Debt Instruments | 9 Months Ended |
31-May-14 |
Notes to Financial Statements | ' |
Note 9 - Debt Instruments | ' |
Asset-Based Debt Financing |
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On April 11, 2013, the Company executed a non-dilutive asset-based debt financing (the “Lender Financing”) with a third party (the “Lender”). The Lender Financing consists of a $250,000 line of credit secured by all of the Company’s assets. The Company’s management also executed limited recourse guarantees with the Lender. Interest is payable monthly based on a floating interest rate determined based on a formula outlined in detail within the financing agreement. The Company anticipates the effective monthly interest rate charged on the outstanding balance owed to the third party will be between 2.2% and 1.1%. The Lender Financing was due and payable in full on September 30, 2013. |
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Subsequently on June 20, 2014, the Company executed an extension to this agreement whereby the maturity date has been extended to September 30, 2015. The Lender financing is currently capped at $520,000 in which begins decreasing to $500,000 on September 30, 2014; $450,000 on December 31, 2014; $400,000 on March 31, 2015; and $300,000 on June 30, 2015. |
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Convertible Notes Payable |
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Creditor |
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The Company has relied on financing from a lender since 2010 (the “Creditor”). Each note issued by the Creditor (the “Creditor Notes”) bears interest per annum at a rate of 8%, default interest rate of 22% and is generally payable within six months from the issuance date. The table below details the transactions with the Creditor during the nine months ended May 31, 2014. The Company is currently in default on these Creditor’s Notes. |
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Creditor’s Notes, in default, principal balance as of August 31, 2013 | | $ | 230,500 | |
Proceeds received from Creditor | | | 42,500 | |
Conversion of a portion of Creditor’s Note to common stock (25,499,783 common shares issued) | | | (127,356 | ) |
Assignment of Creditor Note | | | (145,644 | ) |
Creditor’s Notes, principal balance as of May 31, 2014 | | $ | - | |
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In April 2014, the Creditor entered into an exchange agreement with another lender whereby they transferred their interest in the Creditor Notes to the other lender. See below for additional information. |
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Creditor #2 |
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In April 2014, the Creditor entered into an exchange agreement with another lender (the “Creditor #2”). Whereby the Creditor transferred the Creditor's notes and accrued interest to Creditor #2. In April, the Company entered i) a note agreement for $284,560 representing amounts transferred from the Creditor; ii) two $125,000 notes in which the proceeds were received on the same date (collectively referred to as the “Creditor #2 Notes”) with Creditor #2. The Creditor #2 Notes bears interest per annum at 10.0%, payable six months after the issuance date and is convertible on the date of issuance based upon based upon a 45% discount to lowest trading price, for the 15 trading days prior to conversion. As a result, the lower the stock price at the time the Creditor #2 converts the Creditor #2 Notes, the more common shares the Creditor #2 will receive.. The table below details the transactions with the Creditor #2 during the nine months ended May 31, 2014. |
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Creditor #2’s Notes, principal balance as of August 31, 2013 | | $ | - | |
Assignment of Creditor Note and accrued interest | | | 284,560 | |
Proceeds received from Creditor #2 | | | 250,000 | |
Conversion of a portion of Creditor #2’s Note to common stock (11,031,476 common shares issued) | | | (35,765 | ) |
Creditor #2’s Notes, principal balance as of May 31, 2014 | | $ | 498,795 | |
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To the extent the Creditor #2 converts the Creditor #2 Notes and then sells its common stock, the market price of the common stock may decrease due to the additional shares in the market. This could allow the Creditor #2 to receive greater amounts of common stock upon conversion. The sale of each share of common stock could further depress the stock price. Due to the floating conversion price of the notes, the Company does not know the exact number of shares that the Creditor #2 would be issued upon conversion. The table below details the number of shares of the Company’s common stock the Creditor #2 would be issued, if the Creditor #2 elected to convert the Creditor #2 Notes to common shares on each reporting date. The shares issuable upon conversion of the Creditor #2 Notes may result in substantial dilution to the interests of the Company’s other shareholders. In this regard, even though the investor may not hold shares amounting to more than 9.99% of the outstanding shares at one time, this restriction does not prevent the investor from selling some of its holdings and then receiving additional shares. In this way, the investor could sell more than the 9.99% limit while never holding more than the limit. |
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The table below details the number of shares issuable to the Creditor #2, without regard to the 9.99% limitation, in the event the share price decreases 25%, 50% or 75% from the stock price as of each date set forth below. |
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| | May 31, | |
2014 |
Stock price | | $ | 0.006 | |
Effective conversion price | | $ | 0.0023 | |
Creditor Note and accrued interest balance outstanding | | $ | 498,795 | |
Actual outstanding shares of common stock | | | 96,358,010 | |
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Shares issuable upon conversion, at actual price | | | 221,194,718 | |
% of outstanding common stock, at actual price | | | 230 | % |
Shares issuable upon conversion, assuming 25% price decrease | | | 294,926,291 | |
% of outstanding common stock, assuming 25% price decrease | | | 306 | % |
Shares issuable upon conversion, assuming 50% price decrease | | | 442,389,437 | |
% of outstanding common stock, assuming 50% price decrease | | | 459 | % |
Shares issuable upon conversion, assuming 75% price decrease | | | 884,778,874 | |
% of outstanding common stock, assuming 75% price decrease | | | 918 | % |
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Due to the significant change in terms and amounts payable between the Creditor Notes and Creditor #2 Notes, the Company accounted for the transaction as an extinguishment of the Creditor Note on the date of the exchange. In connection with this extinguishment, the Company recorded a loss on extinguishment of $1,439,044 as the derivatively liability associated with the Creditor #2 Notes was significantly greater in value than that of the Creditor Notes. See below for valuation methods used to determine the fair value of the Company's derivative liabilities |
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In addition, due to the recording of a derivative liability in connection with the $250,000 in proceeds received from the Creditor #2. The Company recorded a full discount to these notes in which is being amortized over the term of the Creditor #2 Notes using the straight line method. During the three and nine months ended May 31, 2014, $62,498 was amortized to interest expense with $187,502 of the discount remaining as of May 31, 2014. |
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Vendor Convertible Note |
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The Company issued a non-interest bearing convertible promissory note due on demand (the “Vendor Note”) to settle all outstanding debts with a former vendor (the “Vendor”). The table below details the transactions with the Vendor during the nine months ended May 31, 2014. |
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Vendor Notes, principal balance as of August 31, 2013 | | $ | 96,500 | |
Conversion of Vendor Note to common stock (18,000,000 common shares issued) | | | (46,200 | ) |
Vendor Note, principal balance, May 31, 2014 | | $ | 50,300 | |
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As of May 31, 2014, the conversion price of the $50,300 Vendor Note is based upon a 50% discount to lowest five days bid prices of the Company’s common stock over the five-day period prior to conversion. As a result, the lower the stock price at the time the Vendor converts the Vendor Note, the more common shares the Vendor will receive. To the extent the Vendor converts the Vendor Note and then sells its common stock, the common stock may decrease due to the additional shares in the market. This could allow the Vendor to receive greater amounts of common stock upon conversion. The sale of each share of common stock further depresses the stock price. Due to the floating conversion price of the notes, the Company does not know the exact number of shares that the Vendor would be issued upon conversion. The table below details the number of shares of the Company’s common stock the Vendor would be issued, if the Vendor elected to convert the Vendor Note to common shares on each reporting date. The shares issuable upon conversion of the Vendor Note may result in substantial dilution to the interests of the Company’s other shareholders. |
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The table below details the number of shares issuable to the Vendor in the event the share price decreases 25%, 50% or 75% from the stock price as of each date set forth below. |
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| | May 31, | |
2014 |
Stock price | | $ | 0.006 | |
Effective conversion price | | $ | 0.0021 | |
Convertible promissory notes balance outstanding | | $ | 50,300 | |
Actual outstanding shares of common stock | | | 96,358,010 | |
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Shares issuable upon conversion, at actual price | | | 24,526,829 | |
% of outstanding common stock, at actual price | | | 25 | % |
Shares issuable upon conversion, assuming 25% price decrease | | | 32,702,439 | |
% of outstanding common stock, assuming 25% price decrease | | | 34 | % |
Shares issuable upon conversion, assuming 50% price decrease | | | 49,053,659 | |
% of outstanding common stock, assuming 50% price decrease | | | 51 | % |
Shares issuable upon conversion, assuming 75% price decrease | | | 98,107,317 | |
% of outstanding common stock, assuming 75% price decrease | | | 102 | % |
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Convertible Promissory Notes |
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As of May 31, 2014, the Company has ten convertible promissory notes issued between December 2011 and May 2014. The convertible promissory notes bear interest at ether 4% or 8% per annum and are due in full, including principal and interest, three years from the issuance date ranging from December 2014 to August 2016. The convertible promissory notes also include a conversion option whereby the holders o may elect at any time to convert any portion or the entire balance into the Company’s common stock at conversion prices ranging from $0.0038 to $1.25. The table below details the transactions associated with the convertible promissory notes during the nine months ended May 31, 2014. |
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Convertible promissory notes, principal balance as of August 31, 2013 | | $ | 835,000 | |
Issuance of convertible promissory notes | | | 25,000 | |
Conversion of convertible promissory notes to common stock | | | - | |
Convertible promissory notes, principal balance, May 31, 2014 | | $ | 860,000 | |
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Of the $860,000 of convertible promissory notes outstanding, $540,000 are held by related parties. These related parties consist of the Company's officers, significant shareholders or entities controlled by these individuals. As of May 31, 2014, $135,000 of these notes were included within the current portion of convertible promissory notes on the accompanying balance sheet as the note was due within one year of the balance sheet. |
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For eight of the convertible promissory notes, the conversion feature associated with the convertible promissory note provide for a rate of conversion that is below market value. This conversion feature is accounted for as a beneficial conversion feature. A beneficial conversion feature was recorded and classified as a debt discount on the balance sheet at the time of issuance of each convertible promissory note with a corresponding credit to additional paid-in capital. |
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In addition, six of the convertible promissory notes received warrants to purchase shares of the Company's common stock. The valuation of the stock warrants and the beneficial conversion feature associated with the issuance of convertible promissory notes utilized valuation inputs and related figures provided by a professional and independent valuation firm. The Company allocated the a portion of the proceeds received from the convertible promissory notes to the warrants using the relative fair value resulting in a debt discount to each convertible promissory note. |
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The discount is amortized over the term of the convertible promissory note using the straight line method. The amortized value for each period is recorded as an offset against the debt discount on the balance sheet, classified as interest expense - accretion in the statement of operations and as accretion of debt discount within the statement of cash flows. During the nine months ended May 31, 2014, the Company recorded a beneficial conversion feature of $22,895 in connection with the issuance of $25,000 in convertible notes. During the nine months ended May 31, 2014 and 2013, $39,097 and $19,224 of the discounts were amortized to interest expense, respectively. |
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Future maturities of the principal balances of the Company’s convertible promissory notes, in the aggregate, are as follows for the years ending August 31, |
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2014 | | $ | 125,000 | |
2015 | | | 625,000 | |
2016 | | | 110,000 | |
Thereafter | | | - | |
| | $ | 860,000 | |