Debt

12 Months Ended

Nov. 30, 2012

Debt [Abstract]

Debt

3.         Debt

The following table summarizes components of long-term debt and capital lease obligations as of November 30, 2012 and 2011:

Principal lender:	2012		2011		Interest Rate
Note dated November 30, 2005	$	986,271	$	2,080,349		5.25	%(1)
Note dated May 31, 2006		716,041		1,510,673		5.25	%(1)
Note dated September 28, 2007		2,378,733		4,960,260		9.75	%(1)
Note dated May 28, 2008		1,148,254		2,332,294		20.00	%(1)
Note dated October 29, 2008		709,001		1,425,045		15.00	%(1)
Note date February 15, 2009		402,797		812,531		20.00	%(1)
Note dated October 6, 2009		3,802		7,835		5.25	%(1)
Note dated November, 2009		23,179		48,600		5.25	%(1)
Total principal lender debt		6,368,078		13,177,587
Short-term borrowings		1,068,867		1,203,274		0.00% - 24.00	%
Capital lease obligations		7,545		32,100		12.00% - 17.38	%
Total short-term debt		7,444,490		14,412,961
Long-Term Debt		358,614		314,355
Total Debt	$	7,803,104	$	14,727,316

(1)  Effective February 1, 2012, the interest rate to the principal lender was revised to 0%.

Debt with Principal Lender

As of November 30, 2012 and 2011, the Company owed its principal lender (“Lender”) $6,368,078 and $13,177,587, respectively.  All of such debt became due by its terms on September 28, 2010.  The Company has not made payments of principal or interest when due, and is not in compliance with its agreements with the Lender. The Lender has not issued a default notice and has signed two agreements over the past fourteen months to sell all of its debt at a discount to a third party.

On February 3, 2012, the Lender entered into a contract to sell such debt to JDM Group, LLC (“JDM”).  JDM agreed to pay the Lender in installments over time, $1,500,000 to acquire all of the debt from the Lender.  The first installment of $600,000 was due on February 15, 2012, and the balance of $900,000 was payable on the 30th day of each month in installments of $100,000 beginning on March 30, 2012. For each $100,000 paid to the lender, $930,000 in debt would be reduced to the lender. In conjunction with this agreement, the Lender agreed to not charge any interest on the debt owed, beginning on February 1, 2012. JDM also entered into an agreement with which required the Company to pay JDM $1,700,000, without interest, in August 2013 to repay such debt to JDM assuming that JDM had paid the full $1,500,000 to the lender. The debt to JDM was convertible by JDM into shares of our common stock at a conversion rate equal to a 10% discount to the volume weighted average trading price of the Company common stock for the three trading days prior to such conversion. The conversion price was subject to a minimum conversion price of $.02 per share.

When the first payment of $600,000 by JDM was due to the lender in February 2012, JDM sold the required installment payment of $600,000 of such debt to other parties in exchange for cash, which was then paid to the Lender. The Company then issued 15,833,713 shares of common stock to settle $350,000 of such debt with the other parties, and the Company issued two new convertible notes aggregating $300,000 to such other parties.  As a result of the first $600,000 payment to the Lender, the liability to the Lender was reduced by approximately $5,580,000.

The Company made the $100,000 payment due to the Lender on March 30, 2012 on behalf of JDM, and JDM signed over to the Company a $930,000 debt reduction that was assigned to JDM by the Lender.  JDM assigned the $100,000 payment due on April 30, 2012 to a third-party investor for a payment to the lender of $100,000, and an additional $930,000 of debt reduction was achieved with the lender. The Company granted the new investor the ability to convert the debt into stock at a 37.5% discount to the market price of our common stock, as defined in the agreement.  Subsequent to such assignment, JDM asked the lender for a deferral of the monthly payments and did not make any of the monthly payments due on May 30, 2012 or thereafter, leaving $700,000 remaining to pay to the Lender under this agreement. Through the $800,000 in payments to the lender under this agreement, the Company achieved a reduction in the debt to the lender of $7,340,000. The Company has no further obligation to JDM (see below).

As the Company is experiencing financial difficulties and JDM has granted the Company a concession by extending the term of the debt and reducing the amount of debt the Company is required to pay, the Company accounted for such transaction as a troubled debt restructuring under ASC 470-60. As the total future cash payments to JDM are less than the carrying value, an adjustment was made to the carrying value of the debt to reflect the portion of the debt that had been cancelled due to the cash payments made during the year ended November 30, 2012 and a gain from troubled debt restructuring was recognized of $6,338,601. The basic and diluted earnings per share on the gain was $0.04 and $0.02.

On February 6, 2013, the Lender cancelled its agreement with JDM and entered into a contract to sell all remaining debt due by the Company to another party, NetCapital.com, LLC. (“NCC”) for a price of $350,000 on the condition that the Company also issue three-year warrants to the Lender to purchase 10 million shares of common stock of the Company at a price of $0.01 per share.  The Company issued such warrants on February 15, 2013 and NCC agreed to pay the Lender a minimum of $25,000 per installment so that a total of $350,000 was to be paid over an eight-week period, to acquire all debt due to the Lender.  NCC assigned its rights to 112359 Factor Fund, LLC (the “Investor”) effective February 15, 2013, and the Investor subsequently made a payment of $250,000 under the agreement between the Lender and NCC.  The Investor plans to make additional payments totaling $100,000 by April 15, 2013 to the Lender so that the existing liens on the Company’s assets are transferred from the Lender to the Investor.  See Note 13.

In connection with the financings, the Company has agreed, so 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.

Short-Term Borrowings

As of November 30, 2012 and 2011, short-term borrowings are :

		2012			2011			Interest Rate
Demand noted payable to Chief Executive Officer	a	$	502,426		$	477,730			12% - 24%
Other demand notes	b		118,642			493,346		0% to 12%
Convertible notes	c		447,799			232,198		0% to 12%
		$	1,068,867		$	1,203,274
Weighted average interest rate on short-term borrowings			8.7	%		8.1	%

a)	Demand notes payable to the Company’s Chief Executive Officer total of $502,426 and $477,730, at November 30, 2012 and 2011, respectively, at annual interest rates ranging from 12% and 24%.
b)	Short-term borrowings at November 30, 2012 include three demand notes of $50,000, $18,000 and $18,000 at a zero percent interest rate and a past-due note of $32,642 that is in default at an annual interest rate of 14%. Short-term borrowings at November 30, 2011 also include three demand notes, at a zero percent interest rate, totaling $144,276, and one demand note totaling $349,070 at an annual interest rate of 12%.
c)	Short-term borrowings at November 30, 2012 also include 11 convertible notes (the “Convertible Notes”) at annual interest rates ranging from 0% to 12%, totaling $447,799. The Convertible Notes consist of six notes totaling $239,499 that we issued in exchange for cash payments to our Company, one note of $19,000 that we issued in exchange for services rendered, and four notes totaling $189,300 that we issued in exchange for existing non-convertible notes payable.  Conversion features allow the holders of the Convertible Notes to convert into shares of our common stock at a discount to the trading price of our common stock, as defined, ranging from 10% to 55%.  For a limited period of time before a conversion notice is submitted, the Company has the right to pre-pay some or all of the Convertible Notes at a 15% to 50% premium to the principal amount that is retired. Short-term borrowings at November 30, 2011 also include 5 convertible notes (the “2011 Convertibles”) at annual interest rates ranging from 0% to 8%, totaling $232,198.  The 2011 Convertibles consist of two notes that we issued in exchange for cash payments to our Company aggregating $105,000, and three notes that which we issued in the aggregate total of $329,610, in exchange for existing notes payable, including notes payable to our Chief Executive Officer of $54,610.  Conversion features allow the holders of the Convertible Notes to convert into shares of our common stock at a discount to the trading price of our common stock, as defined, ranging from 10% to 50%.  For a limited period of time before a conversion notice is submitted, the Company has the ability to pre-pay some or all of the Convertible Notes at a 15% to 30% premium to the principal amount that is retired.

The conversion features embedded in the Convertible Notes were evaluated to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative.  In six of the eleven Convertible Notes for 2012, and four of five Convertible Notes in 2011, the conversion feature was accounted for as a derivative liability.  The derivatives associated with the Convertible Notes were recognized as a discount to the debt instrument and the discount is being amortized over the expected life of the notes with any excess of the derivative value over the note payable value recognized as additional interest expense at the issuance date.  Five of the eleven Convertible Notes for 2012 and one of the five Convertible Notes for 2011 are convertible into common stock at a fixed number of shares and the conversion option is not a derivative liability.

The derivative liability for the Convertible Notes was calculated using the Black Scholes method over the expected terms of the convertible debentures, with a risk free interest rate of 1% and volatility of 243% for 2012 and a risk free interest rate of 1% and volatility of 270% for 2011.  In accordance with authoritative guidance, the embedded derivatives are revalued at each balance sheet date and marked to fair value with the corresponding adjustment as a gain or loss on the change in the fair value of the derivatives, which were recorded as other income or expense in our consolidated statement of income (loss). As of November 30, 2012 and 2011, the fair value of such derivative totaled $361,760 and $274,908.  During the years ended November 30, 2012 and 2011, the Company recognized income arising from the change in fair value of the derivatives of $92,872 and $101,474 respectively.

Long-term Debt

On November 23, 2011, the Company entered into an agreement with an unsecured lender under which the Company assigned a total of six unsecured convertible notes (the “Notes”) with a carrying value of $292,148 and a face value of $400,004 to a new unsecured third-party lender.  The Notes had a stated 6% interest rate and were due at various dates during 2012. Such notes also contained embedded beneficial conversion features for an undeterminable number of shares, which was bifurcated and accounted for as a derivative liability calculated using the Black Scholes method described above and was valued at $497,667 on November 23, 2011.

Upon such assignment, the Company and the new lender restructured the terms of the outstanding notes, creating one new convertible note (the “New Note”) with a face value of $400,004, an interest rate of 6% and a three-year term stating that all principal and accrued interest shall be due on November 23, 2014. Additionally, the New Note contained a beneficial conversion feature allowing the new lender to convert any outstanding principal balance in to shares of the Company’s common stock at a rate of $0.006 per share.

As the Company is experiencing financial difficulties and the creditor has granted a concession by extending the term of the notes, the Company accounted for such transaction as a troubled debt restructuring under ASC 470-60.  As the total future cash payments of the New Note are greater than the carrying value, no adjustment has been made to the carrying value of the debt.  The New Note bears interest under its new effective interest rate of 16.412% representing the rate that equates the present value of the total future cash payments to the carrying value of the debt. The New Note has a carrying value of $344,954 and $292,148 at November 30, 2012 and 2011. Additionally, as the Company no longer has a derivative liability associated with the Notes as the beneficial conversion feature associated with the New Note is for a fixed and determinable number of shares, the Company extinguished the remaining derivative liability and recorded a gain on extinguishment of liabilities of $497,667 for the year ended November 30, 2011.

Capital Lease Obligation

The Company has one capital lease obligation that is payable in quarterly installments of $2,305, ending on February 2, 2016 of which $7,545 is classified as a short-term liability and $13,660 as long-term debt.