6.         Convertible Notes

As described more completely under the caption “Interstate Battery Agreements” below in Note 9, the Company issued to Interstate Battery System International, Inc. and its wholly-owned subsidiary (collectively “Interstate Battery”) an 11% convertible note with a face amount of $5.0 million due May 25, 2019. The Company allocated the proceeds from the Interstate Battery agreements to the convertible note, common stock and warrants comprising the financing agreements based on the relative fair value of the individual securities on the May 24, 2016 closing date of the agreements. Additionally, the convertible notes contained an embedded conversion feature having intrinsic value at the issuance date, which value the Company treated as an additional discount attributed to the convertible note, subject to limitations on the absolute amount of discount attributable to the convertible notes and its allocated value. The Company recorded a corresponding credit to additional paid-in capital, attributable to the beneficial conversion feature. The discounts attributable to the convertible note, an aggregate of $4,975,000, are being amortized using the effective interest method over the three-year term of the note, maturing on May 24, 2019. Because the discount on the convertible note exceeds 99% of its initial face value, and because the discount is amortized over the period from issuance to maturity, the calculated effective interest rate is 184.75%.

Amortization of the note discount for the three and nine month periods ended September 30, 2016 totaled $18,000 and $26,000, respectively. Amortization of the deferred financing costs, more fully described in Note 9, totaled $12,000 and $17,000 for the three and nine month periods ended September 30, 2016, respectively.

The September 30, 2016 convertible note payable is comprised of the following (in thousands):

On October 31, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which the Company issued an aggregate of $6,000,000 principal amount of senior secured convertible notes (the “Convertible Notes”). In connection with the sale of the Convertible Notes (the “Bridge Financing”), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) and a security agreement (the “Security Agreement”) with the Investors. The closing of the Bridge Financing was completed October 31, 2014. Upon issuance, the Convertible Notes bore simple interest at 6% per annum and upon the occurrence of any specified event of default, the Convertible Notes would bear interest at 12% per annum and were scheduled to mature on December 31, 2015.

The principal, $6,000,000, and interest, $279,678, of the Convertible Notes were converted into 2,511,871 shares of the Company’s common stock at a conversion price of $2.50 per share on August 5, 2015 as part of the Company’s Initial Public Offering (“IPO”).