DEBT

9 Months Ended

Sep. 30, 2018

Debt

DEBT

Line-of-Credit Facility

The Company entered into a line-of-credit agreement with a financial institution on June 30, 2014. The terms of the agreement allowed the Company to borrow up to the lesser of $1.5 million or 85% of the sum of eligible accounts receivables. The line of credit agreement matured on July 31, 2018 and was not renewed by the Company. At September 30, 2018, the total outstanding on the line-of-credit was $0.

Food Labs Note Payable

As disclosed in Note 1 above, on September 18, 2018, the Company issued a promissory note to Food Labs in the principal amount of $50,000. The Food Labs Note (i) accrues interest at a rate of 5% per annum, (ii) includes an additional lender’s fee equal to $500, or 1% of the principal amount, and (iii) matures on December 31, 2019. At September 30, 2018, the total outstanding on the Food Labs Note was $50,000.

Note Payable

In April 2017, the Company converted approximately $1,088,000 of accounts payable into a secured note payable agreement with Niagara (the “Niagara Note”). The Niagara Note called for monthly payments of principal and interest totaling $25,000 through December 2017, and monthly payments of approximately $52,000 through maturity. The note bore interest at 8% per annum, was scheduled to mature in April 2019 and was secured by the personal guarantee which secures the Bottling Agreement. As of the date of the Niagara Settlement described in Note 1, the remaining balance on the Niagara Note was $854,366 and was settled in full in exchange for a new note payable.

As of September 30, 2018, and in connection with the Niagara Settlement as further discussed in Note 1 above, the Niagara Note was settled in full, and a new note was issued in the principal amount of $4,644,906. The note bears interest at 5% per annum, and matures in December 2019.

In April 2018, the Company issued a senior secured convertible promissory note in the amount of $2,250,000 to Red Beard in order to pay the initial payment of the Niagara Settlement. Also, in April 2018, the Company sold its remaining AquaBall® inventory to Red Beard for the Purchase Price of $1,436,113. As payment for the Purchase Price, the principal amount of the note was reduced by the Purchase Price, resulting in approximately $814,000 owed to Red Beard under the terms of the Red Beard Note as of April 5, 2018. The note bears interest at 5% per annum, matures in December 2019 and is secured by a continuing security interest in substantially all of the Company’s assets.

Pursuant to the terms of the Red Beard Note, Red Beard shall have the right, at its sole option, to convert the outstanding balance due into that number of fully paid and non-assessable shares of the Company’s Common Stock equal to the outstanding balance divided by $0.005 (the “Conversion Option”); provided, however, that the Company shall have the right, at its sole option, to pay all or a portion of the accrued and unpaid interest due and payable to Red Beard upon its exercise of the Conversion Option in cash. Pursuant to the terms of the Red Beard Note, such Conversion Option shall not be exercisable unless and until such time as the Company has filed the Amendment with the Nevada Secretary of State, which occurred on November 15, 2018. During the nine months ended September 30, 2018, the Company recorded a beneficial conversion feature of the note in the amount of $2,250,000. The amount is netted against the note payable balance as a debt discount with the corresponding entry to additional paid-in capital. The debt discount is amortized as interest expense through the maturity date. During the three months ended September 30, 2018, a total of $115,354 of the debt discount was amortized and recorded as expense.

Secured Note Financing 

As disclosed in Note 3 above, on July 26, 2017, the Company commenced an offering of Secured Notes in the aggregate principal amount of up to $1.5 million to certain accredited investors. The amount available was subsequently raised to $2.3 million. Between July 26, 2017 and September 30, 2018, the Company offered and sold Secured Notes in the aggregate principal amount of $2,465,000 and issued warrants to purchase up to 8,216,671 shares of Common Stock to participating accredited investors. The warrants were valued at $127,466 and were recorded as a discount to notes payable. During the three months ended September 30, 2018, a total of $17,862 of the debt discount was amortized and recorded as expense.

The Secured Notes (i) accrue interest at a rate of 8% per annum, (ii) have a maturity date of 1.5 years from the date of issuance, and (iii) are subject to a pre-payment and change in control premium of 125% of the principal amount of the Secured Notes at the time of pre-payment or change in control, as the case may be. To secure the Company’s obligations under the Secured Notes, the Company granted to participating investors a continuing security interest in substantially all of the Company’s assets pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”).

In addition, during the nine months ended September 30, 2018, Red Beard advanced the Company $355,000 to be used specifically to settle certain accounts payable owing to certain creditors, including Disney, and to provide funds to pay certain operating, administrative and related costs to continue operations. As of September 30, 2018, the Company had settled $730,000 in accounts payable to creditors, including Disney, in consideration for the payment to such creditors of approximately $152,000. The terms of the advances to the Company by Red Beard to finance the settlements, and to allow the Company to continue as a going concern, are currently being negotiated.

A summary of the notes payable as of September 30, 2018 and December 31, 2017 is as follows:

	Amount
Outstanding, December 31, 2017	$	2,803,610
Borrowings on notes payable		415,000
Recording of debt discount on secured notes		(250	)
Amortization of debt discount to interest expense		17,862
Outstanding March 31, 2018		3,236,222
Borrowings on notes payable		2,441,350
Note payable issued in exchange for accounts payable		3,790,540
Reduction of note payable for the sale of inventory		(1,436,113	)
Recording of debt discount on secured notes		(2,250,000	)
Derecognition of debt discount		1,436,113
Amortization of debt discount to interest expense		128,089
Outstanding June 30, 2018	$	7,346,201
Borrowings on notes payable		50,000
Amortization of debt discount to interest expense		133,216
Outstanding September 30, 2018	$	7,529,417