Stockholders' equity and earnings per share

6 Months Ended

Jun. 30, 2013

Stockholders Equity And Earnings Per Share

Stockholders' equity and earnings per share

6 – Stockholders’ equity and earnings per share

2011 Equity Financing

On May 26, 2011, the Company closed a private offering exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder.  In the offering, the Company issued an aggregate of 3,600,000 units.  Each unit was sold at $1.50 and was comprised of one share of common stock and one five-year warrant to purchase a share of common stock at an exercise price of $2.25 per share.   The warrants became exercisable on November 26, 2011.  The Company agreed to use the net proceeds from the sale of the units for general business and working capital purposes and not to use such proceeds for the redemption of any common stock or common stock equivalents.

The investors in the offering  (“Selling Stockholders”) received registration rights.  The Company agreed to file a registration statement covering the resale of the common stock issued and the common stock underlying the warrants issued to the Selling Stockholders within sixty days after the closing date.  If the registration statement was not declared effective by the SEC within the time periods defined within the agreement, then the Company would have made pro rata cash payments to each Selling Stockholder as liquidated damages in an amount equal to 1.0% of the aggregate amount invested by such Selling Stockholder for each 30-day period or pro rata for any portion thereof following the date by which such Registration Statement should have been effective.  If at the time of exercise of the warrants there is no effective registration statement covering the resale of the shares underlying the warrant, then the Selling Stockholders have the right at such time to exercise warrants in full or in part on a cashless basis. The Company filed an S-1 registration statement registering the shares on July 25, 2011, which was declared effective on August 5, 2011.

In addition to registration rights, the Selling Stockholders were offered a right of first refusal to participate in future offerings of common stock if the principal purpose of which was to raise capital.  This right of first refusal terminated upon the one-year anniversary of the closing date.

Warrants

In connection with the equity offering closed on May 26, 2011, the Company issued warrants to purchase an aggregate of 3,600,000 shares of the Company’s common stock at a per share price of $2.25 (the "$2.25 Warrants").  The Company also has outstanding warrants to purchase 3,125 shares of the Company’s common stock at a per share price of $5.00.  The $2.25 Warrants became exercisable in November 2011 and expire in November 2015. On the date of issuance, the warrants were valued at $898,384. Management determined the fair value of the warrants based upon the Black-Scholes option model with a volatility based on the historical closing price of common stock of industry peers and the closing price of the Company’s common stock on the OTCBB on the date of issuance. The volatility and remaining term was 50% and 2.92 years, respectively. The Company does not expect the immediate exercise of these warrants as the exercise price exceeds the average closing market price for the Company's common stock. Furthermore, no assurances can be made that any of the warrants will ever be exercised for cash or at all.

Issuance of Shares to Former Executive

On November 7, 2012, the Company issued 150,000 shares (the “Shares”) of its common stock to Everett Willard Gray II, in full satisfaction of any remaining amounts owed to Mr. Gray by the Company pursuant to Mr. Gray’s employment agreement with the Company, dated as of January 31, 2011 and amended as of March 6, 2012 and April 20, 2012 (as amended, the “Employment Agreement”). Mr. Gray resigned as the Company’s Chairman and Chief Executive Officer effective May 31, 2012 in connection with the transactions described in the Company’s Current Report on Form 8-K filed on April 24, 2012. The Employment Agreement provided for him to receive severance payments of $478,298, payable in installments, of which $239,149 remained to be paid, which was satisfied by the issuance of the 150,000 shares.

Stock Options

In 2011, the Company issued options to purchase 85,000 shares of its common stock at $4.80 to its directors.  For the year ended December 31, 2012 and the six months ended June 30, 2013, there was no stock based compensation.

Stock option activity summary is presented in the table below:

				Weighted-
				average
			Weighted-	Remaining
			average	Contractual
	Number of		Exercise	Term
	Shares		Price	(years)
Outstanding at December 31, 2011	87,500	$	4.80	5.08
Granted	—		—	—
Cancelled	—		—	—
Exercised	—		—	—
Forfeited	—		—	—
Expired	—		—	—
Outstanding and exercisable at December 31, 2012	87,500		4.80	4.08
Granted	—		—	—
Cancelled	—		—	—
Exercised	—		—	—
Forfeited	—		—	—
Expired	—		—	—
Outstanding and exercisable at June 30, 2013	87,500	$	4.80	3.83

There is no intrinsic value in the outstanding options since the option price is in excess of the market price of the Company's common stock.

The fair value of the options granted during 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Closing market price of stock on grant date	$3.11
Risk-free interest rate	2.43%
Dividend yield	0.00%
Volatility factor	50%
Expected life	2.5 years

We elected to use the “simplified” method to calculate the estimated life of options granted to employees. The use of the “simplified” method has been extended until such time when we have sufficient information to make more refined estimates on the estimated life of our options. The expected stock price volatility was calculated by averaging the historical volatility of the Company’s common stock over a term equal to the expected life of the options.

Issuance of Common Shares to Settle Creditors Payable

As described in Note 9, the Company entered into settlement agreements with two of the creditors payable arising out of the 2002 bankruptcy.  The Company paid the creditors $633,975 in cash and the Company’s largest shareholder, Red Mountain Resources, Inc., issued approximately 750,000 shares of its common stock to the creditors in settlement of the claims.  In return for Red Mountain Resources, Inc. issuing its shares to the creditors payable, the Company issued Red Mountain 422,650 shares of its common stock.

Conversion of Notes Payable

On February 28, 2013, Red Mountain Resources, Inc., the holder of the Green Shoe and Little Bay notes, elected to convert the outstanding notes and accrued interest into common shares.  The board of directors of the Company had previously resolved to change the conversion feature from $4.00 per common share to $1.50 per common share.  As a result, the Company issued 611,630 common shares to Red Mountain Resources, Inc.