DERIVATIVE LIABILITIES

9 Months Ended

Jun. 30, 2014

Derivative Liability [Abstract]

DERIVATIVE LIABILITIES

The Company has warrants and debt conversion features issued in connection with its convertible notes payable with price protection provisions that allow for the reduction in the exercise price of the warrants and conversion price of the debt in the event the Company subsequently issues stock or securities convertible into stock at a price lower than the exercise or conversion price. Simultaneously with any reduction to the exercise price of the warrants, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. The Company accounted for its warrants and debt conversion features with price protection in accordance with FASB ASC Topic 815.

 The Company’s derivative instruments have been measured at fair value at June 30, 2014 using the Black-Scholes model, which approximates a binomial or lattice model. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations. The initial recognition and subsequent changes in fair value of the warrant derivative liability have no effect on the Company’s cash flows.

 The recognition and revaluation of the derivatives at each reporting period resulted in the recognition of an expense of $1,680,246 and $8,546,411 for the nine months ended June 30, 2014 and 2013, respectively. The fair value of the derivatives at June 30, 2014 is $762,808, which is reported on the consolidated balance sheet under the caption “Derivative Liabilities”.

 Fair Value Assumptions Used in Accounting for Derivative Liabilities

 The Company has determined its derivative liabilities to be a Level 3 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value as of June 30, 2014. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement.  The key inputs used in the June 30, 2014 fair value calculations were as follows:

Stock Price	$	0.01
Volatility		120%-188	%
Strike Price	$	0.029 - 0.25
Risk-free Rate		0.10%-0.13	%
Dividend Rate		0	%
Expected Life	6 months – 5 years

 At June 30, 2014, the estimated fair values of the liabilities measured on a recurring basis are as follows:

	Fair Value Measurements at June 30, 2014
	Balance at June 30, 2014		Significant Unobservable Inputs (Level 3)
Warrant derivative liabilities	$	762,808	$	762,808

 The following tables present the activity for liabilities measured at estimated fair value using unobservable inputs for nine months ended June 30, 2014:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Derivative Liabilities
Beginning balance at September  30, 2013	$	252,210
Issuance of derivative liabilities		1,928,901
Changes in estimated fair value		1,680,246
Reclassification of derivative liability to additional paid-in capital		(3,098,549)
Ending balance at June 30, 2014	$	762,808