During the nine months ended November 30, 2016, we refinanced $35,100 of non-interest bearing advances into a convertible note. All principal and accrued interest is payable on the maturity date.
The Company evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying common stock is indexed to the Company’s common stock. We determined that the conversion features did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. We evaluated the conversion features for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the note. Therefore, we recognized a discount for the beneficial conversion features of $35,100, in aggregate, on the date the notes were signed. We amortize the discounts for the notes dated May 31, 2016 at an effective interest rates of 317.38%. The beneficial conversion feature was recorded as an increase in additional paid-in capital and a discount to the convertible notes payable. The discount to the convertible notes payable will be amortized to interest expense over the life of the notes. During the nine months ended November 30, 2016 and 2015, we amortized discount on convertible notes payable of $516,682 and $429,326, respectively, to interest expense.
On March 22, 2016, we issued a convertible promissory note for $40,000. The note has an original issue discount of $6,500. The note matures on March 22, 2017, and bears interest at 5% per annum. The terms on the note allow the noteholder to convert principal and accrued interest into shares of our common stock beginning 180 days after issuance. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days.
On September 6, 2016, we issued a convertible promissory note with a face value of $31,320. The note has an original issue discount of $6,320. The note matures on August 30, 2017, and bears interest at 8% per annum. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock beginning 180 days after issuance. The variable conversion rate is a 50% discount to the lowest trading price over the preceding 20 trading days.
We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying common stock is indexed to the Company’s common stock. Once the note becomes convertible 180 days after issuance, the conversion features will meet the definition of a liability and therefore we will need to bifurcate the conversion feature and account for it as a separate derivative liability. We amortize the discounts for the notes dated May 31, 2016 and August 30, 2016 at effective interest rates of 26.12% and 2,361%, respectively. The original issue discount to the convertible notes payable will be amortized to interest expense over the life of the note.
On July 18, 2016, we issued a convertible promissory note for $9,000, with an original issue discount of $2,000. The note matures on July 18, 2017, and bears interest at 8% per annum. The noteholder paid the proceeds from this note directly to one of our vendors to reduce our outstanding account payable. The terms of the note allow the noteholder to convert principal and accrued interest into shares of common stock beginning 180 days after issuance. The variable conversion rate is a 49% discount to the lowest trading price over the preceding 20 trading days.
We evaluated the terms of the notes in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s common stock. The conversion features met the definition of a liability and therefore we bifurcated the conversion feature and account for it as a separate derivative liability. We recognized a $19,894 derivative liability related to the note using Black-Scholes model, $7,000 of which was recorded as a discount, and $12,894 as a loss on derivative instruments. Due to the embedded derivative, we had to evaluate our existing convertible notes for derivative liabilities. See Note 8.
The terms of the convertible note required us to issue 900,000 warrants with a strike price of $0.01 per share, with a maturity date of July 18, 2021. We recognized $117,058 derivative liability, which was immediately recognized as a loss on derivative instruments.
Violation of Debt Covenants
We violated the terms of our agreements for the convertible notes dated February 3, 2016 and March 22, 2016 on July 20, 2016 and July 25, 2016, respectively. The agreement had required us to file all quarterly and annual reports with the SEC on time. We filed our quarterly report on form 10-Q for the period May 31, 2016 after the deadline. As a result, the annual interest rate on each note increased from 5% per year to 18% per year. Additionally, the agreement called for us to increase the principal balance of the notes by 50% of their original face value. We recognized a loss on debt covenant violations of $23,000 and $20,000 on the notes dates February 3, 2016 and March 22, 2016, respectively. $25,000 of one of the note was re-assigned to another note holder and convertible immediately. The conversion feature was determined to be derivative liabilities, see Note 8.
Conversions to common stock
During nine months ended November 30, 2016, the holders of the Convertible Note Payable dated January 31, 2013 elected to convert principal and accrued interest in the amounts show below into shares of common stock at a rate of $0.01 per share. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion.
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Date
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|
Amount
Converted
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|
Number of
Shares Issued
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March 1, 2016
|
|
$
|
1,900
|
|
190,000
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August 8, 2016
|
|
|
9,871
|
|
175,000
|
August 26, 2016
|
|
|
9,425
|
|
264,000
|
September 8, 2016
|
|
|
6,003
|
|
193,633
|
September 9, 2016
|
|
|
7,268
|
|
285,000
|
September 22, 2016
|
|
|
3,065
|
|
299,000
|
September 29, 2016
|
|
|
3,486
|
|
574,635
|
October 11, 2016
|
|
|
1,713
|
|
339,142
|
November 7, 2016
|
|
|
2,868
|
|
1,075,249
|
November 23, 2016
|
|
|
2,146
|
|
715,356
|
Total
|
|
$
|
47,744
|
|
4,111,015
|
Note 8. Derivative Liabilities
On July 18, 2016, we issued a convertible promissory note with embedded variable price conversion options that is determined to be derivative instrument (see Note 7). We recognized a derivative liability of $19,894, which was recorded as a $7,000 discount to the note and a loss on derivative instruments of $12,894.
The same note required us to issue 900,000 warrants, which are also valued as a derivative instrument. Therefore, we recognized a derivative liability $117,058. This was recorded as a $117,058 loss on derivative instruments.
The embedded derivative in the July 18, 2016 convertible note tainted our outstanding convertible notes issues prior to that period. We calculated a $47,960,399 derivative liability related to those notes, which we reclassified from additional paid-in capital.
On August 30, 2016, we issued a modified convertible promissory note for $25,000, which had an embedded derivative liability of $48,833. We recognized this as a $25,000 discount against the note and a $23,833 loss on derivative instruments.
On September 6, 2016, we issued a convertible promissory note for $31,320, which had an embedded derivative liability of $50,500, which we recorded as a $25,000 discount against the note, and a $25,500 loss on derivative instruments.
- 13 -
During the nine months ended November 30, 2016, we released $60,509 of our derivative liability to equity due to conversions of principal on the associated notes.
On November 30, 2016, we revalued the fair value all of our derivative instruments and determined that we had total derivative liabilities of $5,470,256. During the nine months ended November 30, 2016, we recognized gain on derivative of $42,486,634.
The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following key assumptions during the nine months ended November 30, 2016
|
|
|
|
Expected dividends
|
|
—
|
%
|
Expected term (years)
|
|
0.25 – 5.00
|
|
Volatility
|
|
291% – 598
|
%
|
Risk-free rate
|
|
1.57% – 2.37
|
%
|
Note 9. Gain on Disposal of Assets
On September 30, 2016, we terminated the capital lease of our delivery van, with mutual agreement with the leaseholder. As such, On September 30, 2016 we wrote off both the asset value of the van and the capital lease obligation. The difference is recorded to gain on asset disposal.
Note 10. Debt Payment Obligations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended November 30,
|
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Convertible notes
|
|
$
|
1,611,276
|
|
$
|
269,791
|
|
$
|
130,345
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,011,412
|
|
Total
|
|
$
|
1,611,276
|
|
$
|
269,791
|
|
$
|
130,345
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,011,412
|
|
Note 11. Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased to reflect the potential dilution that could occur if outstanding convertible notes payable were converted and warrants were exercised. Anti-dilutive shares represent potentially dilutive securities that which are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30,
|
|
Three Months Ended
November 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
|
|
5,822,446
|
|
|
2,319,673
|
|
|
7,228,963
|
|
|
3,872,587
|
|
Dilution effect of warrants
|
|
|
811,216
|
|
|
—
|
|
|
539,083
|
|
|
—
|
|
Dilution effect of convertible notes payable
|
|
|
439,266,647
|
|
|
—
|
|
|
439,266,647
|
|
|
—
|
|
Weighted-average shares - diluted
|
|
|
445,900,309
|
|
|
2,319,673
|
|
|
447,043,693
|
|
|
3,872,587
|
|
Note 12. Subsequent Events
On December 2, 2016, the holder of the modified convertible promissory note dated August 30, 2016, converted $2,986 of principal and accrued interest into 891,304 shares of common stock.
On December 19, 2016, the holder of the modified convertible promissory note dated August 30, 2016, converted $3,703 of principal and accrued interest into 892,173 shares of common stock.
On December 28, 2016, the holder of the modified convertible promissory note date August 30, 2016, converted $2,670 of principal and accrued interest into 1,067,808 shares of common stock.
- 14 -
On January 4, 2017, the holder of the convertible promissory note dated November 30, 2013, modified a $2,500 portion of the note into a convertible debenture. The debenture is non-interest bearing, matures on January 4, 2018, and is convertible into shares of our common stock at a rate of $0.001 per share.
On January 5, 2017, the holder of the convertible debenture issues on January 4, 2017 converted $580 of principal into 580,000 shares of our common stock.
On January 13, 2017, we issued a new convertible promissory note with a face value of $38,000. The note matures on October 28, 2017 and bears interest at 8% per annum. The note is convertible into shares of common stock at a 40% discount to the average of the three lowest trading prices over the preceding ten trading days.