Note 9 – Convertible Notes Payable

3.5% OID Convertible Notes

On May 11, 2016 the Company entered into Securities Purchase Agreements with certain purchasers (“the Holders”).  The Company issued 3.5% original issue discount (“OID”) senior secured convertible promissory notes having an aggregate face amount of $440,000 (the “3.5% OID Convertible Notes”).  These notes bear interest at a rate of 10% per annum and mature in six months.  The Company received cash proceeds of $424,600 net of the 3.5% original issue discount of $15,400.  At the Holders option the principal and accrued interest under the Notes are convertible into common stock at a rate of $0.50 per share and have a full reset feature.  The Notes are secured by all assets of the Company.  The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 125% during the first 90 days and 130% for the period from the 91st day through maturity. During November 2016 Company entered into forbearance agreements with the investors extending its time to pay the Notes until December 16, 2016. See Note 12.

In addition the Company issued to the Holders an aggregate of 200,000 shares of common stock value at $360,000 as commitment shares.  These shares were issued during the period and are considered a discount to the Notes.  Due to the reset feature of the conversion price of the convertible notes, the Company concluded that a derivative liability existed at the date of issuance and recorded a derivative liability in the amount of $192,841 (see note 7).  The sum of the value of the derivative liability of $192,841, the original issue discount of $15,400,  and the discount attributable to the 200,000 commitment shares of $360,000 was $568,241, which exceeded the $440,000 face amount of the 3.5% OID Convertible Notes by $128,241; this amount was charged to interest expense during the year ended August 31, 2016.  During the three months ended November 30, 2016 the Company amortized $172,735 of these discounts were charged to interest expense.  As of November 30, 2016 and August 31, 2016 the balance due on the 3.5% OID Convertible Notes was $440,000 and $267,265 net of unamortized debt discounts of $0 and $172,735, respectively.

During the three months ended November 30, 2016, the Company accrued interest on the 3.5% OID Convertible Notes in the amount of $10,970.  Accrued interest on these notes is convertible to common stock at the same terms as the principal. 

During the three months ended February 28, 2017, the 3.5% OID Convertible Notes became due. The Company entered into restructuring agreements with the Holders under the following terms:   new notes (the “January and February 2017 Convertible Notes”) would be issued for the amounts due under the 3.5% OID Convertible Notes;  penalties, fees, and accrued interest in the aggregate amount of $212,702 would be added to the principal amount due under  the January and February 2017 Convertible Notes; 35,000 shares of common stock would be issued as a commitment fee; the January and February 2017 Convertible Notes would be issued at a discount of 3.5%, and bear interest at the rate of 10% per annum; the notes are convertible at a rate of $0.50 per share, and also contain a variable conversion rate whereby, should the Company subsequently sell common stock at a price less than the conversion price, the conversion price of the January and February 2017 Convertible Notes will be reduced to match the lower conversion price. In addition, the proceeds from one of the January and February 2017 Convertible Notes were used to fully redeem one of the 3.5% OID Convertible Notes. The aggregate amount of principal due under the January and February 2017 Convertible Notes is $614,258.  Two of the January and February 2017 Convertible Notes in the aggregate amount of $494,340 are due March 31, 2017, and one of the January and February 2017 Convertible Notes in the amount of $119,918 is due August 17, 2017.  In April 2017, the Company received forbearance letters from the Holders of the January and February 2017 Convertible Notes that are due March 31, 2017 to extend the due date to April 17, 2017 in exchange for principal payments in the aggregate amount of $75,000.   Discounts attributable to the beneficial conversion features of the January and February 2017 Convertible Notes were calculated in the aggregate amount of $426,154.  $177,181 of this amount was amortized to interest expense during the three months ended February 28, 2017; unamortized discounts in the aggregate amount of $252,783 is carried on the Company’s balance sheet at February 28, 2017.

During the three months ended May 31, 2017, the January and February 2017 Convertible Notes became due.  On April 4, 2017, the Company entered into a forbearance agreement with the Holders with the following terms: the Company would pay $75,000 towards the balance of the note in exchange for an extension of the maturity date of the notes until April 17, 2017.  On April 18, 2017 the Company entered into an additional forbearance agreement with the Holders with the following terms: the Company would pay a penalty of $45,000 to the Holders in exchange for an extension of the maturity date until May 1, 2017.  On April 28, 2017, the Company entered into an additional forbearance agreement with the other two Holders with the following terms: the Company would pay a penalty of $20 to the Holders in exchange for an extension of the maturity date until June 2, 2017.  The Holders also converted $15,000 of principal and $10,000 of accrued interest into 208,333 shares of common stock. As of May 31, 2017 the balance due on the January and February 2017 Convertible Notes was $614,258.  The Company also amortized $267,829 of the discount during the three months ended May 31, 2017 to interest expense; the unamortized discount as of May 31, 2017 was $85,212.

BK Consulting Notes

On October 28, 2015, the Company issued an unsecured convertible loan to a related party of $1,700, non-interest bearing, due on demand and convertible into Common Stock at a rate $0.002 per share, from a major shareholder, BK Consulting, to fund operations.  The Company calculated the beneficial conversion feature embedded in the convertible note.  The conversion feature, in the amount of $1,700, was recorded as debt discount.

On November 2, 2015, the Company converted $29,500 of convertible debt due to the Company’s major shareholder, BK Consulting, into 14,750,400 shares of common stock at a conversion price of $0.002.  As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.

On November 10, 2015, the Company converted $10,744 of convertible debt due to the debt holder, BK Consulting, into 5,371,500 shares of common stock at a conversion price of $0.002.  As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.

The Company calculates any beneficial conversion feature embedded in its convertible notes via the intrinsic value method.  The conversion feature was considered a discount to the notes, to the extent the aggregate value of the conversion feature did not exceed the face value of the notes.  These discounts are amortized to interest expense through earlier of the term or conversion of the notes.  During the three months ended November 30, 2015, the Company recorded debt discounts in the amount of $1,700, respectively.  During the three months ended November 30, 2016, the Company amortized debt discounts to interest expense in the aggregate amount of $1,700.

As of May 31, 2017 and August 31, 2016 the balance of the convertible debt due to BK Consulting was $0 and $0.  The Company recorded imputed interest on all outstanding BK Consulting convertible notes at a rate of 8%.  The Company recorded imputed interest in the amount of $0 and $553 during the three months ended May 31, 2017 and 2016 related to the BK Consulting convertible notes.