Note 9 – Derivative Liability

The Company entered into convertible note agreements containing beneficial conversion features.  One of the features is a ratchet reset provision which allows the note holders to reduce the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see note 10). The Company accounts for the fair value of the conversion feature in accordance with ASC 815, Accounting for Derivatives and Hedging and EITF 07-05, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcate treated as a derivative liability. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations.

On May 11, 2016, the Company recorded a derivative liability in the amount of $192,841.  During the three months ended May 31, 2016, the Company recognized a loss on the fair value of the derivative liability in the amount of $1,001 bringing the fair value of the derivative liability to $193,842 as of May 31, 2016.