4. Debt

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

4. Debt

Note 4 — Debt

Debt is comprised of the following:

Description	Note		March 31, 2016			December 31, 2015
Line of credit		A	$	47,000		$	47,000
Note payable to distribution partner		B		550,000			550,000
Investor debt		C		267,787			267,787
Related party debt		D		5,932,543			5,632,543
Other notes payable		E		64,619			66,786
Cash draw notes		F		213,745			204,423
Convertible promissory notes		G		144,937			154,437
Total				7,220,631			6,922,976
Less:  unamortized discount and debt issuance costs				(98,311	)		(173,668	)
Debt, net of unamortized discount and debt issuance costs				7,122,320			6,749,308
Less:  current portion				(5,865,572	)		(5,156,305	)
Debt, long-term portion			$	1,256,748		$	1,593,003

 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 (collectively, “the defendants”) 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. As of April 4, 2016, the parties to this action have entered into a settlement whereby the defendants agreed to pay to the bank the sum of $59,177 on or before April 30, 2016. In the event of a default on this settlement agreement, the bank may request entry of a judgment against both defendants jointly and severally for any amounts unpaid pursuant to the settlement agreement.

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 March 31, 2016 and December 31, 2015. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:

	March 31, 2016		December 31, 2015	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:

	March 31, 2016		December 31, 2015		Interest Rate
D1	$	4,420,465	$	4,120,465		various
D2		528,214		528,214		various
D3		34,888		34,888		12	%
D4		280,800		280,800		various
D5		668,176		668,176		18	%
Total	$	5,932,543	$	5,632,543

D1 – Notes payable to Symbiote, Inc. (“Symbiote”), entered into from December 2014 to March 2016, with monthly principal and interest payable through November 2017. The 2014 notes aggregated the previous notes payable, accrued interest and accounts payable. None of the 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 provides our payroll services.

We evaluated the agreement for derivatives and determined that it does not qualify for derivative treatment for financial reporting purposes, because the agreement relates 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 December 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 December 2016.

D4 – Notes payable to the spouse of our CEO, entered into from September 2013 to October 2015, with principal and interest payments due upon a specific event or upon demand.

D5 – Notes payable to the consulting firm that employs our Chief Financial Officer, entered into in June 2015. These notes aggregated the previous accounts payable and accrued interest due to the consulting firm. 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 was amortized through interest expense.

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 $291,527 as of March 31, 2016. The maturity dates of the agreements range from May to July 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 three months ended March 31, 2016, $9,500 of principal and $371 of accrued interest was converted into 8,275,238 shares of common stock. We also recorded a loss on conversion of debt of $15,940 related to these transactions.

Debt issuance costs of $98,311 are being amortized over the life of the respective notes.