Principal Financing Arrangements

3 Months Ended

Feb. 29, 2012

Notes to Financial Statements

Principal Financing Arrangements

Note 10 – Principal Financing Arrangements

The following table summarizes components of long-term debt and capital lease obligations as of February 29, 2012 and November 30, 2011:

Principal lender:	Feb. 29, 2012	Nov. 30, 2011	Interest Rate
Note dated November 30, 2005	$1,263,070	$2,080,349	5.25%
Note dated May 31, 2006	916,997	1,510,673	5.25%
Note dated September 28, 2007	3,038,242	4,960,260	9.75%
Note dated May 28, 2008	1,460,208	2,332,294	20.00%
Note dated October 29, 2008	903,520	1,425,045	15.00%
Note date February 15, 2009	510,690	812,531	20.00%
Note dated October 6, 2009	4,813	7,835	5.25%
Note dated November, 2009	29,505	48,600	5.25%
Total principal lender debt	8,127,045	13,177,587
Short-term borrowings	1,099,258	1,203,274	0.00% - 24.00%
Capital lease obligations	32,100	32,100	12.00% - 17.00%
Total short-term debt	9,258,403	14,412,961
Long-term debt	463,289	314,355
Total	$9,727,692	$14,727,316

Debt with Principal Lender

As of February 29, 2012 and November 30, 2011 we owed our principal lender (“Lender”) $8,127,045 and $13,177,587, 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 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.

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 30th day of each month in installments of $100,000 beginning on March 30, 2012. So long as JDM is making the required monthly payments of $100,000, our Lender is not charging us any interest on the debt we owe, beginning on February 1, 2012. JDM also entered into an agreement with us which requires us 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 our common stock at a conversion rate equal to a 10% discount to the volume weighted average trading price of our 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. We then issued 15,833,713 shares of common stock to settle $350,000 of such debt with the other parties, and we 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. We also have 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 the Lender shall be reduced by approximately $930,000.

As the Company is experiencing financial difficulties and JDM has granted us a concession by extending the term of the debt and reducing the amount of debt we are required to pay, we 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 quarter ended February 29, 2012 and a gain from troubled debt restructuring was recognized of $4,779,634. The debt payable to JDM at February 29, 2012 amounts to $150,000 and it carries a zero percent interest rate.

We made the $100,000 payment due to the Lender on March 30, 2012 on behalf of JDM, and JDM signed over to us a $930,000 debt reduction that was assigned to JDM by our Lender. The remaining amount due to the Lender under the agreement with JDM is $800,000, as of April 18, 2012. There can be no assurance that either JDM or the Company will be able to make the remaining payments, of $100,000 a month for eight consecutive months, to the Lender.

In connection with the financings with our Lender, 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; 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 $32,100, are current obligations. Short-term borrowings include demand notes from our chief executive officer of $450,679 and $459,339 at February 29, 2012 and November 30, 2011, respectively, at annual interest rates ranging from 12% to 24%. Short-term borrowings at February 29, 2012 also include two demand notes, totaling $93,282, at a zero percent interest rate, one demand note totaling $349,070 at an annual interest rate of 12% and five convertible notes (the “Convertible Notes”) totaling $175,279, at annual interest rates ranging from 0% to 12%.

The Convertible Notes consist of two notes that we issued in exchange for cash payments to our Company aggregating $105,000, and four notes that we issued in the aggregate total of $475,200, in exchange for existing 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 ability to pre-pay some or all of the Convertible Notes at a 10% 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 six Convertible Notes, the conversion option was accounted for as a derivative liability, in accordance with authoritative 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. Two of the six Convertible Notes are 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 250%. 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 February 29, 2012 and November 30, 2011, the fair value of the embedded derivative totaled $362,148 and $274,908, respectively. During the three-month periods ended February 29, 2012 and February 28, 2011, we recognized a gain on the change in fair value of the derivatives of approximately $90,000 and $8,000, 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 was 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. At February 29, 2012, the New Note is recorded as long-term debt at a carrying value of $305,190.

Other Long-Term Debt

In August 2011, we 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 February 29, 2012 was $45,046, of which $14,099 is recorded as long-term debt.