| Convertible Notes | Note 5 Convertible Notes
May 31, 2017 November 30, 2016
Series A Notes:
Principal value of 10%, convertible at $2.00 at November 30, 2016. $ - $ 12,500
Fair value of bifurcated embedded conversion option of Series A Notes - 12,000
Debt discount - (2,194 )
Carrying value of Series A Notes - 22,306
Series B Notes:
Principal value of 10%, convertible at $2.00 at November 30, 2016. - 55,000
Fair value of bifurcated embedded conversion option of Series B Notes - 55,000
Debt discount - (19,229 )
Carrying value of Series B Notes - 90,771
Series C Notes:
Principal value of 10%, convertible at $1.55 at November 30, 2016. - 576,383
Fair value of bifurcated embedded conversion option of Series C Notes - 838,000
Debt discount - (250,969 )
Carrying value of Series C Notes - 1,163,414
Series D Notes:
Principal value of 10%, convertible at $1.85 at November 30, 2016. - 160,000
Debt discount - (140,961 )
Carrying value of Series D Notes - 19,039
Series E Notes:
Principal value of 10%, convertible at $2.50 at May 31, 2017 and November 30, 2016. 30,000 180,000
Debt discount (5,477 ) (124,164 )
Carrying value of Series E Notes 24,523 55,836
Secured Convertible Debenture:
Principal value of 5%, convertible at $3.59 and $2.98 at May 31, 2017 and November 30, 2016, respectively. 3,500,000 1,500,000
Fair value of bifurcated contingent put option of Secured Convertible Debenture 49,833 72,000
Debt discount (693,650 ) (297,000 )
Carrying value of Secured Convertible Debenture Note 2,856,183 1,275,000
Total short-term carrying value of convertible notes $ 2,880,706 $ 2,394,849
Total long-term carrying value of convertible notes $ - $ 231,517
Series A Notes The Series A convertible notes payable
(the Series A Notes) are due and payable 18 months after issuance and bear interest at 10% per annum. At
the election of the holder, outstanding principal and accrued but unpaid interest under the Series A Notes is convertible into
shares of the Companys common stock at any time prior to maturity at a conversion price per share equal to the higher
of: (i) forty percent (40%) discount to the average closing price for the ten (10) consecutive trading days immediately preceding
the notice of conversion or (ii) $1.25 per share. At maturity, any remaining outstanding principal and accrued but unpaid
interest outstanding under the Series A Notes will automatically convert into shares of the Companys common stock
under the same terms. As of May 31, 2017, the Company has no Series A Notes outstanding. Series B Notes The Series B convertible notes payable
(the Series B Notes) have the same terms as the Series A Notes. As of May 31, 2017, the Company has no Series B Notes
outstanding. Series C Notes The Series C convertible notes payable
(the Series C Notes) are due and payable 18 months after issuance and bear interest at 10% per annum. At
the election of the holder, outstanding principal and accrued but unpaid interest under the Series C Notes is convertible into
shares of the Companys common stock at a conversion price per share equal to the lesser of a 40% discount to the average
closing price for the 10 consecutive trading days immediately preceding the notice of conversion or $1.55, but in no event shall
the conversion price be lower than $1.25 per share. If the average VWAP, as defined in the agreement, for the ten trading
days immediately preceding the maturity date $5.00 or more, any remaining outstanding principal and accrued but unpaid interest outstanding
under the Series C Notes will automatically convert into shares of the Companys common stock under the same terms. The terms of the Series C Notes also provided
that up until maturity date, the Company cannot enter into any additional, or modify any existing, agreements with any existing
or future investors that are more favorable to such investor in relation to the Series D Note holders, unless, the Series C Note
holders are provided with such rights and benefits (Most Favored Nations Clause). As of May 31, 2017, the Company
has no Series C Notes outstanding. Series D Notes The Series D convertible notes payable
(the Series D Notes) are due and payable 18 months after issuance and bear interest at 10% per annum. At
the election of the holder, outstanding principal and accrued but unpaid interest under the Series D Notes is convertible into
shares of the Companys common stock at a fixed conversion price per share equal to $1.85. The Series D Notes
automatically convert upon maturity at $1.85 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or
greater. Additionally, if the Companys common shares are up-listed to a senior exchange such as the AMEX or NASDAQ,
all monies due under the Series D Notes will automatically convert at $1.85 per share. The terms of the Series D Notes also included
the Most Favored Nations Clause. The Most Favored Nations Clause was viewed as providing the Series D Note holder with down-round
price protection. As such, the embedded conversion option in the Series D Note was separately measured at fair value upon
issuance, with subsequent changes in fair value recognized in current earnings. On September 30, 2016, the Company amended
the Most Favored Nations Clause of the Series D Notes to restrict the Company from taking dilutive action without the Series D
note holders consent, effectively removing the down-round price protection. At the amendment date, the conversion price
of the amended Series D Notes was below the quoted market price of the Companys common stock. As such, the Company recognized
a beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount
to the amended Series D Notes of $160,000 with a corresponding credit to additional paid-in capital. The resulting debt discount
is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized
to interest expense over the notes term. As of May 31, 2017, the Company has no Series D Notes outstanding. Series E Notes The Series E convertible notes payable
(the Series E Notes) are due and payable 18 months after issuance and bear interest at 10% per annum. At
the election of the holder, outstanding principal and accrued but unpaid interest under the Series E Notes is convertible into
shares of the Companys common stock at a fixed conversion price per share equal to $2.50. The Series E Notes
automatically convert upon maturity at $2.50 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or
greater. Additionally, if the Companys common shares are up-listed to a senior exchange such as the AMEX or NASDAQ,
all monies due under the Series E Notes will automatically convert at $2.50 per share. At the issuance date, the conversion price
of the Series E Notes was below the quoted market price of the Companys common stock. As such, the Company recognized a
beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount
to the Series E Notes of approximately $141,000 with a corresponding credit to additional paid-in capital. The resulting debt discount
is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized
to interest expense over the notes term. Secured Convertible Debentures On November 29, 2016, the Company entered
into a securities purchase agreement with an accredited investor to place Convertible Debentures (the Debentures),
which was later amended on March 7, 2017, with a one-year term in the aggregate principal amount of up to $4,000,000. The initial
closing occurred on November 30, 2016 when the Company issued a Debenture for $1,500,000 (Initial Debenture Note).
The second closing of $1 million was on March 10, 2017 (Second Debenture Note), when the registration statement
to register for resale all of the shares of common stock into which the Debentures may be converted (the Conversion Shares)
was filed with the SEC. The remaining balance of $1.5 million was received on April 6, 2017 (Third Debenture Note),
the date the registration statement was declared effective by the SEC. The Debentures bear interest at the rate of 5% per
annum. In addition, the Company must pay to an affiliate of the holder a fee equal to 5% of the amount of the Debenture at
each closing. The Debenture may be converted at any time
on or prior to maturity at the lower of $4.00 or 93% of the average of the four lowest daily VWAP of the Companys common
stock during the ten consecutive trading days immediately preceding the conversion date, provided that as long as the Company is
not in default under the Debenture, the conversion price may never be less than $2.00. The Company may not convert any portion
of the Debenture if such conversion would result in the holder beneficially owning more than 4.99% of the Companys then
issued common stock, provided that such limitation may be waived by the holder. Any time after the six-month anniversary
of the issuance of the Debenture, if the daily VWAP of the Companys common stock is less than $2.00 for a period of twenty
consecutive trading days (the Triggering Date) and only for so long as such conditions exist after a Triggering Date,
the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred.
Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided
by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount being
paid (up to a maximum of $300,000 in redemption premium) and (iii) accrued and unpaid interest as of each payment date. The
Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through
the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment. Each deferral payment
may be paid by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share
equal to 93% of the average of the four lowest daily VWAP of the Companys common stock during the ten consecutive Trading
Days immediately preceding the due date in respect of such monthly payment begin deferred, provided that such shares issued will
be immediately freely tradable shares in the hands of the holder. The Company also entered into a Security
Agreement to secure payment and performance of its obligations under the Debenture and related agreements pursuant to which the
Company granted the investor a security interest in all of its assets. The security interest granted pursuant to the Security
Agreement terminated on the effectiveness of the Registration Statement on April 6, 2017. Upon issuance of the Second and Third Debenture
Notes, the Company recognized a debt discount of $731,000, resulting from the recognition of a beneficial conversion feature of
$645,000 and a bifurcated embedded derivative of $86,000. The beneficial conversion feature was recognized as the intrinsic
value of the conversion option on issuance of the Debentures. The monthly payment provision within the Debentures
is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value recognized
in the Condensed Consolidated Statement of Operations during the six months ended May 31, 2017. The Company estimated the fair
value of the monthly payment provision, as of May 31, 2017 and November 30, 2016, using probability analysis of the occurrence
of a Triggering Date applied to the discounted maximum redemption premium for any given payment. The probability analysis utilized
an expected volatility for the Company's common stock range of 101.58% - 146.26% and a risk free rate of range of 0.53% to 1.08%.
The maximum redemption was discounted at 20%, the calculated effective rate of the Debenture before measurement of the
contingent put option. The fair value estimate is a Level 3 measurement. Embedded Conversion Options The embedded conversion feature is separately
measured at fair value, with changes in fair value recognized in current operations. Management used a binomial valuation
model, with fourteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at issuance of the
Series A, B, and C Notes with the following key inputs:
Embedded derivatives at inception and upon conversion
For the six months ended May 31,
2017 2016
Stock price $ 4.93 - $7.05 $ 3.05 - $4.24
Terms (years) 0.11 - 0.85 0.75 - 1.1
Volatility 144.26% - 157.35 % 123.53% - 154.70 %
Risk-free rate 0.53% - 0.76 % 0.58% - 1 %
Dividend yield 0.00 % 0.00 %
Embedded derivatives at period end
May 31, 2017 November 30, 2016
Stock price - $ 3.43
Term (years) - 0.25 - 1.05
Volatility - 156.74% - 163.49 %
Risk-free rate - 0.48% - 0.80 %
Dividend yield - 0.00 %
During the six months ended May 31, 2017 and 2016, the Company
recognized interest expense of approximately $355,000 and $164,000, respectively, resulting from amortization of the debt discount
for the outstanding convertible notes. As of May 31, 2017, the embedded conversion
options have an aggregate fair value of $50,000 and are presented on a combined basis with the related loan host in the Companys
Condensed Consolidated Balance Sheets. The table below presents changes in fair value for the embedded conversion options,
which is a Level 3 fair value measurement:
Rollforward of Level 3 Fair Value Measurement for the Six Months Ended May 31, 2017
Balance at November 30, 2016 Issuance Net unrealized gain/(loss) Conversion Balance at May 31, 2017
$ 977,000 86,000 845,000 (1,858,167 ) $ 49,833
Conversions of debt The following conversions of the convertible
notes occurred during the six months ended May 31, 2017:
Principal Shares
Series A conversions 12,500 5,936
Series B conversions 55,000 27,995
Series C conversions 576,383 407,484
Series D conversions 160,000 91,782
Series E conversions 150,000 63,255
Secured Debenture conversions 500,000 155,199
Total $ 1,453,883 751,651
As the embedded conversion option in each
note series had been separately measured at fair value, the conversion of each note was recognized as an extinguishment of debt.
The Company recognized a loss on conversion of debt of approximately $365,000 as the difference between the fair value of common
stock issued to the holders of approximately $2.7 million and the aggregate net carrying value of the convertible notes, including
the bifurcated conversion options, of approximately $2.3 million. Events of default The Company will be in default of the Series
E Notes, and all amounts outstanding will become immediately due and payable upon: (i) maturity, (ii) any bankruptcy, insolvency,
reorganization, cessation of operation, or liquidation events, (iii) if any money judgement, writ or similar process filed against
the Company for more than $150,000 remains unvacated, unbonded or unstayed for a period of twenty (20) days, (iv) the Company fails
to maintain the listing of the common stock on at least one of the OTC markets or the equivalent replacement exchange, (v) the
Companys failure to maintain any material intellectual property rights, personal, real property or other assets that are
necessary to conduct its business, (vi) the restatement of any financial statements filed with the U.S. Securities and Exchange
Commission (SEC) for any period from two years prior to the notes issuance date and until the notes are no longer
outstanding, if the restatement would have constituted a material adverse effect of the rights of the holders of the notes, (vii)
the Company effectuates a reverse stock split of its common stock without twenty (20) days prior written notice to the notes
holders, (viii) in the event that the Company replaces its transfer agent but fails to provide, prior to the effective date, a
fully executed irrevocable transfer agent instructions signed by the successor transfer agent and the Company, (ix) in
the event that the Company depletes the share reserve and fails to increase the number of shares within three (3) business days,
(x) if the Company fails to remain current in its filings with the SEC for more than 30 days after the filing deadline, (xi) after
12 months following the date the Company no longer deems itself a shell company as reflected in a 34 Act filing, the Lenders
are unable to convert the notes into free trading shares, and (xii) upon fundamental change of management. The Company is currently not in default
for any convertible notes issued. |
