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NOTES PAYABLE

12 Months Ended

Aug. 31, 2013

On September 30, 2012, the Company executed a promissory note with an individual for $1,900. The note bears interest at 10% and was due on or before December 29, 2012. This note and all accrued interest has been repaid in full.

On October 12, 2012, the Company executed a promissory note with Argent Offset, LLC for $20,000. The note bears interest at 18% and was due on or before January 10, 2013. On February 27, 2013, a new convertible promissory note was executed for $33,850. The note bears interest at 18% compounded monthly and is due August 26, 2013. The new note amends and replaces in its entirety the note dated October 12, 2012. Pursuant to the terms of the note, it is convertible into shares of the Company’s common stock at the option of the holder at any time in whole or in part at a conversion rate of $0.11. On the commitment date, management evaluated the conversion feature with respect to the benefit of the holder and determined the value of the conversion feature to be $18,464. This amount has been recorded as a discount against the outstanding balance of the note. The discount was amortized to interest expense over the life of the debt using the effective interest method. Interest charged to operations relating to the amortization of the debt discount for the year ended August 31, 2013 amounted to $18,464. In addition, the note included one warrant giving the holder the right to purchase 50,000 shares of common stock at a price of $0.20 per share for a period of three years. As required by ASC 470-20 the Company valued the warrant and recorded a debt discount to additional paid in capital in the amount of $3,690 based on the discount to market available at the time of issuance. The discount was to be amortized over the life of the loan to interest expense. As of August 31, 2013, $3,690 has been amortized to interest expense. As of August 31, 2013, the note has accrued interest of $1,641. On November 26, 2013, an agreement of temporary forbearance was executed in which for a $1,000 fee the lender agreed to waive any default until December 15, 2013.

On December 3, 2012, the Company executed a convertible promissory note with Steven J. Caspi (“Caspi”) for $125,000. The note bears interest at 5% and was due on or before November 30, 2013. Pursuant to the terms of the note, it is convertible into shares of the Company’s common stock at the option of the holder at any time in whole or in part at a conversion rate of $1.25. On the commitment date, management evaluated the conversion feature with respect to the benefit of the holder and determined the value of the conversion feature to be $60,000. This amount has been recorded as a discount against the outstanding balance of the note. The discount is being amortized to interest expense over the life of the debt using the effective interest method. Interest charged to operations relating to the amortization of the debt discount for the year ended August 31, 2013 amounted to $44,712. The note also issued one warrant giving the holder the right to purchase 15,625 shares of common stock at a price of $2.00 per share for a period of five years. As required by ASC 470-20 the Company recorded a debt discount to additional paid in capital in the amount of $16,455 based on the discount to market available at the time of issuance. The discount is to be amortized over the life of the loan to interest expense. As of August 31, 2013, $12,263 has been amortized to interest expense. As of August 31, 2013, this note is still outstanding and has accrued interest of $4,766. The note is shown net of a debt discount of $19,480 at August 31, 2013 This note is currently in default with the parties renegotiating the terms of repayment.

On March 20, 2013, the Company executed a convertible promissory note for $32,500 with an investor. The note bears interest at 8% per annum and is due on or before December 26, 2013. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. As of August 31, 2013 this note is still outstanding and has accrued interest of $1,168.

On April 4, 2013, the Company executed a convertible promissory note for $15,500 with an investor. The note bears interest at 8% per annum and is due on or before January 8, 2014. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. As of August 31, 2013 this note is still outstanding and has accrued interest of $506.

On June 3, 2013, the Company executed a convertible promissory note for $32,500 with an investor. The note bears interest at 8% per annum and is due on or before December 26, 2013. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. As of August 31, 2013 this note is still outstanding and has accrued interest of $637.

On August 5, 2013, the Company executed a convertible promissory note for $32,500 with an investor. The note bears interest at 8% per annum and is due on or before December 26, 2013. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. As of August 31, 2013 this note is still outstanding and has accrued interest of $192.

On June 15, 2013, the Company executed a promissory note for $15,000 with a shareholder. The note bears interest at 10% and was due within ninety days. As of August 31, 2013 this note was still outstanding and has subsequently become past due. Accrued interest as of August 31, 2013 is $312.

On June 12, 2013, the Company executed a promissory note for $15,000. The loan was due August 12, 2013. The note does not bear interest but its principal balance includes a loan fee of $5,000. Subsequent to August 31, 2013, the loan was extended with no specific terms of repayment.

On June 19, 2013, the Company executed a Convertible Promissory Note (the “note”) with JMJ Financial (“JMJ”). The nominal principal sum of the Note is $300,000, with an original issue discount of ten percent (10%). The note matures one year from the effective date of each payment, which are made at the sole discretion of JMJ. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 60% discount to the lowest trade price in the twenty five trading days prior to conversion.

The Company received its first payment from JMJ towards the loan of $55,000 on June 19, 2013. The Company recorded a debt discount in the amount of $60,500 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $75,507 based on the Black Scholes Merton pricing model using the following attributes: .13% risk free rate, 134% volatility and a one year term to maturity.

As of August 31, 2013, $12,266 of the discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $102,245 resulting in a loss on the change in fair value of the derivative. Accrued interest totaled $1,452 due to a onetime 12% interest charge incurred if the loan was not repaid within ninety days. The note is shown net of a debt discount of $48,234 at August 31, 2013.

The Company received its second payment from JMJ towards the loan of $25,000 on August 14, 2013. The Company recorded a debt discount in the amount of $27,500 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $62,569 based on the Black Scholes Merton pricing model using the following attributes: .12% risk free rate, 144% volatility and a one year term to maturity.

As of August 31, 2013, $1,356 of the discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $46,625 resulting in a gain on the change in fair value of the derivative. Accrued interest totaled $163 due to a onetime 12% interest charge incurred if the loan was not repaid within ninety days. The note is shown net of a debt discount of $26,144 at August 31, 2013.

A summary of the status of the Company’s debt discounts, derivative liabilities and original issue discounts, and changes during the periods is presented below:

Debt Discount	August 31, 2012		Additions		Amortization		August 31, 2013
Caspi	$	—	$	76,455	$	56,975	$	19,480
Argent		—		22,154		22,154		—
JMJ – 6/19/13		—		60,500		12,266		48,234
JMJ – 8/14/13		—		27,500		1,356		26,144
	$	—	$	186,609	$	92,751	$	93,858

Derivative Liabilities	August 31, 2012		Initial Valuation		Reevaluation on 8/31/2013		(Gain) Loss on Derivative
JMJ – 6/19/13	$	—	$	75,507	$	102,245	$	26,738
JMJ – 8/14/13		—		62,569		46,625		(15,944	)
	$	—	$	138,076	$	148,870	$	10,794

Original Issue Discount	August 31, 2012		Additions		Amortization		August 31, 2013
JMJ – 6/19/13	$	—	$	5,500	$	1,115	$	4,385
JMJ – 8/14/13		—		2,500		123		2,377
	$	—	$	8,000	$	1,238	$	6,762

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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