CONVERTIBLE DEBT

9 Months Ended

Dec. 31, 2011

Convertible Debt Disclosure [Abstract]

Convertible Debt Disclosure [Text Block]

4. CONVERTIBLE DEBT

On March 3, 2010, the Company issued secured convertible notes and warrants to Iroquois Capital Opportunity Fund LP (“Iroquois”) and 12 other investors in exchange for $3,350,000. The notes mature in two years and accrue interest at an annual rate of 8%. The Company, with the Note holders’ permission, can elect to defer the required quarterly interest payments by increasing the interest rate charged to 12% per annum. The outstanding principal and interest on the notes is convertible into common stock of the Company at the option of each note holder at $0.30 per share with the Company having the right to force conversion once the Company achieves a greater than $1.25 share price and minimum daily volume of $2,000,000. Upon the occurrence of a default that continues for more than 30 business days, a change of control or certain other events, the Note holders can demand redemption of the outstanding notes at a price of 120% of the principal plus accrued and unpaid interest. The original maximum number of conversion common stock shares for the notes’ principal amounts, assuming all shares are converted was 11,166,667 shares of common stock.

During the fiscal year ended March 31, 2011, one of the Note holders converted $45,000 of the Note balance into stock, resulting in the conversion of principal equivalent to 150,000 shares of common stock. During the nine months ended December 31, 2011, four Note holders converted their principal balance and accrued interest into common stock. The first Note holder converted $38,209 into 127,362 shares of common stock while the second Note holder converted $63,157 into 210,524 shares of common stock. The third and fourth Note holders each converted $44,350 into 147,833 shares of common stock. As of December 31, 2011, the remaining maximum number of conversion shares of common stock for the notes’ principal amounts plus accrued and unpaid interest, assuming all remaining shares are converted was 12,006,158 shares of common stock. The Company incurred loans fees of $250,311, which has been deferred and is being amortized over the life of the notes.

The notes are secured by all of the Company’s and its subsidiaries’ assets. The investors also received a total of 11,166,667 warrants exercisable at $0.60 per share with five year terms. The warrants have cashless exercise provisions. These warrants and conversion option contain certain reset provisions including (i) should the Company issue common stock to third parties for consideration less than the note conversion price or the warrant exercise price during the term of the notes or warrants, the note conversion price and the warrant exercise price shall be adjusted downward to equal the price at which the Company issued that common stock (referred to as the “down-round” feature), and (ii) should certain events occur, the number of warrants at the new exercise price shall be increased. On January 24, 2011, the Company issued Series D convertible preferred stock to third-party investors in a Regulation S Offering (see Note 5) at a conversion price of $0.30 per share. Due to the provisions of that stock offering and the warrant reset provisions, the Company adjusted the exercise price of the warrants to $0.30 per share and increased the number of warrants to 22,333,334.

The subscription agreement also calls for the Company to have a director nominated by Iroquois Capital Opportunity Fund LP or its assignee. Accordingly, the Company has amended its bylaws to provide for such a “Nominated Director.” Further, under the amended bylaws, the Nominated Director must approve certain business decisions without regard to the vote of the other Directors, including (i) the Company’s or Subsidiary’s annual budget; (ii) acquisition or disposition of material assets, outside the ordinary course of business; (iii) formation or dissolution of the Company or Subsidiary; (iv) expenditure of or incurring of an obligation of $20,000 or more for a single purpose during any consecutive twelve month period unless such expenditure has been approved in a budget approved by the board of directors of the Company or Subsidiary (“single purpose” may include an approved general plan of operations relating to oil and gas production and shall not be a reference to the engagement of any single vendor in connection with such approved general plan of operations relating to oil and gas production), provided such expenditure has been approved in a budget approved by the board of directors of the Company and Subsidiary, as applicable; (v) open or close any account with any financial institution; (vi) initiation or settlement of any litigation, arbitration or judicial proceeding; and (vii) the issuance of any equity of the Company or right to receive or acquire any equity of the Company, or modification of any of the foregoing outstanding at any time. The Nominated Director bylaw provision ceases to be effective when the notes are paid.

In accordance with terms of the loan, the $3,350,000 was placed in escrow. Pursuant to the terms of the Escrow Agreement, funds were held in escrow and were released at the Company’s written request. As of March 31, 2011, all funds were released from escrow at the written permission of the Note holders.

In analyzing this transaction the Company considered all the terms and provisions of the convertible notes and the warrants. As a result of the down-round feature discussed above the Company applied the provisions of ASC Topic 815-15, Derivatives and Hedging, and concluded the conversion option is required to be bifurcated from the host contract and adjusted to fair value at each reporting period. The warrants also have the same down-round feature and thus the Company has concluded that the warrants are required to be classified as a liability and will be adjusted to fair value at each reporting period. In addition, the Company determined that the Note holders right to demand redemption of the notes upon certain events occurring also needs to be bifurcated. The convertible notes were recorded net of a discount of $3,350,000 due to the fair value of the warrants and derivatives amounting to $4,258,094 and $1,593,002, respectively, and being in excess of the principal value of the convertible notes. The difference of $2,501,096 between the discount and the fair value of the warrants and derivatives was recorded as interest expense at issuance. The discount is being amortized and charged to operations over the two year life of the notes using the effective interest method.

The initial fair value of the warrants of $4,258,094 and the initial fair value of the derivatives of $1,593,002 was calculated using the Monte Carlo simulation model. The underlying value of the model is Enterprise Value, and each Claim is treated as a Claim on the Enterprise Value. Since the common stock price is not the underlying value, the volatility implied by the model is not equal to the volatility used under a closed-form Black-Scholes model which values the warrants with the common stock as the underlying security. The Enterprise Value volatility used at December 31, 2011 and 2010 was 52.1% and 34.1%, respectively.

Amortization of the discount that was charged to interest expense for the three and nine months ended December 31, 2011 amounted to $750,841 and $1,743,273, respectively. For the three and nine months ended December 2010, $243,056 and $564,318 of discount amortization was recorded to interest expense.

Interest charged to operations on the principal balance of the notes for the three and nine months ended December 31, 2011 totaled $135,644 and $404,415, respectively. For the three and nine months ended December 31, 2010, interest charged to operations on the principal balance of the notes was $135,043 and $371,546, respectively.

The following is a summary of amounts related to the notes as of December 31, 2011 and March 31, 2011. The amounts related to the Statement of Operations are summarized for the three and nine months ended December 31, 2011 and 2010:

Consolidated Balance Sheet – Assets 

	December 31, 2011			March 31, 2011
Deferred financing fees	$	250,311		$	250,311
Accumulated amortization		(230,824	)		(140,453	)
Net deferred financing fees	$	19,487		$	109,858

Consolidated Balance Sheet – Liabilities

	December 31, 2011			March 31, 2011
Face value of Convertible Notes	$	3,350,000		$	3,350,000
Unamortized Original Issue Note Discount		(669,672	)		(2,412,966	)
Accrued and unpaid interest		486,892			298,058
Conversions		(235,066	)		(45,000	)
Convertible notes payable, net of unamortized discount	$	2,932,154		$	1,190,092
Derivatives Liability – Convertible Note (Iroquois)	$	271,749		$	4,534,069
Warrant Liability – Convertible Note (Iroquois)		8,375,343			12,809,065
Carrying value of notes and liabilities	$	11,579,246		$	18,533,226

Consolidated Statement of Operations

	Three Months Ended December 31,
	2011			2010 (restated)
Interest Expense – Principal	$	(135,644	)	$	(135,043	)
Interest Expense – Deferred Financing		(29,527	)		(31,975	)
Interest Expense – Loan Discount		(750,841	)		(243,056	)
Change in Convertible Note Warrant Liability		96,184			(968,299	)
Change in Convertible Note Derivative Liability		1,022,321			392,949
	$	202,493		$	(985,424	)

	Nine Months Ended December  31,
	2011			2010 (restated)
Interest Expense – Principal	$	(404,415	)	$	(371,546	)
Interest Expense – Deferred Financing		(90,371	)		(97,869	)
Interest Expense – Loan Discount		(1,743,273	)		(564,319	)
Change in Convertible Note Warrant Liability		4,433,722			(1,196,503	)
Change in Convertible Note Derivative Liability		4,262,320			1,133,075
	$	6,457,983		$	(1,097,162	)

Working Interest in Oil Properties

In February 2010, the Company sold a 12.5% working interest in the production of newly drilled wells located in Wardlaw Field to Glen Rose Partners I, LLC, (“GRP1”) for $1,000,000. The purchase and sale agreement excludes certain existing producing wells. GRP1 has the right to participate in all non-excluded wells, including wells on the Adamson leases. Pursuant to the terms of the purchase and sale agreement, the Company is required to pay all of GRP1’s drilling and production costs until GRP1’s carried costs equal $2,000,000. Further, for five years, GRP1 will also have conversion rights to convert its working interest in the Wardlaw Prospect with an imputed value equal to the working interest purchase price as adjusted, into the Company’s common stock in the same manner as the secured convertible notes are convertible, except that GRP1 conversion price shall be 150% of the secured convertible notes’ conversion price in effect as of the conversion date, ($0.45 as of December 31, 2011) provided that the secured convertible notes remain outstanding on the date of such conversion. GRP1 is an affiliate of Iroquois Capital Opportunity Fund, LP.

The Company included the $1,000,000 purchase price and is adding the carried interest to the full cost pool in accordance with ASC Topic 932, Extractive Activities – Oil and Gas. The Company considered if the conversion option was required to be bifurcated from the host contract and concluded it did not because the conversion option and the host contract are clearly and closely related.