In April 2013, the Company acquired the remaining 20% interest in certain assets and properties of Medina Property Group, LLC (see Note 5). Part of the considerations consists of a 3% convertible note in the amount of $4,000,000, due in April 2018, and convertible into common stock at a conversion rate equal to 30% of the average closing price for the ten trading days immediately preceding the day of conversion. Because the conversion price of the 3% $4,000,000 convertible note is uncertain and the number of shares issuable upon conversion are unknown and unlimited, equity classification of the conversion option is prohibited. Therefore, the conversion option is required to be separated from the debt and recorded as a derivative liability, with subsequent changes in fair value reflected in the statement of operations. The Company estimated the fair value of the conversion option on the date of issuance using Monte Carlo simulations and the following assumptions: volatility – 134.16%; risk free rate -0.7%; Term – 5 Years. The Company estimated the fair value of the conversion option as of the issuance date to be $10,309,000. The excess of the initial fair value of the conversion option over the face value of the convertible note, totaling $6,309,395, was recorded as derivative expense on the issuance date and $4,000,000 was recorded as a discount against the convertible note to be amortized into interest expense over the five-year term of the note. During the nine months ended September 30, 2013, the Company recognized $172,961 of interest expense from the amortization of the discount. In addition to the amortization of the discount, the Company recognized $25,973 of interest expense on the Convertible Note for the three and nine months ended September 30, 2013. The carrying value of the convertible note as of September 30, 2013 was $229,377, net of unamortized discount of $3,827,039.
