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EX-32 - RANCHER ENERGY CORP.ex32.txt
EX-31 - RANCHER ENERGY CORP.ex31.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 December 31, 2012

                                       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

(State or other of jurisdiction or             (IRS Employer Identification No.)
organization)

                        1615 California Street Suite 607
                                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
wasrequired  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 February 1, 2013, 119,862,791 shares of Rancher Energy Corp. common stock,
$0.00001 par value, were outstanding.



2 Table of Contents PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets -December 31, 2012 (Unaudited) and March 31, 2012 (Audited).............................3 Statements of Operations (Unaudited) for the Three and Nine Months Ended December 31, 2012 and 2011 ..........................................................................4 Statement of Changes in Stockholders' Equity for the Nine Months Ended December 31, 2012 (Unaudited)........................................................................6 Statements of Cash Flows(Unaudited) for the Nine Months Ended December 31, 2012 and 2011 ..............7 Notes to Financial Statements (Unaudited)..............................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................22 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. Mine and Safety Disclosures...........................................................................25 Item 5. Other Information.....................................................................................25 Item 6. Exhibits..............................................................................................25 SIGNATURES.....................................................................................................27 2
Item 1. Financial Statements Rancher Energy Corp. Balance Sheets December 31, March 31, 2012 2012 (unaudited) (audited) --------------- --------------- ASSETS Current Assets: Cash and cash equivalents $2,193,409 $3,229,858 Restricted cash - 500,641 Accounts receivable - 30,958 Accounts receivable, settlement - 525,000 Prepaid expenses and other 116,103 303,104 --------------- --------------- Total current assets 2,309,512 4,589,561 --------------- --------------- Furniture and equipment, net of accumulated depreciation of $190,846 and $164,998 respectively 146,836 172,684 Deposits and other assets 200,000 200,350 --------------- --------------- Total other assets 346,836 373,034 --------------- --------------- Total assets $2,656,348 $4,962,595 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities - post petition $ 11,176 $ 449,224 Accounts payable, settlement - 500,000 Current liabilities of discontinued operations - 112,620 --------------- --------------- Total current liabilities, not subject to compromise 11,176 1,061,844 Liabilities subject to compromise 98,584 1,259,827 --------------- --------------- Total liabilities $ 109,760 $2,321,671 --------------- --------------- Stockholders' Equity Common stock, $0.00001 par value; 275,000,000 shares authorized, 119,862,791 and 119,316,723 shares issued and outstanding at December 31, 2012 and March 31, 2012, respectively 1,200 1,194 Additional paid-in capital 93,205,016 93,193,008 Accumulated deficit (90,659,628) (90,553,278) --------------- --------------- Total stockholders' equity 2,546,588 2,640,924 --------------- --------------- Total liabilities and stockholders' equity $ 2,656,348 $4,962,595 =============== =============== See notes to these financial statements. See notes to these financial statements 3
Rancher Energy Corp. Statements of Operations (Unaudited) For the Three Months Ended December 31, 2012 2011 ---------------------- ---------------------- Revenue $ - $ - ---------------------- ---------------------- Operating expenses: General and administrative expenses 159,132 360,236 Depreciation and amortization 8,616 8,616 ---------------------- ---------------------- Total operating expenses 167,748 368,852 ---------------------- ---------------------- (Loss) from operations (167,748) (368,852) ---------------------- ---------------------- Other income (expense): Interest expense and financing costs - (6,096) Interest and other income 84,234 84,095 ---------------------- ---------------------- Total other income 84,234 77,999 ---------------------- ---------------------- (Loss) before reorganization items and discontinued operations (83,514) (290,853) Reorganization items: Credit of professional and legal fees - - Professional and other costs, net (65,768) (43,675) ---------------------- ---------------------- Total reorganization items (65,768) (43,675) ---------------------- ---------------------- (Loss) from continuing operations (149,282) (334,528) ---------------------- ---------------------- Discontinued operations: Income from discontinued operations - 32 ---------------------- ---------------------- Total income from discontinued operations - 32 ---------------------- ---------------------- Net (loss) $ (149,282) $ (334,496) ====================== ====================== Net (loss) per share from continuing operations $ 0.00* $ 0.00* ====================== ====================== Net income per share from discontinued operations $ 0.00* $ 0.00* ====================== ====================== Basic and diluted net (loss) per share $ 0.00* $ 0.00* ====================== ====================== Basic and diluted weighted average shares outstanding 119,862,791 119,316,723 ====================== ====================== * Less than $0.01 per share See notes to these financial statements. 4
Rancher Energy Corp. Statements of Operations (Unaudited) For the Nine Months Ended December 31, 2012 2011 ---------------------- ---------------------- Revenue $ - $ - ---------------------- ---------------------- Operating expenses: General and administrative expenses 409,527 872,915 Depreciation and amortization 25,848 28,720 ---------------------- ---------------------- Total operating expenses 435,375 901,635 ---------------------- ---------------------- (Loss) from operations (435,375) (901,635) ---------------------- ---------------------- Other income (expense): Interest expense and financing costs 47,236 (18,094) Interest and other income 321,384 272,834 ---------------------- ---------------------- Total other income 368,620 254,740 ---------------------- ---------------------- (Loss) before reorganization items and discontinued operations (66,755) (646,895) Reorganization items: Loss on settlement (25,000) - Professional and other costs, net (14,595) (274,780) ---------------------- ---------------------- Total reorganization items (39,595) (274,780) ---------------------- ---------------------- (Loss) from continuing operations (106,350) (921,675) ---------------------- ---------------------- Discontinued operations: (Loss) from discontinued operations - (1,899) ---------------------- ---------------------- Total (loss) discontinued operations - (1,899) ---------------------- ---------------------- Net (loss) $ (106,350) $ (923,574) ====================== ====================== Net (loss) per share from continuing operations $ 0.00* $ (0.01) ====================== ====================== Net (loss) per share from discontinued operations $ 0.00* $ 0.00* ====================== ====================== Basic and diluted net (loss) per share $ 0.00* $ (0.01) ====================== ====================== Basic and diluted weighted average shares outstanding 119,499,098 119,316,723 ====================== ====================== * Less than $0.01 per share See notes to these financial statements. 5
Rancher Energy Corp. Statements of Cash Flows (Unaudited) For The Nine Months Ended December 31, 2012 2011 ----------------- ----------------- Cash flows (used in) operating activities: Net (loss) $ (106,350) $ (923,574) Adjustments to reconcile net (loss) from continuing operations to cash used in operating activities, before reorganization items: Loss from discontinued operations - 1,899 Reorganization items, net 39,595 274,780 Depreciation and amortization 25,848 28,720 Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 217,959 89,229 Accounts payable and accrued liabilities (438,048) (173,378) ----------------- ----------------- Net cash used in operating activities, before reorganization items (260,996) (702,324) ----------------- ----------------- Payments for reorganization items - Professional and other costs rendered in connection with the Chapter 11 proceeding (1,163,824) (531,964) ----------------- ----------------- Net cash used in operating activities (1,424,820) (1,234,288) ----------------- ----------------- Cash flows from (used in) investing activities: - - Cash flows from (used in) financing activities: - - Discontinued operations: Cash flows from (used in) discontinued operating activities 388,371 691,024 Cash flows from (used in) discontinued investing activities - - Cash flows from (used in) discontinued financing activities - - ----------------- ----------------- Net cash provided by discontinued operations 388,371 691,024 ----------------- ----------------- (Decrease) in cash and cash equivalents (1,036,449) (543,264) Cash and cash equivalents, beginning of period 3,229,858 3,883,228 ----------------- ----------------- Cash and cash equivalents, end of period $ 2,193,409 $ 3,339,964 ================= ================= SUPPLEMENTAL SCHEDULE OF CASHFLOW INFORMATION Cash paid for interest $ - $ 18,094 ================= ================= See notes to these financial statements. 6
Rancher Energy Corp. Statement of Changes in Stockholders' Equity (Unaudited) Additional paid-in Accumulated Shares Amount Capital Deficit Total ------------------ ------------ ---------------- -------------- -------------- Balance - March 31, 2012 119,316,723 $ 1,194 $ 93,193,008 $(90,553,278) $2,640,924 Shares issued for warrants 546,068 6 12,008 - 12,014 Net (loss) for the period - - - (106,350) (106,350) ------------------ ------------ ---------------- -------------- -------------- Balance - December 31, 2012 119,862,791 $ 1,200 $ 93,205,016 $(90,659,628) $2,546,588 ================== ============ ================ ============== ============== See notes to these financial statements. 7
RANCHER ENERGY CORP. NOTES TO THE FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2012 AND 2011 (Unaudited) Note 1 - Business Organization Organization ------------ Rancher Energy Corp. ("Rancher Energy" or the "Company") formerly known as Metalex Resources, Inc. ("Metalex") was incorporated in Nevada on February 4, 2004. 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 continued 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 until its plan of reorganization (the "Plan") was approved by the Bankruptcy Court and the Company was discharged from bankruptcy on its effective date of September 28, 2012. See Note 3 - Proceedings Under Chapter 11 of the Bankruptcy Code. Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 ASC 852-10 effective on October 28, 2010 and will segregate those items as outlined above for all activityprior to September 28, 2012. As the Company emerged from bankruptcy, it reviewed the use of "Fresh-start" accounting and determined that pursuant with ASC 852, the Company does not qualify to use the provisions of "Fresh-start" accounting. The Company's voting shareholders immediately before the confirmation date do not ownless than 50% of the voting shares of the emerging entity. Note 2 - Summary of Significant Accounting Policies 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 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. 8
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 December 31, 2012, the Company had $1,943,409in cash deposits in excess of FDIC insured limits. Restricted cash --------------- The restricted cash that was held in an escrow account in the amount of $500,641 was released on July 18, 2012 as part of an agreed upon and Bankruptcy Court approved settlement agreement. See Note 7 - Commitments and Contingencies. Accounts Receivable ------------------- As of July 18, 2012, the Bankruptcy Court approved and the Company received $525,000 as part of a royalty fee arrangement relating to a settlement agreement among Rancher Energy, GasRock and Linc Energy and at December 31, 2012 the balance owed to the Company is $0.See Note 7 - Commitments and Contingencies. 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 ASC 932, "Extractive Activities - Oil and Gas". The Company currently does not have any existing capitalized exploratory well costs, and has therefore determined that there are no suspended well costs that 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 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 December 31, 2012 or March 31, 2012. 9
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. See the description of the sale of all oil and gas properties as of March 1, 2011 contained in the Item 2 of Part I of this report as a result of the bankruptcy filing. Property and Equipment ---------------------- Property and equipment, such as office furniture and equipment, and computer hardware and software, are 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. Depreciation expense for the three and nine months ended December 31,2012 was $8,616 and $25,848 and for the three and nine months ended December 31, 2011 was $8,616 and $28,720, respectively. 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. Revenue Recognition ------------------- The Company currently has no revenue from continuing or discontinued operations, other than payments received for the resale of carbon dioxide under a supply and sales agreement that expired in December 2012. 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 assessed the likelihood of utilization of the deferred tax assets in light of recent and expected continuing losses. As a result of this review, the deferred tax asset of $12,443,000 and $12,407,000 has been fully reserved at December 31, 2012 and March 31, 2012, respectively. At December 31, 2012, the Company had net operating loss carryforwards of approximately $37,400,000that begin to expire in the year 2023. The Company adopted the provisions of 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 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. 10
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 number of common shares outstanding during each period. Diluted net (loss) per common share is calculated by dividing net (loss) by the weighted-average number 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 Nine Months Ended December 31, ------------------------------------- 2012 2011 ----------------- ---------------- Dilutive - - Anti-dilutive 5,478,889 66,073,564 Stock options and warrants were not considered in the detailed calculations as their effect would be anti-dilutive. 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. 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 income (loss) is equal to net income (loss). Major Customers --------------- The Company's only source of income was from a carbon dioxide resale contract that expired in December 2012. The Company had no oil and gas operations during the three and nine months ended December 31, 2012 and 2011, and no customers or billings as a result. 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 its incorporation on February 4, 2004 through December 31, 2012, the Company has not been involved in any unconsolidated SPE transactions. Reclassification ---------------- Certain amounts in the prior period financial statements have been reclassified to conform to the current period financial statement presentation. Such reclassifications had no effect on the Company's net income (loss). 11
Recent Accounting Pronouncements -------------------------------- The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations. Note 3- Proceedings under Chapter 11 of the United States Bankruptcy Code On October 28, 2009, the Company filed a 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 continued 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 until its Plan was approved by the Bankruptcy Court and the Company was discharged from bankruptcy on its effective date of September 28, 2012. In general, as debtor-in-possession, the Company was authorized under Chapter 11 to continue to operate as an ongoing business, but could not engage in transactions outside of the ordinary course of business without the prior approval of the Bankruptcy Court. As the Company emerges from bankruptcy under its Plan with the availability of cash, the Company's holders of its securities could receive a payment in respect of such securities. However, caution should be exercised with respect to existing and future investments in any of its securities. Subject to certain exceptions under the Bankruptcy Code, the bankruptcy filing automatically enjoined, or stayed, 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 were enjoined unless and until the Bankruptcy Court lifted the automatic stay. In order to successfully exit Chapter 11 bankruptcy, the Company needed to propose, and obtain Bankruptcy Court confirmation of, a plan of reorganization that satisfied the requirements of the Bankruptcy Code. The 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 classes of holders of impaired claims and equity interests in order to become effective. As such, the Company did satisfy these requirements with its Plan. Under section 365 of the Bankruptcy Code, the Company could 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 constituted a court-authorized breach of the lease or contract in question and, subject to certain exceptions, relieved the Company of its future obligations under such lease or contract but created a deemed Prepetition claim for damages caused by such breach or rejection. Parties whose contracts or leases were rejected could file claims against the Company for damages. Thus, the Company's leased office space under a non-cancelable operating lease expired during the quarter ended September 30, 2012. As a result of the bankruptcy filing, realization of assets and liquidation of liabilities could be 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 could sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed financial statements. As such, the Company recognized a net gain from the settlement and adjustment of liabilities of $18,042 and $85,750 for the years ended March 31, 2012 and 2011, respectively. Further, the Plan could materially change the amounts and classifications reported in the Company's financial statements and as further noted in ASC 852 within the provisions of "Fresh-start" accounting. The Company's historical 12
financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities as a consequence of confirmation of the Plan and, more specifically, since the Company as it emerges from bankruptcy did not qualify to use "Fresh-start" accounting. The adverse publicity associated with the bankruptcy filing and the resulting uncertainty regarding the Company's future prospects could hinder the Company's ongoing business activities and its ability to operate, fund and execute its 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. On October 15, 2010, the Company filed with the Bankruptcy Court its proposed Debtor's Plan of Reorganization and a proposed Disclosure Statement was filed simultaneously with the Plan of Reorganization. On December 13, 2010, the Company filed with the Bankruptcy Court its First Amended Proposed Plan of Reorganization and Disclosure Statement. The Disclosure Statement was first required to be approved by the Bankruptcy Court before creditors and shareholders could be presented with the opportunity to vote on the Plan of Reorganization. Prior to confirmation and approval by the Court, the Proposed Plan of Reorganization could be amended. 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 was 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 and provide new financing for the price of approximately $20 million. The sale closed effective March 1, 2011.S ee Note 4 - Discontinued Operations. On April 30, 2012, the Company filed its 2nd Amended Plan of Reorganization and Disclosure Statement with the Bankruptcy Court which eventually became the Plan. The Plan provided for the Company to pay the claims of its creditors as the assets of the Company allowed and permitted, but did not obligate the Company to continue in the oil and gas industry with a focus on the purchase on non-operating interests in oil and gas producing properties. On September 10, 2012, the Bankruptcy Court approved the Plan and the Company was discharged from bankruptcy on its effective date of September 28, 2012. As a result of this approval by the Bankruptcy Court, the Company during the months of September and October 2012 paid $1,258,477 of creditor claims. 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 could result in additional charges and other adjustments for expected allowed claims (including claims that have been allowed by the Bankruptcy 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 December 31, 2012 and March 31, 2012 include the following Prepetition liabilities: December 31, 2012 March 31, 2012 ------------------ ---------------- Accounts payable, trade $ - $ 176,726 Other payables and accrued liabilities 98,584 943,101 Convertible notes payable - 140,000 ------------------- ---------------- $98,584 $ 1,259,827 ------------------- ---------------- 13
Note 4- Discontinued Operations In March 2011, the Company completed the sale of all of its oil and gas properties and substantially all fixed assets for approximately $20 million 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 allowances 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 year ended March 31, 2011,the Company 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 liabilities (18,440) --------------------- Total basis in assets sold 13,739,217 --------------------- Gain on disposition of assets, net $ 4,807,221 --------------------- The financial results of the Company's business related to oil and gas operations have been classified as discontinued operations in its statements of operations for all periods presented. The following summarizes components of income (loss) from the Company's discontinued operations for the three and nine months ended December 31, 2011only as there was no activity of discontinued operations for the three and nine months ended December 31, 2012: Three months Nine months December 31, 2011 December 31, 2011 ------------------- ------------------- Revenue $ - $ - ------------------- ------------------- Operating income (loss) 32 (1,899) ------------------- ------------------- Operating income (loss)from discontinued operations 32 (1,899) Other income (expenses) from discontinued operations, net - - ------------------- ------------------- Net income (loss) from discontinued operations $ 32 $ (1,899) =================== =================== 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, 2012 as the Company had no assets and liabilities of discontinued operations at December 31, 2012: 14
March 31, 2012 ----------------- Assets: ------ Current assets of discontinued operations - Accounts receivable $ - Deposits and other assets - ----------------- - ----------------- Other assets Long-term assets of discontinued operations - ----------------- Total assets of discontinued operations $ - ----------------- Liabilities: ----------- Accounts payable and accrued liabilities $ 112,620 ----------------- Total current liabilities of discontinued operations $ 112,620 ----------------- Oil and gas properties ---------------------- As previously noted throughout this report, all oil and gas properties were sold in a transaction as of March 1, 2011. There have been no further acquisitions or dispositions of oil and gas properties since that date. 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 Linc Energy. The DIP Credit Agreement provided loan advances up to an aggregate of $14.7 million and was scheduled to mature on 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. The DIP Credit Agreement specified 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 was 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 Linc Energy for $20.0 million. Effective March 1, 2011, the Company sold substantially of its assets to Linc Energy. On March 14, 2011, all outstanding principal and accrued interest totaling $14,829,250 were paid and the DIP Credit Agreement was cancelled. See Note 4 - Discontinued Operations. Through January 28, 2011, the Company had a note payable (the "Prepetition Note") outstanding under the terms of a Term Credit Agreement with GasRock (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, or (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 15
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 GasRock various additional considerations, 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 filed an adversary action in the Bankruptcy Court against GasRock in an effort to avoid certain interests previously assigned to the Prepetition Lender. The Company, GasRock and Linc Energy executed a settlement agreement as of June 15, 2012, that called for the Company to make a payment of $500,000 to GasRock to dismiss all claims in the litigation by GasRock and in return the Company would receive a $525,000 payment form Linc Energy to settle other matters in the litigation. The settlement agreement was approved by the Bankruptcy Court in July 2012 and the respective payments among the parties were made and other issues in the agreement were settled as noted in this report as of July 18, 2012. As a result of the settlement agreement, the Company incurred a reorganization loss of $25,000 that was written off and reported in the statement of operations for the three months ended September 30, 2012 and the nine months ended December 31, 2012. Note 6- Convertible Promissory Notes Payable On October 27, 2009, the Company issued convertible promissory notes (the "Promissory Notes") totaling $140,000 of which$100,000 of the Promissory Notes were issued to officers and/or directors or $25,000 each. The additional Promissory Notes were issued to existing shareholders. The Promissory Notes carried 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 were convertible, at the holder's option, into shares of the Company's common stock at a conversion price of $0.02 per share and at any time during the term of the Promissory Notes. The Promissory Notes matured on November 1, 2010, and all obligations and payments due under the Promissory Notes were subordinate to the Company's senior debt. As a result of the Company's bankruptcy filing described in Notes 1 and 3 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 enjoined, or stayed, 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. At December 31, 2012 and March 31, 2012, the principal outstanding on the Promissory Notes was $0 and $140,000, respectively. At December 31, 2012 and March 31, 2012, accrued interest related to these Promissory Notes was $0 and $54,015, respectively. There was a reduction in the accrued interest of $53,300from March 31, 2012 to December 31, 2012 as a result of a Bankruptcy Court decision that the amount of the interest related to the Promissory Notes shall be $715. This reduction of $53,300 was reported in the statement of operations as part of "Reorganization items - Professional and other costs, net" for the three months ended September 30, 2012 and the nine months ended December 31, 2012. Note 7- Commitments and Contingencies Commitments ----------- On February 12, 2010, the Company filed an adversary action in the Bankruptcy Court against GasRock, the holder of the then senior secured note payable seeking to avoid certain ownership interests assigned to GasRock in connection with the Term Credit Agreement and amendments thereto. On March 18, 2010, GasRockfiled a motion with the Bankruptcy Court to dismiss the complaint. On October 21, 2010, the Bankruptcy Court issued an order on the Motion to Dismiss that dismissed three of the nine claims made in the adversary action. The Company, GasRock and Linc Energy executed a settlement agreement as of June 15, 2012, that called for the Company to make a payment of $500,000 to GasRock to dismiss all claims in the litigation by GasRock and in return the Company would receive a $525,000 payment form Linc Energy to settle other matters in the litigation. The settlement agreement was approved by the Bankruptcy Court in July 2012 and the respective payments among the parties were made and other issues in the agreement were settled as noted in this report as of July 18, 2012. As a result of the settlement agreement, the Company incurred a reorganization loss of $25,000 that was written off and reported in the statement of operations for the three months ended September 30, 2012 and the nine months ended December 31, 2012. 16
Bankruptcy Proceedings ---------------------- On October 28, 2009, the Company filed a Petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the District of Colorado. The Company continued 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 until its Plan was approved by the Bankruptcy Court and became effective September 28, 2012. All pending or threatened litigation or claims involving the Company were automatically stayed as a result of the bankruptcy filing, and all such claims subject to compromise or modification through the terms of any plan of reorganization filed by the Company in the bankruptcy proceedings. On September 10, 2012, the Bankruptcy Court approved the Plan and the Company was discharged from bankruptcy on its effective date ofSeptember28, 2012.SeeNote 3 - Proceedings Under Chapter 11 of the United States Bankruptcy Code. 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 $1.8 million 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 bankruptcy filing, 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. These claims are covered under the Company's D & O insurance policy. In June 2011, the Bankruptcy Court rendered a decision that these claims are subordinated to unsecured claims. If management believes that a loss arising from this matter is probable and can reasonably be estimated, the Company would record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to this matter will be assessed and the treatment revised, if necessary. Based on current available information, management is unable to make a determination as to the probability of a gain or loss regarding this suit at this time. A law firm that was formerly counsel to the Company filed a Proof of Claim for Prepetition fees, to which the Company objected with the Bankruptcy Court. The Company agreed to a settlement which the Bankruptcy Court approved in September 2012. A former officer of the Company filed a proof of claim for wages and benefits to which the Company objected with the Bankruptcy Court. The Company agreed to a settlement of $18,750 with the former officer, which the Bankruptcy Court approved. Two of the Company's employees filed proofs of claim and motions to allow administrative expenses for certain bonus payments. The Company and the employees reached a Bankruptcy Court settlement in the amount of $78,902 which was paid in September 2012. GasRock filed a proof of claim for attorney's fees and costs related to the bankruptcy filing generally and to the litigation pending between GasRock and the Company. The Company objected to these fees on various grounds. Subsequently, as of June 15, 2012, a Settlement and Release Agreement covering these claims and other issues was executed by the Company, GasRock and Linc Energy. This agreement was approved by the Bankruptcy Court in July 2012, and such claims were released and certain payments were made among the parties as of July 18, 2012. 17
Note 8- Stockholders' Equity The Company's capital stock atDecember 31, 2012 and March 31, 2012consists of 275,000,000 authorized shares of common stock, par value $0.00001 per share. At December 31, 2012 and March 31, 2012, a total of 119,862,791 and 119,316,723shares of common stock were issued and outstanding, respectively. Issuance of Common Stock ------------------------ During the three months ended December 31, 2012 the Company issued 546,068 shares of common stock as compensation for cancellation of 54,632,565 warrants. See Note 8 - Warrants. Warrants -------- As part of the Plan approved by the Bankruptcy Court, warrant holders holding 54,632,565 warrants exercisable for shares of the Company's common stock are to be cancelled and the holders of these warrants will receive one share of the Company's common stock for every 100 shares of common stock the warrantholder would have been entitled to if the warrants were exercised. Therefore, the Company issued 546,068 shares of common stock to the warrantholders during October 2012 valued at $12,014 or $0.022 per share that was recorded as part of "Reorganization items - Professional and other costs, net" in the statement of operations for the three and nine months ended December 31, 2012. Note 9- Share-Based Compensation During the nine months ended December 31, 2012 and 2011, the Company did not issue any stock options. 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 million shares of the Company's 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 nine months ended December 31, 2012, no options were granted, expired or exercised under the 2006 Stock Incentive Plan. The following table summarizes information related to the outstanding and vested options at December 31, 2012: Outstanding and Vested Options ----------------------- Number of shares Non-qualified 10,000,000 2006 Plan 1,375,000 Weighted average remaining contractual life Non-qualified 2.6 years 2006 Plan 2.5 years Weighted average exercise price Non-qualified $ 0.035 2006 Plan $ 0.0875 Aggregate intrinsic value Non-qualified $ 0 2006 Plan $ 0 18
The aggregate intrinsic value of outstanding securities is the amount by which the fair value of underlying (common) shares exceeds the exercise price of the options issued and outstanding. At December 31, 2012, all outstanding options were fully vested. No options were exercised during the nine months ended December 31, 2012. The Company did not realize any income tax expense related to the exercise of stock options for the nine months ended December 31, 2012 and 2011. Note 10- 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 $9,685 and $52,026 during the nine months ended December 31, 2012 and 2011, respectively that are included in the statement of operations. The amount owed to the law firm was $0 and $9,234 at December 31, 2012 and March 31, 2012, respectively. Note 11-Subsequent Events We have evaluated subsequent events through January 22, 2013. Other than those set forth above, there have been no subsequent events after December 31, 2012 for which disclosure is required. 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; o Future cash flows and borrowings; o The availability and terms of financing; o Ability to obtain permits and governmental approvals; o Financial strategy; o General and administrative costs; 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 19
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, 2012. 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. From October 28, 2009 to September 28, 2012, we operated our 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 until our Plan was approved by the Bankruptcy Court when we were discharged from bankruptcy effective September 28, 2012. Effective March 1, 2011, we sold all of our oil and gas properties, which allowed us to eliminate the majority of our debt and also provide financial resources during our reorganization. The following summarizes our goals and objectives for the next twelve months: o Minimize our operating and administrative expenses; and o Pursue and analyze any and all oil and gas related opportunities. Proceedings under Chapter 11 ---------------------------- On October 28, 2009, we filed a Petition for relief in the United States Bankruptcy Court under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. As a result of the bankruptcy filing, we continued to operate our business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the order of the Bankruptcy Court until we emerged from bankruptcy in September 2012.Wedevoted efforts to resolve our liquidity problems and develop a reorganization plan that was finally approved by the Bankruptcy Court. As of the date of filing this quarterly report, no creditor has a lien on our cash. From January 2007 through March 2011, we operated four fields in the Powder River Basin, Wyoming, which were located in the Rocky Mountain region of the United States. The fields, acquired in December 2006 and January 2007, were the South Glenrock B Field, the Big Muddy Field, the Cole Creek South Field and the South Glenrock A Field. Effective March 1, 2011, we sold all of our interest in the four fields to Linc Energy Petroleum (Wyoming), Inc. as part of the bankruptcy proceedings. The sale of such properties allowed us to eliminate the majority of our debt and also provide financial resources during our reorganization. On April 30, 2012, we filed our Plan with the Bankruptcy Court. The Plan provided for us to pay the claims of our creditors as the assets of the Company allowed, and permitted but did not obligate us to continue in the oil and gas industry with a focus on the purchase on non-operating interests in oil and gas producing properties. On September 10, 2012, the Bankruptcy Court approved the Plan and the Plan became effective September28, 2012. As a result of this approval by the Bankruptcy Court, we during September and October 2012 paid $1,258,477 of creditor claims. Results of Operations --------------------- With the sale of substantially all of our assets in March 2011, our results of operations are presented as follows: Continuing operations o Results of the Company's continuing operations for the three and nine months ended December 31, 2012 as compared to the three and nine months ended December 31, 2011; and 20
Discontinued operations o Results of the Company's discontinued operations for the three and nine months ended December 31, 2012 as compared to the three and nine months ended December 31, 2011. Continuing Operations Three months ended December 31, 2012 compared to three months December 31, 2011 - continuing operations. The following is a comparative summary of our results from continuing operations: Three Months Ended December 31, --------------------------------------- 2012 2011 ------------------ ------------------- Revenues $ - $ - ================== =================== Operating expenses: General and administrative 159,132 360,236 Depreciation and amortization 8,616 8,616 ------------------ ------------------- Total operating expenses 167,748 368,852 ------------------ ------------------- Other income (expense): Interest expense and financing costs - (6,096) Interest and other income 84,234 84,095 ------------------ ------------------- Total other income 84,234 77,999 ------------------ ------------------- (Loss) before reorganization items (83,514) (290,853) Reorganization items (65,768) (43,675) ------------------ ------------------- Net (loss) from continuing operations $ (149,282) $ (334,528) ================== =================== Overview. For the three months ended December31, 2012, we reported a net loss from continuing operations of $149,282 or $0.00 per basic and fully-diluted share, compared to a net loss of $334,528 or $0.00 per basic and fully-diluted share, for the three months ended December 31, 2011. Discussions of individually significant period to period variances follow. General and administrative expense. For the three months ended December 31, 2012, we incurred general and administrative expenses of $159,132 as compared to $360,236 for the corresponding three months ended December 31, 2011. The decrease in our general and administrative resulted primarily from decreases in compensation and office expenses. Office expenses decreased primarily as a result of lower rent expense associated with the April 2012 relocation of the Company's headquarters. Reorganization items. Reorganization items totaling $65,768 for the three months ended December 31, 2012 as compared to the corresponding three months in 2011where we had total expense of $43,675 and we anticipate these expenses will cease as we have emerged from bankruptcy. 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 $0.03 per Mcf purchased by Merit under this supply agreement, which expired in December2012. Thus, during the three months ended December 31, 2012, the Company recognized income of $84,234 as compared to income of $84,095 for the three months of 2011. Nine months ended December 31, 2012 compared to nine months ended December 31, 2011 - continuing operations. 21
The following is a comparative summary of our results from continuing operations: Nine Months Ended December 31, --------------------------------------- 2012 2011 ------------------ ------------------- Revenues $ - $ - ================== =================== Operating expenses: General and administrative 434,527 872,915 Depreciation and amortization 25,848 28,720 ------------------ ------------------- Total operating expenses 460,375 901,635 ------------------ ------------------- Other income (expense): Interest expense and financing costs 47,236 (18,094) Interest and other income 321,384 272,834 ------------------ ------------------- Total other income 284,386 254,740 ------------------ ------------------- (Loss) before reorganization items (91,755) (646,895) Reorganization items (14,595) (274,780) ------------------ ------------------- Net (loss) from continuing operations $ (106,350) $ (921,675) ================== =================== Overview. For the nine months ended December 31, 2012, we reported a net loss from continuing operations of $106,350 or $0.00 per basic and fully-diluted share as compared to a net loss of $921,675 or $0.00 per basic and fully-diluted share, for the nine months ended December 31, 2011. Discussions of individually significant period to period variances follow. General and administrative expense. For the nine months ended December 31, 2012, we incurred general and administrative expenses of $434,527 as compared to $872,915 for the corresponding nine months ended December 31, 2011. The decrease in our general and administrative resulted primarily from decreases in compensation and office expenses. Office expenses decreased primarily as a result of lower rent expense associated with the April 2012 relocation of the Company's headquarters. Reorganization items. Reorganization items of$14,595 for the nine months ended December 31, 2012 includes a credit of $158,160 specifically related to our reorganization following the filing of the Petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on October 28, 2009. This credit consisted entirely of legal and other professional fees for assistance with our reorganization plan and other bankruptcy related matters and this credit was the result of over accruing these legal and other professional fees in prior periods. Thus the amount of $172,755 ($14,595 plus the credit of $158,160) compares to the corresponding nine months in 2011 where we had total expense of $274,780and we expect these expenses will cease as we have emerged from bankruptcy. 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 $0.03 per Mcf purchased by Merit under this supply agreement, which expired in December 2012. Thus, during the nine months ended December 31, 2012, the Company recognized income of $321,384 as compared to income of $272,834 for the nine months of 2011. 22
Discontinued Operations Three and nine months ended December 31, 2012 compared to three and nine months ended December 31, 2011 - discontinued operations. For the three and nine months ended December 31, 2012, we did not report a net income or loss from discontinued operations, compared to a net income of $32 and a net loss of $1,899, for the corresponding three and nine months of 2011, respectively. 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 and nine months ended December 31, 2012. Liquidity and Capital Resources ------------------------------- The report of our independent registered public accounting firm on the financial statements for the years ended March 31, 2012 and 2011 includes an explanatory paragraph relating to the uncertainty of our ability to continue as a going concern. As we emerge from bankruptcy, we have incurred a cumulative net loss of approximately $93.2 million for the period from incorporation, February 4, 2004, to December 31, 2012. 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 did not have any sources of revenue and our projected interest and other income sufficient to sustain our ongoing general and administrative, legal and reorganization costs. We received proceeds from the return of funds we had on deposit for oil and gas environmental and performance bonds with the State of Wyoming. These amounts totaled approximately $279,000 and were returned to the Company in October 2011. Now that we have emerged from bankruptcy and that the revenue from the CO2 supply agreement has expired, we expect that our monthly operating expenses will exceed monthly income by approximately $36,000 until we are able to pursue other business opportunities in the oil and gas industry. As a result of the approval by the Bankruptcy Court on September 10, 2012, the Company during September and October of 2012 paid $1,258,477 of creditor claims. We have prepared and filed all required financial and operating reports and other documents with the Bankruptcy Court. There is no assurance that as the Company emerges from bankruptcy that we will be able to raise the capital or funds necessary to analyze and pursue other oil and gas related opportunities and thus in the meantime we will rely on our net cash of approximately $2.2 million in the bank. Cash flows used for continuing operations decreased during the nine months ended December 31, 2012 as compared to the nine months ended December 31, 2012 primarily due to a decrease in the Company's operational activities and a decrease in the fees associated with its administrative activities. During the three months ended December 31, 2012, management of the Company held extensive discussions with the principals of another energy company in an effort to acquire oil and gas assets and enhance the value of the Company. After much deliberation, management determined that it was not in the best of the Company and its shareholders to pursue further negotiations. Nonetheless, the Company will continue to seek other potential opportunities. 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, 2012. Additional disclosures are provided in Notes to Financial Statements (unaudited) which are included in Item 1 - Financial Statements to this Quarterly Report on Form 10-Q for the quarter ended December 31, 2012. 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. 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, 2012and as of the end of the period covered by this Quarterly Report that our disclosure controls and procedures were not effective. 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. However, the Company has retained the services of a certified public accountant to assist the Acting Chief Accounting Officer in the preparation of books and records as well as the Company's Form 10-Q. 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 Petition for relief in the Bankruptcy Court under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On September 10, 2012, the Bankruptcy Court approved the Plan and the Plan became effective September28, 2012. 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 ("The Lender") in connection with the Eighth Amendment to the Term Credit Agreement and the 24
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 characterized 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 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. On June 15, 2012, the Company entered into a settlement agreement with GasRock and Linc Energy to resolve the adversary proceeding against GasRock. In July, the Bankruptcy Court approved the settlement agreement and on July 18, 2012 the Company: a. received the disputed NPI, which the Company conveyed to Linc Energy; b. released all claims to the funds held in escrow pursuant to the terms of the sale of substantially all of its assets to Linc Energy; c. received from Linc Energy $525,000 plus an amount of $35,523 for final settlement of Rancher's litigation costs due under the Litigation Agreement with Linc Energy; d. Dismissed the adversary proceeding against GasRock with prejudice; and e. Paid to GasRock $500,000 from an existing escrow account, and was released from GasRock's claim for attorneys' fees and costs that GasRock asserted it was owed for defending itself in the adversary proceeding. 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 and at the date of this filing and as the Company emerges from bankruptcy no clear determination can be assessed. If management believes that a loss arising from this matter is probable and can reasonably be estimated, the Company would record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to this matter will be assessed and the treatment revised, if necessary. As such, based on current available information, management is unable to make a determination as to the probability of a gain or loss regarding the suit at this time. ITEM 1A. Risk Factors As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. 25
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS NONE. ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE. ITEM 4. MINE AND SAFETY DISCLOSURE NOT APPLICABLE. 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) 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. Dated: February 1, 2013 RANCHER ENERGY CORP. By: /s/ Jon C. Nicolasen ------------------------------- Jon C. Nicolaysen, President, Chief Executive Officer, and Acting Chief Accounting Officer 27