NOTE 10 – SHAREHOLDERS’ EQUITY

Preferred Stock

Simultaneous with the Shea Exchange Agreement, Wits Basin exchanged 19,713,544 shares of our common stock it held for 10 million shares ($.001 par value each) of our newly created non-voting 5% preferred stock, referred to as the "Series A Preferred Stock" with an original issue price of $1.00 per share. The Series A Preferred Stock has a liquidation preference of $10 million, payable only upon certain liquidity events or upon achievement of a market value of our equity equaling $200 million or more. As of December 31, 2011, there were undeclared dividends of approximately $396,000 on the outstanding Series A Preferred Stock. In conformity with accounting principles generally accepted in the United States of America, these undeclared dividends have not been accrued in the Company’s consolidated financial statements and had no effect on the earnings per share calculation.

Attributes of Series A Preferred Stock include but are not limited to the following:

Dividends

Dividends at a rate per annum equal to five percent (5%) of the Liquidation Value (as defined below) of the Series A Preferred Stock plus the amount of previously accrued dividends, compounding on an annual basis, shall accrue on such shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock) (the "Accruing Dividends"). Accruing Dividends shall accrue from day to day, and shall be cumulative. The Company may pay Accruing Dividends at any time; provided, however, that Accruing Dividends must be paid in full to holders of Series A Preferred Stock upon the occurrence of a Liquidation Event, as further defined.

Distribution in Liquidation

Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Company shall be distributed, either in cash or in kind, first pro rata to the holders of the Series A Preferred Stock in an amount equal to the Liquidation Value; then, to any other series of Preferred Stock, until an amount to be determined by a resolution of the Board of Directors prior to issuances of such Preferred Stock, has been distributed per share, and, then, the remainder pro rata to the holders of the Common Stock.

Upon the occurrence of any Liquidation Event (as defined below), each holder of Series A Preferred Stock will receive a payment equal to the Original Issue Price for each share of Series A Preferred Stock held by such holder, plus any Accruing Dividends (the "Liquidation Value"). A "Liquidation Event" will have occurred when:

The Company has an average market capitalization (calculated by adding the value of all outstanding shares of Common Stock valued at the Company's closing sale price on the OTCBB or other applicable bulletin board or exchange, plus the value of the outstanding Series A Preferred Stock at the Original Issue Price per share) of $200,000,000 or more over any 90-day period. The holders of the Series A Preferred Stock would have the right, for 30 days after the end of such qualifying 90-day measurement period, to require the Company to purchase the Series A Preferred Stock for an amount equal to the Liquidation Value.

Any Liquidity Event in which the Company receives proceeds of $50,000,000 or more. For purposes hereof, a "Liquidity Event" means any (a) liquidation, dissolution or winding up of the Company; (b) acquisition of the Company by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger, share exchange, share purchase or consolidation) provided that the applicable transaction shall not be deemed a liquidation unless the Company's stockholders constituted immediately prior to such transaction hold less than 50% of the voting power of the surviving or acquiring entity; or (c) the sale, lease, transfer or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries.

Redemption

The Series A Preferred Stock may be redeemed in whole or in part as determined by a resolution of the Board of Directors at any time, at a price equal to the Liquidation Value.

Voting Rights

Shares of Series A Preferred Stock shall have no rights to vote on any matter submitted to a vote of shareholders, except as required by law, in which case each share of Series A Preferred Stock shall be entitled to one vote. Any other shares of Preferred Stock shall only be entitled to such vote as is determined by the Board of Directors prior to the issuance of such stock, except as required by law, in which case each share of Preferred Stock shall be entitled to one vote.

Conversion Rights

Holders of Series A Preferred Stock will have no right to convert such shares into any other equity securities of the Company. Holders of shares of any other series of Preferred Stock may be granted the right to convert such Preferred Stock to Common Stock of the Company on such terms as may be determined by the Board of Directors prior to issuance of such Preferred Stock.

Common Stock Issuances

During fiscal 2010, we issued the following shares of our unregistered common stock:

(1)

In January 2010, we issued 50,000 shares of our unregistered common stock in a private placement offering to an accredited investor (as that term is defined under Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)) at $0.50 per unit, each unit consisting of one share of our common stock, par value $0.001 per share, and one five-year warrant to purchase a share of common stock at an exercise price of $1.00 per share, resulting in net proceeds of $25,000.

(2)

In May 2010, pursuant to a one-year consulting services agreement (which became effective October 2009) we issued 300,000 shares of our unregistered common stock to the consultant. The fair value of the common stock was $300,000, which has been fully expensed.

(3)

In September 2010, pursuant to a consulting services agreement (which became effective May 28, 2010) we issued 100,000 shares of our unregistered common stock to the consultant and also terminated the agreement prior to its completion. The fair value of the common stock was $154,000, which has been fully expensed.

(4)

On September 14, 2010, the Company appointed Alfred A. Rapetti and Manfred E. Birnbaum to serve as members of our board of directors and in consideration of their appointment to the board, they were each issued 100,000 shares of our unregistered common stock. The fair value of each issuance was $51,000.

(5)

On October 18, 2010, the Company issued 100,000 shares of our unregistered common stock to Donald Stoica in consideration of his serving on the board of directors. The fair value of the issuance was $65,000.

(6)

In October 2010, two warrant holders exercised certain warrants and received 1,476,923 shares of our unregistered common stock by surrendering 23,077 of their available shares to pay for the exercise, via the cashless exercise provision.

(7)

In December 2010, in a private placement, we accepted subscriptions for 16,000 shares of our unregistered common stock at a price of $0.50 per share and received proceeds of $883 (net of offering costs totaling $7,117).

During fiscal 2011, we issued the following shares of our unregistered common stock:

(1)

In March 2011, we issued 35,100,000 shares of our unregistered common stock (valued at $31,239,000) pursuant to the March 15, 2011, Shea Exchange Agreement.

(2)

In May 2011: we issued 50,000 shares of unregistered common stock (valued at $75,000) as consideration for a 60-day extension from NJB Mining on the $2,500,000 Tonopah mortgage and we issued 50,000 shares of our unregistered stock (valued at $170,000) to Stephen E. Flechner as settlement for his resignation as President.

(3)

In July 2011, we issued 555,556 shares of unregistered common stock to NJB Mining, which was applied as a $500,000 principal payment on the $2,500,000 Tonopah mortgage and we issued 600,000 shares of our unregistered stock to an investment agent as settlement for terminating an agreement (valued at $690,000).

(4)

In August 2011, we issued 200,000 shares of unregistered common stock (valued at $180,000) as consideration for a 60-day extension from NJB Mining on the Tonopah mortgage.

(5)

In October 2011, we issued 500,000 shares of unregistered common stock (valued at $300,000) as consideration for an extension from NJB Mining pursuant to the NJB Forbearance Agreement.

(6)

In November 2011, we issued 1,000,000 shares of unregistered common stock (valued at $700,000) as consideration for an extension from NJB Mining pursuant to the NJB Forbearance Agreement.

(7)

During 2011, three convertible promissory note holders converted $81,750 of principal and $1,117 of accrued interest into an aggregate of 165,735 shares of unregistered common stock.

(8)

During 2011, four stock option holders exercised and received an aggregate of 90,665 shares of unregistered common stock (valued at $51,139).

(9)

During 2011, three warrant holders exercised certain warrants and received 166,772 shares of our common stock by surrendering 133,228 of their available shares to pay for the exercises, via the cashless exercise provision.

Option Grants

We have one stock option plan: the 2010 Stock Incentive Plan, as amended (the “Plan”). Stock options, stock appreciation rights, restricted stock and other stock and cash awards may be granted under the Plan. In general, options vest over a period ranging from immediate vesting to five years and expire 10 years from the date of grant. Effective January 21, 2011, the Company’s Board of Directors (the “Board”) authorized an amendment to the 2010 Stock Incentive Plan, to increase the number of options available for granting under the Plan from 3,000,000 to 13,500,000 and authorized the Company to file an S-8 Registration Statement with the U.S. Securities and Exchange Commission (subsequently filed on January 27, 2011, File No. 333-171906) for the registration of the shares available in the Plan. On March 15, 2011, with the closing of the Shea Exchange Agreement a “change of control” event was deemed to have occurred and 13,500,000 previously granted stock options vested in full. Effective July 25, 2011, the Plan was amended to increase the total shares of stock which may be issued under the Plan from 13,500,000 to 14,500,000. As of December 31, 2011, an aggregate of 1,000,000 shares of our common stock are available to be granted under our Plan.

During fiscal 2010, we granted the following stock options:

(1)

In April 2010, the Company entered into two ten-year stock option agreements: one with Stephen E. Flechner (at which time Mr. Flechner was the Company’s President) to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.90 per share and one with Stephen D. King (at which time Mr. King was the Company’s Chief Executive Officer) to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.90 per share.

(2)

In September 2010, the Company’s Board of Directors authorized stock option agreements with Alfred Rapetti and Manfred Birnbaum as new members of the Company’s board, whereby they were each granted a ten-year stock option to purchase up to 400,000 shares of the Company’s common stock, with such grants becoming effective October 14, 2010, at an exercise price of $0.59 per share. The options vest in equal annual installments of 200,000 shares each over two years, with the first installments vesting September 14, 2011.

(3)

On October 18, 2010, the Company’s Board of Directors authorized a stock option agreement with Donald Stoica, a member of the Company’s board, whereby Mr. Stoica was granted a ten-year stock option to purchase up to 400,000 shares of the Company’s common stock, with such grant becoming effective November 16, 2010, at an exercise price of $0.72 per share. The option vests in equal annual installments of 200,000 shares each over two years, with the first installment vesting October 18, 2011.

During fiscal 2011, we granted the following stock options:

(1)

In January 2011, the Board authorized the grant of 10,500,000 ten year stock options, with an exercise price of $0.51 per share to certain directors, officers and consultants vesting annually over three years and incorporated “change of control” language in all previously granted stock options.

(2)

In February 2011, the Board granted a stock option agreement to Mr. Birnbaum for his services to serve on a Special Committee of the Board to review, evaluate, negotiate and approve (or reject) the proposed Shea Exchange Agreement, including the execution and delivery of any agreements entered into by the Company, whereby he was granted a ten year stock option to purchase up to 200,000 shares of the Company’s common stock, 100,000 vest each annual anniversary thereafter from the date of grant or immediately upon a “change of control,” at an exercise price of $0.60 per share.

(3)

In March 2011, the Company issued replacement stock options for 1,299,000 and 630,000 shares of the Company’s common stock at exercise prices of $1.00 and $0.50, respectively, which options were being held by Wits Basin and transferred to the Company as part of the Shea Exchange Agreement. The aforementioned stock options were grants outside of the Plan.

(4)

In May 2011, the Board granted a stock option to Mr. Birnbaum for his services to serve as Chairman of the Board, whereby he was granted a ten year stock option to purchase up to 300,000 shares of the Company’s common stock, 75,000 vested immediately and 75,000 vest each December 31 thereafter, at an exercise price of $1.50 per share. The aforementioned stock options were grants outside of the Plan.

The Company uses the Black-Scholes pricing model as a method for determining the estimated fair value for stock awards. Compensation expense for stock awards is recognized on a straight-line basis over the vesting period of service awards and for performance based awards, the Company recognizes the expense when the performance condition is probable of being met.

In determining the compensation cost of the stock awards granted during fiscal 2011 and 2010, the fair value of each grant had been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized below:

	2011		2010
Risk-free interest rate		2.00% – 2.25%		2.00%
Expected volatility factor		146% - 158%		145% - 150%
Expected dividend		—		—
Expected option term		10 years		10 years

The Company reviews its current assumptions on a periodic basis and adjusts them as necessary to ensure an accurate valuation. The risk-free interest rate is based on the Federal Reserve Board’s constant maturities of the U.S. Treasury bond obligations with terms comparable to the expected life of the options at their issuance date. The Company uses historical data to estimate expected forfeitures, expected dividend yield, expected volatility of the Company’s stock and the expected life of the options.

We recorded $6,835,006 and $1,101,994 related to compensation expense for the year ended December 31, 2011 and 2010, respectively. All compensation expense is included in general and administrative expense. There was no tax benefit from recording this non-cash expense due to our income tax valuation allowance and due to a portion of the options being incentive stock options. The compensation expense had a $0.18 and $0.05 per share impact on the loss per share for the year ended December 31, 2011 and 2010, respectively. As of December 31, 2011, approximately $222,000 of the total unrecognized compensation expense is expected to be recognized over a period of 24 months.

The following tables summarize information about the Company’s stock options:

	Number of Options			Weighted Average Exercise Price
Options outstanding - December 31, 2009		—		$	—

Granted		2,800,000			0.79
Canceled or expired		—			—
Exercised		—			—
Options outstanding - December 31, 2010		2,800,000		$	0.79

Granted		12,929,000			0.58
Canceled or expired		—			—
Exercised		(90,665	)		0.56
Options outstanding – December 31, 2011		15,638,335		$	0.62

Weighted average fair value of options granted during the year ended December 31, 2011				$	0.53
Weighted average fair value of options granted during the year ended December 31, 2010				$	0.78

A summary of the Company’s nonvested options at December 31, 2011, and changes during the year ended December 31, 2011, is presented below:

	Options		Weighted Average Grant Date Fair Value
Nonvested, beginning of year		—	$	—
Granted		12,929,000	$	0.58
Vested		12,779,000	$	0.52
Forfeited		—	$	—
Nonvested, end of year		150,000	$	1.48

	Options Outstanding at December 31, 2011
Range of Exercise Prices	Number Outstanding		Weighted Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value(1)

$0.50 to $0.60		12,049,335	8.7 years	$	0.52	$	3,418,607
$0.72 to $0.90		2,000,000	8.4 years	$	0.86	$	32,000
$1.00 to $1.50		1,589,000	4.2 years	$	1.09	$	—
$0.50 to $1.50		15,638,335	8.2 years	$	0.62	$	3,450,607

	Options Exercisable at December 31, 2011
Range of Exercise Prices	Number Exercisable		Weighted Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value(1)

$0.50 to $0.60		12,049,335	8.7 years	$	0.52	$	3,418,607
$0.72 to $0.90		2,000,000	8.4 years	$	0.86	$	32,000
$1.00 to $1.50		1,439,000	3.6 years	$	1.05	$	—
$0.50 to $1.50		15,488,335	8.2 years	$	0.61	$	3,450,607

(1) The aggregate intrinsic value in the table represents the difference between the closing stock price on December 31, 2011 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their options on December 31, 2011. During the year ended December 31, 2011 an aggregate of 90,665 options were exercised resulting in $51,139 of gross proceeds. No options were exercised during 2010.

Stock Warrants

For warrants granted to non-employees in exchange for services, we recorded the fair value of the equity instrument using the Black-Scholes pricing model unless the value of the services is more reliably measurable.

During fiscal 2010, we granted the following warrant issuances:

(1)

We issued a five-year warrant to purchase up to 50,000 shares of common stock at $1.00 per share, in a private placement offering to an accredited investor, with a fair value of $4,000.

(2)

In consideration of a $25,000 loan, we issued a three-year warrant to purchase up to 50,000 shares of our common stock at $0.50 per share, which includes a cashless exercise provision. The allocated fair value of the warrant totaled $7,921.

(3)

In consideration of a $32,000 loan, we issued a two-year warrant to purchase up to 64,000 shares of our common stock at $0.50 per share, which includes a cashless exercise provision. The allocated fair value of the warrant totaled $17,219.

(4)

We issued five-year warrants to two consultants to purchase an aggregate of 250,000 shares of common stock at $0.50 per share, each includes a cashless exercise provision, with an aggregate fair value of $191,000.

During fiscal 2011, we granted the following warrant issuances:

(1)

In January 2011, the Company sold to a shareholder a five-year warrant to purchase up to 4,000,000 shares of the Company’s common stock at an exercise of $0.60 per share for $100,000. The shareholder exchanged a $50,000 short-term note and paid $50,000 cash for the warrant.

(2)

In June 2011, the Company entered into a consulting agreement for investor and public relations with an unaffiliated third party and issued a two-year warrant to purchase up to 20,000 shares of our common stock at $1.00 per share (the fair value of the warrant totaled $19,400).

(3)

During the fiscal year of 2011, we issued 5,312,878 two-year warrants to purchase common stock at an exercise price of $0.50 per share in connection with convertible promissory notes (the allocated fair value of the warrants was calculated to be $1,482,137).

Using the Black-Scholes pricing model, the following assumptions were used to calculate the fair value of the stock purchase warrants granted, for which the fair value of the services were not more reliably measurable: (i) during 2011: dividend yield of 0%, risk-free interest rate of 2.0%, expected life equal to the contractual life between two and five years, and volatility of 148% to 158% and (ii) during 2010: dividend yield of 0%, risk-free interest rate of 2.0%, expected life equal to the contractual life between two and five years, and volatility of 145% to 150%.

The Company reviews its current assumptions on a periodic basis and adjusts them as necessary to ensure an accurate valuation. The risk-free interest rate is based on the Federal Reserve Board’s constant maturities of the U.S. Treasury bond obligations with terms comparable to the contractual term of the warrants at their issuance date. The Company uses historical data to estimate expected dividend yield and volatility of the Company’s stock.

The following table summarizes information about the Company’s stock purchase warrants outstanding at December 31, 2011:

	Number			Weighted Average Exercise Price		Range of Exercise Price		Weighted Remaining Contractual Life
Outstanding at December 31, 2009		4,130,000		$	0.64		$ 0.01 – 1.00

Granted		414,000			0.56		0.50 – 1.00
Cancelled or expired		(23,077	)		0.01		0.01
Exercised		(1,476,923	)		0.01		0.01
Outstanding at December 31, 2010		3,044,000		$	0.94		$ 0.50 – 1.00
		—
Granted		9,332,878			0.54		0.50 – 0.60
Cancelled or expired		(133,228	)		0.50		0.50
Exercised		(166,772	)		0.50		0.50
Outstanding at December 31, 2011		12,076,878		$	0.62		$ 0.50 – 1.00		2.6 years

Warrants exercisable at December 31, 2011		12,076,878		$	0.62		$ 0.50 – 1.00

The aggregate intrinsic value of the 12,076,878 outstanding and exercisable warrants at December 31, 2011, was $2,599,063. The intrinsic value is the difference between the closing stock price on December 31, 2011 and the exercise price, multiplied by the number of in-the-money warrants had all warrant holders exercised their Warrants on December 31, 2011.