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Convertible Debentures

3 Months Ended

Mar. 31, 2016

Note 5. Convertible Debentures

At March 31, 2016, the Company had convertible debentures totaling $128,000 outstanding, of which $33,000 are due during the third quarter of 2016 and $95,000 are due during the third quarter of 2017. The convertible debentures bear interest at 7%. At the option of the lender, $95,000 principal of the debentures and accrued interest are convertible in whole or part into common stock of the Company at $0.025 per share and $33,000 principal of the debentures and accrued interest are convertible in whole or part into common stock of the Company at $0.05 per share. The Company also granted warrants to purchase 691,365 shares of the Company’s common stock at $0.02 per share to the holders of the debentures. The warrants are exercisable two years after issuance and expire seven years after issuance.

The fair value of the warrants was determined using the Black-Scholes pricing model. The relative fair value of the warrants was recorded as a discount to the notes payable with an offsetting credit to additional paid-in capital since the Company determined that the warrants were an equity instrument in accordance with FASB ASC 815. The debt discount related to the warrant issuances is being accreted through interest expense over the term of the notes payable. For the three months ended March 31, 2016 and March 31, 2015, approximately $200 and $1,400, respectively, was accreted through interest expense.

The following table summarizes all warrant activity of the Company since December 31, 2015:


			Weighted Average
	Number	Exercise	Exercise
	of Shares	Price	Price

Outstanding warrants - December 31, 2015	756,365	$0.01 to $0.07	$0.022

Warrants expired	15,000	$0.06	$0.06

Outstanding warrants - March 31, 2016	741,365	$0.01 to $0.07	$0.021

Weighted average remaining contractual life (years)	4.35

Exercisable warrants - March 31, 2016	575,000	$0.01 to $0.07	$0.022

Weighted average remaining contractual life (years)	4.08