Long-Term Debt and Capital Lease Obligations

12 Months Ended

Nov. 30, 2011

Notes to Financial Statements

Long-Term Debt and Capital Lease Obligations

3. Long-Term Debt and Capital Lease Obligations

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

Principal lender:	2011		2010		Interest Rate
Note dated November 30, 2005	$	2,080,349	$	2,261,281		5.25	%
Note dated May 31, 2006		1,510,673		1,642,059		5.25	%
Note dated September 28, 2007		4,960,260		5,153,932		9.75	%
Note dated May 28, 2008		2,332,294		2,230,658		20.00	%
Note dated October 29, 2008		1,425,045		1,414,968		15.00	%
Note date February 15, 2009		812,531		792,064		20.00	%
Note dated October 6, 2009		7,835		11,634		5.25	%
Note dated November, 2009		48,600		52,849		5.25	%
Total principal lender debt		13,177,587		13,559,445
Short-term borrowings		1,203,274		487,676		0.00% - 24.00%
Capital lease obligations		32,100		83,457		12.00% - 17.00%
Total short-term debt		14,412,961		14,130,578
Long-Term Debt		314,355		—
Total Debt	$	14,727,316	$	14,130,578

Debt with Principal Lender

As of November 30, 2011 and 2010, the Company owed its principal lender (“Lender”) $13,177,587 and $13,559,445, respectively. All of such debt became due by its terms on September 30, 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. As a result of the transaction described below, the Lender has agreed that it cannot attempt to collect the debt, pledge the debt to others, or foreclose on the debt so long as payments as described below are made to the Lender.

Subsequent to our year ended November 30, 2011, 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 is payable on the 30^th day of each month in installments of $100,000 beginning on March 30, 2012. JDM also entered into an agreement with the Company which requires the Company to pay JDM $1,700,000, without interest, in August 2013 to repay such debt to JDM. The debt to JDM is convertible by JDM into shares of the Company’s common stock at a conversion rate equal to a 10% discount to the volume weighted average trading price of the Company’s common stock for the three trading days prior to such conversion. The conversion price is 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 $5,580,000. The Company also has the option, in the event that JDM is unable to make future payments, to make JDM’s scheduled payments itself to the Lender in satisfaction of the debt. The agreements between JDM, the Company and the Lender provide that, after the initial payment to the Lender of $600,000, for every $100,000 paid to the lender, the outstanding principal amount owing to the Lender shall be reduced by $930,000. There can be no assurance that either JDM or the Company will be able to make the remaining payments to the Lender.

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 and Capital Lease Obligations

The Company is in default on its capital lease obligation and has recorded the obligation as a current obligation of $32,100 as of November 30, 2011. Short-term borrowings include demand notes from the Company’s Chief Executive Officer of $477,730 and $459,339, at November 30, 2011 and 2010, respectively at annual interest rates of ranging from 12% and 24%. Short-term borrowings at November 30, 2011 also include three demand notes, at a zero percent interest rate, totaling $144,276, one demand note totaling $349,070 at an annual interest rate of 12% and 5 convertible notes (the “Convertible Notes”) totaling $232,198.

The Convertible Notes 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 four of the five Convertible Notes, the conversion option was accounted for as a derivative liability, in accordance with authorative accounting guidance. 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. One of the five Convertible Notes is convertible into common stock at a fixed price 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 rate of 1% and volatility of 270%. 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 operations and comprehensive loss. As of November 30, 2011 and 2010, the fair value of such derivative totaled $274,908 and $70,519. During the years ended November 30, 2011 and 2010, we recognized income and a (loss) on the change in fair value of the derivatives of $101,474 and $(28,419), respectively.

Troubled Debt Restructuring

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 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 will bear 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. 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.

Other Long-Term Debt

In August 2011, the Company entered into an agreement with the Federal Communications Commission to convert its existing Universal Service Fund liability of $61,366 into a two year promissory note requiring monthly payments of $2,910 including interest at 12.75% through August 2013. The balance outstanding as of November 30, 2011 was $52,188.