CAPITAL STOCK

9 Months Ended

Sep. 30, 2011

CAPITAL STOCK [Text Block]

NOTE 3 - CAPITAL STOCK

Common Stock

The Company is authorized to issue 100,000,000 shares of common stock.  All shares have equal voting rights and have one vote per share.  Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.

On February 15, 2011, the Company issued 25,000 shares of common stock valued at $0.70 per share or $17,500 in services.  The shares were issued to an employee under the Company’s 2008 Stock Option/Stock Issuance Plan pursuant to the terms of the employee’s employment agreement with the Company.

On May 3 and May 10, 2011, the Company issued a total of 220,000 shares of common stock valued at $0.70 per share or $154,000 in services and 138,000 shares valued at $0.70 or $96,600 to satisfy accrued expenses for prior services.  The shares were issued to non-employees under the Company’s 2008 Stock Option/Stock Issuance Plan.

An equity financing in the form of a 506 offering was initiated during third quarter 2011.  At September 30, 2011, $316,125 had been raised through sales of 274,891 shares of common stock.  This 506 offering is expected to continue until January 31, 2012 or until 4,000,000 shares of common stock have been sold.  The shares offered and sold in this non-public equity financing have not been and will not be registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  

Preferred Stock

In July 2010 the Company filed a Certificate of Designations with the State of Nevada to create 958,033 shares of Series A Preferred Stock.  The Series A Preferred Shares have voting rights with the common stock equal to the conversion value of the preferred shares into common shares.

In July 2010 the Company issued 958,033 shares of its Series A Preferred Stock to DMRJ Group in connection with financing (see Note 8). These preferred shares are convertible into shares of the Company’s common stock at the rate of one common share for each preferred share converted, subject to certain adjustments.

In connection with the Fourth Amendment to the DMRJ Group funding (See Note 8), on May 3, 2011, the Company created and designated 2,500,000 shares of its authorized preferred stock as Series A-1 Preferred Stock and 1,000,000 shares as Series A-2 Preferred Stock. 

Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to (i) for the Series A-1 Preferred Stock ten times the Series A-1 Issue Price ($0.70) divided by the conversion price for Series A-1 Preferred and (ii) for the Series A-2 Preferred Stock ten times the Series A-2 Issue Price ($1.00) divided by the conversion price for such Series A-2 Preferred Stock.  The initial conversion price of the Series A-1 preferred stock is $0.70 per share and the conversion price of the Series A-2 preferred stock is $1.00.  If the Company issues or sell shares of its common stock, or grant options or other convertible securities which are exercisable or convertible into common shares, at prices less than the conversion price of Series A-1 or A-2 shares, except in certain exempted situations, then the conversion price of the Series A-1 and A-2 shares will be reduced to this lower sale or conversion price.  The Series A-1 and A-2 shares may not be converted into common shares if the beneficial owner of such shares would thereafter exceed 4.9% of the outstanding common shares.

 The Series A-1 and A-2 shares have the following rights and preferences:

·

The holders of the Series A-1 and A-2 shares have no preference as to any dividends declared by the Company.

·

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or a change of control transaction or the sale or lease of all or substantially all of its assets without the majority consent of the holders of the Series A-1 and A-2 shares, the holders of the Series A shares will be entitled to receive ratably an amount of the funds available for liquidation equal to the issue price of the Series A shares plus any accrued and unpaid dividends.  Any remaining funds available for distribution will be distributed pro rata among the holders of the common stock and the Series A, A-1 and A-2.

·

The holders of the Series A-1 and A-2 shares are entitled to the number of votes equal to the number of whole shares of common stock into which the Series A-1 or A-2 shares are convertible.  The Series A-1 and A-2 shares vote together with the holders of the common stock, except as provided by law.  In addition, the Company is prohibited from taking various actions without the separate consent of persons owning a majority of the Series A-1 and A-2 preferred shares, including:

o

Amending the Articles of Incorporation or Bylaws of the Company or its subsidiary;

o

Entering into another business;

o

Adopting a new equity compensation plan or amending the current plan;

o

Redeeming, retiring or acquiring the Company’s own securities;

o

Entering into any merger transaction, selling, licensing or transferring any of the Company’s assets, or pledging or granting a security interest in its assets;

o

Entering into any agreement or arrangement for the purchase of capital stock or a substantial portion of the assets of another entity or any type of joint venture or strategic alliance;

o

Declaring or paying any dividends on the Company’s equity securities;

o

Issuing any debt or equity securities, except in certain limited circumstances;

o

Entering into any insider transactions, except for transactions in the normal course of business, the payment of customary salaries or other standard employee benefit programs available to all employees;

o

Creating any subsidiaries;

o

Dissolving, liquidating, or reorganizing the Company;

o

Creating any new indebtedness in excess of $500,000 other than trade payables and the indebtedness created under the DMRJ Group Investment Agreement;

o

Fix or change the number of directors set in any resolution of the Board;

o

Making any loans or advances to any person other than ordinary business expenses not to exceed in the aggregate $15,000;

o

Granting any registration, preemptive, anti-dilution, or redemption or repurchase rights with respect to any securities; and

o

Borrowing against, pledging, assigning, modifying, cancelling or surrendering any key man insurance policy maintained by or for the Company.

·

The holders of record of the Series A-1 and Series A-2 shares, voting together as a single class, have the right to elect two directors of the Board, to remove any such directors elected by them and to fill any vacancy caused by the death, resignation or removal of such directors.

·

The Company has the right to create and issue additional classes or series of preferred shares so long as the new class or series does not have preferences, limitations, or relative rights which are superior or senior to the preferences, limitations and relative rights granted the holders of the Series A-1 or A-2 shares.

·

The holders of the Series A-1 and A-2 shares have preemptive rights to purchase shares of common stock in any offering by the Company.

·

There are no redemption or sinking fund provisions applicable to the Series A-1 or A-2 shares.

At September 30, 2011, 100,000 shares of Series A-2 Preferred Shares are outstanding that are convertible by the holder into 1,000,000 shares of the Company’s common stock.   These shares were issued during the quarter ended June 30, 2011, in connection with the Fourth Amendment of the DMRJ Group financing arrangement (see Note 8).