As discussed in Note 5 above, we have recorded a derivative liability and a debt discount representing the imputed interest associated with the embedded derivative associated with our convertible debentures.

The debt discount is amortized over the life of the note and recognized as interest expense. For the three months ended March 31, 2016 and 2015, we amortized debt discount of $310,043 and $480,338 to interest expense, respectively. The derivative liability is adjusted periodically according to stock price fluctuations and other inputs and was $7,168,777 and $10,852,906 at March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016, the convertible debentures and related accrued interest payable were convertible into approximately 3,799,337,000 shares of our common stock. Based on the assumptions used to estimate the fair value of the derivative liability at March 31, 2016, and assuming all lenders converted the notes payable at the March 31, 2016 conversion prices, the Company would have had insufficient authorized shares of common stock to complete the debt conversions.

During the three months ended March 31, 2016, the Company had the following activity in its derivative liability account:


Derivative liability at December 31, 2015	$10,852,906
Addition to liability for new debt issued	260,000
Elimination of liability on conversion	(77,942)
Change in fair value	(3,866,187)

Derivative liability at March 31, 2016	$7,168,777

For purpose of determining the fair market value of the derivative liability, we used the Black Scholes option valuation model.

The significant assumptions used in the Black Scholes valuation of the derivative liability at March 31, 2016 are as follows:


Stock price on the valuation date	$0.0025
Conversion price for the debt	$0.00025- $0.0022
Dividend yield	0.00%
Years to maturity	0.26- 1.68
Risk free rate	0.39% - 0.66%
Expected volatility	165.17%% - 351.39%

These assumptions are subject to significant changes and market fluctuations from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material.