Note 4. Notes Payable and Advances

6 Months Ended

Feb. 28, 2014

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 4.  Notes Payable and Advances

Our convertible notes had various maturity dates, most of which expired on or before August 31, 2013; however, we have restructured the secured convertible debt into a new senior credit facility and signed loan extensions from all secured creditors.  Pursuant to terms of a number of the convertible notes, such notes are convertible into shares of our common stock at our election, which is expected to occur with a near-term financing event.

Notes payable and advances consist of the following (in thousands):

	February 28,		August 31,
	2014		2013
Convertible notes, interest at 12%	$	2,925	$	3,080
Line of credit notes		600		-
Settlement note payable		-		65
Advances		475		475
Total notes payable and advances		4,000		3,620
Discount, net of amortization		-		(25	)
Total	$	4,000	$	3,595

In December 2013, we entered into a revolving credit agreement with one of our investors pursuant to which we may borrow up to $1 million.  Borrowings are evidenced by an inventory secured revolving promissory note, convertible into shares of our common stock at $0.05 per share, with interest of 12% and due December 31, 2014.  We issued 1,000,000 shares of our common stock in connection with the line of credit facility.  In December we borrowed $300,000.  As of February 28, 2014, total line of credit borrowings are $600,000, which includes $300,000 of previously issued convertible notes exchanged for line of credit notes.

During the three months ended November 30, 2013, we issued $175,000 of our 12% convertible notes having terms of three months to nine months, and agreed to issue approximately 580,000 shares of our common stock.

In April 2014, we entered into Forbearance and Letter Agreements with the holder of past due $365,000 of convertible notes (the Forbearance Note) and related accrued interest of approximately $55,000, pursuant to which, among other things, the holder will forbear from pursuing its default remedies as provided in a prior settlement agreement, we will issue the holder 3,000,000 shares of our common stock, and have agreed to pay remaining accrued interest on May 15, 2014, and quarterly principal and interest payments of $75,000 commencing July 1st 2014, until repaid in full July 1st, 2015.

In connection with note payable financings, we incur fees and expenses and have agreed to issue shares of our common stock and warrants to purchase our common stock to our financial advisor for placement services.  During the three months ended February 28, 2014, we recorded approximately $33,000 of debt issue costs, which included fees of $27,000 and fair value of warrants issuable of approximately $6,000, and which is amortized to interest expense over borrowing terms.  

During the six months ended February 28, 2014, we also issued shares of our common stock in connection with issuance of our convertible notes, and have recorded the related fair value of approximately $16,000 as debt discount based on the closing stock date when issuable, and which is amortized to interest expense over borrowing terms.  

During the three months ended February 28, 2014, we issued 2,600,000 shares of our common stock upon conversion, at holders election, of notes payable of $130,000.

During the six months ended February 28, 2014 and 2013, we recognized amortization of debt issue costs and debt discount of approximately $74,000 and $206,000, respectively.

Settlement Note Payable – In 2012, we issued a promissory note payable due July 1, 2013 in the amount of $130,000.  The note payable is collateralized by a pledge of interests in all of the Company’s assets on a pari passu basis with holders of other notes payable.  The balance payable on the note was $65,000 on August 31, 2013.  In November 2013, we entered into an agreement with the note holder to pay $105,000 in February 2014 and issue the holder 600,000 shares of our common stock is full satisfaction of the note.  During the three months ended November 30, 2013, we recorded expense of $65,000, comprised of $40,000 additional payment and $15,000 for the fair value of shares issuable based on the closing price of our common stock on the date of the agreement, which is included in interest expense.  In February 2014, the note was repaid in full.

Advances –During the years ended August 31, 2012 and 2011, we received cash from an investor pursuant to an arrangement that would include our issuing notes or other securities, the terms of which were not finalized. We have accrued financing expense using interest rates in effect during the period funds were advanced.