DERIVATIVE LIABILITIES

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

DERIVATIVE LIABILITIES

Warrant Derivative Liability

The January 2014 Warrants contain price protection provisions that allow for the reduction in the exercise price of the Warrants in the event we subsequently issues stock or securities convertible into stock at a price lower than the exercise price of the Warrants. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of the January 2014 Warrants is increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of Warrants is the same as the aggregate exercise price in effect immediately prior to such adjustment. We accounted for the issuance of the January 2014 Warrants in accordance with FASB ASC Topic 815.

We measured our derivative warrant instruments at fair value at June 30, 2015 and September 30, 2014 using the Black-Scholes model, which approximates a binomial or lattice model. The derivative 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 fair value of the January 2014 Warrants at June 30, 2015 and September 30, 2014 was $2,032 and $241,336, respectively, which is reported on the unaudited condensed consolidated balance sheet under the caption “Derivative Liabilities”.

Fair Value Assumptions Used in Accounting for Warrant Derivative Liabilities. We determined our warrant derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of June 30, 2015. 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, 2015 and September 30, 2014 fair value calculations were as follows:

	June 30, 2015		September 30, 2014
Stock Price	$	0.003	$	0.8
Volatility		130%-145%		130%-145%
Strike Price	$	0.0006	$	0.30
Risk-free Rate		0.28%		0.13%
Dividend Rate		0%		0%
Expected Life	12 months – 16 months		12 months – 16 months

Series A Convertible Preferred Stock

The Series A Prefs contain price protection provisions that allow for the reduction in the conversion price of the Series A Prefs.. We accounted for the Series A Prefs in accordance with FASB ASC Topic 815.

We measured our derivative preferred stock instruments at fair value at issuance based on a market approach method utilizing level 2 inputs, which include the following considerations:

· The trading price of a share of our common stock at the pricing dates

· Our market capitalization based on the publicly traded value of our common stock

· The value of the exchange consideration

· The value of publically traded shells

· The sale by the Company of other preferred shares

The fair value of the Series A Prefs at June 30, 2015 and September 30, 2014 was $209,120 and $972,000, respectively, and is included in the unaudited condensed consolidated balance sheet under the caption “Derivative liabilities”.

Series B Convertible Preferred Stock

The Series B Convertible Preferred Stock (the “Series B Prefs”) contains price protection provisions that allow for the reduction in the conversion price of the Series B Prefs. We accounted for the Series B Prefs in accordance with FASB ASC Topic 815.

The fair value of the Series B Prefs at June 30, 2015 and October 3, 2014 was $6,400 and $160,000, respectively, and is included in the unaudited condensed consolidated balance sheet under the caption “Derivative liabilities”.

At June 30, 2015, the estimated fair values of the liabilities measured on a recurring basis are as follows:

	Fair Value Measurements at June 30, 2015
	Balance at		Quoted Prices in		Significant Other		Significant
	June 30, 2015		Active Markets		Observable Inputs		Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Warrant derivative liabilities	$	2,032	$	-	$	-	$	2,032
Series A Prefs		209,120		-		209,120		-
Series B Prefs		6,400		-		-		6,400
	$	217,552	$	-	$	209,120	$	8,432

The following tables present the activity for liabilities measured at estimated fair value using unobservable inputs for the nine months ended June 30, 2015:

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Derivative Liabilities
Beginning balance at September  30, 2014	$	241,336
Issuance of Series B Prefs derivative liabilities		160,000
Changes in estimated fair value		(392,904)
Ending balance at June 30, 2015	$	8,432

	Fair Value Measurements Using
	Significant Observable Inputs
	(Level 2)
	Derivative Liabilities
Beginning balance at September 30, 2014	$	972,000
Changes in estimated fair value		(762,880)
Ending balance at June 30, 2015	$	209,120