Reasons for the Increase in Authorized Common Stock
The Company has entered into a series of agreements with Asher Enterprises Inc. (the “Asher Agreements”), to provide working capital for the Company’s operations while the Company raises a higher amount needed to re-open operations at the Chloride Copper Mine. These agreements were previously disclosed in the Company’s filings with the Securities and Exchange Commission on April 15, 2011, August 15, 2011and November 16, 2011. The Asher Agreements require, among other things, that the Company maintain a reserve of authorized but unissued Class A Common Stock (the “Reserve Shares”) in an amount 5-times the number of shares into which the outstanding debt of the Company to Asher Enterprises is convertible (the “Conversion Shares”). With the recent share price drop that the Company has experienced, the number of Conversion Shares has increased and the number of required Reserve Shares increased proportionately. As a result, the number of required Reserve Shares exceeded the number of authorized but unissued shares of the Company’s Class A Common Stock, and the Company became noncompliant with the contractual requirement. The increase in the number of authorized but unissued shares of Class A Common Stock will both (i) place the Company back into compliance with the contractual requirements and (ii) enable the Company to borrow further amounts from Asher Enterprises for short term working capital to keep the Company operating while efforts continue to raise sufficient funds to re-start mining operations at the Chloride Copper Mine.
Further, the increase in the number of authorized but unissued shares of Class A Common Stock would enable us, without further stockholder approval, to issue shares from time to time as may be required for proper business purposes, such as raising additional capital for ongoing operations, business and asset acquisitions, stock splits and dividends, present and future employee benefit programs and other corporate purposes. Due to the current state of the U.S. and international capital markets, we anticipate that we will need to issue a significant number of shares of our Class A Common Stock or securities convertible into or exercisable for shares of Common Stock to raise financing to meet our working capital needs. In addition, the authorization of additional shares of Common Stock will provide us with the flexibility from time to time in the future to seek additional capital through equity financings in a competitive environment and to use equity, rather than cash, to complete acquisitions.
Having such additional authorized shares of capital stock available for issuance in the future should give us greater flexibility. The increase in the authorized number of shares of our Common Stock will permit our Board of Directors to issue additional shares of our Common Stock without further approval of our Stockholders and without the related expense and delay of a special stockholders’ meeting. Our Board of Directors does not intend to seek stockholder approval prior to any issuance of the authorized capital stock unless stockholder approval is required by applicable law or stock market or exchange requirements.
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In addition to financing purposes, while not the purpose, having additional shares authorized and available for issuance would allow us to issue shares of Common Stock that may make it more difficult or discourage an attempt to obtain control of our Company by means of a merger, tender offer, proxy contest or other means. When, in the judgment of our Board of Directors, this action will be in the best interest of our Stockholders and our Company, such shares could be used to create voting or other impediments or to discourage persons seeking to gain control of our Company. Such shares also could be privately placed with purchasers favorable to our Board of Directors in opposing such action. The existence of the additional authorized shares could have the effect of discouraging unsolicited takeover attempts. The issuance of new shares also could be used to dilute the stock ownership of a person or entity seeking to obtain control of our Company should our Board of Directors consider the action of such entity or person not to be in the best interest of the Stockholders. The issuance of new shares also could be used to entrench current management or deter an attempt to replace our Board of Directors by diluting the number or rights of shares held by individuals seeking to control our Company by obtaining a certain number of seats on our Board of Directors.
Principal Effects of the Increase in Authorized Common Stock
The Articles Amendment: (i) puts the Company into compliance with the contractual requirement to maintain a reserve of its authorized but unissued Class A Common Stock pursuant to the Company’s loan agreements with Asher Enterprises, (ii) enables the Company to borrow additional funds from Asher Enterprises as needed for short term working capital, and (iii) will increase the ability of our Board of Directors to issue shares without further action or vote by our Stockholders, including for potential capital-raising purposes and acquisitions of other businesses or assets. The issuance in the future of such additional authorized shares may have the effect of diluting the earnings per share and book value per share, as well as the stock ownership and voting rights, of existing holders of our Common Stock. Such dilution may be substantial, depending upon the amount of shares issued. It may also adversely affect the market price of our Common Stock.
Capitalization
