Stockholders' Equity

12 Months Ended

Dec. 31, 2012

Stockholders' Equity

4. Stockholders’ Equity

Common stock

On April 11, 2011 the Company held its annual meeting of stockholders. The stockholders voted to reverse split the common stock of the Company 100 for 1. The effective date of the reverse split was April 18, 2011. All references to shares have been restated to reflect the reverse stock split if it had occurred at the beginning of the earliest period presented.

During the year ended December 31, 2011, the Company had the following common stock issuances:

• 770,000 shares of common stock were issued to third parties to pay certain contract obligations in the amount of $481,251 and 770,000 shares were issued to repay certain advances of directors’ common stock amounting to $675,000;

• Three members of the board of directors exchanged $500,000 of their loans and advances to the Company for 62,500 shares of common stock or $8.00 per common share;

• 72,841 shares of common stock valued at $1.75 per share were issued for accrued directors’ fees of $128,000;

• 203,500 shares of common stock valued at $1.00 per share were issued to unrelated parties for cash of $203,500;

• 75,000 shares of common stock valued at $6.10 per share were issued for consulting services to an unrelated party for services valued at $457,500 related to the acquisition of properties;

• 3,000 shares of common stock valued at $4.00 per share were issued in exchange for loan fees valued at $12,000 to an unrelated party, a stockholder, and our CEO; and

• Notes payable of $835,000 to 14 unrelated parties were exchanged for 835,000 shares of common stock valued at $1.00 per share.

• In June 2012, the Company issued an aggregate of 215,325 shares of common stock in satisfaction of previously accrued liabilities as follows:

	Number of		Valuation
	Shares		Price		Amount
Board of Director fees:
Fees for second quarter of 2011		5,769	$	5.20	$	30,000
Fees for third quarter of 2011		10,000	$	3.00		30,000
Fees for fourth quarter of 2011		22,058	$	1.36		30,000
Fees for first quarter of 2012		27,778	$	1.08		30,000
Related party executive, administrative & operational services
Fees for January 2012		11,538	$	1.30		15,000
Fees for February 2012		12,500	$	1.20		15,000
Fees for March 2012		13,890	$	1.08		15,000
Fees for April 2012		13,042	$	1.15		15,000
Related party consulting services in June 2012		85,000	$	0.59		50,000
Accrued interest on unrelated party notes payable		7,750	$	1.35		10,463
Unrelated party consulting		6,000	$	1.08		6,480
Total		215,325	$	0.59	$	246,943

Board of Directors fees are payable quarterly in common stock based on the closing price at the end of each quarter. Through the second quarter of 2012, each of the Company’s five directors earned a monthly fee of $2,000 for an aggregate of $30,000 per quarter. In June 2012, an aggregate of 65,605 shares were issued for director fees incurred in the second quarter of 2011 through the first quarter of 2012. Beginning in the third quarter of 2012, directors are entitled to 300 shares of the Company’s common stock for each meeting attended. Each of the Company’s five directors attended six meetings in the second half of 2012 resulting in an obligation for the Company to issue an aggregate of 9,000 shares with an estimated fair value of $3,615.

From January 2012 through July 2012, the Board of Directors agreed to pay fees for executive, administrative and operational services in the aggregate amount of $15,000 per month to three individuals who are directors and/or stockholders of the Company. These fees are payable in shares of the Company’s common stock based on the closing price on the last day of the month for which the services are performed. In June 2012, the Company issued an aggregate of 50,970 shares of common stock in satisfaction of this obligation for the months of January through April 2012. The Company has not yet settled the liabilities for services performed in May through July 2012, but management expects to issue 44,823 shares of the Company’s common stock valued at $0.67 per share to settle the remaining liability for $30,000.

In June 2012, the Board of Directors approved the issuance of 85,000 shares of common stock for consulting services provided by an individual that owns preferred stock of the Company. The services were valued based on the closing price of the Company’s common stock on the date of board approval which was $0.59 and resulted in a charge to related party consulting fees of $50,000.

As of December 31, 2012, the Company has a liability for directors’ fees of $33,615 which is expected to result in the issuance of 64,556 shares of common stock in 2013. Additionally, the Company has a liability for accrued consulting fees of $29,550 which is expected to result in the issuance of 85,000 shares of common stock in 2013.

Preferred Stock Dividends

Preferred stock dividends are payable semi-annually in cash or shares of the Company’s common stock, at the election of the Company. During 2012, the Board of Directors declared and paid an aggregate of $783,750 for the 15% semi-annual dividend on the Series A-1 preferred stock. As of December 31, 2012, accrued dividends amounted to $195,938 which is excluded from liabilities until formally declared by the Company’s Board of Directors. As of April 15, 2013, the Board of Directors has not declared the semi-annual dividend payable to preferred shareholders of record on March 31, 2013. Under most circumstances, the Company is required to either pay the dividend in cash in the aggregate amount of $391,875 or in shares of common stock of equivalent value.

Preferred Stock

On September 29, 2011, the Company completed a private placement of its Preferred Stock Series A1 which resulted in the issuance of 522.5 shares for gross proceeds of $5,225,000. The following are the terms of the Preferred Stock Series A1:

Authorized Shares, Stated Value and Liquidation Preference. Seven hundred fifty shares are designated as the Series A1 15% Convertible Preferred Stock, which has a stated value and liquidation preference of $10,000 per share plus accrued and unpaid dividends.

Ranking. The Series A1 Preferred Stock will rank senior to future classes or series of preferred stock established after the issue date of the Series A1 Preferred Stock, unless the Company’s Board of Directors expressly provides otherwise when establishing a future class or series. The Series A1 Preferred Stock ranks senior to the Company’s common stock in liquidation and dissolution.

Dividends. Holders of Series A1 Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, non-cumulative dividends at an annual rate of 15.0% of the $10,000 per share stated value. Declared dividends are payable in cash or in shares of Common Stock (at its then fair market value), at the election of the Company.

Voting Rights. The holders of the Series A1 Preferred Stock will vote together with the holders of common stock as a single class on all matters upon which the holders of common stock are entitled to vote, except that the common stock will elect four directors and the Series A1 Preferred Stock will elect three directors. Each share of Series A Preferred Stock will be entitled to such number of votes as the number of shares of common stock into which such share of Preferred Stock is convertible; however, solely for the purpose of determining such number of votes, the conversion price per share will be deemed to be $3.30, subject to customary anti-dilution adjustment. In addition, the holders of the Series A1 Preferred Stock will vote as a separate class with respect to certain matters, including amendments to the Company’s Articles of Incorporation that alter the voting powers, preferences and special rights of the Series A1 Preferred Stock.

Liquidation. In the event we voluntarily or involuntarily liquidate, dissolve or wind up, the holders of the Series A1 Preferred Stock will be entitled, before any distribution or payment out of the Company’s assets may be made to or set aside for the holders of any junior capital stock and subject to the rights of creditors, to receive a liquidation distribution in an amount equal to $10,000 per share, plus any accrued but unpaid dividends. A merger, consolidation or sale of all or substantially all of the Company’s property or business is not deemed to be a liquidation for purposes of the preceding sentence.

Redemption. The Series A1 Preferred Stock is redeemable in whole or in part at the Company’s option at any time. The redemption price is equal to $10,000 per share, plus any accrued but unpaid dividends.

Preemptive Rights. Holders of the Series A1 Preferred Stock do not have preemptive rights to purchase securities of the Company.

Mandatory Conversion. Each share of Series A1 Preferred Stock remaining outstanding will automatically be converted into shares of our common stock upon the earlier of (i) any closing of underwritten offering by the Company of shares of Common Stock to the public pursuant to an effective registration statement under the Securities Act of 1933, in which the aggregate cash proceeds to be received by the Company and selling stockholders (if any) from such offering (without deducting underwriting discounts, expenses and commissions) are at least $15,000,000, and the price per share paid by the public for such shares is at least $3.30 (such price to be adjusted for any stock dividends, combinations or splits or (ii) the date agreed to by written consent of the holders of a majority of the outstanding Series A1 Preferred Stock.

Optional Conversion by Investors. At any time, each holder of Series A1 Preferred Stock has the right, at such holder’s option, to convert all or any portion of such holder’s Series A1 Preferred Stock into shares of common stock prior to the mandatory conversion of the Series A1 Preferred Stock at a price of $3.30 per share.

Optional Conversion by the Company. If the closing price of the Company’s common stock on the Trading Market is $4.50 or more for 20 consecutive trading days, then up to 25% of the outstanding stated value of the Series A1 Preferred Stock, plus any accrued and unpaid dividends, will be subject to conversion into Company common stock at the option of the Company. For each successive period that the closing price of the common stock is at least $4.50 for a period of 20 consecutive trading days beyond the first 20 day period, the Company will have the right to convert another 25% of the outstanding Series A1 Preferred Stock, such that if the closing price of the common stock is at least $4.50 for 80 consecutive trading days, then all of the outstanding shares of Series A1 Preferred Stock may be converted into common stock at the Company’s option.

Conversion Price. Each share of Series A1 Preferred Stock is convertible into shares of common stock at a conversion price of $3.30 per share, subject to customary anti-dilution adjustments, including in connection with stock dividends and distributions, stock splits, subdivisions and combinations.

Redemption by Holder. Unless prohibited by Colorado law, upon 90 days’ prior written request from any holders of outstanding shares of Series A1 Preferred Stock, the Company may at its discretion, redeem at a redemption price equal to the sum of (i) $10,000 per share and (ii) the accrued and unpaid dividends thereon, to the redemption date, up to one-third of each holder’s outstanding shares of Series A1 Preferred Stock on: (i) the first anniversary of the Original Issuance Date (the “First Redemption Date”), (ii) the second anniversary of the Original Issue Date (the “Second Redemption Date”) and (iii) the third anniversary of the Original Issue Date (the “Third Redemption Date”, along with the First Redemption Date and the Second Redemption Date, collectively, each a “Redemption Date”). The redemption price for any shares of Series A1 Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. The Company may instead at its option, reduce the applicable conversion price by 50% with respect to the shares of preferred stock for which redemption has been requested.