The Company issues convertible notes in exchange for cash. The notes typically do not bear any interest; however, there is an implied interest rate of 10% since the notes are issued at a price 10% less than its face value. The notes are unsecured, and usually mature twelve months from issuance.

The notes are convertible at the option of the note holder into the Company’s common stock at a conversion price stipulated in the conversion agreement. In addition, the note holders received warrants to purchase shares of common stock that are fully vested and will expire in one year from the date of issuance.

As a result, the Company records a note discount to account for the relative fair value of the warrants, the notes’ beneficial conversion feature or BCF, and original issue discount of 10% (OID). The note discounts are amortized over the term of the notes or amortized in full upon its conversion to common stock. At December 31, 2016, total outstanding notes payable amounted to $417,000, accrued penalty interest of $23,000 and unamortized note discount of $92,000, or a net balance of $348,000.

During the nine-month period ending September 30, 2017, the Company issued similar convertible promissory notes in the aggregate of $1,616,000 for cash of $1,469,000 or a discount of $147,000. The notes do not bear any interest; however, the implied interest rate used was 10% since the notes were issued at a price 10% less than its face value. The notes are unsecured, mature in twelve months from issuance and convertible at $0.05 per share. In addition, the Company also granted these note holders warrants to purchase 16,160,770 shares of the Company’s common stock. The warrants are fully vested, exercisable at $0.05 per share and will expire in one year. As a result, the Company recorded a note discount of $1,616,000 to account for the relative fair value of the warrants, the notes’ BCF, and OID. The note discounts are being amortized over the term of the note or amortized in full upon the conversion to common stock.

During the nine-month period ended September 30, 2017, a total of $1,522,000 notes payable was converted to 29,876,772 shares of common stock. In addition, the note discount of $1,625,000 was amortized to interest expense, and interest of $42,000 was accrued.

As of September 30, 2017, total outstanding notes payable amounted to $515,000, accrued interest of $61,000 and unamortized note discount of $83,000 for a net balance of $493,000. In addition, a total of four notes amounting to $381,000 reached maturity and are past due. The Company is currently in negotiations with the noteholders to settle the matured notes payable.