Derivative and Hedging Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative and Hedging Financial Instruments [Abstract]

DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

NOTE 6 — DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

ASC 480-10-25-8 through 25-12, Derivative and Hedging Activities, as amended, establishes accounting and reporting standards for derivative instruments. As a part of the April 26, 2012 ASD Credit Agreement, the Company entered into a warrant agreement with Chambers which requires American Shale to sell the Lenders for a total of $2 million a warrant for 19,500 shares representing 19.5% of ASD’s stock at $263.44 per share. The warrant expires on February 28, 2015. The warrant includes a put option whereby the Lender could require ASD to repurchase the warrant as of February 28, 2015, or earlier if certain events occur which is in accordance with the credit agreement. Under the put option, ASD would pay the excess of the fair market value per share of the stock over $263.44 times the number of shares exercisable less any distributions or similar payments defined by the agreement. In certain circumstances ASD has the option to transfer working interest in all of its wells equal to the value of the put option instead of paying in cash.

The embedded derivative is recorded at fair value and reported as a Long-Term Liability on the Consolidated Balance Sheet with the change in fair value recorded in the Consolidated Statements of Operations in Other Income (Expenses). The gain on the change in fair value of the embedded warrant amounted to $123,677 for the three months ended March 31, 2013. The Embedded Warrant Liability had a fair value of $2,684,601 and $2,808,278 as of March 31, 2013 and December 31, 2012, respectively.