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7. CONVERTIBLE NOTES PAYABLE

12 Months Ended

Dec. 31, 2013

12% Convertible notes

The Company issued $530,000 in convertible notes on December 27, 2013. These notes have an interest rate of 12%, paid quarterly, and mature on October 31, 2018. They are convertible at any time to shares of stock at $5.00 per share. After November 1, 2015, the Company can force conversion of these notes if the trading stock price has exceeded $10 for 20 consecutive trading days.

The Company paid commission of $63,600 and incurred other debit issuance costs of $2,540. The Company also issued 10,600 warrants with an exercise price of $5.00 per share as further compensation to the broker dealer who raised this funding for us.

We valued the convertible feature of the 12% convertible notes and the warrants issued to the broker dealer using the Black Scholes valuation model, assuming an expected life of 4.8 years, an annual volatility factor of 127%, a risk free interest rate of 1.65%, and $0 dividends. The debt discount on these convertible notes payable will be amortized over the life of the notes from December 27, 2013 through October 31, 2018 on a straight line basis that approximates the effective interest rate method.

8 ½% Convertible Note Payable

The company executed a mortgage on their Pueblo West property in the amount of $170,000 at 8 ½% interest amortized over years with a maturity date of January 1, 2019. This note is convertible at any time at $5.00 per share.

We valued the convertible feature of the 8 ½% Convertible note payable using the Black Scholes valuation model, assuming an expected life of 4.8 years, an annual volatility factor of 104%, a risk free interest rate of 1.65%, and $0 dividends. The debt discount on this convertible note payable will be amortized over the life of the note from January 1, 2014 through January 2019 on a straight line basis that approximates the effective interest rate method

The table below summarizes out Convertible Notes activity during the year ended December 31, 2013:

	Convertible Notes Payable			Debt Discount			Convertible Notes Payable, Net
June 5, 2013 (Inception)	$	-		$	-		$	-
Proceeds from issuance of convertible debt
12% convertible notes issued December 27,2013		530,000			(278,853	)		251,147
8% convertible notes issued December 31,2013		170,000			(77,104	)		92,896
Amortization of debt discount		-			794			794
Total		700,000			(355,163	)		344,837
Current portion of debt		(5,356	)		2,426			(2,930	)
Long term portion at December 31, 2013	$	694,644		$	(355,163	)	$	339,481

- 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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