Spring 2015 Convertible Notes:

In the second quarter of 2015, the Company issued convertible notes in the aggregate of $550,000 for cash consideration of $475,500, net of original issue discount of $50,000 and commission paid of $24,500. The notes do not bear any interest; however, the Company used an implied interest rate of 10%. The notes are unsecured, mature one year after issuance, and are convertible into 1,833,333 shares of common stock at a conversion price of $0.30 per share. The Company determined that the notes contained a beneficial conversion feature of $352,139 since the market price of the Company’s common stock was higher than the effective conversion price of the notes when issued.  

Investors in the convertible notes received, for no additional consideration, warrants to purchase a total of 916,667 shares of common stock. Each warrant is exercisable on a cash basis only at an exercise price of $0.30 per share, are exercisable immediately upon issuance, and expires one year from the date of issuance. The relative fair value of the warrants issued with the convertible notes was determined to be $118,806 computed using the Black-Scholes Option Pricing model.

The fair value of the warrants, the beneficial conversion feature, the original issue discount and commission paid, aggregated $545,445 and is considered a debt discount. In June 2015, the full balance of these notes in the amount of $550,000 was converted to 1,833,333 shares of common stock and the full aggregated debt discount amortized as interest expense. During the three and nine month periods ending September 30, 2015, the total note discount amortized as interest expense was $0 and $545,455, respectively. As of September 30, 2015 there was no remaining balance due on these notes.

Fall 2014 Convertible Notes:

In the fourth quarter of 2014, the Company issued convertible notes in the aggregate of $280,390 for cash consideration of $254,900, resulting in an original issue discount of $25,490. The notes do not bear any interest; however, the Company used an implied interest rate of 10%. The notes are unsecured, mature one year after issuance, and were convertible into 584,147 shares of common stock at a conversion price of $0.48 per share. The Company determined that the notes contained a beneficial conversion feature of $94,845 since the market price of the Company’s common stock was higher than the conversion price of the notes when issued.  

Investors in the convertible notes received, for no additional consideration, warrants to purchase a total of 146,037 shares of common stock. Each warrant is exercisable on a cash basis only at an exercise price of $0.48 per share, are exercisable immediately upon issuance, and expires one year from the date of issuance. The fair value of the warrants issued with the convertible notes was determined to be $24,826 computed using the Black-Scholes Option Pricing model.

The fair value of the warrants, the beneficial conversion feature, and the original issue discount, aggregated $145,161 and was considered a debt discount. The debt discount is being amortized to interest expense over the term of the notes, or in full upon the conversion of a note. As of December 31, 2014 the balance due on these notes was $244,640 and unamortized note discount was $105,542. 

During the nine month period ended September 30, 2015, the Company converted $52,800 of these notes into 110,000 shares of common stock. As of September 30, 2015 the balance due on these notes was $191,840.

During the three and nine month periods ended September 30, 2015, amortization of the note discount totaled $25,986 and $98,231, respectively. As of September 30, 2015, the unamortized note discount was $7,119.

In October 2015, two notes payable with a total balance of $26,840 matured. As of the date of this report, the notes payable are still outstanding and past due. Under terms of the notes, the principal balance of each note increased by 10% at maturity and interest thereon accrues at 10% per annum.