10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to ______________.

Commission File Number 000-10690

LATTICE INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	22-2011859
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

7150 N. Park Drive
Pennsauken, New Jersey 08109

(Address of Principal Executive Offices including zip code)

(856) 910-1166

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ¨

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 ¨

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o
(Do not check if a smaller reporting company) Smaller reporting company x

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

As of May 16, 2016, 95,038,673 shares of the issuer’s common stock, par value $0.01, were outstanding.

TABLE OF CONTENTS

Part I    FINANCIAL INFORMATION	3
ITEM 1   CONSOLIDATED FINANCIAL STATEMENTS	3
ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4   CONTROLS AND PROCEDURES.	23
Part II    OTHER INFORMATION	24
ITEM 1   LEGAL PROCEEDINGS	24
ITEM 1A.   RISK FACTORS	24
ITEM 2   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
ITEM 3   DEFAULTS UPON SENIOR SECURITIES	24
ITEM 4   mine safety disclosures	24
ITEM 5   OTHER INFORMATION	24
ITEM 6   EXHIBITS	25

2

Part I. FINANCIAL INFORMATION

ITEM 1     CONSOLIDATED FINANCIAL STATEMENTS

LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31			December 31
	2016			2015
	(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	100,603		$	186,839
Accounts receivable, net		1,187,011			977,638
Inventories		50,711			50,711
Costs and gross profit in excess of billings		492,121			324,673
Other current assets		67,411			61,940
Total current assets		1,897,857			1,601,801
Property and equipment, net		427,619			515,668
Intangible assets, net		487,512			520,012
Other receivable, net		761,607			761,607
Deposits		58,473			58,473
Total assets	$	3,633,068		$	3,457,561
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	2,266,693		$	2,390,420
Accrued expenses		1,420,385			1,110,346
Accrued settlement		2,750,000			2,750,000
Customer advances		199,134			400,985
Notes payable - current, net of debt discount		2,199,144			1,806,981
Capital lease obligation		4,764			4,601
Derivative liability		37,716			30,154
Deferred revenue		108,872			166,883
Total current liabilities		8,986,708			8,660,370
Long-term liabilities:
Derivative liability		–			–
Capital lease obligation		5,938			7,192
Convertible notes payable, net of debt discount		2,105,195			2,090,049
Notes payable - long-term		61,153			69,797
Total long-term liabilities		2,172,286			2,167,038
Total liabilities		11,158,994			10,827,408
Shareholders' deficit
Preferred stock - $0.01 par value
Series B 1,000,000 shares authorized 1,000,000 issued and outstanding		10,000			10,000
Common stock - $0.01 par value, 200,000,000 authorized, 95,341,557 and 94,741,557 issued and outstanding respectively		953,416			947,416
Common stock subscribed - 500,000 shares		5,000			5,000
Additional paid-in capital		45,753,692			45,673,848
Accumulated deficit		(53,685,152	)		(53,451,081	)
Accumulated other comprehensive income		(4,786	)		3,066
		(6,967,830	)		(6,811,751	)
Stock held in treasury, at cost		(558,096	)		(558,096	)
Total shareholders' (deficit)		(7,525,926	)		(7,369,847	)
Total liabilities and shareholders' deficit	$	3,633,068		$	3,457,561

See accompanying notes to the condensed consolidated financial statements.

3

LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(UNAUDITED)

	2016			2015
Revenue	$	2,430,148		$	1,509,671
Cost of Revenue		1,215,903			985,102
Gross Profit		1,214,245			524,569
Operating  Expenses:
Selling, general and administrative		945,528			1,079,409
Research and development		273,465			309,239
Total operating expenses		1,218,993			1,388,648
Loss from Operations		(4,748	)		(864,079	)
Other Income (Expense):
Derivative income (expense)		(7,562	)		346,409
Write-off of note receivable		–			(37,250	)
Interest expense		(215,484	)		(151,339	)
Total other income (expense)		(223,046	)		157,820
Loss before taxes		(227,794	)		(706,259	)
Income taxes		–			–
Net Loss		(227,794	)		(706,259	)
Preferred Stock Dividend		(6,277	)		(6,277	)
Net Loss Available to Common Shareholders		(234,071	)		(712,536	)
Net loss per common share
Basic	$	(0.00	)	$	(0.01	)
Diluted	$	(0.00	)	$	(0.01	)
Weighted average shares:
Basic		94,833,865			53,911,094
Diluted		94,833,865			53,911,094
Comprehensive Loss
Net Loss		(227,794	)		(706,259	)
Foreign Currency Translation Gain (Loss)		(7,852	)		(2,017	)
Comprehensive Loss		(235,646	)		(708,276	)

See accompanying notes to the condensed consolidated financial statements.

4

LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(UNAUDITED)

	2016			2015
Cash flows from operating activities:
Net loss	$	(227,794	)	$	(706,259	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write-off of note receivable		–			37,250
Derivative income		7,562			(346,409	)
Stock issued for services		–			15,000
Amortization of intangible assets		32,500			32,500
Amortization of debt discount		94,342			76,833
Bad debt expense		8,119			21,680
Share-based compensation		61,844			58,038
Depreciation		89,573			79,452
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		(217,492	)		43,965
Costs in excess of billings		(167,448	)		40,841
Other current assets		(5,471	)		30,218
Increase (decrease) in:
Accounts payable and accrued liabilities		180,035			(9,010	)
Deferred revenue		(58,011	)		(33,990	)
Customer advances		(201,851	)		369,126
Total adjustments		(176,298	)		415,494
Net cash used in operating activities		(404,092	)		(290,765	)
Cash flows from investing activities:
Principal payments received on note receivable		–			–
Purchase of equipment		(1,524	)		(21,153	)
Net cash used in investing activities		(1,524	)		(21,153	)
Cash flows from financing activities:
Cash paid for financing fees		(21,815	)		(78,000	)
Payments on capital lease		(1,091	)		–
Payments on notes payable		(24,862	)		(29,218	)
Proceeds from notes payable		375,000			500,000
Net cash provided by financing activities		327,232			392,782
Effect of exchange rate changes on cash		(7,852	)		(2,017	)
Net (decrease) increase in cash and cash equivalents		(86,236	)		78,847
Cash and cash equivalents - beginning of period		186,839			255,954
Cash and cash equivalents - end  of period		100,603			334,801
Supplemental cash flow information
Interest paid in cash	$	103,879		$	61,258
Summary of non-cash investing and financing activities
Dividends declared but not paid	$	6,277		$	6,277
Common stock issued as prepayment for services	$	–		$	75,000
Common stock issued for deferred financing fees	$	–		$	70,000
Stock issued for debt discount	$	24,000		$	–

See accompanying notes to the condensed consolidated financial statements.

5

LATTICE INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(UNAUDITED)

Note 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 owned 100% of the shares of CLR Group Limited. (“CLR”), a government contractor. Together, the SMEI, RTI and CLR acquisitions formed our federal government services business unit, Lattice Government Services (“LGS”). Through 2012 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 Department of Defense agencies either as a 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 sold the assets of LGS for approximately $1.2 million. These assets essentially comprised our federal government services segment operations.

On November 1, 2013, the Company purchased certain assets of Innovisit, LLC. The acquired assets mainly included: awarded contracts, customer lists, and its intellectual property rights to video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations have been transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complemented the product offering of our telecom services business.

In 2013, the Company established a wholly owned subsidiary, Lattice Communications Inc., to enable us to operate in Canada. During 2014, we started operating a call center and collecting fee income for processing prepaid deposits for a large Canadian telecom provider which operates Lattice technology systems to provide call provisioning services to correctional facilities located in Canada.

b) Basis of Presentation / Going Concern

As disclosed in Note 3 to the condensed consolidated financial statements, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” during the first quarter of 2016. In accordance with the guidance, $115,000 of unamortized debt issuance costs, associated with the Company’s convertible notes payable, were reclassified from other current assets, as previously reported on the consolidated balance sheet as of December 31, 2015, to convertible notes payable, net of debt discount.

6

At March 31, 2016, our working capital deficiency was approximately $7,089,000 compared to a working capital deficiency of approximately $7,059,000 at December 31, 2015. 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 extended on payables with trade creditors. We have several payment arrangements in place but face continuing pressures 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 additional capital. Management is currently engaged in raising capital with a goal of raising approximately $4,000,000 to $5,000,000, the proceeds of which will be used to improve working capital and strengthen our balance sheet. To address this objective and to address short term liquidity needs, Lattice engaged in a private placement of restricted common stock bringing in gross proceeds of $382,800 in April 2016. Management is actively seeking additional funding opportunities. There is no assurance, however, that we will succeed in raising the additional financing needed 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.

The condensed consolidated 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”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s consolidated financial position and operating results. The condensed consolidated balance sheet at March 31, 2016 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements for the three months ended March 31, 2016 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, 2015 appearing in Form 10-K filed on April 14, 2016.

d) Principles of Consolidation

The condensed consolidated 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.

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 consolidated 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.

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f) 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), 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.

g) Cash and Cash Equivalents

The Company maintains its cash balances with various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation limits.

h) Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

i) Revenue Recognition

Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.

Direct Call Provisioning Services:

Revenues related to collect and prepaid calling services generated by communication services 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.

Wholesaled Technology:

We sell telephony systems with embedded proprietary software to other service providers. We recognize revenue when the equipment is shipped to the customer.

Breakage:

In compliance with regulatory tariffs, we recognize as income prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.

Prepaid Cards:

We also sell prepaid phone cards to end user facilities on a wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user facilities.

Software Maintenance:

We offer software maintenance and support contracts to customers who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life of the contract.

Revenue Recognition for Construction Projects:

Revenues from construction contracts are included in contract revenue in the condensed 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.

8

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. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

Software and Software License Sales

The Company recognizes revenue when a fixed fee order has been received and delivery has occurred to the customer. The Company assesses whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software and licenses are delivered electronically to the customer. Revenue attributable to software licenses sold with extended payment terms in excess of twelve months are recognized ratably over the payment term.

j) 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 consolidated financial statements based on their fair values.

For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. At March 31, 2016, there was $162,510 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. This amount will be amortized over the remaining vesting periods of the grants.

k) 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.

At least annually, The Company reviews all long-lived assets for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.

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l) Fair Value of Financial Instruments

In accordance with FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data. Unobservable inputs reflect assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

· Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

· Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value.

As of March 31, 2016 and December 31, 2015, the derivative liabilities amounted to $37,716 and $30,154. In accordance with the accounting standards the Company determined that the carrying value of these derivatives approximated the fair value using the level 3 inputs.

m) Derivative Financial Instruments and Registration Payment Arrangements

Derivative financial instruments, as defined in Financial Accounting Standards, consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital requirements, including convertible debt and other financial instruments indexed to the Company's own stock. These contracts require careful evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved. In instances where derivative financial instruments require liability classification, the Company is required to initially and subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge to income until such time as the instruments require classification in stockholders' equity (deficit). See Note 4 for additional information.

As previously stated, derivative financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, the Company generally uses the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.

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n) 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 exited its government services business in April 2013 and is reporting the operating results of that unit as discontinued operations in the consolidated financial reports. Accordingly, the Company operated in one segment during the three months ended March 31, 2016 and 2015 (Telecom services).

o) Basic and Diluted Income (Loss) Per Common Share

The Company calculates income (loss) per common share in accordance with ASC Topic 260, “Earnings Per Share”. Basic and diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible preferred stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled approximately 39 million shares at March 31, 2016.

p) Recent Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11“). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required and early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the new standards.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. See Note 3 for the impact of this adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards.  Early adoption will be permitted, but not before the first quarter of 2017.  Adoption can occur using one of two prescribed transition methods.  In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.

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During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position, results of operations or cash flows.

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.

In March 2016, the FASB issued ASU No. 2016-06, “Contingent Put and Call Option in Debt Instruments” (“ASU 2016-06”).  ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.

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

Note 2 – Notes Payable

Notes payable consists of the following as of March 31, 2016 and December 31, 2015:

	March 31, 2016			December 31, 2015
Bank line of credit (a)	$	–		$	–
Notes payable to shareholder/former director (b)		192,048			192,048
Notes payable (c)		2,055,515			1,656,996
Note payable, Innovisit (d)		12,734			27,734
Total notes payable		2,260,297			1,876,778
Less current maturities		(2,199,144	)		(1,806,981	)
Long term debt	$	61,153		$	69,797

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(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 is obligated to 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 is obligated to pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month. 

The outstanding balance owed on the line at March 31, 2016 and December 31, 2015 was $0 and $0 respectively. If the credit facility is drawn upon, the interest rate would be 13.25%.

(b) Notes Payable to Shareholder/Former Director

There are two notes outstanding with a former 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 principal was to be paid. This note had an outstanding principal balance of $24,048 as of March 31, 2016 and December 31, 2015, respectively. The Company is in arrears on interest payments that were due but has accrued the interest 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 principal and interest payments. 

The second note is dated October 14, 2011 had a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800 was 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 was due at maturity on October 14, 2014. This note had an outstanding principal balance of $168,000 as of March 31, 2016 and December 31, 2015, respectively. The Company is in arrears on interest payments that were due but has accrued the interest 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 principal and 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 difference between the face amount of the note and proceeds received 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 and 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 2014 the Company paid $100,000 each in April and July reducing the principal on this note to $781,655 as of December 31, 2014. As of March 31, 2016 and December 31, 2015, there was $781,655 of unpaid principal remaining on this note. As of the date of this filing, the Company is currently in violation under terms of the note agreement requiring 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.

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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 was 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. As of March 31 2016 and December 31, 2015, there was $200,000 of unpaid principal remaining on this note. The holder has not as of the date of this filing invoked his rights under the default provisions of the note.

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. 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 June 30, 2012. During the quarter ended June 30, 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 as of March 31, 2016 and December 31, 2015. On January 23, 2014 the maturity date, the principal amounts 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.

During November 2015, the Company issued a secured note to an investor for $580,000 for which $355,174 of net proceeds were received. Of the $580,000; $58,000 was an original issue discount, $29,000 was used for placement fees and legal expenses and $137,826 was used to pay the remaining principal and accrued interest outstanding on the March 2015 note. In addition, the Company was required to issue 1,862,500 shares of common stock ($55,875 based on the closing price of the stock on the date of closing) to the Lender. The original issue discount was recorded as a debt discount, as were the placement and legal fees and the value of the 1,862,500 shares were recorded as deferred financing fees and included in prepaid expenses on the balance sheet. The debt discount is amortized using the effective interest method. The unamortized debt discount as of March 31, 2016 was $27,445. The carrying balance of this note, net of unamortized debt discount of $27,445, at March 31, 2016 was $552,555. On April 27, 2016, the maturity date of this note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000, thereby increasing the principal balance to $600,000, and to issue 1,000,000 common shares to the investor. The Company is currently evaluating whether the accounting for debt extinguishment or debt modification applies.

During June 2015, we closed on an equipment loan of $67,275 with Royal Bank America Leasing, L.P. The loan is payable monthly at $2,136 per month over a 36 month term with the last payment due in May 2018. The principal balance on this loan as of March 31, 2016 and December 31, 2015 was $48,250 and $53,454 respectively.

During October 2015, we closed on an equipment loan of $61,783 with Royal Bank America Leasing, L.P. The loan is payable monthly at $1,941 per month over a 36 month term with the last payment due in September 2018. The principal balance on this loan as of March 31, 2016 and December 31, 2015 was $52,173 and $56,831 respectively.

On February 25, 2016, the Company issued to an investor a promissory note in the aggregate principal amount $375,000 and received $353,000 in gross proceeds (equivalent to a 5% original issue discount of $18,750 and other closing fees of $3,065) (the "Loan"). Additionally, the Company issued 600,000 shares of its common stock to the investor at an extended fair value of $24,000 based on the publicly traded value of the Company’s shares at closing. The Loan is secured by a first priority security interest in certain of the Company's components and work-in progress. The outstanding principal balance net of unamortized debt discount of $38,482 at March 31, 2016 was $336,518. The loan was re-paid in full during May 2016 upon the collection of the associated Purchase Order/Accounts Receivable that was financed.

(d) Note Payable – Innovisit

In conjunction with the purchase of intellectual property and certain other assets of Innovisit 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, (b) four payments of $60,000 on each of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014, and (c) final payment of $100,000 on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual property acquired. In 2016, the Company made cash payments on this note totaling $15,000 leaving $12,734 outstanding as of March 31, 2016 compared to an outstanding balance of $27,734 at December 31, 2015.

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Note 3 – Convertible Notes

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. The 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 contained 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 needed 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 November 2, 2015 the derivative was valued at $218,819. The debt discount was amortized using the effective interest method and was $956,090 at November 2, 2015. The fair value of the embedded conversion feature was estimated at the end of each quarterly reporting period using the Monte Carlo model.

On November 2, 2015, the Company issued 5,000,000 shares of its common stock to Lender to amend the promissory note issued to it in May 2015 to eliminate certain anti-dilution provisions. Based on management’s review, the accounting for debt extinguishment applied. In accordance with the accounting for debt extinguishment, the Company wrote-off the unamortized debt discount of $929,177 and unamortized deferred finance fees relating to this note of $172,222. These charges were offset by the difference of the carrying value of the associated embedded derivative liability of $218,819 and the fair value of $150,000 for the 5,000,000 shares issued resulting in a net gain of $68,819. The net of these three items resulted in a loss on extinguishment of debt of $1,032,580 in 2015.

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. 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 common shares at a conversion 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 Note Purchase and Security 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 issued 2,875,333 shares valued at $0.07 per share based on the closing price the day of the borrowings. This resulted in a debt discount of $355,633, which is being amortized over the life of the loan using the effective interest method. Amortization expense of the debt discount was $15,146 in the current period.

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The LF2 convertible note consists of the following at March 31, 2016:

	March 31, 2016
Principal	$	908,000
Discount		(355,633	)
Accumulated amortization of discount		52,828
Total	$	605,195

During the first quarter of 2016, the Company adopted ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” In accordance with the guidance, $115,000 of unamortized debt issuance costs, associated with the Company’s convertible notes payable, were reclassified from other current assets, as previously reported on the consolidated balance sheet as of December 31, 2015, to convertible notes payable, net of debt discount.

Note 4 – Fair Value of Derivative Financial Instruments

The condensed consolidated balance sheet caption derivative liability includes warrants and a convertible note. The warrants were 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, 2016 and December 31, 2015, and are carried at fair value. The balance at March 31, 2016 was $37,716 compared to $30,154 at December 31, 2015.

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 March 31, 2016 included the March 31, 2016 publicly traded stock price of the Company of $0.05, the conversion or strike price of $0.10 per the agreement, a historical volatility factor of 221.77% based upon forward terms of instruments, and a risk free rate of 2.09% and remaining life 6.47 years.

Note 5 – Litigation

On June 26, 2015, Global Tel*Link Corporation (“GTL”) filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement between, dated December 31, 2008 (the “MSA”). GTL alleged that we breached the MSA by failing to pay them commissions pursuant to the MSA and that we owe them approximately $2.9 million, including interest. We filed a reply to the claim on July 24, 2015. On April 29, 2016, we and GTL entered into a settlement agreement pursuant to which:

· we agreed to pay GTL $250,000 within five business days of the date of the settlement agreement;

· we issued a confession of judgment promissory note in the aggregate principal amount of $2,495,625 (the “Note”); and

· we entered into a Teaming Agreement with GTL.

The Note bears interest at the rate of 8% per year and provides a schedule of payments consisting of principal and interest through April 30, 2019. The obligations under the Note are secured by all of our assets pursuant to the terms of a Security Agreement (the “Security Agreement”). The Security Agreement provides for customary events of default.

Except as disclosed above, we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

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Note 6 – Commitments

(a) Operating Leases

The Company leases its office, sales and manufacturing facilities under non-cancelable operating leases with varying terms expiring through 2016. The leases generally provide that the Company pay the taxes, maintenance and insurance expenses related to the leased assets.

Future minimum lease commitments as of March 31, 2016 are approximately as follows:

For the Twelve Months Ending March 31, :
2017	$	7,967

Total rent expense was $27,853 for the quarter ended March 31, 2016 compared to $27,694 in the prior year quarter.

(b) Capital lease

During May 2015, we entered into a capital lease financing obligation with Marlin Leasing Corporation in the amount of $14,585 which bears interest at 13% and is payable monthly over a 3 year term at $497 per month.  The lease includes an end of term purchase option of $1.00. The outstanding principal balance on this lease at March 31, 2016 was $10,702.

Note 7 – Subsequent Events

On April 22, 2016, Lattice sold an aggregate of 10,633,336 shares of its common stock to 15 accredited investors for aggregate gross proceeds of $382,800. In connection with the sale of the shares, the Company paid a placement agent fee of $19,140 in cash to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S a warrant to purchase 319,000 shares of the Company’s common stock at the price of $0.06 per share. The Company may sell up to an additional 6,033,333 shares for $217,200 pursuant to the terms of the Placement Agreement.

On April 27, 2016, the maturity date of the $580,000 bridge note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000 thereby increasing the principal balance to $600,000 and to issue 1,000,000 common shares to the investor.

On April 29, 2016, Lattice entered into a settlement agreement with Global Tel*Link Corporation (“GTL”) for $2,745,625 related to past due general unsecured (on-demand) liabilities. At March 31, 2016, such amount was classified in the consolidated Balance Sheet as an accrued settlement under current liabilities. Per the settlement agreement, Lattice converted the on-demand liability to a promissory note for $2,745,625 carrying an 8% annual interest rate with principal payments due as follows: $250,000 within five business days of the date of the settlement agreement (Paid by Lattice) leaving a remaining principal balance owing of $2,495,625, of which, $250,000 will be payable in (7) quarterly principal payments starting July 31, 2016 with any remaining principal balance due under the note by April 30, 2018.

The $375,000 loan dated February 26, 2016 was re-paid in full during May 2016 upon the collection of the associated Purchase Order/Accounts Receivable that was financed.

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with the included consolidated financial statements. This discussion should not be construed to imply that the results discussed will necessarily continue into the future, or that any conclusion reached will necessarily be indicative of actual operating results in the future. Such discussion only represents management’s best present assessment.

Business Overview:

Lattice’s target domestic market is small to mid-sized correctional facilities. The Company first launched its direct service business during 2011. Previously, the Company served this market exclusively through other service providers. As of March 31, 2016, the Company served approximately 7,050 inmates through its direct service offering. In 2014, Lattice identified 9 target market states. To date, Lattice has obtained certification to provide communications services in 6 of these 9 states, and Lattice is actively engaged in sales and marketing activities in five. In addition, Lattice identified key products and services that would enable the Company to maximize revenue generation in our accounts. These include key modules of Lattice’s Corrections Operating Network™ (COP) which incorporates an investigative tool set, secure communications, video visitation, payment and trust accounting, customer care and kiosk solutions. In the second quarter of 2015, Lattice introduced its Video Arraignment solution, which helps facilities reduce labor costs and security risks associated with transporting inmates for courtroom arraignments. With more clarification surrounding the FCC order regarding rate caps and elimination of ancillary fees we have seen an increase in market activity that we believe will translate into sales this year. Accordingly, the Company has attempted to align its sales and operations to address these opportunities in the most cost effective manner. 

For the quarter ended March 31, 2016, total revenue increased by 61% from the prior year period. Technology revenue increased 191%, or $628,000, from the prior year quarter. Service revenue, comprised of call provisioning and ancillary services, accounted for approximately 61% of total revenues. Call provisioning revenue, a component of service revenue, increased by 18%, a key growth metric for our business strategy as Lattice increases the number of deposit touch points and end-user correctional facilities being serviced. Technology sales, which accounted for 39% of revenues this quarter, fluctuate period to period and can have a material impact on financial results.

In late 2015, Lattice launched its CellMate™ Mobile platform which provides inmates with a new wireless communications device that encompasses the latest communications and media tools for inmates to maintain contact with friends and family and also access resources for self-improvement. Numerous studies have shown that more frequent contact with friends and family leads to increases in inmate morale and helps contribute to a reduction in recidivism. Lattice anticipates offering new CellMate applications and services in a number of institutions in 2016. The launch of this new product enables the Company to offer a full suite of services that have not traditionally been available to small and mid-sized correctional facilities. Currently, Lattice’s average revenue per inmate is over $800, compared to an industry average of $515 per inmate. The Company attributes this performance to quality and accessibility of service, as well as an innovative product mix. Lattice believes it can further enhance its revenue as it continues to deploy a full suite of phone, video, and mobile device services across its installed base. As Lattice rolls out the new CellMate™ platform, adoption of the new technology should accelerate as new services and applications are added. Lattice anticipates beginning to realize revenues from the new platform by the end of the current year.

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Additionally, Lattice has had success in launching its solutions globally. Currently, Lattice has customers in the U.K., Canada, Singapore, Japan, and Bermuda. Canada is Lattice’s largest international market. Lattice is currently working with multiple global partners, including telecommunication providers Bell Canada and Telus, to help develop new opportunities in current and new international markets.

On April 22, 2016, the Company sold an aggregate of 10,633,336 shares of its common stock for aggregate gross proceeds of $382,800. The Company continues to seek capital raising opportunities to address the firm’s short term liquidity requirement.

The Company recently reached an agreement with Global Tel*Link (GTL) to settle a claim against Lattice and work cooperatively through a teaming agreement. This teaming agreement enables Lattice to request that GTL allow it to use its products where they provide Lattice with a competitive advantage while giving GTL a right of first refusal to act as a subcontractor on certain projects that Lattice bids on. Lattice believes that the agreement will enable Lattice to expand its existing product offerings and provide new complementary products and services that aren’t currently offered by Lattice.

Results of Operations – Quarter Ended March 31, 2016 Compared to the Quarter Ended March 31, 2015

	For the Quarter Ending March 31
	2016			2015
Revenue	$	2,430,000		$	1,510,000
Net loss		(228,000	)	$	(706,000	)
Net loss per common share – Basic and Diluted		(0.00	)	$	(0.01	)

	OPERATING EXPENSES				PERCENT OF SALES
	2016		2015		2016		2015
Research & Development	$	273,000		309,000		11.2%		20.5%
Selling, General & Administrative	$	946,000		1,079,000		38.9%		71.5%

REVENUES:

Total revenue increased 61% to approximately $2,430,000 from approximately $1,510,000 in the prior year period.

The primary components of the change in revenues are provided below:

	For the Quarter Ended
	March 31,		March 31,
	2016		2015		Variance		% Change
(Dollars in thousands)
Direct Service & Ancillary revenue	$	1,474	$	1,181	$	293		24.8%
Wholesaled Technology revenue	$	956	$	329	$	627		190.6%
Total revenue	$	2,430	$	1,510	$	920		60.9%

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Direct Service & Ancillary revenue:

Direct Service & Ancillary revenue derives from recurring services provided to correctional facilities based on multi-year contractual relationships with local governments. This revenue consists mainly of call provisioning revenue, fees charged for prepaid account management, voicemail, support, software maintenance and validation services. This revenue increased by 24.8%, to $1,474,000, from the prior year quarter and accounted for 61% of total revenue in the current period. Call provisioning revenue, as a component of Direct Service & Ancillary revenue, increased by 18.2%, or $161,000, to $1,045,000 from $884,000. The rate of growth in call provisioning revenue is a key operating metric of Lattice’s growth strategy. The direct call provisioning increase is mainly attributable to adding touch points for collecting prepaid deposits, either by installing kiosks or integrating with commissary systems at existing customer facilities, combined with an increase in the number of customer accounts where Lattice can provide direct telecom service provisioning to end-user correctional facilities.

Wholesaled Technology revenue:

Our technology product revenues, where we provide wholesaled technology systems embedded with our proprietary software to other service providers, increased by $627,000, or 190.6%, to $956,000 from $329,000 in the prior period. Included in the current quarter was a large order for approximately $700,000 to a key wholesale partner. This revenue stream varies period to period with the timing of shipments and larger orders. Quarter to quarter variations in this revenue stream should not be viewed as a trend.

GROSS PROFIT:

Gross profit increased to $1,214,000 from $525,000 in the prior year period. As a percentage of revenues, gross profit increased to 50.0% from 34.7% prior year. When compared to the prior year quarter the increase in percentage in the current quarter was mainly attributable to the higher technology sales relative to service revenue. The gross profit percentage for technology revenue increased to 77% from 58% in the prior year quarter, driven by the large sales order during the quarter with a key wholesale partner. The Company expects the percentage on average to remain in the 60% range for wholesaled technology products. Gross profit as a percentage of revenues for service revenues tracked with historical levels at approximately 30%.

RESEARCH AND DEVELOPMENT EXPENSES:

Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in the technology products segment. Research and development expenses decreased to approximately $273,000 from approximately $309,000 in the prior year period. The lower expense resulting from a reduction in engineering staffing and costs as we continue to rationalize expense levels to be in line with current revenue levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:

Selling, general and administrative ("SG&A") expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. These expenses decreased by approximately $134,000 to approximately $945,000 from approximately $1,079,000 in the prior year quarter. The decrease mainly resulted from reductions in sales staff that resulted from realigning our sales force to more efficiently target geographic territories.

INTEREST EXPENSE:

Interest expense increased to approximately $209,000 from $126,000 in the prior year period. Included in the current period interest was approximately $88,000 of amortized debt discount related to debt financings compared to approximately $45,000 in the prior year period. Excluding the non-cash amortization of debt discount, interest expense increased to approximately $121,000 from approximately $81,000, resulting from a higher level of average borrowings.

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OPERATING LOSS:

As a result of the foregoing, the Company’s reported loss from operations was approximately $5,000 compared to an operating loss of $864,000 in the prior year period. The current period operating loss adjusts to approximately $180,000 of adjusted operating income, a Non-GAAP measure. The prior year quarter’s adjusted operating loss, a Non-GAAP measure, was $694,000.  See the discussion of Non-GAAP financial measures below.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased to approximately $101,000 at March 31, 2016 from approximately $187,000 at December 31, 2015.

Net cash used in operating activities:

Net cash used in operating activities was approximately $404,000 for the quarter ended March 31, 2016. The net cash used in operating activities was comprised of an adjusted operating income of $180,000, a Non-GAAP measure, offset by cash interest paid of approximately $104,000 and an increase in net operating assets and liabilities of approximately $470,000.

Net cash used in investing activities:

Net cash used in investing activities was approximately $2,000 for the quarter ended March 31, 2016 compared to net cash used in investing activities of approximately $21,000 in the prior year period.

Net cash provided by financing activities:

Net cash provided by financing activities was approximately $327,000 for the quarter ended March 31, 2016 and consisted of net proceeds of $353,000 received on Purchase Order financing during the quarter which was offset by principal repayments on outstanding loans and capital leases totaling approximately $26,000.

Non-GAAP Financial Measures

In addition to our GAAP results, this report also includes a discussion of adjusted operating income, a non-GAAP financial measure as defined by the SEC. The Company defines adjusted operating income (Loss) as reported Operating Income (Loss) before depreciation, amortization and share-based compensation. Adjusted operating income (loss) is a key measure used by management to evaluate our results and make strategic decisions. Management believes this measure is useful to investors because it is an indicator of operational performance. Because not all companies use identical calculations, the Company's presentation of adjusted operating income (loss) may not be comparable to similarly titled measures of other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with the U.S. GAAP.

Reconciliation of Operating Income (Loss) to Adjusted Operating Income (Loss)

(Amounts expressed in US$)

(in thousands)

	For the Three Months Ended
	March 31
	2016			2015
Operating income(loss)	$	(5.0	)	$	(864.0	)
Add: Share-based compensation		63.0			58.0
Add: Depreciation and amortization		122.0			112.0
Adjusted operating income(loss)	$	180.0		$	(694.0	)

GOING CONCERN CONSIDERATIONS

At March 31, 2016, the working capital deficit was approximately $7,089,000, compared to a working capital deficit of approximately $7,059,000 at December 31, 2015. There is approximately $3.2 million in principal due on notes during the next twelve months inclusive of payments due under the “GTL” settlement dated April 29, 2016 and notes totaling approximately $1.2 million which are past due. Of the $3.2 million due, $250,000 was paid under the GTL settlement during May 2016. Additionally, Lattice is carrying a significant level of past due general unsecured trade payables which includes facility commissions owed to some of our customer facilities pursuant to contractual agreements. Such facilities account for a majority of our revenues. In addition, certain of the facilities have provided notice to us that we are in breach of such contractual agreements. We are working with these facilities to come back into compliance with the terms of the agreements. The increase in these payables occurred mainly during the 4^th quarter of fiscal 2015. Unless the past due amounts are resolved and brought back into compliance with the terms and conditions of contractual arrangements, the Company risks termination of the respective contracts and a possible disruption of the associated recurring revenue. If these contracts are terminated, it would have a material adverse impact to the Company’s revenue, borrowing ability, and operating cash flows.

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During the quarter, the Company met its liquidity needs primarily from financing activities. Lattice’s current cash position and projected operating cash flows are inadequate to cover payments that are either past due or coming due in the next twelve months and also support its working capital requirements. In that regard, Lattice is highly dependent on its ability to raise the additional capital needed to fund its liquidity needs in 2016.

The working capital deficit and the debt coming due in the next twelve months raise substantial doubt regarding Lattice’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon its ability to raise additional alternative financing. Management is continuously engaged in obtaining the additional capital needed. Management estimates that it will need funds in the range of $4.0 to $5.0 million, consisting of either external financing or a combination of external financing and restructuring of current obligations with existing note holders, in order to support the Company’s liquidity, improve its balance sheet, and support its operating cash needs for the next twelve months. To address this targeted $4.0 to $5.0 million and to address short term liquidity needs, Lattice engaged in a private placement of restricted common stock bringing in gross proceeds of $382,800 in April 2016. Management is actively seeking additional funding opportunities. There is no assurance that Lattice will be able to obtain the total funding requirement and/or restructure its existing debt to provide the necessary liquidity to continue operations and may be required to curtail or cease operations.

Financing activities:

On February 25, 2016, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Cantone Asset Management LLC ("Cantone"), an investor, pursuant to which the Company issued a promissory note in the aggregate principal amount $375,000 and received $353,000 in gross proceeds (equivalent to a 5% original issue discount) (the "Loan"). The Company issued 600,000 shares of its common stock to Cantone pursuant to the Loan Agreement, and paid Cantone additional fees of approximately $3,000. The Loan is secured by a first priority security interest in certain of the Company's components and work-in progress. The loan was re-paid in full during May 2016 upon the collection of the associated Purchase Order/Accounts Receivable that was financed.

On April 22, 2016, Lattice sold an aggregate of 10,633,336 shares of its common stock to 15 accredited investors for aggregate gross proceeds of $382,800. In connection with the sale of the shares, the Company paid a placement agent fee of $19,140 in cash to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S a warrant to purchase 319,000 shares of the Company’s common stock at the price of $0.06 per share. The Company may sell up to an additional 6,033,333 shares for $217,200 pursuant to the terms of the Placement Agreement.

On April 27, 2016, the maturity date of the $580,000 bridge note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000 thereby increasing the principal balance to $600,000, and agreed to issue 1,000,000 common shares to the investor.

On April 29, 2016, Lattice entered into a settlement agreement with Global Tel*Link Corporation (“GTL”) for $2,745,625 related to past due general unsecured (on-demand) liabilities. At March 31, 2016, such amount was classified in the consolidated Balance Sheet as an accrued settlement under current liabilities. Per the settlement agreement, Lattice converted the on-demand liability to a promissory note for $2,745,625 carrying an 8% annual interest rate with principal payments due as follows: 250,000 within five business days of the date of the settlement agreement (which has been paid by Lattice) leaving a remaining principal balance owing of $2,495,625, of which, $250,000 will be payable in (7) quarterly principal payments starting July 31, 2016 with any remaining principal balance due under the note by April 30, 2018.

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide information required by this Item.

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives.

As required by SEC Rule 13a-15(b), our management carried out an evaluation, with the participation of our Chief Executive and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no other changes in our internal control over financial reporting during the three months ended March 31, 2016 that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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Part II
OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

On June 26, 2015, Global Tel*Link Corporation (“GTL”) filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement between, dated December 31, 2008 (the “MSA”). GTL alleged that we breached the MSA by failing to pay them commissions pursuant to the MSA and that we owe them approximately $2.9 million, including interest. We filed a reply to the claim on July 24, 2015. On April 29, 2016, we and GTL entered into a settlement agreement pursuant to which:

·we agreed to pay GTL $250,000 within five business days of the date of the settlement agreement;

·we issued a confession of judgment promissory note in the aggregate principal amount of $2,495,625 (the “Note”); and

·we entered into a Teaming Agreement with GTL.

The Note bears interest at the rate of 8% per year and provides a schedule of payments consisting of principal and interest through April 30, 2019. The obligations under the Note are secured by all of our assets pursuant to the terms of a Security Agreement (the “Security Agreement”). The Security Agreement provides for customary events of default.

Except as disclosed above, we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

ITEM 1A RISK FACTORS

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As previously disclosed, during November 2015, the Company issued a secured note to an investor for $580,000 for which $355,174 of net proceeds were received. On April 27, 2016, the maturity date of this note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000, thereby increasing the principal balance to $600,000, and to issue 1,000,000 common shares to the investor. The shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering.

There were no other unregistered sales of equity securities that were not reported on a Current Report on Form 8-K during the quarter. 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 mine safety disclosures

Not Applicable.

ITEM 5 OTHER INFORMATION

The information included in Item 3 above is incorporated by reference herein.

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ITEM 6 EXHIBITS

The exhibits listed on the Exhibit Index are filed as part of this report.

No.	Description
10.1*	Settlement Agreement between GTL and the Company
10.2*	Confession of Judgment Promissory Note made in favor of GTL
10.3*	Security Agreement with GTL
10.4*	Extension Agreement dated April 27, 2016
10.5***	Loan and Security Agreement dated February 25, 2016, between Lattice and Cantone Asset Management LLC
10.6***	Promissory Note dated February 26, 2016 made in favor of Cantone Asset Management LLC
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Schema Document
101.CAL**	XBRL Taxonomy Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Definition Linkbase Document
101.LAB**	XBRL Taxonomy Label Linkbase Document
101.PRE**	XBRL Taxonomy Presentation Linkbase Document

____________

* Filed herewith.

** To be filed by amendment.

*** Incorporated by reference to the Current Report on Form 10-Q dated February 25, 2016

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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.

Dated: May 16, 2016	LATTICE INCORPORATED
	By:	/s/ Paul Burgess
		Paul Burgess
		Chief Executive Officer, Secretary and President (Principal Executive Officer)
Dated: May 16, 2016	LATTICE INCORPORATED
	By:	/s/ Joe Noto
		Joe Noto
		Chief Financial Officer (Principal Financial and Accounting Officer)

26

EX-10.1

Exhibit 10.1

SETTLEMENT AGREEMENT

This Settlement Agreement is made this 29th day of April 2016, between Value-Added Communications, Inc., a wholly owned subsidiary of Global Tel*Link Corporation and Value Added Communications, Inc. on the one hand (collectively, “GTL”), and Lattice Incorporated (“Lattice”) on the other hand (collectively, GTL and Lattice may be referred to herein as the “Parties”).

RECITALS

WHEREAS on December 31, 2008, Lattice and GTL's predecessor in interest FSH Communications (“FSH”), entered into a Master Services Agreement (the “MSA”), in which Lattice agreed to provide telephone services as an outsourced vendor for FSH;

WHEREAS pursuant to the MSA, FSH would pay Lattice for the above-referenced services and Lattice would pay a monthly commission consisting of all or a portion of the fees and charges collected from the telephone calls Lattice facilitated to FSH;

WHEREAS prior to 2011, FSH sold its prison phone division to Value-Added Communications, Inc., which included an assignment of the MSA to Value-Added Communications, Inc., and on August 1, 2011, GTL purchased Value-Added Communications, Inc. and assumed and was assigned all the rights and obligations of FSH arising under the MSA;

WHEREAS on or about June 25, 2015, GTL filed a Demand for Arbitration before JAMS, captioned Global Tel*Link Corporation vs. Lattice Incorporated — REF#1340012070, JAMS (the “Arbitration”);

WHEREAS in the Arbitration, GTL asserted that Lattice breached the MSA by failing to pay, when due, the monthly commissions it owed to GTL under the MSA. More specifically, GTL asserted that as of the date the Arbitration was filed, Lattice owed GTL $2,981,231.00, including interest;

WHEREAS the Parties through this Settlement Agreement wish to resolve all of their disputes arising in connection with the Arbitration;

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby warrant, covenant and agree as follows:

1. Effective Date: This Settlement Agreement will become effective when it, and all attached exhibits, are fully executed by both Parties (the “Effective Date”).

2. Settlement Payments and Security:

a. Lattice agrees to pay to GTL, within five business days of the Effective Date, two hundred fifty thousand dollars ($250,000.00) (the “Cash Payment”) to be paid via wire transfer or certified funds.

1

b. In addition to the Cash Payment, and simultaneously with the execution of this Settlement Agreement, Lattice shall execute the confessed judgment promissory note attached hereto as Exhibit A (the “Promissory Note”), which is incorporated herein by reference, which shall provide for the payment by Lattice to GTL of two million four hundred ninety five thousand six hundred twenty five dollars ($2,495,625.00) by April 29, 2019, bearing an interest rate of 8%, subject to the following terms that are included in the Promissory Note:

(i) The total amount owed under the Promissory Note shall be discounted by five percent (5%) if such Promissory Note is satisfied on or prior to the one year anniversary of the Effective Date, inclusive; and

(ii) The total amount owed under the Promissory Note shall be discounted by three percent (3%) if such Promissory Note is satisfied on or prior to the two year anniversary of the Effective Date, inclusive.

c. Lattice shall make its best efforts, and take all commercially reasonable steps associated therewith, to raise additional capital to accelerate satisfaction of the Promissory Note;

d. As security for the Promissory Note, Lattice shall grant to GTL a security interest in Lattice's personal property and assets (the “Liened Property”), as set forth in the attached Exhibit B, subject to and consistent with the terms of any pre-existing security interests granted to third-party lenders and licensees. Accordingly, contemporaneously with the execution of this Settlement Agreement, Lattice shall execute the Security Agreement, which is incorporated herein by reference and are attached hereto as Exhibit C.

3. Mutual Release:

A. Upon GTL's receipt of the Cash Payment, GTL and its past, present and future parent companies, affiliates, and subsidiaries, and each of its respective past, present and future officers, directors, employees, insurers, predecessors, successors, and assigns hereby knowingly and voluntarily release and forever discharge Lattice and its past, present and future parent companies, affiliates, and subsidiaries, and each of its respective past, present and future officers, directors, employees, insurers, predecessors, successors, and assigns, from all claims, demands, rights, and causes of action of any kind, whether known, unknown, or yet to be discovered, liquidated or unliquidated, fixed or contingent, direct or indirect, on account of or in any way arising from or relating to the subject matter of the Arbitration through and including the Effective Date of this Settlement Agreement, including without limitation any claims that were made against Lattice in the Arbitration or could have been made against Lattice in the Arbitration. Nothing contained herein is intended to be or shall be deemed to be a release of Lattice's obligations contained in this Settlement Agreement, and the Parties expressly agree that Lattice is not released from its obligations herein.

2

B. Lattice and its past, present and future parent companies, affiliates, and subsidiaries, and each of its respective past, present and future officers, directors, employees, insurers, predecessors, successors, and assigns hereby knowingly and voluntarily releases and forever discharges GTL and its past, present and future parent companies, affiliates, and subsidiaries, and each of its respective past, present and future officers, directors, employees, insurers, predecessors, successors, and assigns from all claims, demands, rights, and causes of action of any kind, whether known, unknown, or yet to be discovered, liquidated or unliquidated, fixed or contingent, direct or indirect, on account of or in any way arising from or relating to the subject matter of the Arbitration through and including the Effective Date of this Settlement Agreement, including without limitation any claims that were made against GTL in the Arbitration or could have been made against GTL in the Arbitration. Nothing contained herein is intended to be or shall be deemed to be a release of GTL's obligations contained in this Settlement Agreement, and the Parties expressly agree that GTL is not release from its obligations herein.

4. Warranty. As an inducement to enter into this Settlement Agreement, Lattice represents that, as of the time of execution of this Settlement Agreement, Lattice has no plans to file a petition for bankruptcy. The Parties acknowledge that GTL has reasonably relied upon the foregoing representation by Lattice in deciding to enter this Settlement Agreement, and that such representations were a material inducement in GTL entering into this Settlement Agreement. GTL further expressly reserves the right to bring an action contesting the dischargeability of Lattice's obligations to GTL, and, to the extent permitted by law, Lattice agrees not to oppose such action.

5. Stipulation of Dismissal: Within three business days of GTL's receipt of the Cash Payment, the Parties shall file a Stipulation of Dismissal in the Arbitration, with prejudice, providing for the dismissal of the Complaint.

6. Binding Obligations: THIS SETTLEMENT AGREEMENT CREATES LEGAL, BINDING OBLIGATIONS. EACH PARTY HAS READ THIS SETTLEMENT AGREEMENT AND UNDERSTANDS ITS CONTENTS. EACH PARTY HAS MADE SUCH INVESTIGATION OF THE FACTS PERTAINING TO THIS SETTLEMENT AGREEMENT AND ALL OTHER RELATED MATTERS AS IT HAS DEEMED NECESSARY. EACH PARTY ACKNOWLEDGES THAT THEY HAVE CONSULTED WITH COUNSEL OF THEIR OWN CHOICE BEFORE SIGNING THIS SETTLEMENT AGREEMENT.

3

7. Execution via Email PDF and in Counterparts: This Settlement Agreement may be executed by email PDF and in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Settlement Agreement.

8. Binding on Successors: This Settlement Agreement shall be binding upon the Parties and their representatives and successors.

9. Entire Agreement: This Settlement Agreement, including all exhibits hereto, constitutes the complete agreement and contains all of the promises and undertakings between the Parties with regard to the subject matter addressed herein. No Party relies on any statement or representation of any other Party executing this Settlement Agreement, except as expressly stated in this Settlement Agreement. This Settlement Agreement may not be revised or modified without the mutual written consent of the Parties.

10. Severability: If any provision of this Settlement Agreement shall be determined to be invalid or unenforceable under applicable law by a court of competent jurisdiction, that part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way effecting the remaining parts of such provision or the remaining provisions of this Settlement Agreement.

11. Choice of Law and Jurisdiction: This Settlement Agreement shall be construed and enforced in accordance with, and governed by, the laws of the Commonwealth of Virginia, without regard to principles of conflict of laws. In addition, the Parties hereby submit to the jurisdiction of the courts of Virginia for all disputes relating to or arising from this Settlement Agreement.

12. Attorneys' Fees: If any Party institutes legal proceedings over the enforcement of this Settlement Agreement or any provision of it, including exhibits, the prevailing Party (as determined by the court having jurisdiction over such dispute) shall be entitled to recover from the losing Party its costs, including reasonable attorneys' fees, at both the trial and appellate levels.

13. Construction of this Agreement: This Settlement Agreement was negotiated at arm's length by the Parties and their counsel. This Settlement Agreement, and any terms herein, shall not be construed against either Party as the drafter of the agreement or any particular provision.

[END OF TEXT — SIGNATURE PAGE(S) TO FOLLOW]

4

GLOBAL TEL*LINK CORPORATION

By:  /s/ Jeffrey B. Haidinger

Title:  President& COO

Date:  4/26/16

VALUE-ADDED COMMUNICATIONS, INC.

By:  /s/ Jeffrey B. Haidinger

Title:  President& COO

Date:  4/26/16

5

LATTICE INCORPORATED

By: /s/ Paul Burgess

Title: CEO

Date: 4/22/16

STATE OF New Jersey	)
COUNTY OF Camben	)

Before me, Dawn Gilbert, a Notary Public of said County and State, personally appeared Paul Burgess, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself/herself to be duly authorized to execute the instrument on behalf of Lattice Incorporated, and that he/she executed the foregoing instrument for the purposes therein contained.

Witness my hand and seal, at Office, this 22nd day of April 2016.

/s/ Dawn Gilbert

Notary Public

My Commission Expires: January 25, 2017

6

EX-10.2

Exhibit 10.2

IMPORTANT NOTICE

THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT FURTHER NOTICE

CONFESSED JUDGMENT NOTE

$2,495,625.00	April 29, 2016
8% annual interest rate	Fairfax County, Virginia

Lattice Incorporated promises to pay to Global Tel*Link Corporation the sum of TWO MILLION FOUR HUNDRED NINETY FIVE THOUSAND SIX HUNDRED TWENTY FIVE ($2,495,625.00), plus interest at the annual rate of 8% on or before April 30, 2019. Value received, without offset. Lattice agrees to pay on the last day of the month of each following quarter year (each, a “Settlement Date”), beginning on July 31, 2016, that portion of the outstanding principal amount of this Note and all interest accrued thereon that is specified in Schedule A attached hereto. To the extent any Settlement Date is not a business day, then the Settlement Date shall be the first business day immediately preceding such Settlement Date.

All exemptions, protest, presentment and notice of dishonor to this debt are hereby waived by the maker and endorser hereof.

Payable to: Global Tel*Link Corporation

Delivery to: Global Tel*Link Corporation
c/o Claudia G. Regen
12021 Sunset Hills Road, #100
Reston, VA 20190

Global Tel*Link Corporation shall permit payment of this Note, at a discounted amount of TWO MILLION THREE HUNDRED SEVENTY THOUSAND EIGHT HUNDRED FORTY THREE AND 75/100 ($2,370,843.75), at any time on or before April 30, 2017. There shall be no grace period for such payment. Timely payment of TWO MILLION THREE HUNDRED SEVENTY THOUSAND EIGHT HUNDRED FORTY THREE AND 75/100 ($2,370,843.75), plus interest at the annual rate of 8%, on or before April 30, 2017, pursuant to the terms of this Note, shall constitute full satisfaction of this Note.

Global Tel*Link Corporation shall permit payment of this Note, at a discounted amount of TWO MILLION FOUR HUNDRED TWENTY THOUSAND SEVEN HUNDRED FIFTY SIX AND 25/100 ($2,420,756.25), at any time after April 30, 2017 but on or before April 30, 2018. There shall be no grace period for such payment. Timely payment of TWO MILLION FOUR HUNDRED TWENTY THOUSAND SEVEN HUNDRED FIFTY SIX AND 25/100 ($2,420,756.25), plus interest at the annual rate of 8%, on or before April 30, 2018, pursuant to the terms of this Note, shall constitute full satisfaction of this Note.

1

Neither Lattice Incorporated nor Global Tel*Link Corporation may assign any of its rights or obligations under this Note without the prior written consent of the other party hereto, any such purported assignment without such consent being null and void.

In the event of a default under the terms of this Note, Lattice Incorporated agrees to pay the full amount due under the terms of this Note in the amount of TWO MILLION FOUR HUNDRED NINETY FIVE THOUSAND SIX HUNDRED TWENTY FIVE ($2,495,625.00), plus interest at the annual rate of 8%, less any payments made after the date of this Note.

TO THE CLERK OF THE CIRCUIT COURT FOR THE COUNTY OF FAIRFAX, VIRGINIA, GREETING:

Be it known to you that Lattice Incorporated is justly indebted to Global Tel*Link Corporation in the amount of TWO MILLION FOUR HUNDRED NINETY FIVE County, Virginia, in your said office and to confess judgment before you therein against Lattice Incorporated in favor Global Tel*Link Corporation, or its assigns, for said amount due, and for which Lattice Incorporated authorizes said attorney-in-fact to confess judgment against it with waiver of all exemptions.

2

4/22/16	LATTICE INCORPORATED
	By: /s/ Paul Burgess
	Title: CEO

STATE OF New Jersey	)
COUNTY OF Camben	)

Before me, Dawn Gilbert, a Notary Public of said County and State, personally appeared Paul Burgess, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself/herself to be duly authorized to execute the instrument on behalf of Lattice Incorporated, and that he/she executed the foregoing instrument for the purposes therein contained.

Witness my hand and seal, at Office, this 22nd day of April 2016.

/s/ Dawn Gilbert

Notary Public

My Commission Expires: January 25, 2017

3

SCHEDULE A

Payment Schedule

Paid on the date hereof $ 250,000 Upon Signature

Date		Prin Bal		Prin		Interest		TTL Pay’t
7/31/2016	$	2,245,625	$	250,000	$	49,913	$	299,913
10/31/2016	$	1,995,625	$	250,000	$	44,913	$	294,913
1/31/2017	$	1,45,625	$	250,000	$	39,913		289,913
4/30/2017	$	1,495,625	$	250,000	$	34,913	$	284,913
7/31/2017	$	1245,625	$	250,000	$	29,913	$	279,913
10/31/2017	$	995,625	$	250,000	$	24,913	$	274,913
1/31/2018	$	745,625	$	50,000	$	19,913	$	269,913
4/30/2018	$	250,000	$	495,625	$	14,913	$	510,538
			$	2,245,625	$	259,300	$	2,504,925

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EX-10.3

Exhibit 10.3

SECURITY AGREEMENT

This SECURITY AGREEMENT (this “Security Agreement”), is made as of this 29^th day of April, 2016, by and between LATTICE INCORPORATED, a Delaware corporation, whose address of its principal place of business is 7150 N. Park Drive, Suite 500, Pennsauken, New Jersey, 08109 (the “Debtor”), and GLOBAL TEL*LINK CORPORATION, an Idaho corporation whose address is 12021 Sunset Hills Road, #100, Reston, Virginia 20190 (the “Secured Party”).

R E C I T A L S:

A. The Debtor and the Secured Party have entered into that certain Settlement Agreement, dated as of April 29, 2016 (as amended from time to time, the “Settlement Agreement”), which provides, in part, that the Debtor will execute that certain Confessed Judgment Note, dated as of the date hereof (as amended from time to time, the “Note”), in the principal amount of up to Two Million Four Hundred Ninety Five Thousand Six Hundred and Twenty Five and 00/100 Dollars ($2,495,625.00).

B. Pursuant to the Settlement Agreement, the Debtor has agreed to enter into this Security Agreement in order to secure the obligations and performance of the Debtor under the Note.

NOW THEREFORE, in consideration of the premises, and the mutual covenants and agreements set forth herein, the Debtor and the Secured Party hereby agree as follows:

A G R E E M E N T S:

Section 1 DEFINITIONS.

1.1. Defined Terms. For the purposes of this Security Agreement, the following capitalized words and phrases shall have the meanings set forth below.

“Bankruptcy Code” shall mean the United States Bankruptcy Code, as now existing or hereafter amended.

“Collateral” shall have the meaning set forth in Section 2.1 hereof.

“Event of Default” shall mean the occurrence of any of the following events: (a) the principal and accrued interest under the Note or any of the other notes is not paid when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise; (b) material failure to observe or perform any covenant, obligation or agreement of the Debtor under any of the Transaction Documents, which failure continues for 15 days after the earlier of (i) the date Debtor receives notice from Secured Party of such failure and (ii) the date Debtor was aware of such failure; (c) any representation, warranty or certification made by the Debtor herein or in the Transaction Documents or in any certificate, report, document, agreement or instrument delivered pursuant to any provision hereof or thereof shall prove to have been false or incorrect in any material respect on the date or dates as of which made; (d) the occurrence after the date hereof of an event of default under, or any other event that permits the acceleration of the principal amount of, any other indebtedness of the Debtor that is not cured within 15 days of such event, and that does or would reasonably be expected to cause a Material Adverse Effect; (e) any judgment, order, injunction, decree, stipulation or award (whether rendered by a court, administrative agency, or by arbitration, as a result of a grievance or other procedure) binding on the Debtor that does or would reasonably be expected to cause a Material Adverse Effect, provided that such judgment, order, injunction, decree, stipulation or award is not vacated within 30 days of when entered; or (f) the Debtor shall (i) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of itself or any part of its property, (ii) become subject to the appointment of a receiver, trustee, custodian or liquidator for itself or any part of its property, (iii) make an assignment for the benefit of creditors, (iv) or, except as listed on Schedule 3.6, fail generally or admit in writing to its inability to pay its debts as they become due, (v) institute any proceedings under the Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, or file a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any insolvency law, or file an answer admitting the material allegations of a bankruptcy, reorganization or insolvency petition filed against it, or (vi) become subject to any involuntary proceedings under the Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, or have an order for relief entered against it in any proceeding under the Bankruptcy Code, that is not rescinded or stayed during the 60 days after the Debtor receives notice of such proceedings.

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“GAAP” shall mean generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination, provided, however, that interim financial statements or reports shall be deemed in compliance with GAAP despite the absence of footnotes and fiscal year-end adjustments as required by GAAP.

“Material Adverse Effect” shall mean any event, matter, condition or circumstance which (a) except as listed on Schedule 3.6, has or would reasonably be expected to have a material adverse effect on the business, properties, results of operations or condition (financial or otherwise) of the Debtor and its subsidiaries, taken as a whole; (b) would materially impair the ability of the Debtor or any other person to perform or observe its obligations under or in respect of the Transaction Documents; or (c) materially affects the legality, validity, binding effect or enforceability of any of the Transaction Documents.

“Obligations” shall mean all loans, advances and other financial accommodations, arising pursuant to the Note, all interest accrued thereon (including interest which would be payable as post-petition interest in connection with any bankruptcy or similar proceeding, whether or not permitted as a claim thereunder), any reasonable and documented, out of pocket, fees or expenses of counsel due the Secured Party under the Transaction Documents, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, together with any and all renewals or extensions thereof.

“Permitted Liens” shall mean (a) liens existing on the date hereof and identified on Schedule 1.1; (b) the liens in favor of the Secured Party created by the Security Agreement and/or any other Transaction Document; (c) liens for taxes or other governmental charges that are not at the time delinquent or that are being contested in good faith and are appropriately reserved for in accordance with GAAP; (d) statutory liens of carriers, warehousemen, mechanics, materialmen, and vendors arising by operation of law for sums not overdue; (e) non-exclusive licenses and sublicenses granted in the ordinary course of the Debtor’s business and any interest or title of a licensor or under any license or sublicense; (f) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations; (g) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (h) customary rights of set-off, revocation, refund or chargeback under deposit agreements or under Uniform Commercial Code or common law of banks or other financial institutions where the Debtor maintains deposits (other than deposits intended as cash collateral) in the ordinary course of business; (i) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or materially interfere with the ordinary conduct of business of the Debtor and its subsidiaries taken as a whole, and (j) such other liens as the Secured Party consents to after the date hereof (such consent not to be unreasonably withheld).

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“Transaction Documents” shall mean the Note, this Security Agreement and the Settlement Agreement and each of the agreements, documents, instruments and certificates from time to time executed and delivered by the Debtor for the benefit of the Secured Party in connection therewith, and all amendments, restatements, supplements and other modifications thereto. Notwithstanding the foregoing, the term Transaction Documents does not include the Teaming Agreement of even date herewith.

“UCC” shall mean the Uniform Commercial Code in effect in the Commonwealth of Virginia from time to time.

1.2. Other Terms Defined in the Note or UCC. All other capitalized words and phrases used herein and not otherwise specifically defined herein shall have the respective meanings assigned to such terms in the Note or UCC, as applicable, to the extent the same are used or defined therein.

1.3. Other Interpretive Provisions.

(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word “Debtor” shall be so construed.

(b) Section and Schedule references are to this Security Agreement unless otherwise specified. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Security Agreement shall refer to this Security Agreement as a whole and not to any particular provision of this Security Agreement.

(c) The term “including” is not limiting, and means “including, without limitation”.

(d) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including”.

(e) Unless otherwise expressly provided herein, (i) references to agreements (including this Security Agreement and the other Transaction Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Transaction Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

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(f) To the extent any of the provisions of the other Transaction Documents are inconsistent with the terms of this Security Agreement, the provisions of this Security Agreement shall govern.

(g) This Security Agreement and the other Transaction Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

Section 2 SECURITY FOR THE OBLIGATIONS.

2.1. Security for Obligations. As security for the payment and performance of the Obligations, the Debtor does hereby collaterally pledge, assign, transfer, deliver and grant to the Secured Party, subject to the Permitted Liens, a continuing and unconditional security interest in and to any and all property of the Debtor, of any kind or description, tangible or intangible, wheresoever located and whether now existing or hereafter arising or acquired, including the following (all of which property, along with the products and proceeds therefrom, are individually and collectively referred to as the “Collateral”):

(a) All Goods and Equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located;

(b) All Inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of the Debtor’s custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above;

(c) All contract rights and General Intangibles, including Payment Intangibles, now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, domain names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, Software, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind;

(d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to the Debtor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by the Debtor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by the Debtor;

(e) All documents, cash, Deposit Accounts, securities, Securities Entitlements, Securities Accounts, Financial Assets, Investment Property, letters of credit, certificates of deposit, Instruments now owned or hereafter acquired and the Debtor’s books relating to the foregoing;

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(f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing;

(g) All Chattel Paper, Electronic Chattel Paper, Instruments, Documents, Letter of Credit Rights, all proceeds of letters of credit, Health-Care-Insurance Receivables, Supporting Obligations, notes secured by real estate, Commercial Tort Claims and General Intangibles; and

(h) All the Debtor’s books and records relating to the foregoing, and all Proceeds (whether Cash Proceeds or Noncash Proceeds) of the foregoing property, including all insurance policies and proceeds of insurance payable by reason of loss or damage to the foregoing property, including unearned premiums, and of eminent domain or condemnation awards.

2.2. Possession and Transfer of Collateral. Unless an Event of Default has occurred and is continuing and Creditor exercises its remedies under Section 5 hereof, subject to the Permitted Liens, the Debtor shall be entitled to possession or use of the Collateral (other than Instruments or Documents (including Tangible Chattel Paper and Investment Property consisting of certificated securities) and other Collateral required to be delivered to the Secured Party pursuant to this Section 2). The cancellation or surrender of any promissory note evidencing an Obligation, upon payment or otherwise, shall not affect the right of the Secured Party to retain the Collateral for any other of the Obligations. The Debtor shall not convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “Transfer”), any Collateral except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn out, surplus or obsolete Equipment that is, in the reasonable judgment of Debtor, no longer economically practicable to maintain or useful in the ordinary course of business of Debtor; (c) consisting of Debtor’s use or transfer of money in a manner that is not prohibited by the terms of this Agreement or the other Transaction Documents; (d) of non-exclusive licenses for the use of the property of Debtor in the ordinary course of business and licenses that could not result in a legal transfer of title of the licensed property but that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discreet geographical areas outside of the United States; (e) pursuant to Permitted Liens, and (f) so long as no Event of Default has occurred and is then continuing, that are not otherwise permitted under this Section 2.2, in an amount not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate.

2.3. Financing Statements. The Debtor shall, at the Secured Party’s request, at any time and from time to time, execute and deliver to the Secured Party such financing statements, amendments and other documents and do such acts as the Secured Party reasonably requests in order to establish and maintain valid, attached and perfected security interests in the Collateral in favor of the Secured Party, free and clear of all Liens and claims and rights of third parties whatsoever, except Permitted Liens. The Debtor hereby irrevocably authorizes the Secured Party at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto without the signature of the Debtor that (a) indicate the Collateral (i) is comprised of all assets of the Debtor or words of similar effect, regardless of whether any particular asset comprising a part of the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or (ii) as being of an equal or lesser scope or within greater detail as the grant of the security interest set forth herein, and (b) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Debtor is an organization, the type of organization and any Organizational Identification Number issued to the Debtor, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of the real property to which the Collateral relates. The Debtor hereby agrees that a photogenic or other reproduction of this Security Agreement is sufficient for filing as a financing statement and the Debtor authorizes the Secured Party to file this Security Agreement as a financing statement in any jurisdiction. The Debtor agrees to furnish any such information to the Secured Party promptly upon request.

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2.4. Preservation of the Collateral. The Secured Party may, but is not required, to take such actions from time to time as the Secured Party deems appropriate to maintain or protect the Collateral so long as such actions are permitted by applicable law. The Secured Party shall have exercised reasonable care in the custody and preservation of the Collateral if the Secured Party takes such action as the Debtor shall reasonably request in writing which is not inconsistent with the Secured Party’s status as a secured party, but the failure of the Secured Party to comply with any such request shall not be deemed a failure to exercise reasonable care; provided, however, the Secured Party’s responsibility for the safekeeping of the Collateral shall (i) be deemed reasonable if such Collateral is accorded treatment substantially equal to that which the Secured Party accords its own property, and (ii) not extend to matters beyond the control of the Secured Party, including acts of God, war, insurrection, riot or governmental actions. In addition, any failure of the Secured Party to preserve or protect any rights with respect to the Collateral against prior or third parties, or to do any act with respect to preservation of the Collateral, not so requested by the Debtor, shall not be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral. The Debtor shall have the sole responsibility for taking such action as may be necessary, from time to time, to preserve all rights of the Debtor and the Secured Party in the Collateral against prior or third parties. Without limiting the generality of the foregoing, where Collateral consists in whole or in part of securities, the Debtor represents to, and covenants with, the Secured Party that the Debtor has made arrangements for keeping informed of changes or potential changes affecting the securities (including rights to convert or subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and the Debtor agrees that the Secured Party shall have no responsibility or liability for informing the Debtor of any such or other changes or potential changes or for taking any action or omitting to take any action with respect thereto.

2.5. Other Actions as to any and all Collateral. The Debtor further agrees to take any other action reasonably requested by the Secured Party to ensure the attachment and perfection of and the ability of the Secured Party to enforce, subject to the Permitted Liens, the security interest of the Secured Party, for its own benefit and as agent for its affiliates, in any and all of the Collateral including (a) causing the Secured Party’s name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the bank to enforce, the security interest of the Secured Party, for its own benefit and as agent for its affiliates, in such Collateral, (b) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the security interest of the Secured Party, for its own benefit and as agent for its affiliates, in such Collateral, (c) obtaining governmental and other third party consents and approvals, including any consent of any licensor, lessor or other Person obligated on Collateral and (d) taking all actions required by the UCC in effect from time to time or by other law, as applicable in any relevant UCC jurisdiction, or by other law as applicable in any foreign jurisdiction.

2.6. Collateral in the Possession of a Warehouseman or Bailee. If any of the Collateral at any time is in the possession of a warehouseman or bailee, the Debtor shall promptly notify the Secured Party thereof.

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2.7. Commercial Tort Claims. If the Debtor shall at any time hold or acquire a Commercial Tort Claim, the Debtor shall promptly notify the Secured Party in writing signed by the Debtor of the details thereof and grant to the Secured Party, in such writing, subject to the Permitted Liens, a security interest therein and in the proceeds thereof, all upon the terms of this Security Agreement, in each case in form and substance satisfactory to the Secured Party, and shall execute any amendments hereto deemed reasonably necessary by the Secured Party to perfect the security interest of the Secured Party, for its own benefit and as agent for its affiliates, in such Commercial Tort Claim.

2.8. Electronic Chattel Paper and Transferable Records. If the Debtor at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Debtor shall promptly notify the Secured Party thereof and, at the request of the Secured Party, Subject to the Permitted Liens, shall take such action as the Secured Party may reasonably request to vest in the Secured Party control under Section 9-105 of the UCC of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, §16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. The Secured Party agrees with the Debtor that the Secured Party will arrange, pursuant to procedures satisfactory to the Secured Party and so long as such procedures will not result in the Secured Party’s loss of control, for the Debtor to make alterations to the electronic chattel paper or transferable record permitted under Section 9-105 of the UCC or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control.

Section 3 REPRESENTATIONS AND WARRANTIES.

The Debtor makes the following representations and warranties to the Secured Party as of the date of this Agreement:

3.1. Debtor Organization and Name. The Debtor is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full and adequate power to carry on and conduct its business as presently conducted. The Debtor is duly licensed or qualified in all foreign jurisdictions wherein the nature of its activities requires such qualification or licensing. The exact legal name of Debtor is as set forth in the first paragraph of this Security Agreement, and, except as listed on Schedule 3.1, the Debtor currently does not conduct, nor has it, during the last five (5) years, conducted business under any other name or trade name.

3.2. Authorization. The Debtor has full right, power and authority to enter into this Security Agreement and to perform all of its duties and obligations under this Security Agreement. The execution and delivery of this Security Agreement and the other Transaction Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law or of the articles/certificate of incorporation or bylaws of the Debtor. All necessary and appropriate action has been taken on the part of the Debtor to authorize the execution and delivery of this Security Agreement.

3.3. Validity and Binding Nature. This Security Agreement is the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.

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3.4. Consent; Absence of Breach. The execution, delivery and performance of this Security Agreement and any other documents or instruments to be executed and delivered by the Debtor in connection herewith, do not and will not (a) require any consent, approval, authorization, or filings with, notice to or other act by or in respect of, any governmental authority or any other Person (other than any consent or approval which has been obtained and is in full force and effect); (b) conflict with (i) any provision of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority, (ii) the articles of organization or operating agreement of the Debtor, or (iii) any material agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Debtor or any of its properties or assets; or (c) require, or result in, the creation or imposition of any Lien on any asset of the Debtor, other than Liens in favor of the Secured Party created pursuant to this Security Agreement.

3.5. Ownership of Collateral; Liens. The Debtor is the sole owner or has other rights in all of the Collateral, free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like), other than Permitted Liens.

3.6. Adverse Circumstances. Except as disclosed on Schedule 3.6, no condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or, to the Debtor’s knowledge, threatened litigation or proceeding or basis therefor) exists which (a) would have a Material Adverse Effect upon the Debtor, or (b) would constitute an Event of Default.

3.7 Security Interest. This Security Agreement creates a valid security interest in favor of the Secured Party in the Collateral and, when properly perfected by filing in the appropriate jurisdictions, or by possession or Control (as defined in the UCC) of such Collateral by the Secured Party or delivery of such Collateral to the Secured Party, shall constitute a valid, perfected, first-priority security interest in such Collateral to the extent a security interest in such Collateral may be perfected under Article 9 of the UCC.

3.8. Place of Business. The principal place of business of the Debtor is set forth in the preamble to this Security Agreement, and the location of all Collateral, if other than at such principal place of business, is as set forth on the Debtor’s Certificate provided in connection herewith, and the Debtor shall promptly notify the Secured Party of any change in such locations. The Debtor will not remove or permit the Collateral to be removed from such locations without prior written notice to the Secured Party, except for Inventory sold in the usual and ordinary course of the Debtor’s business.

3.8. Complete Information. This Security Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials and information heretofore or contemporaneously herewith furnished in writing by the Debtor to the Secured Party for purposes of, or in connection with, this Security Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Debtor to the Secured Party pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Secured Party that any projections and forecasts provided by the Debtor are based on good faith estimates and assumptions believed by the Debtor to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).

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Section 4 COVENANTS.

4.1. Debtor Existence. The Debtor shall at all times preserve and maintain (a) its existence and good standing in the jurisdiction of its organization, and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect), and shall at all times continue as a going concern in the business which the Debtor is presently conducting. If the Debtor does not have an Organizational Identification Number and later obtains one, the Debtor shall promptly notify the Secured Party of such Organizational Identification Number.

4.2. Compliance With Laws. The Debtor shall comply in all respects, including the conduct of its business and operations and the use of the Collateral, with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect.

4.3. Payment of Taxes and Liabilities. The Debtor shall pay, prior to delinquency and before penalties accrue thereon, all property and other taxes, and all governmental charges or levies against it or any of the Collateral, as well as claims of any kind which, if unpaid, could reasonably be expected to become a Lien on any of its property; provided that the foregoing shall not require the Debtor to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any of the Collateral, such contest proceedings stay the foreclosure of such Lien or the sale of any portion of the Collateral to satisfy such claim.

4.4. Maintain Property. The Debtor shall at all times maintain, preserve and keep the Collateral, in good repair, working order and condition, normal wear and tear excepted, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall be preserved and maintained in all material respects.

4.5. Maintain Insurance. The Debtor shall at all times maintain with insurance companies reasonably acceptable to the Secured Party such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, including employers’, public and professional liability risks, as is customarily maintained by companies similarly situated, and shall have insured amounts no less than, and deductibles no higher than, are reasonably acceptable to the Secured Party; it being agreed that the Debtor’s current insurance policies are reasonably acceptable to the Secured Party. The Debtor shall furnish to the Secured Party a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Debtor other than director’s and officer’s insurance policies. The Debtor shall cause each issuer of an insurance policy to provide the Secured Party with an endorsement (i) showing the Secured Party as loss payee and as additional insured with respect to each policy of property or casualty insurance; and (ii) providing that thirty (30) days’ notice will be given to the Secured Party prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy.

In the event the Debtor either fails to provide the Secured Party with evidence of the insurance coverage required by this Section or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then the Secured Party, without waiving or releasing any obligation or default by the Debtor hereunder, may at any time (but shall be under no obligation to so act), obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto, which the Secured Party deems advisable. This insurance coverage (a) may, but need not, protect the Debtor’s interests in such property, including the Collateral, and (b) may not pay any claim made by, or against, the Debtor in connection with such property, including the Collateral. The Debtor may later cancel any such insurance purchased by the Secured Party, but only after providing the Secured Party with evidence that the Debtor has obtained the insurance coverage required by this Section. If the Secured Party purchases insurance for the Collateral, the Debtor will be responsible for the costs of that insurance, including interest and any other charges that may be imposed with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the principal amount of the Loans owing hereunder. The costs of the insurance may be more than the cost of the insurance the Debtor may be able to obtain on its own.

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4.6. Field Audits. Upon reasonable advance written notice, but not more than once per calendar year (unless an Event of Default exists) and during reasonable normal business hours, the Debtor shall permit the Secured Party to inspect the Collateral, to perform appraisals of the Collateral of the Debtor, and to inspect, audit, check and make copies of, and extracts from, the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other Collateral. All such inspections or audits by the Secured Party shall be at the Debtor’s sole expense.

4.7. Collateral Records. The Debtor shall keep at its principal place of business full and accurate books and records relating to the Collateral and shall mark such books and records to indicate the Secured Party’s Lien in the Collateral including placing a legend, in form and content acceptable to the Secured Party, on all Chattel Paper created by the Debtor indicating that the Secured Party has a Lien in such Chattel Paper.

Section 5 REMEDIES.

Upon the occurrence of an Event of Default beyond the expiration of any applicable grace or cure periods (if any), the Secured Party shall have all rights, powers and remedies set forth in this Security Agreement or the other Transaction Documents or in any other written agreement or instrument relating to any of the Obligations or any security therefor, as a secured party under the UCC or as otherwise provided at law or in equity. Without limiting the generality of the foregoing, the Secured Party may, at its option upon the occurrence of an Event of Default, declare its commitments to the Debtor to be terminated and all Obligations to be immediately due and payable, or, if provided in the Transaction Documents, all commitments of the Secured Party to the Debtor shall immediately terminate and all Obligations shall be automatically due and payable, all without demand, notice or further action of any kind required on the part of the Secured Party. The Debtor hereby waives any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of the Secured Party’s rights under the Transaction Documents, and hereby consents to, and waives notice of release, with or without consideration, of any Collateral, notwithstanding anything contained herein or in the Transaction Documents to the contrary. In addition to the foregoing:

5.1. Possession and Assembly of Collateral. The Secured Party may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which the Secured Party already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may at any time enter into any of the Debtor’s premises where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of and the Secured Party shall have the right to store and conduct a sale of the same in any of the Debtor’s premises without cost to the Secured Party. At the Secured Party’s request, the Debtor will, at the Debtor’s sole expense, assemble the Collateral and make it available to the Secured Party at a place or places to be designated by the Secured Party which is reasonably convenient to the Secured Party and the Debtor.

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5.2. Sale of Collateral. The Secured Party may sell any or all of the Collateral at public or private sale, upon such terms and conditions as the Secured Party may deem proper, and the Secured Party may purchase any or all of the Collateral at any such sale. The Debtor acknowledges that the Secured Party may be unable to effect a public sale of all or any portion of the Collateral because of certain legal and/or practical restrictions and provisions which may be applicable to the Collateral and, therefore, may be compelled to resort to one or more private sales to a restricted group of offerees and purchasers. The Debtor consents to any such private sale so made even though at places and upon terms less favorable than if the Collateral was sold at public sale. The Secured Party shall have no obligation to clean-up or otherwise prepare the Collateral for sale. The Secured Party may apply the net proceeds, after deducting all reasonable and documented costs, expenses, attorneys’ and paralegals’ fees incurred or paid at any time in the collection, protection and sale of the Collateral and the Obligations, to the payment of the Obligations, returning the excess proceeds, if any, to the Debtor. The Debtor shall remain liable for any amount remaining unpaid after such application. Any notification of intended disposition of the Collateral required by law shall be conclusively deemed reasonably and properly given if given by the Secured Party at least ten (10) calendar days before the date of such disposition. The Debtor hereby confirms, approves and ratifies all acts and deeds of the Secured Party relating to the foregoing, and each part thereof, and expressly waives any and all claims of any nature, kind or description which it has or may hereafter have against the Secured Party or its representatives, by reason of taking, selling or collecting any portion of the Collateral. The Debtor consents to releases of the Collateral at any time after an Event of Default and to sales of the Collateral in groups, parcels or portions, or as an entirety, as the Secured Party shall deem appropriate. The Debtor expressly absolves the Secured Party from any loss or decline in market value of any Collateral by reason of delay in the enforcement or assertion or nonenforcement of any rights or remedies under this Security Agreement.

5.3. Standards for Exercising Remedies. To the extent that applicable law imposes duties on the Secured Party to exercise remedies in a commercially reasonable manner, the Debtor acknowledges and agrees that it is not commercially unreasonable for the Secured Party (a) to fail to incur expenses reasonably deemed significant by the Secured Party to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Debtor, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including any warranties of title, (k) to purchase insurance or credit enhancements to insure the Secured Party against risks of loss, collection or disposition of Collateral or to provide to the Secured Party a guaranteed return from the collection or disposition of Collateral, or (l) to the extent deemed appropriate by the Secured Party, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Secured Party in the collection or disposition of any of the Collateral. The Debtor acknowledges that the purpose of this section is to provide non-exhaustive indications of what actions or omissions by the Secured Party would not be commercially unreasonable in the Secured Party’s exercise of remedies against the Collateral and that other actions or omissions by the Secured Party shall not be deemed commercially unreasonable solely on account of not being indicated in this section. Without limitation upon the foregoing, nothing contained in this section shall be construed to grant any rights to the Debtor or to impose any duties on the Secured Party that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this section.

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5.4. UCC and Offset Rights. The Secured Party may exercise, from time to time, any and all rights and remedies available to it under the UCC or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Security Agreement or in any other agreements between the Debtor and the Secured Party, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the Obligations, whether matured or unmatured, including costs of collection, and reasonable and documented attorneys’ and paralegals’ fees, and in such order of application as the Secured Party may, from time to time, elect, any indebtedness of the Secured Party to the Debtor, however created or arising, including balances, credits, deposits, accounts or moneys of the Debtor in the possession, control or custody of, or in transit to the Secured Party. The Debtor, on behalf of itself and the Debtor, hereby waives the benefit of any law that would otherwise restrict or limit the Secured Party in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from the Secured Party to the Debtor.

5.5. Additional Remedies. The Secured Party shall have the right and power to:

(a) instruct the Debtor, at its own expense, to notify any parties obligated on any of the Collateral, including any Account Debtors, to make payment directly to the Secured Party of any amounts due or to become due thereunder, or, the Secured Party may directly notify such obligors of the security interest of the Secured Party, and/or of the assignment to the Secured Party of the Collateral and direct such obligors to make payment to the Secured Party of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such Persons obligated thereon;

(b) enforce collection of any of the Collateral, including any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or compromise, extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder;

(c) take possession or control of any proceeds and products of any of the Collateral, including the proceeds of insurance thereon;

(d) extend, renew or modify for one or more periods (whether or not longer than the original period) the Obligations or any obligation of any nature of any other obligor with respect to the Obligations;

(e) grant releases, compromises or indulgences with respect to the Obligations, any extension or renewal of any of the Obligations, any security therefor, or to any other obligor with respect to the Obligations;

(f) transfer the whole or any part of securities which may constitute Collateral into the name of the Secured Party or the Secured Party’s nominee without disclosing, if the Secured Party so desires, that such securities so transferred are subject to the security interest of the Secured Party, and any corporation, association, or any of the managers or trustees of any trust issuing any of such securities, or any transfer agent, shall not be bound to inquire, in the event that the Secured Party or such nominee makes any further transfer of such securities, or any portion thereof, as to whether the Secured Party or such nominee has the right to make such further transfer, and shall not be liable for transferring the same;

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(g) vote the Collateral;

(h) make an election with respect to the Collateral under Section 1111 of the Bankruptcy Code or take action under Section 364 or any other section of the Bankruptcy Code; provided, however, that any such action of the Secured Party as set forth herein shall not, in any manner whatsoever, impair or affect the liability of the Debtor hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive the Secured Party’s rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, the Debtor, any guarantor or other Person liable to the Secured Party for the Obligations; and

(i) at any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Collateral, without in any way altering, impairing, diminishing or affecting the provisions of this Security Agreement, the Transaction Documents, or any of the other Obligations, or the Secured Party’s rights hereunder or under the Obligations.

The Debtor hereby ratifies and confirms whatever the Secured Party may do with respect to the Collateral and agrees that the Secured Party shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Collateral.

5.6. Attorney-in-Fact. The Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any officer of the Secured Party or any Person designated by the Secured Party for that purpose) as the Debtor’s true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Debtor’s name, place and stead, with full power of substitution, to (i) take such actions as are permitted in this Security Agreement, (ii) execute such financing statements and other documents and to do such other acts as the Secured Party may require to perfect and preserve the Secured Party’s security interest in, and to enforce such interests in the Collateral, and (iii) carry out any remedy provided for in this Security Agreement, including endorsing the Debtor’s name to checks, drafts, instruments and other items of payment, and proceeds of the Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of the Debtor, changing the address of the Debtor to that of the Secured Party, opening all envelopes addressed to the Debtor and applying any payments contained therein to the Obligations. The Debtor hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Debtor hereby ratifies and confirms all that such attorney-in-fact may do or cause to be done by virtue of any provision of this Security Agreement.

5.7. No Marshaling. The Secured Party shall not be required to marshal any present or future collateral security (including this Security Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, the Debtor hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Secured Party’s rights under this Security Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Debtor hereby irrevocably waives the benefits of all such laws.

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5.8. Application of Proceeds. The Secured Party will within three (3) business days after receipt of cash from proceeds of Collateral or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Secured Party shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Debtor. Any proceeds of any disposition by the Secured Party of all or any part of the Collateral may be first applied by the Secured Party to the payment of expenses incurred by the Secured Party in connection with the Collateral, including reasonable and documented attorneys’ fees and legal expenses as provided for in Section 6.13 hereof.

5.9. No Waiver. No Event of Default shall be waived by the Secured Party except in writing. No failure or delay on the part of the Secured Party in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There shall be no obligation on the part of the Secured Party to exercise any remedy available to the Secured Party in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Debtor agrees that in the event that the Debtor fails to perform, observe or discharge any of its Obligations or liabilities under this Security Agreement or any other agreements with the Secured Party, no remedy of law will provide adequate relief to the Secured Party, and further agrees that the Secured Party shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

Section 6 MISCELLANEOUS.

6.1. Entire Agreement. This Security Agreement and the other Transaction Documents (i) are valid, binding and enforceable against the Debtor and the Secured Party in accordance with their respective provisions and no conditions exist as to their legal effectiveness; (ii) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof; and (iii) are the final expression of the intentions of the Debtor and the Secured Party. No promises, either expressed or implied, exist between the Debtor and the Secured Party, unless contained herein or therein. This Security Agreement, together with the other Transaction Documents, supersedes all negotiations, representations, warranties, commitments, term sheets, discussions, negotiations, offers or contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof with respect to any matter, directly or indirectly related to the terms of this Security Agreement and the other Transaction Documents. This Security Agreement and the other Transaction Documents are the result of negotiations among the Secured Party, the Debtor and the other parties thereto, and have been reviewed (or have had the opportunity to be reviewed) by counsel to all such parties, and are the products of all parties. Accordingly, this Security Agreement and the other Transaction Documents shall not be construed more strictly against the Secured Party merely because of the Secured Party’s involvement in their preparation.

6.2. Amendments; Waivers. No amendment, modification or waiver of, or consent with respect to, any provision of this Security Agreement or the other Transaction Documents shall in any event be effective unless the same shall be in writing and acknowledged by the Secured Party, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

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6.3. WAIVER OF DEFENSES. THE DEBTOR WAIVES EVERY PRESENT AND FUTURE DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE DEBTOR MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE SECURED PARTY IN ENFORCING THIS SECURITY AGREEMENT.. PROVIDED THE SECURED PARTY ACTS IN GOOD FAITH, THE DEBTOR RATIFIES AND CONFIRMS WHATEVER THE SECURED PARTY MAY DO PURSUANT TO THE TERMS OF THIS SECURITY AGREEMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE SECURED PARTY GRANTING ANY FINANCIAL ACCOMMODATION TO THE DEBTOR.

6.4. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS SECURITY AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF FAIRFAX COUNTY, VIRGINIA OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA; PROVIDED THAT NOTHING IN THIS SECURITY AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE SECURED PARTY FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF FAIRFAX COUNTY, VIRGINIA AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE COMMONWEALTH OF VIRGINIA. THE DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

6.5. WAIVER OF JURY TRIAL. THE SECURED PARTY AND THE DEBTOR, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS SECURITY AGREEMENT, ANY NOTE, ANY OTHER TRANSACTION DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE SECURED PARTY AND THE DEBTOR ARE ADVERSE PARTIES, AND EACH AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE SECURED PARTY GRANTING ANY FINANCIAL ACCOMMODATION TO THE DEBTOR.

6.6. Assignability. The Secured Party may at any time assign the Secured Party’s rights in this Security Agreement, the other Transaction Documents, the Obligations, or any part thereof and transfer the Secured Party’s rights in any or all of the Collateral, and the Secured Party thereafter shall be relieved from all liability with respect to such Collateral. This Security Agreement shall be binding upon the Secured Party and the Debtor and their respective legal representatives and successors. All references herein to the Debtor shall be deemed to include any successors, whether immediate or remote. In the case of a joint venture or partnership, the term “Debtor” shall be deemed to include all joint venturers or partners thereof, who shall be jointly and severally liable hereunder.

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6.7. Binding Effect. This Security Agreement shall become effective upon execution by the Debtor and the Secured Party. If this Security Agreement is not dated or contains any blanks when executed by the Debtor, the Secured Party is hereby authorized, without notice to the Debtor, to date this Security Agreement as of the date when it was executed by the Debtor, and to complete any such blanks according to the terms upon which this Security Agreement is executed.

6.8. Governing Law. This Security Agreement shall be delivered and accepted in and shall be deemed to be a contract made under and governed by the internal laws of the Commonwealth of Virginia applicable to contracts made and to be performed entirely within such state, without regard to conflict of laws principles.

6.9. Enforceability. Wherever possible, each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Security Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

6.10. Time of Essence. Time is of the essence in making payments of all amounts due the Secured Party under this Security Agreement and in the performance and observance by the Debtor of each covenant, agreement, provision and term of this Security Agreement.

6.11. Counterparts; Electronically Transmitted Signatures. This Security Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Security Agreement. Receipt of an executed signature page to this Security Agreement by electronic transmission shall constitute effective delivery thereof. Electronic records of executed Transaction Documents maintained by the Secured Party shall be deemed to be originals thereof.

6.12. Notices. All notices from the Debtor to the Secured Party and the Secured Party to the Debtor required or permitted by any provision of this Security Agreement shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand or by electronic transmission (with receipt and oral confirmation of successful and full transmission) or three (3) days after being mailed, registered or certified mail, return receipt requested, with postage prepaid to the applicable parties at the physical or email address stated below or on the signature page hereto, or if any Party shall have designated a different address or facsimile number by notice to the other party given as provided above, then to the last physical or email address or facsimile number so designated.

If to the Debtor:

Lattice Incorporated

7150 N. Park Drive, Suite 500

Pennsauken, New Jersey, 08109

Attention: Chief Executive Officer

Facsimile No.:

Email Address:

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If to the Secured Party:

Global Tel*Link Corporation
12021 Sunset Hills Road, #100
Reston, Virginia 20190

Attention: Claudia G. Regen
Facismile No.:

Email Address:

6.13. Costs, Fees and Expenses. The Debtor shall pay or reimburse the Secured Party for all reasonable and documented fees and expenses of counsel incurred by the Secured Party or for which the Secured Party becomes obligated in connection with the enforcement of this Security Agreement, including reasonable and documented attorneys’ fees of counsel to the Secured Party, search fees, costs and expenses; and all taxes payable in connection with this Security Agreement. In furtherance of the foregoing, the Debtor shall pay any and all stamp and other taxes, UCC search fees, filing fees and other costs and expenses in connection with the execution and delivery of this Security Agreement and the other Transaction Documents to be delivered hereunder, and agrees to save and hold the Secured Party harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses. That portion of the Obligations consisting of costs, expenses or advances to be reimbursed by the Debtor to the Secured Party pursuant to this Security Agreement or the other Transaction Documents which are not paid on or prior to the date hereof shall be payable by the Debtor to the Secured Party on demand. If at any time or times hereafter the Secured Party: (a) employs outside counsel for advice or other representation (i) with respect to this Security Agreement or the other Transaction Documents, (ii) to represent the Secured Party in any litigation, contest, dispute, suit or proceeding or to commence, defend, or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit, or proceeding (whether instituted by the Secured Party, the Debtor, or any other Person) in any way or respect relating to this Security Agreement, or (iii) to enforce any rights of the Secured Party against the Debtor or any other Person under of this Security Agreement; (b) takes any action to protect, collect, sell, liquidate, or otherwise dispose of any of the Collateral; and/or (c) attempts to or enforces any of the Secured Party’s rights or remedies under this Security Agreement, the reasonable and documented costs and expenses incurred by the Secured Party in any manner or way with respect to the foregoing, shall be part of the Obligations, payable by the Debtor to the Secured Party on demand, and shall accrue interest at a rate equal to twelve percent (12%) per annum.

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IN WITNESS WHEREOF, the Debtor and the Secured Party have executed this Security Agreement as of the date first above written.

DEBTOR:

LATTICE INCORPORATED, a Delaware corporation

By:   /s/ Paul Burgess

Name: Paul Burgess

Title: CEO

SECURED PARTY:

GLOBAL TEL*LINK CORPORATION, an Idaho corporation

By: /s/ Jeffrey B. Haidinger

Name: Jeffrey B. Haidinger

Title: President & COO

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SCHEDULE 1.1

PERMITTED LIENS

Principal Balance	Holder		Collateral	Lein	Maturity date
$908,000	Lattice Funding Inc. (Cantone Asset Management as Placement Agent)	Convertible Note	right, title to, and interest in revenue proceeds of ALL faciilty contracts and telecom equipment associated with such contracts	first priority security interest (UCC filed)	4/30/2020
$375,000	Cantone Asset Management (CAM	Note	Accounts Receivable Correct Solutions Order)	first priority security interest (UCC filed)	5/26/2016 potentially to be extended upon agreement with Cantone	Purchase order financing
$600,000	Cantone Asset Management (CAM	Note	right, title to, and interest in revenue proceeds of ALL facility contracts and telecom equipment associated with such contracts	first priority security interest (UCC filed)	7/2/2016	Bridge financing
$1,500,000	Lattice Funding Inc. (Cantone Asset Management as Placement Agent)	Convertible Note	right, title to, and interest in revenue proceeds of ALL facility contracts and telecom equipment associated with such contracts	first priority security interest (UCC filed)	5/15/2017
$781,655	Wistar Morris	Note	Federal Contract receivables ($1.2 million) related to cost  recoverable type contract settlements . These originated from disposed Government business. Note derived from continuing operations	first priority security interest (UCC filed)	6/30/2012
$168,000.00	Robert Glabraith	Note Unsecured*	n/a	n/a	10/14/2014
$200,000.00	Darrell Patrick	Note Unsecured*	n/a	n/a	5/15/2013
$84,364.00	Medvitz /Margolies	Note Unsecured*	n/a	n/a	1/23/2014
$110,284.32	Royal Bank Leasing	Equipment financing loans	UCC security interest in property underlying equipment financing UCC	UCC
$      -	Action Capital	Revolver AR Credit Facility	Blanket Lien	first priority security interest (UCC filed)	n/a
$ 4,707,303

The Secured Party consents to a financing on the following terms which is anticipated to close in May 2016:

Issuer  Lattice Incorporated

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Investor Suitability	“Accredited Investors” as defined in Rule 501 of Regulation D and otherwise acceptable to us. See “Investor Suitability Standards.”
Units Offered	Each Unit consists of a $10,000 8% Senior Secured Note and 50,000 shares of Lattice Restricted Stock
Offering Price	$10,000 per Unit.
Maximum Offering Amount	Up to 1,500 of Units (with an option to sell an additional $300,000 (30 Units)). The closing of the Offering is not conditioned upon the acceptance of subscriptions for any minimum amount of Units.
Minimum Investment	$10,000.00 (one Unit), with half Units ($5,000) thereafter; provided,
Per Investor	however, that we have the right to accept a lesser investment amount from any prospective purchaser in our sole discretion.
Maturity Date	The Note portion of the Units will be due and payable on April 30, 2020 (the “Maturity Date”).
Interest Rate	Interest on the Notes will accrue at a rate of 8% per annum, payable quarterly in arrears. The next interest payment will be due February 15, 2016, and subsequent payments due May 15, August 15 and November 15 thereafter, until the earlier of Lattice’s payment of all principal and accrued interest on the Note, or the principal and accrued but unpaid interest on the Note is converted.
Conversion Shares	The Unitholder has the right, beginning any time after six months from the Final Closing and before the Maturity Date, to convert the Amount Due on the Note into Conversion Shares at the Conversion Price of $0.10 (subject to adjustment). Lattice will pay the Placement Agent a fee of 2% of the aggregate principal amount of Notes converted upon any conversion.
Ranking	The Note will rank equal to Lattice senior debt and ahead of any non-senior debt, except for trade debt.
Use of Proceeds	Lattice will use the net proceeds as described in the Use of Proceeds.

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Type of Offering	The Company is offering the Units on a “best efforts, no minimum” basis, through the Placement Agent. The Company anticipates conducting multiple Closings before the Offering Termination Date. The Placement Agent anticipates an initial Closing on or about December 31, 2015.
	The Company reserves the right to accept or reject any subscription for Units, in whole or in part, and any subscription for Units that is not accepted will be returned without interest. You may not revoke a subscription tendered to purchase any Units.
Escrow	The cash subscriptions for Units will be held in a non-interest bearing account established by the Placement Agent.
Offering Period	The Offering will terminate upon the earlier of: (i) the Company’s acceptance of subscriptions for the Maximum Offering Amount at one or more Closings or (ii) the Offering Termination Date.
Offering Termination Date	March 30, 2016.
Placement	Agent As consideration for acting as Placement Agent, under this Offering,
Compensation	Lattice will: pay to CRI (a) a commission equal to 8% of the aggregate gross cash proceeds received by the Company from each Closing, (b) 1,500 shares of Lattice’s restricted Common Stock for each $1,000 face value of Notes sold, and (c) a non-accountable expense allowance equal to 1% of the aggregate gross cash proceeds received by the Company from each Closing. Lattice will also reimburse the Placement Agent for all of its expenses, including legal fees of 1% of the total gross proceeds accepted at any Closing.
Administrative Fee	Lattice Funding, the Collateral Agent, will receive an annual Administrative Fee from Lattice of 2% of the Principal balance on the Notes, payable at the same time Lattice pays interest. This fee increases to 3% upon a default under the Notes.
Risk Factors	An investment in the Units involves a high degree of risk. You should purchase the Units only if you can afford a complete loss of your investment. See “Risk Factors” and “Where You Can Find More Information.”

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SCHEDULE 3.1

TRADE NAMES

Innovisit

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SCHEDULE 3.6

PAST-DUE OBLIGATIONS

The following is a list of past-due obligations of Lattice Incorporated:

· $1.253 million aggregate principal of notes which are past due and may be called at any time. Interest is also owed under the notes.

· Lattice owes facility commissions to customers that are outside of payment terms. Customers could invoke termination and cause disruption of revenue if not cured within 10 days of notification of default.

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EX-10.4

Exhibit 10.4

EXTENSION AGREEMENT

This extension agreement (the "Agreement) is made as of April 27, 2016 by and between LATTICE INCORPORATED, a Delaware corporation ("Borrower"), and CANTONE ASSET MANAGEMENT, LLC, a Pennsylvania limited liability company ("Lender") (collectively, the "Parties" and singularly, a "Party").

The Lender previously extended credit to the Borrower in the amount of $580,000 on or about November 2, 2015 (the "Loan"). The Loan is evidenced and secured by (i) a Secured Promissory Note dated November 2, 2015, and (ii) a Loan and Security Agreement dated November 2, 2015 (the "Loan Documents"). The Loan is secured by a security interest in certain contracts of the Borrower. The due date of the Note is May 2, 2016 (the "Due Date").

Borrower has requested, and Lender is willing to grant, a sixty (60) day extension for payment of the Loan, with a new due date of July 2, 2016 (the "New Due Date"), under the terms and conditions described below.

In consideration of the mutual promises contained in this Agreement, and intending to be legally bound, the Parties agree as follows:

1. Representations by Borrower. The Borrower represents as follows:

a) Borrower is able to pay interest on the Loan but not principal. Lender acknowledges that Borrower has paid all interest due on the Loan as of May 2, 2016. As of the date of this Agreement, the total principal due on the Loan is $580,000.

b) On the date of this Agreement, Borrower is not insolvent and is financially able to pay interest on the Loan, as described below.

c) The Borrower makes no admission of default or non-compliance under the Loan Documents. For purposes of financial statement reporting or obtaining credit, during the term of this Agreement, if requested by Borrower, the Lender agrees to issue a statement to the effect that the Borrower is not now in default under the Loan Documents.

2. Extension. Lender agrees to extend the Due Date under the Loan Documents to the New Due Date, and to forbear from exercising any rights Lender might have under the Loan Documents or otherwise until the New Due Date under the terms and conditions of this Agreement.

3. Conditions Precedent. Lender's agreement to the New Due Date is expressly conditioned upon the timely occurrence of each of the following events:

a) Interest and Payments. Interest will continue to accrue on the Loan at the rate of 14% per annum. Borrower has paid all accrued but unpaid interest on the Loans as of May 2, 2016 upon execution of this Agreement and pay monthly interest in arrears on the 2^nd of each month beginning June 2, 2016 in the amount of $7000 on the Loan, until principal of the Loan is fully repaid. Borrower will pay the principal and all accrued but unpaid interest on the Loan on or before the New Due Date.

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b) If, at any time during which any indebtedness under the Loan remains outstanding, Borrower defaults on any indebtedness owed by Borrower to any person (excluding trade payables under $10,000.00), Borrower must give Lender written notice of such default within five (5) days. For the purposes of this Section 4(b), "default" shall have the same meaning as defined in the Loan Documents or in any loan document relating to the indebtedness in default. Upon any such default that is not cured within five (5) days after the date of such notice (regardless of any cure period found in the Loan Documents or any loan documents related to the indebtedness in default), the default provisions as found in the Secured Note document will apply: the Maker will immediately issue to the Payee a certificate representing 2,500,000 shares of the Maker's common stock as a late payment penalty and not as interest, and $50,000 will be added to the principal amount and begin accruing Default Interest at 18%.

c) Expenses. Borrower shall pay the Lender's legal fee of $750.00 upon execution of this Agreement.

d) The Borrower shall not sell or transfer any part of the Collateral without approval of Lender. The Borrower shall not incur any debt secured by a lien on the Collateral without prior written approval of 100% of the members of the Borrower.

e) The principal amount of the Loan will increase to $600,000, effective upon execution of this Agreement, to be evidenced by a new note (the "New Note") dated April 27, 2016.

f) As additional consideration for the Lender extending the Loan to the New Due Date, the Borrower will issue to the Lender, or to its order, 1,000,000 shares of the Borrower's restricted common stock, to be issued within 30 days after the execution of this Agreement.

4. Default. If Borrower causes any event of default under the Loan Documents, the extension of the Loan under this Agreement will immediately end, and the Lender may take any and all remedies available to the Lender under the Loan Documents for payment of principal and interest under the Loan or hereunder.

5. Modifications. The Loan Documents remain in full force and effect except as expressly modified by this Agreement. Neither this Agreement nor the Loan Documents may be amended except by an instrument in writing signed by the Parties, their successors or assigns.

IN WITNESS WHEREOF, the Parties have signed this Extension Agreement as of the 27th day of April, 2016.

LATTICE INCORPORATED

By: /s/ Paul Burgess       

             Paul Burgess, CEO

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CANTONE ASSET MANAGEMENT, LLC:

By: /s/ Anthony J. Cantone

         Anthony J. Cantone, Managing Member

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EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer
Pursuant to Rule 13A-14(A)/15D-14(A)
of the Securities Exchange Act of 1934

I, Paul Burgess, certify that:

1. I have reviewed this Quarterly report on Form 10-Q for the period ended March 31, 2016 of Lattice Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(c) evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated: May 16, 2016	By:	/s/ Paul Burgess
		Paul Burgess
		Chief Executive Officer and President
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Rule 13A-14(A)/15D-14(A)
of the Securities Exchange Act of 1934

I, Joe Noto, certify that:

1. I have reviewed this Quarterly report on Form 10-Q for the period ended March 31, 2016 of Lattice Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(c) evaluated the effectiveness of registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated: May 16, 2016	By:	/s/ Joe Noto
		Joe Noto
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350 AND EXCHANGE ACT RULES 13a-14(b) AND 15d-14(b)
(Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Lattice Incorporated on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge and belief:

(1)           the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operation of the Company.

Dated: May 16, 2016	By:	/s/ Paul Burgess
		Paul Burgess
		Chief Executive Officer, Secretary and President
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350 AND EXCHANGE ACT RULES 13a-14(b) AND 15d-14(b)
(Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Lattice Incorporated on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge and belief:

(1)           the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operation of the Company.

Dated: May 16, 2016	By:	/s/ Joe Noto
		Joe Noto
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	May. 16, 2016
Document And Entity Information
Entity Registrant Name	Lattice INC
Entity Central Index Key	0000350644
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
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		95,038,673
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2016

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 100,603	$ 186,839
Accounts receivable, net	1,187,011	977,638
Inventories	50,711	50,711
Costs and gross profit in excess of billings	492,121	324,673
Other current assets	67,411	61,940
Total current assets	1,897,857	1,601,801
Property and equipment, net	427,619	515,668
Intangible assets, net	487,512	520,012
Other receivable, net	761,607	761,607
Deposits	58,473	58,473
Total assets	3,633,068	3,457,561
Current liabilities:
Accounts payable	2,266,693	2,390,420
Accrued expenses	1,420,385	1,110,346
Accrued settlement	2,750,000	2,750,000
Customer advances	199,134	400,985
Notes payable - current, net of debt discount	2,199,144	1,806,981
Capital lease obligation	4,764	4,601
Derivative liability	37,716	30,154
Deferred revenue	108,872	166,883
Total current liabilities	8,986,708	8,660,370
Long term liabilities:
Derivative liability	0	0
Capital lease obligation	5,938	7,192
Convertible notes payable, net of debt discount	2,105,195	2,090,049
Notes payable - long-term	61,153	69,797
Total long-term liabilities	2,172,286	2,167,038
Total liabilities	11,158,994	10,827,408
Shareholders' deficit
Preferred stock - .01 par value. Series B 1,000,000 shares authorized 1,000,000 issued and outstanding	10,000	10,000
Common stock - $0.01 par value, 200,000,000 authorized, 95,341,557 and 94,741,557 issued and outstanding respectively	953,416	947,416
Common stock subscribed - 500,000 shares	5,000	5,000
Additional paid-in capital	45,753,692	45,673,848
Accumulated deficit	(53,685,152)	(53,451,081)
Accumulated other comprehensive income	(4,786)	3,066
Stockholders' Equity before Treasury Stock	(6,967,830)	(6,811,751)
Stock held in treasury, at cost	(558,096)	(558,096)
Total shareholders' (deficit)	(7,525,926)	(7,369,847)
Total liabilities and shareholders' deficit	$ 3,633,068	$ 3,457,561

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2016	Dec. 31, 2015
Shareholders' equity
Preferred stock, par value	$ .01	$ .01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	1,000,000	1,000,000
Preferred stock, shares outstanding	1,000,000	1,000,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	95,341,557	94,741,557
Common stock, shares outstanding	95,341,557	94,741,557
Common stock shares subscribed	500,000	500,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Statement [Abstract]
Revenue	$ 2,430,148	$ 1,509,671
Cost of Revenue	1,215,903	985,102
Gross Profit	1,214,245	524,569
Operating expenses:
Selling, general and administrative	945,528	1,079,409
Research and development	273,465	309,239
Total operating expenses	1,218,993	1,388,648
Loss from operations	(4,748)	(864,079)
Other income (expense):
Derivative income (expense)	(7,562)	346,409
Write-off of note receivable	0	(37,250)
Interest expense	(215,484)	(151,339)
Total other income (expense)	(223,046)	157,820
Loss before taxes	(227,794)	(706,259)
Income taxes	0	0
Net loss	(227,794)	(706,259)
Preferred Stock Dividend	(6,277)	(6,277)
Net Loss Available to Common Stockholders	$ (234,071)	$ (712,536)
Net loss per common share - Basic	$ 0.00	$ (.01)
Net loss per common share - Diluted	$ 0.00	$ (.01)
Weighted average shares - Basic	94,833,865	53,911,094
Weighted average shares - Diluted	94,833,865	53,911,094
Comprehensive net loss	$ (227,794)	$ (706,259)
Foreign currency translation gain (loss)	(7,852)	(2,017)
Comprehensive loss	$ (235,646)	$ (708,276)

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flow from operating activities:
Net Loss	$ (227,794)	$ (706,259)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write-off of note receivable	0	37,250
Derivative income	7,562	(346,409)
Stock issued for services	0	15,000
Amortization of intangible assets	32,500	32,500
Amortization of debt discount	94,342	76,833
Bad debt expense	8,119	21,680
Share-based compensation	61,844	58,038
Depreciation	89,573	79,452
(Increase) decrease in:
Accounts receivable	(217,492)	43,965
Costs in excess of billings	(167,448)	40,841
Other current assets	(5,471)	30,218
Increase (decrease) in:
Accounts payable and accrued liabilities	180,035	(9,010)
Deferred revenue	(58,011)	(33,990)
Customer advances	(201,851)	369,126
Total adjustments	(176,298)	415,494
Net cash used in operating activities	(404,092)	(290,765)
Cash flows from investing activities:
Principal payments received on note receivable	0	0
Purchase of equipment	(1,524)	(21,153)
Net cash used in investing activities	(1,524)	(21,153)
Cash flows from financing activities:
Cash paid for financing fees	(21,815)	(78,000)
Payments on capital lease	(1,091)	0
Payments on notes payable	(24,862)	(29,218)
Proceeds from notes payable	375,000	500,000
Net cash provided by financing activities	327,232	392,782
Effect of exchange rate changes on cash	(7,852)	(2,017)
Net (decrease) increase in cash and cash equivalents	(86,236)	78,847
Cash and cash equivalents - beginning of period	186,839	255,954
Cash and cash equivalents - end of period	100,603	334,801
Supplemental cash flow information
Interest paid in cash	103,879	61,258
Summary of non-cash investing and financing activities
Dividends declared but not paid	6,277	6,277
Common stock issued as prepayment for services	0	75,000
Common stock issued for deferred financing fees	0	70,000
Stock issued for debt discount	$ 24,000	$ 0

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1 - Organization and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 owned 100% of the shares of CLR Group Limited. (“CLR”), a government contractor. Together, the SMEI, RTI and CLR acquisitions formed our federal government services business unit, Lattice Government Services (“LGS”). Through 2012 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 Department of Defense agencies either as a 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 sold the assets of LGS for approximately $1.2 million. These assets essentially comprised our federal government services segment operations.

On November 1, 2013, the Company purchased certain assets of Innovisit, LLC. The acquired assets mainly included: awarded contracts, customer lists, and its intellectual property rights to video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations have been transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complemented the product offering of our telecom services business.

In 2013, the Company established a wholly owned subsidiary, Lattice Communications Inc., to enable us to operate in Canada. During 2014, we started operating a call center and collecting fee income for processing prepaid deposits for a large Canadian telecom provider which operates Lattice technology systems to provide call provisioning services to correctional facilities located in Canada.

b) Basis of Presentation / Going Concern

As disclosed in Note 3 to the condensed consolidated financial statements, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” during the first quarter of 2016. In accordance with the guidance, $115,000 of unamortized debt issuance costs, associated with the Company’s convertible notes payable, were reclassified from other current assets, as previously reported on the consolidated balance sheet as of December 31, 2015, to convertible notes payable, net of debt discount.

At March 31, 2016, our working capital deficiency was approximately $7,089,000 compared to a working capital deficiency of approximately $7,059,000 at December 31, 2015. 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 extended on payables with trade creditors. We have several payment arrangements in place but face continuing pressures 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 additional capital. Management is currently engaged in raising capital with a goal of raising approximately $4,000,000 to $5,000,000, the proceeds of which will be used to improve working capital and strengthen our balance sheet. To address this objective and to address short term liquidity needs, Lattice engaged in a private placement of restricted common stock bringing in gross proceeds of $382,800 in April 2016. Management is actively seeking additional funding opportunities. There is no assurance, however, that we will succeed in raising the additional financing needed 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.

The condensed consolidated 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”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s consolidated financial position and operating results. The condensed consolidated balance sheet at March 31, 2016 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements for the three months ended March 31, 2016 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, 2015 appearing in Form 10-K filed on April 14, 2016.

d) Principles of Consolidation

The condensed consolidated 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.

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 consolidated 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) 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), 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.

g) Cash and Cash Equivalents

The Company maintains its cash balances with various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation limits.

h) Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

i) Revenue Recognition

Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.

Direct Call Provisioning Services:

Revenues related to collect and prepaid calling services generated by communication services 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.

Wholesaled Technology:

We sell telephony systems with embedded proprietary software to other service providers. We recognize revenue when the equipment is shipped to the customer.

Breakage:

In compliance with regulatory tariffs, we recognize as income prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.

Prepaid Cards:

We also sell prepaid phone cards to end user facilities on a wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user facilities.

Software Maintenance:

We offer software maintenance and support contracts to customers who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life of the contract.

Revenue Recognition for Construction Projects:

Revenues from construction contracts are included in contract revenue in the condensed 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. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

Software and Software License Sales

The Company recognizes revenue when a fixed fee order has been received and delivery has occurred to the customer. The Company assesses whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software and licenses are delivered electronically to the customer. Revenue attributable to software licenses sold with extended payment terms in excess of twelve months are recognized ratably over the payment term.

j) 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 consolidated financial statements based on their fair values.

For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. At March 31, 2016, there was $162,510 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. This amount will be amortized over the remaining vesting periods of the grants.

k) 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.

At least annually, The Company reviews all long-lived assets for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.

l) Fair Value of Financial Instruments

In accordance with FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data. Unobservable inputs reflect assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

· Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

· Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value.

As of March 31, 2016 and December 31, 2015, the derivative liabilities amounted to $37,716 and $30,154. In accordance with the accounting standards the Company determined that the carrying value of these derivatives approximated the fair value using the level 3 inputs.

m) Derivative Financial Instruments and Registration Payment Arrangements

Derivative financial instruments, as defined in Financial Accounting Standards, consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital requirements, including convertible debt and other financial instruments indexed to the Company's own stock. These contracts require careful evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved. In instances where derivative financial instruments require liability classification, the Company is required to initially and subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge to income until such time as the instruments require classification in stockholders' equity (deficit). See Note 4 for additional information.

As previously stated, derivative financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, the Company generally uses the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.

n) 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 exited its government services business in April 2013 and is reporting the operating results of that unit as discontinued operations in the consolidated financial reports. Accordingly, the Company operated in one segment during the three months ended March 31, 2016 and 2015 (Telecom services).

o) Basic and Diluted Income (Loss) Per Common Share

The Company calculates income (loss) per common share in accordance with ASC Topic 260, “Earnings Per Share”. Basic and diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible preferred stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled approximately 39 million shares at March 31, 2016.

p) Recent Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11“). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required and early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the new standards.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. See Note 3 for the impact of this adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards.  Early adoption will be permitted, but not before the first quarter of 2017.  Adoption can occur using one of two prescribed transition methods.  In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.

During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position, results of operations or cash flows.

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.

In March 2016, the FASB issued ASU No. 2016-06, “Contingent Put and Call Option in Debt Instruments” (“ASU 2016-06”).  ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.

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

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2 - Notes payable

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Notes payable

Notes payable consists of the following as of March 31, 2016 and December 31, 2015:

	March 31, 2016			December 31, 2015
Bank line of credit (a)	$	–		$	–
Notes payable to shareholder/former director (b)		192,048			192,048
Notes payable (c)		2,055,515			1,656,996
Note payable, Innovisit (d)		12,734			27,734
Total notes payable		2,260,297			1,876,778
Less current maturities		(2,199,144	)		(1,806,981	)
Long term debt	$	61,153		$	69,797

(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 is obligated to 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 is obligated to pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month. 

The outstanding balance owed on the line at March 31, 2016 and December 31, 2015 was $0 and $0 respectively. If the credit facility is drawn upon, the interest rate would be 13.25%.

(b) Notes Payable to Shareholder/Former Director

There are two notes outstanding with a former 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 principal was to be paid. This note had an outstanding principal balance of $24,048 as of March 31, 2016 and December 31, 2015, respectively. The Company is in arrears on interest payments that were due but has accrued the interest 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 principal and interest payments. 

The second note is dated October 14, 2011 had a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800 was 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 was due at maturity on October 14, 2014. This note had an outstanding principal balance of $168,000 as of March 31, 2016 and December 31, 2015, respectively. The Company is in arrears on interest payments that were due but has accrued the interest 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 principal and 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 difference between the face amount of the note and proceeds received 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 and 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 2014 the Company paid $100,000 each in April and July reducing the principal on this note to $781,655 as of December 31, 2014. As of March 31, 2016 and December 31, 2015, there was $781,655 of unpaid principal remaining on this note. As of the date of this filing, the Company is currently in violation under terms of the note agreement requiring 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 was 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. As of March 31 2016 and December 31, 2015, there was $200,000 of unpaid principal remaining on this note. The holder has not as of the date of this filing invoked his rights under the default provisions of the note.

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. 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 June 30, 2012. During the quarter ended June 30, 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 as of March 31, 2016 and December 31, 2015. On January 23, 2014 the maturity date, the principal amounts 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.

During November 2015, the Company issued a secured note to an investor for $580,000 for which $355,174 of net proceeds were received. Of the $580,000; $58,000 was an original issue discount, $29,000 was used for placement fees and legal expenses and $137,826 was used to pay the remaining principal and accrued interest outstanding on the March 2015 note. In addition, the Company was required to issue 1,862,500 shares of common stock ($55,875 based on the closing price of the stock on the date of closing) to the Lender. The original issue discount was recorded as a debt discount, as were the placement and legal fees and the value of the 1,862,500 shares were recorded as deferred financing fees and included in prepaid expenses on the balance sheet. The debt discount is amortized using the effective interest method. The unamortized debt discount as of March 31, 2016 was $27,445. The carrying balance of this note, net of unamortized debt discount of $27,445, at March 31, 2016 was $552,555. On April 27, 2016, the maturity date of this note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000, thereby increasing the principal balance to $600,000, and to issue 1,000,000 common shares to the investor. The Company is currently evaluating whether the accounting for debt extinguishment or debt modification applies.

During June 2015, we closed on an equipment loan of $67,275 with Royal Bank America Leasing, L.P. The loan is payable monthly at $2,136 per month over a 36 month term with the last payment due in May 2018. The principal balance on this loan as of March 31, 2016 and December 31, 2015 was $48,250 and $53,454 respectively.

During October 2015, we closed on an equipment loan of $61,783 with Royal Bank America Leasing, L.P. The loan is payable monthly at $1,941 per month over a 36 month term with the last payment due in September 2018. The principal balance on this loan as of March 31, 2016 and December 31, 2015 was $52,173 and $56,831 respectively.

On February 25, 2016, the Company issued to an investor a promissory note in the aggregate principal amount $375,000 and received $353,000 in gross proceeds (equivalent to a 5% original issue discount of $18,750 and other closing fees of $3,065) (the "Loan"). Additionally, the Company issued 600,000 shares of its common stock to the investor at an extended fair value of $24,000 based on the publicly traded value of the Company’s shares at closing. The Loan is secured by a first priority security interest in certain of the Company's components and work-in progress. The outstanding principal balance net of unamortized debt discount of $38,482 at March 31, 2016 was $336,518. The loan was re-paid in full during May 2016 upon the collection of the associated Purchase Order/Accounts Receivable that was financed.

(d) Note Payable – Innovisit

In conjunction with the purchase of intellectual property and certain other assets of Innovisit 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, (b) four payments of $60,000 on each of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014, and (c) final payment of $100,000 on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual property acquired. In 2016, the Company made cash payments on this note totaling $15,000 leaving $12,734 outstanding as of March 31, 2016 compared to an outstanding balance of $27,734 at December 31, 2015.

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3 - Convertible Notes

3 Months Ended

Mar. 31, 2016

Convertible Notes Payable [Abstract]

Convertible Notes

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. The 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 contained 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 needed 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 November 2, 2015 the derivative was valued at $218,819. The debt discount was amortized using the effective interest method and was $956,090 at November 2, 2015. The fair value of the embedded conversion feature was estimated at the end of each quarterly reporting period using the Monte Carlo model.

On November 2, 2015, the Company issued 5,000,000 shares of its common stock to Lender to amend the promissory note issued to it in May 2015 to eliminate certain anti-dilution provisions. Based on management’s review, the accounting for debt extinguishment applied. In accordance with the accounting for debt extinguishment, the Company wrote-off the unamortized debt discount of $929,177 and unamortized deferred finance fees relating to this note of $172,222. These charges were offset by the difference of the carrying value of the associated embedded derivative liability of $218,819 and the fair value of $150,000 for the 5,000,000 shares issued resulting in a net gain of $68,819. The net of these three items resulted in a loss on extinguishment of debt of $1,032,580 in 2015.

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. 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 common shares at a conversion 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 Note Purchase and Security 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 issued 2,875,333 shares valued at $0.07 per share based on the closing price the day of the borrowings. This resulted in a debt discount of $355,633, which is being amortized over the life of the loan using the effective interest method. Amortization expense of the debt discount was $15,146 in the current period.

The LF2 convertible note consists of the following at March 31, 2016:

	March 31, 2016
Principal	$	908,000
Discount		(355,633	)
Accumulated amortization of discount		52,828
Total	$	605,195

During the first quarter of 2016, the Company adopted ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” In accordance with the guidance, $115,000 of unamortized debt issuance costs, associated with the Company’s convertible notes payable, were reclassified from other current assets, as previously reported on the consolidated balance sheet as of December 31, 2015, to convertible notes payable, net of debt discount.

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4 - Fair Value of Derivative Instruments

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value of Derivative Instruments

The condensed consolidated balance sheet caption derivative liability includes warrants and a convertible note. The warrants were 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, 2016 and December 31, 2015, and are carried at fair value. The balance at March 31, 2016 was $37,716 compared to $30,154 at December 31, 2015.

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 March 31, 2016 included the March 31, 2016 publicly traded stock price of the Company of $0.05, the conversion or strike price of $0.10 per the agreement, a historical volatility factor of 221.77% based upon forward terms of instruments, and a risk free rate of 2.09% and remaining life 6.47 years.

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5 - Litigation

3 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Litigation

On June 26, 2015, Global Tel*Link Corporation (“GTL”) filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement between, dated December 31, 2008 (the “MSA”). GTL alleged that we breached the MSA by failing to pay them commissions pursuant to the MSA and that we owe them approximately $2.9 million, including interest. We filed a reply to the claim on July 24, 2015. On April 29, 2016, we and GTL entered into a settlement agreement pursuant to which:

· we agreed to pay GTL $250,000 within five business days of the date of the settlement agreement;

· we issued a confession of judgment promissory note in the aggregate principal amount of $2,495,625 (the “Note”); and

· we entered into a Teaming Agreement with GTL.

The Note bears interest at the rate of 8% per year and provides a schedule of payments consisting of principal and interest through April 30, 2019. The obligations under the Note are secured by all of our assets pursuant to the terms of a Security Agreement (the “Security Agreement”). The Security Agreement provides for customary events of default.

Except as disclosed above, we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

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6 - Commitments

3 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments

(a) Operating Leases

The Company leases its office, sales and manufacturing facilities under non-cancelable operating leases with varying terms expiring through 2016. The leases generally provide that the Company pay the taxes, maintenance and insurance expenses related to the leased assets.

Future minimum lease commitments as of March 31, 2016 are approximately as follows:

For the Twelve Months Ending March 31, :
2017	$	7,967

Total rent expense was $27,853 for the quarter ended March 31, 2016 compared to $27,694 in the prior year quarter.

(b) Capital lease

During May 2015, we entered into a capital lease financing obligation with Marlin Leasing Corporation in the amount of $14,585 which bears interest at 13% and is payable monthly over a 3 year term at $497 per month.  The lease includes an end of term purchase option of $1.00. The outstanding principal balance on this lease at March 31, 2016 was $10,702.

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7 - Subsequent Events

3 Months Ended

Mar. 31, 2016

Subsequent Events [Abstract]

Subsequent Events

On April 22, 2016, Lattice sold an aggregate of 10,633,336 shares of its common stock to 15 accredited investors for aggregate gross proceeds of $382,800. In connection with the sale of the shares, the Company paid a placement agent fee of $19,140 in cash to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S a warrant to purchase 319,000 shares of the Company’s common stock at the price of $0.06 per share. The Company may sell up to an additional 6,033,333 shares for $217,200 pursuant to the terms of the Placement Agreement.

On April 27, 2016, the maturity date of the $580,000 bridge note was extended from May 2, 2016 to July 2, 2016. As consideration, the Company agreed to increase the original issue discount of the note by $20,000 thereby increasing the principal balance to $600,000 and to issue 1,000,000 common shares to the investor.

On April 29, 2016, Lattice entered into a settlement agreement with Global Tel*Link Corporation (“GTL”) for $2,745,625 related to past due general unsecured (on-demand) liabilities. At March 31, 2016, such amount was classified in the consolidated Balance Sheet as an accrued settlement under current liabilities. Per the settlement agreement, Lattice converted the on-demand liability to a promissory note for $2,745,625 carrying an 8% annual interest rate with principal payments due as follows: $250,000 within five business days of the date of the settlement agreement (Paid by Lattice) leaving a remaining principal balance owing of $2,495,625, of which, $250,000 will be payable in (7) quarterly principal payments starting July 31, 2016 with any remaining principal balance due under the note by April 30, 2018.

The $375,000 loan dated February 26, 2016 was re-paid in full during May 2016 upon the collection of the associated Purchase Order/Accounts Receivable that was financed.

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

3 Months Ended

Mar. 31, 2016

Organization And Summary Of Significant Accounting Policies Policies

Organization

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 owned 100% of the shares of CLR Group Limited. (“CLR”), a government contractor. Together, the SMEI, RTI and CLR acquisitions formed our federal government services business unit, Lattice Government Services (“LGS”). Through 2012 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 Department of Defense agencies either as a 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 sold the assets of LGS for approximately $1.2 million. These assets essentially comprised our federal government services segment operations.

On November 1, 2013, the Company purchased certain assets of Innovisit, LLC. The acquired assets mainly included: awarded contracts, customer lists, and its intellectual property rights to video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations have been transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complemented the product offering of our telecom services business.

In 2013, the Company established a wholly owned subsidiary, Lattice Communications Inc., to enable us to operate in Canada. During 2014, we started operating a call center and collecting fee income for processing prepaid deposits for a large Canadian telecom provider which operates Lattice technology systems to provide call provisioning services to correctional facilities located in Canada.

Basis of Presentation Going Concern

b) Basis of Presentation / Going Concern

As disclosed in Note 3 to the condensed consolidated financial statements, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” during the first quarter of 2016. In accordance with the guidance, $115,000 of unamortized debt issuance costs, associated with the Company’s convertible notes payable, were reclassified from other current assets, as previously reported on the consolidated balance sheet as of December 31, 2015, to convertible notes payable, net of debt discount.

At March 31, 2016, our working capital deficiency was approximately $7,089,000 compared to a working capital deficiency of approximately $7,059,000 at December 31, 2015. 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 extended on payables with trade creditors. We have several payment arrangements in place but face continuing pressures 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 additional capital. Management is currently engaged in raising capital with a goal of raising approximately $4,000,000 to $5,000,000, the proceeds of which will be used to improve working capital and strengthen our balance sheet. To address this objective and to address short term liquidity needs, Lattice engaged in a private placement of restricted common stock bringing in gross proceeds of $382,800 in April 2016. Management is actively seeking additional funding opportunities. There is no assurance, however, that we will succeed in raising the additional financing needed 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.

The condensed consolidated 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”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s consolidated financial position and operating results. The condensed consolidated balance sheet at March 31, 2016 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim Condensed Financial Statements

c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements for the three months ended March 31, 2016 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, 2015 appearing in Form 10-K filed on April 14, 2016.

Principles of Consolidation

d) Principles of Consolidation

The condensed consolidated 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.

Use of Estimates

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 consolidated 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.

Fair Value Disclosures

f) 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), 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.

Cash and Cash Equivalents

g) Cash and Cash Equivalents

The Company maintains its cash balances with various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation limits.

Inventories

h) Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

Revenue Recognition

i) Revenue Recognition

Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.

Direct Call Provisioning Services:

Revenues related to collect and prepaid calling services generated by communication services 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.

Wholesaled Technology:

We sell telephony systems with embedded proprietary software to other service providers. We recognize revenue when the equipment is shipped to the customer.

Breakage:

In compliance with regulatory tariffs, we recognize as income prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused deposit.

Prepaid Cards:

We also sell prepaid phone cards to end user facilities on a wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer end user facilities.

Software Maintenance:

We offer software maintenance and support contracts to customers who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably over the life of the contract.

Revenue Recognition for Construction Projects:

Revenues from construction contracts are included in contract revenue in the condensed 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. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.

Software and Software License Sales

The Company recognizes revenue when a fixed fee order has been received and delivery has occurred to the customer. The Company assesses whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software and licenses are delivered electronically to the customer. Revenue attributable to software licenses sold with extended payment terms in excess of twelve months are recognized ratably over the payment term.

Share-based payments

j) 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 consolidated financial statements based on their fair values.

For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. At March 31, 2016, there was $162,510 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. This amount will be amortized over the remaining vesting periods of the grants.

Depreciation, amortization and long-lived assets

k) 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.

At least annually, The Company reviews all long-lived assets for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.

Fair Value of Financial Instruments

l) Fair Value of Financial Instruments

In accordance with FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data. Unobservable inputs reflect assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

· Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

· Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value.

As of March 31, 2016 and December 31, 2015, the derivative liabilities amounted to $37,716 and $30,154. In accordance with the accounting standards the Company determined that the carrying value of these derivatives approximated the fair value using the level 3 inputs.

Derivative Financial Instruments

m) Derivative Financial Instruments and Registration Payment Arrangements

Derivative financial instruments, as defined in Financial Accounting Standards, consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital requirements, including convertible debt and other financial instruments indexed to the Company's own stock. These contracts require careful evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved. In instances where derivative financial instruments require liability classification, the Company is required to initially and subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge to income until such time as the instruments require classification in stockholders' equity (deficit). See Note 4 for additional information.

As previously stated, derivative financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, the Company generally uses the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.

Segment Reporting

n) 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 exited its government services business in April 2013 and is reporting the operating results of that unit as discontinued operations in the consolidated financial reports. Accordingly, the Company operated in one segment during the three months ended March 31, 2016 and 2015 (Telecom services).

Basic and diluted income (loss) per common share

o) Basic and Diluted Income (Loss) Per Common Share

The Company calculates income (loss) per common share in accordance with ASC Topic 260, “Earnings Per Share”. Basic and diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible preferred stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled approximately 39 million shares at March 31, 2016.

Recent accounting pronouncements

p) Recent Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11“). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method  are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required and early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the new standards.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. See Note 3 for the impact of this adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards.  Early adoption will be permitted, but not before the first quarter of 2017.  Adoption can occur using one of two prescribed transition methods.  In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.

During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position, results of operations or cash flows.

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.

In March 2016, the FASB issued ASU No. 2016-06, “Contingent Put and Call Option in Debt Instruments” (“ASU 2016-06”).  ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.

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

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2 - Notes payable (Tables)

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Notes payable

	March 31, 2016			December 31, 2015
Bank line of credit (a)	$	–		$	–
Notes payable to shareholder/former director (b)		192,048			192,048
Notes payable (c)		2,055,515			1,656,996
Note payable, Innovisit (d)		12,734			27,734
Total notes payable		2,260,297			1,876,778
Less current maturities		(2,199,144	)		(1,806,981	)
Long term debt	$	61,153		$	69,797

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3 - Convertible Notes (Tables)

3 Months Ended

Mar. 31, 2016

Convertible Notes Payable [Abstract]

Schedule of convertible notes

	March 31, 2016
Principal	$	908,000
Discount		(355,633	)
Accumulated amortization of discount		52,828
Total	$	605,195

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6 - Commitments (Tables)

3 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Future minimum lease payments operating leases

For the Twelve Months Ending March 31, :
2017	$	7,967

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1 - Organization and summary of significant accounting policies (Details Narrative) - USD ($)	3 Months Ended	4 Months Ended
	Mar. 31, 2016	Apr. 30, 2016	Dec. 31, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Working capital	$ (7,089,000)		$ (7,059,000)
Proceeds from sale of stock		$ 382,800
Unrecognized compensation cost	162,500
Derivative liabilities	$ 37,716		$ 30,154
Anitdilutive shares excluded from EPS	39,000,000

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2 - Notes payable (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Total notes payable	$ 2,260,297	$ 1,876,778
Less current maturities	(2,199,144)	(1,806,981)
Long-term debt	61,153	69,797
Note payable to shareholder/director
Total notes payable	192,048	192,048
Note payable
Total notes payable	2,055,515	1,656,996
Note payable, Innovisit
Total notes payable	12,734	27,734
Line of Credit [Member]
Total notes payable	$ 0	$ 0

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2 - Notes payable (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Note payable outstanding	$ 2,260,297		$ 1,876,778
Proceeds from note payable	375,000	$ 500,000
Repayment of note payable	24,862	$ 29,218
Note payable to shareholder/director
Note payable outstanding	192,048		192,048
Note payable to shareholder/director | Shareholder Note 1 [Member]
Note payable outstanding	$ 24,048		24,048
Debt maturity date	Dec. 31, 2013
Note payable to shareholder/director | Shareholder Note 2 [Member]
Note payable outstanding	$ 168,000		168,000
Debt stated interest rate	10.00%
Debt maturity date	Oct. 14, 2014
Note payable
Note payable outstanding	$ 2,055,515		1,656,996
Note payable | Note payable1 [Member]
Note payable outstanding	$ 781,655		781,655
Debt maturity date	Jun. 30, 2012
Note payable | Note payable 2 [Member]
Note payable outstanding	$ 200,000		200,000
Debt stated interest rate	12.00%
Debt maturity date	May 15, 2013
Note payable | Note payable 3 [Member]
Note payable outstanding	$ 552,555
Debt maturity date	Jul. 02, 2016
Unamortized debt discount	$ 27,445
Note payable | Note payable 4 [Member]
Note payable outstanding	$ 48,250		53,454
Debt maturity date	May 31, 2018
Note payable | Note payable 5 [Member]
Note payable outstanding	$ 52,173		56,831
Debt maturity date	Sep. 30, 2018
Note payable | Note payable 6 [Member]
Note payable outstanding	$ 336,518
Debt maturity date	May 31, 2016
Unamortized debt discount	$ 38,482
Debt face amount	375,000
Proceeds from note payable	353,000
Original issue discount	18,750
Closing fees	$ 3,065
Stock issued with debt, shares	600,000
Stock issued with debt, value	$ 24,000
Note payable | Note payable 7 [Member]
Note payable outstanding	$ 84,364		84,364
Debt stated interest rate	12.00%
Debt face amount	$ 198,000
Proceeds from note payable	175,000
Original issue discount	23,000
Repayment of note payable	113,636
Note payable, Innovisit
Note payable outstanding	12,734		27,734
Repayment of note payable	15,000
Line of Credit [Member]
Note payable outstanding	$ 0		$ 0
Debt stated interest rate	13.25%

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3 - Convertible Note (Details - Notes outstanding) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Total convertible note	$ 2,105,195	$ 2,090,049
LF2 [Member]
Convertible note	908,000
Discount on convertible note	(355,633)
Accumulated amortization of discount	52,828
Total convertible note	$ 605,195

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3 - Convertible Note (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Amortization of debt discount	$ 94,342	$ 76,833
LF2 [Member]
Amortization of debt discount	$ 15,146

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4 - Fair Value of Derivative Instruments (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Conversion price	$ .10
Volatility	221.77%
Risk free interest rate	2.09%
Expected term	6 years 5 months 19 days
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | Warrants
Fair value derivative liability	$ 37,716	$ 30,154

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5 - Litigation (Details Narrative) - Global Tel Link [Member]	3 Months Ended
	Mar. 31, 2016 USD ($)
Note payable from litigation	$ 2,495,625
Debt stated interest rate	8.00%
Debt maturity date	Apr. 30, 2019

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6 - Commitments (Details)	Mar. 31, 2016 USD ($)
Commitments and Contingencies Disclosure [Abstract]
2017	$ 7,967

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6 - Commitments (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Commitments and Contingencies Disclosure [Abstract]
Rent expense	$ 27,853	$ 27,694
Capital lease obligation	$ 10,702