6. Debt

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

6. Debt

Note 6 — Debt

Debt is comprised of the following:

Description	Note		September 30, 2015			December 31, 2014
Line of credit		A	$	47,000		$	47,000
Note payable to distribution partner		B		550,000			580,000
Investor debt		C		267,787			267,787
Related party debt		D		5,340,709			3,840,749
Other notes payable		E		68,952			57,692
Cash draw notes		F		146,432			255,793
Convertible promissory notes		G		188,684			217,500
Total				6,609,564			5,266,521
Less:  unamortized discount				(145,415	)		—
Debt, net of unamortized discount				6,464,149			5,266,521
Less:  current portion, net of unamortized discount				(4,529,439	)		(2,373,307	)
Debt, long-term portion			$	1,934,710		$	2,893,214

A – Line of Credit – We utilized this entire bank line of credit for working capital purposes. The outstanding obligation is due on demand, has a stated initial interest rate of 10.5% that is subject to adjustment, and is guaranteed by our majority shareholder/CEO. Energie and our CEO were served with a summons and complaint, wherein the bank brought an action to collect the amount due, including interest, costs and attorney’s fees. We have filed a response to the complaint and are engaged in settlement discussions with the bank. Accordingly, the amounts due are classified as current liabilities in the accompanying condensed, consolidated balance sheets.

B – Note payable to distribution partner – Note payable to a significant European distribution partner, entered into in October 2014, bearing interest at 5% payable quarterly, with principal payable monthly through September 2019. The 2014 note payable aggregated the 2007 promissory note, accrued interest and accounts payable.

C – Investor Debt – Notes payable to lenders having an ownership interest in Holdings at September 30, 2015 and December 31, 2014. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:

	September 30, 2015		December 31, 2014	Interest Rate
$	87,787	$	87,787	24	%
	50,000		50,000	24	%
	50,000		50,000	24	%
	25,000		25,000	8	%
	25,000		25,000	8	%
	20,000		20,000	2	%
	10,000		10,000	24	%
$	267,787	$	267,787

D –Related Parties Debt – The following summarizes notes payable to related parties:

	September 30, 2015		December 31, 2014		Interest Rate
D1	$	3,850,465	$	3,152,231		6	%
D2		527,380		497,130		12	%
D3		34,888		34,888		12	%
D4		274,800		156,500		24	%
D5		653,176		—		18	%
Total	$	5,340,709	$	3,840,749

D1 – Notes payable to Symbiote, Inc. (“Symbiote”), entered into from December 2014 through August 2015, with monthly principal and interest payable through November 2017. The 2014 notes aggregated previous notes payable, accrued interest and accounts payable. Neither the 2014 nor the 2015 notes are convertible. The previous note agreement gave Symbiote, at its option at any time after default, the right to convert any remaining balance of the notes to equity at a rate equal to the proportion of the remaining balance of the note divided by $4,000,000 enterprise value. Symbiote holds a large ownership percentage in Holdings, is the lessor of our manufacturing facility, and the provider of our payroll services.

We evaluated the agreements for derivatives and determined that they do not qualify for derivative treatment for financial reporting purposes, because the agreements relate to our own equity, and the debt and the equity are not closely related. We also determined this does not qualify as a beneficial conversion feature.

D2 – Notes payable to an executive vice president, entered into from December 2014 through July 2015, with monthly principal and interest payable through November 2017. The 2014 note aggregated previous notes payable, accrued interest and accounts payable.

D3 – Note payable to our Chief Executive Officer (“CEO”), entered into in December 2014, with monthly principal and interest payable through November 2015.

D4 – Notes payable to the spouse of our CEO, due upon demand.

D5 – Notes payable to the consulting firm that employs our Chief Financial Officer, entered into in June 2015. These notes aggregate the previous accounts payable and accrued interest due to the consulting firm. If we have not paid $300,000 by December 31, 2015, then beginning January 1, 2016, the notes are convertible into shares of our common stock at a conversion rate of 75% of the volume weighted average market price of our stock over the 20 days preceding the notification of conversion. We determined that this conversion feature does not meet the requirements to be treated as a derivative; however, we did determine it was a beneficial conversion feature. Accordingly, we recorded a debt discount of $217,725, which is being amortized through interest expense over the life of the notes.

E – Other Notes Payable – Represents the outstanding principal balance on three separate notes bearing interest at approximately 12% annually. In the event we receive proceeds as the beneficiary of a life insurance policy covering our majority shareholder/CEO, repayment of principal and interest is due on these notes prior to using the proceeds for any other purpose.

F – Cash draw agreements – Under these agreements, the lender advances us the principal balance and then automatically withdraws a stated amount each business day. Accordingly, there is no stated interest rate. The total remaining daily payments due under these arrangements was $194,170 as of September 30, 2015. The maturity dates of the agreements range from October 2015 to February 2016.

G – Convertible promissory notes – Represents the outstanding principal balance on two separate convertible promissory notes payable to an entity with interest of 8% annually, due in August 2016. During the third quarter of 2015, the current holder of the notes purchased all of our similar outstanding convertible notes from another entity and consolidated those notes into two new notes. At the option of the holder, the notes may be settled in cash or converted into shares of our common stock at any time beginning 180 days from the date of the notes at a price equal to 61% of the average closing bid price of our common stock during the 10 trading days immediately preceding the date of conversion. In the event we fail to pay the notes when they become due, the balance due under the notes incurs interest at the rate of 22% per annum. The notes contain additional terms and conditions normally included in instruments of this kind, including a right of first refusal wherein we have granted the holders the right to match the terms of any future financing in which we engage on the same terms and contemplated in such future financing. We estimate that the fair value of the conversion feature is minimal, so no value has been assigned to the beneficial conversion feature. During the nine months ended September 30, 2015, $95,395 of principal and $3,912 of interest was converted into 34,768,112 shares of common stock.

Debt issuance costs of $100,360 are included in Other assets as of September 30, 2015, and are being amortized over the life of the respective notes.