Quarterly report pursuant to Section 13 or 15(d)

Senior Secured Convertible Note Payable

Senior Secured Convertible Note Payable
3 Months Ended
Nov. 30, 2018
Notes to Financial Statements  
Note 4: Senior Secured Convertible Note Payable

On June 4, 2018, the Company issued convertible notes in the principal amount of $10 million for a purchase price of $9 million to institutional investors, bearing interest at a rate of 8%, with maturity date of September 4, 2019, for cash proceeds of $8.4 million for mobile application development and support, IT and HR platform development and support and working capital. The Company incurred approximately $0.6 million of debt issuance costs that are incremental costs directly related to the issuance of the senior secured convertible notes payable.


Concurrently with the sale of the notes, the Company also granted warrants to purchase 1,004,016 shares of common stock to its institutional investors and also granted warrants to purchase 216,867 shares of common stock to its investment banker as placement fees, at an exercise price of $2.49, subject to down round price protection adjustment, as defined in the agreements.


The terms of convertible notes are summarized as follows:


  · Term: September 4, 2019;
  · Coupon: 8%;
  · Convertible at the option of the holder at any time;
  · Conversion price is initially set at $2.49 but subject to down round price protection. After the maturity, the conversion price will be set subsequently at the lesser of the then conversion price and 85% of the volume weighted average price for the trading date immediately prior to the application conversion date; and
  · Monthly amortization of principal either in cash at a 10% premium or in stock, subject to equity conditions, at a 15% discount to the lowest volume weighted average price, at the option of the  Company.


The Company had the following principal balances under its convertible notes outstanding as of November 30, 2018 and August 31, 2018:








    2018     2018  
8% Senior Secured Convertible notes, Principal (in default)   $ 10,000,000     $ 10,000,000  
Less debt discount costs     (462,871 )     (617,162 )
Less debt issuance costs     (1,669,692 )     (2,226,323 )
Less Principal converted to common stock     (1,558,333 )     -  
Total outstanding convertible notes, net     6,309,104       7,156,515  
Less current portion of convertible notes payable     (6,309,104 )     (7,156,515 )
Long-term convertible notes payable   $ -     $ -  


The Company recognized amortization expense related to the debt discount and debt issuance costs of $710,922 and $0 for the three months ended November 30, 2018 and 2017, respectively, which is included in interest expense in the statements of operations.


For the fiscal quarter ended November 30, 2018, and 2017, the interest expense on convertible notes was $0, respectively. The Company applied the interest paid in cash and interest paid in equity against the make whole provision, which represents guaranteed twelve months of coupon payments since the Company was in default from its registration rights agreements. As of November 30, 2018, and August 31, 2018, the balance in the make whole accrual amounts to $446,555 and $608,889, respectively, and such amount was accrued as of November 30, 2018 and August 31, 2018.


During the three months ended November 30, 2018, the Company converted $1,558,332 of principal and $86,778 accrued interest into shares of commons to our institutional investors and issued 664,923 shares of common stock.


Event of default


The Company executed registration rights agreements with each of its institutional investors. These registration rights agreements require, among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared effective within 90 days of June 4, 2018. Our registration statement was filed on October 1, 2018 and it was declared effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed.


The Company recorded in its condensed consolidated financial statements the mandatory default amount as stipulated in the convertible note agreements. As of November 30, 2018 and August 31, 2018, the Company recorded approximately $3.5 million, which is reported under current liabilities in its condensed consolidated statement of operations.


On December 20, 2018, the Company entered into settlement agreements with its institutional investors, which resolves all disputes relating to technical defaults by the Company in failing to meet deadlines for filing a registration statement and for having a registration statement effective by the SEC. As a result of such settlement, the Company increased the principal amount of the convertible notes by $888,888 in full settlement of the previously accrued $3.5 million default amount thereby decreasing the total liabilities reported on the Company’s November 30, 2018, and August 31, 2018, balance sheet by $2.6 million, respectively.