| Convertible Promissory Note | 13. Convertible Promissory Note On June 24, 2014, the Company entered into
a securities purchase agreement with Typenex Co-Investment, LLC, a Utah limited liability company. Under this agreement, the Company
has issued a secured convertible promissory note in the original principal amount of $1,105,000, deliverable in eleven tranches
(the “Typenex Note”). On the closing date, Typenex delivered the initial cash purchase price of $150,000, plus any
interest, costs, fees or charges accrued under the Typenex Note, including the original issue discount of $20,000. The outstanding
principal and accrued and unpaid interest on the Typenex Note is convertible at any time into shares of common stock at a conversion
price of $1.00, subject to adjustment as described below (the “Lender Conversion Price”). As of June 24, 2014, the
Company evaluated the Beneficial Conversion Feature under this note and determined as of June 24, 2014, there was no beneficial
conversion feature as the Lender Conversion Price exceeded the fair market value of the Company’s common stock. As of November 30, 2014, the company has received
net proceeds of $135,000 related to this convertible promissory note, representing $150,000 less financing costs of $15,000. Each subsequent tranche will be in the amount
of $85,000, plus any interest, costs, fees or charges accrued thereon under the terms of the Typenex Note, including the original
issuer discount of $8,500. Each tranche will be accompanied by its own secured investor note (the “Investor Notes”).
The Company has agreed to pay $5,000 to cover Typenex’s legal fees, accounting costs, due diligence, monitoring and other
transaction costs in connection with the purchase and sale of the Typenex Note. All loans received bear an interest rate of 10%
per annum. The loan is due 23 months after the initial cash purchase price is delivered to the Company. Typenex has pledged a 40%
membership interest in Typenex Medical, LLC to secure its obligations under all of the Typenex Notes. A warrant to purchase shares of the Company
has been issued to Typenex as of June 24, 2014. This warrant grants Typenex the ability to purchase a number of fully paid and
non-assessable shares of the Company’s stock, par value $0.001, equal to $552,500 divided by the market price. This warrant
is issued pursuant to the terms of the securities purchase agreement as described above. Provided there is an outstanding balance,
the Company will pay an installment amount equal to $61,388.89 plus any accrued and unpaid interest on the installment due date,
which is six months after the initial loan disbursement. This installment amount is the maximum that must be paid on any given
installment due date, and is limited by the amounts owed. This amount can be converted at the lesser of either the lender conversion
price or at 70% of the average of the three lowest closing bid prices in the 20 trading days immediately preceding the applicable
conversion. Should the average trading price be less than $0.35 during any such period, then the conversion factor will be reduced
to 65% for all future conversion, additionally the conversion price will be reduced by 5% if the Company’s common stock
is not available for DWAC. Should the Company decide to prepay this amount, there is a prepayment premium equal to 125% of the
outstanding balance of the Typenex Note. Should the prepayment premium not be paid within 2 days of the prepayment notice, the
Company forfeits its right to prepay the Typenex Note. Under this agreement, Typenex has the right
at any time after the purchase price date until the outstanding balance has been paid in full to convert any or all of the outstanding
balance into shares of the Company’s common stock under the following formula: the number of shares issued equals the amount
being converted divided by $1. These shares must be delivered to Typenex within three trading days of the conversion notice being
given to the Company. Should any shares be sold to Typenex or any third party at a value that is less than the effective lender
conversion price, then the lender conversion price will be reduced to equal such lower issuance price. The effective lender conversion
price will also be adjusted as needed upon any forward or reverse split of the Company’s shares. Should the Company fail
to deliver the shares in a timely manner, a late fee of the greater of $500 per day and 2% of the applicable lender conversion
share value rounded to the nearest multiple of $100 will be assed for each day after the third that the Company is late (though
not exceeding 200% of the applicable lender conversion share value. In the event of a default, the Typenex Note
may be accelerated by Typenex by providing written notice to the Company. The outstanding balance is immediately due and payable
at the greater of the outstanding balance divided by the installment conversion price, or the default effect, which is calculated
by multiplying the conversion eligible outstanding balance by 15% for each major default or 5% for each minor default and then
adding the resulting product to the outstanding balance as of the date of default. In addition, an interest rate of the lesser
of 22% per annum (or the maximum rate permitted under law) will be applied to the outstanding balance. Typenex is prohibited from
owning more than 4.99% of the Company’s outstanding shares, unless the market capitalization of the Company’s common
stock is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company’s outstanding
shares. On a date that is 23 trading days from each
date that the Company delivers conversion shares to Typenex, there is a true-up date in which the Company will deliver additional
shares if the installment conversion price on that date is less than the installment conversion price used in the applicable installment
notice. These additional shares will be equal to the difference between the number of shares that would be delivered to Typenex
at the time of the true-up date and the amount originally delivered.\ Notice of Default – on January 9, 2015,
the Company received a Notice of Default from Typenex under the Convertible Promissory Note described in Note 12 above. In the
letter, the noteholder described two major defaults where the Company failed to meet its obligations under the Typenex Note. The
first default was triggered on December 16, 2014 related to a request from the noteholder to increase the number of shares reserved
for issuance under the Typenex Note on the books of the Company’s transfer agent. The second default was triggered on December
27, 2014, when the Company failed to make its first installment payment of $61,888.89 according to the terms of the Typenex Note.
Each default triggered a penalty of 115% of the then outstanding principal and accrued and unpaid interest and triggers the interest
rate to 22%. As of January 9, 2015, the outstanding principal, accrued interest and accrued penalties on the Typenex Note was
$239,483.61. On January 23, 2015, the Company satisfied its first default by instructing its transfer agent to reserve a total
of 5,092 (50,925,000 pre-split) shares of common stock covering the potential conversion of the original principal value of the
Typenex Note ($1,100,000) plus common shares issuable upon the exercise of warrants underlying the Typenex Note. On February 12,
2015, the Company received a notice from Typenex waiving the penalties on the December 16, 2014 default and waived $26,755.16
of penalties imposed on December 16, 2014. Under the terms of the Typenex Note, the Lenders Conversion Price will reset to 60%
of the average of the three lowest closing bid prices of the Company’s common stock in the 20 days prior to conversion.
During the quarter ended August 31, 2015, the Company re-evaluated the Notice of Default and determined that it had previously
recorded a beneficial conversion feature incorrectly. The Company has computed a Derivative liability effective December 2014
and has corrected its statements as of February 28, 2015 to reflect this accounting treatment. As of February 28, 2015 and November
30, 2015, the Derivative Liability on the Typenex Note was $169,868 and $143,335, respectively. On February 3, 2015, the Company exercised
its borrower offset right under the Typenex Note. Through this offset right, the Company is entitled to deduct and offset any amount
owing by Typenex under the initial securities purchase agreement dated June 24, 2014 from any amount owed by the Company under
the note. The combined balance of the secured investor notes and the investor notes as of the January 28, 2015 offset date was
$890,800. In addition, the note balance prior to the offset included $85,000 of unearned original issue discounts. In conjunction with the Company’s exercise
of its offset right, the Company and Typenex each hereby acknowledge that the secured investor notes and the investor notes were
offset against the Company balances owed under the note as of the offset date, and as a result thereof, each of the secured investor
notes and the investor notes is deemed to have been paid in full and are now cancelled and terminated and the Company balance owed
under the note has been reduced to $218,028.47 as of the offset date. Additionally, the Company specifically acknowledges that
Typenex has no further obligations under any of the secured investor notes and investor notes. Further, the Company acknowledges that the
investor pledge agreement, dated June 24, 2014, and all security interests granted thereunder with respect to the collateral (as
defined in the investor pledge agreement have terminated and all such security interests shall be deemed released. Notice of Conversion
Date of Notice Principal Market Price* Conversion Shares True Up Shares Total Shares Issued
March 2, 2015 $ 14,000 $ 0.071788 1,005 — 1,005
March 31, 2015 — — — 2,204 2,204
May 14, 2015 $ 15,000 $ 0.203395 2,098 953 3,051
August 10, 2015 $ 25,000 $ 0.139860 3,496 — 3,496
Total $ 54,000 6,599 3,157 9,756 *Market Price as defined by the
Typenex Note All shares and Market Price in
the above table are stated to reflect the 10,000 to 1 reverse stock split. At August 31, 2015 and February
28, 2015, convertible notes payable included the following:
November 30, 2015 February 28, 2015
Outstanding principal balance on Typenex Note: $ 77,500 $ 131,500
Unamortized original issue discount (7,650 ) (12,870 )
Accrued interest 97,687 76,118
Net Convertible Notes Payable $ 167,537 $ 194,748 |
