Convertible Debt and Note Payable

6 Months Ended

Jun. 30, 2015

Debt Disclosure [Abstract]

Convertible Debt and Note Payable

Note 6 – Convertible Debt and Note Payable

2014 Convertible Note

In January 2014, the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”) which includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each in the amount of $200,000 (the 2014 “Investor Notes”). All or any portion of the outstanding balance The 2014 Investor Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Tonaquint any amounts on the unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest at 8% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at Tonaquint’s option at a price of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of $340,000 of principal and any interest, fees costs or charges, and six additional tranches of $220,000 each, plus any interest, costs, fees or charges.

Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The 2014 Company Note matured fifteen months after the Issuance Date.

During the year ended December 31, 2014, the Company received an additional $800,000 of the purchase price and an additional $100,000 (including $17,609 of interest) during the six months ended June 30, 2015. As of June 30, 2015, the balance of the purchase price of $317,609 is included in Notes receivable on the unaudited condensed consolidated financial statements included herein, as well as $25,326 of interest receivable. During the three and six months ended June 30, 2015, the Company recorded interest expense of $43,464 and $183,352, respectively, and increased accrued interest expense by $183,552 for amounts due Tonaquint, pursuant to the 2014 Company Note. As of June 30, 2015, $753,128 of principal and accrued interest of $246,446 is outstanding on the 2014 Company Note.

During the six months ended June 30, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note:

Date		Principal Conversion		Interest Conversion		Total Conversion		Conversion Price		Shares Issued
	1/3/15	$	65,460	$	9,540	$	75,000	$	.045		1,665,445
	1/28/15	$	54,123	$	8,377	$	62,500	$	.0334		1,869,187
	2/20/15	$	55,901	$	9,099	$	65,000	$	.0244		2,668,309
	3/13/15	$	60,000	$	—	$	60,000	$	.0244		2,463,045
	3/31/15	$	66,555	$	8,445	$	75,000	$	.0125		5,985,634
	5/5/15	$	66,731	$	8,269	$	75,000	$	.0125		6,008,171
	6/2/15	$	67,277	$	7,723	$	75,000	$	.0095		7,917,238
	6/29/15	$	67,483	$	7,517	$	75,000	$	.0055		13,678,643
		$	503,530	$	58,970	$	562,500				42,255,672

2015 Convertible Notes

On March 2, 2015, the Company issued a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000 after debt issuance costs of $4,000 paid for lender legal fees. The Note matures November 25, 2015 and converts at a 39% discount to the market price as defined in the Note.

On March 27, 2015, the Company issued a Convertible Promissory Note for $27,000 to GW Holding Group, LLC. On March 31, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note.

March 27, 2015, the Company issued a Convertible Promissory Note for $78,750 to LG Capital Funding, LLC. The Company received net proceeds of $75,000 after debt issuance costs of $3,750 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note.

On March 30, 2015, the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC. On April 6, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 30, 2016 and converts at a 42% discount to the market price as defined in the Note.

The debt issuance costs of $11,750 in the aggregate included in the 2015 Convertible Notes, will be amortized over the earlier of the terms of the Note or any redemptions and accordingly, $3,271 and $3,715, respectively, has been expensed as debt issuance costs (included in interest expense) for the three and six months ended June 30, 2015. As of June 30, 2015, $211,750 of principal and accrued interest of $4,762 is outstanding on the 2015 Convertible Notes, and the principal amount is carried at $211,750, net of a remaining note discount of $107,226.

Among other terms the 2015 Notes are due nine to twelve months from their issuance date, bearing interest at 8% per annum, payable in cash or shares at a conversion price (the “Conversion Price”) for each share of common stock equal to 39% - 42% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten to eighteen trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2015 Convertible Notes, the Company was required to pay interest at 22% per annum and the holders could at their option declare a Note, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2015 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.

The Company determined that the conversion feature of the 2015 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2015 Convertible Notes were not considered to be conventional debt under EITF 00-19 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2015 Convertible Notes resulted in an initial debt discount and an initial derivative liability of $157,881.

As of June 30, 2015 the Company revalued the embedded conversion feature of the 2015 Convertible Notes. The fair value of the 2015 Convertible Notes was calculated at June 30, 2015 based on the average historical effective discounts to market over periods consistent with the terms of the related debt.

A summary of the derivative liability balance as of June 30, 2015 is as follows:

	2015
Beginning Balance	$	—
Initial Derivative Liability		157,881
Fair Value Change		7,603
Ending Balance	$	165,484

Note Payable

On March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. The promissory note is being amortized on the basis of five (5) years, with principal payments of $17,150 plus interest at 3.5% due annually on December 1 of each year. Payments begin December 1, 2014, and shall be due on the first day of each succeeding December, with any balance of principal and accrued interest due December 1, 2020. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount. As of June 30, 2015, the balance of note is $74,313, including a past due amount of $5,713 of the December 2014 amount due.