Derivative Liability

12 Months Ended

Dec. 31, 2013

Derivative Liability [Abstract]

Derivative Liability

Note 8.  Derivative Liability

As described in Note 7, Debt, Warrants and Preferred Stock 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.

During the year ended December 31, 2013, Water Tech exercised 19,035,638 warrants on a cashless basis, which had a fair value of $1,332,360 on the date of exercise, and received 18,790,174 restricted shares of our common stock as a result. The fair value was extinguished to additional paid-in capital on our consolidated balance sheets. At December 31, 2013, the total fair value of the remaining outstanding warrants was $163,299. The total change in fair value, less the warrant exercise, was $1,021,296, which was recognized as a loss on our consolidated statements of operations.

The following table presents a roll-forward of the derivative liability:

	2013			2012
Beginning derivative liability	$	474,203		$	-
Recognition of new derivative liability		-			474,203
Mark-to-market loss		1,021,457			-
Warrant exercises		(1,332,361	)		-
Ending derivative liability	$	163,299		$	474,203