Note 5 - Notes and Convertible Notes

12 Months Ended

Dec. 31, 2015

Notes to Financial Statements

Short-term Debt [Text Block]

Note

5.

Notes and Convertible Notes Payable

As of

December

31,

2015,

we have outstanding a total of

$3,245,972

unsecured convertible promissory notes with a maturity date of

June

 

1,

 

2018,

which accrue interest at a rate of

12%

per annum. We

may

pay these notes at maturity by the issuance of common stock at the rate set forth in the note. These notes include those issued to investors in the

2015

Unit Offering (see

“2015

Unit Offering” immediately below), and notes that were converted into

2015

Unit Offering notes (see Note

6).

For the years ended

December

31,

2014

and

2015,

we recorded

$348,153

and

$994,671

of interest expense related to our line of credit, convertible notes payable and amortization of discount on convertible notes payable.

2015

Unit Offering

  On

January

15,

2015,

we commenced a private securities offering of “units”, each Unit consisting of a convertible promissory note and Series A stock purchase warrant

(“2015

Unit Offering”). The price and availability of the Units are set forth in a “Pricing Supplement” issued from time - to - time, and priced up to a

30%

discount to the market price of the Company’s common stock. The Offering is subject to an over - allotment of

20%,

or an additional

$1,000,000

in Units, for an aggregate total of

$6,000,000,

and shall be known as the Company’s

“2015

Unit Offering.” The Company has the right to register the common shares underlying the notes and warrants (“Shares”) with the Securities and Exchange Commission, and the obligation to register the Shares in the event we are successful in raising

$3,000,000

of gross proceeds.

Purchasers of the Units will receive an unsecured   convertible promissory note bearing interest at the rate of

12%

per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the

20

trading days prior to the interest payment due date. The principal amount of the note

may

be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election. When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the Unit price, as it is established at the time of the original investment by the applicable Pricing Supplement. The notes

may

be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as all of the following conditions are met: (i) the Shares issued as payment are registered with the SEC, (ii) the Company’s common stock closes for

ten

consecutive trading days at or above

three

times the Unit price. The Notes mature on

June

1,

2018.

Each Series A warrant allows for the purchase of the number of common shares equal to the investment amount divided by the Unit price, (e.g.,

one

warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note) and, the warrant will have an exercise price as set forth in the Pricing Supplement. Each Series A warrant expires

June

1,

2020.

The Company

may

“call” the Series A warrant, requiring the investor to exercise the warrant within

30

days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC, and (ii) the Company’s common stock closes for

10

consecutive trading days at or above

two

times the exercise price.

During the year ended

December

31,

2015,

we received

$2,671,713

and issued unsecured convertible promissory notes with maturity dates of

June

 

1,

 

2018,

which accrue interest at a rate of

12%

per annum, and are convertible at the Unit price set forth in the investor’s subscription agreement. Of this amount, notes in the face amount of

$1,535,000

were issued at a Unit price of

$0.25,

and

$1,136,713

at a Unit price of

$0.35.

Each investor, for no additional consideration, received a Series A stock purchase warrant. (See Note

7.)

December/January Notes

In

December

2014,

we received

$200,000

and issued unsecured convertible promissory notes each with a

one

- year maturity date, which accrue interest at a rate of

12%

per annum. Each noteholder, for no additional consideration, received a stock purchase warrant exercisable at

$0.30

per share, which terminates

three

years after the date of issuance. We issued warrants to purchase an aggregate

350,000

shares. The fair value of the warrants and the intrinsic value of the   beneficial conversion feature resulted in a

$200,000

discount on the convertible note payables. Each noteholder

may

exchange the note for the securities offered in our current private securities offering.

In

January

2015,

we received

$133,000

and issued unsecured convertible promissory notes each with a

one

- year maturity date, which accrue interest at a rate of

12%

per annum. Each noteholder, for no additional consideration, received a stock purchase warrant exercisable at

$0.30

per share, which terminates

three

year after the date of issuance. (See Note

7).

In

2015,

these notes were converted to a convertible promissory note and Series A stock purchase warrant on the same terms as our

2015

Unit Offering. (See Note

6.)

Line of Credit

On

November

19,

2013,

we received

$50,000

pursuant to a line of credit which accrues interest at a rate of

24%.

We have pledged our inventory and accounts receivable as collateral. The maturity date of the line of credit is

May

15,

2016.

In

September

2015,

this line of credit was converted to a convertible promissory note and Series A stock purchase warrant on the same terms as our

2015

Unit Offering. (See Note

6.)