8. Derivative Liabilities

9 Months Ended

Jul. 31, 2014

The conversion options of the convertible notes payable, as disclosed in Note 7, are required to record a derivative at their estimated fair value on each balance sheet date with changes in fair value reflected in the statement of operations.

The fair value of the derivative liabilities for the February 10, 2013 and February 20, 2013 convertible notes were $57,147 and $91,023, respectively, on vesting. The fair values as at July 31, 2014 and October 31, 2013 are as follows:

	July 31, 2014 $ (unaudited)		October 31, 2013 $
$27,500 convertible debenture issued February 10, 2013		2,995		2,777
$37,500 convertible debenture issued February 20, 2013		81,308		118,855
		84,303		121,632

During the nine months ended July 31, 2014, the Company recorded a loss on the change in fair value of the derivative liabilities of $65,412 (2013 – $213,787). The Company uses the Black-Scholes option pricing model to calculate the fair values of the derivative liabilities. The following table shows the assumptions used in the calculations:

	Expected Volatility			Risk-free Interest Rate			Expected Dividend Yield			Expected Life (in years)
February 10, 2013 convertible note
As at February 10, 2013 (date of vesting)		307	%		0.17	%		0	%		1.00
As at July 31, 2014		603	%		0.12	%		0	%		1.00
February 20, 2013 convertible note
As at August 19, 2013 (date of vesting)		301	%		0.04	%		0	%		0.25
As at July 31, 2014		593	%		0.12	%		0	%		1.00

ON4 COMMUNICATIONS INC. 10-Q