Transactions With Dart Energy

12 Months Ended

Dec. 31, 2011

Transactions With Dart Energy [Abstract]

Transactions with Dart Energy

4. Transactions with Dart Energy

     In 2009, we entered into a series of transactions related to our Qinnan Block with Dart Energy, formerly known as Arrow Energy International Pte Ltd. In connection with these transactions, one of our wholly owned subsidiaries, FEEB, and Dart Energy entered into a Farmout Agreement (the "Farmout Agreement") under which, subject to certain conditions, FEEB would assign to Dart Energy 75.25% of its rights in the Qinnan PSC in Shanxi Province (the "Assignment"). The Assignment was not carried out and FEEB terminated the Farmout Agreement in November 2011.

     In conjunction with the Farmout Agreement, FEEB issued an Exchangeable Note, $10 million principal amount, to Dart Energy for $10 million in cash and a warrant to Dart Energy for 7,420,000 shares of our common stock, at an exercise price of $1.00 per share ("Warrant"). The Warrant was not exercised and expired in December 2009.

     Of the $10 million in cash received from Dart Energy for the Exchangeable Note, $2 million was to be set aside to be used exclusively to satisfy FEEB's existing exploration and development commitments in connection with the Qinnan PSC. This restricted portion of the proceeds was recorded as restricted cash on the consolidated balance sheet until it was fully utilized for exploration expenditures related to the Qinnan PSC by the end of the quarter ended September 30, 2010.

     The Exchangeable Note had an initial principal amount of $10 million and bore interest at a rate of 8% per annum, which began to accrue on October 16, 2009. Dart Energy had the right at any time to exchange the Exchangeable Note in whole or in part for shares of the Company's common stock at an exchange rate of 21,052.63 shares per $10,000, or $0.475 per share (the "Exchange Rate"), of principal and interest. In February 2011, Dart Energy exercised its right to exchange a total of $6.8 million in principal amount under the Exchangeable Note for 14,315,789 shares of Common Stock. Dart Energy has informed the Company that it has sold all of the acquired shares through block trades with institutional investors.

     On September 15, 2011, the Company fulfilled its obligations under the Exchangeable Note by paying in full the remaining $3,200,000 principal balance on the Exchangeable Note plus the $1,226,577 in accrued interest, and the Company elected to terminate the Farmout Agreement on November 11, 2011.

     We applied ASC 815 and ASC 470 in the recording of the transaction with Dart Energy. We determined the fair value of the Warrant using a combination of the Black-Scholes-Merton valuation technique and a Monte Carlo simulation. The significant assumptions used in the valuation were as follows:

	Black-Scholes		Monte Carlo
	-Merton		Simulation
Volatility	124.60	%	110.16	%
Risk free interest rate	0.67	%	0.83	%
Expected dividend yield	-		-
Expected term	0.99	year	1.51 years

     Based on the combination of the Black-Scholes-Merton valuation technique and the Monte Carlo simulation, the Warrant was valued at $624,612 at time of issuance. The amount was recorded as a discount to the Exchangeable Note in the liabilities section and as additional paid-in capital in the Stockholders' Equity section of the Consolidated Balance Sheets. The debt discount is accreted as interest expense periodically over the term of the Exchangeable Note. Accretion expense for the years ended December 31, 2011 and 2010 was $42,000 and $186,000, respectively.

     The Company incurred approximately $0.5 million in direct costs in connection with entering into the transactions with Dart Energy. These direct costs were allocated between the Exchangeable Note and the Warrant in proportion to their respective fair values at time of issuance. The costs related to the Warrant were recorded as an offset to the value of the Warrant in paid-in capital. The costs related to the Exchangeable Note were capitalized as deferred financing costs and amortized based on the effective interest method over the term of the Exchangeable Note. The objective of that method is to arrive at a periodic interest cost which represents a level effective rate over the term of the Exchangeable Note on its face amount reduced by the unamortized discount and expense at the beginning of the period. The effective interest rate for the Exchangeable Note as calculated is 11.64% per annum. Amortization expense for the years ended December 31, 2011 and 2010 was $31,000 and $138,000, respectively.