Convertible Notes | 3 Months Ended |
Nov. 30, 2013 |
Convertible Notes | ' |
Convertible Notes | ' |
Note 7 – Convertible Notes |
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Convertible notes payable consist of the following as of November 30, 2013 and August 31, 2012: |
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| | 30-Nov-13 | | | 31-Aug-13 | |
Convertible notes payable, interest at 8% per annum (A) – related parties | | $ | 47,590 | | | $ | 47,590 | |
Convertible notes payable, interest at 10% per annum (B) | | | 238,482 | | | | 450,982 | |
Convertible notes payable | | | 286,072 | | | | 498,572 | |
Less: note discount | | | - | | | | (142,187 | ) |
Convertible notes payable, net of discount | | $ | 286,072 | | | $ | 356,385 | |
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(A) Asher Enterprises, Inc. (Assigned on March 21, 2013) |
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During the period November 15, 2011 to August 31, 2013, the Company issued four unsecured convertible notes (the “Asher Notes”) to Asher Enterprises, Inc. (“Asher”) in the aggregate amount of $135,500. The Asher Notes are due after one year and bear interest at 8% per annum where interest accrues and is payable in cash upon maturity provided that the elected conversion to common shares does not occur. Any amount of principal or interest on these Asher Notes which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date until the past due amount is paid. At any time or times after 180 days from the date of the Asher Notes and until the maturity dates, Asher is entitled to convert any portion of the outstanding and unpaid amount into fully paid and non-assessable shares of Common Stock. The conversion price will be based on a 49-59% discount to the average of the three lowest closing bid prices for the Company’s Common Stock during the ten trading days immediately preceding a conversion date. |
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Each of the Asher Notes includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Asher Notes is not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance and at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. |
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During the year ending August 31, 2012, $113,000 of the Asher Notes were issued. The Company determined the initial fair value of the embedded conversion feature of the Asher Notes issued during the year ended August 31, 2012 to be $258,510. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model. In accordance with current accounting guidelines, the excess of $145,510 of derivative liability created over the face amount of the Asher Notes was considered to be a debt issuance cost during the year ended August 31, 2012. As such the Company recorded an $113,000 valuation discount upon issuance. During the year ended August 31, 2012, the Company amortized $34,338 of the discount and as of August 31, 2012, the remaining discount of $78,662 is offset against the balance of the notes for financial statement presentation. During the year ended August 31, 2013, the $22,500 of the Asher Notes was issued. The Company determined the initial fair value of the embedded conversion feature of the Asher Notes issued during the year ended August 31, 2013 to be $39,846. The excess of $17,346 of derivative liability over the face amount was considered to be a loss on derivative liability and recorded a $22,500 debt discount. During the year ended August 31, 2013 the Company further amortized $92,275 of the discount and as of August 31, 2013, the remaining discount of $89,911 is offset against the balance of the notes for financial statement presentation. |
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On March 21, 2013, the Company entered into that certain Assignment, Termination and Release Agreement (the “Assignment Agreement”) by and among the Company; Asher; Samuel Kotch (“S. Kotch”) and Benjamin Kotch (“B. Kotch”) (S. Kotch and B. Kotch each an “Assignee” and collectively the “Assignees”), each the son of Eric Kotch, the Chief Financial Officer, Secretary, Treasurer and a director of the Company, pursuant to which i) Asher assigned its rights to the Asher Notes, issued pursuant to those certain corresponding securities purchase agreements (the “SPAs”); ii) the Company and Asher agreed to terminate their obligations to one another under the Asher Notes and the SPAs; and iii) the Company and Asher provided one another with complete releases of all claims, in consideration of a payment by the Assignees of $125,500 to Asher. The Company and the Assignees also entered into that certain Consent to Assignment dated March 21, 2103, whereby the Company consented to the waiver of the requirement under the SPAs that any assignee of the Asher Notes be an accredited investor. |
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During the year ended August 31, 2013, the Company issued a total of 8,070,793 shares of Common Stock at an average conversion price of $0.01 or $87,910 and $7,769 as partial repayment of the Convertible Notes and accrued interest. As a result of the conversion, $886,875 of loss on conversion of debt and accrued interest was recognized during the year ended August 31, 2013. As of August 31, 2013, the total remaining balance was $39,153, net of discount of $8,437. |
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During the three months ended November 30, 2013 the Company further amortized $8,437 leaving no remaining discount to offset against the balance of the notes for financial statement presentation. As of August November 30, 2013, the total remaining balance was $47,590. |
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The Company determined the fair value of the embedded conversion feature of all the Asher Notes as of November 30, 2013 to be $57,430. For the three months ended November 30, 2013, $32,481 was recorded as a gain on derivative from these notes resulted from the change in fair value of the conversion features. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model. |
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(B) Panache Capital, LLC |
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During the period March 5, 2012 to April 26, 2012, the Company issued four convertible promissory notes (the “March Panache Notes”) to Panache Capital, LLC (the “Panache”) for an aggregate amount of $250,000, with 10% annum interest. The Panache Notes are each due after the one year anniversary thereof. All past-due principal of the March Panache Notes bears interest at 15%. There is a 25% prepayment fee. Panache has the right to convert the March Panache Notes, in their entirety or in part, into Common Stock of the Company. The conversion price is based on a 25% discount to the average of the three lowest closing bid prices for the Company’s Common Stock during the ten trading days immediately preceding a conversion date. The Company determined the initial fair value of the beneficial conversion feature was $83,333 and was recorded by the Company as a loan discount, which is being amortized as interest expense over the life of the notes. As of August 31, 2013 and 2012, the unamortized balance of the March Panache Notes discount was $417 and $47,861, respectively. The Company recorded an additional $30,000 of debt discount, and amortized a total of $77,444 of debt discount into interest expense during the year ended August 31, 2013. |
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On September 21, 2012, the Company entered into an amendment agreement (the “Panache Amendment”) with Panache which amends the March Panache Notes. Pursuant to the Panache Amendment, the Company had the option, for 90 days after September 21, 2012 (the “Outside Date”), to redeem the March Panache Notes for 100% of their outstanding principal and interest, which it opted not to do. Additionally, Panache was not able, until the Outside Date and absent an event of default, to convert any of the March Panache Notes into Company Common Stock. Each of the March Panache Notes were further amended to permit Panache to convert the March Panache Notes at a price not to fall below a 49% discount to the average of the three lowest closing bid prices for the Company Common Stock during the ten trading days immediately preceding a conversion date. |
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The Company analyzed the modification of the term under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”. The Company determined the creditor has not granted a concession and the modification of the embedded conversion options does not fall in the scope of ASC 470-50. |
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On September 21, 2012, the Company issued a convertible promissory note (the “September Panache Note” and together with the March Panache Notes, the “Panache Notes”) to Panache in the principal amount of $30,000, with 10% annum interest. The September Panache Note is due after the one year anniversary thereof. All past-due principal of the September Panache Note bears interest at 15%. There is a 25% prepayment fee. Panache has the right to convert the September Panache Note, in its entirety or in part, into Common Stock of the Company. The original conversion price was based on a 49% discount to the average of the three lowest closing bid prices for the Company’s common stock during the ten trading days immediately preceding a conversion date. |
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The March and September Panache Note includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of Common Stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the September Panache Note is not a fixed amount because it is subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance and at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. |
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During the year ended August 31, 2013, the Company paid $25,000 and issued a total of 4,018 shares of Common Stock at an average conversion price of $1.00 or $4,018 in partial repayment of the Panache Notes. As of August 31, 2013 and 2012, the total remaining balance outstanding to Panache under the Panache Notes was $250,565 and $212,739, net of discount of $417 and $47,861, respectively. |
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During the three months ended November 30, 2013, the Company paid $12,500 in partial repayment of the Panache Notes. As of November 30, 2013, the total remaining balance outstanding to Panache under the Panache Notes was $238,482. |
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The Company determined the fair value of the embedded conversion feature for the March and September Panache Notes as of November 30, 2013 to be $247,345 and $5,297, respectively. For the three months ended November 30, 2013, $246,921 and ($3,434) was recorded as gain (loss) on derivative for the March and September Panache Notes, respectively resulted from the change in fair value of the conversion features. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model. |
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Kevin Mulhearn |
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On June 21, 2013, the Company issued an unsecured convertible promissory note to Kevin Mulhearn (“Mulhearn”) in the principal amount of $200,000, with 10% annum interest. The note is due on December 21, 2013. The note is convertible, in its entirety or in part, into Common Stock of the Company. The conversion price is the average of the three trading days prior to conversion, and the principal that will be converted is $400,000. |
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Under ASC 815-15 “Derivative and Hedging”, the Company determined that the convertible feature of the note should be classified as a derivative liability. See footnote 10 for further information on the impact. The derivative resulted in a debt discount of $200,000, of which $66,667 has been amortized into interest expense. As of August 31, 2013, the total remaining balance outstanding to Kevin Mulhearn was $66,667, net of discount of $133,333. |
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On October 2, 2013 the Company entered into a Project Collaboration and Profit Sharing Agreement (“Collaboration Agreement”) with Mulhearn (See Note 11), at which time the Company reclassified the balance owed on the $200,000 unsecured convertible note to additional paid in capital. In addition, the Company expensed the remaining debt discount balance of $133,333 to interest expense during the three months ended November 30, 2013. |