Principal Financing Arrangements

3 Months Ended

Aug. 31, 2012

Debt Disclosure [Abstract]

Principal Financing Arrangements

Note 10 – Principal Financing Arrangements

The following table summarizes components of long-term debt and capital lease obligations as of August 31, 2012 and November 30, 2011:

Principal lender:		Aug. 31, 2012		Nov. 30, 2011	Interest Rate
Note dated November 30, 2005	$	986,271	$	2,080,349	5.25	%
Note dated May 31, 2006		716,041		1,510,673	5.25	%
Note dated September 28, 2007		2,378,733		4,960,260	9.75	%
Note dated May 28, 2008		1,148,253		2,332,294	20.00	%
Note dated October 29, 2008		709,001		1,425,045	15.00	%
Note date February 15, 2009		402,797		812,531	20.00	%
Note dated October 6, 2009		3,803		7,835	5.25	%
Note dated November, 2009		23,179		48,600	5.25	%
Total principal lender debt		6,368,078		13,177,587
Short-term borrowings		1,010,551		1,203,274	0.00% - 24.00%
Capital lease obligations		—		32,100	12.00% - 17.00%
Total short-term debt		7,378,629		14,412,961
Long-term debt		331,252		314,355
Total	$	7,709,881	$	14,727,316

Debt with Principal Lender

As of August 31, 2012 and November 30, 2011 we owed our principal lender (“Lender”) $6,368,078 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 an option, in the event that JDM is unable to make future payments, to make JDM’s scheduled payments to the Lender in satisfaction of the debt, upon receipt of written notice from the Lender that the Lender has terminated its agreement with JDM. If we receive a notice from our Lender that it has terminated its agreement with JDM, we have a limit of one day to remit to the Lender any past due amounts owed by JDM. 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 nine and three-month periods ended August 31, 2012 and a gain from troubled debt restructuring was recognized of $6,338,601 and $0, respectively. The debt payable to JDM at August 31, 2012 amounts to $148,000 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. JDM assigned the $100,000 payment due on April 30, 2012 to a third-party investor for a payment of $100,000, and we 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 has not made the monthly payments due on May 30, June 30, July 30, August 30, or September 30, 2012. The remaining amount due to the Lender under the agreement with JDM is $700,000. In September 2012 we offered our Lender a lump sum payment of $350,000 in full settlement of all the remaining debt and our Lender responded by telling us it preferred to receive the remaining $700,000 over an extended period of time and did not plan to take any action or send out any default notices. Should JDM be declared in breach of its agreement with our Lender, the interest rates on the remaining debt to our Lender will revert to the rates that were originally in effect, unless we make the remaining payments for JDM. We have continued to record no interest accrual on our remaining debt to the Lender because the Lender has not sent us written notice that JDM is in default with its agreement with the Lender. It is possible that the Lender will conclude that accrued interest is due as a result of the delinquency by JDM.

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 seven consecutive months, to the Lender, or that the Lender will continue to allow some of the payments to be deferred.

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

Short-term borrowings include demand notes from our chief executive officer of $465,677 and $459,339 at August 31, 2012 and November 30, 2011, respectively, at annual interest rates ranging from 12% to 24%. Short-term borrowings at August 31, 2012 also include five promissory notes (the “Promissory Notes”), totaling $310,000, at a zero percent interest rate, one note for $30,063 that is in default and accruing interest at a 14.0% annual interest rate, and nine convertible notes (the “Convertible Notes”) totaling $204,811, at annual interest rates ranging from 0% to 12%.

Three of the Promissory Notes are convertible into shares of the Company’s common stock. Promissory notes of $98,000, $75,000 and $50,000 are convertible into common stock at a price of $0.02, $0.03 and $0.03 per share, respectively.

The Convertible Notes consist of six notes that the Company issued in exchange for cash payments aggregating $218,500, and three notes that we issued in the aggregate total of $197,027, 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 in the Convertible Notes, 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 50% premium to the principal amount that is retired.

The conversion features embedded in the Convertible Notes and three Promissory Notes were evaluated to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. The conversion option in the Convertible Notes 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. Three of the Promissory Notes are convertible into common stock at a fixed price and the conversion option is not accounted for as 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 215%. 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 income (loss). As of August 31, 2012 and November 30, 2011, the fair value of the embedded derivative totaled $496,218 and $274,908, respectively. During the nine-month periods ended August 31, 2012 and 2011, we recognized a gain / (loss) on the change in fair value of the derivatives of approximately $108,000 and $(197,000), respectively. During the three-month periods ended August 31, 2012 and 2011, we recognized a loss on the change in fair value of the derivatives of approximately $(27,000) and $(74,000), 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 into 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 August 31, 2012, the New Note is recorded as long-term debt at a carrying value of $331,252.