Principal Financing Arrangements

9 Months Ended

Aug. 31, 2011

Notes to Financial Statements

Principal Financing Arrangements

The following table summarizes components of long-term debt and capital lease obligations as of August 31, 2011 and November 30, 2010:

Principal lender:	Aug. 31, 2011		Nov. 30, 2010		Interest Rate
Note dated November 30, 2005	$	2,134,526	$	2,261,281		5.25	%
Note dated May 31, 2006		1,550,014		1,642,059		5.25	%
Note dated September 28, 2007		5,032,372		5,153,932		9.75	%
Note dated May 28, 2008		2,320,011		2,230,658		20.00	%
Note dated October 29, 2008		1,430,001		1,414,968		15.00	%
Note date February 15, 2009		793,968		792,164		20.00	%
Note dated October 6, 2009		8,019		11,634		5.25	%
Note dated November, 2009		49,872		52,849		5.25	%
Total principal lender debt		13,318,783		13,559,545
Short-term borrowings		572,203		487,576		12.00% - 24.00%
Capital lease obligations		40,740		83,457		12.00% - 17.00%
Total	$	13,931,726	$	14,130,578

Debt with Principal Lender

As of August 31, 2011 and November 30, 2010, we owed our principal lender (“Lender”) $13,318,783 and $13,559,545, respectively. All of such debt became due by its terms on September 30, 2010. We have not made payments of principal or interest when due, and we are not in compliance with our agreements with our Lender. However, our Lender has not issued us a default notice and our Lender cannot attempt to collect the debt from us, pledge the debt to others, or foreclose on the debt, because, in a private transaction, our Lender entered into a contract to assign all of its debt to NetCapital.com LLC (an “Investor”). So long as the Investor continues to make scheduled monthly payments over a two-year period, our Lender cannot collect money from us or take any of our assets as payment against unpaid debt. Through September 30, 2011, the reduction in debt owed to our Lender, and the corresponding increase in debt that we owed to the Investor, totaled $1,666,591. As of September 30, 2011, we have settled $1,317,522 of the $1,666,591 assigned to the Investor, and the Investor has assigned portions of the debt to third parties, so that our liability to the Investor at September 30, 2011 totaled $349,070. Upon assignment to third-parties, we have restructured the notes as convertible debt. The Investor has no written plan with us on how we will make payments or settlements on the debt owed to the Investor. Any cash payments the Investor collects from us, before the Investor has made all of its required payments to our Lender, must be remitted to the Lender by the Investor. Further, the Investor cannot enforce or take action to enforce any lien or security interest of our Company.

In connection with the debt issued to our Lender, in prior years, we had issued warrants to our Lender. During the year ended November 30, 2010, the warrants were cancelled by the Lender. In connection with the financings, we agreed, so long as 25% of the principal amount of the financings is outstanding, to certain restrictive covenants, including, among others, that we 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 our preferred stock or other equity interests; dissolve, liquidate or merge with any other party unless, in the case of a merger, we are the surviving entity; materially alter or change the scope of our 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 our Lender, we entered into a master security agreement that assigns and grants to the Lender a continuing security interest and first lien on all of our assets and the assets of our subsidiaries.

Short-Term Borrowings and Capital Lease Obligations

All of our capital lease obligations, totaling $40,740, are current obligations. Short-term borrowings include demand notes from our chief executive officer of $456,199 at annual interest rates ranging from 12% and 24% and convertible debentures outstanding of $116,004, at annual interest rates ranging from 6% to 12%.

The convertible debentures (the “Debentures”) consist of three convertible debentures that we issued in exchange for cash payments to our Company aggregating $120,000 and seven debentures, which we issued in the aggregate total of approximately $1,045,000, in exchange for a reduction in notes payable, including notes payable to our Chief Executive Officer of approximately $75,000. Conversion features allow the holders to convert into shares of our common stock at a discount to the trading price of our common stock, ranging from 10% to 50%. We can pre-pay any portion of the debentures at any time at a 15% to 25% premium to the principal amount that is retired.

We evaluated the conversion features embedded in our convertible notes to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. We determined that the conversion option should be classified as a derivative liability as the number of shares issuable pursuant to the conversion option is undeterminable. 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.

The derivative liability for the Debentures was calculated using the Black Scholes method over the expected terms of the convertible debentures, with a risk free rate of 1% and volatility of 330%. 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 we record as other income or expense in our consolidated statement of operations and comprehensive loss. As of August 31, 2011, the fair value of the embedded derivative totaled $1,455,819. During the nine and three-month periods ended August 31, 2011, we recognized a loss on the change in fair value of the derivatives of approximately $202,000 and $80,000, respectively.