5. Derivative Liability

12 Months Ended

Dec. 31, 2014

Notes

5. Derivative Liability

5.  Derivative Liability

We evaluated the convertible debentures in accordance with ASC Topic 815, “Derivatives and Hedging,” and determined that the conversion feature of the convertible promissory notes were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The notes have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. We elected to recognize the notes under paragraph 815-15-25-4, whereby there would be a separation into a host contract and derivative instrument. We elected to initially and subsequently measure the notes in their entirety at fair value, with changes in fair value recognized in earnings.  We recorded a derivative liability representing the imputed interest associated with the embedded derivative.  The debt discount is amortized over the life of the note and recognized as interest expense.  For the years ended December 31, 2014 and 2013, we amortized debt discount of $1,287,418 and $445,979 to interest expense, respectively.  For purpose of estimating the fair value of the derivative liability, we used the Black Scholes option valuation model.  The derivative liability is adjusted periodically according to stock price fluctuations and other inputs and was $2,718,652 and $2,104,849 at December 31, 2014 and 2013, respectively.

At December 31, 2014 and 2013, the convertible debentures and related accrued interest payable were convertible into approximately 1,900,021,000 and 7,963,000 shares of our common stock, respectively.

During the years ended December 31, 2014 and 2013, the Company had the following activity in its derivative liability account:

Derivative liability at December 31, 2012	$-
Derivative liability at inception of new debt	1,269,103
Elimination of liability on conversion	(982,668)
Loss on derivative liability	1,818,414
Derivative liability at December 31, 2013	2,104,849
Derivative liability at inception of new debt	1,127,938
Derivative liability at issuance of warrants	2,334
Elimination of liability on conversion	(1,014,809)
Elimination of liability for cash payments	(26,659)
Loss on derivative liability	524,999
Derivative liability at December 31, 2014	$2,718,652

The significant assumptions used in the Black Scholes valuation as of December 31, 2014 are as follows:

Stock price at valuation date: $0.0012	Risk free interest rates: .04% - .46%
Conversion prices: $0.00025 - $0.013	Volatility: 320.24% – 502.31%
Years to maturity: .12 - 1.68