| Note 8 - Debt Instruments | Asset-Based Debt
Financing 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 for a 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 3.2% and 1.1%. On January 22, 2016,
the Company executed an addendum to the Lender Financing agreement whereby the maturity date has been extended to December 15,
2016 with interest calculated at Prime plus 15.25% per annum. In the event the facility is below $750,000 prior to March 15, 2016
the interest rate shall be Prime plus 12.5%; below $500,000 prior to June 15, 2016 the interest rate shall be Prime plus 10%. Vendor Convertible
Note On November 1, 2012,
the Company issued a convertible note for $140,000 (the "Vendor Note") to a former Vendor ("Vendor"). The
Vendor Note was executed on November 1, 2012 and was immediately convertible into the Company's common stock at a 50% discount
to the lowest bid price for the five days prior to the conversion date. As of August 31, 2015, the note was fully converted. Creditor #2 Convertible
Promissory Notes 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 into 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 bear interest per annum at 10.0%, payable six
months after the issuance date and are 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. There were no conversions during the nine months ended
May 31, 2016 and thus the remaining principal balance was $391,242 as of May 31, 2016 and August 31, 2015. 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 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. During the nine months
ended February 28, 2015, the Company amortized a discount of $62,500 to interest expense. As of August 31, 2015, the discount was
fully amortized. Creditor #3 Convertible
Promissory Note In December 2014, a convertible
promissory note holder ("Holder") entered into an exchange agreement with another lender (the "Creditor #3")
whereby the Holder transferred the Holder's notes and accrued interest to Creditor #3. In December 2014, the Company entered into
i) a note agreement for $150,000 representing the principal amount transferred from the Holder. The Creditor #3 Note bears interest
per annum at 10.0%, due on August 22, 2015 and is convertible on the date of issuance based upon based upon a 25% discount to lowest
trading price, for the 5 trading days prior to conversion. As a result, the lower the stock price at the time the Creditor #3 converts
the Creditor #3 Notes, the more common shares the Creditor #3 will receive. There were no conversions during the nine months ended
May 31, 2016 and thus the remaining principal balance was $93,350 as of May 31, 2016 and August 31, 2015. To the extent the Creditor
#3 converts the Creditor #3 Note 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 #3 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 #3 would be issued upon conversion. The shares issuable upon
conversion of the Creditor #3 Note 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 4.99% 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 4.99% limit while never holding more than the limit. Upon issuance, the Company
recorded a discount of $150,000 due to the derivative liability, as discussed below in Note 9, having a fair market value in excess
of the principal amount of the convertible note. As of August 31, 2015, the discount was fully amortized. Convertible Promissory
Notes As of May 31, 2016 and
August 31, 2015, the Company has outstanding 38 and 33 convertible promissory notes respectively issued between December 2011 and
September 2015. The convertible promissory notes bear interest at either 4% or 8% per year and are due in full, including principal
and interest, two-three years from the issuance date ranging from August 2014 to February 2018. The convertible promissory notes
also include a conversion option whereby the holders may elect at any time to convert any portion or the entire balance into the
Company's common stock at conversion prices ranging from $0.0001 to $1.25. There were no transactions in which impacted the convertible
notes payable during the nine months ended May 31, 2016, other than the accrual of interest. As of May 31, 2016 and August 31,
2015, the balance of convertible notes payable was $1,702,120 and $1,615,120 respectively. As of May 31, 2016 and
August 31, 2015, convertible promissory notes outstanding of $1,153,964 and $1,068,964 respectively, are held by related parties.
These related parties consist of the Company's officers, former officers, significant shareholders or entities controlled by these
individuals. As of May 31, 2016 and August 31, 2015, $938,464 and $197,850, respectively, 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. For some of the convertible
promissory notes, the conversion feature associated with the convertible promissory notes 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. In addition, six of the
convertible promissory note purchasers were issued 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 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. The discounts are 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. During the nine months ended May 31,
2016 and 2015, $370,463 and $427,390 of the discounts were amortized to interest expense, respectively. As of May 31, 2016, $247,324
discounts remained which will be expensed in fiscal 2016 through 2018. Future Maturities As of August 31, 2015,
future maturities of notes payable is as follows for the years ending August 31; $957,442 current; $1,067,270 2017; and $75,000
2018. Included within those amounts due to related parties are: $197,820 current and $871,114 for 2017. |
