Derivative Liabilities

9 Months Ended

Aug. 31, 2014

Notes to Financial Statements

Derivative Liabilities

Note 10 - Derivative Liabilities

The Company evaluated its 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 its convertible notes. The Company valued the embedded derivatives using the Black-Scholes valuation model.  

Convertible debt with a variable conversion feature

In 2014, the Company estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 0.15 years; (2) a computed volatility rate of 230%; (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, the Company estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0.33 to 1.33 years; (2) a computed volatility rate of 268%; (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.

Tainted conventional convertible debt

In 2014, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 0.33 years; (2) a computed volatility rate of 230%; (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, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 1.33 years; (2) a computed volatility rate of 268%; (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 the 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, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 6.73 years; (2) a computed volatility rate of 230%; (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, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 1.0 to 7.73 years; (2) a computed volatility rate of 268%; (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 nine months ended August 31, 2014 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in
	Balance at		issuance of new		fair value of			Exercise
	November 30,		securities during		derivative			of stock options/		Conversion of debt			Balance at August 31,
	2013		the period		liabilities			warrants		to equity			2014
Variable convertible debt	$	1,467,182	$	230,836	$	(254,972	)	$	—	$	(300,920	)	$	1,142,126
Tainted convertible debt		139,953		—		(139,879	)		—		—			74
Tainted stock options		30,343		—		(27,480	)		—		—			2,863
Tainted warrants		34,866		—		(34,584	)				—			282
	$	1,672,344	$	230,837	$	(456,916	)	$	—	$	(300,920	)	$	1,145,345

Activity for embedded derivative instruments during the nine months ended August 31, 2013 was as follows:

			Initial valuation
			of derivative
			liabilities upon		Change in
	Balance at		issuance of new		fair value of					Conversion			Balance at
	November 30,		securities during		derivative			Debt		of debt			August 31,
	2012		the period		liabilities			Retirement		to equity			2013
Variable convertible debt	$	361,760	$	3,292,892	$	(122,185	)		210,107	$	(1,730,109	)	$	1,592,251
Tainted convertible debt		264,189		—		208,615			—		(253,225	)		219,579
Tainted stock options		49,483		—		(27,711	)		—		—			21,772
Tainted warrants		27,973		—		10,136			—		—			38,109
	$	703,405	$	3,292,892	$	68,855			210,107	$	(1,983,334	)	$	1,871,711