3 - Convertible Notes

6 Months Ended

Jun. 30, 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 LF1 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 the Lender. 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 LF2 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 LF2 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 June 30, 2016:

	June 30, 2016
Principal	$	908,000
Discount		(355,633	)
Accumulated amortization of discount		68,295
Total	$	620,662

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.