DERIVATIVE WARRANT LIABILITY

3 Months Ended

Dec. 31, 2015

Notes to Financial Statements

NOTE 5. DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At December 31, 2015 and September 30, 2015, the Company had outstanding warrants to purchase 3,620,371 shares and 3,037,037 shares, respectively, of its common stock that are considered to be derivative instruments since the agreements contain "down round" provisions whereby the exercise price of the warrants is subject to adjustment in the event that the Company issues common stock for less than $0.60 per share within one-year of the original issuance of the warrants (see Note 6).

The Company performs valuations of the warrants using the Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. This model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividend rates and has also considered the likelihood of "down round" financings. Selection of these inputs involves management's judgment and may impact net income. Due to our limited operating history and limited number of sales of our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at December 31, 2015 was 57%. We used a risk-free interest rate of 1.76%, estimated lives of 4.22 to 4.89 years, which are the remaining contractual lives of the warrants subject to "down round" provisions, and no dividends to our common stock. The volatility calculated at September 30, 2015 was 57%. We used a risk-free interest rate of 1.37%, estimated lives of 4.47 to 4.96 years, which are the remaining contractual lives of the warrants subject to "down round" provisions, and no dividends to our common stock.

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy:

	Three Months Ended December 31, 2015			Three Months Ended December 31, 2014
Derivative warrant liability, beginning of period	$	738,955		$	1,450,943
Fair value of warrants issued		157,984			—
Total realized/unrealized gains included in net loss (1)		(23,940	)		(60,489	)
Derivative warrant liability, end of period	$	872,999		$	1,390,454

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(1)     Included in gain or loss on revaluation of derivative warrant liability in the Condensed Consolidated Statement of Operations.