Derivative Liability

12 Months Ended

Dec. 31, 2012

Derivative Liability [Abstract]

Derivative Liability

Note 9.  Derivative Liability

As described in Note 8 Debt and Warrants Issuance, we issued a total of 23,711,052 warrants on December 31, 2012.  Pursuant to ASC 815, the reset provision contained in the warrants qualifies the warrants for derivative accounting.  In addition, the derivative liability must be marked-to-market each reporting period and the change in its fair value will be recorded in our statement of income.

On the date of the issuance, the fair value of the derivative liability was $474,203, which was calculated using the Black-Scholes model based upon the following assumptions: expected volatility of 419.44%, discount rate of 0.36%, expected term of three years and no dividends.

$427,450 of the fair value was attributable to warrants issued to Water Tech as additional consideration for the $310,000 note discussed above.  As the fair value of the warrants was higher than the face value of the note, a debt discount of $310,000 was recorded on the note with the additional $117,450 of fair value recorded as a loss on derivative liability during the year ended December 31, 2012.  The entire debt discount was amortized during the first quarter of 2013.

The remaining $46,753 of the fair value of the warrants was attributable to warrants issued to the Investor as additional consideration for the $50,000 note discussed above.  The fair value was recorded as a debt discount on the note and was fully amortized during the year ended December 31, 2012.

The following table presents the recording of these transactions as of and for the year ended December 31, 2012:

	Water Tech			Investor		Total
Note issued	$	310,000		$	50,000	$	360,000
Debt Discount		(310,000	)		-		(310,000	)
	$	-		$	50,000	$	50,000

	Water Tech			Investor		Total
Note issued	$	310,000		$	50,000
Fair value of the warrants at issuance	$	427,450		$	46,753	$	474,203
Loss on derivative liability	$	(117,450	)		-