Notes to the Consolidated Financial Statements
(Unaudited)
As of May 31, 2014 and August 31, 2013 and
for the three and nine months ended May 31, 2014 and 2013
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Red Giant Entertainment LLC (the “LLC”) was formed in the State of Florida, U.S.A., on January 1, 2011. On May 9, 2012, the LLC incorporated and changed its name to Red Giant Entertainment, Inc. (“RGE”). The LLC was originally a publishing company, but has expanded its operations to include mass media and graphic novel artwork development.
On June 11, 2012, Castmor Resources Ltd., a Nevada corporation entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with RGE, and Benny Powell, who had owned 100% of the issued and outstanding shares in RGE. Pursuant to the terms and conditions of the Share Exchange Agreement, RGE exchanged 100% of the outstanding shares in RGE for forty million (40,000,000; 240,000,000 post-split) newly-issued restricted shares of the Company’s (Castmor Resources Ltd.) common stock. Due to the recapitalization and reverse merger with Castmor Resources Ltd., 32,487,000 shares (194,922,000 post split) were issued by Castmor Resources Ltd., which changed its name to Red Giant Entertainment, Inc. (the “Company”). The Company subsequently approved a 6 to 1 forward stock split of all shares of record in June, 2012. The Company’s fiscal year end is August 31.
The exchange resulted in RGE becoming a wholly-owned subsidiary of the Company. As a result of the Share Exchange Agreement, the Company’s principal business became the business of RGE. All share information has been restated for both the reverse merger and the forward stock split for all periods presented.
On March 4, 2013, the Company acquired ComicGenesis, LLC (“ComicGenesis”), a Nevada limited liability company that operates a user-generated comic site that hosts over 10,000 independent webcomics.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been made in order to make the financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year.
These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ending August 31, 2013 and the notes thereto and other information in our annual report on Form 10-K/A, filed with the Securities and Exchange Commission on February 20, 2014.
Basis of Presentation
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The Company operates under the name of Red Giant Entertainment, Inc. and its wholly owned subsidiaries RGE and ComicGenesis. The companies were incorporated for the intentions of developing brand names. Any activities of these subsidiaries or holdings have been included in the consolidated financial statements, with elimination of any intercompany accounts and transactions.
Fair Value Measurements
Topic 820 in the Accounting Standards Codification (ASC 820) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
|
·
|
Level 1 inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
|
|
·
|
Level 2 inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
·
|
Level 3 inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
|
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents.
Inventory
As of May 31, 2014, inventory consisted of physical copies of published books, as well as artwork that is used for digitally distributed works for advertising revenue and future publications. The inventory is valued at the cost to produce, on a first-in-first-out (FIFO) basis.
Long-lived Assets
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost and capitalized. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. The Company currently has equipment being depreciated for estimated lives of three to five years. Depreciation for the three and nine months ended May 31, 2014 and 2013 was $940, $166, $2,136 and $498, respectively.
Intangible Property
Intellectual property, including patents and other intangible assets have been capitalized and recorded at their fair value historical cost. The Company’s intellectual property consists of graphic novel artwork and was contributed in January 2011 by a stockholder to the Company and valued at $29,250, which was determined based on the shareholder’s historical costs for art and printing. The intangible is being amortized over its life of five years. The Company acquired website and other intangible assets in the acquisition of a subsidiary in March 2013, valued at the fair market value of stock exchanged by a shareholder, valued in the amount of $45,000. Amortization is calculated on a straight line basis over the estimated useful life of three years. Amortization for the three and nine months ended May 31, 2014 and 2013was $1,463, $1,464, $11,889 and $4,390, respectively
Long-lived Assets Impairment
Long-lived assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360, Property, Plant and Equipment. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a discounted cash flow analysis. Based upon its most recent analysis, the Company believes that no impairment of property existed at May 31, 2014 and August 31, 2013.
Recent Accounting Pronouncements
We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
Revenue Recognition
Revenue for the Company is recognized from three primary sources: Advertising Revenue, Publishing Sales and Creative Services. Revenue was processed through our Paypal Account and Project Wonderful accounts where applicable.
Advertising Revenue comes from the following sources and is stated at net after commissions:
|
o
|
Keenspot: Revenue is earned on a net 90 basis and is based upon traffic to Red Giant property Web sites. It is calculated on a Cost Per Thousand (CPM) of verified impressions and varies based upon bids by advertisers and other customary factors. In exchange for advertising, hosting, IT, and sales management, Keenspot takes 50% commission of ad revenue for their services.
|
|
o
|
Project Wonderful: Revenue is paid immediately and based upon bids by advertisers for a set amount of time at the prevailing highest winning rate. Project Wonderful takes a 25% commission of ad revenue for their services.
|
Publishing Revenue comes from the following sources:
|
o
|
Kickstarter Campaigns: These are presales for books and revenue is recognized only once the books arrive and are shipped to the buyers.
|
|
o
|
Direct Sales: Through our online store, we sell directly to clients and the transactions process through our Paypal account. All orders are shipped immediately and revenue is recognized upon shipment.
|
Creative Services are artwork, writing, advertising, and other creative endeavors we handle for outside clients. Revenue is recognized upon completion of the services and collectability is reasonably assured.
Shipping and Handling for purchases are paid directly by the consumer through PayPal. The Company has not established an allowance for doubtful accounts, as all transactions are handled through PayPal directly by the consumer.
Cost of Goods Sold
Cost of goods sold includes the cost of the creating services for artwork, advertising and books.
Advertising
Advertising costs are expensed as incurred. The Company expensed advertising costs of $86,105, $65,230, $135,171 and $66,001 for the three and nine month periods ending May 31, 2014 and 2013, respectively.
Stock Based Compensation
The Company issues restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services. Stock compensation for the periods presented were issued for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions. For agreements requiring future services, the consulting expense is to be recognized ratably over the requisite service period. The Company has issued shares and warrants to individuals for the purpose of compensation during the three and nine month periods ending May 31, 2014 and 2013, in the amounts of $196,303, $0, $196,303 and $0, respectively.
Income Taxes
The Company has adopted ASC 740,
Income Taxes
, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The Company may be assessed penalties and interest related to the underpayment of income taxes. Such assessments would be treated as a provision of income tax expense on the financial statements. At May 31, 2014, the tax return for 2011 through 2013 have not been filed. No income tax expense has been realized as a result of operations and no income tax penalties and interest have been accrued related to uncertain tax positions. The Company has not filed a tax return for the new entity. These filings will be subject to a three year statute of limitations. No adjustments have been made to reduce the estimated income tax benefit at fiscal year-end. Any valuations relating to these income tax provisions will comply with U.S. generally accepted accounting principles.
Earnings (Loss) Per Share
The Company follows financial accounting standards, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. There were approximately 1,545,000,000 common stock equivalents outstanding at May 31, 2014, related to the convertible debt arrangements, which have been excluded from diluted earnings per share since their effect would have been anti-dilutive.
NOTE 3 -
GOING CONCERN
The Company is currently generating revenues from operations insufficient to meet its operating expenses. The Company has incurred losses, resulting in an accumulated deficit. Additionally, the Company has negative cash flows from operations and negative working capital. Management is currently pursuing various funding options, including seeking debt or equity financing, licensing opportunities, as well as a strategic or other transaction, to obtain additional funding to continue the development of, and successfully commercialize, its products. There can be no assurance that the Company will be successful in its efforts and this raises substantial doubt about the Company’s ability to continue as a going cocern. Should the Company be unable to obtain adequate financing or generate sufficient revenue in the future, the Company’s business, results of operations, liquidity and financial condition will be materially and adversely harmed, and the Company will be unable to continue as a going concern.
The Company believes that its ability to execute its business plan, and therefore continue as a going concern, is dependent upon its ability to do the following:
|
·
|
obtain adequate sources of funding to fund long-term business operations;
|
|
·
|
enter into a licensing or other relationship that allows the Company to commercialize its products;
|
|
·
|
manage or control working capital requirements; and
|
|
·
|
develop new and enhance existing relationships with product distributors and other points of distribution for the Company’s products.
|
There can be no assurance that the Company will be successful in achieving its short- or long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 - CONVERTIBLE NOTES PAYABLE
The Company entered into lending arrangements with several lending institutions, each with convertible features. The Company evaluated the terms of the convertible notes, with remaining outstanding face values totaling $421,450, in accordance with ASC Topic No. 815 - 40,
Derivatives and Hedging – Contracts in Entity’s Own Stock
. The Company determined that the conversion features meet the definition of a liability and therefore bi-furcated the conversion feature and accounted for it as a separate derivative liability. The Company recognized a debt discount on the notes on the origination date. The debt discount was recorded as reduction (contra-liability) to the Convertible Notes Payable. The debt discount is being amortized over the term of the notes. Additionally, the notes called for an immediate withholding of service charges, which have been treated as an original issue discount or deferred financing costs, a contra-liability charge, which is to be amortized as finance cost over the life of the loan. Interest expense, in the amount of $693,061 and $867,114, was recognized for the three and nine month period ended May 31, 2014.
A derivative liability, in the amount of $1,910,561 has been recorded, as of May 31, 2014, related to the convertible notes. The Company recognized a change in the derivative liability, resulting in a loss in the amount of $82,496 and $314,462 for the three and nine month periods ending May 31, 2014. The derivative value was calculated using the Black-Scholes method. Assumptions used in the derivative valuation were as follows:
|
Weighted Average:
|
|
|
|
|
Dividend rate
|
|
|
0.0
|
%
|
|
Risk-free interest rate
|
|
|
0.06
|
%
|
|
Expected lives (years)
|
|
|
0.265
|
|
|
Expected price volatility
|
|
|
441.7
|
%
|
|
Forfeiture Rate
|
|
|
0.0
|
%
|
Summary of Convertible Notes Payable:
|
Original value
|
|
$
|
421,450
|
|
|
Deferred finance cost
|
|
|
(55,028
|
)
|
|
Unexpired debt discount
|
|
|
(212,926
|
)
|
|
|
|
$
|
153,496
|
|
|
Less current portion of debt
|
|
|
153,496
|
|
|
Non-current
|
|
$
|
--
|
|
NOTE
5
– CAPITAL STOCK
The Company has 100,000,000 shares of preferred stock authorized and none have been issued.
The Company has 3,000,000,000 shares of common stock authorized, as amended January 29, 2014. All shares of common stock are non-assessable and non-cumulative, with no preemptive rights.
During the year ending August 31, 2013 the Company entered into a stock buy-back plan, whereby 1,785,900 shares were repurchased for $55,000 cost. The shares remain in the name of the Corporation until such time as they are cancelled.
The Company issued warrants to purchase approximately 37,166,700 shares of common stock, at a strike price of $.015 per share, in association with a financing arrangement. Warrants may be exercised on a cashless basis. The company valued these warrants using the Black-Scholes method, resulting in an interest expense of $355,800 and a corresponding derivative liability.
In March 2013, the Company’s majority shareholder issued 500,000 common shares held personally for the acquisition of its subsidiary, CosmicGenesis, valued at a fair market value of $45,000, considered to be the fair value of the website created and acquired. The fair value of the common shares were recognized as a contribution to capital.
During the three and nine month periods ending May 31, 2014, the Company issued 1,202,602,616 and 1,451,432,007 shares of its common stock in upon conversion of $666,180 and $1,071,180 of convertible notes payable, respectively. The Company recognized a loss in the amount of $3,996,268 and $4,589,509, respectively, resulting from the excess in the fair market value of the stock above that of the retired debt.
During the three month period ending May 31, 2014, the Company issued 14,541,570 common shares to a vendor in exchange for services. The services were valued at the fair market value of the shares at the date of the exchange, resulting in a charge to operations in the amount of $148,324.
On March 27, 2014, the Company issued non-statutory stock options to officers and directors to purchase 5 million shares each of common stock each at an exercise price of $.0048, the trading price at the date of the issuance. Theseoptions were valued at $23,990 using the Black-Scholes Model. On the same day an additional 5 million Incentive Stock Options (as defined in Section 422A of the Internal Revenue Code of 1986) (“ISOs”) were issued to the Chief Executive Officer at an exercise price of $.0053. The ISOs were valued at $23,989. Assumptions in the model used in both issuances: historical volatility of 313.78%; life of 5 years; and a risk free rate of 1.7%.
NOTE
6
– RELATED PARTIES
Benny Powell was an officer and director of both parties to the merger. See Note 1. Mr. Powell continues as the Company’s Chief Executive Officer and a director post-merger.
The Company purchases print materials through Active Media Publishing, Inc. (“AMPI”), an entity wholly owned by Mr. Powell. AMPI has certain arrangements with overseas printing companies, whereby the printing is facilitated to the Company. The Company’s agreement with AMPI states processing is at near cost prices on a non-exclusive basis. During the nine month periods ending May 31, 2014, the Company purchased print media in the amount of $109,614.
Keenspot, a general partnership co-founded by Chris Crosby, our Chief Technology Officer and a member of our Board of Directors, has been paid or accrued commissions in the amount of approximately $1,409 during the nine month period ending May 31, 2014.
The Company also from time to time have retained Glass House Graphics, a sole proprietorship owned by David Campiti, our Chief Operating Officer and a member of the Board, to provide creative services for us. The Company paid an aggregate of $14,435 to Glass House Graphics during the nine month period ended May 31, 2014.
As of December 2013, the Company has retained Chris Crosby, one of the Company’s officers and directors, to also serve as web editor for the Company’s webcomics. Mr. Crosby will be compensated for his web editing services, approximately $1,500 per month, which the Company believes to be substantially less than the compensation the Company would pay for an independent third party to provide such services. The Company has paid an aggregate of $11,900 to Mr. Crosby during the nine month period ended May 31, 2014.
The Company does not own or lease property or lease office space. The officers of the Company provide office and storage space to the Company at no charge through their other ventures. The fair value of the office and storage is considered immaterial.
The Company does not have employment contracts with its key employees, including the controlling stockholder who is an officer of the Company, although it has independent contractor agreements with its other officers.
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.
NOTE
7
– BUSINESS SEGMENTS
The Company generates revenues from three service offerings: Advertising, Book publishing and Creative. The Company’s management measures its performance by revenue lines and does not allocate its selling, general and administrative expenses to each revenue offering. A summary of the lines of revenue are as follows, for the nine months ending May 31, 2014:
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
932
|
|
|
|
2,216
|
|
|
|
3,254
|
|
|
|
4,838
|
|
|
Book Publishing
|
|
|
5,525
|
|
|
|
70,761
|
|
|
|
13,827
|
|
|
|
209,416
|
|
|
Creative
|
|
|
-
|
|
|
|
57,148
|
|
|
|
-
|
|
|
|
81,399
|
|
|
TOTAL
|
|
|
6,457
|
|
|
|
130,125
|
|
|
|
17,081
|
|
|
|
295,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
932
|
|
|
|
3,861
|
|
|
|
3,312
|
|
|
|
7,283
|
|
|
Book Publishing
|
|
|
5,525
|
|
|
|
18,424
|
|
|
|
6,707
|
|
|
|
91,110
|
|
|
Creative
|
|
|
-
|
|
|
|
3,580
|
|
|
|
-
|
|
|
|
8,380
|
|
|
TOTAL
|
|
|
6,457
|
|
|
|
25,865
|
|
|
|
10,019
|
|
|
|
106,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
-
|
|
|
|
(1,645
|
)
|
|
|
(58
|
)
|
|
|
(2,445
|
)
|
|
Book Publishing
|
|
|
-
|
|
|
|
52,337
|
|
|
|
7,120
|
|
|
|
118,306
|
|
|
Creative
|
|
|
-
|
|
|
|
53,568
|
|
|
|
-
|
|
|
|
73,019
|
|
|
TOTAL
|
|
|
-
|
|
|
|
104,260
|
|
|
|
7,062
|
|
|
|
188,880
|
|
NOTE
8
– COMMITMENTS AND CONTINGENCIES
Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. They may face a conflict in selecting between the Company and other business interests. The Company has not formulated a policy for the resolution of such conflicts. Additionally, regarding this concern, the Company does not have employment agreements with its key officers and directors.
On May 13, 2013, George Sharp (“Plaintiff”) filed a Complaint in San Diego Superior Court, Central District, Case No. 37-2013-00048310-CU-MC-CTL, against 14 companies, including us (collectively, “Defendants”). We were served with the Complaint on May 23, 2013. The Complaint alleges that the Plaintiff received unsolicited promotional emails being sent by Defendant, Victory Mark Corp. Ltd., discussing the other 13 corporate Defendants, including us. The Plaintiff is seeking liquidated damages in the amount of $1,000 for each email he received for a total of $1,204,000 collectively for all Defendants. We have responded to discovery propounded by the Plaintiff and are awaiting Plaintiff’s response to our discovery request.
We are not currently a party to, nor are any of our property currently the subject of, any other material legal proceeding. None of our directors, officers, or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters could have a material adverse effect upon our financial condition and/or results of operations.
NOTE
9
– SUBSEQUENT EVENTS
Subsequent to May 31, 2014, we have issued shares of common stock as follows:
|
·
|
On June 4, 2014, we issued 54,685,981 shares of common stock to LG Capital Funding, LLC to convert $32,811.59 in principal and interest due under the 9% Convertible Redeemable Note dated October 2, 2013 (the "2013 LG Note") filed as Exhibit 4.8 to our Annual Report on Form 10-K filed with the SEC on December 5, 2013. The issuance was made pursuant to a May 27, 2014 notice of conversion and fully paid off the 2013 LG Note.
|
|
·
|
On June 6, 2014, we issued 38,197,717 shares of common stock to Iconic Holdings, LLC to convert $22,918.63 of principal and interest due under the 9.9% Secured Convertible Promissory Note dated April 15, 2013 filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on September 20, 2013. The issuance was made pursuant to a June 3, 2014 notice of conversion.
|
|
·
|
On June 13, 2014, we issued 30,000,000 to JMJ Financial to convert $15,000 of partial principal and interest due under the Promissory Note filed as Exhibit 4.13 to our Amended Annual Report on Form 10-K/A filed with the SEC on February 20, 2014.The issuance was made pursuant to a June 10, 2014 notice of conversion.
|
|
·
|
On July 10, 2014, we issued 50,000,000 to JMJ Financial to convert $22,500 of partial principal and interest due under the Promissory Note filed as Exhibit 4.13 to our Amended Annual Report on Form 10-K/A filed with the SEC on February 20, 2014. The issuance was made pursuant to a July 8, 2014 notice of conversion.
|
|
·
|
On July 10, 2014, we issued 86,644,000 shares of common stock to WHC Capital LLC to convert $42,888.78 in principal and interest due under the 12% Secured Convertible Debenture filed as Exhibit 4.6 to our Annual Report on Form 10-K filed with the SEC on December 5, 2013. The issuance was made pursuant to a June 18, 2014 notice of conversion.
|
|
·
|
On July 11, 2014, we issued 11,111,698 shares of common stock to GEL Properties, LLC to convert $12,445.12 in principal and interest due under 6% Convertible Redeemable Secured Notes in the form filed as Exhibit 4.12 to our Annual Report on Form 10-K filed with the SEC on February 20, 2014. The issuance was made pursuant to a July 7, 2014 notice of conversion.
|
Subsequent to May 31, 2014, we have entered into the following convertible debt arrangements:
On June 10, 2014, we issued a $50,000 12% Convertible Note (the "JSJ Note") to JSJ. The JSJ Note is due and payable on December 30, 2014 at a premium of 150% of the principal amount upon approval and acceptance by JSJ Investments; provided, however, that the principal balance of the note is payable on demand. If we fail to repay the JSJ Note on demand, a default interest rate of 12% shall also apply from such date. We may not prepay this Note. The JSJ Note is convertible into shares of our common stock at a conversion price equal to the lower of 55% of the average of the three lowest trading prices in (i) the 20 trading days prior to the date of conversion; or (ii) the ten trading days prior to the execution of the JSJ Note. If we do not issue shares to JSJ within three business days after receipt of a conversion notice, we will be required to issue an additional 25% shares of the shares in the conversion notice per day beginning on the fourth day following our receipt of a conversion notice. This conversion price is subject to adjustment if we issue any securities convertible into or exercisable for common stock where the aggregate price of purchase and exercise per share is lower than the then-existing conversion price.
On July 11, 2014, we issued another $50,000 12% Convertible Note to JSJ (together with the June 10, 2014 12% Convertible Note, the “JSJ Notes”) with a maturity date of January 11, 2015. The JSJ Notes are identical in all respects other than the stated maturity date.