All of the notes above are unsecured. The note dated February 28, 2011 is currently is in default and bears default interest at 18% per annum.
__________
|
|
(1)
|
This note is convertible at 49% discount to the lowest trading price over the preceding 20 trading days. The note becomes convertible 180 days after issuance.
|
|
|
(2)
|
This note is convertible at a 60% discount to the volume weighted average closing price over the preceding five trading days, subject to the condition that the conversion price shall never be less than $0.01 per share.
|
|
|
(3)
|
This note is convertible at 50% discount to the lowest trading price over the preceding 20 trading days. As this note was a modification of an existing note that was convertible, it is immediately convertible.
|
Advances Refinanced into Convertible Notes
During the six months ended August 31, 2016, we refinanced $35,100 of non-interest bearing advances into a convertible note. All principal and accrued interest is payable on the maturity date.
The Company evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying common stock is indexed to the Company’s common stock. We determined that the conversion features did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. We evaluated the conversion features for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the note. Therefore, we recognized a discount for the beneficial conversion features of $67,100, in aggregate, on the date the notes were signed. We amortize the discounts for the notes dated May 31, 2016 at an effective interest rates of 317.38%. The beneficial conversion feature was recorded as an increase in additional paid-in capital and a discount to the convertible notes payable. The discount to the convertible notes payable will be amortized to interest expense over the life of the notes. During the six months ended August 31, 2016 and 2015, we amortized discount on convertible notes payable of $239,575 and $252,246, respectively, to interest expense.
Convertible Notes Issued for Cash
On March 22, 2016, we issued a convertible promissory note for $40,000. The note has an original issue discount of $6,500. The note matures on March 22, 2017, and bears interest at 5% per annum. The terms on the note allow the noteholder to convert principal and accrued interest into shares of our common stock beginning 180 days after issuance. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days.
On August 30, 2016, we issued a convertible promissory note with a face value of $31,320. The note has an original issue discount of $6,320. The note matures on August 30, 2017, and bears interest at 8% per annum. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock beginning 180 days after issuance. The variable conversion rate is a 50% discount to the lowest trading price over the preceding 20 trading days. As of August 31, 2016, we had not received the cash proceeds from this note, so these funds appear on the balance sheet as “Note proceeds receivable.” The funds were received subsequent to the end of the quarter, and is considered a subsequent event.
We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying common stock is indexed to the Company’s common stock. The conversion met the definition of a liability and therefore we bifurcated the conversion feature and account for it as a separate derivative liability. We recognized derivative liability of $48,833. $25,000 of this was recorded as a discount to the convertible note, and the remaining $23,833 was immediately expensed to loss on derivative instruments.
Convertible Notes Issued for payment of Accounts Payable
On July 18, 2016, we issued a convertible promissory note for $9,000, with an original issue discount of $2,000. The note matures on July 18, 2017, and bears interest at 8% per annum. The noteholder paid the proceeds from this note directly to one of our vendors to reduce our outstanding account payable. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock immediately upon issuance.
- 12 -
We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying common stock is indexed to the Company’s common stock. The conversion features met the definition of a liability and therefore we bifurcated the conversion feature and account for it as a separate derivative liability. We recognized a $19,894 derivative liability related to the note using Black-Scholes model, $7,000 of which was recorded as a discount, and $12,894 as a loss on derivative instruments. Due to the embedded derivative, we had to evaluate our existing convertible notes for derivative liabilities. See Note 8.
The terms of the convertible note required us to issue 900,000 warrants with a strike price of $0.01 per share, with a maturity date of July 18, 2021. We recognized $117,058 derivative liability, which was immediately recognized as a loss on derivative instruments.
Violation of Debt Covenants
We violated the terms of our agreements for the convertible notes dated February 3, 2016 and March 22, 2016 on July 20, 2016 and July 25, 2016, respectively. The agreement had required us to file all quarterly and annual reports with the SEC on time. We filed our quarterly report on form 10-Q for the period May 31, 2016 after the deadline. As a result, the annual interest rate on each note increased from 5% per year to 18% per year. Additionally, the agreement called for us to increase the principal balance of the notes by 50% of their original face value. We recognized a loss on debt covenant violations of $23,000 and $20,000 on the notes dates February 3, 2016 and March 22, 2016, respectively. $25,000 of one of the note was re-assigned to another note holder and convertible immediately. The conversion feature was determined to be derivative liabilities, see Note 8.
Conversions to common stock
During six months ended August 31, 2016, the holders of the Convertible Note Payable dated January 31, 2013 elected to convert principal and accrued interest in the amounts show below into shares of common stock at a rate of $0.01 per share. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion.
|
|
|
|
|
|
Date
|
|
Amount Converted
|
|
Number of Shares Issued
|
March 1, 2016
|
|
$
|
1,900
|
|
190,000
|
August 8, 2016
|
|
|
9,871
|
|
175,000
|
August 26, 2016
|
|
|
9,425
|
|
264,000
|
Total
|
|
$
|
21,196
|
|
629,000
|
Note 8. Derivative Liabilities
On July 18, 2016, we issued a convertible promissory note with embedded variable price conversion options that is determined to be derivative instrument (see Note 7). We recognized a derivative liability of $19,894, which was recorded as a $7,000 discount to the note and a loss on derivative instruments of $12,894.
The same note required us to issue 900,000 warrants, which are also valued as a derivative instrument. Therefore, we recognized a derivative liability $117,058. This was recorded as a $117,058 loss on derivative instruments.
The embedded derivative in the July 18, 2016 convertible note tainted our outstanding convertible notes issues prior to that period. We calculated a $47,960,399 derivative liability related to those notes, which we reclassified from additional paid-in capital.
On August 30, 2016, we issued a modified convertible promissory note for $25,000, which had an embedded derivative liability of $48,833. We recognized this as a $25,000 discount against the note and a $23,833 loss on derivative instruments.
On August 31, 2016, we revalued the fair value all of our derivative instruments and determined that we had total derivative liabilities of $36,671,152. We recognized a gain on derivative instruments of $11,475,032. During the six months ended August 31, 2016, we recognized gain on derivative of $11,321,247.
We used Black-Scholes model to determine the fair value of the conversion option and warrants.
As of August 31, 2016, the aggregate fair value of the outstanding derivative liabilities was $36,371,152.
- 13 -
The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following key assumptions during the six months ended August 31, 2016
|
|
|
|
Expected dividends
|
|
—
|
%
|
Expected term (years)
|
|
0.25 – 5.00
|
|
Volatility
|
|
121% – 295
|
%
|
Risk-free rate
|
|
1.57% – 1.59
|
%
|
Note 9. Debt Payment Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended August 31,
|
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Convertible notes
|
|
$
|
1,211,961
|
|
$
|
396,958
|
|
$
|
400,137
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,009,056
|
|
Capital lease
|
|
|
3,861
|
|
|
4,038
|
|
|
1,387
|
|
|
—
|
|
|
—
|
|
|
9,286
|
|
Total
|
|
$
|
1,215822
|
|
$
|
400,996
|
|
$
|
401,524
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,018,342
|
|
Note 10. Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased to reflect the potential dilution that could occur if outstanding convertible notes payable were converted and warrants were exercised. Anti-dilutive shares represent potentially dilutive securities that which are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
August 31,
|
|
Three months ended
August 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
|
|
5,126,832
|
|
|
1,551,656
|
|
|
5,156,914
|
|
|
2,311,368
|
|
Dilution effect of warrants
|
|
|
850,793
|
|
|
—
|
|
|
827,942
|
|
|
—
|
|
Dilution effect of convertible notes payable
|
|
|
377,782,274
|
|
|
—
|
|
|
377,782,274
|
|
|
—
|
|
Weighted-average shares - diluted
|
|
|
383,759,899
|
|
|
1,551,656
|
|
|
383,767,130
|
|
|
2,311,368
|
|
The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
August 31,
|
|
Three months ended
August 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock issuable under convertible notes payable excluded from diluted EPS due to the anti-dilutive effect due to net loss
|
|
|
—
|
|
|
1,692
|
|
|
—
|
|
|
1,393
|
|
Note 10. Subsequent Events
On September 4, 2016, we issued into a convertible promissory note for $31,320, for $25,000 in cash proceeds.
On September 8, 2016, the holder of our modified convertible promissory note dated August 30, 2016, converted $6,002 of principal and accrued interest into 193,633 shares of our common stock.
On September 9, 2016, the holder of our convertible promissory note dated February 3, 2016, converted $7,268 of principal into 285,000 shares of our common stock.
On September 22, 2016, the holder of our convertible promissory note dated February 3, 2016, converted $3,065 of principal into 299,000 shares of our common stock.
- 14 -
On September 29, 2016, the holder of our modified convertible promissory note dated August 30, 2016, converted $1,558 of principal and accrued interest into 259,635 shares of our common stock.
On September 29, 2016, the holder of our convertible promissory note dated February 3, 2016, converted $1,928 of principal into 315,000 share of our common stock.
On October 10, 2016, the holder of our modified convertible promissory note dated August 30, 2016, converted $1,713 of principal and accrued interest into 339,142 shares of our common stock.