Convertible Notes Payable | Note 7. Convertible Notes Payable Convertible notes payable consist of the following as of August 31, 2016 and February 29, 2016 : Issued Maturity Interest Rate Conversion Rate per Share Balance August 31, 2016 Balance February 29, 2016 February 28, 2011 February 27, 2013 7% $0.015 $ 32,600 $ 32,600 January 31, 2013 February 28, 2017 10% $0.01 119,091 120,562 May 31, 2013 November 30, 2016 10% $0.01 261,595 261,595 November 30, 2013 November 30, 2017 10% $0.01 396,958 396,958 August 31, 2014 August 31, 2016 10% $0.002 355,652 355,652 November 30, 2014 November 30, 2016 10% $0.002 103,950 103,950 February 28, 2015 February 28, 2017 10% $0.001 63,357 63,357 May 31, 2015 May 31, 2017 10% $1.00 65,383 65,383 August 31, 2015 August 31, 2017 10% $0.30 91,629 91,629 November 30, 2015 November 30, 2018 10% $0.30 269,791 269,791 February 3, 2016 February 3, 2017 5% 49% discount 24,705 46,000 February 29, 2016 February 28, 2019 10% 60% discount 95,245 95,245 March 22, 2016 March 22, 2017 5% 49% discount 60,000 — May 31, 2016 May 31, 2019 10% 60% discount 35,100 — July 18, 2016 July 18, 2017 8% 49% discount 9,000 — August 30, 2016 August 30, 2017 8% 50% discount 25,000 — Total convertible notes payable $ 2,009,056 $ 1,902,722 Less: short-term convertible notes payable (118,704 ) (46,000 ) Less: current portion of convertible notes payable (1,093,257 ) (937,716 ) Less: discount on noncurrent convertible notes payable (371,900 ) (500,485 ) Long-term convertible notes payable, net of discount $ 425,195 $ 418,521 Current portion of convertible notes payable 1,093,257 937,716 Less: discount on current portion of convertible notes payable (350,560 ) (422,298 ) Current portion of convertible notes payable, net of discount $ 742,697 $ 515,418 Short-term convertible notes 118,704 46,000 Less: discount on short-term convertible notes (39,165 ) (7,333 ) Short-term convertible notes, net of discount $ 79,539 $ 38,667 All of the notes above are unsecured. The note dated February 28, 2011 is currently is in default and bears default interest at 18% per annum. Convertible notes issued Issued Maturity Interest Rate Conversion Rate per Share Amount of Note Original Issue Discount Beneficial Conversion Feature March 22, 2016 March 22, 2017 5% 49% discount (1) $ 40,000 $ 6,500 $ — May 31, 2016 May 31, 2019 10% 60% discount (2) 35,100 — 35,100 July 18, 2016 July 18, 2017 8% 49% discount (1) 9,000 2,000 — August 30, 2016 August 30, 2017 8% 50% discount (3) 25,000 — — Total $ 108,420 $ 8,500 $ 35,100 (1) This note is convertible at 49% discount to the lowest trading price over the preceding 20 trading days. The note becomes convertible 180 days after issuance. (2) This note is convertible at a 60% discount to the volume weighted average closing price over the preceding five trading days, subject to the condition that the conversion price shall never be less than $0.01 per share. (3) This note is convertible at 50% discount to the lowest trading price over the preceding 20 trading days. As this note was a modification of an existing note that was convertible, it is immediately convertible. Advances Refinanced into Convertible Notes During the six months ended August 31, 2016, we refinanced $35,100 of non-interest bearing advances into a convertible note. All principal and accrued interest is payable on the maturity date. The Company evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock Convertible Notes Issued for Cash On March 22, 2016, we issued a convertible promissory note for $40,000. The note has an original issue discount of $6,500. The note matures on March 22, 2017, and bears interest at 5% per annum. The terms on the note allow the noteholder to convert principal and accrued interest into shares of our common stock beginning 180 days after issuance. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days. On August 30, 2016, we issued a convertible promissory note with a face value of $31,320. The note has an original issue discount of $6,320. The note matures on August 30, 2017, and bears interest at 8% per annum. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock beginning 180 days after issuance. The variable conversion rate is a 50% discount to the lowest trading price over the preceding 20 trading days. As of August 31, 2016, we had not received the cash proceeds from this note, so these funds appear on the balance sheet as “Note proceeds receivable.” The funds were received subsequent to the end of the quarter, and is considered a subsequent event. We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock Convertible Notes Issued for payment of Accounts Payable On July 18, 2016, we issued a convertible promissory note for $9,000, with an original issue discount of $2,000. The note matures on July 18, 2017, and bears interest at 8% per annum. The noteholder paid the proceeds from this note directly to one of our vendors to reduce our outstanding account payable. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock immediately upon issuance. We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock The terms of the convertible note required us to issue 900,000 warrants with a strike price of $0.01 per share, with a maturity date of July 18, 2021. We recognized $117,058 derivative liability, which was immediately recognized as a loss on derivative instruments. Violation of Debt Covenants We violated the terms of our agreements for the convertible notes dated February 3, 2016 and March 22, 2016 on July 20, 2016 and July 25, 2016, respectively. The agreement had required us to file all quarterly and annual reports with the SEC on time. We filed our quarterly report on form 10-Q for the period May 31, 2016 after the deadline. As a result, the annual interest rate on each note increased from 5% per year to 18% per year. Additionally, the agreement called for us to increase the principal balance of the notes by 50% of their original face value. We recognized a loss on debt covenant violations of $23,000 and $20,000 on the notes dates February 3, 2016 and March 22, 2016, respectively. $25,000 of one of the note was re-assigned to another note holder and convertible immediately. The conversion feature was determined to be derivative liabilities, see Note 8. Conversions to common stock During six months ended August 31, 2016, the holders of the Convertible Note Payable dated January 31, 2013 elected to convert principal and accrued interest in the amounts show below into shares of common stock at a rate of $0.01 per share. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion. Date Amount Converted Number of Shares Issued March 1, 2016 $ 1,900 190,000 August 8, 2016 9,871 175,000 August 26, 2016 9,425 264,000 Total $ 21,196 629,000 |