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CONVERTIBLE DEBENTURES
6 Months Ended
May 31, 2012
Debt Disclosure [Abstract]  
Long-term Debt [Text Block]

NOTE 3. CONVERTIBLE DEBENTURES

 

The Company entered into a Securities Purchase Agreement with LJCI on February 28, 2007 pursuant to which the Company agreed to sell a convertible debenture in the principal amount of $100,000 and maturing on February 28, 2012 (the “Debenture”). On August 16, 2011, the Company and LJCI amended the Debenture to extend the maturity date to February 28, 2014. The Debenture accrues interest at 4.75% per year, payable at each conversion date, in cash or common stock at the option of LJCI. In connection with the Debenture, the Company issued LJCI a warrant to purchase up to 10 million shares of our common stock (the “LJCI Warrant”) at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007. On August 16, 2011, the Company and LJCI amended the LJCI Warrant to extend the expiration date to February 28, 2014. Pursuant to the terms of the LJCI Warrant, upon the conversion of any portion of the principal amount of the Debenture, LJCI is required to simultaneously exercise and purchase that same percentage of the warrant shares equal to the percentage of the dollar amount of the Debenture being converted. Therefore, for each $1,000 of the principal converted, LJCI would be required to simultaneously purchase 100,000 shares under the LJCI Warrant at $1.09 per share.

 

The Debenture is convertible at the option of LJCI at any time up to maturity into the number of shares determined by the dollar amount of the Debenture being converted multiplied by 110, minus the product of the Conversion Price multiplied by 100 times the dollar amount of the Debenture being converted, with the entire result divided by the Conversion Price. The Conversion Price is equal to the lesser of $1.00 or 80% of the average of the three lowest volume-weighted average prices during the twenty trading days prior to the election to convert. LJCI converted $4,510 and $7,575 of the Debenture into 144,291,494 and 244,556,594 shares, respectively, of common stock during the six months ended May 31, 2012 and 2011. Simultaneously with these conversions, LJCI exercised warrants to purchase 451,000 shares and 757,500 shares of the Company’s common stock during the six months ended May 31, 2012 and 2011, respectively. Proceeds from the exercise of the warrants were $491,590 and $825,675 for the six months ended May 31, 2012 and 2011, respectively. At times, LJCI makes advances to the Company prior to the exercise of warrants. At May 31, 2012 and November 30, 2011, LJCI had advanced $108,035 and $301,930, respectively, to the Company in advance of LJCI’s exercise of warrants.

 

As of May 31, 2012, the remainder of the Debenture in the amount of $60,086 could have been converted by LJCI into approximately 3.0 billion shares of common stock, which would require LJCI to simultaneously exercise and purchase all of the remaining 6,008,629 shares of common stock under the LJCI Warrant at $1.09 per share. As of November 30, 2011, the balance of the Debenture was $64,596. For the Debenture, upon receipt of a conversion notice from the holder, the Company may elect to immediately redeem that portion of the Debenture that the holder elected to convert in such conversion notice, plus accrued and unpaid interest. After February 28, 2008, the Company, at its sole discretion, has the right, without limitation or penalty, to redeem the outstanding principal amount of the Debenture not yet converted by the holder into common stock, plus accrued and unpaid interest thereon.

 

A discount representing the value of 10 million warrants issued in the amount of $73,727 was recorded as a reduction to the note. The discount was calculated based on the relative fair values of the Debenture and the warrants. The fair value of the warrants used in the above calculation was determined under the Black-Scholes option-pricing model. Additionally, based on the excess of the aggregate fair value of the common shares that would have been issued if the Debenture had been converted immediately over the proceeds allocated to the Debenture, the investors received a beneficial conversion feature for which the Company recorded an increase in additional paid-in-capital of $26,273 and a corresponding discount to the Debenture. These discounts, in the aggregate amount of $100,000, were amortized over the original 60-month term of the Debenture as a charge to interest expense. The discount is fully amortized as of May 31, 2012 and the balance of the unamortized discount was $5,000 at November 30, 2011.