Annual report pursuant to Section 13 and 15(d)

13. Derivatives Liability

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13. Derivatives Liability
12 Months Ended
Sep. 30, 2016
Notes  
13. Derivatives Liability

13.                Derivatives Liability

The derivatives liability as of September 30, 2016 and 2015, was $2,054,071 and $79,347, respectively.  The derivatives liability as of September 30, 2014, was related to a variable conversion price adjustment on the Series F preferred stock.  The derivatives liability as of December 31, 2014, was eliminated due to the conversion price on Series F preferred stock being adjusted from $500.00 to $166.85 based on the number of subscribers as of December 31, 2014.  The derivatives liability as of September 30, 2016 and 2015 is related to a variable conversion price adjustment on outstanding notes payable and warrants.  A portion of derivatives liability as of December 31, 2015, and all of the derivatives outstanding as of September 30, 2015, were eliminated during February 2016, due to the conversion of notes payable into shares of common stock (see Note 9).

During fiscal year 2016, the Company estimated the fair value of some of the embedded derivatives upon issuance, at the end of each reporting period and prior to their conversion and elimination using a binomial option-pricing model with the following assumptions, according to the instrument: exercise prices ranging from $0.03 to $0.09 per share; risk free interest rates ranging from 0.16% to 1.06%; expected lives ranging from 0.05 to 2.09 years; expected dividends of 0%; volatility factors ranging from 125.33% to 510.03%; and stock prices ranging from $0.03 to $0.14.  During fiscal 2016, the Company estimated the fair value of the remaining embedded derivatives upon issuance and at the end of each reporting period using a Monte Carlo valuation model with the following assumptions: exercise prices ranging from $0.02 to $0.40 per share; risk free interest rates ranging from 0.18% to 1.44%; expected lives ranging from 0.04 to 6.40 years; expected dividends of 0%; volatility factors of 129% to 189%; and stock prices ranging from $0.02 to $0.40 per share. 

During the fiscal year ended September 30, 2015, the Company estimated the fair value of the embedded derivatives prior to their conversion and elimination using a binomial option-pricing model with the following assumptions, according to the instrument: exercise prices ranging from $0.12 to $0.33 per share; risk free interest rates ranging from 0.01% to 0.26%; expected lives ranging from 0.001 to 0.50 years; expected dividends of 0%; volatility factors ranging from 0.01% to 138.68%; and stock prices ranging from $0.12 to $0.33 per share.  The expected lives of the instruments were equal to the average term of the conversion option or expected exercise period of the warrants.  The expected volatility is based on the historical price volatility of the Company's common stock.  The risk-free interest rate represents the US Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.  The Company recognized a gain on derivatives liability for fiscal 2016 and 2015, of $3,405,035 and $128,942, respectively.

Pursuant to agreements entered into subsequent to September 30, 2016, $1,772,458 of the derivatives liability will be eliminated upon the offering (see Note 21).