Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2011
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number: 000-51425
RANCHER ENERGY CORP
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(Exact name of registrant as specified in its charter)
Nevada 98-0422451
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
999 18th Street, Suite 2700, Denver, CO 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 629-1125
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
registered on which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data file required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files) Yes |_| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer [___] Accelerated filer [___]
Non-accelerated filer [___] Smaller reporting company [_X_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter ended September 30, 2010 was $2,072,274.
The number of shares outstanding of the registrant's common stock as of July 11,
2011 was 119,316,723.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Removed and Reserved
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
ITEM 9A(T). Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers, and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director
Independence
ITEM 14. Principal Accounting Fees and Services
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
SIGNATURES
1
Note about Forward-Looking Statements
This From 10-K contains forward-looking statements, such as statements relating
to our financial condition, results of operations, plans, objectives, future
performance and business operations. These statements relate to expectations
concerning matters that are not historical facts. These forward-looking
statements reflect our current views and expectations based largely upon the
information currently available to us and are subject to inherent risks and
uncertainties. Although we believe our expectations are based on reasonable
assumptions, they are not guarantees of future performance and there are a
number of important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. By making
these forward-looking statements, we do not undertake to update them in any
manner except as may be required by our disclosure obligations in filings we
make with the Securities and Exchange Commission under the Federal securities
laws. Our actual results may differ materially from our forward-looking
statements.
PART I
ITEM 1. BUSINESS
General
The following is a summary of some of the information contained in this
document. Unless the context requires otherwise, references in this document to
"Rancher," "we," "our," "us" or the "Company" are to Rancher Energy Corp.
HISTORY OF RANCHER ENERGY CORP.
We are an independent energy company engaged in the development,
production, and marketing of oil and gas in North America. Our business strategy
is to use modern tertiary recovery techniques on older, historically productive
fields with proven in-place oil and gas. Higher oil and gas prices and advances
in technology such as 3-D seismic acquisition and evaluation and carbon dioxide
(CO2) injection and sequestration, should position us to capitalize on
attractive sources of potentially recoverable oil and gas.
From January 2007 through March 2011, we operated four fields in the
Powder River Basin, Wyoming, which is located in the Rocky Mountain region of
the United States. The fields, acquired in December 2006 and January 2007, are
the South Glenrock B Field, the Big Muddy Field, the Cole Creek South Field and
the South Glenrock A Field. All four fields currently produce some oil and
reservoir engineering studies indicate significant volumes of crude oil could be
recovered through the use of secondary and tertiary recovery techniques.
Effective March 1, 2011, we sold all of our interest in the four fields to Linc
Energy Petroleum (Wyoming), Inc. as part of the Chapter 11 Bankruptcy proceeding
discussed below.
Rancher's main emphasis going forward will be to acquire, either by
lease, farmout, or purchase, an interest in oil or gas prospects or properties
for exploration, when available, with third parties.
COMPANY OVERVIEW
General
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Our headquarters office is located in Denver, Colorado where we employ
three persons, including one executive officer.
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Incorporation, Organization and Management
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We were incorporated on February 4, 2004, as Metalex Resources, Inc.,
in the State of Nevada. Prior to April 2006, we were engaged in the exploration
of a gold prospect in British Columbia, Canada. Metalex found no commercially
exploitable deposits or reserves of gold. During April 2006, our stockholders
voted to change our name to Rancher Energy Corp.
Chapter 11 Reorganization
-------------------------
On October 15, 2009, a Note Payable (the "Note") issued by the Company
to GasRock Capital LLC ("GasRock" or the "Lender") in October 2007 became due
and payable. We were unable to pay the amount due of approximately $10.2
million, and we were unsuccessful in reaching agreement with GasRock to extend
the term or otherwise modify the terms of the Note. On October 16, 2009, GasRock
notified us of the existence of an event of default and of their intention to
foreclose on the assets that secured the Note. On October 21, 2009, GasRock gave
instructions to our bank to transfer all funds held in our operating account to
GasRock, leaving us without funds to conduct operations, pay staff or generally
operate our business. On October 28, 2009, the Company filed a voluntary
petition (the "petition") for relief in the United States Bankruptcy Court (the
"Court"), District of Colorado under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code").
As a result of the Chapter 11 filing we continue to operate our
business as "debtor-in-possession" under the jurisdiction of the Court and in
accordance with the applicable provisions of the Bankruptcy Code and the order
of the Court, as we devote renewed efforts to resolve our liquidity problems and
develop a reorganization plan. In November 2009, the Court approved an interim
order for our Use of Cash Collateral. The interim order for continued Use of
Cash Collateral has since been extended by the Court on several occasions. As of
the date of filing this annual report, we continue to use cash collateral under
the authority of the Court, until such time as the Company is dismissed from
bankruptcy proceedings.
On January 26, 2011, the Court granted the Company's Motion to
Approve Debtor-In-Possession Secured Financing from Linc Energy Petroleum
(Wyoming), Inc. ("Linc Energy."). On January 28, 2011, the financing with Linc
Energy was closed and distributed to the Company.
The Debtor-In-Possession Financing provided for the following:
- Authorizing the Company to borrow up to a maximum of $14,700,000 from
Linc Energy, for the limited purposes of: (a) paying the GasRock
Capital, LLC debt ("GasRock Debt") in the amount of $13,653,698, in
full; (b) holding the Carve-Out Amount ($100,000 to be used to pay
actual administrative expenses) in the Carve-Out Account until the
close of the Sale; (c) paying pre-petition ad valorem taxes with
respect to Real Property located in Wyoming; (d) funding the Escrow
Amount into an interest bearing account to be maintained and disbursed
pursuant to the terms and conditions of the Escrow Agreement; and (e)
other purposes with the prior written consent of Lender, in its sole
and absolute discretion.
- In exchange for such funds, the Company granted to Linc Energy valid
and perfected first priority security interests in and liens on all of
Rancher's assets ("the Collateral"), which Collateral includes but is
not limited to (a) Rancher's interests in oil and gas producing
properties; (b) accounts receivable; (c) equipment; (d) general
intangibles; (e) accounts; (f) deposit accounts; and (g) all other
real and personal property of Rancher, except for the Carve-Out
Amount.
On February 24, 2011, the Court granted the Company's Motion For
Order Authorizing (I) Sale of Substantially All of the Debtor's Assets; and (II)
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Assumption and Assignment of Certain Executory Contracts and Unexpired Leases
pursuant to an Asset Purchase Agreement with Linc Energy, dated as of December
20, 2010.
On March 15, 2011, effective as of March 1, 2011, the Company closed on
the sale of substantially all of its assets pursuant to the Asset and Purchase
Agreement with Linc Energy. In exchange for cash of $20 million plus other
potential future consideration up to $825,000, and subject to other adjustments
as specified in the Asset Purchase Agreement, the Company sold all right, title
and interest in and to substantially all operating assets, properties, rights
and business of every kind, character and description, to the extent owned, held
or primarily used in the conduct of the Company's business. Funds from the sale
of assets were primarily used to pay outstanding principal and accrued interest
on a Debtor-In-Possession Loan.
Following the closing of the sale, the Company began the process of
developing and confirming its proposed plan of reorganization and pay creditors
pursuant thereto, and therefore the amount of cash immediately following closing
does not represent the amount of cash that the Company anticipates having
following payment of its creditors, administrative expenses and other items.
Business Strategy
Emergence From Bankruptcy
-------------------------
As discussed above, we are evaluating strategic operations alternatives
in an effort to develop a plan of reorganization that will satisfy the
requirements of the Court and enable us to meet our pre-petition obligations and
ultimately to emerge from Bankruptcy. There is no certainty that we will be
successful in completing a plan of reorganization that it will be confirmed by
the Court. If we are not successful in presenting a plan of reorganization
within the prescribed time or if any such plan of reorganization is not
confirmed by the Court, any party in interest may file a plan of reorganization
for us or move to have the case converted to a case under Chapter 7.
New Prospect Criteria
---------------------
The Company will consider the following criteria when evaluating
whether to acquire an oil and gas prospect:
1) proximity to existing production;
2) depth of existing production;
3) location in a known producing region;
4) whether there is well control data from nearby drill sites;
5) geologic evaluations by local geologists of production potential;
6) reasonable cost of acquisition;
7) term of lease and drilling commitment, if any; and
8) reasonable drilling cost estimates.
COMPETITION, MARKETS, REGULATION AND TAXATION
Competition
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There are a large number of companies and individuals engaged in the
exploration for minerals and oil and gas; accordingly, there is a high degree of
competition for desirable properties. Almost all of the companies and
individuals so engaged have substantially financial resources than Rancher does.
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Markets
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The availability of a ready market for oil and gas discovered, if any,
will depend on numerous factors beyond the Company's control, including the
proximity and capacity of refineries, pipelines, and the effect of state
regulation of production and of federal regulations of products sold in
interstate commerce, and recent intrastate sales. The market price of oil and
gas are volatile and beyond the Company's control. The market for natural gas is
also unsettled, and gas prices have increased dramatically in the past four
years with substantial fluctuation, seasonally and annually.
There generally are only a limited number of gas transmission companies
with existing pipelines in the vicinity of a gas well or wells. In the event
that producing gas properties are not subject to purchase contracts or that any
such contracts terminate and other parties do not purchase the Company's gas
production, there is no assurance that Rancher will be able to enter into
purchase contracts with any transmission companies or other purchasers of
natural gas and there can be no assurance regarding the price which such
purchasers would be willing to pay for such gas. There presently exists an
oversupply of gas in the certain areas of the marketplace due to pipeline
capacity, the extent and duration of which is not known. Such oversupply may
result in restrictions of purchases by principal gas pipeline purchasers.
Effect of Changing Industry Conditions on Drilling Activity
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Lower oil and gas prices have caused a decline in drilling activity in
the U.S. from time to time. However, such reduced activity has also resulted in
a decline in drilling costs, lease acquisition costs and equipment costs, and an
improvement in the terms under which drilling prospects are generally available.
Rancher cannot predict what oil and gas prices will be in the future and what
effect those prices may have on drilling activity in general, or on its ability
to generate economic drilling prospects and to raise the necessary funds with
which to drill them.
Federal and State Regulations
Governmental Regulation and Environmental Consideration
-------------------------------------------------------
Numerous Federal and state laws and regulations govern the oil and gas
industry. These laws and regulations are often changed in response to changes in
the political or economic environment. Compliance with this evolving regulatory
burden is often difficult and costly and substantial penalties may be incurred
for noncompliance. The following section describes some specific laws and
regulations that may affect us. We cannot predict the impact of these or future
legislative or regulatory initiatives Federal income and "windfall profit" taxes
have in the past affected the economic viability of such properties.
The above paragraphs only give a brief overview of potential state and
federal regulations. Because the Company has only acquired specific properties,
and because of the wide range of activities in which Rancher may participate, it
is impossible to set forth in detail the potential impact federal and state
regulations may have on the Company.
Bankruptcy Proceedings
----------------------
Since filing a voluntary petition for relief in the United States
Bankruptcy Court on October 28, 2009, we have operated as a debtor-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the U.S. Bankruptcy Code and orders of the Bankruptcy
Court.
Environmental Laws and Regulations
----------------------------------
Various Federal, state, and local laws regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, directly impact oil and gas exploration, development, and
production operations and consequently may impact our operations and costs.
These regulations include, among others (i) regulations by the EPA and various
state agencies regarding approved methods of disposal for certain hazardous and
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nonhazardous wastes; (ii) the Comprehensive Environmental Response, Compensation
and Liability Act, Federal Resource Conservation and Recovery Act, and analogous
state laws that regulate the removal or remediation of previously disposed
wastes (including wastes disposed of or released by prior owners or operators),
property contamination (including groundwater contamination), and remedial
plugging operations to prevent future contamination; (iii) the Clean Air Act and
comparable state and local requirements, which may result in the gradual
imposition of certain pollution control requirements with respect to air
emissions from our operations; (iv) the Oil Pollution Act of 1990, which
contains numerous requirements relating to the prevention of and response to oil
spills into waters of the United States; (v) the Resource Conservation and
Recovery Act, which is the principal Federal statute governing the treatment,
storage, and disposal of hazardous wastes; and (vi) state regulations and
statutes governing the handling, treatment, storage, and disposal of naturally
occurring radioactive material.
Rancher's operations are subject to local, state and federal laws and
regulations governing environmental quality and pollution control. To date the
Company's compliance with these regulations has had no material effect on its
operations, capital, earnings, or competitive position, and the cost of such
compliance has not been material. The Company is unable to assess or predict at
this time what effect additional regulations or legislation could have on its
activities.
Oil and gas exploration and development are specifically subject to
existing federal and state laws and regulations governing environmental quality
and pollution control. Such laws and regulations may substantially increase the
costs of exploring for, developing, or producing oil and gas and may prevent or
delay the commencement or continuation of a given operation.
All of Rancher operations involving the exploration for or the
production of any minerals are subject to existing laws and regulations relating
to exploration procedures, safety precautions, employee health and safety, air
quality standards, pollution of stream and fresh water sources, odor, noise,
dust, and other environmental protection controls adopted by federal, state and
local governmental authorities as well as the right of adjoining property
owners. Rancher may be required to prepare and present to federal, state or
local authorities data pertaining to the effect or impact that any proposed
exploration for or production of minerals may have upon the environment. All
requirements imposed by any such authorities may be costly, time consuming, and
may delay commencement or continuation of exploration or production operations.
It may be anticipated that future legislation will significantly
emphasize the protection of the environment, and that, as a consequence, the
Company's activities may be more closely regulated to further the cause of
environmental protection. Such legislation, as well as future interpretation of
existing laws, may require substantial increases in equipment and operating
costs to the Company and delays, interruptions, or a termination of operations,
the extent to which cannot now be predicted.
Crude Oil and Natural Gas Liquids Price and Allocation Regulation
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Pursuant to Executive Order Number 12287, issued January 28, 1981,
President Reagan lifted all existing federal price and allocation controls over
the sale and distribution of crude oil and natural gas liquids. Executive Order
Number 12287 was made effective as of January 28, 1981, and consequently, sales
of crude oil and natural gas liquids after January 27, 1981 are free from
federal regulation. The price for such sales and the supplier-purchaser
relationship will be determined by private contract and prevailing market
conditions. As a result of this action, oil which may be sold by Rancher will be
sold at deregulated or free market prices. At various times, certain groups have
advocated the reestablishment of regulations and control on the sale of domestic
oil and gas.
6
Proposed Legislation
--------------------
A number of legislative proposals have been and probably will continue
to be introduced in Congress and in the legislatures of various states, which,
if enacted, would significantly affect the petroleum industries. Such proposals
and executive actions involve, among other things, the imposition of land use
controls such as prohibiting drilling activities on certain federal and state
lands in roadless wilderness areas. At present, it is impossible to predict what
proposals, if any, will actually be enacted by Congress or the various state
legislatures and what effect, if any, such proposals will have. However,
President Clinton's establishment of numerous National Monuments by executive
order has had the effect of precluding drilling across vast areas of the Rocky
Mountain West.
Title to Properties
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As is customary in the oil and gas industry, a preliminary title
examination will be conducted at the time unproved properties or interests are
acquired by us. Prior to commencement of drilling operations on such acreage and
prior to the acquisition of proved properties, Rancher will conduct a title
examination and attempt extremely significant defects before proceeding with
operations or the acquisition of proved properties, as it may deem appropriate.
Government Contracts
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The Company has no government contracts.
Number of Persons Employed
--------------------------
As of March 31, 2011, Rancher had 3 employees. Directors work on an as
needed basis.
ITEM 1A. RISK FACTORS
FORWARD LOOKING STATEMENTS
This document includes forward-looking statements, including, without
limitation, statements relating to Rancher plans, strategies, objectives,
expectations, intentions and adequacy of resources. These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause Rancher actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. These factors include,
among others, the following: ability of Rancher to implement its business
strategy; ability to obtain additional financing; Rancher limited operating
history; unknown liabilities associated with future acquisitions; ability to
manage growth; significant competition; ability to attract and retain talented
employees; and future government regulations; and other factors described in
this registration statement or in other of Rancher filings with the Securities
and Exchange Commission. Rancher is under no obligation, to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Risk Factors
Our pending bankruptcy raises questions as to our ability to continue as a going
concern and may limit our ability to borrow additional funds, issue equity or
capitalize on acquisition or other business opportunities and preserve the value
of our equity.
On October 28, 2009, we filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Our bankruptcy filing was made after defaulting on the
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terms of our senior secured debt and being notified by the lender of their
intention to foreclose on the assets held as collateral for the debt.
As of March 31, 2011, and as of the filing of this annual report, we
continued to operate as a debtor-in-possession in the Chapter 11 case. We are in
the process of developing a plan of reorganization to resolve pre-petition
obligations; however, there is no assurance that any such plan of reorganization
will ultimately be confirmed and become effective, nor is there any assurance
that the ultimate terms of our exit from bankruptcy will preserve the rights of
our existing equity holders in whole or at all. Accordingly, our equity holders
continue to be subject to a risk that we will not be able to successfully emerge
from bankruptcy or that rights of the equity holders will be diminished
substantially or eliminated entirely.
Presently our only source of cash to pay for operating activities and
overhead is proceeds from the sale of Rancher's assets, interest earned on our
cash, and monthly proceeds from Merit Energy. Under a litigation agreement with
Linc Energy entered into as part of the sale to Linc Energy, the Company is
entitled to reimbursement for some legal fees incurred in ongoing litigation
with GasRock concerning the prepetition conveyance of certain oil and gas
interests to GasRock. At the same time, GasRock has asserted a claim against the
Company for its litigation fees.
We are operating as a debtor-in possession under the authorization of the US
Bankruptcy Court and provisions of the U.S. Bankruptcy Code.
Under the priority scheme established by the Bankruptcy Code, unless
creditors agree otherwise, post-petition liabilities and pre-petition
liabilities must be satisfied in full before shareholders of the Company are
entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery, if any, to shareholders of the Company
will not be determined until confirmation and consummation of a plan of
reorganization. No assurance can be given as to what values, if any, will be
ascribed in the bankruptcy case to shareholders or what types or amounts of
distributions, if any, they would receive. Accordingly, the Company urges that
extreme caution be exercised with respect to existing and future investments in
any of the Company's liabilities and/or securities.
Our status as debtor-in-possession may adversely affect our ability to find and
develop reserves.
There is no assurance that we will be able to secure financing on
acceptable terms, or that we will be able to successfully operate following the
Chapter 11 case, any of which could result in a total loss to our Company and
our shareholders. While in Chapter 11, the Company is unable to obtain any
financing, without the Court's approval and potential financers or acquisition
possibilities, may be unwilling to wait the amount time needed for the Company
to obtain that approval.
If a plan of reorganization is not approved by the Court, we could be forced to
sell our remaining assets and liquidate the company.
If we are not successful in presenting a plan of reorganization within
the prescribed time or if any such plan of reorganization is not confirmed by
the court, any party in interest may file a plan of reorganization for us, which
could result in the forced sale of our remaining assets and liquidation of the
Company to satisfy our pre-petition obligations.
We have incurred losses from operations in the past and expect to do so in the
future.
We have never been profitable. We incurred net losses of $674,059 and
$20,261,262 for the fiscal years ended March 31, 2011 and 2010, respectively. We
do not expect to be profitable during the fiscal year ending March 31, 2012. Our
8
acquisition and development of prospects will require substantial additional
capital expenditures in the future. The uncertainty and factors described
throughout this section may impede our ability to economically acquire, develop,
and exploit oil reserves. As a result, we may not be able to achieve or sustain
profitability or positive cash flows from operating activities in the future.
The Company will need additional financing for which Rancher has no commitments,
and this may jeopardize execution of the Company's business plan.
Rancher has limited funds, and such funds may not be adequate to carry
a business plan in the energy industry. The Company's ultimate success depends
upon its ability to raise additional capital. The Company has not investigated
the availability, source, or terms that might govern the acquisition of
additional capital and will not do so until it determines the exact need for
additional financing and what amounts, if any, may be needed. If the Company
needs additional capital, it has no assurance that funds will be available from
any source or, if available, that they can be obtained on terms acceptable to
the Company and/or Bankruptcy Court. If not available, Rancher operations will
be limited to those that can be financed with its modest capital.
Rancher is not diversified and it will be dependent on only one business.
Because of the limited financial resources that the Company has, it is
unlikely that the Company will be able to diversify its operations. Rancher
probable inability to diversify its activities into more than one area will
subject the Company to economic fluctuations within the energy industry and
therefore increase the risks associated with the Company's operations due to
lack of diversification.
Our failure to maintain effective internal control over financial reporting may
not allow us to accurately report our financial results, which could cause our
financial statements to become materially misleading and adversely affect the
trading price of our stock.
In our annual reports on Form 10-K for the fiscal years ended March 31,
2011 and 2010, we reported the determination of our management that we had a
material weakness in our internal control over financial reporting. The
determination was made by management that we did not adequately segregate duties
of different personnel in our accounting department due to an insufficient
complement of staff and inadequate management oversight. While we have made
progress in remediating the weakness, we have not completely remediated it,
primarily due to limited resources to add experienced staff. Until we obtain
sufficient financing we will not be able to correct the material weakness in our
internal control over financial reporting, and our business could be harmed and
the stock price of our common stock could be adversely affected.
RISK FACTORS RELATING TO THE COMPANY'S BUSINESS
Rancher business, the oil and gas business, has numerous risks which could
render the Company unsuccessful.
The search for new oil and gas reserves frequently results in
unprofitable efforts, not only from dry holes, but also from wells which, though
productive, will not produce oil or gas in sufficient quantities to return a
profit on the costs incurred. There is no assurance the Company will find or
produce oil or gas from any of the undeveloped acreage farmed out to Rancher or
which may be acquired by the Company, nor are there any assurances that if
Rancher ever obtains any production it will be profitable. (See "Business and
Properties")
9
Competition in the oil and gas industry is intense, which may adversely affect
our ability to succeed.
The oil and gas industry is intensely competitive and we compete with
companies that are significantly larger and have greater resources. Many of
these companies not only explore for and produce oil, but also carry on refining
operations and market petroleum and other products on a regional, national, or
worldwide basis. These companies may be able to pay more for oil properties and
prospects or define, evaluate, bid for, and purchase a greater number of
properties and prospects than our financial or human resources permit. Our
larger competitors may be able to absorb the burden of present and future
Federal, state, local, and other laws and regulations more easily than we can,
which would adversely affect our competitive position. Our ability to acquire
additional properties and to increase reserves in the future will be dependent
upon our ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
Rancher will be subject to all of the market forces in the energy business, many
of which could pose a significant risk to the Company's operations.
The marketing of natural gas and oil which may be produced by the
Company's prospects will be affected by a number of factors beyond the Company's
control. These factors include the extent of the supply of oil or gas in the
market, the availability of competitive fuels, crude oil imports, the world-wide
political situation, price regulation, and other factors. Current economic and
market conditions have created dramatic fluctuations in oil prices. Any
significant decrease in the market prices of oil and gas could materially affect
the Company's profitability of oil and gas activities.
There generally are only a limited number of gas transmission companies
with existing pipelines in the vicinity of a gas well or wells. In the event
that producing gas properties are not subject to purchase contracts or that any
such contracts terminate and other parties do not purchase the Company's gas
production, there is assurance that Rancher will be able to enter into purchase
contracts with any transmission companies or other purchasers of natural gas and
there can be no assurance regarding the price which such purchasers would be
willing to pay for such gas. There may, on occasion, be an oversupply of gas in
the marketplace or in pipelines, the extent and duration may affect prices
adversely. Such oversupply may result in reductions of purchases and prices paid
to producers by principal gas pipeline purchasers. (See "Our Business and
Competition, Markets, Regulation and Taxation.")
Rancher business is subject to significant weather interruptions.
The Company's activities may be subject to periodic interruptions due
to weather conditions. Weather-imposed restrictions during certain times of the
year on roads accessing properties could adversely affect its ability to benefit
from production on such properties or could increase the costs of drilling new
wells because of delays.
Rancher will require significant financing to fund any future activities.
If Rancher finds oil and gas reserves to exist on a prospect it will
need substantial additional financing to fund the necessary exploration and
development work. Furthermore, if the results of that exploration and
development work are successful, the Company will need substantial additional
funds for continued development. There is no assurance that the Company will be
successful in obtaining any financing. These various financing alternatives may
dilute the interest of Rancher shareholders and/or reduce the Company's interest
in the properties.
The Company is subject to Federal Income Tax laws and changes therein which
could adversely impact us.
Federal income tax laws are of particular significance to the oil and
gas industry in which the Company intends to engage. Legislation has eroded
various benefits of oil and gas producers and subsequent legislation could
continue this trend. Congress is continually considering proposals with respect
10
to Federal income taxation which could have a material adverse effect on Rancher
future operations and on its ability to obtain risk capital which Rancher's
industry has traditionally attracted from taxpayers in high tax brackets.
Rancher is subject to substantial government regulation in the energy industry
which could adversely impact the Company.
The production and sale of oil and gas are subject to regulation by
state and federal authorities, the spacing of wells and the prevention of waste.
There are both federal and state laws regarding environmental controls which may
necessitate significant capital outlays, resulting in extended delays,
materially affect Rancher earnings potential and cause material changes in the
in the Company's proposed business. Rancher cannot predict what legislation, if
any, may be passed by Congress or state legislatures in the future, or the
effect of such legislation, if any, on the Company. Such regulations may have a
significant effect on the Company's operating results.
Government Regulations: The area of exploration of natural resources
has become significantly regulated by state and federal governmental agencies,
and such regulation could have an adverse effect on the Company's operations.
Compliance with statutes and regulations governing the oil and gas industry
could significantly increase the capital expenditures necessary to develop the
Company's prospects.
Nature of Rancher's Business: Rancher business is highly speculative,
involves the commitment of high-risk capital, and exposes the Company to
potentially substantial losses. In addition, the Company will be in direct
competition with other organizations which are significantly better financed
than Rancher.
General Economic and Other Conditions: The Company's business may be
adversely affected from time to time by such matters as changes in general
economic, industrial and international conditions; changes in taxes; oil and gas
prices and costs; excess supplies and other factors of a general nature.
Rancher will experience substantial competition for supplies in the energy
industry.
The Company will be required to compete with a large number of entities
which are larger, have greater resources and more extensive operating histories
than the Company does. Shortages of supplies may result from this competition
and will lead to increased costs and delays in operations which will have a
material adverse effect on the Company.
Rancher will be subject to many factors beyond the Company's control.
The acquisition, exploration, development, production and sale of oil
and gas are subject to many factors which are outside the Company's control.
These factors include general economic conditions, proximities to pipelines, oil
import quotas, supply and price of other fuels and the regulation of
transportation by federal and state governmental authorities.
The Company anticipates substantial competition in its effort to explore oil and
gas properties and may have difficulty in putting together drilling participants
and getting prospects drilled and explored. Established companies have an
advantage over Rancher because of substantially greater resources to devote to
property acquisition and to obtain drilling rigs, equipment and personnel. If
the Company is unable to compete for capital, participation and drilling rigs,
equipment and personnel, Rancher business will be adversely affected.
11
The Company has agreed to indemnification of officers and directors as is
provided by Nevada Statute.
Nevada Statutes provide for the indemnification of the Company's
directors, officers, employees, and agents, under certain circumstances, against
attorney's fees and other expenses incurred by them in any litigation to which
they become a party arising from their association with or activities on
Rancher's behalf. The Company will also bear the expenses of such litigation for
any of its directors, officers, employees, or agents, upon such person's promise
to repay Rancher therefore if it is ultimately determined that any such person
shall not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by the Company that it may be unable to
recoup.
Rancher directors' liability to the Company and shareholders is limited
Nevada Corporate Statutes exclude personal liability of the Company's
directors and its stockholders for monetary damages for breach of fiduciary duty
except in certain specified circumstances. Accordingly, Rancher will have a much
more limited right of action against its directors than otherwise might be the
case. This provision does not affect the liability of any director under federal
or applicable state securities laws.
Rancher may depend upon outside advisors
To supplement the business experience of the Company's officers and
directors, Rancher may be required to employ accountants, technical experts,
appraisers, attorneys, or other consultants or advisors. The Company's Board,
will make the selection of any such advisors. Furthermore, the Company
anticipates that such persons will be engaged on an "as needed" basis without a
continuing fiduciary or other obligation to Rancher.
RISK FACTORS RELATED TO OUR STOCK
We are operating as a debtor-in possession under the authorization of the U.S.
Bankruptcy Court and provisions of the U.S. Bankruptcy Code.
Under the priority scheme established by the Bankruptcy Code, unless
creditors agree otherwise, post-petition liabilities and pre-petition
liabilities must be satisfied in full before shareholders of the Company are
entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery, if any, to shareholders of the Company
will not be determined until confirmation and consummation of a plan of
reorganization and the final resolution of the objections to claims and of the
adversary proceeding against GasRock. No assurance can be given as to what
values, if any, will be ascribed in the bankruptcy case to shareholders or what
types or amounts of distributions, if any, they would receive. Accordingly, the
Company urges that extreme caution be exercised with respect to existing and
future investments in any of the Company's liabilities and/or securities.
The regulation of "penny stocks" by SEC and FINRA may discourage the tradability
of the Company's securities.
Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the
definition of a "penny stock," as any equity security that has a minimum bid
price of less than $4.00 per share or with an exercise price of less than $4.00
per share, subject to a limited number of exceptions which are likely not
available to us. Based on the recent trading prices of our common stock, we are
considered a penny stock and it is likely that our shares will be considered to
be penny stocks for the immediately foreseeable future. This classification
severely and adversely affects any market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny
stock rules require that a broker or dealer approve an investor's account for
transactions in penny stocks and the broker or dealer receive from the investor
a written agreement to the transaction setting forth the identity and quantity
of the penny stock to be purchased. In order to approve a customer's account for
transactions in penny stocks, the broker or dealer must obtain financial
12
information and investment experience and objectives of the customer and make a
reasonable determination that the transactions in penny stocks are suitable for
that customer and that they have sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prepared by the SEC relating to the penny
stock market, which, in highlight form, sets forth the basis on which the broker
or dealer made the suitability determination, and that the broker or dealer
received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about (a) the risks of investing in
penny stock in both public offerings and in secondary trading; (b) commissions
payable to both the broker-dealer and the registered representative; (c) current
quotations for the securities; and (d) the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in
the above-referenced required paperwork and disclosures. In addition, they may
encounter difficulties when attempting to sell shares of our common stock, which
may affect the ability of selling shareholders or other holders to sell their
shares in any secondary market. These additional sales practices and disclosure
requirements may impede the sale of our securities and the liquidity for our
securities may decrease, with a corresponding decrease in the price of our
securities. Our shares, in all probability, will be considered subject to such
penny stock rules for the foreseeable future, and our shareholders may, as a
result, find it difficult to sell their securities.
Rancher will pay no foreseeable dividends in the future.
Rancher has not paid dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future.
The Company may in the future issue more shares which could cause a loss of
control by its present management and current stockholders.
Rancher may issue further shares as consideration for the cash or
assets or services out of its authorized but unissued common stock that would,
upon issuance, represent a majority of the voting power and equity of the
Company. The result of such an issuance would be those new stockholders and
management would control the Company, and persons unknown could replace the
Company's management at this time. Such an occurrence would result in a greatly
reduced percentage of ownership of Rancher by its current shareholders, which
could present significant risks to investors.
Rule 144 sales in the future may have a depressive effect on Rancher stock
price.
All of the outstanding shares of common stock held by the Company's
present officers, directors, and affiliate stockholders are "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933, as
amended. As restricted Shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or other
applicable exemptions from registration under the Act and as required under
applicable state securities laws. We have registered the outstanding shares held
by our officers, directors and affiliates, these individuals will be able to
sell their shares, if a public market for our stock develops. Rule 144 provides
in essence that a person who has held restricted securities for six months,
under certain conditions, can sell every three months, in brokerage
transactions, a number of shares that does not exceed the greater of 1.0% of a
company's outstanding common stock or the average weekly trading volume during
13
the four calendar weeks prior to the sale. There is no limit on the amount of
restricted securities that may be sold by a nonaffiliate after the owner has
held the restricted securities for a period of two years. A sale under Rule 144
or under any other exemption from the Act, if available, or pursuant to
subsequent registration of shares of common stock of present stockholders, may
have a depressive effect upon the price of the common stock in any market that
may develop.
Rancher stock is thinly traded and as a result you may be unable to sell at or
near ask prices or at all if you need to liquidate your shares.
Our common stock is thinly-traded on the OTC Pink, or the OTC's
speculative trading marketplace. The OTC Pink typically offers less liquidity
that other trading markets, meaning that the number of persons interested in
purchasing the Company's common shares at or near ask prices at any given time
may be relatively small or non-existent. This situation is attributable to a
number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if it came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven, early stage company
such as Rancher or purchase or recommend the purchase of any of our common stock
until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in the our common
stock is minimal or non-existent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on the stock price. Rancher cannot
give you any assurance that a broader or more active public trading market for
the Company's common stock will develop or be sustained, or that any trading
levels will be sustained. Due to these conditions, the Company can give
investors no assurance that they will be able to sell their shares at or near
ask prices or at all if they need money or otherwise desire to liquidate their
shares in the Company.
There are risks associated with forward-looking statements made by us and actual
results may differ.
Some of the information in this Annual Report contains forward-looking
statements that involve substantial risks and uncertainties. These statements
can be identified by the use of forward-looking words such as "may", "will",
"expect", "anticipate", "believe", "estimate", and "continue", or similar words.
Statements that contain these words should be read carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict
and/or over which we have no control. The risk factors listed in this section,
other risk factors about which we may not be aware, as well as any cautionary
language in this Annual Report, provide examples of risks, uncertainties, and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. The occurrence of
the events described in these risk factors could have an adverse affect on our
business, results of operations, and financial condition.
Our failure to maintain effective internal control over financial reporting may
not allow us to accurately report our financial results, which could cause our
financial statements to become materially misleading and adversely affect the
trading price of our stock.
14
In our annual reports on Form 10-K for the fiscal years ended March 31,
2011 and 2010, we reported the determination of our management that we had a
material weakness in our internal control over financial reporting. The
determination was made by management that we did not adequately segregate duties
of different personnel in our accounting department due to an insufficient
complement of staff and inadequate management oversight. While we have made
progress in remediating the weakness, we have not completely remediated it,
primarily due to limited resources to add experienced staff. Until we obtain
sufficient financing we will not be able to correct the material weakness in our
internal control over financial reporting, and our business could be harmed and
the stock price of our common stock could be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
Rancher Energy Corp. is located at 999 18th Street, Suite 2700, Denver,
Colorado 80202. In March 2011, we entered into a lease for three offices for a
period of 1 year.
DESCRIPTION OF PROPERTIES/ASSETS/OIL AND GAS PROSPECTS
(a) Real Estate. None.
(b) Title to properties. None.
(c) Oil and Gas Prospects. None.
(d) Patents. None.
Rancher does not own any property, real or otherwise.
ITEM 3. LEGAL PROCEEDINGS
On October 28, 2009, the Company filed a voluntary petition (the
"petition") for relief in the United States Bankruptcy Court (the "Court"),
District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code.
(the "Bankruptcy Code"). The Bankruptcy proceedings are discussed in further
detail in Item 1 of this filing.
On February 12, 2010, the Company filed an adversary proceeding in the
Bankruptcy Court against GasRock Capital LLC, Case No. 10-01173-MER. The
complaint seeks to recover the 10% NPI conveyed to GasRock in connection with
the Eighth Amendment to the Term Credit Agreement and the additional 1% ORRI
conveyed to the Lender in October 2008 in connection with an extension of the
short term note. The primary basis of the complaint is that the Lender gave less
than fair equivalent value for the conveyances at a time when the Company was
insolvent, or when the conveyances left the Company with insufficient capital.
In other words, the Company has claimed that the value of the conveyances was in
excess of a reasonable fee for the extensions, and, as a result, the conveyances
were "constructively fraudulent" under both applicable Bankruptcy law and the
Uniform Fraudulent Transfers Act.
In addition, the Company has challenged the conveyance of the NPI and
the 1% ORRI, together with the original 2% ORRI conveyed to Lender when its loan
was first made, on the grounds that they should be recharacterized as security
interests and not outright transfers of title. The Bankruptcy Court has granted
GasRock's motion to dismiss these claims. The Company has also claimed that the
conveyances rendered the Loan usurious under Texas law. Further, the Company has
sought to have the NPI and 1% ORRI avoided as preferences under ss. 547 of the
Bankruptcy Code and to equitably subordinate the Lender's claim. Although the
15
Company believes its claims are well-taken, the Lender is vigorously defending
against the complaint, and no assurance can be given that the Company will be
successful in whole or in part.
In a letter dated February 18, 2009, sent to each of our then Directors,
attorneys representing a group of persons who purchased approximately $1,800,000
of securities (in the aggregate) in our private placement offering commenced in
late 2006 alleged that securities laws were violated in that offering. In April
2009, we entered into tolling agreements with the purchasers to toll the
statutes of limitations applicable to any claims related to the private
placement. In February 2009, our Board of Directors established a Special
Committee of the Board (the "Special Committee") to investigate the allegations.
Following the completion of the investigation, the Special Committee recommended
no action be taken. We deny the allegations and believe they are without merit.
The claimants have filed Proof of Claims with the Bankruptcy Court in the amount
of $1,776,050 plus ancillary amounts purported to be damages attributable to the
alleged securities violations. The Company objected to the claims and asked the
Bankruptcy Court to subordinate the claims to the level of equity. In June 2011,
the Bankruptcy Court rendered a decision that these claims are subordinated to
unsecured claims. We cannot predict the possible outcome of any further
objection to these claims, or estimate a range of possible losses, if any, that
could result in the event of an adverse judgment.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
--------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
Market Information
Our Common Stock is quoted on the OTC Bulletin Board and traded under
the symbol "RNCH" prior to our filing for protection under the U.S. Bankruptcy
Code, our stock has been trading under the symbol "RNCHQ" since October 28,
2009. For the periods indicated, the following table sets forth the high and low
bid prices per share of our common stock as reported by the OTC Bulletin Board.
These prices represent inter-dealer quotations without retail markup, markdown,
or commission and may not necessarily represent actual transactions.
Fiscal Year 2011 High Bid Low Bid
-----------------------------------------------------------------
First Quarter $ 0.035 $ 0.028
Second Quarter $ 0.027 $ 0.011
Third Quarter $ 0.02 $ 0.009
Fourth Quarter $ 0.065 $ 0.009
Fiscal Year 2010
First Quarter $ 0.044 $ 0.012
Second Quarter $ 0.065 $ 0.023
Third Quarter $ 0.09 $ 0.01
Fourth Quarter $ 0.04 $ 0.006
Holders
There were approximately 185 holders of record of Rancher common stock
as of March 31, 2011. This does not include any beneficial owners for whom
shares may be held in "nominee" or "street name."
16
Dividend Policy
Holders of Rancher common stock are entitled to receive such dividends
as may be declared by Rancher board of directors. The Company has not declared
or paid any dividends on Rancher common shares and it does not plan on declaring
any dividends in the near future. The Company currently intends to use all
available funds to finance the operation and expansion of its business.
Recent Sales of Unregistered Securities
During the year ended March 31, 2011, we did not issue any securities.
During the year ended March 31, 2010, we issued the following
securities:
On October 27, 2009, under the provisions Management Retention
Agreements with each of our four directors, we granted each director an
option to purchase 2,500,000 shares of our common stock at a price of
$0.035 per share. These options vest 10% on the date of grant and 90%
upon the earliest to occur of the following:
1. November 1, 2010;
2. the confirmation by the Bankruptcy Court of a plan of
reorganization;
3. the dismissal from Chapter 11 Bankruptcy with the approval of the
Court;
4. an event of a merger, consolidation, sale of assets or other
transaction which results in the holders of the Company's common
stock immediately before such transaction owning less that 50% of
the stock outstanding immediately after the transaction;
5. any other forms of change of control;
6. a voluntary termination for good reason.
The foregoing transaction was made pursuant to Section 4(2) of the
Securities Act.
Pursuant to our 2006 Stock Incentive Plan (the 2006 Stock Incentive
Plan), we have granted options to purchase shares of the Company's
common stock to directors, officers, employees and consultants. As of
March 31, 2011, the following options were outstanding:
Number of Exercise
Date Granted To Options Price Vesting Term
---- ---------- ------- ----- ------- ----
April 10, 2007 Employees 31,000 $ 1.18 33.3% on 1st , 2nd and 3rd "
anniversaries of grant;
April 10, 2007 Consultant 25,000 $ 1.64 50% at 8/31/07 and 50% at "
2/29/08;
10% at date of grant, 90%
upon the earliest of
November 1, 2010 or
October 27, 2009 Employees 385,000 $ 0.035 change of control or 5 years
emergence from
October 27, 2009 Consultant 1,000,000 $ 0.035 bankruptcy, of change of
control.
--------------- 10% at date of grant, 90%
1,441,000 upon the earliest of
================ November 1, 2010 or
emergence from
bankruptcy, or change of 5 years
control.
17
The options granted to officers and employees are subject to early
termination of the individual's employment with us. The foregoing
transactions were made pursuant to Section 4(2) of the Securities Act.
As of March 31, 2011, options for 8,559,000 shares remain available for
issuance under the 2006 Stock Incentive Plan.
Issuer Purchases of Equity Securities
Rancher did not repurchase any shares of its common stock during the
year ended March 31, 2011.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
The independent registered public accounting firm's report on the Company's
financial statements as of December 31, 2011, and for each of the years in the
two-year period then ended, includes a "going concern" explanatory paragraph,
that describes substantial doubt about the Company's ability to continue as a
going concern.
Organization
We are an independent energy company that explores for and develops,
produces, and markets oil and gas in North America. Through March 2011, we
operated four oil fields in the Powder River Basin, Wyoming. Since October 28,
2009 we have been operating as debtor-in-possession under Chapter 11 of the
United States Bankruptcy Code. See "Proceedings Under Chapter 11" below.
Effective March 1, 2011, we sold all of our oil and gas properties,
which has allowed us to eliminate the majority of our debt and also provide
financial resources during our continuing reorganization.
18
The following summarizes our goals and objectives for the next twelve
months:
o Minimize our operating and administrative expenses while we are
reorganizing;
o Successfully emerge from bankruptcy under the provisions of an
approved plan of reorganization; and
o Pursue and analyze oil and gas related opportunities for us, should we
successfully emerge from bankruptcy.
Proceedings under Chapter 11
----------------------------
We acquired our oilfields in late 2006 and early 2007 with the
intention of significantly increasing crude oil production through an enhanced
oil recovery (EOR) project utilizing modern CO2 injection techniques. The
planned EOR project required a significant amount of capital to carry out. In
October 2007, we borrowed $12.24 million from GasRock Capital LLC (GasRock), an
investment bank, to serve as a "bridge loan" to enable us to complete plans for
the EOR project while we sought a larger, longer-term source of capital to
conduct the project. At least partially due to the severe disruptions in credit
and financial markets, coupled with extreme volatility in crude oil prices, we
were not successful in raising the capital to repay the bridge loan and commence
the project. Following a series of amendments to the GasRock loan agreement and
extensions of the maturity date, we were unable to repay the loan on the amended
due date of October 15, 2009. On October 16, 2009, GasRock notified us the
failure to repay the loan constituted an event of default and notified us of its
intention to foreclose on the assets pledged as collateral for the loan. GasRock
instructed our bank to transfer all cash we had on deposit to GasRock, leaving
us without funds to operate the oilfields or pay overhead.
On October 28, 2009 (the "Petition Date"), we filed a voluntary
petition for relief under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Colorado (the "Court") (Case number 09-32943). We continue to operate our
business as "debtor-in-possession" under the jurisdiction of the Court and in
accordance with the applicable provisions of the Bankruptcy Code and the order
of the Court, as we devote renewed efforts to resolve our liquidity problems and
develop a reorganization plan.
In November 2009, the Court granted our motion for interim use of cash
collateral. We immediately took steps to reduce operating costs and overhead,
including salary cuts of 10% - 20% for employees and the rejection of the office
lease for our corporate headquarters. In addition, we implemented a program of
repair and remediation on a number wells that had become non-producing,
resulting in a 25% increase in daily crude oil production as compared to
pre-petition production levels.
On October 15, 2010, the Company filed its proposed Debtor's Plan of
Reorganization ("Proposed Plan of Reorganization") with the Court. A proposed
Disclosure Statement was filed simultaneously with the Proposed Plan of
Reorganization.
On December 13, 2010, the Company filed its First Amended Proposed Plan
of Reorganization and Disclosure Statement for the amended Plan with the Court.
The Disclosure Statement must be first approved by the Court before
it may be sent to creditors, along with the Proposed Plan of Reorganization, for
approval. Prior to confirmation and approval by the Court, the Proposed Plan of
Reorganization is subject to further amendment. As of the filing date of this
report, the Court has not scheduled a hearing on the Proposed Plan of
Reorganization.
On December 15, 2010, the Company filed a motion with the
Court to approve financing from a party not affiliated with its present lender,
GasRock. This proposed financing was to repay GasRock in full and to pay certain
past due ad valorem taxes. On January 26, 2011, the Court granted the Company's
motion and approved the new debtor-in-possession secured financing ("DIP
19
Financing"). Under the DIP Financing, Linc Energy Petroleum (Wyoming), Inc.
("Linc Energy"), would lend the Company up to a maximum of $14,700,000 for
specified purposes, including repayment of amounts due to GasRock. In
consideration for the DIP Financing, the Company would grant Linc Energy valid
and perfected first priority security interests in, and liens on, all of the
Company's assets (the "Collateral"), which includes, but is not limited to, (a)
the Company's interests in oil and gas producing properties; (b) accounts
receivable; (c) equipment; (d) general intangibles; (e) accounts; (f) deposit
accounts; and (g) all other real and personal property of the Company, except
for the Carve-Out Amount, as defined.
On January 28, 2011, the terms of the DIP Financing were executed as
part of a debtor-in-possession credit agreement (the "DIP Credit Agreement") and
the Company received loan proceeds of just over $14 million, which were used as
follows:
o To pay the allowed, secured claim for past due ad valorem property
taxes in the amount of $532,000;
o To pay the secured claim of the then current Lender, GasRock Capital,
in the amount of $13,653,698, which represented principal outstanding,
unpaid interest, and all fees and expenses allowed per the terms of
the credit agreement with GasRock;
o To fund an escrow account established per the Order issued by the
Bankruptcy Court granting the motion to approve debtor-in-possession
secured financing. The escrow account was established with the
Company, prior lender, and current lender as parties until the
Bankruptcy Court enters a final order regarding certain fees and costs
claimed by the prior lender; and
o The remaining balance was used to fund certain fees and expenses
associated with the DIP Financing, totaling $186,235.
On December 20, 2010, the Company filed a motion to approve the sale of
substantially all of its assets to Linc Energy for the price of approximately
$20.0 million. On February 16, 2011, the Bankruptcy Court issued an order
approving the motion to sell substantially all of the Company's assets. The
closing of this sales transaction occurred March 14, 2011, with an effective
sale date of March 1, 2011. As a result of this sale, the Company recognized a
gain of over $4,807,000.
Immediately following this sales transaction, we vacated our office
space and abandoned leasehold improvements with carrying costs of $102,000.
On January 24, 2011, we filed an omnibus objection to the claims for
securities violations and rescission asserted by a shareholder group. The
claimants filed a response, and the Bankruptcy Court set a hearing for March 18,
2011 on whether the claimants were subject to subordination. A hearing occurred
on March 18, 2011 and the Bankruptcy Court entered a schedule for the Company
and the claimants to brief the disputed legal issues, which concluded April 15,
2011. In June 2011, the Bankruptcy Court rendered a decision that these claims
are subordinated to unsecured claims.
In February 2011, we filed objections to three proof of claims that had
been filed with the Bankruptcy Court. Hearings have been scheduled for two of
these claims (May 24, 2011and September 29, 2011), and as of the date of the
filing of this report no hearing has been scheduled for the third claim.
Results of Operations
With the sale of substantially all of the Company's assets in March,
2011, the discussion regarding the Company's results of operations are presented
as follows:
o A discussion of the results of the Company's continuing operations for
the year ended March 31, 2011 as compared to the year ended March 31,
2010; and
20
o A discussion of the results of the Company's discontinued operations
for the year ended March 31, 2011 as compared to the year ended March
31, 2010.
The Company's results of operations for the year ended March 31, 2011
as compared to the year ended March 31, 2010 should be read in conjunction with
our Financial Statements and the Notes to Financial Statements included in this
report.
Results of Continuing Operations for the year ended March 31, 2011 as
-----------------------------------------------------------------------
compared to the year ended March 31, 2010
-----------------------------------------
Overview. With respect to our continuing operations, for the year ended
March 31, 2011, we reported a net loss of ($3,069,191), or ($0.03) per basic and
fully-diluted share, compared to a net loss of ($2,800,422), or ($0.02) per
basic and fully-diluted share, for year ended March 31, 2010. Discussions of
individually significant year-over-year variances follow.
Revenues. The Company had no revenues from continuing operations in
2011 or 2010.
General and administrative expenses. General and administrative
expenses for 2011 were $1,508,635, compared to $2,350,348 for 2010. The decrease
of $841,713 was primarily attributable to decreases in employee overhead costs,
legal and insurance expenses, and directors' fees.
Interest expense. Interest expense from continuing operations reflects
interest incurred on unsecured, convertible promissory notes that were not
associated with the Company's assets sold. Interest expense was $16,312 and
$7,513 for 2011 and 2010, respectively. These notes originated in October 2009,
therefore 2011 reflects interest expense for the entire year, while 2010
includes interest expense for only a portion of the year. Additionally, the
interest rate on these loans for 2011 is higher than 2010 due to interest
accruing at the default interest rate since November, 2010.
Abandonment of leasehold improvements. On March 31, 2011, following the
sale of substantially all of our assets, we reduced our administrative overhead
by downsizing our corporate office. With our move to a smaller office, we
abandoned leasehold improvements in our previous office, which had a net
carrying cost of $102,000. No such expense was incurred in 2010.
Interest and other income. Interest and other income increased to
$92,214 in 2011, from $3,487 in 2010. The increase of $88,727 is primarily due
to income generated from the resale of carbon dioxide under a supply and sales
agreement that the Company entered into in January 2011.
Reorganization expenses. Reorganization items for 2011 were $1,434,334,
compared to $310,591 for 2010. The increase of $1,123,743 primarily resulted
from the following factors:
o We incurred reorganization expenses during our entire 2011 fiscal
year, while we only incurred reorganization expenses for just over
five months of our 2010 fiscal year;
o Under the terms of the credit agreement with our prepetition secured
lender, we were responsible for reimbursing them for certain fees and
expenses related to the repayment of amounts due under the credit
facility. Expenses totaled $1,044,500 were incurred in 2011, with no
such expenses incurred in 2010.
o Fees incurred for the eventual sale of substantially all of our
assets.
21
Results of Discontinued Operations for the year ended March 31, 2011 as
---------------------------------------------------------------------------
compared to the year ended March 31, 2010
-----------------------------------------
We sold all of our oil and gas related operating assets effective March
1, 2011. The following comparisons are for the 11 months ended February 28, 2011
compared to the year ended March 31, 2010.
Overview. With respect to activities related to our discontinued
operations, for the year ended March 31, 2011, we reported net income of
$2,395,132, or $0.02 per basic and fully-diluted share, compared to a net loss
of ($17,460,840), or ($0.15) per basic and fully-diluted share, for year ended
March 31, 2010. Discussions of individually significant year-over-year variances
follow.
Revenues. Revenues from oil sales for the eleven months ended March 31,
2011 were $4,385,829, compared to $3,585,738 for the year ended March 31, 2010.
The increase of $800,091 is the result of a production increase of approximately
$260,000 and a favorable price variance of approximately $540,000. In 2010, the
Company incurred net losses on derivative activities of ($357,582), with no
related activities in 2011.
Operating expenses. Operating expenses for year ended March 31, 2011
were $4,558,108, compared to $17,193,360 for the year ended March 31, 2010. The
decrease of $12,635,252 was the result of an impairment recorded in 2010 of
$13,525,642 for the remaining carrying value of our undeveloped properties,
offset in part by increases in lease operating expenses and payments for the
settlement of certain claims. Lease operating expenses increased as a result of
our operational plan to enhance recovery from existing wells. Based on the
incremental revenue, the expected payback period from this investment would have
been less than two years. Additionally, during 2011 we settled certain
contractual claims that arose from our filing for bankruptcy for $375,000.
Gain on sale of discontinued operations. The Company recorded a gain of
$4,807,221 in connection with the sale of substantially all of our assets for
approximately $20 million, effective March 1, 2011.
Liquidity and Capital Resources
The report of our independent registered public accounting firm on the
financial statements for the years ended March 31, 2011 and 2010 includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern. We have incurred a cumulative net loss of approximately $90
million for the period from inception (February 4, 2004) to March 31, 2011.
In March 2011, we sold all of our oil and gas income producing assets
which enabled us to pay off all secured debt and left us with net cash proceeds
of approximately $3,500,000 and a receivable from the transaction of $250,000.
We do not have any sources of revenue and our projected interest and other
income is not sufficient to sustain our ongoing general and administrative,
legal and reorganization costs. We do expect to receive proceeds from the return
of funds we have on deposit for oil and gas environmental and performance bonds
with the State of Wyoming. These amounts total approximately $814,000 and are
expected to be returned in the first half of our 2012 fiscal year. We expect
that our monthly operating expenses will exceed monthly operating income by
approximately $70,000 until we are able to pursue other business activities.
We continue to operate our business as "debtor-in-possession" under the
jurisdiction of the Court and in accordance with the applicable provisions of
the Bankruptcy Code and orders the Court. As debtors-in-possession, the Company
is authorized to continue to operate as an ongoing business, and may pay all
debts and honor all obligations arising in the ordinary course of our business
after the Petition Date. However, we may not pay creditors on account of
obligations arising before the Petition Date or engage in transactions outside
the ordinary course of business without approval of the Court, after notice and
an opportunity for a hearing.
22
We have prepared and filed all required financial and operating reports
and other documents with the Court. There is no assurance the Company will be
able to emerge from bankruptcy as an operating business, and if so, that we will
be able to raise the capital or funds necessary to analyze and pursue other oil
and gas related opportunities.
Off-Balance Sheet Arrangements
------------------------------
We have no material off-balance sheet arrangements nor do we have any
unconsolidated subsidiaries.
Critical Accounting Policies
Estimates. We are engaged in the exploration, exploitation,
development, acquisition, and production of natural gas and crude oil. Our
discussion of financial condition and results of operations is based upon the
information reported in our financial statements. The preparation of these
financial statements requires us to make assumptions and estimates that affect
the reported amounts of assets, liabilities, revenues, and expenses as well as
the disclosure of contingent assets and liabilities as of the date of our
financial statements. We base our decisions, which affect the estimates we use,
on historical experience and various other sources that are believed to be
reasonable under the circumstances. Actual results may differ from the estimates
we calculate due to changing business conditions or unexpected circumstances.
Policies we believe are critical to understanding our business operations and
results of operations are detailed below. For additional information on our
significant accounting policies see Note 1 - Organization and Summary of
Significant Accounting Policies and Note 12 - Disclosures About Oil and Gas
Producing Activities in the Notes to Financial Statements of our audited
financial statements included in this Annual Report.
Successful efforts method of accounting. Generally accepted accounting
principles provide for two alternative methods for the oil and gas industry to
use in accounting for oil and gas producing activities. These two methods are
generally known in our industry as the full cost method and the successful
efforts method. Both methods are widely used. The methods are different enough
that in many circumstances the same set of facts will provide materially
different financial statement results within a given year. We have chosen the
successful efforts method of accounting for our oil and gas producing activities
and a detailed description is included in Note 1 - Organization and Summary of
Significant Accounting Policies in the Notes to Financial Statements of our
audited financial statements included in this Annual Report.
Income taxes. We provide for deferred income taxes on the difference
between the tax basis of an asset or liability and its carrying amount in our
financial statements in accordance with FASB ASC 740 "Income Taxes". This
difference will result in taxable income or deductions in future years when the
reported amount of the asset or liability is recovered or settled, respectively.
Considerable judgment is required in determining when these events may occur and
whether recovery of an asset is more likely than not. Additionally, our Federal
and state income tax returns are generally not filed before the financial
statements are prepared, therefore we estimate the tax basis of our assets and
liabilities at the end of each period as well as the effects of tax rate
changes, tax credits, and net operating and capital loss carryforwards and
carrybacks. Adjustments related to differences between the estimates we used and
actual amounts we reported are recorded in the period in which we file our
income tax returns. These adjustments and changes in our estimates of asset
recovery could have an impact on our results of operations. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. To date, we have not recorded any deferred tax assets because
of the historical losses that we have incurred.
23
Stock-based compensation. As of April 1, 2006, we adopted the
provisions of FASB ASC. This statement requires us to record expense associated
with the fair value of stock-based compensation.
Commodity Derivatives. The Company accounts for derivative instruments
or hedging activities under the provisions of FASB ASC 815, "Derivative and
Hedging". FASB ASC 815 requires the Company to record derivative instruments at
their fair value. The Company's risk management strategy is to enter into
commodity derivatives that set "price floors" and "price ceilings" for its crude
oil production. The objective is to reduce the Company's exposure to commodity
price risk associated with expected crude oil production.
The Company has elected not to designate the commodity derivatives to
which they are a party as cash flow hedges, and accordingly, such contracts are
recorded at fair value on its consolidated balance sheets and changes in such
fair value are recognized in current earnings as income or expense as they
occur.
The Company does not hold or issue commodity derivatives for
speculative or trading purposes. The Company is exposed to credit losses in the
event of nonperformance by the counterparty to its commodity derivatives. It is
anticipated, however, that its counterparty will be able to fully satisfy its
obligations under the commodity derivatives contracts. The Company does not
obtain collateral or other security to support its commodity derivatives
contracts subject to credit risk but does monitor the credit standing of the
counterparty. The price we receive for production in our three fields is indexed
to Wyoming Sweet crude oil posted price. The Company has not hedged the basis
differential between the NYMEX price and the Wyoming Sweet price.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Rancher operations do not employ financial instruments or derivatives
which are market sensitive. Short term funds are held in non-interest bearing
accounts and funds held for longer periods are placed in interest bearing
accounts. Large amounts of funds, if available, will be distributed among
multiple financial institutions to reduce risk of loss. The Company's cash
holdings do not generate interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of Rancher for the years ended March
31, 2011 and 2010, appear as pages F-1 through F-25, at the end of the document
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Controls and Procedures
We conducted an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and
Acting Chief Accounting Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. The term "disclosure
controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act), means controls and
other procedures of a company that are designed to ensure that information
24
required to be disclosed by the company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures also include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. We identified a material weakness in our internal control
over financial reporting and, as a result of this material weakness, we
concluded as of March 31, 2011, that our disclosure controls and procedures were
not effective.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) is
defined as a process designed by, or under the supervision of, a company's
principal executive and financial officers, or persons performing similar
functions, and effected by a company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally acceptable accounting principles
and includes those policies and procedures that:
a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
c) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of March 31, 2011. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Internal Control-Integrated Framework
A material weakness is a control deficiency, or combination of control
deficiencies, that result in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected. As of March 31, 2011, the Company identified the following material
weakness:
We did not adequately segregate the duties of different personnel
within our Accounting Department due to an insufficient complement of
staff and inadequate management oversight.
We have limited accounting personnel with sufficient expertise in
generally accepted accounting principles to enable effective segregation of
duties with respect to recording journal entries and to allow for appropriate
monitoring of financial reporting matters and internal control over financial
reporting. Specifically, the Acting Chief Accounting Officer has involvement in
25
the creation and review of journal entries and note disclosures without adequate
independent review and authorization. This control deficiency is pervasive in
nature and impacts all significant accounts. This control deficiency also
affects the financial reporting process including financial statement
preparation and the related note disclosures.
As a result of the aforementioned material weakness, management
concluded that the Company's internal control over financial reporting as of
March 31, 2011 was not effective.
Management's Planned Corrective Actions
In relation to the material weakness identified above, and subject to
emerging from bankruptcy and securing permanent financing, our management and
the board of directors intend to work to remediate the risk of a material
misstatement in financial reporting. Subject to obtaining permanent financing,
we intend to implement the following plan to address the risk of a material
misstatement in the financial statements:
o Engage qualified accounting staff to prepare journal entries and note
disclosures thereby enabling our Chief Accounting Officer the
opportunity to independently review and authorize such entries and
disclosures prior to entering the information into the accounts and
financial satements diclosures;
o Engage qualified third-party accountants and consultants to assist us
in the preparation and review of our financial information,
o Ensure employees, third-party accountants and consultants who are
performing controls understand responsibilities and how to perform
said responsibilities, and
o Consult with qualified third-party accountants and consultants on the
appropriate application of generally accepted accounting principles
for complex and non-routine transactions.
Auditors Attestation
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this annual
report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during the most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
26
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our current directors and executive officers, their respective positions
and ages, and the year in which each director was first elected, are set forth
in the following table.
Beginning of Term of
Name Age Positions Held Service
-------------------------------------- -------- --------------------------------------- --------------------------
Jon C. Nicolaysen 64 Director, President, Chief Executive President and CEO Oct 2,
Officer 2009; Director Oct 27,
2009;
-------------------------------------- -------- --------------------------------------- --------------------------
A.L. Sid Overton 70 Director, Chairman of the Board Sep 30, 2009
-------------------------------------- -------- --------------------------------------- --------------------------
Mathijs van Houweninge 45 Director Sep 30, 2009
-------------------------------------- -------- --------------------------------------- --------------------------
Jeffrey B. Bennett 56 Director Sep 30, 2009
-------------------------------------- -------- --------------------------------------- --------------------------
Rancher's directors hold office until their successors are duly elected and
qualified under Rancher's bylaws. The directors named above will serve until the
next annual meeting of Rancher's stockholders. Thereafter, directors will be
elected for one-year terms at the annual stockholders' meeting. Officers will
hold their positions at the pleasure of the board of directors absent any
employment agreement.
Jon C. Nicolaysen, President, CEO and Director
In 1985, Mr. Nicolaysen completed the Atlantic Businessman's Exchange
Program. In 1986, he completed the W.K. Kellogg Foundations Fellowship Wyoming
Agriculture Leadership Program. In 1970, he received an MS in Business
Administration from the University of Wyoming, and in 1968, he earned his BS in
Business Administration from Colorado College.
From 1970 to the present, Mr. Nicolaysen has been Vice President and
President of Cole Creek Sheep Company, Inc., a cattle and sheep ranching and
farming operation. From 1989 to June of 2009, he was president of Parkerton
Ranch, Inc., a cattle and sheep ranching and farming operation. From 1988 to the
present, he's been president of JK Minerals, Inc., an oil production and mineral
leasing company. From 1995 to June 2009, he was the President of Cole Creek
Outfitters, Inc., a guiding and hunting operation. From 1998 to the present he
has been President, and was a founding member of, Seven Cross Ranches, LLC;
Wcamp, FLLC; Sagebrush Land Management, FLLC, all of which are real estate
development companies.
From 2001 to 2008, Mr. Nicolaysen was a unit operator for JK Minerals, Inc.
From 2004 - 2007 Mr. Nicolaysen was an operator of Big Muddy Field for Wyoming
Mineral Exploration, LLC, of which he was a founding member. From 2007 - 2008,
he was a founding member of Muddy Mineral Exploration, LLC in Wyoming. From 2008
to May 1, 2009, he was a board member of Ameriwest Energy Corp.
Mr. Nicolaysen, and A.L. Sid Overton, Director and Chairman of the Board,
are brothers-in-law.
A.L. Sid Overton, Director and Chairmen of the Board of Directors
In 1964, Mr. Overton received his B.A. from the University of North Dakota.
In 1966, he earned his L.L.B. from the University of North Dakota School of Law,
and in 1969, he earned his J.D. from the University of North Dakota School of
Law. Since 1998, Mr. Overton has worked as a lawyer for Overton & Associates,
LLC. Mr Overton is the brother-in-law of Mr. Nicolaysen.
Mathijs Van Houweninge, Director
Mr. van Houweninge studied Cognitive Artificial Intelligence at the
University of Utrecht, The Netherlands. In 1998, he attended the Young Managers
Programme at Insead Business School in Paris. In addition to being self-employed
since 1992, Mr. van Houweninge was the founder and CEO of "Effective," a Dutch
27
software and consultancy firm, from 1992 - 2002. From September 2007 to April
2008, Mr. van Houweninge was an associate at Advisor Falcon Capital in London.
From May 2008 to December 2008, he was a Partner at Falcon Capital in London.
He currently serves as a Director of the following companies and
organizations: Nieuwe Regentesseschool, a Dutch primary school (Utrecht,
November 2004, non-profit); Blackwater Midstream Corp., a midstream gas storage
facility (New Orleans, May 2008, listed); Cybercity 3D, a 3D modeling and
marketing company (El Segundo, February 2008, non-listed); SkyPostal Networks,
Inc., an air courier services company (Miami, April 2008, listed); IonIP bv, a
network and business intelligence technology firm (Amsterdam, June 2008,
non-listed); and Skillcity, an ICT support organization (Utrecht, August 2008,
non-profit).
Jeffrey B. Bennett, Director
Mr. Bennett obtained a Bachelor's of Arts from Western State College
of Colorado in 1979, majoring in Biology. Mr. Bennett has been a
co-owner/partner in TCF Services, Inc. from 2005 to present and a
co-owner/partner in Flame Energy, Inc. from May 2005 to present. He was Vice
President of Operations of NQL Energy Services in Alberta, Canada from June 2003
through 2005. He was employed by Black Max Downhole Tools, Inc. from May 2001
through 2003, as a Region Manager. From 2000 to 2001, Mr. Bennett was operations
manager for the western United States for Sharewell.
Conflicts of Interest - General
The Company's directors and officers are, or may become, in their
individual capacities, officers, directors, controlling shareholder and/or
partners of other entities engaged in a variety of businesses. Thus, there exist
potential conflicts of interest including, among other things, time, efforts and
corporation opportunity, involved in participation with such other business
entities.
Conflicts of Interest - Corporate Opportunities
Presently no requirement contained in the Company's Articles of
Incorporation, Bylaws, or minutes which requires officers and directors of the
Company's business to disclose to Rancher business opportunities which come to
their attention. The Company's officers and directors do, however, have a
fiduciary duty of loyalty to Rancher to disclose to it any business
opportunities which come to their attention, in their capacity as an officer
and/or director or otherwise. Excluded from this duty would be opportunities
which the person learns about through his involvement as an officer and director
of another company. The Company has no intention of merging with or acquiring an
affiliate, associate person or business opportunity from any affiliate or any
client of any such person.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics for our
directors, officers, and employees. The Board expects all directors, as well as
officers and employees, to act ethically at all times and to adhere to the
policies outlined in our Code of Business Conduct and Ethics. Copies of our Code
of Business Conduct and Ethics are available by contacting the Company at the
address or phone number contained in this annual report.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to officers and
board members during the fiscal years ended March 31, 2011 and 2010. The table
sets forth this information for Rancher, including salary, bonus, and certain
28
other compensation to the Board members and named executive officers for the
past two fiscal years and includes all Officers as of March 31, 2011.
SUMMARY EXECUTIVES COMPENSATION TABLE
-------------------- -------- --------- -------- -------- ------- ------------- -------------- ------------- ---------
Non-equity Non-qualified
Option incentive deferred
Stock awards plan compensation All other
Name & Position Salary Bonus awards ($) compensation earnings compensation Total
Year ($) ($) ($) (1) ($) ($) ($) ($)
-------------------- -------- --------- -------- -------- ------- ------------- -------------- ------------- ---------
Jon C. Nicolaysen,
Chief Executive 2011 120,000 0 0 0 0 0 6,000 126,000
Officer (2) 2010 60,423 0 0 63,363 0 0 3,000 126,786
-------------------- -------- --------- -------- -------- ------- ------------- -------------- ------------- ---------
Richard E. 2011 46,667 0 0 0 0 0 7,415 54,082
Kurtenbach, Former 2010 170,569 0 0 8,909 0 0 4,780 184,258
Chief Accounting
Officer (3)
-------------------- -------- --------- -------- -------- ------- ------------- -------------- ------------- ---------
John H. Works (4) 2011 0 0 0 0 0 0 0 0
2010 116,827 0 0 0 0 0 29,939 146,766
-------------------- -------- --------- -------- -------- ------- ------------- -------------- ------------- ---------
(1) The amount in this column reflects the total grant date fair value for
financial statement reporting purposes for awards granted in the
fiscal year ended March 31, 2010, in accordance with FASB ASC 718
"Share Based Payments". Please refer to Note 10 of the Notes to
Financial Statements of our audited financial statements for the
fiscal year ended March 31, 2010, for a discussion of the assumptions
made in the valuation of the stock option awards.
(2) For Mr. Nicolaysen, Other Compensation represents auto allowances. Mr.
Nicolaysen was appointed as Chief Executive Officer and President on
October 2, 2009, and as a Director on October 27, 2009. He serves as a
Director for no additional compensation.
(3) For Mr. Kurtenbach, Other Compensation represents auto allowances,
contributions to his 401(k) accounts, and payment for accrued but
unused vacation as of his resignation. Mr. Kurtenbach resigned and as
the Company's Chief Accounting Officer on July 31, 2010.
(4) For Mr. Works Other Compensation represents auto allowances,
contributions to his 401(k) accounts, and payment for accrued but
unused vacation as of his termination. Mr. Works also served as a
member of our Board of Directors for no additional compensation. Mr.
Works' employment with the Company was terminated on October 2, 2009.
Employment Agreements; Potential Payments Upon Termination or Change-in-Control
Employment Agreements
On October 27, 2009, we entered into an Executive Employment
Agreement with Jon C. Nicolaysen to become our President and Chief Executive
Officer. Pursuant to the agreement, Mr. Nicolaysen will receive a base salary of
$120,000 per year. The base salary shall thereafter be increased annually at the
greater of five percent or such other increase as may be approved by the Board
of Directors. In addition, Mr. Nicolaysen: i) shall be eligible to receive
incentive compensation or a bonus, payable solely in the discretion of the Board
of Directors; ii) he shall be entitled to participate in all benefit programs
established by the Company, and; iii) he shall be entitled to a Company-provided
vehicle or a monthly allowance of $500. The Agreement may be terminated by
either party upon fifteen days written notice. Also on October 27, 2009 we
entered into a Management Retention Agreement with Mr. Nicolaysen, under which
Mr. Nicolaysen was granted options to purchase 2,500,000 shares of the Company's
common stock at $0.035 per share. The Management Retention Agreement shall
terminate the earlier of (i) one year; (ii) thirty days after the consummation
29
of a Change in Control; (iii) thirty days following the confirmation of a
Reorganization Plan, or: (iv) the date that all obligations of the parties have
been satisfied. See the table below for a description of the vesting provisions
and term of the stock options.
Outstanding Equity Awards at Fiscal Year-end Table
The following table sets forth certain information regarding stock
options held by the named executive officers as of March 31, 2011.
Name Option Awards
Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised
Options (#) Options (#)
-------------------------------- ------------------ ------------------
Non Exercisable Option
Exercisable exercisable Price Expiration Date
------------------ ------------------ ----------------- --------------------
Jon C. Nicolaysen (A) 2,500,000 -0- $0.035 10/27/19
(A) Mr. Nicolaysen's options vested 10% on the date of grant, October 27, 2009
and 90% on the earlier to occur of:
i) November 1, 2010;
ii) The confirmation by the Bankruptcy Court of a Plan of Reorganization;
iii) The dismissal from Chapter 11 Bankruptcy with the approval of the
Court
iv) An event of a merger, consolidation, sale of assets or other
transaction which results in the holders of the Company's common stock
immediately before such transaction owning less than 50% of the common
stock outstanding immediately after the transaction;
v) Any other form of change of control, or;
vi) Voluntary termination for good reason.
Director Compensation
During the year ended March 31, 2011, we compensated our non-employee
Directors under the following compensation scheme.
Cash Compensation and Equity Compensation
In September 2009 the new Board of Directors implemented a new scheme
under which each non-employee director would receive a cash payment of $5,000
per fiscal quarter. In addition, under the terms of Management Retention
Agreements entered into with each non-employee Director and the President and
CEO, each member of the Board of Directors would be granted options to purchase
2,500,000 shares of the Company's common stock at $0.035 per share.
30
The following table sets forth certain information concerning
compensation paid to the Company's directors during the year ended March 31,
2011:
Fees Non-equity Non-qualified
earned or incentive deferred
paid in Stock plan compensation All other
cash awards Option compensation earnings compensation Total
Name ($) ($) awards ($) ($) ($) ($) ($)
------------------ ------------ -------- ----------- --------------- --------------- --------------- -----------
Jon C. $ -0- $ -0- $ -0- $ -0- $ -0- $126,000 $126,000
Nicolaysen (1)
------------------ ------------ -------- ----------- --------------- --------------- --------------- -----------
A.L. Sid Overton $ 20,000 $ -0- $ -0- $ -0- $ -0- $ -0- $20,000
------------------ ------------ -------- ----------- --------------- --------------- --------------- -----------
Mathijs Van $20,000 $ -0- $-0- $ -0- $-0- $ -0- $20,000
Houweninge
------------------ ------------ -------- ----------- --------------- --------------- --------------- -----------
Jeffrey B. $20,000 $ -0- $-0- $ -0- $-0- $ -0- $20,000
Bennett
------------------ ------------ -------- ----------- --------------- --------------- --------------- -----------
(1) Mr. Nicolaysen is employed as the Company's Chief Executive Officer.
During the year ended March 31, 2011, he received $126,000 in
compensation for his services in that capacity, as discussed in the
Executive Compensation Table.
All of the Company's officers and/or directors will continue to be
active in other companies. All officers and directors have retained the right to
conduct their own independent business interests.
Indemnification of Directors and Officers
Rancher officers and directors are indemnified as provided by the
Nevada Revised Statutes and the bylaws.
Under the Nevada Revised Statutes, director immunity from liability to
a company or its shareholders for monetary liabilities applies automatically
unless it is specifically limited by a company's Articles of Incorporation. The
Company's Articles of Incorporation do not specifically limit the directors'
immunity. Excepted from that immunity are: (a) a willful failure to deal fairly
with Rancher or its shareholders in connection with a matter in which the
director has a material conflict of interest; (b) a violation of criminal law,
unless the director had reasonable cause to believe that his or her conduct was
lawful or no reasonable cause to believe that his or her conduct was unlawful;
(c) a transaction from which the director derived an improper personal profit;
and (d) willful misconduct.
The Company's bylaws provide that it will indemnify the directors to
the fullest extent not prohibited by Nevada law; provided, however, that it may
modify the extent of such indemnification by individual contracts with the
directors and officers; and, provided, further, that the Company shall not be
required to indemnify any director or officer in connection with any proceeding,
or part thereof, initiated by such person unless such indemnification: (a) is
expressly required to be made by law, (b) the proceeding was authorized by the
board of directors, (c) is provided by the Company, in sole discretion, pursuant
to the powers vested under Nevada law or (d) is required to be made pursuant to
the bylaws.
The Company's bylaws provide that it will advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of Rancher as a director or
31
executive officer of another company, partnership, joint venture, trust or other
enterprise, prior to the final disposition of the proceeding, promptly following
request therefore, all expenses incurred by any director or officer in
connection with such proceeding upon receipt of an undertaking by or on behalf
of such person to repay said amounts if it should be determined ultimately that
such person is not entitled to be indemnified under the bylaws or otherwise.
The Company's bylaws provide that no advance shall be made by Rancher
to an officer except by reason of the fact that such officer is or was the
Company's director in which event this paragraph shall not apply, in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, if
a determination is reasonably and promptly made: (a) by the board of directors
by a majority vote of a quorum consisting of directors who were not parties to
the proceeding, or (b) if such quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the Company's best interests.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of March 31, 2011, with
respect to compensation plans (including individual compensation arrangements)
under which equity securities of the Company that are authorized for issuance,
aggregated as follows:
Number of securities to be Weighted-average
issued upon exercise of exercise Number of securities
outstanding options, price of remaining available for
warrants and rights outstanding future issuance under
(a) options, equity compensation plans
warrants and (excluding securities
rights reflected in column (a))
Plan Category (b) (c)
Equity compensation plans
approved by security holders 1,441,000 $0.0875 8,559,000
Equity compensation plans not
approved by security holders 10,000,000 $ 0.035 -
--------------------------- -----------------------------
Total 11,441,000 $0.0416 8,559,000
=========================== =============================
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
--------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
---------------------------
The following table sets forth information with respect to the
beneficial ownership of Rancher outstanding common stock by:
o each person who is known by Rancher to be the beneficial owner of five
percent (5%) or more of Rancher common stock;
o Rancher chief executive officer, its other executive officers, and
each director as identified in the "Management -- Executive
Compensation" section; and
o all of the Company's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock and options, warrants
and convertible securities that are currently exercisable or convertible within
60 days of the date of this document into shares of the Company's common stock
are deemed to be outstanding and to be beneficially owned by the person holding
the options, warrants or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
The information below is based on the number of shares of our common
stock that Rancher believes was beneficially owned by each person or entity as
of March 31, 2011.
32
Title of Class Name and Address of Beneficial Amount and Nature of Percent of Class (1)
Owner Beneficial Owner*
------------------------ -------------------------------- ----------------------- -------------------------
Common shares Jon C. Nicolaysen, Director,
President, Chief Executive
Officer (2)
999-18th Street, Suite 3400 4,450,000 3.73%
Denver, Colorado 80202
Common shares A.L. Sid Overton (3) 3,750,000 3.14%
999-18 Street, Suite 3400
Denver, Colorado 80202
Common shares Mathijs van Houweninge (4) 3,750,000 3.14%
999-18 Street, Suite 3400
Denver, Colorado 80202
Common shares Jeffrey B. Bennett (5) 3,753,000 3.15%
999-18 Street, Suite 3400
Denver, Colorado 80202
------------------------ -------------------------------- ----------------------- -------------------------
Common shares All Directors and Executive
Officers as a Group
(4 persons) 15,703,000 13.16%
------------------------ -------------------------------- ----------------------- -------------------------
All 5% or Greater Shareholders
Common shares Sergei Stetsenko
Paradeplatz 4
Zurich 8001 Switzerland 8,896,000 7.45%
Common shares Andrew P. Vander Ploeg 7,000,000 5.9%
19 Foxtail Circle
Cherry Hills Village, CO
80113
(1) At March 31, 2011, the Company had 119,316,723 shares of its common
stock issued and outstanding.
(2) Mr. Nicolaysen holds 700,000 shares of common stock. In addition Mr.
Nicolaysen holds a $25,000 convertible promissory note, convertible
into 1,250,000 shares of common stock at $0.02 per share and is
convertible in whole or in part. Mr. Nicolaysen also holds an option
exercisable into 2,500,000 shares of common stock at $0.035 per share.
(3) Mr. Overton holds a $25,000 convertible promissory note, convertible
into 1,250,000 shares of common stock at $0.02 per share and is
convertible in whole or in part. Mr. Overton also holds an option
exercisable into 2,500,000 shares of common stock at $0.035 per share.
(4) Mr. van Houweninge holds a $25,000 convertible promissory note,
convertible into 1,250,000 shares of common stock at $0.02 per share
and is convertible in whole or in part. Mr. van Houweninge also holds
an option exercisable into 2,500,000 shares of common stock at $0.035
per share.
(5) Mr. Bennett holds 3,000 shares of common stock. In addition Mr.
Bennett holds a $25,000 convertible promissory note, convertible into
1,250,000 shares of common stock at $0.02 per share and is convertible
in whole or in part. Mr. Bennett also holds an option exercisable into
2,500,000 shares of common stock at $0.035 per share.
33
Rule 13d-3 under the Securities Exchange Act of 1934 governs the
determination of beneficial ownership of securities. That rule provides that a
beneficial owner of a security includes any person who directly or indirectly
has or shares voting power and/or investment power with respect to such
security. Rule 13d-3 also provides that a beneficial owner of a security
includes any person who has the right to acquire beneficial ownership of such
security within sixty days, including through the exercise of any option,
warrant or conversion of a security. Any securities not outstanding which are
subject to such options, warrants or conversion privileges are deemed to be
outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by such person. Those securities are not deemed to
be outstanding for the purpose of computing the percentage of the class owned by
any other person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Related Transactions
----------------------------
On October 27, 2009, each of the four members of our Board of Directors
loaned $25,000 for a total of $100,000 to the Company, under the terms of
Convertible Promissory Notes (the "Notes"). The Notes as fully described in Note
7 - Convertible Promissory Notes Payable, of the Notes to Financial Statements
of our audited financial statements for the fiscal year ended March 31, 2010,
interest at the greater of 12% or prime plus 4%, mature on November 1, 2010and
are convertible, at the holder's option, into shares of the Company's common
stock at a conversion price of $0.02 per share.
During the years ended March 31, 2011 and 2010, the Company incurred
legal fees totaling $113,313 and $72,768, respectively, with Overton and
Associates, LLC, a law firm in which Mr. Overton, a director of the Company, is
a principal. The employment of Overton and Associates as special counsel has
been approved by the Bankruptcy Court.
During the years ended March 31, 2011 and 2010, the Company incurred
engineering and oilfield operating consulting fees totaling $108,969 and 68,907,
respectively, with TCF Services, Inc., an engineering consulting firm in which
Mr. Bennett, a director of the Company, is a principal. The employment of TCF
Services, Inc. has been approved by the Bankruptcy Court.
The Company has not implemented a formal written policy concerning the
review of related party transactions, but compiles information about
transactions between the Company and its directors and officers, their immediate
family members, and their affiliated entities, including the nature of each
transaction and the amount involved. The Board of Directors has responsibility
for reviewing these transactions.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Auditor's Fees
The following table describes fees for professional audit services
rendered by Hein & Associates LLP ("Hein"), our principal accountant, for the
audit of our annual financial statements for the years ended March 31, 2011 and
March 31, 2010 and fees billed for other services rendered by Hein during the
2011 and 2010 fiscal years.
Fiscal Fiscal 2010
Type of Fee 2011
------------------------------------------------------------------------
Audit Fees (1) $ 103,434 $ 74,093
Audit-Related Fees $ - $ -
Tax Fees (2) $ 8,536 $ 10,464
All Other Fees $ - $ -
-------------------------------
Total $ 111,970 $ 84,557
===============================
34
1. Audit Fees include the aggregate fees incurred by us for professional
services rendered by Hein for the audit of our annual financial
statements and review of financial statements included in our Forms
10-Q for the 2011 and 2010 fiscal years.
2. Tax Fees include the aggregate fees incurred by us for professional
services rendered by Hein for tax compliance and tax planning for the
2011 and 2010 fiscal years.
Pre-approval Policies and Procedures
------------------------------------
The Board of Directors on an annual basis reviews audit and non-audit
services performed by the independent auditor. All audit and non-audit services
are preapproved by the Board of Directors, which considers, among other things,
the possible effect of the performance of such services on the auditors'
independence. The Board of Directors has considered the role of Hein in
providing services to us for the fiscal years ended March 31, 2011 and March 31,
2010 and has concluded that such services are compatible with their independence
as our auditors. In 2011 and 2010, 100% of the Audit Related Fees, Tax Fees and
All Other Fees were pre-approved by the Board of Directors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following is a complete list of exhibits filed as part of this Form
10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601
of Regulation S-K.
(a) Audited financial statements for years ended March 31, 2011 and 2010
(b) Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act*
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act*
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act*
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act*
*Filed herewith.
35
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements - Rancher Energy Corp.
Report of Independent Registered Public Accounting Firm
Balance Sheets as of March 31, 2011 and 2010
Statements of Operations for the Years Ended March 31, 2011 and 2010
Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended
March 31, 2011 and 2010
Statements of Cash Flows for the Years Ended March 31, 2011 and 2010
Notes to Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Rancher Energy Corp.
We have audited the accompanying balance sheets of Rancher Energy Corp. (the
"Company") as of March 31, 2011 and 2010, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rancher Energy Corp. as of
March 31, 2011 and 2010, and the results of its operations and its cash flows
for the years then ended in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, on October 28, 2009, the Company filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. Uncertainties inherent in
the bankruptcy process, as well as recurring losses from operations raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HEIN & ASSOCIATES LLP
Denver, Colorado
July 12, 2011
F-2
Rancher Energy Corp.
(Debtor-in-possession)
Balance Sheets
March 31,
-------------------------------------
2011 2010
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,883,228 $ 372,286
Restricted cash 500,066 -
Accounts receivable and prepaid expenses 420,875 75,793
Current assets of discontinued operations 45,229 539,809
------------------ ------------------
Total current assets 4,849,398 987,888
------------------ ------------------
Furniture and equipment, net of accumulated depreciation of $127,662
and $124,820 respectively 210,020 308,972
Other assets 350 40,777
Long-term assets of discontinued operations 814,354 17,247,579
------------------ ------------------
Total other assets 1,024,724 17,597,328
------------------ ------------------
Total assets $ 5,874,122 $ 18,585,216
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities - post petition $ 1,115,151 $ 142,967
Current liabilities of discontinued operations 58,191 11,690,065
------------------ ------------------
Total current liabilities 1,213,342 11,833,032
Long-term liabilities of discontinued operations - 1,255,497
------------------ ------------------
Total liabilities not subject to compromise 1,213,342 13,088,529
------------------ ------------------
Liabilities subject to compromise 1,136,928 1,465,908
------------------ -------------------
Total liabilities 2,350,270 14,554,437
------------------ ------------------
Commitments and contingencies (Notes 2, 5, 6 and 7)
Stockholders' equity:
Common stock, $0.00001 par value, 275,000,000 shares authorized at March 31,
2011 and 2010; 119,316,723 shares issued and outstanding at March 31, 2011
and
2010 1,194 1,194
Additional paid-in capital 93,193,008 93,025,876
Accumulated deficit (89,670,350) (88,996,291)
------------------ ------------------
Total stockholders' equity 3,523,852 4,030,779
------------------ ------------------
Total liabilities and stockholders' equity $ 5,874,122 $ 18,585,216
================== ==================
The accompanying notes are an integral part of these financial statements.
F-3
Rancher Energy Corp.
(Debtor-in-possession)
Statements of Operations
For the Year Ended March 31,
-----------------------------------------
2011 2010
------------------- -----------------
Revenue $ - $ -
------------------- -----------------
Operating expenses:
General and administrative expenses 1,508,635 2,350,348
Depreciation and amortization 100,124 135,457
------------------- -----------------
Total operating expenses 1,608,759 2,485,805
------------------- -----------------
Loss from operations (1,608,759) (2,485,805)
------------------- -----------------
Other income (expense):
Interest expense and financing costs (16,312) (7,513)
Abandonment of leasehold improvements (102,000) -
Interest and other income 92,214 3,487
------------------- -----------------
Total other income (expense) (26,098) (4,026)
------------------- -----------------
Loss before reorganization items and discontinued operations (1,634,857) (2,489,831)
------------------- -----------------
Reorganization items:
Professional and legal fees 1,643,011 310,591
Provision for settlement and adjustment of liabilities (85,750) -
Provision for executory contracts rejected (122,927) -
------------------- -----------------
Total reorganization items 1,434,334 310,591
------------------- -----------------
Loss from continuing operations (3,069,191) (2,800,422)
Discontinued operations:
Loss from discontinued operations (2,412,089) (17,460,840)
Gain on sale of discontinued operations 4,807,221 -
------------------- -----------------
Total discontinued operations 2,395,132 (17,460,840)
------------------- -----------------
Net loss $ (674,059) $ (20,261,262)
=================== =================
Net loss per share from continuing operations $ (0.03) $ (0.02)
=================== =================
Net income (loss) per share from discontinued operations $ 0.02 $ (0.15)
=================== =================
Basic and diluted net loss per share $ (0.01) $ (0.17)
=================== =================
Basic and diluted weighted average shares outstanding 119,316,723 119,347,248
=================== =================
The accompanying notes are an integral part of these financial statements.
F-4
Rancher Energy Corp.
(Debtor-in-possession)
Statements of Changes in Stockholders' Equity
Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
--------------- ----------- --------------- ---------------- ----------------
Balance March 31, 2009 119,016,723 $ 1,191 $92,582,001 $(68,735,029) $23,848,163
Common stock issued on exercise of
stock options 500,000 5 - - 5
Common stock issued to directors
for services rendered - - 51,700 - 51,700
Cancelation of non-vested restricted
stock (200,000) (2) 2 - -
Discount on convertible notes due to
beneficial conversion feature - - 105,000 - 105,000
Stock-based compensation - - 287,173 - 287,173
Net loss - - - (20,261,262) (20,261,262)
--------------- ----------- --------------- ---------------- ----------------
Balance March 31, 2010 119,316,723 $ 1,194 $93,025,876 $(88,996,291) $ 4,030,779
Stock-based compensation - - 167,132 - 167,132
Net loss - - - (674,059) (674,059)
--------------- ----------- --------------- ---------------- ----------------
Balance March 31, 2011 119,316,723 $ 1,194 $93,193,008 $(89,670,350) $ 3,523,852
=============== =========== =============== ================ ================
The accompanying notes are an integral part of these financial statements.
F-5
Rancher Energy Corp.
(Debtor-in-possession)
Statements of Cash Flows
For the Year Ended March 31,
--------------------------------------
2011 2010
------------------ -----------------
Cash flows from operating activities:
Net loss $ (674,059) $ (20,261,262)
Adjustments to reconcile net loss from continuing operations to cash used for
operating activities, before reorganization items:
Income (loss) from discontinued operations (2,395,132) 17,460,840
Reorganization items, net 1,434,334 310,591
Loss on abandonment of leasehold improvements 102,000 -
Depreciation and amortization 100,124 135,457
Gain on settlement of liabilities (208,677)
Stock-based compensation expense 167,132 287,173
Common stock issued for services, directors - 51,700
Interest expense - convertible notes beneficial conversion feature - 105,000
Changes in operating assets and liabilities:
Restricted cash (500,066) -
Accounts receivable and prepaid expenses (62,234) 171,358
Accounts payable and accrued liabilities (10,429) 1,877,377
------------------ -----------------
Net cash provided by (used for) operating activities, before reorganization items (2,227,416) 138,234
Operating cash flows from reorganization items -
professional fees for services rendered in connection with the Chapter 11 proceeding (1,137,046) (110,154)
------------------ -----------------
Net cash provided by (used for) operating activities (3,414,462) 28,080
------------------ -----------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (5,890) -
Proceeds from sales of assets - 8,014
------------------ -----------------
Net cash provided by (used for) investing activities (5,890) 8,014
------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable - 140,000
Proceeds from issuance of common stock upon exercise of stock options
- 5
------------------ -----------------
Net cash provided by financing activities 140,005
-
------------------ -----------------
Discontinued operations:
Operating cash flows (494,320) (590,088)
Investing cash flows 2,815,601 (32,760)
Financing cash flows 4,610,013 (98,125)
------------------ -----------------
Net cash provided by (used for) discontinued operations 6,931,294 (720,973)
------------------ -----------------
Increase (decrease) in cash and cash equivalents 3,510,942 (544,874)
Cash and cash equivalents, beginning of period 372,286 917,160
------------------ -----------------
Cash and cash equivalents, end of period $ 3,883,228 $ 372,286
================== =================
Supplemental Statement of Cash Flow Information:
Cash paid for interest $ 2,566,088 $ 613,479
================== =================
Non-cash investing and financing activities:
Closing costs from repayment of debt and asset dispositions $ 593,438 $ -
================== =================
Repayment of debt from asset sale proceeds $ 14,700,000 $ -
================== =================
Asset retirement asset and obligation $ - $ (18,747)
================== =================
Discount on note payable, conveyance of overriding royalty interest and net profits $ - $ 1,500,000
interest
================== =================
The accompanying notes are an integral part of these financial statements.
F-6
Rancher Energy Corp.
(Debtor-in-possession)
Notes to Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
------------
Rancher Energy Corp. ("Rancher Energy" or the "Company"), formerly
known as Metalex Resources, Inc. ("Metalex"), was incorporated in Nevada on
February 4, 2004. The Company acquires, explores for, develops and produces oil
and natural gas, concentrating on applying secondary and tertiary recovery
technology to older, historically productive fields in North America.
Metalex was formed for the purpose of acquiring, exploring and
developing mining properties. On April 18, 2006, the stockholders of Metalex
voted to change its name to Rancher Energy Corp. and announced that it changed
its business plan and focus from mining to oil and gas.
Bankruptcy Filing
-----------------
On October 28, 2009, the Company filed a voluntary petition (the
"petition") for relief in the United States Bankruptcy Court, District of
Colorado (the "Bankruptcy Court") under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code"). The Company will continue to operate
its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Code and orders of
the Bankruptcy Court. See Note 2 "Proceedings Under Chapter 11 of the Bankruptcy
Code" for details regarding the bankruptcy filing and the Chapter 11 case.
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. However, the petition raises substantial doubt about the Company's
ability to remain a going concern. The Company's continuation as a going concern
may be contingent upon, among other things, its ability (i) to obtain
Debtor-in-Possession financing; (ii) to reduce administrative, operating and
interest costs and liabilities through the bankruptcy process; (iii) to generate
sufficient cash flow from operations; (iv) to obtain confirmation of a plan of
reorganization under the Bankruptcy Code; and (v) to obtain financing to
facilitate an exit from bankruptcy. The Company is currently evaluating various
courses of action to address the operational and liquidity issues it is facing
and has begun the process of improving operations. There can be no assurance
that any of these efforts will be successful. The accompanying financial
statements do not include any adjustments that might result should we be unable
to continue as a going concern. In the event the Company's restructuring
activities are not successful and it is required to liquidate, additional
significant adjustments in the carrying value of assets and liabilities, the
revenues and expenses reported and the balance sheet classifications used may be
necessary.
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (FASB ASC) 852 "Financial Reporting During Reorganization
Proceedings," which is applicable to companies in Chapter 11, generally does not
change the manner in which financial statements are prepared. However, it does
require that the financial statements for periods subsequent to the filing of a
Chapter 11 case distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business. Revenues,
expenses, realized gains and losses, and provisions for losses that can be
directly associated with the reorganization and restructuring of the business
must be reported separately as reorganization items in the statements of
operations. The balance sheet must distinguish Prepetition liabilities subject
to compromise from both those Prepetition liabilities that are not subject to
compromise and from post-petition liabilities. Liabilities that may be affected
by a plan of reorganization must be reported at the amounts expected to be
allowed, even if they may settled for lesser amounts. In addition, cash provided
by reorganization items, if any, must be disclosed separately in the statement
of cash flows. The Company adopted FASB ASC 852-10 effective on October 28, 2010
and will segregate those items as outlined above for all reporting periods
subsequent to such date.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of oil and gas
reserves, assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
F-7
from those estimates. Estimates of oil and gas reserve quantities provide the
basis for calculations of depletion, depreciation, and amortization (DD&A) and
impairment, each of which represents a significant component of the financial
statements.
Revenue Recognition
-------------------
The Company currently has no revenue from continuing operations. The
Company's discontinued operations derived revenue primarily from the sale of
produced crude oil. Revenue (and net revenue interests) included in discontinued
operations represent amounts received before taking into account production
taxes and transportation costs, which are reported as separate expenses. Revenue
included in discontinued operations was recorded in the month the Company's
production was delivered to the purchaser and was not recognized unless title to
the product transferred to the purchaser.
Cash and Cash Equivalents
-------------------------
The Company considers all liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include demand deposits and money market funds carried at cost which
approximates fair value. The Company maintains its cash in institutions insured
by the Federal Deposit Insurance Corporation ("FDIC"). At March 31, 2011, the
Company had $3,633,228 in cash deposits in excess of FDIC insured limits.
Restricted cash
---------------
At March 31, 2011 the Company had $500,066 of restricted cash, which
was classified as a current asset. The restricted cash is held in an escrow
account until a determination is made by the Court of the responsible party for
legal fees incurred by GasRock Capital LLC in an adversary proceeding in process
(See Note 7).
Accounts Receivable
-------------------
Accounts receivable consists primarily of amounts due in connection
with substantially all of the Company's assets. Such amounts were held back from
the sales proceeds and are due contingent upon the Company providing certain
information post-closing, which has been performed as of March 31, 2011.
Oil and Gas Producing Activities
--------------------------------
The Company uses the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well does not find proved reserves, the costs of
drilling the well are charged to expense. Exploratory dry hole costs are
included in cash flows from investing activities as part of capital expenditures
within the consolidated statements of cash flows. The costs of development wells
are capitalized whether or not proved reserves are found. Costs of unproved
leases, which may become productive, are reclassified to proved properties when
proved reserves are discovered on the property. Unproved oil and gas interests
are carried at the lower of cost or estimated fair value and are not subject to
amortization.
Geological and geophysical costs and the costs of carrying and
retaining unproved properties are expensed as incurred. DD&A of capitalized
costs related to proved oil and gas properties is calculated on a
property-by-property basis using the units-of-production method based upon
proved reserves. The computation of DD&A takes into consideration restoration,
dismantlement, and abandonment costs and the anticipated proceeds from salvaging
equipment.
The Company complies with FASB ASC 932, "Extractive Activities - Oil
and Gas". The Company currently does not have any existing capitalized
exploratory well costs, and has therefore determined that no suspended well
costs should be impaired.
The Company reviews its long-lived assets for impairments when events
or changes in circumstances indicate that impairment may have occurred. The
impairment test for proved properties compares the expected undiscounted future
net cash flows on a property-by-property basis with the related net capitalized
costs, including costs associated with asset retirement obligations, at the end
of each reporting period. Expected future cash flows are calculated on all
proved reserves using a discount rate and price forecasts selected by the
Company's management. The discount rate is a rate that management believes is
representative of current market conditions. The price forecast is based on
NYMEX strip pricing, adjusted for basis and quality differentials, for the first
three to five years and is held constant thereafter. Operating costs are also
adjusted as deemed appropriate for these estimates. When the net capitalized
costs exceed the undiscounted future net revenues of a field, the cost of the
field is reduced to fair value, which is determined using discounted future net
F-8
revenues. An impairment allowance is provided on unproved property when the
Company determines the property will not be developed or the carrying value is
not realizable. The sale of substantially of the Company's assets in March, 2011
resulted in the Company having no oil and gas properties at March 31, 2011.
During the year ended March 31, 2010, the Company recognized an impairment of
$13,525,000, representing the excess of the carrying value over the estimated
realizable value of such properties. Following the recognition of impairment in
the year ended March 31, 2010, the net book value of the Company's unproved
properties was $0.
Sales of Proved and Unproved Properties
---------------------------------------
The sale of a partial interest in a proved oil and gas property is
accounted for as normal retirement, and no gain or loss is recognized as long as
this treatment does not significantly affect the units-of-production DD&A rate.
A gain or loss is recognized for all other sales of producing properties and is
reflected in results of operations. The sale of a partial interest in an
unproved property is accounted for as a recovery of cost when substantial
uncertainty exists as to recovery of the cost applicable to the interest
retained. A gain on the sale is recognized to the extent the sales price exceeds
the carrying amount of the unproved property. A gain or loss is recognized for
all other sales of nonproducing properties and is reflected in results of
operations.
Property and Equipment
----------------------
Property and equipment, such as office furniture and equipment, and
computer hardware and software, is recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repair costs are expensed when incurred.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets from three to seven years. When other property and
equipment is sold or retired, the capitalized costs and related accumulated
depreciation are removed from their respective accounts.
Deferred Financing Costs
------------------------
Costs incurred in connection with the Company's debt issuances are
capitalized and amortized over the term of the debt, which approximates the
effective interest method. Amortization of deferred financing costs of
$1,500,000 was recognized for the year ended March 31, 2010, and has been
charged to operations as an expense in the Statement of Operations.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments, including cash and cash
equivalents, accounts receivable, and accounts payable, are carried at cost,
which approximates fair value due to the short-term maturity of these
instruments. Because considerable judgment is required to develop estimates of
fair value, the estimates provided are not necessarily indicative of the amounts
the Company could realize upon the sale or refinancing of such instruments.
Income Taxes
------------
The Company uses the liability method of accounting for income taxes
under which deferred tax assets and liabilities are recognized for the future
tax consequences of temporary differences between the accounting bases and the
tax bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company adopted the provisions of FASB ASC 740, "Income Taxes" on
April 1, 2007. FASB ASC 740 provides detailed guidance for the financial
statement recognition, measurement and disclosure of uncertain tax positions
recognized in the financial statements. Tax positions must meet a
"more-likely-than-not" recognition threshold at the effective date to be
recognized upon the adoption of FASB ASC 740 and in subsequent periods. The
adoption of FASB ASC 740 had an immaterial impact on the Company's financial
position and did not result in unrecognized tax benefits being recorded.
Subsequent to adoption, there have been no changes to the Company's assessment
of uncertain tax positions. Accordingly, no corresponding interest and penalties
have been accrued. The Company's policy is to recognize penalties and interest,
if any, related to uncertain tax positions as general and administrative
expense. The Company files income tax returns in the U.S. Federal jurisdiction
and various states.
F-9
Net Loss per Share
------------------
Basic net (loss) per common share of stock is calculated by dividing
net loss available to common stockholders by the weighted-average of common
shares outstanding during each period.
Diluted net income per common share is calculated by dividing adjusted
net loss by the weighted-average of common shares outstanding, including the
effect of other dilutive securities. The Company's potentially dilutive
securities consist of in-the-money outstanding options and warrants to purchase
the Company's common stock. Diluted net loss per common share does not give
effect to dilutive securities as their effect would be anti-dilutive.
The treasury stock method is used to measure the dilutive impact of
stock options and warrants. The following table details the weighted-average
dilutive and anti-dilutive securities related to stock options and warrants for
the periods presented:
For the Year Ended March 31,
--------------------------------------
2011 2010
----------------- -----------------
Dilutive - -
Anti-dilutive 60,111,454 69,091,225
Stock options and warrants were not considered in the detailed
calculations below as their effect would be anti-dilutive.
The following table sets forth the calculation of basic and diluted
loss per share:
For the Year Ended March 31,
---------------------------------------------
2011 2010
-------------------- ---------------------
Net loss $ (674,059) $ (20,261,262)
Basic weighted average common shares outstanding 119,316,700 119,347,248
$ $
Basic and diluted net loss per common share (0.01) (0.17)
==================== =====================
Share-Based Payments
--------------------
The Company recognizes compensation cost for stock-based awards based
on estimated fair value of the award and records compensation expense over the
requisite service period. See Note 9 - Share-Based Compensation for further
discussion.
Commodity Derivatives
---------------------
The Company accounts for derivative instruments or hedging activities
under the provisions of FASB ASC 815 "Derivatives and Hedging". FASB ASC 815
requires the Company to record derivative instruments at their fair value. The
Company's risk management strategy is to enter into commodity derivatives that
set "price floors" and "price ceilings" for its crude oil production. The
objective is to reduce the Company's exposure to commodity price risk associated
with expected crude oil production.
The Company has elected not to designate the commodity derivatives to
which they are a party as cash flow hedges, and accordingly, such contracts are
recorded at fair value on its balance sheets and changes in such fair value are
recognized in current earnings as income or expense as they occur.
The Company does not hold or issue commodity derivatives for
speculative or trading purposes. The Company is exposed to credit losses in the
event of nonperformance by the counterparty to its commodity derivatives. It is
anticipated, however, that its counterparty will be able to fully satisfy its
obligations under the commodity derivatives contracts. The Company does not
obtain collateral or other security to support its commodity derivatives
contracts subject to credit risk but does monitor the credit standing of the
F-10
counterparty. The price the Company receives for production in its three fields
is indexed to Wyoming Sweet crude oil posted price. The Company has not hedged
the basis differential between the NYMEX price and the Wyoming Sweet price.
Under the terms of our Term Credit Agreement issued in October 2007 the Company
was required hedge a portion of its expected future production, and it entered
into a costless collar agreement for a portion of its anticipated future crude
oil production. The costless collar contains a fixed floor price (put) and
ceiling price (call). If the index price exceeds the call strike price or falls
below the put strike price, the Company receives the fixed price and pays the
market price. If the market price is between the call and the put strike price,
no payments are due from either party. The table below summarizes the terms of
the Company's costless collar:
The table below summarizes the realized and unrealized losses related
to the Company's derivative instruments for the years ended March 31, 2011 and
2010.
For the Year Ended March 31,
--------------------------------------------
2011 2010
------------------ ----------------------
Realized gains on derivative instruments $ - $ 98,378
Unrealized losses on derivative instruments $ - (455,960)
------------------ --------------------
Net realized and unrealized losses on derivative instruments $ - $ (357,582)
================== ====================
The Company's sole derivative instrument expired during the year ended
March 31, 2010, and the Company had no hedge positions after that date.
Comprehensive Income (Loss)
---------------------------
The Company does not have revenue, expenses, gains or losses that are
reflected in equity rather than in results of operations. Consequently, for all
periods presented, comprehensive loss is equal to net loss.
Major Customers
---------------
For the years ended March 31, 2011 and 2010, one customer accounted for
100% of the Company's oil and gas sales from discontinued operations.
Off-Balance Sheet Arrangements
------------------------------
As part of its ongoing business, the Company has not participated in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. From February 4, 2004 (inception) through March 31,
2011, the Company has not been involved in any unconsolidated SPE transactions.
Reclassification
----------------
Certain amounts in the 2010 financial statements have been reclassified
to conform to the 2011 financial statement presentation. Such reclassifications
had no effect on the Company's net loss.
Recent Accounting Pronouncements
--------------------------------
In January 2010, the FASB issued FASB Accounting Standards Update (ASU)
No. 2010-03 "Oil and Gas Estimations and Disclosures" (ASU 2010-03). This update
aligns the current oil and natural gas reserve estimation and disclosure
requirements of the Extractive Industries Oil and Gas topic of the FASB
Accounting Standards Codification (ASC Topic 932) with the changes required by
the SEC final rule ASC 2010-3, as discussed above, ASU 2010-03 expands the
disclosures required for equity method investments, revises the definition of
oil- and natural gas-producing activities to include nontraditional resources in
reserves unless not intended to be upgraded into synthetic oil or natural gas,
amends the definition of proved oil and natural gas reserves to require 12-month
average pricing in estimating reserves, amends and adds definitions in the
Master Glossary that is used in estimating proved oil and natural gas quantities
and provides guidance on geographic area with respect to disclosure of
information about significant reserves. ASU 2010-03 must be applied
F-11
prospectively as a change in accounting principle that is inseparable from a
change in accounting estimate and is effective for entities with annual
reporting periods ending on or after December 31, 2009. The Company adopted ASU
2010-03 effective December 31, 2009. The Company does not believe that
provisions of the new guidance, other than pricing, significantly impacted the
reserve estimates or consolidated financial statements. The Company does not
believe that it is practicable to estimate the effect of applying the new rules
on net loss or the amount recorded for depreciation, depletion and amortization
for the years ended March 31, 2011 and 2010.
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures
About Fair Value Measurements", which provides amendments to fair value
disclosures. ASU 2010-06 requires additional disclosures and clarifications of
existing disclosures for recurring and nonrecurring fair value measurements. The
revised guidance for transfers into and out of Level 1 and Level 2 categories,
as well as increased disclosures around inputs to fair value measurement, was
adopted January 1, 2010, with the amendments to Level 3 disclosures effective
beginning after January 1, 2011. ASU 2010-06 concerns disclosure only. Neither
the current requirements nor the amendments effective in 2011 will have a
material impact on the Company's financial position or results of operations.
Note 2 - Proceedings Under Chapter 11 of the United States Bankruptcy Code
On October 28, 2009 (the "Petition Date"), the Company filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court. The petition was filed in order to enable the Company to
pursue reorganization efforts under Chapter 11 of the Bankruptcy Code. The
Company continues to operate its business as debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In
general, as debtor-in-possession, the Company is authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside of the ordinary course of business without the prior approval of the
Bankruptcy Court.
No assurance can be provided as to what values, if any, will be
ascribed in the bankruptcy proceedings to the Company's Prepetition liabilities,
common stock and other securities. Based upon the status of the Company's plan
of reorganization, we currently believe that it is uncertain whether holders of
our securities will receive any payment in respect of such securities.
Accordingly, extreme caution should be exercised with respect to existing and
future investments in any of these liabilities or securities.
Subject to certain exceptions under the Bankruptcy Code, the Bankruptcy
Filing automatically enjoins, or stays, the continuation of any judicial or
administrative proceedings or other actions against the Company or its property
to recover on, collect or secure a claim arising prior to the Petition Date.
Thus, for example, creditor actions to obtain possession of property from the
Company, or to create, perfect or enforce any lien against the property of the
Company, or to collect on or otherwise exercise rights or remedies with respect
to a Prepetition claim are enjoined unless and until the Bankruptcy Court lifts
the automatic stay.
In order to successfully exit Chapter 11 bankruptcy, the Company will
need to propose, and obtain Bankruptcy Court confirmation of, a plan of
reorganization that satisfies the requirements of the Bankruptcy Code. A plan of
reorganization would, among other things, resolve the Debtors' Prepetition
obligations, set forth the revised capital structure of the newly reorganized
entity and provide for corporate governance subsequent to exit from bankruptcy.
In addition to the need for Bankruptcy Court confirmation and satisfaction of
Bankruptcy Code requirements, a plan of reorganization must be accepted by
holders of impaired claims and equity interests in order to become effective.
Under section 365 of the Bankruptcy Code, the Company may assume,
assume and assign, or reject executory contracts and unexpired leases, including
real property and equipment leases, subject to the approval of the Bankruptcy
Court and certain other conditions. Rejection constitutes a court-authorized
breach of the lease or contract in question and, subject to certain exceptions,
relieves the Company of its future obligations under such lease or contract but
creates a deemed Prepetition claim for damages caused by such breach or
rejection. Parties whose contracts or leases are rejected may file claims
against the Company for damages. The Company leased office space under a
non-cancelable operating lease that was scheduled to expire on July 31, 2012. In
October 2009, in connection with the Company's bankruptcy petition the Company
rejected the office lease and relocated April 2011. The Company reached
agreement with the building owner, to continue to occupy the office space on a
month to month basis at a significantly reduced rental rate and continued to
accrue the full amount of rent expense in accordance with the original lease. In
March 2011 an Order was issued by the Bankruptcy Court specifying the claim
amount to be $325,531. The $122,927 gain on the difference between the amount of
rent expense accrued and the Court specified amount is recognized as provision
for executory contracts rejected in the Statement of Operation.
F-12
The ability of the Company to continue as a going concern is dependent
upon, among other things, (i the ability of the Company to generate cash from
operations; (ii) the ability of the Company to maintain adequate cash on hand;
(iii) the ability of the Company to obtain confirmation of and to consummate a
plan of reorganization under the Bankruptcy Code; and, (iv) the cost, duration
and outcome of the reorganization process. Uncertainty as to the outcome of
these factors raises substantial doubt about the Company's ability to continue
as a going concern. The Company is currently evaluating various courses of
action to address the operational issues it is facing. There can be no assurance
that any of these efforts will be successful. The accompanying financial
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
As a result of the Bankruptcy Filing, realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
financial statements. The Company has recognized a net gain from the settlement
and adjustment of liabilities of $85,750 and $0 for the years ended March 31,
2011 and 2010, respectively.
Further, a plan of reorganization could materially change the amounts
and classifications reported in our financial statements. Our historical
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
The adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company's future prospects may hinder the
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with property owners and
potential lessees, vendors and service providers; negatively impacting the
ability of the Company to attract, retain and compensate key executives and
employees and to retain employees generally; limiting the Company's ability to
obtain trade credit; and limiting the Company's ability to maintain and exploit
existing properties and acquire and develop new properties.
Under the priority scheme established by the Bankruptcy Code, unless
creditors agree otherwise, post-petition liabilities and Prepetition liabilities
must be satisfied in full before shareholders of the Company are entitled to
receive any distribution or retain any property under a plan of reorganization.
The ultimate recovery, if any, to creditors and shareholders of the Company will
not be determined until confirmation and consummation of a plan of
reorganization. No assurance can be given as to what values, if any, will be
ascribed in the Bankruptcy Cases to each of these constituencies or what types
or amounts of distributions, if any, they would receive. Accordingly, the
Company urges that extreme caution be exercised with respect to existing and
future investments in any of the Company's liabilities and/or securities.
On October 15, 2010, the Company filed with the Court its proposed
Debtor's Plan of Reorganization and a proposed Disclosure Statement was filed
simultaneously with the Plan. On December 13, 2010, the Company filed with the
Court its First Amended Proposed Plan of Reorganization and Disclosure
Statement. The Disclosure Statement must be first approved by the Bankruptcy
Court before creditors and shareholders are presented with the opportunity to
vote on the Plan. Prior to confirmation and approval by the Court, the Proposed
Plan of Reorganization is subject to amendment.
On December 15, 2010, the Company filed a Motion to approve financing
from a party not affiliated with its present lender. The purpose of the loan is
to repay the existing lender in full and to pay certain past due ad valorem
taxes owed to Converse County, Wyoming. Converse County agreed that if it was
paid by February 1, 2011, it would waive penalties and interest of approximately
$93,000. This loan closed in January 2011, see Note 5 - Short Term Notes
Payable.
On December 20, 2010, the Company filed a Motion to allow the Company
to enter into an agreement and approve the sale of substantially all its assets
to the same party providing the new financing for the price of approximately $20
million. The sale closed effective March 1, 2011, see Note 3 - Discontinued
Operations.
Reorganization Items
Reorganization items represent the direct and incremental costs related
to the Company's Chapter 11 case, such as professional fees incurred, net of
interest income earned on accumulated cash during the Chapter 11 process. These
restructuring activities may result in additional charges and other adjustments
F-13
for expected allowed claims (including claims that have been allowed by the
Court) and other reorganization items that could be material to the Company's
financial position or results of operations in any given period.
Liabilities Subject to Compromise
Liabilities subject to compromise at March 31, 2011 and 2010 include
the following Prepetition liabilities:
2011 2010
-------------- --------------
Accounts payable, trade $ 176,616 $ 164,390
Other payables and accrued liabilities 820,312 395,291
Property and ad valorem taxes payable - 766,227
Convertible notes payable 140,000 140,000
-------------- --------------
$1,136,928 $ 1,465,908
============== ==============
Note 3 - Discontinued Operations
In March 2011, we completed the sale of all our oil and gas properties
and substantially all fixed assets for approximately $20,000,000, consisting of
cash of $3,503,000, a receivable of $250,000, secured note and accrued interest
payoff in the amount of $14,829,250, including purchase price adjustments and
allowances of $1,417,750. Significant purchase price adjustments and allowance
included the Company retaining performance bonds for properties in Wyoming of
$814,000, asset valuation adjustments of $130,000 and production tax allowance
of $395,000. For the fiscal year ended March 31, 2011 we recorded a gain on the
sale of discontinued operations of $4,807,221, which was determined as follows:
Total sales price $ 20,000,000
Adjustments to sales price for assets retained (945,367)
Transaction expenses from sale of assets (508,195)
---------------------
Adjusted sales price 18,546,438
Summary of assets sold:
Fixed assets, net 126,712
Oil and gas properties, net 13,630,945
Other assets (18,440)
---------------------
Total basis in assets sold 13,739,217
---------------------
Gain on disposition of assets, net $ 4,807,221
=====================
The financial results of our business related to oil and gas operations
have been classified as discontinued operations in our Statements of Operations
for all period presented. The following summarizes components of income (loss)
from the Company's discontinued operations for the years ended March 31, 2011
and 2010:
2011 2010
------------------- ------------------
Revenue $ 4,385,829 $ 3,228,156
------------------- ------------------
Operating expenses 4,558,108 17,193,360
------------------- ------------------
Operating loss from discontinued operations (172,279) (13,965,204)
Other expenses from discontinued operations, net (2,239,810) (3,495,636)
------------------- ------------------
Net operating loss from discontinued operations (2,412,089) (17,460,840)
Net gain on sale of discontinued operations 4,807,221 -
------------------- ------------------
Net income (loss) from discontinued operations $ 2,395,132 $ (17,460,840)
=================== ==================
F-14
The assets and liabilities relating to the Company's discontinued oil
and gas operations are reflected as assets and liabilities of discontinued
operations in the accompanying balance sheets. The following summarizes the
components of these assets and liabilities at March 31, 2011 and 2010:
March 31,
------------------------------------
2011 2010
---------------- ----------------
Assets:
------
Current assets of discontinued operations -
accounts receivable $ 45,229 $ 539,809
---------------- ----------------
Furniture and equipment, net - 265,965
Oil and gas properties, net - 16,108,293
Other assets 814,354 873,321
---------------- ----------------
Long-term assets of discontinued operations 814,354 17,247,579
---------------- ----------------
Total assets of discontinued operations $ 859,583 $ 17,787,388
================ ================
Liabilities:
-----------
Current liabilities of discontinued operations:
Accounts payable and accrued liabilities $ 58,191 $ 532,131
Asset retirement obligation 174,332
Accrued interest 893,615
Note payable - 10,089,987
---------------- ----------------
Total current liabilities of discontinued operations 58,191 11,690,065
Long-term liabilities of discontinued operations -
asset retirement obligation - 1,255,497
---------------- ----------------
$ 58,191 $ 12,945,562
================ ================
Oil and gas properties
The following summarizes the oil and gas properties of discontinued
operations as of March 31, 2011 and 2010:
2011 2010
------------ --------------
Proved properties $ - $ 19,432,703
------------ --------------
Unimproved properties excluded from DD&A - 52,716,480
Equipment and other - 314,334
------------ --------------
Unevaluated properties -
------------ --------------
Total oil and gas properties - 72,463,517
Less: Accumulated depletion, depreciation, - (56,355,224)
amortization and impairment
------------ --------------
$ - $ 16,108,293
============ ==============
F-15
Impairment of Unproved Properties
---------------------------------
In conjunction with the regular periodic assessment of impairment of
unproved properties, the Company assessed the carrying value of its unproved
properties giving consideration to volatility of commodity prices and the
difficulties encountered in raising capital to develop the properties. As a
result of this assessment, the Company recorded an impairment on unproved
properties of $13,525,000 during the year ended March 31, 2010. This amount is
included in operating expenses from discontinued operations.
Asset Retirement Obligations
----------------------------
The Company recognizes an estimated liability for future costs
associated with the abandonment of its oil and gas properties. A liability for
the fair value of an asset retirement obligation and a corresponding increase to
the carrying value of the related long-lived asset are recorded at the time a
well is completed or acquired. The increase in carrying value is included in
proved oil and gas properties in the balance sheets. The Company depletes the
amount added to proved oil and gas property costs and recognizes accretion
expense in connection with the discounted liability over the remaining estimated
economic lives of the respective oil and gas properties. Cash paid to settle
asset retirement obligations is included in the operating section of the
Company's statement of cash flows.
The Company's estimated asset retirement obligation liability is based
on our historical experience in abandoning wells, estimated economic lives,
estimated costs abandoning wells in the future, and Federal and state regulatory
requirements. The liability is discounted using a credit-adjusted risk-free rate
estimated at the time the liability is incurred or revised. The credit-adjusted
risk-free rate used to discount the Company's abandonment liabilities was 13.1%.
Revisions to the liability are due to changes in estimated abandonment costs and
changes in well economic lives, or if Federal or state regulators enact new
requirements regarding the abandonment of wells.
A reconciliation of the Company's asset retirement obligation liability
during the years ended March 31, 2011 and 2010 is as follows:
2011 2010
----------------- --------------------
Beginning asset retirement obligation $ 1,429,829 $ 1,280,680
Liabilities incurred
- -
Liabilities settled (1,589,138) -
Changes in estimates - (18,747)
Accretion expense 159,309 167,896
----------------- --------------------
Ending asset retirement obligation $ - $ 1,429,829
================= ====================
Current $ - $ 174,332
Long-term - 1,255,497
----------------- --------------------
$ - $ 1,429,829
================= ====================
Note 4 - Fair Value Measurements
On April 1, 2008, the Company adopted FASB ASC 820, "Fair Value
Measurements and Disclosures," which defines fair value, establishes a framework
for using fair value to measure assets and liabilities, and expands disclosures
about fair value measurements. The Statement establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company's assumptions of what market
participants would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is broken down
into three levels based on the reliability of the inputs as follows:
o Level 1: Quoted prices are available in active markets for identical
assets or liabilities;
o Level 2: Quoted prices in active markets for similar assets and
liabilities that are observable for the asset or liability; or
F-16
o Level 3: Unobservable pricing inputs that are generally less
observable from objective sources, such as discounted cash flow models
or valuations.
FASB ASC 820 requires financial assets and liabilities to be classified
based on the lowest level of input that is significant to the fair value
measurement. The Company's assessment of the significance of a particular input
to the fair value measurement requires judgment, and may affect the valuation of
the fair value of assets and liabilities and their placement within the fair
value hierarchy levels. As of March 31, 2011 the Company had no derivative or
other financial assets or liabilities required to be reported at fair value. In
accordance with FSP 157-2, the Company has not applied the provisions of ASC 820
to its asset retirement obligations.
Note 5 - Short Term Notes Payable
On January 28, 2011 the Company received debtor-in-possession financing
("DIP Financing") pursuant to a credit agreement (the "DIP Credit Agreement")
with a new lender. The DIP Credit Agreement provided loan advances up to an
aggregate of $14,700,000, and matures May 28, 2011 (total term of 120 days from
the date of closing). The Company borrowed a total of approximately $14.0
million under the DIP Credit Agreement and the proceeds were used to pay the
allowed, secured claims for certain ad valorem property taxes, amounts due to
under Prepetition Note (defined below) and to fund $100,000 for the Company's
bankruptcy estate if no plan or reorganization is approved.
The DIP Credit Agreement specifies interest at the rate of 10% per
annum for the 60 days following the date of closing and 12% per annum through
loan maturity. Accumulated interest and principal is due in full at maturity.
The DIP Financing lender obtained a valid and perfected first priority security
interest in and liens on all the collateral including, but not limited to: (a)
the Company's interests in oil and gas producing properties; (b) accounts
receivable; (c) equipment; (d) general intangibles; (e) accounts; (f) deposit
accounts; and (g) all other real and personal property of the Company.
On February 16, 2011, the Bankruptcy Court approved an order
authorizing the sale of substantially all of the Company's assets to the DIP
Financing lender for $20.0 million. Effective March 1, 2011, the Company sold
substantially of its assets to the DIP Financing Lender (see Note 3 -
Discontinued Operations). On March 14, 2011, all outstanding principal and
accrued interest totaling $14,829,250 were paid and the DIP Credit Agreement was
cancelled.
Through January 28, 2011, the Company had a note payable (the
"Prepetition Note") outstanding under the terms of a Term Credit Agreement with
a financial institution (the "Prepetition Lender"). The original principal
balance of $12,240,000 outstanding under the Prepetition Note was initially due
and payable on October 31, 2008, with interest accruing at a rate equal to the
greater of (a) 12% per annum; and (b) the one-month LIBOR rate plus 6% per
annum. The Prepetition Note was amended on October 22, 2008 (the "First
Amendment"), to extend the maturity date from October 31, 2008 to April 30,
2009. In consideration of the six month extension and other terms included in
First Amendment, the Company made a principal payment on the Prepetition Note in
the amount of $2,240,000, resulting in a new loan balance of $10,000,000. The
maturity date of the Prepetition Note was amended several times after April 30,
2009, with a final maturity date of October 15, 2009. In connection with these
amendments to the maturity date of the Prepetition Note, the Company granted the
Prepetition Lender various additional consideration, including overriding
royalty interests and net profits interests. Payment of the principal balance of
approximately $10,188,000, plus accrued interest, was not made on October 15,
2009, and therefore, an event of default occurred under the Term Credit
Agreement, as amended. In connection with the DIP Financing, the Prepetition
Note was paid in full on January 28, 2011.
The Company has filed an adversary action in the Bankruptcy Court
against the Prepetition Lender in an effort to avoid certain of the interests
previously assigned to the Prepetition Lender (see Note 7 - Commitments and
Contingencies).
Note 6 - Convertible Promissory Notes Payable
On October 27, 2009, the Company issued Convertible Promissory Notes
(the "Promissory Notes") totaling $140,000. One hundred thousand dollars of the
Promissory Notes were issued to officers and/or directors ($25,000 each). The
remainder of the Promissory Notes was issued to existing shareholders. The
Promissory Notes bear interest at an annual rate equal to the greater of (i)
12%, or (ii) the prime rate (as published in the Wall Street Journal) plus 3%.
The Promissory Notes are convertible, at the holder's option, into shares of the
Company's common stock at a conversion price of $0.02 per share, at any time
during the term of the Promissory Notes. The Promissory Notes matured on
F-17
November 1, 2010, and all obligations and payments due under the Promissory
Notes are subordinate to the Company's senior debt. As a result of the Company's
Chapter 11 bankruptcy filing described in Notes 1 and 2 above, the Company was
not able to pay principal and accumulated interest on the Promissory Notes when
due. Subject to certain exceptions under the Bankruptcy Code, the Company's
bankruptcy filing automatically enjoins, or stays, the continuation of any
judicial or administrative proceedings or other actions against the Company or
its property to recover on, collect or secure a claim arising prior to the
Petition Date.
Note 7 - Commitments and Contingencies
Commitments
-----------
On February 12, 2010, the Company filed an adversary action in the
Bankruptcy Court against the holder of the then senior secured note payable (see
NOTE 6 - Short Term Note Payable) seeking to avoid certain ownership interests
assigned to the Lender in connection with the Term Credit Agreement and
amendments thereto. On March 18, 2010, the Lender filed a motion with the Court
to dismiss the complaint. On October 21, 2010, the Court issued an order on the
Motion to Dismiss dismissing three of the nine claims made in the adversary
action. The Company is actively pursuing the remaining claims. The Company is
unable to predict a likely outcome or estimate the possible benefit should the
Company prevail in the litigation.
Bankruptcy Proceedings
----------------------
On October 28, 2009, the Company filed a voluntary petition for
reorganization under Chapter 11 in the United States Bankruptcy Court for the
District of Colorado During the pendency of the Chapter 11 proceedings, the
Company operates the business as a debtor-in-possession in accordance with the
provisions of Chapter 11, and will be subject to the jurisdiction of the
Bankruptcy Court. All pending or threatened litigation or claims involving the
Company were automatically stayed as a result of this Bankruptcy Filing, and all
such claims may be subject to compromise or modification through the terms of
any Plan of Reorganization filed by the Company in the Chapter 11 proceedings.
Litigation
----------
In a letter dated February 18, 2009 sent to each of the Company's
Directors, attorneys representing a group of persons who purchased approximately
$1,800,000 of securities (in the aggregate) in the Company's private placement
offering commenced in late 2006, alleged that securities laws were violated in
that offering. In April 2009, the Company entered into tolling agreements with
the purchasers to toll the statutes of limitations applicable to any claims
related to the private placement. The Company's Board of Directors directed the
Special Committee to investigate these allegations. The Company denies the
allegations and believes they are without merit. The Company cannot predict the
likelihood of a lawsuit being filed, its possible outcome, or estimate a range
of possible losses, if any, that could result in the event of an adverse verdict
in any such lawsuit. Any suit against the Company is stayed by the Chapter 11
case, and, insofar as these claims are asserted against the Company, they are
subject to the claim process imposed by the Bankruptcy Code and the possible
subordination under Section 510(b) of the Bankruptcy Code. The purchasers have
filed a Proof of Claim with the Bankruptcy Court in the amount of $1,776,050
plus ancillary amounts purported to be damages attributable to the alleged
securities violations. In June 2011, the Bankruptcy Court rendered a decision
that these claims are subordinated to unsecured claims.
A former supplier to the Company filed a Proof of Claim with the
Bankruptcy Court for alleged liquidated damages resulting from the Company's
filing for bankruptcy. In November 2010, the Company agreed to a settlement of
$375,000 with the former supplier, which the Bankruptcy Court approved as an
unsecured claim in December 2010. This amount is included in discontinued
operations on the accompanying statements of operations.
A law firm that was formerly counsel to the Company filed a Proof of
Claim for Prepetition fees, to which the Company has objected with the
Bankruptcy Court. No hearing on the matter has yet been held.
A former officer of the Company filed a Proof of Claim for wages and
benefits, to which the Company has objected with the Bankruptcy Court. No
hearing on the matter has yet been held.
GasRock filed a Proof of Claim for attorney's fees and costs related to
the Chapter 11 case generally, and to the litigation pending between GasRock and
the Company. The Company has objected to these fees on various grounds, and no
hearings on these objections have been held.
Note 8 - Stockholders' Equity
The Company's capital stock as of March 31, 2011 and 2010 consists of
275,000,000 authorized shares of common stock, par value $0.00001 per share.
Issuance of Common Stock
------------------------
During the year ended March 31, 2011, there were no issuances or
cancellations of common stock.
During the year ended March 31, 2010, activity in the Company's common
stock consisted of the following:
F-18
- issued 500,000 shares to an officer of the upon the exercise of stock
options;
- cancelled 200,000 of non-vested shares previously issued to directors
Warrants
--------
In connection with sale of common stock and other securities in the
fiscal year ended March 31, 2007, the Company issued warrants to purchase shares
of common stock. The following is a summary of warrants outstanding as of March
31, 2011:
Warrants Exercise Price Expiration Date
------------------- ------------------ -----------------------
Warrants issued in connection with the following:
Private placement of common stock 45,940,510 $1.50 March 30, 2012
Private placement of convertible notes payable 6,996,322 $1.50 March 30, 2012
Private placement agent commissions 1,445,733 $1.50 March 30, 2012
Acquisition of oil and gas properties 250,000 $1.50 December 22, 2011
-------------------
Total warrants outstanding at March 31, 2011 54,632,565
===================
Note 9 - Share-Based Compensation
Share-based awards to employees and directors are accounted for under
FASB ASC 718 "share-Based Payment FASB SAC 718 requires companies to recognize
share-based payments to employees as compensation expense using a fair value
method. Under the fair value recognition provisions of FASB ASC 718, stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as an expense over the service period on a straight-line
basis, which generally represents the vesting period. The Company did not
recognize a tax benefit from the stock compensation expense because it is more
likely than not that the related deferred tax assets, which have been reduced by
a full valuation allowance, will not be realized.
The Black-Scholes option-pricing model was used to estimate the option
fair values. The option-pricing model requires a number of assumptions, of which
the most significant are the stock price at the valuation date, the expected
stock price volatility, and the expected option term (the amount of time from
the grant date until the options are exercised or expire).
Prior to the adoption of FASB ASC 718, the Company reflected tax
benefits from deductions resulting from the exercise of stock options as
operating activities in the statements of cash flows. FASB ASC 718 requires tax
benefits resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) be classified and reported as
both an operating cash outflow and a financing cash inflow upon adoption of FASB
ASC 718. As a result of the Company's net operating losses, the excess tax
benefits, which would otherwise be available to reduce income taxes payable,
have the effect of increasing the Company's net operating loss carry forwards.
Accordingly, because the Company is not able to realize these excess tax
benefits, such benefits have not been recognized in the statements of cash flows
for the years ended March 31, 2011 and 2010.
Chief Executive Officer (CEO) and Non-Executive Director Option Grants
----------------------------------------------------------------------
On May 15, 2006, in connection with an employment agreement, the
Company granted its President and CEO options to purchase up to 4,000,000 shares
of Company common stock at an exercise price of $0.00001 per share. The options
vest as follows: (i) 1,000,000 shares upon execution of the employment
agreement, (ii) 1,000,000 shares from June 1, 2006 to May 31, 2007 at the rate
of 250,000 shares per completed quarter of service, (iii) 1,000,000 shares from
June 1, 2007 to May 31, 2008 at the rate of 250,000 shares per completed quarter
of service, and (iv) 1,000,000 shares from June 1, 2008 to May 31, 2010 at the
rate of 250,000 shares per completed quarter of service. In the event the
employment agreement is terminated, the CEO will be allowed to exercise all
options that are vested. All unvested options shall be forfeited. The options
have no expiration date.
The Company determined the fair value of the options to be $0.4235 per
underlying common share. The value was determined by using the Black-Scholes
valuation model using assumptions which resulted in the value of one Unit (one
common share and one warrant to purchase a common share) equaling $0.50, the
price of the most recently issued securities at the date of grant of the
F-19
options. The combined value was allocated between the value of the common stock
and the value of the warrant. The value of one common share from this analysis
($0.4235) was used to calculate the resulting compensation expense under the
provisions of SFAS 123(R). The assumptions used in the valuation of the CEO
options were as follows:
Volatility 87.00%
Expected option term One year
Risk-free interest rate 5.22%
Expected dividend yield 0.00%
The expected term of options granted was based on the expected term of
the warrants included in the Units described above. The expected volatility was
based on historical volatility of the Company's common stock price. The risk
free rate was based on the one-year U.S Treasury bond rate for the month of July
2006.
The Company recognized the remaining stock compensation expense
attributable to these options of $105,875 during the ended March 31, 2010. All
compensation expense relating to these options had been recognized prior to the
termination of the CEO on October 2, 2009.
On October 27, 2009, in conjunction with the execution of Management
Retention Agreements (the "Retention Agreement"), the Company's new CEO and each
of the Company's three non-executive directors was granted options to purchase
2,500,000 shares of the Company's common stock at an exercise price of $0.035
per share. The options expire on December 31, 2019 and are exercisable as
follows: 1) 10% on the date of grant; and 2) 90% on or after the earliest to
occur of: i) November 1, 2010; ii) the confirmation by the court of a
reorganization plan for the Company filed with the Bankruptcy Court; iii) the
dismissal of the Company from Chapter 11 bankruptcy with approval of the
Bankruptcy Court; iv) an event of merger, consolidation, sale of assets or other
transaction which results in the holders of the Company's common stock
immediately after such transaction owning less the 50% of the stock outstanding
immediately before any such transaction(s); v) any other Change of Control, as
defined in the Retention Agreement; or vi) a Voluntary Termination for Good
Reason, as defined in the Retention Agreement.
The Company determined the fair value of the options to be $0.0255 per
underlying common share. The value was determined using the Black-Scholes
valuation model using the following assumptions:
Volatility 125.14%
Expected option term 3 years
Risk-free interest rate 5.22%
Expected dividend yield 0.00%
The Company recognized stock based compensation expense relating to the
new CEO's and non-executive Director's options of $134,000 and $121,000 for the
fiscal years ended March 31, 2011 and 2010, respectively. As of March 31, 2011,
all outstanding options were vested.
2006 Stock Incentive Plan
-------------------------
On March 30, 2007, the 2006 Stock Incentive Plan (the 2006 Stock
Incentive Plan) was approved by the shareholders and was effective October 2,
2006. The 2006 Stock Incentive Plan had previously been approved by the
Company's Board of Directors. Under the 2006 Stock Incentive Plan, the Board of
Directors may grant awards of options to purchase common stock, restricted
stock, or restricted stock units to officers, employees, and other persons who
provide services to the Company or any related company. The participants to whom
awards are granted, the type of awards granted, the number of shares covered for
each award, and the purchase price, conditions and other terms of each award are
determined by the Board of Directors, except that the term of the options shall
not exceed 10 years. A total of 10,000,000 shares of Rancher Energy common stock
are subject to the 2006 Stock Incentive Plan. The shares issued for the 2006
Stock Incentive Plan may be either treasury or authorized and unissued shares.
During the year ended March 31, 2011 no options were granted under the 2006
Stock Incentive Plan. During the year ended March 31, 2010, options to purchase
1,700,000 of the Company's stock were granted to two employees and one
non-employee under the 2006 Stock Incentive Plan.
F-20
The fair value of the options granted under the 2006 Stock Incentive
Plan during fiscal 2010 was estimated as of the grant date using the
Black-Scholes option pricing model with the following assumptions:
Volatility 125.14%
Expected option term 3 years
Risk-free interest rate 5.22%
Expected dividend yield 0.00%
The expected volatility was based the volatility of the Company's
common stock for a period of time equivalent to the expected term. The expected
term of options granted was estimated in accordance with the simplified method
prescribed in SEC Staff Accounting Bulletin ("SAB") No. 107 and SAB No 110. The
risk free rate was based on the three-year U.S Treasury note rate.
The following table summarizes stock option activity for the year ended
March 31, 2011 and 2010:
2011 2010
----------------------------------------- -----------------------------------------
Weighted Average Weighted Average
Number of Options Exercise Price Number of Options Exercise Price
------------------- ------------------ ------------------ -------------------
Outstanding at beginning of year
$
Non-qualified 10,000,000 $0.00001 500,000 $0.00001
2006 Plan 2,206,000 $ 0.154 576,000 $0.612
Granted
Non-qualified - $ - 10,000,000 $0.035
2006 Plan - $ - 1,700,000 $0.035
Exercised
Non-qualified - $ - (500,000) $0.00001
2006 Plan - $ -
Cancelled
Non-qualified - $ - - -
2006 Plan (765,000) $ 0.279 (70,000) $0.984
------------------- ------------------
Outstanding at March 31,
Non-qualified 10,000,000 $ 0.035 10,000,000 $0.035
=================== ================== ================== ===================
2006 Plan 1,441,000 $ 0.0875 2,206,000 $0.154
=================== ================== ================== ===================
Exercisable at March 31,
Non-qualified 10,000,000 $ 0.035 1,000,000 $0.035
=================== ================== ================== ===================
2006 Plan 1,441,000 $ 0.0875 516,667 $0.40
=================== ================== ================== ===================
The following table summarizes information related to the
outstanding and vested options as of March 31, 2011:
Outstanding Options Vested Options
------------------- --------------------
Number of shares
Non-qualified 10,000,000
10,000,000
2006 Plan
Weighted average remaining contractual life
Non-qualified 3.6 years 3.6 years
2006 Plan 3.5 years 3.5 years
Weighted average exercise price
Non-qualified $ 0.035 $ 0.035
2006 Plan $ 0.0875 $ 0.0875
Aggregate intrinsic value
Non-qualified $(50,000) $(50,000)
$(82,825) $(82,825)
F-21
The following table summarizes changes in the unvested options for the
years ended March 31, 2011 and 2010:
Weighted
Average
Number of Grant Date
Options Fair Value
------------------- --------------------
Non-vested, April 1, 2009
Non-qualified 250,000 $ 0.42
2006 Plan 366,000 $ 0.27
-------------------
Total 616,000 $ 0.33
-------------------
Granted-
Non-qualified 10,000,000 $ 0.02545
2006 Plan 1,700,000 $ 0.02545
-------------------
Total 11,700,000 $ 0.02545
-------------------
Vested-
Non-qualified (1,250,000) $ 0.10506
2006 Plan (338,334) $ 0.13791
-------------------
Total (1,588,334) $ 0.01121
-------------------
Cancelled-
2006 Plan (37,333) $ 0.4996
-------------------
Non-vested, March 31, 2010
Non-qualified 9,000,000 $ 0.02545
2006 Plan 1,690,333 $ 0.04514
-------------------
Total 10,690,333 $ 0.02856
=================== ====================
Granted-
Non-qualified - $ -
2006 Plan - $ -
-------------------
Total - $ -
-------------------
Vested-
Non-qualified (9,000,000) $ 0.02545
2006 Plan (1,225,333) $ 0.04359
-------------------
Total (10,225,333) $ 0.02774
-------------------
Cancelled-
2006 Plan (465,000) $ 0.1343
-------------------
Non-vested, March 31, 2011
Non-qualified - $ -
2006 Plan - $ -
-------------------
Total - $ -
=================== ====================
The total intrinsic value, calculated as the difference between the
exercise price and the market price on the date of exercise of all options
exercised during the years ended March 31, 2011 and 2010, was approximately
$132,825 and $9,700, respectively. No options were exercised during the year
ended March 31, 2011. The Company received $5 for stock options exercised during
the year ended March 31, 2010. The Company did not realize any tax deductions
related to the exercise of stock options for either year.
Note 10 - Income Taxes
The effective income tax rate for the years ended March 31, 2011 and
2010 differs from the U.S. Federal statutory income tax rate due to the
following:
F-22
2011 2010
-------------------- ---------------------
Federal statutory income tax rate $ 236,000 $ 7,092,000
State income taxes, net of Federal benefit 1,000 21,000
Permanent items (254,000) (168,000)
Other 57,000 68,000
Change in valuation allowance (40,000) (7,013,000)
-------------------- ---------------------
$ - $ -
==================== =====================
The components of the deferred tax assets and liabilities as of March
31, 2011 and 2010 are as follows:
2011 2010
------------------- --------------------
Long-term deferred tax assets:
Federal net operating loss carryforwards $ 29,903,000 $ 11,663,000
Asset retirement obligation - 502,000
Stock-based compensation 761,000 714,000
Accrued expenses 132,000 6,000
Property, plant and equipment - 17,797,000
Long-term deferred tax liabilities:
Property, plant and equipment (75,000) -
Valuation allowance (30,721,000) (30,682,000)
------------------- --------------------
Net long-term deferred tax assets $ - $ -
=================== ====================
The Company has net operating loss carryovers of approximately
$85,200,000 as of March 31, 2011. The Company's net operating losses begin to
expire in 2024.
The Company has provided a full valuation allowance for the deferred
tax assets as of March 31, 2011 an 2010, based on the likelihood that the
deferred tax assets will not be utilized in the future.
Note 11 - Related Party Transactions
A director of the Company is a partner in the law firm that acts as
counsel to the Company. The Company incurred legal fees and expenses to the law
firm in the amount of $113,313 and $72,768 during the years ended March 31,
2011 and 2010, respectively. The amount owed to the law firm was approximately
$54,000 and $6,700 as of March 31, 2011 and 2010, respectively.
A director of the Company is a partner in a firm that provides field
supervision and consulting services to the Company. The Company incurred fees
and expenses to the firm in the amount of $108,969 and $68,907 during the years
ended March 31, 2011 and 2010, respectively. The amount owed to the firm was
$7,000 and $23,000 as of March 31, 2011 and 2010, respectively.
Note 12 - Disclosures About Oil and Gas Producing Activities (Discontinued
Operations)
Costs Incurred in Oil and Gas Producing Activities:
Costs incurred in oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, are summarized as
follows:
For the Year Ended March 31,
2011 2010
------------------ ----------------
Exploration $ 31,953 $ 19,181
Development 166,600 82,963
Acquisitions:
Unproved - -
Proved - -
------------------ ----------------
Total $ 198,553 $ 102,144
Costs associated with asset
retirement obligations $ - $ (18,747)
================== ================
F-23
Oil and Gas Reserve Quantities (Unaudited):
The Company had no reserves as of March 31, 2011. For the year ended
March 31, 2010, Ryder Scott Company, L.P. prepared the reserve information for
the Company's Cole Creek South, South Glenrock B, South Glenrock A, and Big
Muddy Fields in the Powder River Basin.
Proved oil and gas reserves, as defined in Regulation S-X., Rule
4-10(a)(22), are those quantities of oil and gas, which, by analysis of
geoscience and engineering data, can be estimated with reasonable certainty to
be economically producible from a given date forward. Proved developed oil and
gas reserves are those expected to be recovered through existing wells with
existing equipment and operating methods. All of the Company's proved reserves
were located in the continental United States.
Presented below is a summary of the changes in the Company's estimated
oil reserves (in barrels) for the years ended March 31, 2011 and 2010 (the
Company did not have any natural gas reserves).
2011 2010
------------------ ------------------
Total proved:
Beginning of year 851,179 1,166,702
Purchases, sales and assignments of minerals
in-place (790,212) (51,235)
Production (60,967) (56,818)
Revisions of previous estimates - (207,470)
------------------ ------------------
End of year - 851,179
================== ==================
Proved developed reserves: - 815,138
================== ==================
Standardized Measure of Discounted Future Net Cash Flows (Unaudited):
FASB ASC 932, "Disclosures about Oil and Gas Producing Activities"
prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. The Company has
followed these guidelines, which are briefly discussed below.
Future cash inflows were determined by applying average first day of
month prices received for the previous year, including transportation, quality,
and basis differentials ("net prices", and production and development costs in
effect at year-end to the year-end estimated quantities of oil and gas to be
produced in the future. Each property the Company operated was also charged with
field-level overhead in the estimated reserve calculation. Estimated future
income taxes were computed using current statutory income tax rates, including
consideration for estimated future statutory depletion. The resulting future net
cash flows were reduced to present value amounts by applying a 10% annual
discount factor.
Future operating costs were determined based on estimates of
expenditures to be incurred in developing and producing the proved oil and gas
reserves in place at the end of the period, using year-end costs and assuming
continuation of existing economic conditions, plus Company overhead incurred by
the central administrative office attributable to operating activities.
The assumptions used to compute the standardized measure are those
prescribed by the FASB and the SEC. These assumptions do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves,
nor their present value. The limitations inherent in the reserve quantity
estimation process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for the
valuation process. With the sale of all of the Company's properties in March
2011, the standardized measure of discounted future net cash flows is $0. The
price, as adjusted for transportation, quality, and basis differentials, used in
the calculation of the standardized measure for the year ended March 31, 2010
was $61.66 per barrel of oil. The Company properties did not produce marketable
quantities of natural gas.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in ASC 932:
F-24
As of March 31, As of March 31,
2011 2010
Future cash inflows $ - $ 54,752,000
Future production costs - (34,313,000)
Future development costs - (600,000)
Future income taxes - -
-------------------- --------------------
Future net cash flows - 19,839,000
10% annual discount - (10,089,000)
-------------------- --------------------
Standardized measure of discounted future net cash flows $ - $ 9,750,000
==================== ====================
The principal sources of change in the standardized measure of
discounted future net cash flows are:
For the year For the year
ended March 31, ended March 31,
2011 2010
---------------- -----------------
Standardized measure of discounted future net cash $ 9,750,000 $ 8,724,000
flows, beginning of year
Sales of oil and gas produced, net of production costs (1,835,000) (1,522,000)
Net changes in prices and production costs - 3,114,000
Purchase, sales and assignments of minerals in-place (8,890,000) (661,000)
Revisions of previous quantity estimates - (2,675,000)
Changes in future development costs - 828,000
Accretion of discount 975,000 872,000
Changes in timing and other - 1,070,000
----------------- ----------------
Standardized measure of discounted future $ - $ 9,750,000
net cash flows, end of year
================= ================
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RANCHER ENERGY CORP.
Dated: July 12, 2011
By: /s/ Jon C. Nicolaysen
------------------------------------
Jon C. Nicolaysen, Chief Executive
Officer & Principal Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: July 14, 2011
RANCHER ENERGY CORP.
/s/ Jon C. Nicolaysen
----------------------------------------
Jon C. Nicolaysen, Chief Executive
Officer & Director
/s/ A.L. Sid Overton
----------------------------------------
A.L. Sid Overton, Director
/s/ Mathijs van Houweninge
----------------------------------------
Mathijs van Houweninge, Director
/s/ Jeffrey B. Bennett
----------------------------------------
Jeffrey B. Bennett, Director
3
