WARRANT LIABILITY

3 Months Ended

Dec. 31, 2012

Warrant Liability [Abstract]

WARRANT LIABILITY

NOTE C – WARRANT LIABILITY

As more fully described in Note E below, on November 28, 2012, the Company entered into a securities purchase agreement (“Purchase Agreement”) with Crede CG II, Ltd. (“Crede”).  In connection with the Purchase Agreement, the Company issued Series A, B and C Warrants allowing Crede to purchase 10,752,688, 29,569,892 and 26,881,720 shares of Common Stock, respectively.

The Company determined that the Series A and B Warrants described above should be classified as a liability due to transactions which may cause an adjustment to the conversion rate (reset provisions) contained in the warrant agreements and remeasured at each reporting date at their fair value with the changes reported in earnings (loss).  Due to a callable provision of the Series C Warrants, the Company deemed such as an equity instrument.  Liability classification of the Series A and B Warrants will end upon expiration of reset provisions, at which time the Warrants will be reclassified to equity based on their then fair value. The Company determined the allocated fair value of the Warrants to be $1,181,324 on the issuance date using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.20 per share; dividend yield 0%; expected terms 5 years; risk free interest rate: 0.64%; expected volatility of: 146.32%; and the expected price at which holders are likely to exercise their Warrants of $0.2232.

At December 31, 2012, the Company determined the fair value of the Warrants to be $7,513,922 using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.21 per share; dividend yield 0%; expected term: 4.91 years; risk free interest rate: 0.72%; expected volatility of: 146.54%; and the expected price at which holders are likely to exercise their Warrants of $0.2232. The increase from the initial allocated fair value on November 29, 2012 to December 31, 2012 of $6,332,599 of warrants liability was included in results of operations for the three months ended December 31, 2012.

The Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and therefore has classified the obligation as a long term liability.

Pursuant to a registration rights agreement between the Company and Crede, the Company agreed to file a registration statement within 30 days of the Initial Closing and to use its best efforts to get such registration statement effective within 90 days.  The registration statement will cover the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including the shares of Common Stock underlying the Series A Preferred and Series A, B and C Warrants.  The Company has also agreed to prepare and file amendments and supplements to the registration statement to the extent necessary to keep the registration statement effective for the period of time required under the Purchase Agreement.