Debt

12 Months Ended

Nov. 30, 2014

Debt Disclosure [Abstract]

Debt

5. Debt

The following table summarizes components of debt as of November 30, 2014 and 2013:

	2014			2013
Debt due to Laurus	$	2,266,186		$	2,108,498
Convertible debt due to Factor Fund		1,935,190			2,182,690
Convertible debt due to various lenders		448,520			250,089
Other short-term debt due to various lenders		170,496			241,730
Total debt		4,820,392			4,783,007
Less: current portion of long-term debt		(4,631,122	)		(3,766,468	)
Less: discount on debt		(189,270	)		(1,002,879	)
Total long-term debt, net of discounts	$	—		$	13,660

Debt due to Laurus

As of November 30, 2014 and 2013, the Company owed a third party lender, LV Administrative Services, Ltd., as agent for Laurus Master Fund, Ltd. and various affiliates (“Laurus”), $2,266,186 and $2,108,498, respectively.   All of such debt became due by its terms on September 28, 2010.  Pursuant to two assignment agreements, in which the Company and Laurus agreed to assign the debt to a third party, the interest rate on the debt was changed to zero percent from January 31, 2012 to April 12, 2013. Beginning on April 12, 2013, the interest rate on the Laurus debt reverted to the rate charged in the original note agreements, which ranges from 5.25% to 20% per annum. The Company has not made payments of principal or interest when due, and is not in compliance with its agreements with Laurus. Laurus has not issued a default notice and had signed an agreement, on two separate occasions, to sell all of its debt at a discount to a third party, however the third parties did not fulfill all of the terms of the agreements and $2,266,186 and $2,108,498 of debt remains due to Laurus at November 30, 2014 and 2013, respectively.

On December 31, 2014, Laurus and the Company again entered into an agreement to assign the remaining debt to a third party for $100,000. Since that date, $30,000 of the $100,000 has been paid. That agreement was then assigned to EXO Opportunity Fund, which has agreed to pay the remaining $70,000 to Laurus. Such payment would eliminate the balances due from the Company to Laurus and release the security interest and lien filed by Laurus.

During the year ended November 30, 2013, the Company recorded a troubled debt restructuring gain of $2,714,461 as a result of a debt assignment agreement that included debt forgiveness in exchange for repayments to Laurus of reduced amounts from other lenders.

Convertible debt due to Factor Fund

In March 2013, 112359 Factor Fund, LLC (the “Fund”), was assigned the $6,368,078 of outstanding debt owed to Laurus, which the Fund could satisfy in full by making certain payments to Laurus. Factor Fund did not abide by the contractual terms of the assignment agreement; therefore, at November 30, 2014 and 2013, the Company is still obligated to Laurus as noted above.

During February 2013, the Company entered into a securities purchase agreement with the Fund pursuant to which the Company issued to the Fund (i) an amended convertible debenture in the principal amount of $1,000,000 (“Amended Note 1”) and (ii) a second amended convertible debenture in the principal balance of $1,000,000 (“Amended Note 2” and together with Amended Note 1, the “Amended Notes”).  The Amended Notes were sold to the Fund by the Company in exchange for the Fund’s assumption and payment of the Laurus assignment agreement (which required the Fund to make payments totaling $350,000, of which $250,000 was paid, to Laurus), payment to the Company of $150,000, and the agreement to purchase from another lender and cancel an existing convertible debenture in the amount of approximately $35,000.

The Amended Notes matured on December 31, 2014, and were modified in January 2015 to mature on December 31, 2015.  Interest accrues on the unpaid principal and interest on the notes at a rate per annum equal to 6% for Amended Note 1 and 2% for Amended Note 2.

Principal and interest payments on Amended Note 1 can be made at any time by the Company, with a 30% prepayment premium, or the Fund can elect at any time to convert any portion of Amended Note 1 into shares of common stock of the Company at 100% of the volume weighted average price of the common stock for the 45 trading days immediately prior to the conversion date.  During the year ended November 30, 2013, the Fund converted $592,310 of principal into 279,958,599 shares of common stock of the Company.

The conversion price of Amended Note 1 is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the note was recognized as a derivative instrument at the issuance date and was measured at fair value at each reporting period. The Company determined that the fair value of the notes was $1,703,423 at the issuance dates. The value of the debt of $1,000,000 was recorded as a debt discount and is amortized to interest expense over the term of the Notes. The variance to the fair value of $703,423 was recognized as an initial loss and recorded to interest expense.

Amended Note 2 converts into shares of common stock of the Company in an amount equal to the lesser of the outstanding balance of Amended Note 2 divided by $0.01. Any principal or interest amount can be paid in cash.

During the year ended November 30, 2013, the Fund also loaned the Company amounts of $50,000, $35,000 and $12,000 (the “Bridge Notes”). In June 2013 the Fund refinanced the Bridge Notes with additional funding into another note for $665,000 (the “New Note”). The additional funding under the New Note provided cash to purchase two outstanding convertible debentures for an aggregate price of $99,360; cash for operations of $60,000 in June 2013; and $40,000 in cash each month for the months of July 2013 through December 2013. The Company incurred $68,640 in finder fees and legal fees in connection with the New Note, and a $100,000 original issuance discount. The New Note bears interest at 6% per annum and was due December 31, 2014. The Fund can elect at any time to convert any portion of the New Note into shares of common stock of the Company at 60% of the volume weighted average price of the common stock for the 20 trading days immediately prior to the conversion date. The Company received an aggregate of $300,000 in cash under the New Note in the months of June through December 2013 under the New Note.

The conversion price of the $665,000 of variable conversion price note is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the conversion feature was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. The Company determined that the fair value of the conversion feature was $1,103,940 at the issuance date. Debt discount was recorded up to the $625,000 face amount of the note and is amortized to interest expense over the term of the note. The fair value of the conversion feature in excess of the principal amount allocated to the notes in the aggregate amount of $478,940 was expensed immediately as additional interest expense

In conjunction with the New Note, the Company agreed to implement a salary deferral plan to reduce the cash expenditures for personnel, to limit its cash expenditures to certain pre-approved items, and to accrue an additional fee to the Fund of $150,000, which is included in interest expense and has been added to the principal balance of Amended Note 1.   The Fund agreed to limit its sales of the Company’s common stock, to not engage in any short transactions involving the Company’s common stock, and to not require the Company to increase its authorized shares of common stock for a certain time period, even though the financing documents require the Company to reserve authorized shares for issuance to the Fund, if the Fund desired to convert existing debt into shares of common stock.

Effective January 20, 2015, the Company signed a debt modification agreement with the Fund. The modification reduced the outstanding balance on Amended Note 1 from $280,190 to $250,000, and provided that upon the completion of the payments required to retire Amended Note 1, the outstanding balance of Amended Note 2 would be reduced to from $1,000,000 to $0.

Effective January 21, 2015, the Company signed a second debt modification agreement with the Fund. This modification reduced the principal balance of the New Note from $634,600 to $250,000.

The Amended Notes and New Note are secured by a blanket lien on substantially all of the Company’s assets pursuant to the terms of security agreements executed by the Company and its subsidiaries in favor of the Fund.  In addition, the Company’s chief executive officer and chief information officer pledged their combined voting control of the Company pursuant to a stock pledge agreement executed by the two officers in favor of the Fund, to further secure the Company’s obligations under the Amended Notes.  If an event of default occurs under the security agreement, the stock pledge agreement, the Amended Notes or the New Note, the secured parties have the right to accelerate payments under such promissory notes and, in addition to any other remedies available to them, to foreclose upon the assets securing such promissory notes.

In connection with the financings, the Company has agreed, for as long as 25% of the principal amount of the financings are outstanding, to certain restrictive covenants, including, among others, that the Company will not declare or pay any dividends, issue any preferred stock that is subject to mandatory redemption prior to the one year anniversary of the maturity date as defined in the agreement, redeem any of its preferred stock or other equity interests, dissolve, liquidate or merge with any other party unless, in the case of a merger, the Company is the surviving entity, materially alter or change the scope of the Company’s business incur any indebtedness except as defined in the agreement, or assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any other party’s obligations.  To secure the payment of all obligations to the lender, the Company entered into a Master Security Agreement that assigns and grants to the lender a continuing security interest and first lien on all of the assets of the Company and its subsidiaries.

During the year ending November 30, 2014, the Fund converted $287,500 of principal into 253,000,000 shares of common stock of the Company and recorded a gain of $1,059,464 on the conversions. During the year ending November 30, 2013, the Fund converted $592,310 of principal into 279,958,599 shares of common stock of the Company and recorded a gain of $1,292,816 on the conversions.

At November 30, 2014 and 2013, the Company owed the Fund $1,935,190 and $2,182,690, respectively.

Convertible Debt due to various lenders

Convertible debt with a fixed conversion rate

At November 30, 2014 and November 30, 2013, the Company owed a lender $138,000 and 144,839 respectively, in connection two notes that are past due, are in default, bear a default interest rate of 18% per annum, and are convertible at prices of $0.015 and $0.02 cents per share.

During the year ended November 30, 2014, the Company received $63,000 in convertible debt with a minimum conversion price of $0.00005 per share. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company at a discount of 49% of the price of the common stock as defined in the agreement, subject to a minimum conversion price of $0.00005 per share. At November 30, 2014 the Company owed the lender $63,000. Effective March 3, 2015, the lender notified the company it was in default and that in accordance with the default provisions of the lending agreement, the amount of principal that the Company was required to pay back to the lender via debt conversions, was increased to $94,500.

At November 30, 2014 and 2013, a total of $201,000 and $144,839 of convertible debt with a fixed conversion rate was outstanding, respectively

During the year ended November 30, 2013, two notes totaling $31,000, previously owed to the CEO of the Company, were assigned to third parties and modified to be convertible debt with a conversion rate of $0.001 and $0.005 per common share and a 0% to 24% interest rate. The $31,000 of debt was converted into 11,000,000 shares of common stock of the Company. No conversions of debt with a fixed conversion rate occurred during fiscal 2014

Convertible debt with a variable conversion rate issued for cash

During the year ended November 30, 2014, the Company received $152,500 in cash from lenders for convertible debt. The convertible debt bears interest at 8% is due between June and October 2015. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company, subject to a limit of 4.99% of the outstanding shares, at a price discount ranging from 30% to 42% of the price of the common stock as defined in the agreements.

The conversion price of the $152,500 of variable conversion price notes is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the notes was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. The Company determined that the fair value of the conversion feature was $163,714 at the issuance dates. The debt was recorded a debt discount of $152,102 and is amortized to interest expense over the term of the note. The fair value of the conversion feature in excess of the principal amount allocated to the notes in the aggregate amount of $11,612 was expensed immediately as additional interest expense.

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During the year ended November 30, 2013, the Company received $135,000 in cash from a lender for convertible debt. The convertible debt bears interest at 8% and was due between November 2013 and August 2014. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company at a volume weighted average price discount of 42% of the price of the common stock as defined in the agreement.

The conversion price of the $135,000 of variable conversion price notes is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the notes was recognized as a derivative instrument at the issuance date and is measured at fair value at each reporting period. The Company determined that the fair value of the note was $287,860 at the issuance dates. Debt discount was recorded up to the $135,000 face amount of the note and is amortized to interest expense over the term of the note. The fair value of the conversion feature in excess of the principal amount allocated to the notes in the aggregate amount of $152,860 was expensed immediately as additional interest expense.

At November 30, 2014 and 2013, a total of $179,770 and $37,500 of variable-rate convertible debt that had been issued for cash was outstanding, respectively. During the year ended November 30, 2014, $10,230 of this debt was converted into 137,000,000 shares of common stock of the Company. During the year ended November 30, 2013, $107,064 of debt and $3,123 of interest

was converted into 79,995,485 shares of common stock of the Company.

Convertible debt with a variable conversion rate assigned to lenders.

During the years ended November 30, 2014 and 2013, no other debt with a variable conversion rate was assigned to a lender. At November 30, 2014 and 2013, the Company owes one lender $67,750 as a result of an assignment in fiscal 2012. The convertible debt bears interest at 0% and is past due. The lender can elect at any time to convert any portion of the debt into shares of common stock of the Company at a price discount of 55% of the market price of the Company’s common stock as defined in the agreements.

During the year ended November 30, 2014, none of this debt was converted into shares of common stock of the Company. During the year ended November 30, 2013, $107,064 of debt and $3,123 of interest was converted into 79,995,485 shares of common stock of the Company.

At November 30, 2014 and 2013, a total of $448,520 and $250,089 of other convertible debt was outstanding, respectively.

Other short-term debt due to various lenders

During the years ended November 30, 2014 and 2013, the Company received $114,000 and $50,000, respectively from lenders in exchange for notes payable that had no conversion features.

At November 30, 2014 and November 30, 2013, the Company owed various lenders $170,496 and $241,730, respectively, for non-convertible notes. Cash payments were made on these notes of $167,980 and $36,034 during the years ended November 30, 2014 and 2013, respectively. Other short-term debt carries an interest rate of 0% to 17% over the term of the loans, and includes cash advances (the “Cash Advances”) from lenders that purchased future sales. The Company agreed to repay the Cash Advances at a premium to the amount received from the lender. For the years ended November 30, 2014 and 2013, $78,275 and $28,264, respectively, of amortization of premium from the Cash Advances is included in interest expense. At November 30, 2014 and 2013, Cash Advances totaled $67,196 and $100,428, respectively. Assets of a subsidiary of the Company secure the Cash Advances, which are currently in default.