Convertible notes

At December 31, 2020, convertible notes payable totaled $936,000. During the year ended December 31, 2021, the Company issued convertible promissory notes in the aggregate of $723,000 for cash proceeds of $658,000, net of OID of $65,000. The notes are unsecured, have an implied interest rate was 10%, mature in twelve months from issuance, and are convertible into 28,794,327 shares of the Company’s common stock at $0.02 to $0.03 per share. In addition, the Company granted the note holders warrants to purchase 18,907,157 shares of the Company’s common stock with a relative fair value of $290,000. The warrants are fully vested, and expire one year from the date of issuance. The Company determined the fair value of the warrants by using a Black-Scholes option pricing model, with the following assumptions: expected term of 1.0 year, stock price of $0.03 to $0.04, exercise price of $0.03, volatility of 250% to 333%, risk-free rate of 0.25% 0 0.35%, and no forfeiture rate. The Company records a debt discount to account for the relative fair value of the warrants, and the OID, which is amortized over the term of the notes. Also during 2021, convertible notes payable of $522,000 and accrued interest of $2,000, net of unamortized discount of $263,000, were converted into 22,085,646 shares of common stock. At December 31, 2021, total outstanding convertible notes payable totaled $1,137,000.

During the year ended December 31, 2022, the Company issued convertible promissory notes in the aggregate of $432,000 for cash proceeds of $393,000, net of OID of $39,000. The notes are unsecured, have implied interest rate was 10%, mature in twelve months from issuance, and are convertible into 14,409,995 shares of the Company’s common stock at $0.03 per share. In addition, the Company granted the note holders warrants to purchase 14,409,995 shares of the Company’s common stock with a relative value of $283,000. The warrants are fully vested, and expire one year from the date of issuance. The Company determined the fair value of the warrants by using a Black-Scholes option pricing model, with the following assumptions: expected term of 1.0 year, stock price of $0.09, exercise price of $0.04, volatility of 212%, risk-free rate of 4.05%, and no forfeiture rate. Also during 2022, convertible notes of $176,000 and accrued interest of $2,000, net of unamortized discount of $119,000, were converted into 6,040,049 shares of common stock. At December 31, 2022, total outstanding convertible notes payable totaled $1,393,000. As of December 31, 2022, convertible notes payable and accrued interest are convertible into approximately 35,138,466 shares of common stock at conversion rates ranging from $0.02 to $0.48 per share. As of December 31, 2022, a total of thirty-four convertible notes and accrued interest in the aggregate of $1,730,000 have reached maturity and are past due. The Company is currently in negotiations with these note holders to settle these past due notes payable.

Accrued interest

At December 31, 2020, accrued interest on convertible notes payable totaled $313,000. During the year ended December 31, 2021, accrued interest of $124,000 was recorded, and accrued interest of $2,000 was converted into shares of common stock. At December 31, 2021, accrued interest on convertible notes payable totaled $435,000.

During the year ended December 31, 2022, accrued interest of $162,000 was recorded, and accrued interest of $2,000 was converted into shares of common stock. At December 31, 2022, accrued interest on convertible notes payable totaled $612,000. In addition, during 2022, $16,500 of accrued interest was reclassified from convertible note principal to accrued interest as of December 31, 2021.

Debt discount

At December 31, 2020, the unamortized debt discount was $83,000. On January 1, 2021 debt discount was decreased by $30,000 due to the adoption of ASU 2020-06 (see below). During the year ended December 31, 2021, debt discount of $355,000 was recorded for the relative fair value of warrants of $290,000 and OID of $65,000, debt discount amortization of $59,000 was recorded, and $263,000 of debt discount was removed and included in the carrying amount of related convertible notes payable that were converted into shares of common stock. At December 31, 2021, the unamortized debt discount was $86,000.

During the year ended December 31, 2022, debt discount of $322,000 was recorded for the relative fair value of warrants of $283,000 and OID of $39,000, debt discount amortization of $149,000 was recorded, and $119,000 of debt discount was removed and included in the carrying amount of related convertible notes payable that were converted into shares of common stock. At December 31, 2022, the unamortized debt discount was $140,000.

Effective January 1, 2021, the Company early adopted ASU No. 2020-06 using the modified retrospective approach (see Note 1). Upon adoption, the following changes resulted: (i) the intrinsic value of the beneficial conversion features recorded in 2020 was reversed as of the effective date of adoption, thereby resulting in an increase in the convertible debentures with an offsetting adjustment to additional paid in capital and (ii) interest expense recorded in 2020 that was related to the amortization of the discount related to the beneficial conversion feature was reversed against opening accumulated deficit. Accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated deficit of $30,000, a decrease in addition paid in capital of $60,000, and an increase in total stockholders’ deficit of $30,000 on January 1, 2021.