Derivative Liabilities

12 Months Ended

Nov. 30, 2013

Notes to Financial Statements

Derivative Liabilities

6.       Derivative Liabilities

The Company evaluated their convertible note agreements pursuant to ASC 815 and due to there being no minimum or fixed conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded derivative existed and ASC 815 applied for their convertible notes. The Company valued the embedded derivatives using the Black-Scholes valuation model.  

Convertible debt with a variable conversion feature

In 2013, we estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0.7 to 3 years; (2) a computed volatility rate of 229 to 283% (3) a discount rate of 0.13 to 0.25% and (4) zero dividends.  Upon settlement the valuation of this embedded derivative was recorded as gain/loss on derivative liability.

In 2012, we estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.5 years; (2) a computed volatility rate of 209 to 250% (3) a discount rate of 0.14 to 0.21% and (4) zero dividends.  Upon settlement the valuation of this embedded derivative was recorded as gain/loss on derivative liability.

Tainted conventional convertible debt

In 2013, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.0 years; (2) a computed volatility rate of 232 to 243% (3) a discount rate of 1% and (4) zero dividends.  The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

In 2012, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0.2 to 2.0 years; (2) a computed volatility rate of 243% (3) a discount rate of 1% and (4) zero dividends.  The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

Tainted stock options and warrants

The Company also evaluated all outstanding warrants and options to determine whether these instruments may be tainted. All warrants outstanding were considered tainted as a result of the tainted equity environment and potential inability of the Company to settle the instruments with shares of the Company’s stock as the number of shares issuable cannot be estimated and could exceed that amount of authorized shares available to be issued by the Company. The Company valued the embedded derivatives within the stock options and warrants using the Black-Scholes valuation model.  

In 2013, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 1.0 to 7.5 years; (2) a computed volatility rate of 232% (3) a discount rate of 1% and (4) zero dividends.  The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

In 2012, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0.2 to 8.5 years; (2) a computed volatility rate of 243% (3) a discount rate of 1% and (4) zero dividends.  The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

Activity for embedded derivative instruments during the year ended November 30, 2013 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in
	Balance at		issuance of new		fair value of			Exercise of		Conversion			Balance at
	November 30,		securities during		derivative			stock options/		of debt to			November 30,
	2012		the period		liabilities			warrants		equity			2013
Variable convertible debt	$	361,760	$	3,307,991	$	(305,050)		$	-	$	(1,897,519	)	$	1,467,182
Tainted convertible debt		264,189				(124,236	)		-		-			139,953
Tainted stock options		49,483		-		(19,140	)		-		-			30,343
Tainted warrants		27,973		-		6,893					-			34,866
	$	703,405	$	3,307,991	$	(441,533)		$	-	$	(1,897,519	)	$	1,672,344

Activity for embedded derivative instruments during the year ended November 30, 2012 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in			Exercise of
	Balance at		issuance of new		fair value of			stock		Conversion			Balance at
	November 30,		securities during		derivative			options/		of debt to			November 30,
	2011		the period		liabilities			warrants		equity			2012
Variable convertible debt	$	274,909	$	1,248,372	$	(92,872	)	$	—	$	(1,068,649	)	$	361,760
Tainted convertible debt		—		—		264,189			—		—			264,189
Tainted stock options		—		175,656		(126,173	)		—		—			49,483
Tainted warrants		—		93,768		(65,795	)		—		—			27,973
	$	274,909	$	1,517,796	$	(20,651	)	$	—	$	(1,068,649	)	$	703,405