The Company entered into notes payable agreements with vendors in lieu of making payments due on accounts payable to these vendors. Interest accrued on these interest bearing notes payables at an annual rate of 7% with accrued interest and principal due at maturity. In August 2014, the Company entered into a settlement agreement with a vendor for the repayment of $631,000 which included $531,000 in notes payable, $93,000 of accrued interest and $7,000 of accounts payable. Under the terms of the settlement agreement, the Company paid the vendor $90,000 and issued 541,948 shares of common stock and a warrant to purchase 162,539 shares of common cost exercisable at $1.00 per share with a five year term. The Company valued the common stock at $341,000 and estimated the fair value of the warrant to be $55,000 based on a Black Sholes valuation. The Company estimated the fair value of the common stock to be $.63 per share based upon the 2014 Private Placement in which we sold one share of common stock and one warrant for $1.00. The Company estimated the fair value of each warrant to be $0.37 based on a Black Scholes valuation model. For the three months ended September 30,  2014,  the Company recorded a gain on the settlement of $145,000 which was recorded as Other Income on the Statement of Operations. The Company also has a note payable outstanding to another vendor with a balance due of 75,244 at September 30, 2014 which has no stated interest rate. The Company had been accruing interest on this note but reached an agreement with the vendor to pay off this note payable with no interest in four equal monthly principal installments of $25,081 and made the first payment in September 2014.

Interest expense for notes payable for the three and nine months ended September 30, 2014 and 2013 totaled $650, $23,045, $9,367 and $31,292, respectively.

Notes payable consisted of the following: