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v2.4.0.6
Debt
12 Months Ended
Oct. 31, 2012
Debt [Abstract]  
Debt
4. Debt
 
Bridge Loans
 
In February and March 2007, we entered into notes (“Bridge Notes”) with several unrelated parties totaling approximately $325,000. The Bridge Notes were originally due on November 11, 2009 and incurred an interest rate of 12% per annum.
 
In August 2007, we entered into exchange agreements with the holders of $300,000 of the Bridge Notes, wherein the notes were to be converted into 3,000,000 shares of our common stock. We originally expected these notes to be converted into common stock shares during the first or second quarter of the fiscal year ending October 31, 2011. One of the note holders converted his $25,000 note into 208,333 shares of common stock in December 2008.
 
In May and June of 2008, we entered into a new series of Bridge Notes with several unrelated parties totaling $470,000. The Bridge Notes were originally due six months from the date of issuance and incur interest at the rate of 10% per annum. On July 2, 2010, the Bridge Note was amended to extend the due date to December 1, 2010. The notes are convertible by the holder at any time at a conversion price equal to the per share price of a new issuance. In connection with the Bridge Notes, we also issued warrants to purchase 470,000 shares of our common stock at an exercise price $.15 and warrants to purchase 470,000 shares of our common stock at an exercise price of $.25, reduced to $.05 and $.15, respectively, by the July 2, 2010 Amendment to the Bridge Notes. The warrants may be exercisable at any time for a period of 5 years. In connection with the issuance of the warrants, we reflected a value for the warrants totaling $47,112; no value adjustment was reflected for the price reduction, as the value change was not material. The fair value of the warrant grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 4.86%; and expected lives of 5 years. On December 1, 2010, we amended these notes to change the warrant exercise price to $.05. During the fiscal year ended October 31, 2010, we issued 3,047,800 common stock shares in connection with the Bridge Note amendments. During the year ended October 31, 2011, the company issued 43,097,752 shares of common stock in payment of accrued interest and principal. In November 2011 and February 2012 $75,000 was repaid to the remaining outstanding note holders.
 
Round D Loans
 
Commencing May through October 2007, we entered into notes (“Round D Notes”) with several unrelated parties totaling approximately $2,916,000. The Round D Notes incur interest at rates ranging from 12% to 14% per annum, payable semi-annually and are due 3 years from the date of issuance. In connection with the Round D Notes, we also issued warrants to purchase 9,445,744 shares of our common stock at an exercise price of $.15. The warrants may be exercisable at any time for a period of 5 years. In connection with the issuance of the warrants, we have reflected a value for the warrants totalling $549,011. The fair value of the warrant grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 3.57%; and expected lives of 5 years. For the years ending October 31, 2011 and 2010 the company issued 48,372,496 and 13,606,592 shares of common stock respectively in payment of accrued interest and principal. In addition, note holders of $646,000 of the remaining $711,000 outstanding convertible notes, have agreed to extend the due dates of their notes until October 2012 and also to subordinate their notes to the new Senior Convertible Notes. In November 2011 and February 2012 $55,000 was repaid to two of the outstanding note holders. On August 7, 2012 the company issued 8,353.497 shares in payment of outstanding principal of $646,000 and interest of $117,572.
 
Round E Loans
 
In April, July and August 2009, we entered into a series of convertible notes aggregating $170,000. The notes are due one year from the date of issuance and incur interest at the rate of 10% per annum. In connection with the notes, we issued five year warrants to purchase 1,602,857 shares of our common stock at an exercise price of $.05 per share. The warrants may be exercisable at any time for a period of 5 years. No expense was recorded for these warrants as the additional cost was not material. The notes were not paid by the due date; however, the note holders waived the default. In October 2011 the company issued 4,230,240 shares in payment of all outstanding accrued interest and principal owed the note holders for this Round.
 
In March 2009, we obtained interest free advances from two of its officers totaling $40,000. In November 2011 one of these loans totaling $20,000 was repaid.
 
Round F Loans
 
In November 2009, January 2010 and March 2010, we entered into a series of convertible notes aggregating $419,000. The notes were originally due one year from the date of issuance at an interest rate of 10% per annum. In connection with the notes, we issued five year warrants to purchase 11,971,429 shares of our common stock at an exercise price of $.05 per share. The warrants may be exercisable at any time over period of 5 years. In connection with the issuance of the warrants and conversion features, the Company has reflected a value totaling $236,417. The fair value of the warrant grant was estimated on the date of the grant using the Black Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 2.068 to 2.60% and expected lives of 5 years. In October 2011 the company issued 12,641,938 shares in payment of all accrued interest and principal owed for this Round.
  
Round G Loans
 
In May through October 2010, we entered into a series of convertible notes aggregating $485,000. The notes were originally due one year from the date of issuance at an interest rate of 10% per annum. The interest is payable in cash or common shares at our discretion. The notes are convertible into common shares at a conversion price of $.035 per share. In connection with the notes, we issued five year warrants to purchase 13,857,143 shares of our common stock at an exercise price of $.05/share. Through October 31, 2010, we issued 2,900,157 shares of common stock in payment of accrued interest and principal. In connection with the issuance of the warrants and conversion features, we have reflected a value totaling $118,067. The fair value of the warrant grant was estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rates between 1.23% and 2.03%, and expected lives of five years. In October 2011 the company issued 23,568,072 shares in payment of accrued interest and principal due all but one note holder. In December 2011 the company repaid $100,000 to the remaining outstanding note holders.
 
Round H loan
 
In March 2011 the Company issued a convertible note aggregating $100,000. The note is due one year from the date of issuance and incurs interest at the rate of 10% per annum. The notes are convertible into common shares at a conversion price of $.035 per share. In connection with the notes, the Company issued five year warrants to purchase 2,857,143 shares of the Company’s common stock at an exercise price of $.05 per share. In October 2011 the company issued 2,903,810 shares in payment of all accrued interest and principal owed for Round H.
 
For all of the debt financing describe above, the Company has the option to either pay the interest due in cash or in shares of our common stock. During the year ended October 30, 2012 the company offered its outstanding warrants holders (for all rounds prior to 2011) to extend the due date of their warrants in exchange for a lower exercise price.
 
Cumulative Convertible Senior Notes
 
In October 2011, May 2012 and July 2012, we completed a private placement of $2,760,500 aggregate principal amount of Cumulative Convertible Senior Notes (“Senior Notes”) and Warrants to certain investors, that included the Company’s existing holders of Series A Preferred Stock (the “Preferred Stock”). In August 2012, the Senior Notes were converted into 110.42 shares of Preferred Stock. In December 2012, we issued an additional 9.58 shares of Preferred Stock and Warrants for proceeds of $239,500.
 
The shares of Preferred Stock bear a cumulative dividend of 7% per annum. Upon liquidation, and upon an acquisition of the Company, the holders of Preferred Stock are entitled to a liquidation preference equal to the greater of (i) the amount invested plus all accrued and unpaid dividends, or the amount the holders of Preferred Stock would receive had they converted the Preferred Stock to Common Stock immediately prior to such event. Each share of Preferred Stock is convertible into 1,250,000 shares of the Company’s Common Stock, subject to certain adjustments. The Certificate of Designation of the Preferred Stock provides that without the consent of a majority of the outstanding Series A Preferred Stock, the Company may not:
 
1.
 
amend the Articles of Incorporation, by-laws, Certificate of Designation or any other certificate of designation or file any new certificate of designation;
 
2.
 
issue any Common Stock, Preferred Stock, Common Stock Equivalents or other securities or amend the terms thereof;
 
3.
 
redeem any outstanding Common Stock, Preferred Stock, Common Stock Equivalents or other securities;
 
4.
 
incur or repay indebtedness for borrowed money;
 
5.
 
acquisitions or dispositions of material assets;
  
6.
 
enter into any acquisition, merger, consolidation, reorganization or similar transaction;
 
7.
 
create subsidiaries or other affiliates;
 
8.
 
dissolve, liquidate or wind up or file any petition under insolvency or bankruptcy laws;
 
9.
 
enter into any contract or arrangement with any present or former director, executive officer, shareholder, partner, member, employee or affiliate of the Company or any of its subsidiaries, or any of such Person’s affiliates or immediate family members;
 
10.
 
change senior management of the Company;
 
11.
 
declare or pay dividends or declare or make other distributions other than the Base Dividends; or
 
12.  
 
adopt or materially deviate from the business plan or budget adopted by the Board of Directors.
 
NextLevel VIII, LLC (“NextLevel”) is the majority holder of the Preferred Stock and therefore the Company may not enter into the transactions described above without NextLevel’s consent.
 
The Warrants are exercisable until October 24, 2016 at a price of $.04 per share (subject to certain adjustments) and entitle the holder to purchase 1,250,000 shares of the Company’s Common Stock for each $25,000 of principal amount of Senior Notes. As of October 31, 2012 the Company is authorized to issue 800,000,000 shares of common stock. The Preferred Stockholders have entered into an Investors’ Rights Agreement which among other things, provides for Board representation, registration rights, and certain provisions regarding future sales of securities by the Company.
 
In prior rounds of financing, described in Note 4 Debt, the Company issued certain warrants, rights convertible into or exercisable or exchangeable for common stock (collectively the “Derivative Securities”). The Derivative Securities contain certain anti-dilution provisions, which provide for adjustment of the conversion price, exercise price or number of shares issuable, upon the occurrence of certain events. The Company, obtained from most of the holders of the unexpired Derivative Securities, a waiver, except in the case of any capital reorganization, split, combination or subdivision or reclassification, of any anti-dilution adjustments, it may have with respect to the Derivative Securities.