Derivative Liabilities

3 Months Ended

Feb. 28, 2014

Notes to Financial Statements

Derivative Liabilities

Note 10.       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 2014, we estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.25 years; (2) a computed volatility rate of 201% (3) a discount rate of 1% and (4) zero dividends.  Upon settlement the valuation of this embedded derivative was recorded as gain/loss on derivative liability.

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.

Tainted conventional convertible debt

In 2014, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.75 years; (2) a computed volatility rate of 201% (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 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.

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 2014, we estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 8.25 years; (2) a computed volatility rate of 201% (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 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.

Activity for embedded derivative instruments during the three months ended February 28, 2014 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in			Exercise
	Balance at		issuance of new		fair value of			of stock		Conversion			Balance at
	November 30,		securities during		derivative			options/		of debt			February 28,
	2013		the period		liabilities			warrants		to equity			2014
Variable convertible debt	$	1,467,182	$	230,837	$	(117,289	)	$	—	$	(300,920	)	$	1,279,810
Tainted convertible debt		139,953		—		(121,361	)		—		—			18,592
Tainted stock options		30,343		—		(20,898	)		—		—			9,445
Tainted warrants		34,866		—		(25,929					—			8,937
	$	1,672,344	$	230,837	$	(285,477	)	$	—	$	(300,920	)	$	1,316,784

Activity for embedded derivative instruments during the three months ended February 28, 2013 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in		Exercise
	Balance at		issuance of new		fair value of		of stock		Conversion			Balance at
	November 30,		securities during		derivative		options/		of debt			February 28,
	2012		the period		liabilities		warrants		to equity			2013
Variable convertible debt	$	361,760	$	1,946,880	$	2,269,698	$	—	$	(308,797	)	$	4,269,541
Tainted convertible debt		264,189				1,071,965		—		(286	)		1,335,868
Tainted stock options		49,483				12,012		—		—			61,500
Tainted warrants		27,973				82,444		—		—			110,417
	$	703,405	$	1,946,880	$	3,436,119	$	—	$	(309,083	)	$	5,777,326