Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments [Abstract]

Derivative Instruments

Note 5. Derivative Instruments

During 2012 we issued instruments that require liability classification under ASC 815.  These instruments are measured at fair value at the end of each reporting period.

On June 18, 2013, Water Tech World Wide exercised is 19,035,638 derivative warrants in a cashless exercise of stock. The value of the derivative liability associated with the warrants on that date was $1,332,360, which was extinguished through Additional Paid In Capital. The value was calculated using the Black-Scholes model based upon the following assumptions: expected volatility of 412.27%, discount rate of 0.66%, expected life of 2.54 years and no dividends.

On September 30, 2013, the fair value of the derivative liability was $584.403, which was calculated using the Black-Scholes model based upon the following assumptions: expected volatility of 432.11%, discount rate of 0.33%, expected life of 2.25 years, and no dividends.

As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (exit price). We utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We classify fair value balances based on those inputs. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 — Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value as September 30, 2013.

Recurring Fair Value Measures	Level 1		Level 2		Level 3			Total
LIABILITIES:
Derivative liabilities as of December 31, 2012					$	474,203		$	474,203
Change in fair value of derivative liability		--		--		1,442,560			1,442,560
Extinguishment of derivative liability		--		--		(1,332,360	)		(1,332,360	)
Derivative liability as of September 30, 2013		--		--	$	584,403		$	584,403