RED MOUNTAIN RESOURCES, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - RED MOUNTAIN RESOURCES, INC.	Financial_Report.xls
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - RED MOUNTAIN RESOURCES, INC.	ex31-1.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - RED MOUNTAIN RESOURCES, INC.	ex31-2.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - RED MOUNTAIN RESOURCES, INC.	ex32-1.htm

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



FORM 10-Q


(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended: March 31, 2014

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission File Number 000-54444

RED MOUNTAIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)


Texas	27-1739487
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2515 McKinney Avenue, Suite 900 Dallas, TX	75201
(Address of principal executive offices)	(Zip Code)

(214) 871-0400
(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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant is required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	o	Accelerated filer	x

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 9, 2014, the registrant had 14,810,864 shares of common stock outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of March 31, 2014 and May 31, 2013 (unaudited)	1

	Condensed Consolidated Statements of Operations for Each of the Three and Nine Months Ended March 31, 2014 and February 28, 2013 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for Each of the Nine Months Ended March 31, 2014 and February 28, 2013 (unaudited)	3

	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2014 (unaudited)	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

Explanatory Note

Red Mountain Resources, Inc. effected a reverse stock split of its outstanding common stock at a ratio of one-for-ten (1:10) on January 31, 2014. All share and per share amounts and calculations in this Quarterly Report and the accompanying consolidated condensed financial statements have been retroactively adjusted to reflect the effects of the reverse stock split.

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

Red Mountain Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands)


	March 31, 2014			May 31, 2013
ASSETS
Current Assets:
Cash and cash equivalents	$	1,233		$	1,112
Accounts receivable – oil and natural gas sales		3,081			3,522
Accounts receivable – joint interest		1,293			2,604
Debt issuance costs		230			230
Prepaid expenses and other current assets		509			420
Commodities derivative asset – current		96			190
Deferred tax asset – current		428			299
Total current assets		6,870			8,377
Long-Term Investments:
Debentures – held to maturity		4,820			4,279
Oil and Natural Gas Properties, Successful Efforts Method:
Proved properties		80,684			63,891
Unproved properties		19,793			19,539
Other property and equipment		1,199			1,026
Less accumulated depreciation, depletion and impairment		(16,684	)		(9,324	)
Oil and natural gas properties, net		84,992			75,132
Other Assets:
Commodities derivative asset, net of current portion		—			75
Restricted cash, long-term		465			452
Debt issuance costs, net of current portion		1,541			450
Security deposit and other assets		131			465
Total Assets	$	98,819		$	89,230

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	6,473		$	9,354
Revenues payable		1,329			774
Preferred dividend payable		298			—
Accrued expenses		2,280			1,137
Stock issuance liability		154			—
Commodities derivative liability		92			34
Convertible notes payable, net of discount of $0 and $442, respectively		—			3,308
Notes payable – current		—			500
Asset retirement obligation – current		228			228
Environmental remediation liability – current		1,400			1,400
Total current liabilities		12,254			16,735
Long-Term Liabilities:
Line of credit, net of current portion		23,800			19,800
Mandatorily redeemable preferred stock, net of discount of $3,105 and $0, respectively		8,812			—
Environmental remediation liability, net of current portion		677			688
Deferred tax liability – long-term		428			299
Asset retirement obligation, net of current portion		5,047			4,751
Total long-term liabilities		38,764			25,538
Total Liabilities		51,018			42,273
Commitments and Contingencies (Note 10)
Stockholders’ Equity:
Common stock, $0.00001 par value; 50,000 shares authorized; 13,422 shares issued and 13,401 outstanding as of March 31, 2014; 12,692 shares issued and 12,596 shares outstanding as of May 31, 2013		1			1
Noncontrolling interest		6,001			5,603
Additional paid-in capital		72,077			65,536
Accumulated deficit		(30,278	)		(24,183	)
Total stockholders’ equity		47,801			46,957
Total Liabilities and Stockholders’ Equity	$	98,819		$	89,230

The accompanying notes are an integral part of these condensed consolidated financial statements.

Red Mountain Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)


	Three Months Ended March 31, 2014			Three Months Ended February 28, 2013			Nine Months Ended March 31, 2014			Nine Months Ended February 28, 2013
Revenue:
Oil and natural gas sales	$	5,270		$	2,463		$	15,511		$	4,917
Operating Expenses:
Exploration expense		515			22			943			53
Production taxes		386			77			1,564			180
Lease operating expenses		633			401			2,088			966
Natural gas transportation and marketing expenses		43			18			117			77
Depreciation, depletion, amortization and impairment		2,460			1,195			6,712			3,193
Accretion of discount on asset retirement obligation		64			44			199			74
General and administrative expense		1,993			2,106			5,852			6,205
Total operating expenses		6,094			3,863			17,475			10,748
Loss from Operations		(824	)		(1,400	)		(1,964	)		(5,831	)
Other Income (Expense):
Change in fair value of derivative liability		—			90			—			182
Unrealized loss on investment in Cross Border Resources, Inc. warrants		—			(612	)		—			(1,304	)
Equity in earnings of Cross Border Resources, Inc.		—			99			—			(332	)
Gain on consolidation of Cross Border Resources, Inc.		—			736			—			736
Interest income		—			29			—			29
Interest expense		(902	)		(873	)		(2,717	)		(2,310	)
Unrealized loss on debentures		—			(455	)		—			(503	)
Impairment on note receivable		—			(856	)		—			(856	)
Unrealized (loss) gain on commodity derivatives		(41	)		177			(272	)		177
Realized (loss) gain on commodity derivatives		(23	)		17			(74	)		17
Total Other Expense		(966	)		(1,648	)		(3,063	)		(4,164	)
Loss Before Income Taxes		(1,790	)		(3,048	)		(5,027	)		(9,995	)
Income tax provision		—			—			—			—
Net loss		(1,790	)		(3,048	)		(5,027	)		(9,995	)
Net income (loss) attributable to non-controlling interest		194			344			437			344
Net loss attributable to Red Mountain Resources, Inc	$	(1,984	)	$	(3,392	)	$	(5,464	)	$	(10,339	)
Basic and diluted net loss per common share	$	(0.15	)	$	(0.33	)	$	(0.41	)	$	(1.10	)
Basic and diluted weighted average common shares outstanding		13,422			10,347			13,237			9,380

The accompanying notes are an integral part of these condensed consolidated financial statements.

Red Mountain Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)


	Nine Months Ended March 31, 2014			Nine Months Ended February 28, 2013
Cash Flow From Operating Activities:
Net loss	$	(5,027	)	$	(9,995	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment		6,712			3,193
Equity in earnings of Cross Border Resources, Inc.		—			332
Issuance of stock for services		—			229
Gain on consolidation of Cross Border Resources, Inc.		—			(736	)
Amortization of debt issuance costs		1,215			1,338
Accretion of discount on asset retirement obligation		199			74
Change in fair value of warrant liability		—			1,304
Impairment on note receivable		—			856
Change in fair value of derivative liability		(18	)		(182	)
Settlement of environmental liabilities		(11	)		—
Dividend accrued for mandatorily redeemable preferred stock		298			—
Change in fair value of commodity derivatives		146			(177	)
Loss on debentures		—			503
Change in working capital:
Accounts receivable - oil and natural gas sales		1,592			(208	)
Accounts receivable - other		373			(974	)
Accounts receivable - related party		—			(245	)
Prepaid expenses and other assets		550			(530	)
Accounts payable		(2,653	)		(1,603	)
Accounts payable – related party		—			21
Restricted cash		(13	)		25
Accrued expenses		1,153			1,739
Net cash provided by (used in) operating activities		4,516			(5,036	)
Cash Flow From Investing Activities:
Additions to oil and natural gas properties		(16,259	)		(408	)
Acquisitions of oil and natural gas properties		—			255
Net cash acquired in business combination		—			279
Additions to other property and equipment		(153	)		(250	)
Settlement of asset retirement obligations		—			(54	)
Net cash used in investing activities		(16,412	)		(178	)
Cash Flow From Financing Activities:
Proceeds from issuance of common stock, net of issuance costs		3,605			5,640
Proceeds from issuance of preferred stock, net of issuance costs		7,068			—
Exercise of warrants		—			150
Draws on line of credit		9,000			11,150
Payments on line of credit		(5,000	)		(3,187	)
Proceeds from notes payable		—			2,400
Payments on notes payable		(2,000	)		(8,327	)
Net cash provided by financing activities		12,673			7,826
Net change in cash and equivalents		777			2,612
Cash at beginning of period		456			168
Cash at end of period	$	1,233		$	2,780
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	489		$	167
Non-Cash Transactions
Change in asset retirement obligation estimate	$	8		$	296
Issuance of shares for investment in Cross Border Resources, Inc.	$	—		$	15,739
Convertible notes payable derivative liability	$	—		$	300
Issuance of shares for debentures	$	541		$	4,782
Issuance of shares for equipment	$	—		$	14
Issuance of shares for debt issuance costs	$	—		$	161
Issuance of stock accrued in stock issuance liability	$	—		$	68
Issuance of shares for services	$	—		$	229
Issuance of shares for acquisition of oil and gas properties	$	—		$	2,232
Issuance of shares to settle Cross Border Resources, Inc. bankruptcy claims	$	—		$	634
Issuance of shares for investment in Cross Border Resources, Inc. subordinated debt	$	—		$	1,744
Issuance of shares to brokers	$	2,395		$	212
Issuance of options	$	—		$	529
Issuance of warrants	$	—		$	334

The accompanying notes are an integral part of these condensed consolidated financial statements.

Red Mountain Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands)


	Common Stock
	Shares		Amount		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Share Subscription Receivable			Noncontrolling Interest			Total

Balance at May 31, 2012		8,693	$	0.869	$	30,548	$	(10,079	)	$	(150	)	$	—		$	20,320
Issuance of shares in private placement, net of offering costs of $1,351		1,160		0.116		7,290		—			(100	)		—			7,190
Issuance of shares for investment in Cross Border Resources, Inc.		1,573		0.157		15,236		—			—			—			15,236
Adjustment for consolidation of Cross Border Resources, Inc.		—		—		—		(1,902	)		—			6,359			4,457
Acquisition of additional minority interest in Cross Border Resources, Inc.		117		0.012		1,438		—			—			(1,438	)		—
Issuance of shares for investment in Cross Border Resources, Inc. subordinated debt		194		0.019		1,744		—			—			—			1,744
Issuance of shares to settle Cross Border Resources, Inc. bankruptcy claims		75		0.007		634		—			—			—			634
Issuance of warrants for investment in warrants of Cross Border Resources, Inc.		—		—		37		—			—			—			37
Issuance of shares for acquisition of oil and gas properties		238		0.024		2,232		—			—			—			2,232
Issuance of shares for equipment		1		—		14		—			—			—			14
Issuance of shares for stock issuance liability		8		0.001		68		—			—			—			68
Issuance of shares for debentures		570		0.057		4,782		—			—			—			4,782
Issuance of shares for debt issuance costs		12		0.001		161		—			—			—			161
Issuance of warrants for debt issuance costs		—		—		133		—			—			—			133
Issuance of shares for services		26		0.003		229		—			—			—			229
Issuance of shares to brokers		25		0.003		212		—			—			—			212
Issuance of warrants to brokers		—		—		249		—			—			—			249
Issuance of options		—		—		529		—			—			—			529
Cash received for subscription receivable		—		—		—		—			250			—			250
Net loss		—		—		—		(12,202	)		—			682			(11,520	)
Balance at May 31, 2013		12,692	$	1.269	$	65,536	$	(24,183	)	$	—		$	5,603		$	46,957

Net loss		—		—		—		(631	)		—			(39	)		(670	)
Balance at June 30, 2013		12,692	$	1.269	$	65,536	$	(24,814	)	$	—		$	5,564		$	46,287
Issuance of shares, net of offering costs of $895		643		0.064		3,605		—			—			—			3,605
Issuance of warrants with preferred stock		—		—		2,395		—			—			—			2,395
Issuance of shares for debentures		87		0.009		541		—			—			—			541
Net income (loss)		—		—		—		(5,464	)		—			437			(5,027	)
Balance at March 31, 2014		13,422	$	1.342	$	72,077	$	(30,278	)	$	—		$	6,001		$	47,801

The accompanying notes are an integral part of these condensed consolidated financial statements.

Red Mountain Resources, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Organization

Red Mountain Resources, Inc. is a growth-oriented energy company engaged in the acquisition, development and exploration of oil and natural gas properties in established basins with demonstrable prolific producing zones. Currently, the Company has established acreage positions and production primarily in the Permian Basin of West Texas and Southeast New Mexico and the onshore Gulf Coast of Texas. The Company’s focus is to grow production and reserves by acquiring and developing an inventory of long-life, low risk drilling opportunities in and around producing oil and natural gas properties. Unless the context otherwise requires, the terms “Red Mountain” and “Company” refer to Red Mountain Resources, Inc. and its consolidated subsidiaries.

2. Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of Red Mountain Resources, Inc. and its subsidiaries. The condensed consolidated financial statements and related footnotes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”).

The Company has prepared the accompanying unaudited interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and in the opinion of management, such financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company at March 31, 2014 and its results of operations and cash flows for the periods presented. The Company has omitted certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP pursuant to those rules and regulations, although the Company believes that the disclosures it has made are adequate to make the information presented not misleading. These unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in its most recent Annual Report on Form 10-K.

In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures. The results of operations for the interim periods are not necessarily indicative of the results the Company expects for the full fiscal year. The Company has not made any changes in its significant accounting policies from those disclosed in its most recent Annual Report on Form 10-K.

On July 17, 2013, the Company’s board of directors approved a change in the Company’s fiscal year end from May 31 to June 30, effective as of June 30, 2013. The change in the Company’s fiscal year end resulted in a one-month transition period that began on June 1, 2013 and ended on June 30, 2013.

As a result of this change, in the Condensed Consolidated Statements of Operations, the Company compares the three-month period ended March 31, 2014 with the previously reported three-month period ended February 28, 2013 and the nine-month period ended March 31, 2014 with the previously reported nine-month period ended February 28, 2013. Financial information for the three and nine months ended March 31, 2013 has not been included in this Quarterly Report on Form 10-Q for the following reasons: (i) the three and nine months ended February 28, 2013 provide a meaningful comparison for the three and nine months ended March 31, 2013; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the three and nine months ended March 31, 2013 were presented in lieu of results for the three and nine months ended February 28, 2013; and (iii) it was not practicable or cost justified to prepare this information.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The

acquisition method requires that assets acquired and liabilities assumed including contingencies be recorded at their fair values as of the acquisition date. As of December 31, 2013, the Company has finalized the determination of the fair values of the assets acquired and liabilities assumed for Cross Border Resources, Inc. (“Cross Border”).

Investments in Non-Performing Debentures

The Company’s investments in non-performing debentures were initially recorded at cost which the Company believes was fair value. Management estimated cash flows expected to be collected considering the contractual terms of the loans, the nature and estimated fair value of collateral, and other factors it deemed appropriate. The estimated fair value of the loans at acquisition was significantly less than the contractual amounts due under the terms of the loan agreements.

Since, at the acquisition date, the Company expected to collect less than the contractual amounts due under the terms of the loans based, at least in part, on the assessment of the credit quality of the borrower, the loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). The difference between the contractually required payments on the loans as of the acquisition date and the total cash flows expected to be collected, or non-accretable difference, is not recognized and totaled $2.5 million and $1.1 million, plus accrued interest in arrears, as of March 31, 2014 and February 28, 2013, respectively.

Debentures are classified as non-accrual when management is unable to reasonably estimate the timing or amount of cash flows expected to be collected from the debentures or has serious doubts about further collectability of principal or interest. As of March 31, 2014 and May 31, 2013, all of the Company’s debentures were on non-accrual status since the borrower remains under the supervision of the bankruptcy court.

The Company periodically re-evaluates cash flows expected to be collected for each debenture based upon all available information as of the measurement date. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment to the debenture’s yield over its remaining life, which may result in a reclassification from non-accretable difference to accretable yield. Subsequent decreases in cash flows expected to be collected are evaluated to determine whether a provision for loan loss should be established. If decreases in expected cash flows result in a decrease in the estimated fair value of the debenture below its amortized cost, the debenture is deemed to be impaired, and the Company will record a provision for impairment to write the

debenture down to its estimated fair value. The Company did not record any impairment on the debentures during the nine months ended March 31, 2014 and February 28, 2013.

The Company’s investments in non-performing debentures are classified as held to maturity because the Company has the intent and ability to hold them until maturity.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB Accounting Standards Codification Topic 740, Income Taxes (“ASU 2013-11”). ASU 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company is currently evaluating the impact of ASU 2013-11 on its consolidated financial statements and financial statement disclosures.

3. Oil and Natural Gas Properties and Other Property and Equipment

Oil and Natural Gas Properties

The following table sets forth the capitalized costs under the successful efforts method for oil and natural gas properties:


(in thousands)	March 31, 2014			May 31, 2013
Oil and natural gas properties:
Proved	$	80,684		$	63,891
Unproved		19,793			19,539
Total oil and natural gas properties		100,477			83,430
Less accumulated depletion and impairment		(16,367	)		(9,140	)
Net oil and natural gas properties capitalized costs	$	84,110		$	74,290

At March 31, 2014 and May 31, 2013, the capitalized costs of the Company’s oil and natural gas properties included (i) $46.7 million and $39.2 million, respectively, relating to acquisition costs of proved properties which are being amortized by the unit-of-production method using total proved reserves and (ii) $28.8 million and $26.8 million, respectively, relating to additional development costs which are being amortized by the unit-of-production method using proved developed reserves.

During the three and nine months ended March 31, 2014 and February 28, 2013, the Company did not incur any significant exploratory drilling costs. The Company had no transfers of exploratory well costs to proved properties during the three and nine months ended March 31, 2014 and February 28, 2013.

The Company recorded no impairment during the three and nine months ended March 31, 2014. The Company recorded $0.4 million of impairment related to its unproved oil and natural gas properties for the three and nine months ended February 28, 2013 related to expiring acreage.

Capitalized costs related to proved oil and natural gas properties, including wells and related equipment and facilities, are evaluated for impairment based on the Company’s analysis of undiscounted future net cash flows. If

undiscounted future net cash flows are insufficient to recover the net capitalized costs related to proved properties, then the Company recognizes an impairment charge in income equal to the difference between the carrying value and the estimated fair value of the properties. Estimated fair values are determined using discounted cash flow models. The discounted cash flow models include management’s estimates of future oil and natural gas production, operating and development costs and discount rates. The Company did not record any impairment charges on its proved properties for the three and nine months ended March 31, 2014 and February 28, 2013.

Other Property and Equipment

The historical cost of other property and equipment, presented on a gross basis with accumulated depreciation and amortization is summarized as follows:


(in thousands)	March 31, 2014			May 31, 2013
Other property and equipment	$	1,199		$	1,026
Less accumulated depreciation and amortization		(317	)		(184	)
Net property and equipment	$	882		$	842

4. Asset Retirement Obligations

The following table summarizes the changes in the Company’s asset retirement obligations (“AROs”) for the nine months ended March 31, 2014 and the fiscal year ended May 31, 2013:


(in thousands)	March 31, 2014		May 31, 2013
Asset retirement obligations at beginning of period	$	5,019	$	836
Liabilities incurred		49		22
Liabilities settled		—		(53	)
Acquisitions		—		3,728
Accretion expense		199		150
Revisions in estimated liabilities		8		296
Asset retirement obligations at end of period		5,275		4,979
Less: current portion		228		228
Long-term portion	$	5,047	$	4,751

During the nine months ended March 31, 2014 and the fiscal year ended May 31, 2013, the Company recorded an upward revision to previous estimates for its ARO primarily due to changes in the estimated future cash outlays.

5. Derivatives

At March 31, 2014, the Company had the following commodity derivatives positions outstanding:


Commodity and Time Period		Contract Type	Volume Transacted	Contract Price
Crude Oil
April 1, 2014―August 31, 2014	Collar - Minimum	Option	1,437 Bbls/month	$80.00/Bbl
April 1, 2014―August 31, 2014	Collar - Maximum	Option	1,437 Bbls/month	$100.50/Bbl
April 1, 2014―November 30, 2014		Swap	2,000 Bbls/month	$93.50/Bbl
April 1, 2014―November 30, 2014		Put	4,061 – 5,076 Bbls/month	$95.00/Bbl

The following table summarizes the fair value of the Company’s open commodity derivatives as of March 31, 2014 and May 31, 2013:


	Balance Sheet Location	Fair Value
(in thousands)		March 31, 2014			May 31, 2013
Derivatives not designated as hedging instruments
Commodity derivatives	Commodities derivative asset	$	96		$	265
Commodity derivatives	Commodities derivative liability	$	92		$	34

The following tables summarize the change in the fair value of the Company’s commodity derivatives:

	Income Statement Location	Three Months Ended,
(in thousands)		March 31, 2014			February 28, 2013
Derivatives not designated as hedging instruments
Commodity derivatives	Realized (loss) gain on commodity derivatives	$	(23	)	$	17
Commodity derivatives	Unrealized (loss) gain on commodity derivatives		(41	)		177
		$	(64	)	$	194

	Income Statement Location	Nine Months Ended,
(in thousands)		March 31, 2014			February 28, 2013
Derivatives not designated as hedging instruments
Commodity derivatives	Realized (loss) gain on commodity derivatives	$	(74	)	$	17
Commodity derivatives	Unrealized (loss) gain on commodity derivatives		(272	)		177
		$	(346	)	$	194

Unrealized gains and losses, at fair value, are included on the Company’s Condensed Consolidated Balance Sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of the Company’s commodity derivatives contracts are recorded in earnings as they occur and included in other income (expense) on the Company’s Condensed Consolidated Statements of Operations. Realized gains and losses are also included in other income (expense) on the Company’s Condensed Consolidated Statements of Operations.

The Company estimates the fair values of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. The Company internally valued the option contracts using industry-standard option pricing models and observable market inputs. The Company uses its internal valuations to determine the fair values of the contracts that are reflected on its Condensed Consolidated Balance Sheets.

The Company is exposed to credit losses in the event of nonperformance by the counterparties on its commodity derivatives positions and has considered the exposure in its internal valuations. However, the Company does not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

In connection with the closing of the Senior First Lien Secured Credit Agreement (as amended, the “Credit Agreement”), the Company was required to enter into hedging agreements effectively hedging at least 50% of the oil volumes of the Company and its subsidiaries. At the same time, the Company entered into a Novation Agreement with BP Energy Company, LP (“BP Energy”) that transferred Cross Border’s then-existing swap agreements to the Company. Pursuant to an Inter-Borrower Agreement between the Company and Cross Border, the Company allocates these swap agreements back to Cross Border and may allocate future hedging agreements related to Cross Border’s production to Cross Border.

6. Fair Value Measurements

Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:


●	Level 1 - quoted prices for identical assets or liabilities in active markets.

●	Level 2 - quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.

●	Level 3 - unobservable inputs for the asset or liability.

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The following table summarizes the valuation of the Company’s financial assets and liabilities at March 31, 2014 and May 31, 2013:


	Fair Value Measurements at Reporting Date Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant or Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Fair Value at March 31, 2014
Assets:
Commodity derivatives	$	—	$	96		$	—		$	96
2009A and 2009B Debentures of O&G Leasing, LLC (nonrecurring)		—		—			4,820			4,820
Total	$	—	$	96		$	4,820		$	4,916

Liabilities:
Asset retirement obligations (non-recurring)	$	—	$	—		$	(5,275	)	$	(5,275	)
Commodity derivative		—		(92	)		—			(92	)
Environmental remediation liability		—		—			(2,077	)		(2,077	)
Total	$	—	$	(92	)	$	(7,352	)	$	(7,444	)


	Fair Value Measurements at Reporting Date Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant or Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Fair Value at May 31, 2013
Assets:
Commodity derivatives	$	—	$	265		$	—		$	265
Oil and gas properties impairment (nonrecurring)		—		—			(411	)		(411	)
2009A and 2009B Debentures of O&G Leasing, LLC (nonrecurring)		—		—			4,279			4,279
Total	$	—	$	265		$	3,868		$	4,133

Liabilities:
Asset retirement obligations (non-recurring)	$	—	$	—		$	(4,979	)	$	(4,979	)
Commodity derivative		—		(34	)		—			(34	)
Environmental remediation liability		—		—			(2,088	)		(2,088	)
Total	$	—	$	(34	)	$	(7,067	)	$	(7,101	)

The following is a summary of changes to fair value measurements using Level 3 inputs during the period ending March 31, 2014:


(in thousands)	Environmental Liability			2009A and 2009B Debentures
Balance, May 31, 2013	$	(2,088	)	$	4,279
Acquisitions		—			541
Settlement of liabilities		11			—
Balance, March 31, 2014	$	(2,077	)	$	4,820

7. Debt

As of the dates indicated, the Company’s debt consisted of the following:


(in thousands)	March 31, 2014		May 31, 2013
Credit Agreement	$	23,800	$	19,800
Subordinated Note		—		500
Convertible notes payable, net of discount of $0 and $442, respectively		—		3,308
Mandatorily redeemable preferred, net of discount of $3,105 and $0, respectively		8,812		—
Total debt		32,612		23,608
Less: short-term portion		—		3,808
Long-term debt	$	32,612	$	19,800

Credit Facility

On February 5, 2013, the Company entered into the Credit Agreement with Cross Border, Black Rock Capital, Inc. and RMR Operating, LLC (the Company, Cross Border, Black Rock Capital, Inc. and RMR Operating, LLC, jointly and severally, the “Borrowers”) and Independent Bank, as Lender. The Credit Agreement provides for an up to $100.0 million revolving credit facility (as amended, the “Credit Facility”) with an initial commitment of $20.0 million and a maturity date of February 5, 2016. The borrowing base under the Credit Facility is determined at the discretion of the Lender based on, among other things, the Lender’s estimated value of the proved reserves attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender, and is subject to regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in the Credit Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base. As of March 31, 2014, the borrowing base and commitment were $30.0 million. As of March 31, 2014, the Company had $23.8 million outstanding under the Credit Facility and had availability of $6.2 million.

Amounts outstanding under the Credit Facility bear interest at a rate per annum equal to the greater of (x) the U.S. prime rate as published in The Wall Street Journal’s “Money Rates” table in effect from time to time and (y) 4.0%. Interest is payable monthly in arrears on the last day of each calendar month. As of March 31, 2014, the interest rate was 4%. Borrowings under the Credit Facility are secured by first priority liens on substantially all the property of each of the Borrowers and are unconditionally guaranteed by Doral West Corp. and Pure Energy Operating, Inc., each a subsidiary of Cross Border.

The Credit Agreement also contains financial covenants, measured as of the last day of each fiscal quarter of the Company. As of March 31, 2014, the Company was in compliance with these covenants.

Pursuant to the Credit Agreement, at least one of the Borrowers is required to have acceptable hedge agreements in place at all times effectively hedging at least 50% of the oil volumes of the Borrowers. Pursuant to the terms of the Credit Agreement, the Company has hedge agreements with various counterparties hedging a portion of the future oil production of the Borrowers.

Notes Payable

On February 6, 2013, the Company issued an Unsecured Subordinated Promissory Note (as amended, the “Subordinated Note”) in the aggregate principal amount of $500,000 payable to Hyman Belzberg, William Belzberg and Caddo Management, Inc. (the “Note Lender”). On July 30, 2013, the Company entered into Amendment No. 1 (the “Amendment”) to the Subordinated Note to extend the maturity date of the Subordinated Note from July 31, 2013 to August 31, 2013. The Subordinated Note accrued interest at a rate of 12% per annum, payable monthly. Upon an event of default, interest would accrue on all outstanding principal at a rate of the lesser of (i) 18% per annum or (ii) the maximum rate permitted by applicable law.

On August 28, 2013, the Company repaid the Subordinated Note with a portion of the proceeds from its common stock offering.

Convertible Promissory Notes

On November 25, 2011, the Company issued a $1.0 million convertible promissory note to Hohenplan Privatstiftung (the “2011 Hohenplan Note”), a $1.5 million convertible promissory note to Personalversorge der Autogrill Schweiz AG (the “Personalversorge Note”) and a $250,000 convertible promissory note to SST Advisors, Inc. (the “SST Note” and collectively with the 2011 Hohenplan Note and the Personalversorge Note, the “Convertible Notes”). On July 30, 2012, the Company issued a $1.0 million convertible promissory note (the “2012 Hohenplan Note”) to Hohenplan Privatstiftung.

In August 2013, the Company issued 100,002 Units in cancellation of the 2011 Hohenplan Note, the 2012 Hohenplan Note and the SST Note. In November 2013, the Company paid in full the Personalversorge Note with cash. Prior to cancellation of these notes, the Company expensed the unamortized beneficial conversion feature, debt issuance costs and discounts totaling $0.3 million to interest expense.

Mandatorily Redeemable Preferred Stock

The Company’s 10.0% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) is mandatorily redeemable and is not convertible into shares of the Company’s common stock. The Company classifies the Series A Preferred Stock as a long-term liability, and the Company records dividends paid or accrued as interest expense in the Company’s Condensed Consolidated Statement of Operations.

In August 2013, the Company closed offerings of 476,687 Units (the “Units”), including 100,002 Units sold in cancellation of $2.3 million in debt under convertible notes payable to Hohenplan Privatstiftung and SST Advisors, Inc., raising net proceeds of $7.1 million. Each Unit consisted of one share of Series A Preferred Stock and one warrant to purchase up to 2.5 shares of common stock at a price of $22.50 per Unit. The warrants are exercisable until the earlier of (i) August 2016 or (ii) the first trading day that is at least 30 days after the date that the Company has provided notice to the holders of the warrants by filing a Current Report on Form 8-K stating that the common stock has (A) achieved a 20 trading day volume weighted average price of $15.00 per share or more and (B) traded, in the aggregate, 300,000 shares or more over the same 20 consecutive trading days for which the 20 trading day volume weighted average price was calculated; provided, that clause (ii) shall only be applicable so long as a warrant is exercisable for shares of common stock. The warrants have an exercise price of $10.00 per share. The warrants issued with the Series A Preferred Stock were valued at $2.4 million. The value of the warrants is treated as a discount to the Series A Preferred Stock and will be accreted over the life of the mandatorily redeemable preferred stock. Management determined the fair value using a probability weighted Black-Scholes option model with a volatility based on the historical closing price of common stock of industry peers and the closing price of the Company’s common stock on the OTCBB on the date of issuance. The volatility and remaining term was approximately 55% and three years, respectively.

The Series A Preferred Stock is mandatorily redeemable on July 15, 2018 at $25.00 per share, plus accrued and unpaid dividends to the redemption date, for a total redeemable value of $11.9 million. The difference between the $11.9 million redeemable value and the $10.8 million of gross proceeds and canceled debt is treated as a discount and will be accreted over the life of the Series A Preferred Stock.

For the three and nine months ended March 31, 2014, we recognized total interest expense of $0.6 million and $1.5 million, respectively, related to the Series A Preferred Stock, which includes accretion of discount and issuance cost of $0.3 million and $0.7 million for the three and nine months ended March 31, 2014, respectively.

Schedule of Future Debt Payments

The following is a schedule by fiscal year of future principal payments required under the Company’s outstanding debt as of March 31, 2014:


(in thousands)
Fiscal Years Ending June 30,
2015		—
2016		23,800
2017		—
2018		—
2019		11,917
Total		35,717
Discount		(3,105	)
Total, net value	$	32,612

8. Earnings Per Share

The Company reports basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is anti-dilutive. The following are reconciliations of the numerators and denominators of basic and diluted earnings per share:


	Three Months Ended						Nine Months Ended
(dollars in thousands, except per share amounts)	March 31, 2014			February 28, 2013			March 31, 2014			February 28, 2013
Net loss (numerator):
Net loss – basic	$	(1,984	)	$	(3,392	)	$	(5,464	)	$	(10,339	)
Weighted average shares (denominator):
Weighted average shares – basic		13,422			10,347			13,237			9,380
Dilution effect of share-based compensation, treasury method(1)		—			—			—			—
Weighted average shares – diluted		13,422			10,347			13,237			9,380
Loss per share:
Basic	$	(0.15	)	$	(0.33	)	$	(0.41	)	$	(1.10	)
Diluted	$	(0.15	)	$	(0.33	)	$	(0.41	)	$	(1.10	)


	(1)	Warrants to purchase approximately 1,553,560, shares of the Company’s common stock were excluded from this calculation because they were anti-dilutive during the three and nine months ended March 31, 2014. Warrants to purchase approximately 86,100 shares of the Company’s common stock were excluded from this calculation because they were anti-dilutive during the three and nine months ended February 28, 2013.

9. Equity

In August 2013, the Company closed a public offering of 642,857 shares of common stock, raising net cash proceeds of $3.6 million after issuance costs of $0.9 million.

10. Commitments and Contingencies

Litigation

Cross Border, Cross Border’s former Chief Executive Officer, and Cross Border’s former Chief Operating Officer are party to a lawsuit with a former employee. On May 4, 2011, Clifton M. (Marty) Bloodworth initially filed a lawsuit in the State District Court of Midland County, Texas, against Doral West Corp. d/b/a Doral Energy Corp. (the predecessor entity of Cross Border) (“Doral Energy”) and Everett Willard Gray II, Cross Border’s former Chief Executive Officer. Mr. Bloodworth later amended his lawsuit to name Horace Patrick Seale, Cross Border’s former Chief Operating Officer, as an additional defendant. Mr. Bloodworth generally alleges that Mr. Gray and Mr. Seale, as agents of Cross Border, made false representations which induced Mr. Bloodworth to enter into an employment contract that was subsequently breached by Cross Border. The claims that Mr. Bloodworth has alleged are: breach of his employment agreement with Doral Energy, fraud in the inducement and common law fraud, civil conspiracy, breach of fiduciary duty, and violation of the Texas Deceptive Trade Practices Act. Mr. Bloodworth is seeking damages of approximately $280,000. Mr. Gray, Mr. Seale and Cross Border deny that Mr. Bloodworth’s claims have any merit.

Cross Border was previously party to an engagement letter, dated February 7, 2012 (the “Engagement Letter”), with KeyBanc Capital Markets Inc. (“KeyBanc”) pursuant to which KeyBanc was to act as exclusive financial advisor to Cross Border’s Board of Directors in connection with a possible “Transaction” (as defined in the Engagement Letter). The Engagement Letter was formally terminated by Cross Border on August 21, 2012. The Engagement Letter provided that KeyBanc would be entitled to a fee upon consummation of a Transaction within a certain period of time following termination of the Engagement Letter. On May 16, 2013, KeyBanc delivered an invoice to Cross Border in the amount of $751,334, representing amounts purportedly owed by Cross Border to KeyBanc as a result of the consummation of a purported Transaction that KeyBanc asserts had been consummated within the required time period and its out-of-pocket expenses in connection therewith. Cross Border disputes that any Transaction was consummated and that KeyBanc is entitled to any out-of-pocket expenses. The matter was originally filed by Cross Border in the 44th-B Judicial District Court for the State of Texas, Dallas County but was subsequently removed to the United States District Court for the Northern District of Texas, Dallas Division, where KeyBanc filed a counterclaim against Cross Border. Cross Border and KeyBanc have each filed motions for summary judgment, requesting the Court to rule in their respective favors. Cross Border intends to vigorously defend the action.

In addition to the foregoing, in the ordinary course of business, the Company is periodically a party to various litigation matters that it does not believe will have a material adverse effect on its results of operations or financial condition.

Environmental issues

The Company is subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent in all oil and natural gas operations, and the Company could be subject to environmental cleanup and enforcement actions. The Company manages this environmental risk through appropriate environmental policies and practices to minimize the impact to the Company.

As of March 31, 2014 and May 31, 2013, the Company had approximately $2.1 million in environmental remediation liabilities related to Cross Border’s operated Tom Tom and Tomahawk fields located in Chaves and Roosevelt counties in New Mexico. In February 2013, the Bureau of Land Management (“BLM”) accepted Cross Border’s remediation plan for the Tom Tom and Tomahawk fields. Cross Border is working in conjunction with the BLM to initiate remediation on a site-by-site basis. This is management’s best estimate of the costs of remediation and restoration with respect to these environmental matters, although the ultimate cost could differ materially. Inherent uncertainties exist in these estimates due to unknown conditions, changing governmental regulation, and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. Cross Border has incurred $11,000 in costs and expects to incur the remaining expenditures over an eighteen month period beginning in April 2014.

Leases

As of March 31, 2014, the Company rented various office spaces in Dallas, Texas; Midland, Texas; and Lafayette, Louisiana under non-cancelable lease agreements. In the aggregate, these leases cover approximately 16,884 square feet at a cost of approximately $24,000 per month and have remaining lease terms ranging from 1 month to 30 months. The following is a schedule by year of future minimum rental payments required under these lease arrangements as of March 31, 2014:


(in thousands)
Fiscal Years Ending June 30,
2014	$	63
2015		206
2016		181
2017		45
2018		—
Total	$	495

Rent expense under the Company’s lease arrangements amounted to approximately $67,000 and $76,000 for the three months ended March 31, 2014 and February 28, 2013 respectively. Rent expense under the Company’s lease arrangements amounted to approximately $200,000 and $225,000 for the nine months ended March 31, 2014 and February 28, 2013 respectively.

11. Related Party Transactions

The Company entered into a drilling consulting agreement with R.K. Ford and Associates, and a contract for drilling services with Western Drilling on the Company’s Madera 24-2H, Madera 25-2H, and Madera 19-4H wells. At the time, each of these entities were owned or partially owned by Randell K. Ford, a then-current director of the Company. Mr. Ford passed away in December 2013. During the three months ended March 31, 2014 and February 28, 2013, these entities provided the Company with an aggregate of approximately $1.3 million and $48,000, respectively, of services, of which $0.3 million and $0, respectively, remained unpaid at the end of the respective periods. During the nine months ended March 31, 2014 and February 28, 2013, these entities provided the Company with an aggregate of approximately $3.2 million and $63,000, respectively, of services, of which $0.3 million and $33,000, respectively, remained unpaid at the end of the respective periods.

In addition, the Company was a party to a lease agreement with R.K. Ford and Associates, pursuant to which the Company leases office space in Midland, Texas. During the three months ended March 31, 2014 and February 28, 2013, the Company paid approximately $0 and $6,000, respectively, to R.K. Ford and Associates pursuant to the lease agreement. During the nine months ended March 31, 2014 and February 28, 2013, the Company paid approximately $2,000 and $19,000, respectively, to R.K. Ford and Associates pursuant to the lease agreement. The lease agreement expired in July 2013.

12. Subsequent Events

The Company agreed to exchange 222,224 shares of its 10.0% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) for 1,388,898 shares of common stock effective as of April 1, 2014. After the exchange, the Company had 254,463 shares of Series A Preferred Stock outstanding with an aggregate redemption amount of $6.4 million.

On April 22, 2014, the Company withdrew $3.0 million under the Credit Facility. As of May 9, 2014, had 26.8 million outstanding under the Credit Facility and had availability of 3.2 million.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to the “Company,” “we,” “our” and “us” refer to (i) Red Mountain Resources, Inc., a Texas corporation (“Red Mountain”), (ii) Red Mountain’s wholly owned subsidiaries, including Black Rock Capital, Inc. (“Black Rock”) and RMR Operating, LLC (“RMR Operating”), and (iii) subsequent to January 28, 2013, Cross Border Resources, Inc. (“Cross Border”). As of March 31, 2014, we owned 83% of the outstanding common stock of Cross Border. Acreage, reserves and production information presented subsequent to January 28, 2013 includes acreage, reserves and production represented by the 17% of Cross Border’s common stock not owned by us.

Overview

We are a Dallas-based growth-oriented energy company engaged in the acquisition, development and exploration of oil and natural gas properties in established basins with demonstrable prolific producing zones. Currently, we have established acreage positions and production in the Permian Basin of West Texas and Southeast New Mexico and the onshore Gulf Coast of Texas. Additionally, we have an established and growing acreage position in Kansas.

We plan to grow production and reserves by acquiring, exploring and developing an inventory of long-life, low risk drilling opportunities with attractive rates of return. Our focus is on opportunities in and around producing oil and natural gas properties where we can enhance production and reserves through application of newer drilling and completion techniques, infill drilling targeting untapped but known productive hydrocarbon strata, and enhanced oil recovery applications.

As of March 31, 2014, we owned interests in 887,341 gross (310,103 net) mineral and lease acres in New Mexico, Texas and Kansas, of which 336,837 gross (31,139 net) acres are within the Permian Basin. We have successfully leased 9,388 net acres in Kansas located on the Central Kansas Uplift, and we also owned interests in over 1,405 net acres located on the Villarreal, Frost Bank, Resendez, Peal Ranch and La Duquesa Prospects in the Gulf Coast of Texas.

On January 28, 2013, we closed the acquisition of 5,091,210 shares of common stock of Cross Border, bringing our total ownership to approximately 78% of the outstanding Cross Border common stock. Prior to the acquisition, we owned 47% of Cross Border’s outstanding common stock, and the investment was accounted for under the equity method of accounting. Subsequent to this transaction, we account for Cross Border as a consolidated subsidiary. As of March 31, 2014, we owned of record 14,327,767 shares of Cross Border common stock, representing 83% of Cross Border’s outstanding common stock.

Recent Developments

Convertible Promissory Note. On November 22, 2013, we paid in full the $1.5 million convertible promissory note, plus accrued and unpaid interest, to Personalversorge der Autogrill Schweiz AG, and the note was terminated.

Reverse Stock Split and Authorized Share Reduction. On January 31, 2014, Red Mountain Resources, Inc., a Florida corporation (“RMR FL”), effected a reverse stock split of RMR FL’s common stock, par value $0.00001 per share (“RMR FL Common Stock”), at an exchange ratio of 1-for-10 (the “Reverse Stock Split”), together with a proportional reduction in the number of authorized shares of RMR FL Common Stock from 500.0 million shares to 50.0 million shares. The par value of RMR FL Common Stock did not change as a result of the Reverse Stock Split. As of January 31, 2014, every ten shares of RMR FL Common Stock were combined into one share of RMR FL Common Stock, reducing the number of outstanding shares of RMR FL Common Stock from approximately 134.0 million to approximately 13.4 million. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding warrants to purchase shares of RMR FL Common Stock.

All share and per share amounts and calculations in this Quarterly Report and the accompanying consolidated condensed financial statements have been retroactively adjusted to reflect the effects of the reverse stock split.

Change of State of Incorporation. On January 31, 2014, RMR FL changed its state of incorporation from the State of Florida to the State of Texas by merging (the “Reincorporation”) with and into its wholly-owned subsidiary, Red Mountain, with Red Mountain continuing as the surviving corporation. As a result, as of January 31, 2014:

(i) RMR FL ceased to exist;

(ii) shareholders of RMR FL automatically became shareholders of Red Mountain, without any action by such shareholders, and began to be governed by (a) the Texas Business Organizations Code, (b) Red Mountain’s Certificate of Formation, and (c) Red Mountain’s Bylaws;

(iii) the name, business, management, fiscal year, accounting, location of the principal executive offices, assets and liabilities of RMR FL became the name, business, management, fiscal year, accounting, location of the principal executive offices, assets and liabilities of Red Mountain; and

(iv) the directors and officers of RMR FL prior to the Reincorporation continued as the directors and officers of Red Mountain after the Reincorporation for an identical term of office.

On January 31, 2014, our common stock commenced trading on a split-adjusted basis under a new OTC Bulletin Board trading symbol, “RDMPD.” The new trading symbol was assigned by the Financial Industry Regulatory Authority in connection with the approval of the Reincorporation and Reverse Stock Split. Our trading symbol will be “RDMPD” for 20 business days from January 31, 2014, after which it will revert to “RDMP.” Our common stock, on a split-adjusted basis, has a new CUSIP number of 75678V 302.

As a result of the Reincorporation, Red Mountain became the successor corporation to RMR FL under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and will succeed to RMR FL’s reporting obligations thereunder. Pursuant to Rule 12g-3 promulgated under the Exchange Act, the common stock, preferred stock and warrants of Red Mountain are deemed to be registered under Section 12(g) of the Exchange Act.

Series A Preferred Stock Exchange. We agreed to exchange 222,224 shares of our 10.0% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) for 1,388,898 shares of common stock effective as of April 1, 2014. After the exchange, we had 254,463 shares of Series A Preferred Stock outstanding with an aggregate redemption amount of $6.4 million.

Fiscal 2014 Third Quarter Operational Update

During the three months ended March 31, 2014, we completed drilling the Madera 19 Federal 4H well, in which we have a 84% working interest and 63% net revenue interest. The well was put on production on March 22, 2014 and achieved a 24-hour initial production rate of 740 barrels of oil equivalent (“Boe”) per day (“Boe/d”), of which 86% was oil, and a 15-day average rate of 666 Boe/d, of which 84% was oil. The Madera 25 Federal 2H well, in which we have a 30% working interest and 23% net revenue interest, has also been drilled in the Madera Area and is scheduled for completion in the near term. Both of these wells are long lateral wells, individually consisting of a total measured depth of approximately 16,000 feet.

Planned Operations

For the remainder of fiscal year 2014, we plan to spend up to $4.0 million for continued development, workovers and recompletions on our properties including Tom Tom and Madera and on properties in our non-operated Permian acreage. The following sets forth our fourth quarter of fiscal 2014 development program (dollars in millions):


Target	Gross Wells		Net Wells		Cost		Percentage of Total Program
Tom Tom (San Andres)		3.0		3.0	$	1.7		43
Madera (Brushy Canyon)		1.0		0.3		0.8		20
Madera (Avalon, Bone Spring, and Wolfcamp)		1.0		0.4		0.5		12
Non-operated (various)		3.0		0.4		1.0		25
Total		8.0		4.1	$	4.0		100	%

Due to delays in regulatory approval, we modified our development program for the Tom Tom which subsequently delayed development at Cowden and Shafter Lake. We have approval to commence work on one of the three Tom Tom wells and expect approval on the additional two wells in the near term. Upon successful completion of the three Tom Tom wells, we will recommence the development program at Tom Tom, Cowden and Shafter Lake. We expect to add a multi-zone completion in a vertical Madera well to evaluate three additional target formations with five potential zones. Each commercial zone would add 12 gross (six net) potential wells per zone at the Madera. Assuming successful and timely implementation of the current and planned operations, we expect to have sufficient liquidity to complete our planned operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. Our significant accounting policies are described in “Note 2—Significant Accounting Policies” to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013 and are of particular importance to the portrayal of our financial position and results of operations and require the application of significant judgment by management. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013.

Transition Period

On July 17, 2013, our board of directors approved a change in our fiscal year end from May 31 to June 30, effective as of June 30, 2013. In the following “Results of Operations,” we compare the results of the three and nine months ended March 31, 2014 with the previously reported three and nine months ended February 28, 2013. Financial information for the three and nine months ended February 28, 2013 has not been included in this Quarterly Report on Form 10-Q for the following reasons: (i) the three and nine months ended February 28, 2013 provide a meaningful comparison for the three and nine months ended March 31, 2014; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the three and nine months ended March 31, 2013 were presented in lieu of results for the three and nine months ended February 28, 2013; and (iii) it was not practicable or cost justified to prepare this information.

Results of Operations

The following table sets forth summary information regarding our oil and natural gas sales, net production sold, average sales prices and production costs and expenses for the three and nine months ended March 31, 2014 and February 28, 2013.


	Three Months Ended				Nine Months Ended

	March 31, 2014		February 28, 2013		March 31, 2014		February 28, 2013
(dollars in thousands, except per unit prices)
Revenue
Oil and natural gas sales	$	5,270	$	2,463	$	15,511	$	4,917

Net Production sold
Oil (Bbl)		43,091		24,091		123,624		43,754
Natural gas (Mcf)		207,123		142,205		650,334		432,810
Natural gas liquids (Bbl)		5,858		861		21,167		4,622
Total (Boe)		83,469		48,653		253,180		120,511
Total (Boe/d) (1)		927		541		924		441

Average sales prices
Oil ($/Bbl)	$	90.37	$	80.61	$	95.45	$	79.23
Natural gas ($/Mcf)		5.37		3.39		4.64		2.77
Natural gas liquids ($/Bbl)		34.06		30.86		27.82		31.19
Total average price ($/Boe)	$	62.37	$	51.54	$	60.84	$	42.43

Costs and expenses (per Boe)
Exploration expense	$	6.17	$	0.43	$	3.73	$	0.43
Production taxes		4.62		1.56		6.18		1.49
Lease operating expenses		7.58		8.20		8.25		8.01
Natural gas transportation and marketing expenses		0.52		0.37		0.46		0.63
Depreciation, depletion, amortization and impairment		29.47		24.56		26.51		26.49
Accretion of discount on asset retirement obligation		0.77		0.90		0.79		0.62
General and administrative expense		23.88		43.31		23.11		51.49


(1) Boe/d is calculated based on actual calendar days during the period.

Results of Operations—Three Months Ended March 31, 2014 Compared to Three Months Ended February 28, 2013

Revenues and Production

Oil and Natural Gas Production. During the three months ended March 31, 2014, we had net production sold of 83,469 Boe, compared to net production sold of 48,653 Boe during the three months ended February 28, 2013. The 72% increase in net production sold was primarily attributable to the consolidation of Cross Border and to new wells coming online during the past year. For the three months ended March 31, 2014, 51.6% of our production was oil, 41.4% was natural gas, and 7.0% was natural gas liquids, compared to 49.5% oil, 48.7% natural gas, and 1.8% natural gas liquids for the three months ended February 28, 2013.

Oil and Natural Gas Sales. During the three months ended March 31, 2014, we had oil and natural gas sales of $5.3 million, as compared to $2.5 million during the three months ended February 28, 2013. The 114% increase in oil and natural gas sales was primarily attributable to a 72% increase in production and a 21% increase in average price realized per Boe.

Costs and Expenses

Exploration Expense. Exploration expense was $0.5 million for the three months ended March 31, 2014, as compared to $22,000 for the three months ended February 28, 2013. The increase in exploration expense was attributable to seismic surveys and geological and geophysical activities performed during the three months ended March 31, 2014.

Production Taxes. Production taxes were $0.4 million for the three months ended March 31, 2014, as compared to $0.1 million for the three months ended February 28, 2013. The increase in production taxes was attributable to increased oil and natural gas sales, primarily as a result of the consolidation of Cross Border and new wells coming online.

Lease Operating Expenses. During the three months ended March 31, 2014, we incurred lease operating expenses of $0.6 million, as compared to $0.4 million during the three months ended February 28, 2013. The increase in lease operating expenses was primarily attributable to the consolidation of Cross Border and new wells coming online.

Natural Gas Transportation and Marketing Expenses. For the three months ended March 31, 2014, natural gas transportation and marketing expenses was $43,000, as compared to $18,000 for the three months ended February 28, 2013.

Depreciation, Depletion, Amortization and Impairment. For the three months ended March 31, 2014, depreciation, depletion, amortization and impairment was $2.5 million, as compared to $1.2 million for the three months ended February 28, 2013. The increase in depreciation, depletion, amortization and impairment was attributable to the consolidation of Cross Border, the depletion of the additional producing wells on our Madera property, partially offset by no impairment for the three months ended March 31, 2014.

General and Administrative Expense. General and administrative expense was $2.0 million for the three months ended March 31, 2014, as compared to $2.1 million for the three months ended February 28, 2013. The decrease in general and administrative expense was primarily attributable to lower professional fees, partially offset by increased personnel costs.

Other Expense. Other expense was $1.0 million for the three months ended March 31, 2014, as compared to other expense of $1.6 million for the three months ended February 28, 2013. The decrease in other expense was primarily attributable to a $0.6 million unrealized loss on investment in Cross Border warrants, a $0.5 million unrealized loss on debentures and a $0.9 million impairment of a note receivable, partially offset by a $0.7 million gain on consolidation of Cross Border during the three months ended February 28, 2013, none of which were also recorded in the quarter ended March 31, 2014.

Results of Operations—Nine Months Ended March 31, 2014 Compared to Nine Months Ended February 28, 2013

Revenues and Production

Oil and Natural Gas Production. During the nine months ended March 31, 2014, we had net production sold of 253,180 Boe, compared to net production sold of 120,511 Boe during the nine months ended February 28, 2013. The 110% increase in net production sold was primarily attributable to the consolidation of Cross Border and to new wells coming online during the past year. For the nine months ended March 31, 2014, 48.8% of our production was oil, 42.8% was natural gas, and 8.4% was natural gas liquids, compared to 36.3% oil, 59.9% natural gas, and 3.8% natural gas liquids for the nine months ended February 28, 2013.

Oil and Natural Gas Sales. During the nine months ended March 31, 2014, we had oil and natural gas sales of $15.5 million, as compared to $4.9 million during the nine months ended February 28, 2013. The 215% increase in oil and natural gas sales was primarily attributable to a 110% increase in production and a 43% increase in the average realized price per Boe.

Costs and Expenses

Exploration Expense. Exploration expense was $0.9 million for the nine months ended March 31, 2014, as compared to $53,000 for the nine months ended February 28, 2013. The increase in exploration expense was attributable to seismic surveys and geological and geophysical activities performed during the nine months ended March 31, 2014.

Production Taxes. Production taxes were $1.6 million for the nine months ended March 31, 2014, as compared to $0.2 million for the nine months ended February 28, 2013. The increase in production taxes was attributable to increased oil and natural gas sales, primarily as a result of the consolidation of Cross Border and to new wells coming online during the past year.

Lease Operating Expenses. During the nine months ended March 31, 2014, we incurred lease operating expenses of $2.1 million, as compared to $1.0 million during the nine months ended February 28, 2013. The increase in lease operating expenses was attributable to the consolidation of Cross Border and increased production from the completed producing wells on our Madera property.

Natural Gas Transportation and Marketing Expenses. For the nine months ended March 31, 2014, natural gas transportation and marketing expenses was $0.1 million, as compared to $0.1 million for the nine months ended February 28, 2013.

Depreciation, Depletion, Amortization and Impairment. For the nine months ended March 31, 2014, depreciation, depletion, amortization and impairment was $6.7 million, as compared to $3.2 million for the nine months ended February 28, 2013. The increase in depreciation, depletion, amortization and impairment was attributable to the consolidation of Cross Border, the depletion of the additional producing wells on our Madera property and the upward revision of asset retirement obligations in December 2012, partially offset by no impairment for the nine months ended March 31, 2014.

General and Administrative Expense. General and administrative expense was $5.9 million for the nine months ended March 31, 2014, as compared to $6.2 million for the nine months ended February 28, 2013. The decrease in general and administrative expense was due primarily to a decrease in professional fees, partially offset by higher personnel costs related to increased headcount.

Other Expense. Other expense was $3.1 million for the nine months ended March 31, 2014, as compared to other expense of $4.2 million for the nine months ended February 28, 2013. The decrease in other expense was primarily attributable to a $1.3 million unrealized loss on investment in Cross Border warrants, a $0.9 million impairment on a note receivable, a $0.5 million unrealized loss on debentures, partially offset by a $0.7 million gain on consolidation of Cross Border during the nine months ended February 28, 2013, none of which were also recorded during the nine months ended March 31, 2014. In addition, we incurred $0.4 million of increased interest expense during the nine months ended March 31, 2014.

Liquidity and Capital Resources

General

Our primary source of liquidity for the third quarter of fiscal 2014 was cash flow from operations and draws under our credit facility. Our ability to fund planned capital expenditures and to make acquisitions depends upon our future operating performance, availability of borrowings under our revolving credit facility with Independent Bank (as amended, the “Credit Facility”), and availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. Our cash flow from operations is mainly influenced by the prices we receive for our oil and natural gas production and the quantity of oil and natural gas we produce. Prices for oil and natural gas are affected by national and international economic and political conditions, national and global supply and demand for hydrocarbons, seasonal weather influences and other factors beyond our control.

Capital Expenditures

Most of our capital expenditures are for the exploration, development, production and acquisition of oil and natural gas reserves. We anticipate cash capital expenditures of up to $4.0 million for the remainder of fiscal year 2014. See “— Planned Operations” for more information about our planned capital expenditures. As of March 31, 2014, assuming successful and timely implementation of the current and planned operations, we expect to have sufficient liquidity to complete our planned operations.

Liquidity

At March 31, 2014, we had $1.2 million in cash and cash equivalents and $32.6 million of total indebtedness, consisting of $23.8 million under the Credit Facility and $8.8 million of Series A Preferred Stock, net of a discount of $3.1 million. At March 31, 2014, we had a working capital deficit of $5.4 million compared to a working capital deficit of $24.3 million at February 28, 2013.

We expect to have sufficient cash on hand, cash flow from operations and available borrowings under our Credit Facility to fund our operations for the remainder of fiscal 2014.

Financings

On November 22, 2013, we paid in full the $1.5 million convertible promissory note, plus accrued and unpaid interest, to Personalversorge der Autogrill Schweiz AG, and the note was terminated.

On April 22, 2014, we withdrew $3.0 million under the Credit Facility. As of May 9, 2014, we had 26.8 million outstanding under the Credit Facility and had availability of 3.2 million.

Cash Flows

Net cash provided by operating activities was $4.5 million for the nine months ended March 31, 2014, compared to net cash used in operating activities of $5.0 million for the nine months ended February 28, 2013. The increase in net cash provided by operating activities was primarily due to a $5.0 million lower net loss, $3.5 million of higher depreciation, depletion, amortization, and impairment, and changes in working capital.

Net cash used in investing activities increased to $16.4 million for the nine months ended March 31, 2014 from $0.2 million for the nine months ended February 28, 2013 due to increased drilling activity during the nine months ended March 31, 2014.

Net cash provided by financing activities was $12.7 million for the nine months ended March 31, 2014, as compared to $7.8 million for the nine months ended February 28, 2013. Net cash provided by financing activities for the nine months ended March 31, 2014 was primarily comprised of proceeds from the sale of common stock and units, consisting of Series A Preferred Stock and warrants, partially offset by $7.0 million of payments on the Credit Facility and convertible notes payable and $9.0 million of draws on the Credit Facility.

Indebtedness

Credit Facility. The Senior First Lien Secured Credit Agreement (as amended, the “Credit Agreement”) with Cross Border, Black Rock and RMR Operating (Red Mountain, Cross Border, Black Rock and RMR Operating, jointly and severally, the “Borrowers”) and Independent Bank, as Lender, provides for our up to $100.0 million Credit Facility with an initial commitment of $20.0 million and a maturity date of February 5, 2016. The borrowing base under the Credit Facility is determined at the discretion of the Lender based on, among other things, the Lender’s estimated value of the proved reserves attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender, and is subject to regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in the Credit Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base. As of March 31, 2014, the borrowing base was $30.0 million.

A portion of the Credit Facility, in an aggregate amount not to exceed $2.0 million, may be used to issue letters of credit for the account of Borrowers. The Borrowers may be required to prepay the Credit Facility in the event of a borrowing base deficiency as a result of over-advances, sales of oil and gas properties or terminations of hedging transactions.

Amounts outstanding under the Credit Facility will bear interest at a rate per annum equal to the greater of (x) the U.S. prime rate as published in The Wall Street Journal’s “Money Rates” table in effect from time to time and (y) 4.0%. Interest is payable monthly in arrears on the last day of each calendar month. Borrowings under the Credit Facility are secured by first priority liens on substantially all the property of each of the Borrowers and are unconditionally guaranteed by Doral West Corp. and Pure Energy Operating, Inc., each a subsidiary of Cross Border.

Under the Credit Agreement, the Borrowers are required to pay fees consisting of (i) an unused facility fee equal to 0.5% multiplied by the average daily unused commitment amount, payable quarterly in arrears until the commitment is terminated; (ii) a fronting fee payable on the date of issuance of each letter of credit and annually thereafter or on the date of any increase or extension thereof, equal to the greater of (a) 2.0% per annum multiplied

by the face amount of such letter of credit or (b) $1,000; and (iii) an origination fee (x) of $200,000, and (y) payable on any date the commitment is increased, an additional facility fee equal to 1.0% multiplied by any increase of the commitment above the highest previously determined or redetermined commitment.

The Credit Agreement contains negative covenants that may limit the Borrowers’ ability to, among other things, incur liens, incur additional indebtedness, enter into mergers, sell assets, make investments and pay dividends. The Credit Agreement permits the payment of cash dividends on our Series A Preferred Stock so long as we are not otherwise in default under the Credit Agreement and payment of such cash dividends would not cause us to be in default under the Credit Agreement.

The Credit Agreement also contains financial covenants, measured as of the last day of each fiscal quarter of Red Mountain, requiring the Borrowers to maintain a ratio of (i) the Borrowers’ and their consolidated subsidiaries’ consolidated current assets (inclusive of the unfunded commitment amount under the Credit Agreement) to consolidated current liabilities (exclusive of the current portion of long-term debt under the Credit Agreement) of at least 1.00 to 1.00; (ii) the Borrowers’ and their subsidiaries’ consolidated “Funded Debt” to consolidated EBITDAX (for the four fiscal quarter period then ended) of less than 3.50 to 1.00; and (iii) the Borrowers’ and their subsidiaries’ consolidated EBITDAX less paid and accrued dividends on the Series A Preferred Stock to interest expenses (each for the four fiscal quarter period then ended) of at least 3.00 to 1.00. Funded Debt is defined in the Credit Agreement as the sum of all debt for borrowed money, whether as a direct or reimbursement obligor, but excludes shares of Series A Preferred Stock. EBITDAX is defined in the Credit Agreement as (a) consolidated net income plus (b) (i) interest expense, (ii) income taxes, (iii) depreciation, (iv) depletion and amortization expenses, (v) dry hole and exploration expenses, (vi) non-cash losses or charges on any hedge agreements resulting from derivative accounting, (vii) extraordinary or non-recurring losses, (viii) expenses that could be capitalized under GAAP but by election of Borrowers are being expensed for such period under GAAP, (ix) costs associated with intangible drilling costs, (x) other non-cash charges, (xi) one-time expenses associated with transactions associated with (b)(i) through (iv), minus (c)(i) non-cash income on any hedge agreements resulting from FASB Statement 133, (ii) extraordinary or non-recurring income, and (iii) other non-cash income.

Amounts outstanding under the Credit Facility may be accelerated and become immediately due and payable upon specified events of default of Borrowers, including, among other things, a default in the payment of principal, interest or other amounts due under the Credit Facility, certain loan documents or hydrocarbon hedge agreements, a material inaccuracy of a representation or warranty, a default with regard to certain loan documents which remains unremedied for a period of 30 days following notice, a default in the payment of other indebtedness of the Borrowers of $200,000 or more, bankruptcy or insolvency, certain changes in control, failure of the Lender’s security interest in any portion of the collateral with a value greater than $500,000, cessation of any security document to be in full force and effect, or Alan Barksdale ceasing to be Red Mountain’s Chief Executive Officer or Chairman of Cross Border and not being replaced with an officer acceptable to the Lender within 30 days.

Pursuant to the Credit Agreement, at least one of the Borrowers is required to have acceptable hedge agreements in place at all times effectively hedging at least 50% of the oil volumes of the Borrowers. Pursuant to the terms of the Credit Agreement, Red Mountain has hedge agreements with various counterparties hedging a portion of the future oil production of the Borrowers.

As of March 31, 2014, the Borrowers had collectively borrowed $23.8 million and had availability of $6.2 million under the Credit Facility. Subsequent to March 31, 2014, the Borrowers borrowed an additional $3.0 million on the Credit Facility, bringing the balance to $26.8 million and leaving of $3.2 million of availability.

Series A Preferred Stock. As of March 31, 2014, we had 476,687 shares of Series A Preferred Stock outstanding. The Series A Preferred Stock is mandatorily redeemable and is not convertible into shares of our common stock. We classify the Series A Preferred Stock as a long-term liability, and we record dividends paid or accrued as interest expense in our condensed consolidated statements of operations.

In August 2013, we closed public offerings of 476,687 Units (the “Units”), including 100,002 Units sold in cancellation of $2.3 million in debt, raising net proceeds of $7.1 million. Each Unit consisted of one share of Series A Preferred Stock and one warrant to purchase up to 2.5 shares of common stock. The warrants are exercisable until the earlier of August 2016 or (ii) the first trading day that is at least 30 days after the date that we have provided notice to the holders of the warrants by filing a Current Report on Form 8-K stating that the common stock has (A) achieved a 20 trading day volume weighted average price of $15.00 per share or more and (B) traded, in the aggregate, 300,000 shares or more over the same 20 consecutive trading days for which the 20 trading day volume weighted average price was calculated; provided, that clause (ii) shall only be applicable so long as a warrant is exercisable for shares of common stock. The warrants have an exercise price of $10.00 per share. The warrants issued with the Series A Preferred Stock were valued at $2.4 million. The value of the warrants is treated as a discount to the Series A Preferred Stock and will be accreted over the life of the mandatorily redeemable preferred stock. Management determined the fair value using a probability weighted Black-Scholes option model with a volatility based on the historical closing price of common stock of industry peers and the closing price of our common stock on the OTCBB on the date of issuance. The volatility and remaining term was approximately 55% and three years, respectively.

We agreed to exchange 222,224 shares of our Series A Preferred Stock for 1,388,898 shares of common stock effective as of April 1, 2014. After the exchange, we had 254,463 shares of Series A Preferred Stock outstanding with an aggregate redemption amount of $6.4 million.

Contractual Obligations

There were no changes to our contractual obligations during the three months ended March 31, 2014.

Off-Balance Sheet Arrangements

Since May 31, 2013, there have been no material changes to our off-balance sheet arrangements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” “understand,” or similar expressions and the negative of such words and expressions, although not all forward-looking statements contain such words or expressions.

Forward-looking statements are only predictions and are not guarantees of performance. These statements generally relate to our plans, objectives and expectations for future operations and are based on management’s current beliefs and assumptions, which in turn are based on its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate under the circumstances. Although we believe that the plans, objectives and expectations reflected in or suggested by the forward-looking statements are reasonable, there can be no assurance that actual results will not differ materially from those expressed or implied in such forward-looking statements. Forward-looking statements also involve risks and uncertainties. Many of these risks and uncertainties are beyond our ability to control or predict and could cause results to differ materially from the results discussed in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following:


•	our ability to raise additional capital to fund future capital expenditures;

•	our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop and produce our oil and natural gas properties;

•	declines or volatility in the prices we receive for our oil and natural gas;

•	general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business;

•	risks associated with drilling, including completion risks, cost overruns and the drilling of non-economic wells or dry holes;

•	uncertainties associated with estimates of proved oil and natural gas reserves;

•	the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

•	risks and liabilities associated with acquired companies and properties;

•	risks related to integration of acquired companies and properties;

•	potential defects in title to our properties;

•	cost and availability of drilling rigs, equipment, supplies, personnel and oilfield services;

•	geological concentration of our reserves;

•	environmental or other governmental regulations, including legislation of hydraulic fracture stimulation;

•	our ability to secure firm transportation for oil and natural gas we produce and to sell the oil and natural gas at market prices;

•	exploration and development risks;


•	management’s ability to execute our plans to meet our goals;

•	our ability to retain key members of our management team;

•	weather conditions;

•	actions or inactions of third-party operators of our properties;

•	costs and liabilities associated with environmental, health and safety laws;

•	our ability to find and retain highly skilled personnel;

•	operating hazards attendant to the oil and natural gas business;

•	competition in the oil and natural gas industry; and

•	the other factors discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013.

Forward-looking statements speak only as of the date hereof. All such forward-looking statements and any subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

Our major market risk exposure is the price we receive for our oil and natural gas production. Realized pricing is primarily driven by the prevailing price for oil and spot market prices for natural gas. Prices for oil and natural gas production are volatile and sometimes experience large fluctuations as a result of relatively small changes in supplies, weather conditions, economic conditions and government actions.

Pursuant to the Credit Agreement, at least one of the Borrowers is required to have acceptable hedge agreements in place at all times effectively hedging at least 50% of the oil volumes of the Borrowers. We have entered into derivative contracts, including costless collars, swaps, and puts, which hedge the price of oil for a portion of our expected production through November 2014.

The derivative contracts economically hedge against the variability in cash flows associated with the forecasted sale of our future oil production. While the use of the hedging arrangements will limit the downside risk of adverse price movements, it may also limit future gains from favorable movements.

The costless collars provide us with a lower limit “floor” price and an upper limit “ceiling” price on the hedged volumes. The floor price represents the lowest price we will receive for the hedged volumes while the ceiling price represents the highest price we will receive for the hedged volumes. The costless collars are settled monthly.

The swaps provide us with a fixed settlement price for our hedged volumes. The swaps are settled monthly.

The puts provide a fixed floor price on a notional amount of sales volumes while allowing full price appreciation if the relevant index price closes above the floor price.

We have elected not to designate our derivative financial instruments as hedges for accounting purposes, and accordingly, we record such contracts at fair value and recognize changes in such fair value in current earnings as they occur. Our commodity derivative contracts are carried at their fair value in earnings as they occur. We recognize unrealized and realized gains and losses related to these contracts on a mark-to-market basis in our condensed consolidated statements of operations under the captions “Unrealized gain (loss) on commodity derivatives” and “Realized gain (loss) on commodity derivatives,” respectively. Each derivative contract is evaluated separately to determine its own fair value. During the three and nine months ended March 31, 2014, we recorded an unrealized (loss) on commodity derivative contracts of $(41,000) and $(272,000), respectively, and a realized (loss) on commodity derivative contracts of $(23,000) and $(74,000), respectively.

The following table summarizes our outstanding derivatives contracts with respect to future oil production as of March 31, 2014:


Commodity and Time Period		Contract Type	Volume Transacted	Contract Price
Crude Oil
April 1, 2014―August 31, 2014	Collar - Minimum	Option	1,437 Bbls/month	$80.00/Bbl
April 1, 2014―August 31, 2014	Collar - Maximum	Option	1,437 Bbls/month	$100.50/Bbl
April 1, 2014―November 30, 2014		Swap	2,000 Bbls/month	$93.50/Bbl
April 1, 2014―November 30, 2014		Put	4,061-5,076 Bbls/month	$95.00/Bbl

The fair values of our commodity derivatives are largely determined by estimates of the forward curves of the relevant price indices. As of March 31, 2014, a 10% increase or decrease in underlying commodity prices would neither reduce nor increase the fair value of these derivatives by a material amount.

Interest Rate Risk

The Credit Facility exposes us to interest risk associated with interest rate fluctuations on outstanding borrowings. At March 31, 2014, we had $23.8 million in outstanding borrowings under the Credit Facility. We incur interest on borrowings under the Credit Facility at a rate per annum equal to the greater of (x) the U.S. prime rate as published in The Wall Street Journal’s “Money Rates” table in effect from time to time and (y) 4.0% (which interest rate was 4.0% at March 31, 2014). A hypothetical 10% change in the interest rates we pay on our borrowings under the Credit Facility as of March 31, 2014 would result in an increase or decrease in our interest costs of approximately $95,000 per year.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit 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 include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014 and, based on that evaluation, and as a result of the material weaknesses described in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2014, we continued implementing a new accounting system that is commonly used by other public oil and gas companies. There have been no other changes in our internal control over financial reporting that occurred during our last 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

There have been no material changes to the pending legal proceedings discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013, except as follows:

Cross Border, Cross Border’s former Chief Executive Officer, and Cross Border’s former Chief Operating Officer are party to a lawsuit with a former employee. On May 4, 2011, Clifton M. (Marty) Bloodworth initially filed a lawsuit in the State District Court of Midland County, Texas, against Doral West Corp. d/b/a Doral Energy Corp. (the predecessor entity of Cross Border) (“Doral Energy”) and Everett Willard Gray II, Cross Border’s former Chief Executive Officer. Mr. Bloodworth later amended his lawsuit to name Horace Patrick Seale, Cross Border’s former Chief Operating Officer, as an additional defendant. Mr. Bloodworth generally alleges that Mr. Gray and Mr. Seale, as agents of Cross Border, made false representations which induced Mr. Bloodworth to enter into an employment contract that was subsequently breached by Cross Border. The claims that Mr. Bloodworth has alleged are: breach of his employment agreement with Doral Energy, fraud in the inducement and common law fraud, civil conspiracy, breach of fiduciary duty, and violation of the Texas Deceptive Trade Practices Act. Mr. Bloodworth is seeking damages of approximately $280,000. Mr. Gray, Mr. Seale and the Company deny that Mr. Bloodworth’s claims have any merit.

Cross Border was previously party to an engagement letter, dated February 7, 2012 (the “Engagement Letter”), with KeyBanc Capital Markets Inc. (“KeyBanc”) pursuant to which KeyBanc was to act as exclusive financial advisor to Cross Border’s Board of Directors in connection with a possible “Transaction” (as defined in the Engagement Letter). The Engagement Letter was formally terminated by Cross Border on August 21, 2012. The Engagement Letter provided that KeyBanc would be entitled to a fee upon consummation of a Transaction within a certain period of time following termination of the Engagement Letter. On May 16, 2013, KeyBanc delivered an invoice to Cross Border in the amount of $751,334, representing amounts purportedly owed by the Company to KeyBanc as a result of the consummation of a purported Transaction KeyBanc asserts had been consummated within the required time period and its out-of-pocket expenses in connection therewith. Cross Border disputes that any Transaction was consummated and that KeyBanc is entitled to any out-of-pocket expenses. The matter was originally filed by Cross Border in the 44th-B Judicial District Court for the State of Texas, Dallas County but was subsequently removed to the United States District Court for the Northern District of Texas, Dallas Division, where KeyBanc filed a counterclaim against Cross Border. Cross Border and KeyBanc have each filed motions for summary judgment, requesting the Court to rule in their respective favors. The Company intends to vigorously defend the action.


Item 1A.	Risk Factors

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.


Item 6.	Exhibits


2.1		Agreement and Plan of Merger, dated January 29, 2014, by and between Red Mountain Resources, Inc., a Florida corporation, and Red Mountain Resources, Inc., a Texas corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

3.1		Certificate of Formation of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

3.2		Bylaws of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.1		Form of Common Stock Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.2		Form of 10.0% Series A Cumulative Redeemable Preferred Stock Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.3		Form of Warrant Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.4		Form of Warrant Agreement between the Company and Broadridge Corporate Issuer Solutions, Inc. (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form 8-A filed on July 24, 2013).

4.5		Amendment No. 1 to Warrant Agreement, effective as of January 31, 2014, between Broadridge Corporate Issuer Solutions, Inc. and Red Mountain Resources, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

31.1*		Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed herewith.
**	Furnished herewith.

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.


	By:	/s/ Alan W. Barksdale
		Alan W. Barksdale
		Chief Executive Officer

	By:	/s/ Hilda D. Kouvelis
		Hilda D. Kouvelis
		Chief Accounting Officer (Principal Financial and Accounting Officer)

	Date: May 12, 2014


INDEX TO EXHIBITS
2.1		Agreement and Plan of Merger, dated January 29, 2014, by and between Red Mountain Resources, Inc., a Florida corporation, and Red Mountain Resources, Inc., a Texas corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

3.1		Certificate of Formation of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

3.2		Bylaws of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.1		Form of Common Stock Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.2		Form of 10.0% Series A Cumulative Redeemable Preferred Stock Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.3		Form of Warrant Certificate of Red Mountain Resources, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

4.4		Form of Warrant Agreement between the Company and Broadridge Corporate Issuer Solutions, Inc. (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form 8-A filed on July 24, 2013).

4.5		Amendment No. 1 to Warrant Agreement, effective as of January 31, 2014, between Broadridge Corporate Issuer Solutions, Inc. and Red Mountain Resources, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2014).

31.1*		Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed herewith.
**	Furnished herewith.

RED MOUNTAIN RESOURCES, INC. - FORM 10-Q - May 12, 2014

Attached files

RED MOUNTAIN RESOURCES, INC. Reports