2014, with interest paid monthly, in arrears, on the last day of the month. Monthly payments of $6,000 per month will be due 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 shareholders, 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; dividend yield of 0%, expected volatility of 176.04%, a risk free rate of 1.72% and an expected life of 4 years. The Company also recorded deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The carrying values at June 30, 2014 and December 31, 2013 were $0 and $377,907 respectively. This note was paid in full with the proceeds of the May 30, 2014 financing discussed below.

On May 30 2014, the Company entered into a Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company affiliated with Cantone Asset Management, LLC as a placement agent.   The Company delivered a secured promissory note in the principal sum of $1,500,000, bearing interest at 8% per annum plus a 2% monitoring fee and maturing on May 15, 2017.   Interest and fees on the note are payable quarterly.   Outstanding principal may be converted into restricted common stock.   The Company also executed UCC financing statements, securing the note with proceeds of certain agreements.   In addition to cash fees and reimbursed expenses to placement agent which totaled $148,000, the Company is to deliver 1,350,000 shares of restricted common stock to Cantone Asset Management, LLC as placement agent fees. The 1,350,000 shares were valued at the closing share price $0.12 per share and resulted in deferred financing of $162,000. The deferred financing fees recorded during the current quarter including the cash fees paid totaled $310,000. This will be amortized ratably over the term of the note. The shares to be delivered are being carried as a current liability in shares to be issued until such time as delivery of the shares is completed. The Company used $600,000 of gross proceeds to repay an existing bridge loan with an affiliate of Lender. Each $10,000 of note principal is convertible into 75,000 common shares at an exercise price of $0.133333 per share any time after November 30, 2014, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilution provisions. The outstanding balance on the note was $1,500,000 at June 30 2014.

(d) Note 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 issued 500,000 common shares in lieu of the January 31, 2014 $60,000 installment payment under the note, and paid the April 30, 2014 installment of $60,000 in cash, leaving a balance outstanding of $220,000 at June 30, 2014.