6. CONVERTIBLE NOTES PAYABLE

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

CONVERTIBLE NOTES PAYABLE

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 on or before the maturity date at $5 per common 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 $63,613 and incurred other debt issuance costs of $2,540.  The Company also issued 10,600 common stock warrants with an exercise price of $5 per share as further compensation to the broker-dealer who placed the issue.

We valued the convertible feature of this issue of 12% 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 method.

The Company issued and additional $1,605,000 in convertible notes on January 29, 2014 to a group of accredited investors.  These notes have an interest rate of 12%, paid quarterly, and mature on October 31, 2018. We valued the convertible feature of the notes and the warrants issued to the broker-dealer using the Black-Scholes valuation model, assuming an expected life of 3.76 years, and annual volatility factor of 171%, a risk free interest rate of 1.80% and $0 dividends.  Based upon the calculation, 100% of the value of the issue was allocated to the conversion factor.  The debt discount on outstanding convertible notes payable will be amortized over the life of these notes from January 29, 2014 through October 31, 2018 on a straight line basis that approximates the effective interest method. They are convertible at any time on or before the maturity date at $5 per common share.  The Company can force conversion of these notes if the trading stock price has exceeded $10 per share for 20 consecutive trading days.

The Company paid a commission of $160,500 and other debt issuance costs of $32,100.  The Company also issued 42,100 common stock warrants with and exercise price of $5 per share as further compensation to the broker-dealer who placed the issue.

8 1/2% Convertible note

The Company executed a mortgage on their Pueblo West property in the amount of $170,000 at 8 1/2% on December 31, 2013, amortizable over 15 years with a maturity date of December 31, 2018.  The note is convertible at any time on or before the maturity date at $5 per common share.

We valued the convertible feature of the 8 1/2% 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 noted will be amortized over the life of the note from January 1, 2014 through December 31, 2018 on a straight line basis for unamortized principal that approximates the effective interest method. The note calls for a balloon payment of principal and accrued interest at December 31, 2018.

Convertible notes payable
	Principal			Loan			Accrued
	Balance			Discount			Interest			Total
December 31, 2013	$	700,000		$	(355,163	)	$	871		$	345,708
Issued in the period		1,605,000			(1,605,000	)		-			-
Converted into shares of common stock		(255,000	)		255,000			-			-
Amortization of loan discount/issuance costs		-			75,399			-			75,399
Payment of loan principal		(943	)		-			-			(943	)
Note issuance costs on convertible debt					(192,600	)		-			(192,600	)
Interest accrued during period		-			-			49,274			49,274
Interest paid during period-cash payments		-						(46,476	)		(46,476	)
Interest paid in stock issued		-			-			(3,669	)		(3,669	)
March 31, 2014	$	2,049,057		$	(1,822,364	)	$	-		$	226,693
Less:  Current portion		(5,927	)(1)								(5,927	)
Long-term debt	$	2,043,130		$	(1,822,364	)		-		$	220,766

(1) Current portion of debt discount at March 31, 2014 is additive to net notes payable due to following 12 month discount amortization relates to assumed note maturity date at October 31, 2018 compared to note balance amortization in same period based upon 15-year assumed amortization period.   Only the current portion of long-term debt is included to indicate that the debt discount current portion remains in the long-term total on the balance sheet and will be amortized by the 2018 call date.