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Long Term Debt

12 Months Ended

Dec. 31, 2014

13. LONG TERM DEBT

Long-term debt consists of the following:
	December 31,
	2014			2013
12.0% convertible notes, due October 31, 2018, issued December 2013	$	530,000		$	530,000
8.5% convertible note payable, due December 31, 2018 (Pueblo West Property)		164,644			170,000
12.0% convertible notes, due October 31, 2018, issued January 2014		1,120,000			—
14.0% mortgage payable, due October 21, 2016 (The Greenhouse)		600,000			—
Unamortized discount		(1,352,510	)		(84,694	)
Long-term debt, net of unamortized discount	$	1,062,134		$	615,306
Debt maturing within one year		(6,337	)		(5,356	)
Debt maturing after one year	$	1,055,797		$	609,950

12% Convertible Notes

December 2013 Issuance

In December 2013, the Company entered into various convertible promissory notes with various third parties totaling $530,000 (the “December 2013 Issuance”), of which the entire amount was outstanding at December 31, 2014 and December 31, 2013, respectively. The principal amounts of these notes range between $10,000 and $300,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of the Company’s common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits, etc.). These notes are convertible at the election of the noteholder at any time on or before maturity date at $5.00 per common share. These notes are secured by a first lien on all of the Company’s assets which the Company acquires with the proceeds from the sale of these notes.

The Company paid approximately $66,000 to a placement agent for finder’s fees, which the Company recorded as a debt discount as of December 31, 2014 and December 31, 2013. In addition, the Company granted the placement agent warrants to purchase 10,600 shares at a price of $5.00 per share, (with standard dilution clause for dividends, stock splits, etc.) which vest immediately, and expire October 31, 2018. The value of the warrants was approximately $20,000 based on the Black-Scholes pricing model. The Company recorded the value of warrants as additional debt discount at issuance. The debt discount is being amortized to interest expense over the life of the notes. Amounts amortized to interest expense were approximately $18,000 and $1,000 for the year ended December 31, 2014 and the 2013 Fiscal Period, respectively. The unamortized debt discount balance at December 31, 2014 is approximately $65,000.

To properly account for the December 2013 Issuance, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the December 2013 Issuance are freestanding or embedded. The Company determined that there were no free standing features. The December 2013 Issuance was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the December 2013 Issuance as conventional debt. The Company then reviewed ASC 470-20, and determined that the December 2013 Issuance met the criteria of a conventional convertible note and that none of the December 2013 Issuance had a beneficial conversion feature. As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.

January 2014 Issuance

In January 2014, the Company entered into various convertible promissory notes with various third parties totaling $1,605,000 (the “January 2014 Issuance”), of which $1,120,000 was outstanding at December 31, 2014. The principal amounts of these notes range between $10,000 and $200,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of the Company’s common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits, etc.). These notes are convertible at the election of the noteholder at any time on or before maturity date at $5.00 per common share. These notes are secured by a first lien on all of the Company’s assets which the Company acquires with the proceeds from the sale of these notes.

The Company paid approximately $165,000 in debt issuance costs and $32,100 to a placement agent for finder’s fees which the Company had initially recorded as a debt discount as of December 31, 2014. In addition, the Company granted the placement agent warrants to purchase 32,100 shares at a price of $5.00 per share, (with standard dilution clause for dividends, stock splits, etc.) which vest immediately, and expire October 31, 2018. The value of the warrants was approximately $84,000 based on the Black-Scholes pricing model.

To properly account for the January 2014 Issuance, the Company evaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the convertible debt are freestanding or embedded. The January 2014 Issuance was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share. The Company determined that the conversion feature was embedded in the January 2014 Issuance, but did not meet the definition of a derivative pursuant to ASC 815 and therefore should not be bifurcated. The Company concluded that the January 2014 Issuance was conventional debt and assessed under ASC 470-20 whether the January 2014 Issuance had a beneficial conversion feature. Since the initial conversion price of the security was less than the market value of the common stock at the time of issuance, it was determined that a beneficial conversion feature existed. The Company calculated the value of the beneficial conversion feature using the intrinsic value method. The stock price on the date of issuance was $13.75 and the conversion price was $5.00.

The calculated value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was limited to the value of the debt balance of $1,605,000. The debt discount is being amortized to interest expense over the life of the notes. The amount amortized to interest expense was approximately $702,000, for the year ended December 31, 2014. The unamortized discount balance at December 31, 2014 was approximately $903,000.

Conversion of 12% Convertible Notes

As of December 31, 2014, seven of the January 2014 Issuance note holders converted their notes with principal balances totaling $485,000 and accrued interest of approximately $4,000 into 97,733 shares of the Company’s common stock at a conversion price of $5.00 per share. Upon conversion, any remaining unamortized portions of debt discount relating to converted notes is immediately expensed to amortization expense. For the year ended December 31, 2014, the Company had amortization expense of debt discount related to these converted notes of approximately $440,000 in 2014.

After December 1, 2015, the remaining convertible notes in the December 2013 Issuance and the January 2014 Issuance (collectively, the “Convertible Notes”) will automatically convert to shares of the Company’s stock if the trading stock price has exceeded $10 for twenty consecutive trading days and the daily volume for those twenty consecutive trading days exceeds 25,000 shares. As of April 24, 2014, these parameters have been met and the Company expects that the Convertible Notes will automatically convert to shares of the Company’s stock on December 1, 2015. If the Convertible Notes had been converted at December 31, 2014, the Company would have issued 330,000 shares of its stock in exchange of $1,650,000 in debt.

8 ½% Convertible Note Payable (Pueblo West Property)

In December 2013, the Company executed a mortgage on its Pueblo West Property in the amount of $170,000 at 8 ½% interest amortized over 15 years with a maturity date of December 31, 2028 (the “Pueblo Mortgage”). This note is convertible at any time at $5.00 per share.

To properly account for the Pueblo Mortgage, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the Pueblo Mortgage are freestanding or embedded. The Company determined that there were no free standing features. The Pueblo Mortgage was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the Pueblo Mortgage as conventional debt. The Company then reviewed ASC 470-20, and determined that the Pueblo Mortgage met the criteria of a conventional convertible note and that none of the Pueblo Mortgage had a beneficial conversion feature As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.

14% Mortgage Note Payable (The Greenhouse)

In October 2014, the Company executed a mortgage on The Greenhouse in the amount of $600,000 at 14.0% interest with a maturity date of October 21, 2016 (the “Greenhouse Mortgage”).

To properly account for the Greenhouse Mortgage, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the Greenhouse Mortgage are freestanding or embedded. The Company determined that there were no free standing features. The Greenhouse Mortgage was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the Greenhouse Mortgage as conventional debt. The Company then reviewed ASC 470-20, and determined that the Greenhouse Mortgage met the criteria of a conventional convertible note and that none of the Greenhouse Mortgage had a beneficial conversion feature. As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.

In addition, the Company granted 600,000 warrants to Evans Lendco, the note holder of the Greenhouse Mortgage, which expire on October 21, 2016. The warrants vest immediately and allow for Evans Lendco to purchase 600,000 shares of the Company’s common stock at a price of $4.40 per share, (with standard dilution clause for dividends, stock splits, etc.). The relative fair value of the warrants was approximately $418,000 based on the Black-Scholes pricing model. The Company recorded the relative fair value of warrants as debt discount at issuance. The debt discount is being amortized to interest expense over the life of the notes. The amount amortized to interest expense was approximately $41,000 for the year ended December 31, 2014. The unamortized debt discount balance at December 31, 2014 was approximately $382,000.

The tables below summarize our convertible notes activity during the year ended December 31, 2014 for the 2013 Fiscal Period:

	Principal			Debt			Accrued
	Balance			Discount			Interest			Total
Balance at June 5, 2013 (Inception)	$	-		$	-		$	-		$	-
Issued in the period		700,000			(85,488	)		-			614,512
Amortization of debt discount		-			794			-			794
Interest accrued during period		-			-			871			871
Balance at December 31, 2013	$	700,000		$	(84,694	)	$	871		$	616,177
Issued in the period		2,205,000			(2,023,541	)		-			181,459
Converted into shares of common stock		(485,000	)		-			(3,669	)		(488,669	)
Amortization of debt discount to interest expense		-			755,725			-			755,725
Payment of loan principal		(5,356	)		-			-			(5,356	)
Interest accrued during period		-			-			244,771			244,771
Interest paid during period		-			-			(225,503	)		(225,503	)
Balance at December 31, 2014		2,414,644			(1,352,510	)		16,470			1,078,604
Less: Current portion (1)		(6,337	)		-			-			(6,337	)
Long-term debt	$	2,408,307		$	(1,352,510	)	$	16,470		$	1,072,267

(1)	The current portion represents the principal balance payable on the 8 ½% convertible note payable in the twelve months following the balance sheet date

Annual maturities of long-term debt (excluding unamortized discount) for the next five years ending December 31, and thereafter, consist of:

2015	$	6,337
2016		606,898
2017		7,507
2018		1,793,902
2019		-
2020		-
Thereafter		-
	$	2,414,644

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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