Senior Secured Promissory Notes

9 Months Ended

Sep. 30, 2011

Senior Secured Promissory Notes [Abstract]

SENIOR SECURED PROMISSORY NOTES

NOTE 7 SENIOR SECURED PROMISSORY NOTES

In September 2010, the Company issued 12% senior secured promissory notes in the principal amount of $15 million (the “Notes”) in order to finance future drilling and development activities. Proceeds of the notes have been used primarily to fund developmental drilling on the Company’s significant acreage positions targeting the Williston Basin Bakken/Three Forks area and the Niobrara formation located in the Denver-Julesberg (D-J) Basin through its joint venture with Slawson.

The Notes bear interest at the rate of 12% per annum, with interest payable monthly beginning October 1, 2010. The Notes are secured by a first priority security interest on all of the Company’s assets, on a pari passu basis with each other.  The Company may pre-pay the Notes at anytime without penalty.

The Notes were sold at a discount and yielded cash proceeds of $14,775,000. The discount amount of $225,000 was amortized to interest expense over the initial term of the Notes using the effective interest method. The amortization of the discount for the nine months ended September 30, 2011 was $163,356.

In September 2011, the Company exercised its option to extend the term of the Notes to September 2012.  The Company was required to make an extension payment equal to two percent (2%) of the principal amount, or $300,000.  This $300,000 has been capitalized as debt issuance costs on the condensed balance sheet and is being amortized to interest expense over the remaining term of the Notes using the effective interest method.  The amortization of the debt issuance costs for the nine months ended September 30, 2011 was $6,575.