| Note 8 - Debt Instruments | Line
of Credit 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 Companys assets. The
Companys 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 approximately 9.75%. 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%. On
September 6, 2016, the Company executed an addendum to this agreement whereby the maturity date has been extended to November
16, 2017. The line of credit was also increased to $1,055,000. On
June 1, 2017, the Company executed an addendum to this agreement whereby the maturity date has been extended to May 15, 2018 with
interest calculated at Prime plus 6.25%. The line of credit was also increased to $1,123,642 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 Creditors 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 six months ended February 28, 2017 and February 29, 2016. The remaining principal balance was $391,242 as of February
28, 2017 and August 31, 2016. The convertible notes were due October 2014, however, as of the date of this filing there have been
no demands or notifications of default received from the holder. Based upon the agreements, at the time of default the Company
was potentially liable for $90,000 in additional penalties. During the six months ended February 28, 2017, the Company recorded
$90,000 in penalties as accrued interest and interest expense. The impact of the penalty wasnt significant to previously
issued financial statements as well as the current six month period being reported on. The penalty doesnt incur interest
and isnt convertible into shares of the Companys common stock. 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 Companys
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. 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 Holders 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 six months ended February 28, 2017 and February 29, 2016. In September 2016, the Creditor
#3 note and accrued interest was satisfied by the Company for $25,000. The Company recorded a gain on extinguishment of $150,387
during the six months ended February 28, 2017. The gain consisted of forgiven principal and accrued interest of $98,184 and removal
of the derivative liability of $52,203. The remaining principal balance was $93,350 as of August 31, 2016. Convertible
Promissory Notes As
of February 28, 2017 and August 31, 2016, in addition to the notes owing to Creditors #2 and #3 (above) the Company has outstanding
35 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 Companys common stock at conversion
prices ranging from $0.0001 to $0.50. There were no transactions in which impacted these 35 convertible notes payable during the
six months ended February 28, 2017 and February 29, 2016, other than the accrual of interest. As of February 28, 2017 and August
31, 2016, the balance of convertible notes payable was $1,704,895 and $1,704,895, respectively. As
of February 28, 2017 and August 31, 2016, 26 of the above mentioned 35 convertible promissory notes with outstanding balances
totaling $1,103,964 and $1,103,964 respectively, are held by related parties. These related parties consist of the Companys
officers, Directors, significant shareholders or entities controlled by these individuals. 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. 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
six months ended February 28, 2017 and February 29, 2016, $109,728 and $246,976 of the discounts were amortized to interest expense,
respectively. As of February 28, 2017, $14,108, all of which is on non-related party notes discounts remained which will be expensed
in fiscal 2017 through 2018. |
