5. DERIVATIVE LIABILITIES

6 Months Ended

Jun. 30, 2014

DerivativeInstrumentsAndHedgingActivitiesAbstract

DERIVATIVE LIABILITIES

As of December 31, 2013, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all convertible notes payable. As a result, the Company determined that the warrants and the embedded conversion features of the outstanding debt instruments did not qualify for equity classification.  Accordingly, the warrants and conversion features were treated as derivative liabilities and were carried at fair value. During the six months ended June 30, 2014, all of the outstanding convertible notes that qualified as derivative liabilities were paid in full or converted to common stock.  As of June 30, 2014, only 910,000 warrants remained as derivative liabilities due to the existence of reset provisions that qualify the instruments as derivative liabilities under FASB ASC 815.

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that they were accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013.

			Fair Value Measurement at June 30, 2014
Liabilities:	Carrying Value at June 30, 2014		Level 1		Level 2		Level 3
Warrant derivative liabilities	$	30,712	$	-	$	-	$	30,712
Convertible debt derivative liabilities		-		-		-		-
Total	$	30,712	$	-	$	-	$	30,712

			Fair Value Measurement at December 31, 2014
Liabilities:	Carrying Value at December 31, 2013		Level 1		Level 2		Level 3
Warrant derivative liabilities	$	955,350	$	-	$	-	$	955,350
Convertible debt derivative liabilities		85,500		-		-		85,500
Total	$	1,040,850	$	-	$	-	$	1,040,850

The Company estimates the fair value of the derivative warrant liabilities by using the Black-Scholes Option Pricing Model and the derivative liabilities related to the conversion features in the outstanding convertible notes using the lack-Scholes Option Pricing Model assuming maximum value, Level 3 inputs, with the following assumptions used:

Dividend yield:	0%
Expected volatility	82% to 174%
Risk free interest rate	0.03% to 1.73%
Expected life (years)	1.33 to 4.52

The following table sets forth the changes in the fair value of derivative liabilities for the six months ended June 30, 2014:

Balance, December 31, 2013	(1,040,850	)
Convertible debt derivatives recognized as derivative loss	(22,500	)
Convertible debt derivatives recognized as debt discount	(90,000	)
Resolution of convertible debt derivatives upon conversions	132,417
Resolution of convertible debt derivatives upon debt payoff	59,311
Resolution of warrant derivatives no longer qualifying as derivative liabilities	918,580
Gain on change in fair value of derivative liabilities	12,330
Balance, June 30, 2014	(30,712	)

The aggregate gain on derivative liabilities for the six months ended June 30, 2014 was $49,141.