Derivative Liabilities

3 Months Ended

Jan. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liabilities

7. Derivative Liabilities

The Notes meet the definition of a hybrid instrument, as defined in ASC 815. The hybrid instrument is comprised of a i) a debt instrument, as the host contract and ii) an option to convert the debentures into common stock of the Company, as an embedded derivative. The embedded derivatives derive their value based on the underlying fair value of the Company’s common stock. The embedded derivatives are not clearly and closely related to the underlying host debt instrument since the economic characteristics and risk associated with these derivatives are based on the common stock fair value.

The Company determines the fair value of the embedded derivatives and records them as a discount to the Notes and a derivative liability. The Company has recognized a derivative liability of $499,952 at January 31, 2016. Accordingly, changes in the fair value of the embedded derivatives are immediately recognized in earnings and classified as a gain or loss on the embedded derivative financial instrument in the accompanying condensed consolidated statements of operations. The Company recorded a gain of $54,634 in the fair value for the three months ended January 31, 2016.

The Company estimated the fair value of the embedded derivatives using a Black Scholes model with the following assumptions: conversion price $0.012 - $0.022 per share according to the agreements; risk free interest rate of .11%; expected life of up to 1 year; expected dividend of zero; a volatility factor of 194% to 278%, as of January 31, 2016. The expected lives of the instruments are equal to the contractual term of the conversion option. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.