NOTE 5. EQUITY

Preferred Stock – 1,000,000 shares authorized, 197,100 shares issued and outstanding

Effective April 11, 2017, the Company initiated a $2,000,000 Series A Convertible Preferred Stock (“Preferred Stock”) offering at a price of $10.00 per share.  The holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 9%.  The Preferred Stock will automatically convert into common stock when the Company’s common stock market price equals or exceeds $0.30 per share for 30 consecutive days.  At conversion, the value of each dollar of preferred share will convert to 7.1429 common shares (which results in a $0.14 per common share conversion rate).  During the second quarter of 2017, 120,590 shares or $1,205,900 of the offering had been issued.  The 120,590 shares were issued as follows: conversion of TORRI (40,500 shares) – See Note 7 for additional details, conversion of debt (28,900 shares - 25,900 related to short term notes [as described in Note 4] and 3,000 related to equipment purchase), conversion of shareholder advances (27,090 shares of which 840 was for accrued interest, see Note 7 for further explanation) and cash (24,100 shares).  Of the 120,590 shares, 57,990 of the shares were issued to related parties while 62,600 of the shares were issued to third parties.

On July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred Stock.  The outstanding debt included the following: a $350,000 Convertible Secured Note dated June 17, 2013, a $100,000 Convertible Secured Note dated September 30, 2013 and a $100,000 Convertible Secured Note dated December 31, 2013.  Subsequent to this conversion, all of the Company’s debt with Mr. Wilber is deemed cancelled and it is no longer due and payable.  Mr. Wilber retains both the warrants and shares that were previously issued by the Company related to the original sale of these notes (and their respective amendments).

As described in greater detail in Note 7 below, on July 19, 2017, Jovian Petroleum Corporation (“Jovian”) converted $2 million of its remaining debt into 12,749,286 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.   The Preferred Stock was priced at $10.00 per share with a value of $215,100.  Refer to Note 7 for further explanation.  The CEO of Jovian is Quinten Beasley, our director, and the largest shareholder of Jovian is Zel C. Khan, our CEO and director.

Common Stock –

Effective March 31, 2017, the seven (7) Advisory Board members were compensated for their service from January 1, 2017 through March 31, 2017 by the granting of warrants to purchase 12,500 shares of common stock each per quarter per Board member (in aggregate 87,500 total warrants per quarter), at an average exercise price of $0.14 per share, which vested immediately, and are exercisable for 36 months thereafter. The warrants were issued with a fair value of $12,127 based on an average $0.14 valuation, volatility of 296%, a discount rate of 1.09% and a 3 year term.  The warrants were valued using the Black Sholes valuation model.  These warrants are subject to a clawback provision which would be ratably invoked if an advisory board member did not complete his 2017 service term.  Effective March 31, 2017, the Advisory Board was dissolved and no other warrants were issued subsequent to the first quarter of 2017.

Effective February 1, 2017, the Company entered into a consulting agreement in exchange for geology related services.  Specifically these services include providing reports detailing analysis of present and potential oil and gas assets.  The term of the agreement is one (1) year, subject to a one (1) year extension.  The consultant is to be granted warrants to purchase 25,000 shares of common stock for services provided each quarter.  The exercise price of the warrants will be the market price of the Company’s stock at quarter end, the warrant term expires 3 years from the date of grant.  During the second quarter of 2017, 25,000 warrants were issued with a fair value of $2,217 based on an average $0.09 valuation, volatility of 296%, a discount rate of 1.09% and a 3 year term.  The warrants vested immediately.  As of September 30, 2017, the consultant has been granted warrants to purchase 50,000 shares of common stock, with a fair value of $5,683.

On December 13, 2016 the Company entered into a consulting agreement in exchange for assistance with evaluating financial offers, raising capital and other strategic operational decisions.  The consultant is to be granted warrants to purchase 40,000 common shares for each month of service.  The exercise price of the warrants is $0.14 per share and the term is 3 years.  During the first quarter of 2017, warrants to purchase 120,000 shares of common stock were issued with a fair value of $15,836, based on a $0.14 valuation, volatility of 296%, a discount rate of 1.09% and the term is 3 years.  The warrants vested immediately.

The Board of Directors authorized the Company to allow outstanding warrant-holders to exercise their outstanding warrants at a 20% discount to the stated exercise price of their warrants.  On May 12, 2017 a warrant holder exercised warrants to purchase 600,000 shares of common stock by remitting a payment of $48,000 at an exercise price of $0.08 per share which is a 20% discount to the originally stated price of $0.10 per share.

On December 31, 2016 the Company signed an amendment with Rick Wilber concerning his outstanding convertible debt.  A clause in the amendment stated that if the outstanding principal balance of Mr. Wilber’s debt was not paid back by January 1, 2017 then he was due to receive warrants to purchase 80,000 shares of Company common stock for each month the balance remained outstanding.  The balance was not repaid during the second quarter of 2017.  During the second quarter of 2017, Mr. Wilber received warrants to purchase a total of 240,000 shares of common stock which were valued at $28,441, with an exercise price of $0.15 per share that expire five (5) years from their grant dates.  As of September 30, 2017, Mr. Wilber has been granted warrants to purchase a total of 480,000 shares of common stock with a fair value of $60,101.

On July 6, 2017, the Company contracted with an attorney to facilitate the conversion of the Rick Wilber debt (described directly above).  To compensate the attorney for his service, he was granted 150,000 shares of common stock valued at $15,000.

On July 31, 2017, based on the terms of the agreement, the Company’s final outstanding $25,000 Convertible Bridge Note was mandatorily converted to 271,096 shares of common stock.  Based on the agreement, the debt was converted at $0.10 per share.  This included the principal balance of $25,000 and accrued interest of $2,110.  However, the market price of the shares on the conversion date was $0.12 per share resulting in a loss on conversion of $5,422.

On August 15, 2017, in exchange for services related to negotiations concerning our New Mexico operating bond requirements, the Company paid one of its attorneys a bonus of 500,000 shares of common stock that was valued at $65,000.

Summary information regarding common stock warrants issued and outstanding as of September 30, 2017, is as follows: