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. In addition, we have recorded a derivative liability for the variable conversion feature of certain outstanding warrants to purchase shares of our common stock.

The debt discount is amortized over the life of the note and recognized as interest expense. For the three months ended June 30, 2016 and 2015, we amortized debt discount of $270,128 and $327,955 to interest expense, respectively. For the six months ended June, 2016 and 2015, we amortized debt discount of $580,171 and $808,293 to interest expense, respectively. The derivative liability is adjusted at each reporting date according to stock price fluctuations and other inputs and was $4,394,475 and $10,852,906 at June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016, the convertible debentures and related accrued interest payable were convertible into approximately 6,698,670,000 shares of our common stock. Based on the assumptions used to estimate the fair value of the derivative liability at June 30, 2016, and assuming all lenders converted the notes payable at the June 30, 2016 conversion prices, the Company would have had insufficient authorized shares of common stock to complete the debt conversions.

During the six months ended June 30, 2016, the Company had the following activity in its derivative liability:


Derivative liability at December 31, 2015	$10,852,906
Addition to liability for new debt issued	375,000
Elimination of liability on conversion	(138,540)
Change in fair value	(6,694,891)

Derivative liability at June 30, 2016	$4,394,475

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 June 30, 2016 are as follows:


Stock price on the valuation date	$0.0009
Conversion price for the debt	$0.00025- $0.00068
Dividend yield	0.00%
Years to maturity	0.186-1.43
Risk free rate	0.36% - 0.52%
Expected volatility	165.21%% - 259.99%

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.