INVESTMENT IN CROSS BORDER RESOURCES, INC.

9 Months Ended

Feb. 29, 2012

Schedule Of Investments [Abstract]

Investment Holdings [Text Block]

NOTE 5. INVESTMENT IN CROSS BORDER RESOURCES, INC.

On May 23, 2011, the Company entered into a securities purchase agreement with Cross Border, pursuant to which the Company purchased 2,136,164 units of Cross Border. Each unit included one share of common stock of Cross Border and one warrant to acquire an additional share of common stock of Cross Border. The aggregate purchase price of the units was $3,204,261. The warrants have an exercise price of $2.25 per share. The warrants are exercisable for a five year term and became exercisable on the sixth month anniversary of the issuance date. The warrants, however, are subject to a cap that precludes the holder from exercising the warrants if after such exercise the holder, alone or with its affiliates, would be the beneficial owner of more than 19.99% of Cross Border’s common stock unless the holders of Cross Border’s common stock approve such exercise.

On August 16, 2011, the Company entered into a stock purchase and sale agreement pursuant to which the Company acquired 218,535 shares of common stock of Cross Border from a third party in exchange for the issuance of 273,169 shares of the Company's common stock.

In October and November 2011, the Company entered into stock purchase and sale agreements pursuant to which the Company acquired an aggregate of an additional 2,014,465 shares of common stock of Cross Border from a third party in exchange for the issuance of 4,028,930 shares of the Company's common stock. The Company also acquired an additional 167,332 shares of Cross Border’s common stock for cash for an aggregate purchase price of $217,532. In January 2012, the Company acquired a further 300,929 shares of Cross Border’s common stock in exchange for the issuance of an aggregate of 501,858 shares of the Company’s common stock and $70,000 in cash. Accordingly, as of February 29, 2012, the Company owned approximately 29.95% of Cross Border’s outstanding common stock, including 2,701,261 shares held by Red Mountain and 2,136,164 shares held by Black Rock. Black Rock also owns warrants to purchase an aggregate of 2,136,164 shares of Cross Border’s common stock as described above.

As a result of the Company’s 29.95% ownership of Cross Border’s outstanding common stock the Company now reflects its investment in Cross Border as an equity method investment and has retroactively reflected the effect of the change in accounting for the investment in Cross Border to present it as a step acquisition of an equity method investment. No goodwill was recorded as a result of this acquisition.  The difference, between the Company’s gross investment of $7,957,931 in Cross Border, and equity share of net assets, totaling $5,227,006, has been allocated to the Company’s investment in Cross Border’s oil and gas properties.  The excess basis of the stock over the equity share of net assets is $2,730,924 and is depleted each quarter based upon Cross Border’s depletion rate calculated on its oil and gas properties.  The depletion for the nine months ended February 29, 2012 was $178,670.  The Company has restated the Statements of Operation for the period ended February 29, 2012 to report this depletion under “Other Income (Expense)” as “Equity in earnings of Cross Border Resources, Inc.”

The effects of retroactively applying equity method accounting as of May 31, 2011 reduced retained earnings by $1,940,198 and increased pro forma net income by $898,681 or $0.03 per share.

Due to timing differences in our filing requirements and the lack of availability of financial information for the current quarterly period, the Company books its share of Cross Border’s financial activity on a two-month lag.  In accordance with the equity method of accounting, the investment is initially recorded at cost and adjusted to reflect the Company’s share of changes in Cross Border’s capital. It is further adjusted to recognize the Company’s share of Cross Border’s earnings as they occur, rather than as dividends or other distributions are received. The Company’s share of Cross Border earnings would also include any other-than-temporary declines in fair value recognized during the period. Changes in the Company’s proportionate share of the underlying equity of Cross Border’s which result from Cross Border’s issuance of additional equity securities are recognized as increases or decreases in shareholders’ equity, net of any related tax effects.  The Company recognized a loss in its equity investment for net losses by Cross Border Resources, Inc. of $211,674 and $269,109 for the three and nine months ended February 29, 2012 and has restated the Statements of Operations for the period ended February 29, 2012 to report this equity gain/loss under “Other Income (Expense)”.

The following represents Cross Border’s summarized financial information for the full year ended December 31, 2011:

Total revenue	$	6,584,134
Loss from operations		(926,506	)
Net loss		(1,196,440	)
Net loss attributable to Red Mountain for the nine months ended February 29, 2012		(447,779	)
Net loss attributable to Red Mountain for the three months ended February 29, 2012		(269,949	)

As of February 29, 2012, the fair value of the units of Cross Border is $8,225,750. The Company valued the warrants as of February 29, 2012 at $1,730,961 using the Black-Scholes valuation model. In determining this valuation, the Company used a volatility rate of 84%, a risk free interest rate of 0.87%, an estimated life of 4.25 years and a dividend rate of zero. The changes in fair value have been recorded in unrealized gain on investment in Cross Border warrants in the Statement of Operations.