2. DERIVATIVES LIABILITIES, WARRANTS AND OTHER OPTIONS

12 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

2. DERIVATIVES LIABILITIES, WARRANTS AND OTHER OPTIONS

Derivative liabilities, warrants and other options outstanding at September 30, 2013:

Warrant	Issue Date	Shares Issuable upon Exercise of Warrant		Exercise Price		Expiration Date	Reference
Series N	8/18/08		518,771		3.00	8/18/14		1
Series A	6/24/09		130,347		5.00	12/24/14		1
Schleuning (Series A)	7/8/09		16,750		5.00	01/8/15		1
Series B	9/4/09		50,000		6.80	9/4/14		1
Series C	8/20/09 -8/26/09		463,487		5.50	2/20/15		1
Series E	9/21/09		71,428		17.50	8/12/14		1
Series F	10/6/11		1,200,000		4.00	10/6/14		1
Series G	10/6/11		66,667		4.00	8/12/14		1
Series H	1/26/12		1,200,000		5.00	8/1/15		1
Series Q	6/21/12		1,200,000		5.00	12/22/15		1
Series R	12/6/12		2,625,000		4.00	12/6/16		1
Series L	4/18/07		25,000		7.50	4/17/14		2
Series L (repriced)	4/18/07		70,000		2.50	4/2/15		2
Series M (modified)	4/18/07		600,000		3.40	7/31/14		2
Series P	2/10/12		590,001		4.50	3/6/17		3
Private Investors	7/18/05 -6/30/09		740,938		5.60 – 8.20	1/26/14 - 7/18/14		4
Warrants held by Officer and Director	6/24/09- 7/6/09		349,754		4.00 – 5.00	12/24/14 - 1/6/15		5
Consultants	2/15/05 – 12/28/12		140,750		2.80 – 20.00	5/20/14 - 12/27/17		6

1.   Derivative Liabilities

The balances of derivative instruments at September 30, 2013 and 2012 are as follows:

	September 30, 2013		September 30, 2012
Series A through E	$	6,106	$	786,989
Series N		41,501		830,034
Series F and G warrants		12,667		1,646,667
Series H warrants		36,000		1,800,000
Series Q warrants		48,000		1,920,000
Series R warrants		288,750		-
Total derivative liabilities	$	433,024	$	6,983,690

The Company reviews all outstanding warrants in accordance with the requirements of ASC 815.  This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The warrant agreements provide for adjustments to the exercise price for certain dilutive events, which includes an adjustment to the number of shares issuable upon the exercise of the warrant in the event that the Company makes certain equity offerings in the future at a price lower than the exercise prices of the warrant instruments.  Under the provisions of ASC 815, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded.

In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and re-valued at the end of each reporting period through expiration.  Any change in fair value between the respective reporting dates is recognized as a gain or loss.

Series K and Series A through E Warrants

The Company accounted for the Series K and A through E Warrants as derivative liabilities in accordance with ASC 815. These warrants do not qualify for equity accounting and must be accounted for as derivative liabilities since the warrant agreements provide the holder with the right, at its option, to require the Company to a cash settlement of the warrants at Black-Scholes value in the event of a Fundamental Transaction, as defined in the warrant agreement.  Since the occurrence of a Fundamental Transaction is not entirely within the Company’s control, there exist circumstances that would require net-cash settlement of the warrants while holders of shares would not receive a cash settlement.

In October 2011, 231,840 warrants held by the investors were reset from $4.00 to $3.00.  In addition, the investors were issued 77,280 warrants exercisable at $3.00 per share at an initial cost of $30,912.  This cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

In February 2012, all Series K warrants were exercised, and the Company received $927,359 from the exercise of Series K warrants to purchase 309,120 of the Company’s common shares. As of September 30, 2012, all Series K warrants had been exercised and no liability was recorded.  When the warrants were exercised, the value of the warrants, or $122,367, was converted from derivative liabilities to equity.  During the year ended September 30, 2011, no Series K warrants were exercised.

During the year ended September 30, 2012, the Company recorded a loss of $21,903 from the exercise and mark to market on the remaining Series K warrants. During the year ended September 30, 2011, the Company recorded a gain of $932,950 on the remaining Series K warrants.

In June 2009, the Company issued 1,011,656 Series A warrants exercisable at $5.00 per share in connection with a financing.  The cost of the warrants of $2,775,021 was recorded as a debit to additional paid in capital and a credit to derivative liabilities.  As of September 30, 2013, 130,347 of these warrants remained outstanding. As of September 30, 2013 and 2012, the fair value of these derivative liabilities totaled $1,303 and $156,417, respectively.  During the years ended September 30, 2013, 2012 and 2011, no Series A warrants were exercised.

In July 2009, the Company issued 16,750 warrants to a private investor.  The warrants were issued with an exercise price of $5.00 per share and valued at $43,550 using the Black Scholes method. The cost of the warrants was accounted for as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2013, 16,750 warrants remained outstanding.  As of September 30, 2013 and 2012, the fair value of these derivative liabilities totaled $168 and $20,100, respectively.

In connection with a loan received and fully repaid in a prior period, the Company issued 50,000 Series B warrants with an exercise price of $6.80 per share. As of September 30, 2013, 50,000 Series B warrants remained outstanding. As

of September 30, 2013 and 2012, the fair value of the Series B warrants totaled $0 and $40,000, respectively.

In connection with an August 2009 financing, the Company issued 539,222 Series C warrants exercisable at $5.50 per share.  As of September 30, 2013, 463,487 of these warrants remained outstanding. As of September 30, 2013 and 2012, the fair values of the Series C warrants totaled $4,635 and $556,186, respectively.

During the years ended September 30, 2013, 2012 and 2011, 0, 0 and 75,733 Series C warrants were exercised, respectively.   The Company received proceeds of $416,532 from the exercise of the Series C warrants during the year ended September 30, 2011.  The Company recognized a gain on exercise of $0, $0 and $232,891, respectively.  When the warrants were exercised in 2011, the value of these warrants of $202,830 was converted from derivative liabilities to equity.

In September 2009, 71,428 Series E warrants were issued to the placement agent in connection with a financing, with an exercise price of $17.50 per share.  As of September 30, 2013, 71,428 Series E warrants remained outstanding.  As of September 30, 2013 and 2012, the fair value of the Series E warrants totaled $0 and $14,286, respectively.

During the years ended September 30, 2013, 2012 and 2011, the Company recorded a gain of $780,883, $588,469 and $2,225,887, respectively, on the Series A through E warrants.

Series N Warrants

In October 2011, 389,078 Series N warrants issued to investors in connection with a prior year financing, were reset from $4.00 to $3.00.  In addition, the investors were issued 129,693 warrants exercisable at $3.00 per share at an initial cost of $220,478.  The cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

As of September 30, 2013, 518,771 Series N warrants remain outstanding.  As of September 30, 2013 and 2012, the fair value of these Series N warrants totaled $41,501 and $830,034, respectively.  During the years ended September 30, 2013, 2012 and 2011, the Company recorded a derivative gain of $788,533, $207,507 and $1,089,420, respectively, on the Series N warrants.

Series F and G warrants

In October 2011, in connection with a financing, the Company issued 1,200,000 Series F warrants exercisable at $4.00 per share at any time prior to October 6, 2014.  The Company also issued 66,667 Series G warrants exercisable at $4.00 per share to the placement agent for this offering.  The Series G warrants are exercisable at any time prior to August 12, 2014. The initial cost of the warrants of $2,146,667 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2013 and 2012, the fair value of the Series F and G warrants totaled $12,667 and $1,646,667, respectively. During the years ended September 30, 2013 and 2012, the Company recorded a gain of $1,634,000 and $500,000, respectively on the Series F and G warrants.

Series H Warrants

In January 2012, in connection with a financing, the Company issued 1,200,000 Series H warrants exercisable at $5.00 per share at any time prior to August 1, 2015.  The initial cost of the warrants of $2,400,000 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2013 and 2012, the fair value of the warrants totaled $36,000 and $1,800,000, respectively.   During the years ended September 30, 2013 and 2012, the Company recorded a gain of $1,764,000 and $600,000, respectively, on the Series H warrants.

Series Q Warrants

In June 2012, in connection with a financing, the Company issued 1,200,000 Series Q warrants exercisable at $5.00 per share at any time prior to December 22, 2015. The initial cost of the warrants of $2,160,000 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of September 30, 2013 and 2012, the fair value of the warrants totaled $48,000 and $1,920,000, respectively.   During the years ended September 30, 2013 and 2012, the Company recorded a gain of $1,872,000 and $240,000, respectively, on the Series Q warrants.

Series R Warrants

On December 4, 2012, the Company sold 3,500,000 shares of its common stock for $10,500,000, or $3.00 per share, in a registered direct offering.  The investors in this offering also received Series R warrants which entitle the investors to purchase up to 2,625,000 shares of the Company’s common stock.  The Series R warrants may be exercised at any time before December 6, 2016 at a price of $4.00 per share.  The initial cost of the warrants of $4,200,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities.  As of September 30, 2013, the fair value of the Series R warrants was $288,750.  During the year ended September 30, 2013, the Company recorded a derivative gain of $3,911,250 on the Series R warrants.

Senior Convertible Notes and Redeemable Series A Convertible Preferred Stock

In March 2012, the Company repaid the remaining Senior Secured Convertible Notes derived from the settlement, thereby completely eliminating the Senior Secured Convertible Notes, satisfying the settlement and having the lien on the Company’s assets removed (see Note 13).

The accounting for the Senior Secured Convertible Notes was within the scope of ASC 815.  Under ASC 815 or ASC 825, ”Financial Instruments,”  the Company may make an irrevocable election to initially and subsequently measure a hybrid financial instrument in its entirety at fair value.  Any change in fair value between the respective reporting dates is recognized as a gain or loss.  Based on the analysis of the Senior Secured Convertible Notes, the Company identified several embedded derivative features.  The Company elected, in accordance with ASC 825, to initially and subsequently carry the instrument at fair value without bifurcating the embedded derivatives.  For the year ended September 30, 2012, the Company recorded a gain of $49,000 on the Senior Secured Convertible Notes. For the year ended September 30, 2011, the Company recorded a loss of $49,000 on the Senior Secured Convertible Notes.

2.   Series L and M Warrants

In April 2007, the Company completed a $15 million private financing.  Shares were sold at $7.50, a premium over the closing price of the previous two weeks.  The financing was accompanied by 1,000,000 warrants with an exercise price of $7.50 and 1,000,000 warrants with an exercise price of $20.00.  The warrants are known as Series L and Series M warrants, respectively.  The warrants issued with the financing qualified for equity treatment in accordance with ASC 815.  The cost of Series L and Series M warrants were recorded as a debit and a credit to additional paid-in capital.

In November 2011, the Company reduced the exercise price of 160,000 Series L warrants to $3.40. The additional cost of $86,826 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend.  This cost is included in modification of warrants and increased the net loss available to shareholders on the statements of operations. In March 2012, 60,000 Series L warrants were exercised at a price of $3.40, and the Company received proceeds of $204,000.

In April 2012, the 25,000 Series L warrants were transferred to a consultant exercisable at a price of $7.50 per share and were extended for two years from the current expiration date. The additional value of $43,910 was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.  In June 2012, 10,167 Series L warrants with an exercise price of $7.50 per share, expired.

In April 2013, 100,000 Series L warrants were repriced to $2.50 and extended for two years to April 2, 2015 in return for a reduction in outstanding warrants to 70,000.  The additional cost of $59,531 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend.  This cost was included in modification of warrants and increased the net loss available to shareholders on the statements of operations.  As of September 30, 2013, 70,000 of the Series L warrants at the reduced exercise price of $2.50 and 25,000 warrants at the original exercise price of $7.50, remained outstanding.

In February 2011, 600,000 Series M warrants, exercisable at a price of $6.00 per share were extended for two years to July 31, 2014.  This cost of $661,457 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend.  This cost is included in modification of warrants and increased the net loss available to shareholders on the statements of operations.

In November 2011, the Company reduced the exercise price of 600,000 Series M warrants from $6.00 to $3.40. The additional cost of $238,794 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend.  This cost is included in modification of warrants and increased the net loss available to shareholders on the statements of operations.  As of September 30, 2013, 600,000 Series M warrants at the reduced exercise price of $3.40 remained outstanding.

3.Series O and P Warrants

In March 2009, as further consideration for its rights under a licensing agreement, Byron Biopharma LLC (“Byron”) purchased 375,000 Units from the Company at a price of $2.00 per Unit.  Each Unit consisted of one share of the Company’s common stock and two Series O warrants.  Each Series O warrant entitles the holder to purchase one share of the Company’s common stock at a price of $2.50 per share.  The Company filed a registration statement to register the shares issuable upon the exercise of the warrants.  The Units were accounted for as an equity transaction using the Black Scholes method to value the warrants.  The fair value of the warrants was calculated to be $1,015,771.  During the year end September 30, 2011, 100,000 Series O warrants were exercised for which the Company received $250,000.  During the year end September 30, 2012, the remaining 650,000 Series O warrants were exercised, for which the Company received $1,625,000. As of September 30, 2013, no Series O warrants remained outstanding.

On February 10, 2012, the Company issued 590,001 Series P warrants to the former holder of the Series O warrants as an inducement for the early exercise of the Series O warrants. Series O warrants entitled the holder to purchase 590,001 shares of the Company’s common stock at a price of $2.50 per share at any time on or prior to March 6, 2016.  The Series P warrants allow the holder to purchase up to 590,001 shares of the Company’s common stock at a price of $4.50 per share.  The Series P warrants are exercisable at any time prior to March 6, 2017.  The warrants were accounted for as an equity transaction using the Black-Scholes method to value the warrants.  The fair value of the warrants was calculated to be $1,593,000.  This cost was recorded as a debit and a credit to additional paid-in capital.  This cost is included in inducement warrants and increased the net loss available to shareholders on the statements of operations.  As of September 30, 2013, 590,001 Series P warrants remained outstanding.

4.   Private Investor Warrants

Between May 2003 and April 2006, the Company issued 190,000 warrants as part of a financing to a private investor at exercise prices between $4.70 and $12.50, of which 70,000 warrants were exercised in April 2006.  During the year ended September 30, 2013, the remaining 120,000 warrants with exercise prices between $4.70 and $12.50 expired.  As of September 30, 2013, none of these warrants remained outstanding.

In February 2011, 132,500 warrants issued to a private investor with exercise prices between $5.60 and $8.20 were extended for three years.  The additional value of $406,912 was calculated using the Black Scholes method and was accounted for as a debit and a credit to additional paid in capital.  As of September 30, 2013, 132,500 warrants remained outstanding.

In January 2009, as part of an amended lease agreement on the Company’s manufacturing facility, the Company repriced 300,000 warrants issued to the lessor in July 2007 at $12.50 per share and which were to expire on July 12, 2013. These warrants were repriced at $7.50 per share and expire on January 26, 2014. The cost of this repricing and extension of the warrants was $70,515 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  In addition, 78,750 additional warrants were given to the lessor of the manufacturing facility on the same date, exercisable at a price of $7.50 per share, and will expire on January 26, 2014. The cost of these warrants was $45,207 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  As of September 30, 2013, 378,750 warrants remained outstanding.

Between March 31 and June 30, 2009, 229,688 warrants were issued at $7.50 to the leaseholder on the manufacturing facility in consideration for the deferment of rent payments.  The cost of these warrants of $251,172 was recorded as a debit to research and development and a credit to additional paid in capital.   As of September 30, 2013, 229,688 warrants remained outstanding.

5.   Warrants held by Officer and Director

Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057.  In June 2009, the Company issued 164,824 warrants, exercisable at $4.00 per share, to Mr. de Clara.  The warrants are exercisable at any time prior to December 24, 2014.  These warrants were valued at $65,796 using the Black-Scholes method.  In July 2009, as consideration for a further extension of the loan, the Company issued 184,930 warrants exercisable at $5.00 per share to Mr. De Clara.  These warrants were valued at $341,454 using the Black-Scholes method and can be exercised at any time prior to January 6, 2015.  The first warrants were recorded as a discount to the loan and a credit to additional paid-in capital.  The second warrants were recorded as a debit to derivative loss of $831,230, a premium of $341,454 on the loan and a credit to additional paid in capital of $489,776.  The warrants and premium are fully amortized. As of September 30, 2013, 349,754 warrants remained outstanding. See Note 10 for additional information.

6.   Options and Shares Issued to Consultants

As of September 30, 2013, 140,750 options that were issued to consultants as payment for services provided between February 2005 and December 2012 remained outstanding, of which 131,250 options were issued from the Non-Qualified Stock Option plans.  On May 22, 2013, 3,000 options previously issued to a consultant from the Non-Qualified Stock Option plans expired.

In October 2010, 8,000 options issued to a consultant with an exercise price of $20.00 were extended for five years from the current expiration date.  The additional value of $30,186 was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.

In December 2011, 5,000 options were issued to a consultant with an exercise price of $3.00 which vested immediately and expire on December 1, 2016.  The cost of these options was $10,211 calculated using the Black-Scholes method and was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.

In March 2012, 5,000 options were issued to a consultant with an exercise price of $3.50 which vested immediately and expire on March 5, 2017.  The cost of these options was $12,037 calculated using the Black-Scholes method and was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.

In April 2012, 7,000 options issued to a consultant with exercise prices between $6.30 and $7.00 were extended for two years from the current expiration date.  The additional value of $10,879 was accounted for as a credit to additional paid in capital and a debit to general and administrative expense.

In October 2012, the Company entered into a six month consulting agreement for public relations, which was extended through September 30, 2013.  This contract totals $108,000 and includes a monthly retainer or 5,000 shares of restricted stock.  The common shares were issued at the fair market value on the grant date.  The aggregate fair market value of $161,500 for the year ended September 30, 2013, was recorded as a general and administrative expense.

On December 28, 2012, the Company entered into a consulting agreement for services to be provided through December 27, 2013.  In consideration for the services to be provided, the Company issued the consultant 50,000 shares of common stock and 50,000 options to purchase common stock at a price of $2.80 per share.  The common shares were issued at the fair market value on the agreement date of $2.80. The aggregate fair market value of $140,000 was recorded as a prepaid expense and will be charged to general and administrative expense over the period of service.  The fair value of the options issued, as calculated using the Black-Scholes method, was determined to be $98,150 and will also be charged to general and administrative expense over the period of service.  During the year ended September 30, 2013, the Company recorded $180,597 of expense relating to this consulting arrangement.  As of September 30, 2013 and September 30, 2012, the Company has prepaid consulting expenses of $57,553 and $53,333, respectively.