WARRANT LIABILITY

6 Months Ended

Mar. 31, 2013

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. The Series C Warrants were repurchased by the Company for $50,000 on January 22, 2013.  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 March 31, 2013, the Company determined the fair value of the Warrants to be $8,033,842 using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.229 per share; dividend yield 0%; expected term: 4.66 years; risk free interest rate: 0.77%; expected volatility of: 141.64%; and the expected price at which holders are likely to exercise their Warrants of $0.2232. The change in fair value of warrant liability amounted to $519,919 for the three months ended March 31, 2013. The increase from the initial allocated fair value on November 29, 2012 to March 31, 2013 of $6,852,518 of warrants liability was included in the results of operations for the six months ended March 31, 2013.

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.