DERIVATIVE LIABILITIES

9 Months Ended

Jun. 30, 2015

DERIVATIVE LIABILITIES [Abstract]

DERIVATIVE LIABILITIES

NOTE 5 – DERIVATIVE LIABILITIES

As described in Notes 4 and 6, the Company has identified embedded derivatives in notes payables and outstanding warrants.

The fair value of the embedded derivatives related to the convertible notes payable, comprising conversion feature with the reset provisions and the default provisions, at issuance and June 30, 2015 was determined using the multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

· The stock price would fluctuate with the Company projected volatility;

· The Derivative Convertible Notes (held by JMJ Financial, LG Capital, Adar Bay, Vista Capital Investment, Tonaquint Inc., KBM Worldwide, JSJ Investments, Iconic Holding LLC, Union Capital, Auctus Private, Redwood Fund III, Cardinal Capital Group, Inc. and Chrome Oil Service Limited ) convert at  40%  to  60%  of the market prices;

· An event of default would occur initially 0% of the time, increasing 1.00% per month until it reaches 10%;

· The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 137% and 200%;

· The Company would redeem the notes initially at 0% of the time, and increase monthly by 1.00% to a maximum of 5.00%;

· The holders of the notes would automatically convert the notes at the maximum of two times the conversion price if the Company is not in default, with the target conversion price dropping as maturity approaches; and

· The Holder would convert the note early after 0-90-180 days and at maturity if the registration was effective and the Company was not in default.

As discussed in Note 4, the Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date.

The fair value of the embedded derivatives related to the tainted outstanding warrants, comprising exercise feature with the full ratchet reset, at June 30, 2015 was determined using the lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

· The stock price would fluctuate with the Company projected volatility;

· The stock price would fluctuate with an annual volatility. The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 103% and 105%;

· The Holder would exercise the warrant as they become exercisable at target prices of two timesthe higher of the projected reset price or stock price;

· The Warrants with the $0.355; $0.28; and $0.275 exercise prices are fixed and not projected to adjust; and

· No warrants have expired in this period ending June 30, 2015.

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date which at June 30, 2015 was an aggregate of $623,593.

During the nine months ended June 30, 2015, the Company recorded an aggregate $150,348 loss on change in fair value of derivative liabilities and a $1,349,261 loss upon recognition of these derivatives. See Note 4 for more information.