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Convertible Debentures

9 Months Ended

Sep. 30, 2017

Note 5. Convertible Debentures

At September 30, 2017, the Company had convertible debentures totaling $128,300 outstanding, of which $95,000 were due during the third quarter of 2017 and $33,300 are due during the third quarter of 2018. The convertible debentures bear interest at 7%. At the option of the lender, the debentures and accrued interest are convertible in whole or part into common stock of the Company at $0.025 per share. During the first quarter of 2017, the Company’s Board of Directors approved and the holders of $33,300 of convertible debentures that had matured during the third quarter of 2016, one of which is held by a Director of the Company, accepted an offer of extension whereby the maturity dates of the convertible debentures are extended for two years and the conversion rate of the debentures and accrued interest into Common Stock of the Company is reduced from $0.05 to $0.025. In accordance with FASB ASC 470, this modification of the convertible debentures was recorded as a debt discount to the notes payable of approximately $13,200 with an offsetting credit to additional-paid in capital. In the three months ended March 31, 2017, the entire $13,200 was accreted through interest expense.

Early in the fourth quarter of 2017, the holders of $95,000 of convertible debentures agreed to extend the maturity dates of those convertible debentures for one year with no change in the terms or conditions of the debentures.

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 has been accreted through interest expense over the term of the notes payable. For the three months ended September 30, 2017 and September 30, 2016, $0 was accreted through interest expense. For the nine months ended September 30, 2017 and September 30, 2016, $0 and approximately $500, respectively, was accreted through interest expense.

The following table summarizes all warrant activity of the Company since December 31, 2016:

Weighted Average

Number

Exercise

of Shares

Price

Outstanding warrants -

December 31, 2016

721,365

$0.01 to $0.07

0.021

Warrants expired

12,300

$0.06 and $0.07

0.063

Outstanding warrants -

September 30, 2017

709,065

$0.01 to $0.03

0.020

Weighted average remaining

contractual life (years)

3.01