Derivative Liabilities

12 Months Ended

Sep. 30, 2015

Derivative Liabilities [Abstract]

Derivative Liabilities

Note 5 – Derivative Liabilities

As described in Notes 3 and 8, 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 September 30, 2015 and 2014 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 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 200% and 260%;

· The Company would redeem the notes initially 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 September 30, 2015 and 2014 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 101% and 103%;

· 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

· The Feltang Warrants expired in the period ending September 30, 2014 without being exercised.

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 September 30, 2015 and 2014 was an aggregate of $725,898 and 1,021,942.

During the years ended September 30, 2015 and 2014, the Company recorded an aggregate loss of $105,951 and gain of $136,811 on change in fair value of derivative liabilities and $1,024,292 and $392,220 day 1 loss on embedded derivative upon recognition of these derivatives, respectively. See Note 3 for more information.