The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Annual Report.
We operate under the name of Red Giant Entertainment, Inc. We have two
wholly-owned subsidiaries, RGE and ComicGenesis. We formed these companies to
develop brand names, but both companies are inactive. Any activities of these
subsidiaries or holdings have been included in our consolidated financial
statements, with elimination of any intercompany accounts and transactions.
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. In consultation with the Board, we have identified several accounting
principles that we believe are key to the understanding of our financial
statements. These important accounting policies require management's most
difficult, subjective judgments.
The financial statements included in our filings have been prepared in
conformity with generally accepted accounting principles that contemplate our
continuance as a going concern. Management may use borrowings and security sales
to mitigate the effects of its cash position; however, no assurance can be given
that debt or equity financing, if and when required, will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should we be unable to continue existence.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires our 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 the reported amounts of revenues and expenses for
the reporting period. We review our estimates on an ongoing basis. The estimates
were based on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
from these estimates. We believe the judgments and estimates required in our
accounting policies to be critical in the preparation of our financial
statements.
Our revenue is recognized from three primary sources: Advertising Revenue,
Publishing Sales, and Creative Services. Revenue is 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:
* Keenspot: Revenue is recognized from Keenspot's arrangements with
advertisers at an agreed upon cost per thousand verified impressions
(CPM) to our Keenspot sites whereby advertisers pay based on the
number of times the target audience is exposed to the advertisement.
This revenue is recognized on a net basis in the monthly period in
which the impressions occur (i.e., advertisers pay us within 90
calendar days of receiving Keenspot's invoices). The particular CPM
rate 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.
* 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 its
services.
* Kickstarter Campaigns: These are presales for books and revenue is
recognized only once the books arrive and are shipped to the buyers.
* 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 immediately.
Creative Services Revenue comes from artwork, writing, advertising, and other
creative endeavors we handle for outside clients. Revenue is recognized upon
completion of the services and payment has been received.
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 includes the cost of creating services or artwork,
advertising and books.
We follow 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 shareholders
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 2,693,271,000 common stock equivalents outstanding,
attributable to the convertible debt agreements as of August 31, 2014.
We have adopted ASC 740, Income Taxes, which requires us to recognize deferred
tax liabilities and assets for the expected future tax consequences of events
that have been recognized in our 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.
Advertising costs are expensed as incurred. We expensed advertising costs of
$130,258 and $88,001, respectively, for the periods ending August 31, 2014 and
August 31, 2013.
For purposes of the statement of cash flows, we consider all highly liquid
investments and short-term debt instruments with original maturities of three
months or less to be cash equivalents. As of August 31, 2014 and August 31,
2013, we had $5,953 and $14,937, respectively in cash. We had no cash
equivalents during the years then ended.
LIQUIDITY AND CAPITAL RESOURCES
We financed ourselves during the reporting period largely through the issuance
of securities to lenders in stock-based loan transactions. We dealt with several
lenders. The terms of certain transactions were carried forward from our prior
annual reporting period. The status of our loan financing transactions as of
August 31, 2014 is as follows:
LOAN TRANSACTIONS GROUPED BY LENDER
1. TYPENEX CO-INVESTMENT, LLC
On June 21, 2013, we entered into a Securities Purchase Agreement (the "Typenex
SPA") with Typenex Co-Investment, LLC ("Typenex") under which we concurrently
issued to Typenex a Secured Convertible Promissory Note in principal amount of
$557,500 with an original issue discount of $50,000 plus an additional $7,500 to
cover Typenex's due diligence and legal fees in connection therewith (the
"Typenex Note") in exchange for $100,000 in cash, two secured notes (the
"Secured Buyer Notes") and two unsecured notes (the "Unsecured Buyer Notes";
together with the Secured Buyer Notes, the "Buyer Notes"). The Typenex Note is
secured by the Buyer Notes. The Buyer Notes are each dated concurrently with the
Typenex SPA and are each in the principal amount of $100,000 and bear interest
at the rate of 5% per annum. Unless we fail to meet certain conditions related
to our common stock and representations and warranties given in the Typenex
Note, the Secured Buyer Notes are due and payable seven and nine months,
respectively, after the issuance of the Typenex Note, and the Unsecured Buyer
notes are due and payable 11 and 13 months after the issuance of the Typenex
Note. Otherwise, each of the Buyer Notes matures two months following the
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maturity of the Typenex Note. Each of the Buyer Notes may be prepaid in
Typenex's discretion. The Secured Buyer Notes are secured by that certain
Membership Interest Pledge Agreement (the "Typenex Pledge Agreement") dated
concurrently with the Typenex SPA under which Typenex has pledged a 40%
membership interest in Typenex Medical, LLC, an Illinois limited liability
company; provided, however, that Typenex may substitute collateral with a fair
market value not less than the aggregate principal balance of the Buyer Notes.
Loan funding under the Typenex Note is made at its discretion. Payment may be
made in cash or in shares of our common stock or any combination of cash and
shares; provided, however, that we may only pay in cash if we fail to meet
certain conditions related to our common stock and representations and
warranties given in the Typenex Note. We may prepay the Typenex Note with a
payment of 125% of the outstanding balance (including interest and other fees
and amounts due).
Interest accrues at the rate of 8% per annum. If we fail to repay the Typenex
Note when due, or if other events of default thereunder apply, a default
interest rate of 22% per annum will apply. In addition, if we fail to issue
stock to Typenex within three trading days of receipt of a notice of conversion,
we must pay a penalty equal to the greater of (i) $2,000 per day; or (ii) 2% of
the product of (A) the number of shares to which Typenex was entitled that were
not issued on a timely basis; and (B) the closing sale price of the common stock
on the trading day immediately preceding the last day for us to timely issued
the shares.
The Typenex Note is convertible into shares of our common stock in five tranches
consisting of an initial tranche of $157,500 plus interest and other fees and
amounts due and four tranches of $100,000 plus interest and other fees and
amounts due, with conversion of the last four tranches conditioned upon payment
in full of the Buyer Note corresponding to such tranche. The Typenex Note is
convertible at a price equal to the average of the daily closing bid prices for
the 15 days immediately prior to the six-month anniversary of the Typenex Note.
Under and concurrently with the Typenex SPA, we also issued to Typenex a warrant
(the "Typenex Warrant") to purchase the number of shares equal to $557,500
divided by the product of (i) the average of the three lowest VWAPs in the 20 if
the three lowest VWAPs were lower than $0.005) at a price of $0.015 per share.
The Typenex Warrant may also be exercised by cashless exercise.
This conversion price of the Typenex Note, the exercise price of the Typenex
Warrant, and the number of shares of our common stock subject to the Typenex
Warrant are subject to adjustment for issuance of securities with a lower
issuance price (as defined in the Typenex Note). Unless Typenex gives us 61
calendar days written notice to the contrary, however, Typenex may not convert
the Typenex Note or exercise the Typenex Warrants in an amount which would cause
Typenex to own more than 4.99%, or if our market capitalization (as defined in
the Typenex Note) is less than $10,000,000, more than 9.99%, of our outstanding
common stock.
Under the Typenex SPA, we must pay a penalty of $100 per $10,000 in outstanding
principal per trading day that we are late in filing any information required to
be filed by us up to ten days, and $200 per day for each trading day after ten
days that we are late. Under the Typenex SPA, we also must pay $100 per $10,000
in outstanding principal per trading day past three business days that we do not
and $200 per day for each trading day after ten days that we are late, and may
be required to pay additional fees if Typenex purchases shares on the open
market in order to make delivery in satisfaction of a sale of our shares by
Typenex.
Under the Typenex SPA, we are also required to periodically post the
then-current number of issued and outstanding shares of our common stock on our
webpage at otcmarkets.com if we fail to maintain a market capitalization of
$10,000,000 or greater, or pay a late fee for each calendar day we fail to
comply with such obligation.
We have granted piggyback registration rights for shares issuable under the
Typenex Note and the Typenex Warrant.
The Typenex Note and Typenex Warrant were issued to Typenex pursuant to the
exemption from registration set forth in Section 4(2) of the Securities Act of
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1933. Typenex represented to us that it is an accredited investor. We believe
that Typenex had adequate information about us as well as the as the opportunity
to ask questions and receive responses from our management.
2. ICONIC HOLDINGS, LLC
As of April 15, 2013, we entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Iconic Holdings, LLC ("Iconic") providing
that at any time during the period beginning upon the effective date of a
registration statement for the registration of the resale by Iconic of the
restricted shares of our common stock issued under, or issuable upon exercise of
any warrants issued under, the Securities Purchase Agreement (the "Registration
Statement") (the "Effective Date") and ending on the earliest to occur of: (1)
the date on which Iconic has purchased a total of $5,000,000 worth of our common
stock pursuant to the Securities Purchase Agreement; or (2) the date of
termination of the Securities Purchase Agreement; or (3) the date which is 36
months from the Effective Date or 48 months from the Effective Date if 36 months
after the Effective Date, we file an amendment to the Registration Statement or
a new registration statement is declared effective, (the "Commitment Period); we
may sell shares of our common stock to Iconic Holdings, LLC, for a purchase
price of: (1) 92.5% of the lowest trading price of our common stock during the
five consecutive trading days including and immediately following the date of
our notice of sale (the "Market Price"); or (2) 90% of the Market Price if our
common stock is eligible for Deposit/Withdrawal at Custodian ("DWAC"); or (3)
80% of the Market Price if our common stock is under a chill order of the
Depository Trust & Clearing Corporation.
We also entered into a Registration Rights Agreement with Iconic as of April 15,
2013 (the "Registration Rights Agreement") under which we are required, among
other things, to file the Registration Statement prior to selling any securities
to Iconic under the Securities Purchase Agreement, to keep the Registration
Statement effective until the fulfillment of the Commitment Period and to pay
all expenses incurred in connection with the registration. In addition, on April
15, 2013, we issued Iconic a 9.9% Secured Convertible Promissory Note in the
amount of $130,000 for which we received $125,000 (the "Note"). The Note matured
on April 15, 2014 and is convertible into our common stock at 60% of the lowest
trading price of any day during the ten consecutive trading days prior to the
date of conversion. The shares of common stock into which the Note is
convertible are not being registered in the Registration Statement. All
descriptions of the Agreements herein are qualified in their entirety by
reference to the respective text thereof filed as exhibits hereto, which are
incorporated herein by reference.
The Note was issued, and securities under the Securities Purchase Agreement will
be issued, if at all, to Iconic pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder. Iconic has represented to us that it is an accredited investor and
had adequate information about us as well the opportunity to ask questions and
receive responses from our management.
On December 20, 2013, we issued Iconic a 10% Secured Convertible Promissory Note
in the amount of $25,000 for which we received $17,500 (the "Second Iconic
Note") with an original issue discount of $7,500. The Second Iconic Note matures
on December 20, 2014 and is convertible into our common stock at the lower of
(i) $0.0033 per share; or (ii) 60% of the lowest trading price of any day during
the 20 consecutive trading days prior to the date of conversion. The shares of
common stock into which the Second Iconic Note is convertible are not being
registered in the Registration Statement.
The Second Iconic Note was issued to Iconic pursuant to the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. Iconic has represented to us that it is an
accredited investor and had adequate information about us as well as the
opportunity to ask questions and receive responses from our management.
3. GEL PROPERTIES, LLC
On May 24, 2013, we issued a $50,000 6% Convertible Redeemable Note to Gel
Properties, LLC ("GEL") (the "Initial GEL Note") in exchange for $42,500 in cash
and $7,500 in legal fees and due diligence fees paid by GEL. On May 24, 2013, we
also issued four $75,000 6% Convertible Redeemable Secured Notes (the "Back-End
Notes"; together with the Initial GEL Note, the "GEL Notes"), each in exchange
for a $75,000 Secured Promissory Note issued by GEL to us and secured by the
$75,000 cash value interest in a life insurance policy assigned to GEL by its
member, or other collateral with an equivalent or greater cash value. The four
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GEL Notes have a maturity date of January 24, March 24, May 24 and July 24,
2014, respectively. $10,000 had been converted into 2,915,452 shares of our
common stock under the Initial GEL Note as of December 5, 2013. The GEL Notes
were issued pursuant to the exemption from registration set forth in Section
4(2) of the Securities Act of 1933 and regulations promulgated thereunder. We
believe that GEL is an accredited investor and had adequate information about us
as well as the opportunity to ask questions and receive responses from our
management.
On January 24, 2014, we agreed with GEL to reduce the second of four $75,000
Secured Promissory Note issued by GEL to us (each, a "GEL Payment Note") as
consideration the second of four $75,000 6% Convertible Redeemable Secured Notes
(each, a "Back End Note") to $35,000 and extend the maturity date of the amended
GEL Payment Note to April 24, 2014, and received the remaining $40,000 GEL
Payment Note in March 2014 to complete the originally contemplated $75,000
tranche.
The GEL Payment Notes are secured by the $75,000 cash value interest in a life
insurance policy assigned to GEL by its member, or other collateral with an
equivalent or greater cash value. If we do not meet the current information
requirement under Rule 144 of the Securities Act of 1933, however, GEL may
offset the amounts owing under the GEL Payment Note from the amount owed by us
to GEL.
Pursuant to the above, the second of four Back End Notes was funded. On April 2,
2014, we received funding of the third of four $75,000 Back End Notes.
The Back End Notes are due and payable on May 24, 2015, with interest payable in
shares of our common stock. If we fail to repay the Back End Notes when due, or
if other events of default thereunder apply, a default interest rate of 24% per
annum will apply. In addition, if we fail to issue unrestricted stock to GEL
within three business days of receipt of a notice of conversion, we must pay a
$250 per day penalty, which fee increases to $500 per day beginning on the tenth
day. We may redeem the Back End Notes with a payment of 150% of the outstanding
principal amount, and are required to redeem the Back End Notes upon certain
sales events as set forth in the Back End Notes. The Back End Notes are
convertible into shares of our common stock at a conversion price equal to 70%
of the lowest closing bid price of our common stock for the five trading days on
or prior to the date upon which notice of conversion is received. The Back End
Notes were issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that GEL is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
On April 28, 2014, we issued a $40,000 8% Convertible Redeemable Note to GEL
(the "GEL Note") in exchange for a $40,000 Collateralized Secured Promissory
Note due December 27, 2014 (contingent on our continuing to meet current
information requirements of Rule 144 under the Securities Act) issued by GEL to
us (the "GEL Payment Note"), bearing interest at the rate of 8% per annum and
secured by a $75,000 8% convertible promissory note issued by BioNeutral, Inc.
to GEL. Provided, however, we agreed that to reimburse GEL $6,000 in legal fees
and due diligence fees paid by GEL. The GEL Note is due and payable on April 28,
2015, with interest payable in shares of common stock. If we fail to repay the
GEL Note when due, or if other events of default thereunder apply, a default
interest rate of 24% per annum will apply. In addition, if we fail to issue
unrestricted stock to GEL within three business days of receipt of a notice of
conversion, we must pay a $250 per day penalty, which fee increases to $500 per
day beginning on the tenth day. We may not prepay the GEL Note. The GEL Note is
convertible into shares of our common stock at a conversion price equal to 62%
of the lowest closing bid price of our common stock for the five trading days on
or prior to the date upon which notice of conversion is received, subject to
reduction to 55% if there is DTC Chill placed on our shares of common stock. The
GEL Note was issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that GEL is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
4. SETTLEMENT AGREEMENT WITH AGS
On January 30, 2014, we entered into a Settlement Agreement and Release (the
"AGS Settlement") with AGS to settle an action brought by AGS against us in the
Circuit Court of the Second Judicial Circuit, Leon County, Florida (the "Court")
for our failure to pay certain invoices (the "Invoices") purchased by AGS from
certain creditors of ours, including (i) $17,901.30 owed by us to Active Media
Publishing, LLC, an entity controlled by Benny R. Powell, an officer and
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director of us; and (ii) $56,352 owed by us to Glass House Graphics, a sole
proprietorship owned by David Campiti an officer and director of us. Following a
fairness hearing pursuant to Section 3(a)(10) of the Securities Act of 1933, the
Court approved and we concurrently issued to AGS a 12% Convertible Promissory
Note in principal amount of $149,129.50 (the "December AGS Note") as payment in
full of the Invoices. The principal balance was converted into our common stock
in April 2014, and the December AGS Note is no longer outstanding. The December
AGS Note was issued to AGS pursuant to the exemption from registration set forth
in Section 3(a)(10) of the Securities Act.
On January 8, 2014, we issued an 18% Convertible Promissory Note in principal
amount of $19,000 (the "January AGS Note") to AGS. If we fail to repay the
January AGS Note when due, or if other events of default thereunder apply, 150%
of sum of the outstanding principal along with any unpaid interest and other
costs, fees or charges under the January AGS Note immediately prior to such
default shall become immediately due and payable, and the January AGS Note will
accrue interest at the maximum amount of interest available under state law
during the default on a note. In addition, if we fail to issue stock to AGS
within three trading days of receipt of a notice of conversion, we must pay a
penalty equal to the greater of (i) $2,000 per day; or (ii) 100% of the product
of (A) the number of shares to which AGS was entitled that were not issued on a
timely basis; and (B) the closing sale price of the common stock on the trading
day immediately preceding the last day for us to timely issued the shares. The
balance due under the January AGS Note will also increase if that our shares are
not DWAC eligible at the time of conversion.
The January AGS Note matures on January 8, 2015 and is initially convertible
into shares of our common stock at a price equal to 60% of the average daily
closing bid prices for the 50 trading days immediately prior to the conversion
date; provided, however, that an additional 10% discount shall apply if we are
late with any of our filings with the SEC, and another 20% discount shall apply
if we are late with another filing after curing the first late filing. This
conversion price of the January AGS Note is subject to adjustment for issuance
of securities for a consideration per share lower than the above conversion
price. Unless AGS gives us 61 calendar days written notice to the contrary,
however, AGS may not convert the January AGS Note in an amount which would cause
AGS to own more than 4.99% of our outstanding common stock. In no case may AGS
convert the January AGS Note in an amount which would cause AGS to own more than
9.99% of our outstanding common stock.
We are prohibited from threatening or entering into litigation with AGS under
the January AGS Note, and have released AGS from any past, current or future
claims we have or may have against AGS. Under the January AGS Note, we are also
prohibited from issuing any securities whose purchase, conversion or exercise
price is determined using any floating discount or other post-issuance
adjustable discount to the market price of our common stock.
We may redeem the January AGS Note with a payment of 150% of the outstanding
principal amount and any unpaid interest thereon upon 20 trading days' notice if
certain conditions related to our performance under the December AGS Note and
our ability to issue shares without restrictive legend are met.
We have granted demand registration rights for shares issuable under the January
AGS Note.
The January AGS Note was issued to AGS pursuant to the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933. We believe
that AGS is an accredited investor and had adequate information about us as well
as the opportunity to ask questions and receive responses from our management.
5. SETTLEMENT AGREEMENT WITH IBC
On February 5, 2014, we entered into a Settlement Agreement and Release (the
"IBC Settlement") with IBC to settle an action brought by IBC against us in the
Circuit Court of the Twelfth Judicial Circuit, Sarasota County, Florida (the
"Court") for our failure to pay certain invoices (the "Invoices") purchased by
IBC from certain creditors of ours, none of whom were related parties of us or
our affiliates. Following a fairness hearing pursuant to Section 3(a)(10) of the
Securities Act of 1933, the Court approved and we issued to IBC 7,500,000 shares
of common stock as payment in full of the Invoices and agreed to issue to IBC in
one or more tranches as necessary that certain number of shares equal to the
$102,000 owed under the Invoices divided by the IBC Repayment Price (as defined
below) (the "Repayment Obligation").
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The IBC Note was issued to IBC pursuant to the exemption from registration set
forth in Section 3(a)(10) of the Securities Act. The Company's obligation is
extinguished.
6. JMJ FINANCIAL
On June 13, 2013, we issued a $335,000 promissory note to JMJ FINANCIAL ("JMJ")
(the "JMJ Note"). Under the terms of the JMJ Note, we have given JMJ a $35,000
original issued discount and anticipate receiving up to $300,000 in installments
payable at JMJ's discretion, of which we have received $55,000 as of the date of
this Annual Report. Each installment by JMJ matures and is due and payable one
year after receipt thereof. No interest applies to an installment if payment is
made within 90 days from receipt thereof. A one-time 12% interest charge applies
to payments made after 90 days from receipt of the respective installment.
If we default on the JMJ Note an interest rate of 18% will apply, and we will be
required to pay the greater of (i) (A) the outstanding balance (including
interest and other fees and amounts), (B) divided by the conversion price and
multiplied by the VWAP; or (ii) 150% of the outstanding principal amount along
with 100% of the accrued and unpaid interest and other fees and amounts due. In
addition, if we fail to issue stock to JMJ within three business days of receipt
of a notice of conversion, we must pay a $2,000 per day penalty, which will be
added to the principal of the JMJ Note.
The JMJ Note is convertible into shares of our common stock at a conversion
price equal to 60% of the lowest trading price of our common stock as reported
on the OTCQB for any of the 25 trading days prior to conversion, subject to
additional discounts based on DWAC and DTC eligibility. Unless otherwise
mutually agreed in writing, however, JMJ may not convert an amount which would
cause JMJ to own more than 4.99% of our outstanding common stock. We have
granted piggyback registration rights for shares issuable under the JMJ Note.
The terms of the JMJ Note are subject to adjustment if we issue securities with
more favorable terms than the JMJ Note, including without limitation terms re:
warrant coverage, original issue discount, interest rates, conversion price and
lookback periods, etc.
The JMJ Note was issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that JMJ is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
As of February 2014, we received an additional $25,000 installment under our
promissory note with JMJ dated June 13, 2013 (the "JMJ Note"), under which JMJ
may lend to us an aggregate amount of $335,000 with a $35,000 original issue
discount. Each installment by JMJ matures and is due and payable one year after
receipt thereof. No interest applies to an installment if payment is made within
90 days from receipt thereof. A one-time 12% interest charge applies to payments
made after 90 days from receipt of the respective installment. If we default on
the JMJ Note an interest rate of 18% will apply, and we will be required to pay
the greater of (i) (A) the outstanding balance (including interest and other
fees and amounts), (B) divided by the conversion price and multiplied by the
VWAP; or (ii) 150% of the outstanding principal amount along with 100% of the
accrued and unpaid interest and other fees and amounts due. In addition, if we
fail to issue stock to JMJ within three business days of receipt of a notice of
conversion, we must pay a $2,000 per day penalty, which will be added to the
principal of the JMJ Note.
The JMJ Note is convertible into shares of our common stock at a conversion
price equal to 60% of the lowest trading price of our common stock as reported
on the OTCQB for any of the 25 trading days prior to conversion, subject to
additional discounts based on DWAC and DTC eligibility. Unless otherwise
mutually agreed in writing, however, JMJ may not convert an amount which would
cause JMJ to own more than 4.99% of our outstanding common stock. We have
granted piggyback registration rights for shares issuable under the JMJ Note.
The terms of the JMJ Note are subject to adjustment if we issue securities with
more favorable terms than the JMJ Note, including without limitation terms re:
warrant coverage, original issue discount, interest rates, conversion price and
lookback periods, etc.
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The JMJ Note was issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that JMJ is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
7. WHC CAPITAL, LLC
On August 1, 2013, we entered into a purchase agreement with WHC Capital, LLC
("WHC") (the "Purchase Agreement" under which we concurrently issued a $166,000
12% secured convertible debenture (the "Debenture") to WHC. The Debenture
matures on August 1, 2014, and interest on the Debenture is payable in cash upon
maturity. If we fail to repay the Debenture with interest upon maturity, the
interest rate increases to 22%. The Debenture is secured by 35,000,000 shares of
common stock pledged by Benny R. Powell, our Chief Executive Officer, President,
Chief Financial Officer, and Secretary, and a member of the Board, from his
individual holdings. Funding of this note was received in August 2013 and the
Debenture was paid in full during the reporting period.
The Debenture was issued to WHC pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933. WHC represented to us that
it is an accredited investor and had adequate information about us as well as
the opportunity to ask questions and receive responses from our management.
8. LG CAPITAL FUNDING, LLC
On October 2, 2013, we issued a $55,000 convertible note (the "LG Note") to LG
Capital Funding, LLC ("LG") with an original issue discount of 10% covering
$5,000 in LG's due diligence and legal fees in connection with the LG Note. The
LG Note is due and payable on October 2, 2015, with interest payable in shares
of our common stock. If we fail to repay the LG Note upon maturity, a default
interest rate of 24% shall also apply from such date, or at the highest rate
permitted by law. We may redeem the LG Note with a payment of 150% of the
outstanding principal amount, and are required to redeem the LG Note upon
certain sales as set forth in the LG Note. The LG Note is convertible after the
running of the applicable Rule 144 holding period without restrictive legend
into shares of our common stock at a conversion price equal to 60% of the lowest
trading price of our common stock as reported on the OTCQB for any of the ten
trading days prior to and including the date upon which notice of conversion is
received. The LG Note was issued pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that LG is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
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"). The
issuance was made pursuant to a May 27, 2014 notice of conversion and fully paid
off the 2013 LG Note.
On March 5, 2014, we issued a $53,000 8% convertible, redeemable note (the "LG
Note") to LG with an original issue discount covering $3,000 in LG's legal fees
in connection with the LG Note. The LG Note is due and payable on March 5, 2015,
with interest payable in shares of our common stock. If we fail to repay the LG
Note upon maturity, a default interest rate of 24% shall also apply from such
date, or at the highest rate permitted by law. We may redeem the LG Note with a
payment of 150% of the outstanding principal amount during the first 180 days of
the LG Note, and are required to redeem the LG Note upon certain sales events as
set forth in the LG Note.
The LG Note is convertible after the running of the applicable Rule 144 holding
period without restrictive legend into shares of our common stock at a
conversion price equal to 55% of the lowest closing bid price of our common
stock as reported on the OTCQB for any of the ten trading days prior to and
including the date upon which notice of conversion is received.
The LG Note was issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that LG is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
On May 24, 2014, we entered into a Securities Purchase Agreement with LG (the
"LG SPA") under which we agreed to issue two 9% convertible notes in the
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principal amount of $50,000 each for an aggregate principal amount of $100,000
(each a "LG Note") in exchange for (i) $50,000 in cash for the first LG Note;
and (ii) for the second LG Note, a $50,000 promissory note issued by LG to us
(the "LG Payment Note") due January 30, 2015 (contingent on our continuing to
meet current information requirements of Rule 144 under the Securities Act)
issued by GEL to us, bearing interest at the rate of 8% per annum and secured by
a pledge of the second LG Note; provided, however, that LG may substitute other
collateral with equivalent appraised value upon three days prior written notice
if we do not object. The second LG Note may not be converted until the LG
Payment Note is fully paid. Provided, however, that we have agreed to reimburse
$2,500 in legal fees to LG for each LG Note.
The LG Notes are due and payable on May 30, 2015, with interest payable in
shares of common stock. If we fail to repay the LG Notes when due, or if other
will apply. In addition, if we fail to issue unrestricted stock to LG within
three business days of receipt of a notice of conversion, we must pay a $250 per
day penalty, which fee increases to $500 per day beginning on the tenth day;
provided, however, that once each LG Note is cash funded, the penalty shall be
an increase of principal by 10%, 20%, or 50% for certain breaches of such LG
Note.
We may redeem the First LG Note within 180 days of issuance of such first LG
Note at 140% of the face value of the note plus any accrued interest. We may not
prepay the Second LG Note unless that first LG Note is redeemed as set forth
above. The LG Note is convertible into shares of our common stock at a
conversion price equal to 55% of the lowest closing bid price of our common
stock for the ten trading days on or prior to the date upon which notice of
conversion is received, subject to reduction to 45% if there is DTC Chill placed
on our shares of common stock. The LG Notes were issued pursuant to the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933 and regulations promulgated thereunder. We believe that LG is an accredited
investor and had adequate information about us as well as the opportunity to ask
questions and receive responses from our management.
9. JSJ INVESTMENTS, INC.
On August 5, 2013, we issued a $27,500 convertible note (the "JSJ Note") to JSJ.
The JSJ Note was due and payable in six months from issuance at a premium of
125% of the principal amount. If we fail to repay the JSJ Note upon maturity, a
default interest rate of 10% shall also apply from such date. 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 ten
trading days prior to the date of conversion; or (ii) the ten trading days prior
to the execution of the JSJ Note. The Debenture was issued to JSJ pursuant to
the exemption from registration set forth in Section 4(2) of the Securities Act
of 1933 and regulations promulgated thereunder. We believe that JSJ is an
accredited investor and had adequate information about us as well as the
opportunity to ask questions and receive responses from our management.
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.
On July 25, 2014, we also entered into amendments of the June 10, 2014 and July
11, 2014 Notes increasing the interest rate on each Prior Note to 22% per annum
from the issue date of such Prior Note and increasing the default interest rate
of each Prior Note to 22% per annum from the maturity date of such Prior Note.
23
On July 25, 2014, we issued a $100,000 22% Convertible Note (the "JSJ Note") to
JSJ. The JSJ Note is due and payable on January 25, 2015 at a premium of 150% of
the principal amount upon approval and acceptance by JSJ, with the principal
balance of the note payable on demand. If we fail to repay the JSJ Note on
demand, a default interest rate of 22% 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% 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. In addition, if the aggregate price per share of
any securities we issue that are convertible into or exchangeable for, directly
or indirectly, or exercisable for common stock The JSJ Note was issued to JSJ
pursuant to the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933 and regulations promulgated thereunder. We believe that
JSJ is an accredited investor and had adequate information about us as well as
the opportunity to ask questions and receive responses from our management.
On August 20, 2014, we issued a $50,000 22% Convertible Note (the "JSJ Note") to
JSJ. The JSJ Note is due and payable on February 20, 2015 at a premium of 150%
of the principal amount upon approval and acceptance by JSJ, with the principal
balance of the note payable on demand. If we fail to repay the JSJ Note on
demand, a default interest rate of 22% 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% 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. The JSJ Note was issued to JSJ pursuant to the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933 and regulations promulgated thereunder. We believe that JSJ is an
accredited investor and had adequate information about us as well as the
opportunity to ask questions and receive responses from our management.
10. ASHER ENTERPRISES, INC.
On September 30, 2013 and November 11, 2013, we entered into Securities Purchase
Agreements (the "Asher SPAs") and 8% Convertible Promissory Notes (the "Asher
Notes") with Asher in the principal amounts of $37,500 and $53,000,
respectively. The two transactions are substantially the same, and the documents
relating to the November 11, 2013 investment are filed herewith.
The Asher Notes were due approximately one year from their respective issuances,
and they were paid in full during the reporting period. .
The Asher Notes were issued pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. Asher has represented to us that it is an accredited investor and
had adequate information about us as well as the opportunity to ask questions
and receive responses from our management.
On January 7, 2014, we entered into a 8% Convertible Promissory Note (the "Asher
Note") and Securities Purchase Agreement (the "Asher SPA") with Asher in the
principal amounts of $32,500. The Asher Note was due approximately one year from
its issuance, but we paid it in full.
The Asher Note was issued pursuant to the exemption from registration set forth
in Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. Asher has represented to us that it is an accredited investor and
had adequate information about us as well as the opportunity to ask questions
and receive responses from our management.
24
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At August 31, 2014, we had cash of $5,953 compared to $14,937 at August 31,
2013. The bulk of our other assets consist of inventory and prepaid inventory
expenses. We are currently generating revenues from operations that are
insufficient to meet our operating expenses. Our management believes that given
the current economic environment and the continuing need to strengthen our cash
position, there is still doubt about our ability to continue as a going concern.
We are 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, our products. There can be no assurance that we will
be successful in these. Should we be unable to obtain adequate financing or
generate sufficient revenue in the future, our business, results of operations,
liquidity and financial condition would be materially and adversely harmed, and
we will be unable to continue as a going concern.
The disclosures contained in "Item 5. Market For Registrant's Common Equity,
Related Stockholder Matters, And Issuer Purchases Of Equity Securities-- Recent
Sales of Unregistered Securities" above are incorporated herein by reference.
We believe that events may have occurred or may exist that (i) may require
adjustments to the conversion price and other terms of our convertible debt;
(ii) may subject us to penalties and fees under such convertible debt; and (iii)
may require us to issue additional securities to convertible debt holders.
Nevertheless, we have not received any notice of default or notice of
acceleration of any of our convertible debt.
STOCK REPURCHASE PROGRAM
On June 25, 2013, we announced that we had authorized a stock repurchase program
permitting us to repurchase shares of our common stock over the next six to 12
months. The shares are to be repurchased from time to time in open market
transactions or in privately negotiated transactions in our discretion. We
purchased 615,900 shares in June 2013 for an average price of $0.0141 and
1,170,000 shares in July 2013 for an average price of $0.0192. We have not
purchased any shares under this program from August 2013 though the date of this
report. The shares repurchased as listed above have not yet been returned to
authorized but unissued status, but upon doing so, will result in us having
outstanding 1,785,900 less shares of common stock.
CASH
Our net cash used by operating activities was $1,019,528 for the fiscal year
ended August 31, 2014 as compared to $451,808 for the fiscal year ended August
31, 2013.
Cash used in investing activities increased from $8,211 for the fiscal year
ended August 31, 2013 to $19,461 for the fiscal year ended August 31, 2014.
Cash provided by financing activities for the fiscal years ended August 31, 2014
and 2013 was $1,030,005 and $474,687, respectively, largely due to proceeds from
notes payable of $1,010,353 in the fiscal year ended August 31, 2014, as
compared to $490,500 from notes payable proceeds in the fiscal year ended August
31, 2013.
OFF BALANCE SHEET ARRANGEMENTS
We may engage in off-balance sheet financing from time-to-time. Generally, such
arrangements have involved the pledging of collateral in connection with loans
undertaken by the Company. Benny R. Powell, our Chief Executive Officer,
President, Chief Financial Officer, and Secretary, and a member of our Board of
Directors, is the principal pledger of collateral. Mr. Powell may be reimbursed
to the extent his pledged assets have been forfeited to the Company's lenders.
Under the 12% Secured Convertible Debenture (the "Debenture") we issued to WHC
Capital, LLC ("WHC") on August 1, 2013, as disclosed in our Current Report on
Form 8-K filed on August 19, 2013, we were required to register 300% of the
principal amount of the shares into which the Debenture may be converted.
Because such registration was not declared effective by the Securities and
25
Exchange Commission by December 9, 2013, the principal amount of the Debenture
has increased by 140% to $232,400. WHC has notified us of its intention to sell
the 35,000,000 shares of common stock (the "Pledged Shares") pledged as
collateral by Benny R. Powell, our Chief Executive Officer, President, Chief
Financial Officer, and Secretary, and a member of our Board of Directors under
the Pledge and Security Agreement with WHC and Mr. Powell, to cover payment of
the $232,400 plus interest.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, REVENUE
FROM CONTRACTS WITH CUSTOMERS. The revenue recognition standard affects all
entities that have contracts with customers, except for certain items. The new
revenue recognition standard eliminates the transaction-and industry-specific
revenue recognition guidance under current GAAP and replaces it with a
principle-based approach for determining revenue recognition. Public entities
are required to adopt the revenue recognition standard for reporting periods
beginning after December 15, 2016, and interim and annual reporting periods
thereafter. Early adoption is not permitted for public entities. The Company has
reviewed the applicable ASU and has not, at the current time, quantified the
effects of this pronouncement, however it believes that there will be no
material effect on the consolidated financial statements.
In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12
COMPENSATION -- STOCK COMPENSATION (TOPIC 718), ACCOUNTING FOR SHARE-BASED
PAYMENTS WHEN THE TERMS OF AN AWARD PROVIDE THAT A PERFORMANCE TARGET COULD BE
ACHIEVED AFTER THE REQUISITE SERVICE PERIOD. A performance target in a
share-based payment that affects vesting and that could be achieved after the
requisite service period should be accounted for as a performance condition
under Accounting Standards Codification (ASC) 718, COMPENSATION -- STOCK
COMPENSATION. As a result, the target is not reflected in the estimation of the
award's grant date fair value. Compensation cost would be recognized over the
required service period, if it is probable that the performance condition will
be achieved. The guidance is effective for annual periods beginning after 15
December 2015 and interim periods within those annual periods. Early adoption is
permitted. Management has reviewed the ASU and believes that they currently
account for these awards in a manner consistent with the new guidance, therefore
there is no anticipation of any effect to the consolidated financial statements.
In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15
PREPARATION OF FINANCIAL STATEMENTS - GOING CONCERN (SUBTOPIC 205-40),
DISCLOSURE OF UNCERTAINTIES ABOUT AN ENTITY'S ABILITY TO CONTINUE AS A GOING
CONCERN. Under generally accepted accounting principles (GAAP), continuation of
a reporting entity as a going concern is presumed as the basis for preparing
financial statements unless and until the entity's liquidation becomes imminent.
Preparation of financial statements under this presumption is commonly referred
to as the going concern basis of accounting. If and when an entity's liquidation
becomes imminent, financial statements should be prepared under the liquidation
basis of accounting in accordance with Subtopic 205-30, PRESENTATION OF
FINANCIAL STATEMENTS--LIQUIDATION BASIS OF ACCOUNTING. Even when an entity's
liquidation is not imminent, there may be conditions or events that raise
substantial doubt about the entity's ability to continue as a going concern. In
those situations, financial statements should continue to be prepared under the
going concern basis of accounting, but the amendments in this Update should be
followed to determine whether to disclose information about the relevant
conditions and events. The amendments in this Update are effective for the
annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted. The Company will evaluate
the going concern considerations in this ASU and future reports will include any
additional disclosures required.
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.
26
SUBSEQUENT EVENTS
ISSUANCES OF PREFERRED STOCK
As of November 6, 2014, we entered into a Securities Purchase Agreement (the
"SPA") with Mark Fischbach under which we agreed to issue to Mr. Fischbach (i)
30,000,000 shares of our common stock (the "Common Shares"); and (ii) 5,000,000
shares of our proposed Series Z Preferred Stock, with rights, privileges and
preferences as set forth below (the "Series Z Preferred Shares") (collectively
with the Common Shares, the "Shares") for an aggregate price of $200,000 (the
"Purchase Price"). We closed on this transaction on November 12, 2014. Mr.
Fischbach is entitled appoint one member of our Board. Mr. Fischbach has been
appointed to our Board contingent on the Closing pursuant to this right.
As of December 23, 2014, we entered into a Securities Purchase Agreement (the
"SPA") with our director and officer Benny R. Powell under which we agreed to
issue to Mr. Powell 5,000,000 shares of our Series Z Preferred Stock, with
rights, privileges and preferences as set forth below (the "Shares") in exchange
for payment of $150,000.00 (the "Purchase Price"). We closed on this transaction
on December 22, 2014.
Each Series Z Preferred Share is entitled to a liquidation preference equal to
the original purchase price of the Series Z Preferred Shares ($0.03 per share).
In addition, subject to the applicable rules and published guidance of a
national securities exchange or automated inter-dealer quotation system on which
our common stock may in the future be listed or quoted (the "Listing Rules"),
and for so long as investor continues to hold Series Z Preferred Shares, the
holder will be entitled to 100:1 super-voting rights on all matters submitted to
a vote of our stockholders, subject to adjustment. The Company retains the
option of redeeming the Series Z Shares to the extent that we reasonably
determine that the above rights would impede our ability to be listed or quoted
under the Listing Rules.
CONVERSION OF DEBT, SHARE ISSUANCES, DEFAULT TO CERTAIN LOAN TERMS
Since the fiscal year end, we converted notes and accrued interest of
approximately $154,000 in exchange for 317,303,879 shares of our common stock.
In accordance with convertible note agreements, delinquent filings of our annual
and quarterly reports are subject to default provisions. As of the date of
filing, we are delinquent in filing this annual report for the year ended August
31, 2014 and in filing our report for the quarter ended November 30, 2014. These
delinquencies trigger defaults in the terms of outstanding loan covenants for
which monetary penalties are accruing. We estimate these costs to be
approximately $152,000, which satisfaction will require additional issuance of
common stock, in accordance with conversion terms of those agreements. We
estimate that an additional 315,000,000 shares of common stock will be required
to be issued in satisfaction of these terms.