In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which did not have fixed settlement provisions were deemed to be derivative instruments. As a result, certain convertible notes issued described in Notes 5 do not have fixed settlement provisions because their conversion prices may be lowered if the Company issues securities at lower prices in the future. The conversion feature has been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

At September 30, 2013, the outstanding fair value of the convertible notes accounted as derivative liabilities amounted to $705,118.

During the six months ended March 31, 2014, as a result of aggregate total of convertible notes we issued that were accounted for as derivative liabilities, we determined that the fair value of the conversion feature of the convertible notes at issuance was $520,477, based upon a Black-Sholes calculation. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over the life of the notes. As the aggregate fair value of these liabilities of $520,477 exceeded the aggregate value of the notes, the excess of the liability over the total combined note value of $302,477 was considered as a cost of the debt and reported in the accompanying Statement of Operation as financing cost.

During the six months ended March 31, 2014, approximately $313,370 convertible notes were converted. As a result of the conversion of these notes, the Company recorded a gain in change in fair value of the derivative liability of $1,148,306 due to the extinguishment of the corresponding derivative liability. Furthermore, during the six months ended March 31, 2014, the Company recognized a loss of $615,265 to account for the change in fair value of the derivative liabilities. At March 31, 2014, the fair value of the derivative liability was $692,552.

For purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:

Risk free interest rate		Between 0.03% and 0.14%
Stock volatility factor		Between 106.82% and 409.17%
Months to Maturity		9 months to 1 year
Expected dividend yield		None