3. Convertible Note

6 Months Ended

Jun. 30, 2015

Debt Disclosure [Abstract]

Convertible Note

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. The Company delivered a secured promissory note (the “LF1 Note”) in the principal sum of $1,500,000, bearing interest at 8% per annum and maturing on May 15, 2017. Interest on the LF1 Note is payable quarterly. Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements, securing the LF1 Note with proceeds of certain agreements.

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).  If the market price of Lattice common stock equals or exceeds twice the exercise price and certain other conditions are met, the Company may call the Note at face value for the purpose of forcing conversion of the balance of the LF1 Note into common stock.

The LF1 Note contains a provision whereby the conversion price is adjustable upon the occurrence of certain events, including the issuance of common stock or common stock equivalents at a price which is lower than the current conversion price. Under FASB ASC 815-40-15-5, the embedded conversion feature is not considered indexed to the Company’s own stock and, therefore does not meet the scope exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The initial fair value at May 30, 2014 of the embedded conversion feature was estimated at $1,223,923 and recorded as a derivative liability, resulting in a net carrying value of the note at May 30, 2014 of $276,077 ($1,500,000 face value less $1,223,923 debt discount). On June 30, 2015 the derivative was valued at $244,929 which resulted in a derivative gain of $199,032 for the quarter ended June 30, 2015. The debt discount was amortized using the effective interest method and was $1,022,411 at June 30, 2015 resulting in a finance charge of $54,475 for the quarter ended June 30, 2015 included in the statement of operations. The fair value of the embedded conversion feature is estimated at the end of each quarterly reporting period using the Monte Carlo model.

The debt discount is being amortized over the life of the convertible note using the effective interest method.

Inherent in the Monte Carlo Valuation model are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield For the Convertible Notes using a Monte Carlo model, we estimate the probability and timing of potential future financing and fundamental transactions as applicable. The assumptions used by the Company are summarized below:

	June 30, 2015		December 31, 2014
Closing stock price	$	0.04	$	0.10
Conversion price	$	0.13	$	0.13
Expected volatility		125%		125%
Remaining term (years)		1.88		2.38
Risk-free rate		0.95%		0.90%
Expected dividend yield		0%		0%

Convertible notes consist of the following at June 30, 2015 and December 31, 2014:

	June 30, 2015			December 31, 2014
Convertible notes	$	1,500,000		$	1,500,000
Discount on convertible notes		(1,223,923	)		(1,223,923	)
Accumulated amortization of discount		201,512			102,287
Total convertible notes	$	477,589		$	378,364

On May 13, 2015, 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. The Company delivered a secured promissory note (the “LF2 Note”) in the principal sum of $908,000, bearing interest at 8% per annum and maturing on April 30, 2020. Interest on the LF2 Note is payable quarterly. After six months the Lender has the right to convert the principal amount of the note into conversion shares at any time before maturity at a price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilution provisions).  The Company cannot prepay the amount due. The Company also executed UCC financing statements, securing the LF2 Note with proceeds of certain agreements.

Each $1,000 of note principal is convertible into 1,000 common shares at an exercise price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilutive provisions). If the market price of Lattice common stock equals or exceeds twice the exercise price and certain other conditions are met, the Company may call the note at face value for the purpose of forcing conversion of the balance of the note in common stock.

The agreement contains a provision that for every $1,000 borrowed, the Company would need to issue 2,500 common shares to holder. The Company borrowed $908,000 on the note and needs to issue 2,270,000 shares valued at $0.07 per share based on the closing price the day of the borrowings. This resulted in a debt discount of $222,460, which is being amortized over the life of the loan using the effective interest method. Amortization expense of the debt discount was $3,867 in the current quarter. The Company has yet to issue these shares and has recorded $222,460 in accrued expenses at June 30, 2015.

In addition, the Company incurred deferred financing fees of $160,800 in connection with the notes which will be amortized over the life of the notes. Amortization expense for these deferred financing fees for the quarter ended June 30 2015 was $5,360. Included within the $160,800 is $70,000 relating to 1,000,000 shares to be issued upon closing of the agreement. The shares were valued at $0.07 per share, the market price of the stock at the closing date of the agreement. At June 30, 2015, these shares have yet to be issued; accordingly $70,000 has been included in accrued expenses.

Convertible notes consist of the following at June 30, 2015:

	June 30, 2015
Convertible notes	$	908,000
Discount on convertible notes		(222,460	)
Accumulated amortization of discount		3,867
Total convertible notes	$	689,407