STOCKHOLDERS' EQUITY

12 Months Ended

Jun. 30, 2011

NOTE 5: STOCKHOLDERS’ EQUITY

The Company had the following stock transactions during the year ended June 30, 2011:

Effective July 1, 2010 and with shareholder approval, the Company entered into a quasi-reorganization (also referred to as a corporate adjustment). As a result of the quasi-reorganization all prior period losses charged to retained deficit were eliminated against additional paid-in capital. A quasi-reorganization requires that retained earnings be dated for ten years after the quasi-reorganization takes place.

The following is the effect of the quasi-reorganization of the Company at July 1, 2010:


	Prior to Quasi-Reorganization	Adjustment	Subsequent to Quasi-Reorganization
Series A Preferred Stock	$ 12	$ -	$ 12
Common Stock	1,107	-	1,107
Additional Paid-In Capital	7,248,354	6,058,126	1,190,228
Retained Deficit	6,058,126	6,058,126	-
Total Stockholders' Equity	$1,191,347	$ -	$1,191,347
	=========	========	=========

In 2011, the Company sold 504,800 Series 2 units at $1.25 per unit to accredited investors in a Private Placement Memorandum. Each unit consisted of one common share and one Class B Warrant to purchase one share of the Company’s common stock at an exercise price of $1.75 per common share and one Class C Warrant to purchase one share of the Company’s common stock at $2.25 per share. The warrants were immediately exercisable for a term of three years.

As of June 30, 2011, the Company recorded proceeds of $393,089 net of fees of $421 from stock sales and recorded another $237,500 in common stock subscriptions. Cash proceeds from the common stock subscriptions were received by the Company subsequent to year end.

100,000 shares of the Company’s common stock were issued to a former employee of the Company pursuant to an employee agreement. The shares vested at July 1, 2010 and were valued at $99,022 using the Black-Scholes pricing model with a volatility of 147.89%. The same employee was granted 8,331 options valued at $4,430 using the same Black-Scholes pricing model with a volatility of 147.89%.

Stock based employee compensation has been recorded in the amount of $2,001,233.

The Company had the following stock transactions during the six month period ended June 30, 2010.

Issued 101,982 shares of the Company’s common stock in settlement of accrued compensation of $75,000 plus accrued interest $26,982.

Issued 138,191 shares of Company’s Series A Preferred Stock in settlement of outstanding related party debt of ($129,411) plus accrued interest ($8,780). The shares were issued to the Company’s majority shareholder and an entity which is one hundred percent (100%) owned by the majority shareholder. The preferred shares are redeemable at the option of the Company in the future at $1.00 per share.

The Company repurchased and retired 15,000 shares of its Series A Preferred Stock. The preferred shares were re-purchased at $1.00 per share.

The Company issued 25,000 of its Series 1 units for office rent valued at $1.00 per unit ($25,000). Each unit consists of one common share and one warrant to purchase one common share at an exercise price of $1.50 per common share.

In order to raise additional capital in 2010, the Company sold 1,466,000 Series 1 units at $1 per unit to accredited investors. Each unit consisted of one common share and one warrant to purchase one common share at an exercise price of $1.50 per common share. The warrants were immediately exercisable for a term of three years.

As of June 30, 2010, the Company recorded proceeds of $501,000 from stock sales and recorded another $965,000 in common stock subscription. Cash proceeds from the common stock subscriptions were received by the Company subsequent to year end.

Stock Based Compensation

On July 1, 2010, the Company awarded 4,300,000 shares of the Company’s common stock and 1,183,331 options to purchase the Company’s common stock as incentives pursuant to employment agreements for several of its key employees, officers, and directors. These shares and options vest as follows:


Years Ended July 31	Shares	Options
2011	100,000	258,333
2012	100,000	158,333
2013	100,000	158,334
2014	2,666,000	100,000
2015-2019	1,334,000	500,000
	4,300,000	1,175,000
	=======	=======

The stock options and common shares were valued using the Black-Scholes pricing model with a volatility of 147.89%, a risk-free interest rate of .22%, a five year expected life and no expected annual dividend. For the year ended June 30, 2011 stock-based compensation was valued at $1,507,331 for the common shares and $493,902 for the stock options for the year ended July 31, 2011. There was no stock-based compensation expense for the six-month period ended June 30, 2010.

Warrants

When the Company sells common stock to investors, each investor receives three year warrants to purchase an equal number of shares of the Company’s common stock. Warrants issued in 2009 and 2010 have an exercise price of $1.50. Class B warrants issued in 2011 have an exercise price of $1.75 and Class C warrants also issued in 2011 have an exercise price of $2.25.

The following is a summary of warrant activity:


		Number of Warrants
Warrants Outstanding, December 31, 2008		542,000
Issuances		45,000
Expirations		(482,000)

Warrants Outstanding, December 31, 2009		105,000
Issuances		1,491,000
Expirations		(10,000)

Warrants Outstanding, June 30, 2010		1,586,000
Issuances		1,009,600
Expirations		(25,000)

Warrants Outstanding, June 30, 2011		2,570,600

Warrants issued in 2007 expired in 2010 and warrants issued in 2008 expired in 2011. Warrants issued in 2009, 2010 and 2011 expire in 2012, 2013, and 2014, respectively.

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Section 04

-Article 3

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Section 02

-Paragraph 29, 30, 31

-Article 5

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 310

-SubTopic 10

-Section S99

-Paragraph 2

-Subparagraph (SAB TOPIC 4.E)

-URI http://asc.fasb.org/extlink&oid=6228006&loc=d3e74512-122707

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 4

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21484-112644

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section S99

-Paragraph 4

-Subparagraph (SAB TOPIC 4.C)

-URI http://asc.fasb.org/extlink&oid=6959260&loc=d3e187143-122770

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 129

-Paragraph 2, 3, 4, 5, 6, 7, 8

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Glossary Preferred Stock

-URI http://asc.fasb.org/extlink&oid=6521494

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 5

-Paragraph 15

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 9: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Section 08

-Article 4

Reference 10: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section S99

-Paragraph 1

-Subparagraph (SX 210.3-04)

-URI http://asc.fasb.org/extlink&oid=6959260&loc=d3e187085-122770

Reference 11: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Staff Accounting Bulletin (SAB)

-Number Topic 4

-Section C

Reference 12: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 5

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21488-112644

Reference 13: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 210

-SubTopic 10

-Section S99

-Paragraph 1

-Subparagraph (SX 210.5-02.29-31)

-URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682

Reference 14: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Article 4

-Section 08

-Paragraph d

Reference 15: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Staff Accounting Bulletin (SAB)

-Number Topic 4

-Section E

Reference 16: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 30

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6405834&loc=d3e23285-112656

Reference 17: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 3

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644

Reference 18: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 235

-SubTopic 10

-Section S99

-Paragraph 1

-Subparagraph (SX 210.4-08.(d),(e))

-URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690

Reference 19: http://www.xbrl.org/2003/role/presentationRef

-Publisher AICPA

-Name Accounting Research Bulletin (ARB)

-Number 43

-Chapter 1

-Section B

-Paragraph 7, 11A

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 20: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21463-112644

Reference 21: http://www.xbrl.org/2003/role/presentationRef

-Publisher AICPA

-Name Accounting Principles Board Opinion (APB)

-Number 12

-Paragraph 10

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 22: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 6

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21506-112644

Reference 23: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 505

-SubTopic 10

-Section 50

-Paragraph 11

-URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21564-112644

+ Details

Earth Energy Reserves, Inc. 10-K