Derivative Liabilities

3 Months Ended

Feb. 29, 2016

Notes to Financial Statements

Derivative Liabilities

Note 10 - Derivative Liabilities

The Company evaluated its convertible note agreements pursuant to ASC 815 and for those notes in which there was 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 2016, we estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 years; (2) a computed volatility rate of 357%; (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 2015, the Company estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term of 0 to 0.84 years; (2) a computed volatility rate of 787%; (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.

Redeemable convertible preferred stock 

In 2016, we estimated the fair value of the derivatives using the Black-Scholes valuation method with assumptions including: (1) term reflecting the immediate exercisability; (2) a computed volatility rate of 357% (3) a discount rate of 1% and (4) zero dividends.  No preferred stock derivatives existed in fiscal 2015.  

Tainted conventional convertible debt

In 2016, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .0 to .08 years; (2) a computed volatility rate of 357%; (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 2015, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .32 to .84 years; (2) a computed volatility rate of 775%; (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 warrants

The Company also evaluated all outstanding warrants 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 warrants using the Black-Scholes valuation model.  

In 2016, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 1.77 to 7.33 years; (2) a computed volatility rate of 357%; (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 2015, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .96 to 8.33 years; (2) a computed volatility rate of 775%; (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 29, 2016 was as follows:

			Change in
	Balance at		fair value of			Balance at
	November 30,		derivative			February 29,
	2015		liabilities			2016
Variable convertible debt	$	166,494	$	(54,193	)	$	112,301
Redeemable convertible preferred stock		412,500		(400,121	)		12,379
Tainted convertible debt		95,018		(93,616	)		1,402
Tainted warrants		18,200		(10,989	)		7,211
	$	692,212	$	(558,919	)	$	133,293

Activity for embedded derivative instruments during the three months ended February 28, 2015 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		of debt to			February 28,
	2014		the period		liabilities		equity			2015
Variable convertible debt	$	527,781	$	74,990	$	2,049,033	$	(115,953	)	$	2,535,852
Tainted convertible debt		106,246		—		106,082		—			212,328
Tainted warrants		5,312		2,000		14,625		—			21,937
	$	639,339	$	76,990	$	2,169,741	$	(115,953	)	$	2,770,117