Quarterly report pursuant to sections 13 or 15(d)

6. Derivative Liability

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6. Derivative Liability
6 Months Ended
Mar. 31, 2014
Notes to Financial Statements  
Derivative Liability

The February 2014 Convertible Note discussed in Note 5 has a reset provision and a dilutive issuance clause that gave rise to a derivative liability.

 

The fair value of the derivative liability is recorded and shown separately under current liabilities. Changes in the fair value of the derivative liability are recorded in the condensed consolidated statement of income under other income (expense).

 

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

  

The range of significant assumptions which the Company used to measure the fair value of derivative liabilities (a level 3 input) at March 31, 2014 is as follows:

 

Stock price   $6.84 - $7.14
Risk free rate   .11% - .13%
Volatility   135.89%-141.97%
Exercise prices   $6.54 - $8.12
Term (years)   1

 

The following table represents the Company’s derivative liability activity for both the embedded conversion features for the six months ended March 31, 2014:  

 

  Amount  
Derivative liability balance, September 30, 2013   $  
Issuance of derivative financial instruments during the six months ended March 31, 2014     139,852  
Change in derivative liability during the six months ended March 31, 2014     34,434  
Derivative liability balance, March 31, 2014   $ 174,286