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EXCEL - IDEA: XBRL DOCUMENT - T-REX OIL, INC.Financial_Report.xls
EX-31 - T-REX OIL, INC.ex31-1.txt
EX-32 - T-REX OIL, INC.ex32-1.txt

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2011

                                       OR

[_]     TRANSITION REPORT UNDER 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.
    -----------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


        Nevada                                         98-0422451
--------------------------                        ---------------------


                           999 18th Street, Suite 2700
                                Denver, CO 80202
                        ---------------------------------
                    (Address of principal executive offices)

                                 (303) 629-1125
                                ----------------
              (Registrant's telephone number, including area code)

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 Web site, if any, every  Interactive  Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.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 [x] No [ ]


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]                     Accelerated filer          [  ]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company)
Small 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]

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  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]

As of November  14, 2011,  119,316,723  shares of Rancher  Energy  Corp.  common
stock, $.00001 par value, were outstanding.



Table of Contents PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - September 30, 2011 (unaudited) and March 31, 2011.................................3 Statements of Operations (Unaudited) for the Three and Six Months Ended September 30, 2011 and 2010......................................................................4 Statement of Changes in Stockholders' Equity for the Six Months Ended September 30, 2011 (Unaudited)...................................................................6 Statements of Cash Flows (Unaudited) for the Six Months Ended September 30, 2011 and 2010..........7 Notes to Financial Statements (Unaudited)..........................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............15 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................23 Item 4. Controls and Procedures...........................................................................23 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................................24 Item 1A. Risk Factors......................................................................................25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................................25 Item 3. Defaults Upon Senior Securities...................................................................25 Item 4. Rescinded and Reserved............................................................................25 Item 5. Other Information.................................................................................25 Item 6. Exhibits..........................................................................................25 SIGNATURES.................................................................................................27 2
Part I - Financial Information Item 1. Financial Statements Rancher Energy Corp. (Debtor-in-possession) Balance Sheets September 30, March 31, 2011 2011 -------------------- ------------------- ASSETS (unaudited) ------ Current assets: Cash and cash equivalents $ 3,011,038 $ 3,883,228 Restricted cash 500,066 500,066 Accounts receivable 285,639 305,049 Prepaid expenses and other assets 285,202 115,826 Current assets of discontinued operations 286,570 45,229 ---------------------------------------- Total current assets 4,368,515 4,849,398 ======================================== Furniture and equipment, net of accumulated depreciation of $147,766 and $127,662, respectively 189,916 210,020 Deposits and other assets 200,350 350 Long-term assets of discontinued operations - 814,354 ---------------------------------------- Total other assets 390,266 1,024,724 ---------------------------------------- Total assets $ 4,758,781 $ 5,874,122 ======================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities - post petition $ 661,162 $ 1,155,151 Current liabilities of discontinued operations 26,887 58,191 ---------------------------------------- Total current liabilities, not subject to compromise 688,049 1,213,342 Liabilities subject to compromise 1,135,958 1,136,928 ----------------------------------------- Total liabilities 1,824,007 2,350,270 ---------------------------------------- Commitments and contingencies (Notes 2, 4 and 5) Stockholders' equity: Common stock, $0.00001 par value, 275,000,000 shares authorized; 119,316,723 shares issued and outstanding 1,194 1,194 Additional paid-in capital 93,193,008 93,193,008 Accumulated deficit (90,259,428) (89,670,350) ---------------------------------------- Total stockholders' equity 2,934,774 3,523,852 ---------------------------------------- Total liabilities and stockholders' equity $ 4,758,781 $ 5,874,122 ======================================== The accompanying notes are an integral part of these financial statements. 3
Rancher Energy Corp. (Debtor-in-possession) Statements of Operations (Unaudited) Three Months Ended September 30, ----------------------------------------- 2011 2010 ------------------- ----------------- Revenue $ - $ - ------------------- ----------------- Operating expenses: General and administrative expenses 289,865 431,504 Depreciation and amortization 8,616 27,267 ------------------- ----------------- Total operating expenses 298,481 458,771 ------------------- ----------------- Loss from operations (298,481) (458,771) ------------------- ----------------- Other income (expense): Interest expense and financing costs (6,064) (4,433) Interest and other income 88,254 223 ------------------- ----------------- Total other income (expense) 82,190 (4,210) ------------------- ----------------- Loss before reorganization items and discontinued operations (216,291) (462,981) ------------------- ----------------- Reorganization items - professional and legal fees (133,509) (579,061) ------------------- ----------------- Loss from continuing operations (349,800) (1,042,042) Discontinued operations - Income (loss) from discontinued operations 4,392 (982,487) ------------------- ----------------- Net loss $ (345,408) $ (2,024,529) =================== ================= Net loss per share from continuing operations $ (0.00) $ (0.01) =================== ================= Net loss per share from discontinued operations $ 0.00 $ (0.01) =================== ================= Basic and diluted net loss per share $ (0.00) $ (0.02) =================== ================= Basic and diluted weighted average shares outstanding 119,316,723 119,357,246 =================== ================= The accompanying notes are an integral part of these financial statements. 4
Statements of Operations (Unaudited) Six Months Ended September September 30, ----------------------------------------- 2011 2010 ------------------- ----------------- Revenue $ - $ - ------------------- ----------------- Operating expenses: General and administrative expenses 512,679 812,917 Depreciation and amortization 20,104 56,036 ------------------- ----------------- Total operating expenses 532,783 868,953 ------------------- ----------------- Loss from operations (532,783) (868,953) ------------------- ----------------- Other income (expense): Interest expense and financing costs (11,998) (8,820) Interest and other income 188,739 11,565 ------------------- ----------------- Total other income 176,741 2,745 ------------------- ----------------- Loss before reorganization items and discontinued operations (356,042) (866,208) ------------------- ----------------- Reorganization items - professional and legal fees (231,105) (719,536) ------------------- ----------------- Loss from continuing operations (587,147) (1,585,744) Discontinued operations - loss from discontinued operations (1,931) (1,399,076) ------------------- ----------------- Net loss $ (589,078) $ (2,984,820) =================== ================= Net loss per share from continuing operations $ (0.00) $ (0.01) =================== ================= Net loss per share from discontinued operations $ (0.00) $ (0.01) =================== ================= Basic and diluted net loss per share $ (0.00) $ (0.02) =================== ================= Basic and diluted weighted average shares outstanding 119,316,723 119,357,246 =================== ================= The accompanying notes are an integral part of these financial statements. 5
Statement of Changes in Stockholders' Equity For the Six Months Ended September 30, 2011 (Unaudited) Total Additional Accumulated Stockholders' Shares Amount Paid-In Capital Deficit Equity ----------------- ----------- ----------------- -------------------- ---------------- Balances, April 1, 2011 119,316,723 $1,194 $ 93,193,008 $ (89,670,350) $ 3,523,852 Net loss - - - (589,078) (589,078) ----------------- ----------- ----------------- -------------------- ----------------- Balances, September 30, 2011 119,316,723 $1,194 $ 93,193,008 $ (90,259,428) $ 2,934,774 ================= =========== ================= ==================== ================= The accompanying notes are an integral part of these financial statements. 6
Rancher Energy Corp. (Debtor-in-possession) Statements of Cash Flows (unaudited) For the Six Months Ended September 30, 2011 2010 ----------------- ----------------- Net loss $ (589,078) $ (2,984,820) Adjustments to reconcile net loss from continuing operations to cash used for operating activities, before reorganization items: Loss from discontinued operations 1,931 1,399,076 Reorganization items 231,105 719,536 Loss on sale of fixed assets - 3,290 Depreciation and amortization 20,104 56,036 Stock-based compensation expense - 145,465 Changes in operating assets and liabilities: Accounts receivable, prepaid expenses and other assets (149,966) 70,404 Accounts payable and accrued liabilities (330,498) 322,283 ----------------- ----------------- Net cash used for operating activities, before reorganization items (816,402) (268,730) Operating cash flows used for reorganization activities - professional fees for services rendered in connection with the Chapter 11 proceeding (395,566) (208,857) ----------------- ----------------- Net cash used for operating activities (1,211,968) (477,587) ----------------- ----------------- Cash flows used for investing activities - purchases of furniture, fixtures and equipment - (5,177) ----------------- ----------------- Discontinued operations: Operating cash flows 339,778 936,889 Investing cash flows - (152,817) ----------------- ----------------- Net cash provided by discontinued operations 339,778 784,072 ----------------- ----------------- (Decrease) increase in cash and cash equivalents (872,190) 301,308 Cash and cash equivalents, beginning of period 3,883,228 372,286 ----------------- ----------------- Cash and cash equivalents, end of period $ 3,011,038 $ 673,594 ================= ================= The accompanying notes are an integral part of these financial statements. 7
Rancher Energy Corp. (Debtor-in-possession) Notes to Financial Statements (unaudited) Note 1 - Organization and Summary of Significant Accounting Policies Organization ------------ Rancher Energy Corp. ("Rancher Energy" or the "Company") was incorporated in the state of Nevada on February 4, 2004. The Company's operations have included acquisition of, exploration for, development and production of oil and natural gas. These activities have historically concentrated on applying secondary and tertiary recovery technology to older, previously productive fields in North America. Basis of Presentation --------------------- The accompanying unaudited financial statements include the accounts of the Company's wholly owned subsidiary, Rancher Energy Wyoming, LLC, a Wyoming limited liability company that was formed on April 24, 2007. In management's opinion, the Company has made all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of financial position, results of operations, and cash flows. The financial statements should be read in conjunction with financial statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 2011. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to financial statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 2011. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. Bankruptcy Filing ----------------- On October 28, 2009, the Company filed a voluntary petition (the "petition") for reorganization relief ("the Bankruptcy Filing") in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the "Bankruptcy Court"). 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, (i) acquiring assets; (ii) the ability of the Company to generate cash from operations; (iii) the ability of the Company to maintain adequate cash on hand; (iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; and, (v) the cost, duration and outcome of the reorganization process. We are currently evaluating various courses of action with respect to our operations when, and if, we exit from bankruptcy. There can be no assurance that any our efforts to do so 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, certain 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) 852-10 "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 8
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 beginning in the period ending December 31, 2009. 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 be settled for lesser amounts. In addition, cash flows from 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, 2009 and currently segregates those items as outlined above for all reporting periods. 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 from those estimates. The Company has relied on estimates of oil and gas reserve quantities, and estimates of the useful lives of fixed assets, as the basis for calculations of depletion, depreciation, and amortization (DD&A) and impairment, which have historically represented a significant component of the financial statements. Accounts Receivable ------------------- Accounts receivable include $250,000 due in connection with the sale of the Company's oil and gas properties. The Company received payment for this amount in October 2011. Additionally, legal expenses incurred through September 30, 2011 of $25,640, relating to the Company's pending litigation (see Note 5 - Contingencies below), are also reimbursable from the purchaser of the Company's oil and gas properties. 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 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 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 9
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 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 all of the Company's assets in March 2011 resulted in the Company having no oil and gas properties at September 30, 2011. 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 loss 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 Six Months Ended September 30, -------------------------------------- 2011 2010 --------------- -------------- Dilutive - - Anti-dilutive 66,073,564 66,523,564 Reclassification ---------------- Certain amounts prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net loss. Other Significant Accounting Policies ------------------------------------- Other accounting policies followed by the Company are set forth in Note 1 to the Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2011, and are supplemented in the Notes to Financial Statements (unaudited) in this Quarterly Report on Form 10-Q for the six months ended September 30, 2011. These unaudited financial statements and notes should be read in conjunction with the financial statements and notes included in the Annual Report on Form 10-K for the year ended March 31, 2011. Recent Accounting Pronouncements -------------------------------- There were various updates issued recently, none of which are expected to have a material impact on the Company's financial position, results of operations or cash flows. Note 2 - Proceedings Under Chapter 11 of the 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 10
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, it is uncertain whether holders of our securities will receive any payment in respect of such 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. 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 did not reject any leases during the six months ended September 30, 2011. The Company sold substantially all of its assets effective March 1, 2011 and the currently proposed plan of reorganization restricts the Company's management to liquidating the Company's assets and making distributions on allowed claims until all allowed claims are satisfied and reserves are established for disputed claims. When and if all allowed claims are satisfied or fully reserved for, it is not known at this time whether the Company will commence new business opportunities or liquidate, and the mechanism for making this determination has yet to be established. The ability of the Company to continue as a going concern is dependent upon, among other things, (i) acquiring assets; (ii) the ability of the Company to generate cash from operations; (iii) the ability of the Company to maintain adequate cash on hand; (iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; and, (v) 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 financial statements. No adjustments to liabilities were recognized during the six months ended September 30, 2011. 11
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. Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied or reserved for 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 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. 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 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 include the following prepetition liabilities: September 30, March 31, 2011 2011 ----------------- ----------------- Accounts payable, trade $ 175,646 $ 176,616 Other payables and accrued liabilities 820,312 820,312 Convertible notes payable 140,000 140,000 ----------------- ----------------- $ 1,135,958 $ 1,136,928 ================= ================= Note 3 - Discontinued Operations In March 2011, we completed the sale of all of our oil and gas properties and substantially all fixed assets. 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 periods presented. The following summarizes components of loss from the Company's discontinued operations for the three and six months ended September 30, 2011 and 2010: Three Months Ended September 30, ------------------------------------------ 2011 2010 ------------------- ------------------- Revenue $ - $ 1,148,241 ------------------- ------------------- Operating expenses (4,392) 1,651,588 ------------------- ------------------- Operating income (loss) from discontinued operations 4,392 (503,347) Other expenses from discontinued operations, net - (479,140) ------------------- ------------------- Net income (loss) from discontinued operations $ 4,392 $ (982,487) =================== =================== Six Months Ended September 30, ------------------------------------------ 2011 2010 ------------------- ------------------- Revenue $ - $ 2,325,290 ------------------- ------------------- Operating expenses (2,109) 2,786,132 ------------------- ------------------- Operating income (loss) from discontinued operations 2,109 (460,842) Other expenses from discontinued operations, net (4,040) (938,234) ------------------- ------------------- Net loss from discontinued operations $ (1,931) $ (1,399,076) =================== =================== 12
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 included in the accompanying balance sheets: September 30, March 31, 2011 2011 ------------------- ------------------ Assets: ------ Current assets of discontinued operations: Accounts receivable $ 7,550 $ 45,229 Deposits and other assets 279,020 - ------------------- ------------------ 286,570 45,229 ------------------- ------------------ Long-term assets of discontinued operations - other assets - 814,354 ------------------- ------------------ Total assets of discontinued operations $ 286,570 $ 859,583 =================== ================== Liabilities: ----------- Current liabilities of discontinued operations - accounts payable and accrued liabilities $ 26,887 $ 58,191 =================== ================== Note 4 - 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 November 1, 2010. 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 automat- ically enjoins, or stays, the continuation of any judicial or administrative proceedings or other actions against the Company orits property to recover on, collect or secure a claim arising prior to the Petition Date. 13
Note 5 - Contingencies Pending Litigation ------------------ On February 12, 2010, the Company filed an adversary action in the Bankruptcy Court against the previous lender of a senior secured note payable, seeking to avoid certain ownership interests assigned to that previous lender in connection with the Term Credit Agreement and amendments thereto and seeking other damages. On March 18, 2010, the Company's previous 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. On May 20, 2011, the Company's previous lender filed three motions for summary judgment, seeking judgment on all of the Company's remaining claims. On November 2, 2011, the Court denied the motions for summary judgment. 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. In connection with the sale of the Company's oil and gas properties in March 2011, the purchaser has agreed to reimburse up to $250,000 of legal expenses incurred in connection with this adversary action. In addition, the Company's previous lender has asserted a claim against the Company for attorneys' fees and costs incurred in connection with the adversary action and the Company's bankruptcy case. The Company paid $814,110 in fees and costs to the previous lender in January 2011 to cause the release of the previous lender's security interest in the Company's assets. The Company has objected to the previous lender's claim for attorneys' fees and costs on various grounds, but no hearing has been scheduled. The Company also escrowed $500,000 for the potential liability, but liability could exceed the escrowed amount. Through August 31, 2011, the Company's previous lender asserted it had incurred $501,331 in attorneys' fees and costs that remained unpaid as of August 31, 2011. Threatened 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. 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 subordination under Section 510(b) of the Bankruptcy Code. The purchasers have filed Proofs 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. On January 24, 2011, the Company filed objections to these claims seeking their disallowance, and in June 2011, the Bankruptcy Court rendered a decision that these claims are subordinated to unsecured claims. The merits of the claims otherwise have not yet been addressed by the Bankruptcy Court and the matter therefore remains open and subject to appeal. Note 6 - Income Taxes As of September 30, 2011, the Company believes that it is more likely than not that its net deferred tax assets, which consist primarily of net operating losses, will not be utilized in the future. As such, a valuation allowance has been recognized for the full amount of its net deferred tax assets. The Company is subject to United States federal income tax and income tax from multiple state jurisdictions. Currently, the Internal Revenue Service is not reviewing any of the Company's federal income tax returns, and agencies 14
in states where the Company conducts business are not reviewing any of the Company's state income tax returns. All tax years remain subject to examination by tax authorities, including for the period from February 4, 2004 through March 31, 2011. Note 7 - Share-Based Compensation Grant of Options to Directors ----------------------------- On October 27, 2009, in conjunction with the execution of Management Retention Agreements (the "Retention Agreement"), each of the Company's four directors was granted options to purchase 2,500,000 share of the Company's common stock at an exercise price of $0.035 per share. The Company recognized stock based compensation expense relating to the directors' options of $114,537 for the six months ended September 30, 2010. As of September 30, 2011, all directors' options have vested and there was no remaining compensation expense to be recognized. 2006 Stock Incentive Plan ------------------------- As of September 30, 2011, there were 1,441,000 options outstanding under the 2006 Stock Incentive Plan and 8,559,000 options are available for issuance. The company recognized stock based compensation expense of $30,928 during the six months ended September 30, 2010. At September 30, 2011, and there was no remaining compensation expense to be recognized. Note 8 - Related Party Transactions A director of the Company is a partner in the law firm that acts as counsel to the Company. Legal fees and expenses from the law firm in the amount of $57,474 and $41,220 during the six months ended September 30, 2011 and 2010, respectively, are included in the accompanying statements of operations. As of September 30, 2011, the Company owed the law firm $2,656. A director of the Company is a partner in a firm that provides field supervision and consulting services to the Company. Fees and expenses from the firm in the amount of $6,867 and $62,533 during the six months ended September 30, 2011 and 2010, respectively, are included in the accompanying statements of operations. As of September 30, 2011, the Company owed the consulting firm $312. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Forward-Looking Statements -------------------------- The statements contained in this Quarterly Report on Form 10-Q that are not historical are "forward-looking statements", as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve a number of risks and uncertainties. These forward-looking statements include, among others, the following: o Business strategy; o Ability to develop a plan of reorganization acceptable to the Bankruptcy Court and to emerge from bankruptcy; o Ability to obtain any additional financial resources needed to continue operations, to repay secured debt, and to purchase additional oil and gas properties; o Inventories, projects, and programs; o Other anticipated capital expenditures and budgets; 15
o Future cash flows and borrowings; o The availability and terms of financing; o Oil reserves; o Ability to obtain permits and governmental approvals; o Technology; o Financial strategy; o Realized oil prices; o Production; o Lease operating expenses, general and administrative costs, and finding and development costs; o Availability and costs of drilling rigs and field services; o Future operating results; and o Plans, objectives, expectations, and intentions. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations", and other sections of this Quarterly Report on Form 10-Q. Forward-looking statements are typically identified by use of terms such as "may", "could", "should", "expect", "plan", "project", "intend", "anticipate", "believe", "estimate", "predict", "potential", "pursue", "target" or "continue", the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently. The forward-looking statements contained in this Quarterly Report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in the "Risk Factors" section and elsewhere in our Annual Report on Form 10-K for the year ended March 31, 2011. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. 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. 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. 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. 16
Proceedings under Chapter 11 ---------------------------- 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). 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. 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 did not reject any leases during the six months ended September 30, 2011. The Company sold substantially all of its assets effective March 1, 2011 and the Company's currently proposed plan of reorganization restricts the Company's management to liquidating the Company's assets and making distributions on allowed claims until all allowed claims are satisfied and reserves are established for disputed claims. When and if all allowed claims are satisfied or fully reserved for, it is not known at this time whether the Company will commence new business opportunities or liquidate, and the mechanism for making this determination has yet to be established. The ability of the Company to continue as a going concern is dependent upon, among other things, (i) acquiring assets; (ii) the ability of the Company to generate cash from operations; (iii) the ability of the Company to maintain adequate cash on hand; (iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; and, (v) 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. 17
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 financial statements. No adjustments to liabilities were recognized during the six months ended September 30, 2011. 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 prospective business activities and its ability to operate, fund and execute a prospective 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 or reserved for 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 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. Results of Operations --------------------- With the sale of substantially all of the Company's assets in March 2011, the Company's results of operations are presented as follows: Continuing operations o Results of the Company's continuing operations for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010; and o Results of the Company's continuing operations for the six months ended September 30, 2011 as compared to the six months ended September 30, 2010; and Discontinued operations o Results of the Company's discontinued operations for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010; and o Results of the Company's discontinued operations for the six months ended September 30, 2011 as compared to the six months ended September 30, 2010. Continuing Operations Three months ended September 30, 2011 compared to three months September 30, 2010 - continuing operations. 18
The following is a comparative summary of our results from continuing operations: Three Months Ended September 30, --------------------------------------- 2011 2010 ------------------ ------------------- Revenues $ - $ - ================== =================== Operating expenses: General and administrative 289,865 431,504 Depreciation and amortization 8,616 27,267 ------------------ ------------------- Total operating expenses 298,481 458,771 ------------------ ------------------- Loss from operations (298,481) (458,771) ------------------ ------------------- Other income (expense): Interest expense and financing costs (6,064) (4,433) Interest and other income 88,254 223 ------------------ ------------------- Total other income 82,190 (4,210) ------------------ ------------------- Loss before reorganization items (216,291) (462,981) Reorganization items (133,509) (579,061) ------------------ ------------------- Net loss from continuing operations $ (349,800) $ (1,042,042) ================== =================== Overview. For the three months ended September 30, 2011, we reported a net loss from continuing operations of ($349,800), or ($0.00) per basic and fully-diluted share, compared to a net loss of ($1,042,042) or ($0.01) per basic and fully-diluted share, for the corresponding three months of 2010. Discussions of individually significant period to period variances follow. General and administrative expense. For the three months ended September 30, 2011, we incurred general and administrative expenses of $289,865 as compared to $431,504 for the corresponding three months ended September 30, 2010. The decrease of $141,639 resulted primarily from decreases in compensation and office expenses. Savings in compensation expense resulted from stock option awards not being granted in 2011, offset, in part, by decreased overhead recoveries due to the Company not having any field operations during the three months ended September 30, 2011. Office expenses decreased primarily as a result of lower rent expense associated with the April 2011 relocation of the Company's headquarters. Reorganization items. Reorganization items totaling $133,509 for the three months ended September 30, 2011 include those items of expense specifically related to our reorganization following the filing of a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on October 28, 2009. These costs consist entirely of professional fees to legal counsel for assistance with our reorganization plan and other bankruptcy related matters. While these costs have decreased as compared to the corresponding three months in 2010 (total expense of $579,061), we expect these expenses will continue to be a significant component of expenses as we progress through the bankruptcy process. Interest and other income. The Company entered into an agreement to assign interests in a CO2 supply agreement to Merit Energy Company ("Merit"), beginning in December 2010. In return for this assignment, the Company receives a fee of $.03 per Mcf purchased by Merit under this supply agreement, which expires at the end of 2012. During the three months ended September 30, 2011, the Company recognized income of approximately $83,000 for purchases made under this supply agreement. 19
Six months ended September 30, 2011 compared to six months September 30, 2010 - continuing operations. The following is a comparative summary of our results from continuing operations: Six Months Ended September 30, --------------------------------------- 2011 2010 ---------------- ------------------- Revenues $ - $ - ================ =================== Operating expenses: General and administrative 512,679 812,917 Depreciation and amortization 20,104 56,036 ---------------- ------------------- Total operating expenses 532,783 868,953 ---------------- ------------------- Loss from operations (532,783) (868,953) ---------------- ------------------- Other income (expense): Interest expense and financing costs (11,998) (8,820) Interest and other income 188,739 11,565 ---------------- ------------------- Total other income 176,741 2,745 ---------------- ------------------- Loss before reorganization items (356,042) (866,208) Reorganization items (231,105) (719,536) ---------------- ------------------- Net loss from continuing operations $ (587,147) $ (1,585,744) ================ =================== Overview. For the six months ended September 30, 2011, we reported a net loss from continuing operations of ($587,147), or ($0.00) per basic and fully-diluted share, compared to a net loss of ($1,585,744) or ($0.01) per basic and fully-diluted share, for the corresponding six months of 2010. Discussions of individually significant period to period variances follow. General and administrative expense. For the six months ended September 30, 2011, we incurred general and administrative expenses of $512,679 as compared to $812,917 for the corresponding six months ended September 30, 2010. The decrease of $300,238 resulted primarily from decreases in compensation and office expenses. Savings in compensation expense resulted from stock option awards not being granted in 2011, offset, in part, by decreased overhead recoveries due to the Company not having any field operations during the six months ended September 30, 2011. Office expenses decreased primarily as a result of lower rent expense associated with the April 2011 relocation of the Company's headquarters. Reorganization items. Reorganization items totaling $231,105 for the six months ended September 30, 2011 include those items of expense specifically related to our reorganization following the filing of a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on October 28, 2009. These costs consist entirely of professional fees to legal counsel for assistance with our reorganization plan and other bankruptcy related matters. While these costs have decreased as compared to the corresponding six months in 2010 (total expense of $719,536), we expect these expenses will continue to be a significant component of expenses as we progress through the bankruptcy process. 20
Interest and other income. The Company entered into an agreement to assign interests in a CO2 supply agreement to Merit, beginning in December 2010. In return for this assignment, the Company receives a fee of $.03 per Mcf purchased by Merit under this supply agreement, which expires at the end of 2012. During the six months ended September 30, 2011, the Company recognized income of approximately $162,000 for purchases made under this supply agreement. Discontinued Operations Three months ended September 30, 2011 compared to three months September 30, 2010 - discontinued operations. The following is a comparative summary of our results from discontinued operations for the three months ended September 30, 2011 and 2010: 2011 2010 --------------- --------------- Revenue $ - $ 1,148,241 - --------------- --------------- Operating expenses (4,392) 1,651,588 --------------- --------------- Operating income (loss) from discontinued operations 4,392 (503,347) Other expenses from discontinued operations, net - (479,140) --------------- --------------- Net income (loss) from discontinued operations $ 4,392 $ (982,487) =============== =============== Overview. For the three months ended September 30, 2011, we reported net income of $4,392 or $0.00 per basic and fully-diluted share, compared to a net loss of ($982,487) or ($0.01) per basic and fully-diluted share, for the corresponding three months of 2010. With the sale of all of the Company's oil and gas properties in March 2011, the Company had no revenue or notable expenses relating to discontinued operations during the three months ended September 30, 2011. Six months ended September 30, 2011 compared to six months September 30, 2010 - discontinued operations. The following is a comparative summary of our results from discontinued operations for the six months ended September 30, 2011 and 2010: 2011 2010 --------------- --------------- Revenue $ - $ 2,325,290 --------------- --------------- Operating expenses (2,109) 2,786,132 --------------- --------------- Operating income (loss) from discontinued operations 2,109 (460,842) Other expenses from discontinued operations, net (4,040) (938,234) --------------- --------------- Net loss from discontinued operations $ (1,931) $ (1,399,076) =============== =============== Overview. For the six months ended September 30, 2011, we reported a net loss of ($1,931) or ($0.00) per basic and fully-diluted share, compared to a net loss of ($1,399,076) or ($0.01) per basic and fully-diluted share, for the corresponding three months of 2010. With the sale of all of the Company's oil 21
and gas properties in March 2011, the Company had no revenue or notable expenses relating to discontinued operations during the six months ended September 30, 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 are in bankruptcy and have incurred a cumulative net loss of approximately $90 million for the period from inception (February 4, 2004) to September 30, 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 received 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 $279,000 and were returned to the Company in October 2011. We expect that our monthly operating expenses (excluding reorganization items) 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. 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. The following is a summary of our comparative cash flows: For the Six Months Ended September 30, -------------------------------------- 2011 2010 ------------------ ---------------- Cash flows used for continuing operations: Operating activities, including reorganization items $ (1,211,968) $ (477,587) Investing activities - (5,177) Cash flows from (used for) discontinued operations: Operating activities $ 339,778 $ 936,889 Investing activities - (152,817) Cash flows used for continuing operations increased in 2011 as compared to 2010, primarily due to the Company settling certain liabilities associated with the sale of substantially all of its assets in March 2011 and payments issued for professional and legal fees associated with the ongoing bankruptcy. Cash flows from operating activities of discontinued operations for 2011 included the return of certain amounts previously on deposit for performance bonds relating to oil and gas properties sold. Funds used for 22
investing activities in 2010 include the cost of work performed to establish oil production in a new zone of an existing well. Off-Balance Sheet Arrangements ------------------------------ We have no material off-balance sheet arrangements nor do we have any unconsolidated subsidiaries. Critical Accounting Policies and Estimates ------------------------------------------ Critical accounting policies and estimates are provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, both of which are included in Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. Additional footnote disclosures are provided in Notes to Financial Statements (unaudited), which are include in Item 1. Financial Statements to this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. Item 3. Quantitative and Qualitative Disclosure About Market Risk Commodity Price Risk -------------------- Because we are not currently operating on any oil and gas properties, we are not exposed to market risk relating to the pricing applicable to the oil and gas commodity markets. However, our ability to raise additional capital at attractive rates, any future revenues from oil and gas operations, and our profitability will depend substantially upon the market prices of oil and natural gas, which fluctuate widely. To the extent we are able to acquire additional oil and gas producing properties, exposure to this risk will become significant. We expect commodity price volatility to continue. Financial Market Risk --------------------- The debt and equity markets have exhibited adverse conditions in recent years. The unprecedented volatility and upheaval in the capital markets impacted our ability to refinance or extend our existing short term debt when it matured on October 15, 2009. Going forward, market conditions may affect the availability of capital for prospective lenders or purchasers of or equity. Item 4. Controls and Procedures Disclosure Controls and Procedures ---------------------------------- We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive 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 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 officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The conclusion by our Chief Executive Office is the identification of the following material weakness in our internal control over financial reporting and, as a result of this material weakness, we concluded as of March 31, 2011 and as of the end of the period covered by this Quarterly Report that our disclosure controls and procedures were not effective. 23
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 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. 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. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings On October 28, 2009, the Company filed a voluntary 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 Part 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 (the "Lender") 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 the Lender when its loan was first made, on the grounds that they should be re-characterized as security interests and not outright transfers of title. 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 Sections 547 of the Bankruptcy Code and to equitably subordinate the Lender's claim. Although the Company believes its claims are well-taken, the Company expects the Lender to vigorously defend against the complaint, and no assurance can be given that the Company will be successful in whole or in part. On October 21, 2010, the Court issued an order dismissing three of nine claims made in the adversary action regarding re-characterization. On May 20, 2011, the Company's previous lender filed three motions for summary judgment, seeking judgment on all of the Company's remaining claims. On November 2, 2011, the Court denied the motions for summary judgment. The Company plans to pursue the remaining claims and may move to have the Bankruptcy Court reconsider the dismissal of the re-characterization claims. In addition, the Lender has asserted a claim against the Company for attorneys' fees and costs incurred in connection with the adversary action and the Company's bankruptcy case. The Company has objected to the Lender's claim 24
for attorneys' fees and costs on various grounds, but no hearing has been scheduled. The Company paid the Lender $814,110 in fees and costs. Through August 31, 2011, the Lender asserted it had incurred an additional $501,331 in attorneys' fees and costs that remained unpaid. See also Note 5 - Contingencies, included in Part 1 - Financial Statements of this quarterly filing, for a description of threatened litigation. ITEM 1A. Risk Factors Not applicable to smaller reporting companies. ITEM 2. CHANGES IN SECURITIES NONE. ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE. ITEM 4. RESERVED AND RESCINDED ITEM 5. OTHER INFORMATION NONE. ITEM 6. EXHIBITS The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K. Exhibit 31.1 Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32.1 Certification of Principal Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act 101.INS XBRL Instance Document (1) 101.SCH XBRL Taxonomy Extension Schema Document (1) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1) 25
101.LAB XBRL Taxonomy Extension Label Linkbase Document (1) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1) (1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. *Filed herewith. 26
SIGNATURES Pursuant to the requirements 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: November 21, 2011 By: /s/ Jon C. Nicolaysen --------------------- Jon C. Nicolaysen, President, Chief Executive Officer, and Acting Chief Accounting Officer 2