UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2012
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to ___________________.
Commission file number: 000-51425
---------
Rancher Energy Corp.
(Exact name of registrant as specified in its charter)
Nevada 98-0422451
------ ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1615 California Street Suite 607
Denver, CO 80202
(Address of principal executive offices)
(303) 629-1125
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this Chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Small reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a courtYes [ ] No [x]
As of November 6, 2012, 119,863,049 shares of Rancher Energy Corp. common stock,
$0.00001 par value, were outstanding.
1
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 2012 (Unaudited) and March 31, 2012 (Audited).....................3
Statements of Operations (Unaudited) for the Three and Six Months Ended
September 30, 2012 and 2011 ...................................................................4
Statement of Changes in Stockholders' Equity for the Six Months Ended
September 30, 2012 (Unaudited).................................................................6
Statements of Cash Flows (Unaudited) for the Six Months Ended September 30, 2012 and 2011 .......7
Notes to Financial Statements (Unaudited)........................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........22
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................23
Item 4. Controls and Procedures.........................................................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................24
Item 1A. Risk Factors....................................................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....................................25
Item 3. Defaults Upon Senior Securities.................................................................25
Item 4. Mine and Safety Disclosures.....................................................................25
Item 5. Other Information...............................................................................25
Item 6. Exhibits........................................................................................25
SIGNATURES 27
2
Item 1. Financial Statements
Rancher Energy Corp.
Balance Sheets
September 30, March 31,
2012 2012
(unaudited) (audited)
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $2,534,900 $3,229,858
Restricted cash - 500,641
Accounts receivable - 30,958
Accounts receivable, settlement - 525,000
Prepaid expenses and other 76,064 303,104
--------------- ---------------
Total current assets 2,610,964 4,589,561
--------------- ---------------
Furniture and equipment, net of accumulated depreciation
of $173,614 and $164,998 respectively 155,452 172,684
Deposits and other assets 200,350 200,350
--------------- ---------------
Total other assets 355,802 373,034
--------------- ---------------
Total assets $2,966,766 $4,962,595
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities - post petition $ 11,176 $ 449,224
Accounts payable, settlement - 500,000
Current liabilities of discontinued operations - 112,620
--------------- ---------------
Total current liabilities, not subject to compromise 11,176 1,061,844
Liabilities subject to compromise 271,734 1,259,827
--------------- ---------------
Total liabilities $ 282,910 $2,321,671
--------------- ---------------
Stockholders' Equity
Common stock, $0.00001 par value; 275,000,000 shares
authorized, 119,316,723 shares issued and outstanding
at September 30, 2012 and March 31, 2012, respectively 1,194 1,194
Additional paid-in capital 93,193,008 93,193,008
Accumulated deficit (90,510,346) (90,553,278)
--------------- ---------------
Total stockholders' equity 2,683,856 2,640,924
--------------- ---------------
Total liabilities and stockholders' equity $ 2,966,766 $4,962,595
=============== ===============
See notes to these financial statements.
3
Rancher Energy Corp.
Statements of Operations
(Unaudited)
For the Three Months Ended
September 30,
2012 2011
---------------------- ----------------------
Revenue $ - $ -
---------------------- ----------------------
Operating expenses:
General and administrative expenses 152,838 289,865
Depreciation and amortization 8,616 8,616
---------------------- ----------------------
Total operating expenses 161,454 298,481
---------------------- ----------------------
(Loss) from operations (161,454) (298,481)
---------------------- ----------------------
Other income (expense):
Interest expense and financing costs 53,300 (6,064)
Interest and other income 148,754 88,254
---------------------- ----------------------
Total other income 202,054 82,190
---------------------- ----------------------
Income (loss) before reorganization items
and discontinued operations 40,600 (216,291)
Reorganization items:
Credit of professional and legal fees 81,550 -
Professional and legal fees - (133,509)
---------------------- ----------------------
Total reorganization items 81,550 (133,509)
---------------------- ----------------------
Income (loss) from continuing operations 122,150 (349,800)
---------------------- ----------------------
Discontinued operations:
Income from discontinued operations - 4,392
---------------------- ----------------------
Total income from discontinued operations - 4,392
---------------------- ----------------------
Net income (loss) $ 122,150 $ (345,408)
====================== ======================
Net income (loss) per share from continuing operations $ 0.00* $ 0.00*
===============================================
Net income per share from discontinued operations $ 0.00* $ 0.00*
===============================================
Basic and diluted net income (loss) per share $ 0.00* $ 0.00*
====================== ======================
Basic weighted average shares outstanding 119,316,723 119,316,723
====================== ======================
Diluted weighted average shares outstanding 179,428,177 119,316,723
====================== ======================
* Less than $0.01 per share
See notes to these financial statements.
4
Rancher Energy Corp.
Statements of Operations
(Unaudited)
For the Six Months Ended
September 30,
2012 2011
---------------------- ----------------------
Revenue $ - $ -
---------------------- ----------------------
Operating expenses:
General and administrative expenses 275,395 512,679
Depreciation and amortization 17,232 20,104
---------------------- ----------------------
Total operating expenses 292,627 532,783
---------------------- ----------------------
(Loss) from operations (292,627) (532,783)
---------------------- ----------------------
Other income (expense):
Interest expense and financing costs 47,236 (11,998)
Interest and other income 237,150 188,739
---------------------- ----------------------
Total other income 284,386 176,741
---------------------- ----------------------
(Loss) before reorganization items and discontinued operations (8,241) (356,042)
Reorganization items:
Credit of professional and legal fees 51,173 -
Professional and legal fees - (231,105)
---------------------- ----------------------
Total reorganization items 51,173 (231,105)
---------------------- ----------------------
Income (loss) from continuing operations 42,932 (587,147)
---------------------- ----------------------
Discontinued operations:
(Loss) from discontinued operations - (1,931)
---------------------- ----------------------
Total (loss) discontinued operations - (1,931)
---------------------- ----------------------
Net income (loss) $ 42,932 $ (589,078)
====================== ======================
Net(loss) per share from continuing operations $ 0.00* $ 0.00*
====================== ======================
Net (loss) per share from discontinued operations $ 0.00* $ 0.00*
====================== ======================
Basic and diluted net income (loss) per share $ 0.00* $ 0.00*
====================== ======================
Basic weighted average shares outstanding 119,316,723 119,316,723
====================== ======================
Diluted weighted average shares outstanding 179,428,177 119,316,723
====================== ======================
* Less than $0.01 per share
See notes to these financial statements.
5
Rancher Energy Corp.
Statements of Cash Flows
(Unaudited)
For The Six Months Ended
September 30,
2012 2011
----------------- -----------------
Cash flows (used in) operating activities:
Net income (loss) from continuing operations $ 42,932 $ (589,078)
Adjustments to reconcile net income (loss) from continuing operations to
cash used in operating activities, before reorganization items:
Loss from discontinued operations - 1,931
Loss from settlement 25,000 -
Reorganization items, net (51,173) 231,105
Depreciation and amortization 17,232 20,104
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 257,998 (149,966)
Accounts payable and accrued liabilities (986,947) (330,498)
----------------- -----------------
Net cash used in operating activities, before reorganization items (694,958) (816,402)
----------------- -----------------
Payments for reorganization items -
Professional fees for services rendered in connection with
the Chapter 11 proceeding - (395,566)
----------------- -----------------
Net cash used in operating activities (694,958) (1,211,968)
----------------- -----------------
Cash flows from (used in) investing activities: - -
Cash flows from (used in) financing activities: - -
Discontinued operations:
Cash flows from (used in) discontinued operating activities - 339,778
Cash flows from (used in) discontinued investing activities - -
Cash flows from (used in) discontinued financing activities - -
----------------- -----------------
Net cash provided by discontinued operations - 339,778
----------------- -----------------
(Decrease) in cash and cash equivalents (694,958) (872,190)
Cash and cash equivalents, beginning of period 3,229,858 3,883,228
----------------- -----------------
Cash and cash equivalents, end of period $ 2,534,900 $ 3,011,038
================= =================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 10,107 $ 11,998
================= =================
See notes to these financial statements.
6
Rancher Energy Corp.
Statement of Changes in Stockholders' Equity
(Unaudited)
Additional
paid-in Accumulated
Shares Amount Capital Deficit Total
------------------ ------------ ---------------- -------------- --------------
Balance - March 31, 2012 119,316,723 $ 1,194 $ 93,193,008 $(90,553,278) $2,640,924
Net income for the period - - - 42,932 42,932
------------------ ------------ ---------------- -------------- --------------
Balance - September 30, 2012 119,316,723 $ 1,194 $ 93,193,008 $(90,510,346) $2,683,856
================== ============ ================ ============== ==============
See notes to these financial statements.
7
Note 1 - Business Organization
Organization
------------
Rancher Energy Corp. ("Rancher Energy" or the "Company") formerly known as
Metalex Resources, Inc. ("Metalex") was incorporated in Nevada on February 4,
2004.
Metalex was formed for the purpose of acquiring, exploring and developing mining
properties. On April 18, 2006, the stockholders of Metalex voted to change its
name to Rancher Energy Corp. and announced that it changed its business plan and
focus from mining to oil and gas.
Bankruptcy Filing
-----------------
On October 28, 2009, the Company filed a voluntary petition (the "Petition") for
relief in the United States Bankruptcy Court, District of Colorado (the
"Bankruptcy Court") under Chapter 11 of Title 11 of the U.S. Bankruptcy Code
(the "Bankruptcy Code"). The Company continued to operate its business as
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Code and orders of the
Bankruptcy Court until its plan of reorganization (the "Plan") was approved by
the Bankruptcy Court and the Company was discharged from bankruptcy on its
effective date of September 28, 2012. See Note 3 - Proceedings Under Chapter 11
of the Bankruptcy Code.
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. The Company's continuation as a going concern may be contingent upon,
among other things, its ability (i) to reduce administrative, operating and
interest costs and liabilities as a result of the bankruptcy process; (ii) to
generate sufficient cash flow from operations; and (iii) to obtain financing
and/or acquire producing assets as it emerges from bankruptcy. The Company is
currently evaluating various courses of action to address the operational and
liquidity issues it is facing. There can be no assurance that any of these
efforts will be successful. The accompanying financial statements do not include
any adjustments that might result should we be unable to continue as a going
concern. In the event the Company's restructuring activities are not successful
and it is required to liquidate, additional significant adjustments in the
carrying value of assets and liabilities, the revenues and expenses reported and
the balance sheet classifications used may be necessary.
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 852 "Financial Reporting During Reorganization Proceedings," which is
applicable to companies in Chapter 11, generally does not change the manner in
which financial statements are prepared. However, it does require that the
financial statements for periods subsequent to the filing of a Chapter 11 case
distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. Revenues, expenses,
realized gains and losses, and provisions for losses that can be directly
associated with the reorganization and restructuring of the business must be
reported separately as reorganization items in the statements of operations. The
balance sheet must distinguish Prepetition liabilities subject to compromise
from both those Prepetition liabilities that are not subject to compromise and
from post-petition liabilities. Liabilities that may be affected by a plan of
reorganization must be reported at the amounts expected to be allowed, even if
they may settled for lesser amounts. In addition, cash provided by
reorganization items, if any, must be disclosed separately in the statement of
cash flows. The Company adopted ASC 852-10 effective on October 28, 2010 and
will segregate those items as outlined above for all activity prior to September
28, 2012.
As the Company emerges from bankruptcy, it has reviewed the use of "Fresh-start"
accounting and determined that pursuant with ASC 852, the Company does not
qualify to use the provisions of "Fresh-start" accounting. The Company's voting
shareholders immediately before the confirmation date do not own less than 50%
of the voting shares of the emerging entity.
8
Note 2 - Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all liquid investments purchased with an initial maturity
of three months or less to be cash equivalents. Cash and cash equivalents
include demand deposits and money market funds carried at cost which
approximates fair value. The Company maintains its cash in institutions insured
by the Federal Deposit Insurance Corporation ("FDIC"). At September 30, 2012,
the Company had $2,284,900 in cash deposits in excess of FDIC insured limits.
Restricted cash
---------------
The restricted cash that was held in an escrow account in the amount of $500,641
was released on July 18, 2012 as part of an agreed upon and Bankruptcy Court
approved settlement agreement. See Note 7 - Commitments and Contingencies.
Accounts Receivable
-------------------
As of July 18, 2012, the Bankruptcy Court approved and the Company received
$525,000 as part of a royalty fee arrangement relating to a settlement agreement
among Rancher Energy, GasRock and Linc Energy and at September 30, 2012 the
balance owed to the Company is $0. See Note 7 - Commitments and Contingencies.
Oil and Gas Producing Activities
--------------------------------
The Company uses the successful efforts method of accounting for its oil and gas
properties. Under this method of accounting, all property acquisition costs and
costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved reserves. If an
exploratory well does not find proved reserves, the costs of drilling the well
are charged to expense. Exploratory dry hole costs are included in cash flows
from investing activities as part of capital expenditures within the
consolidated statements of cash flows. The costs of development wells are
capitalized whether or not proved reserves are found. Costs of unproved leases,
which may become productive, are reclassified to proved properties when proved
reserves are discovered on the property. Unproved oil and gas interests are
carried at the lower of cost or estimated fair value and are not subject to
amortization.
Geological and geophysical costs and the costs of carrying and retaining
unproved properties are expensed as incurred. DD&A of capitalized costs related
to proved oil and gas properties is calculated on a property-by-property basis
using the units-of-production method based upon proved reserves. The computation
of DD&A takes into consideration restoration, dismantlement, and abandonment
costs and the anticipated proceeds from salvaging equipment.
The Company complies with ASC 932, "Extractive Activities - Oil and Gas". The
Company currently does not have any existing capitalized exploratory well costs,
and has therefore determined that there are no suspended well costs that should
be impaired.
The Company reviews its long-lived assets for impairments when events or changes
in circumstances indicate that impairment may have occurred. The impairment test
for proved properties compares the expected undiscounted future net cash flows
on a property-by-property basis with the related net capitalized costs,
9
including costs associated with asset retirement obligations, at the end of each
reporting period. Expected future cash flows are calculated on all proved
reserves using a discount rate and price forecasts selected by the Company's
management. The discount rate is a rate that management believes is
representative of current market conditions. The price forecast is based on
NYMEX strip pricing, adjusted for basis and quality differentials, for the first
three to five years and is held constant thereafter. Operating costs are also
adjusted as deemed appropriate for these estimates. When the net capitalized
costs exceed the undiscounted future net revenues of a field, the cost of the
field is reduced to fair value, which is determined using discounted future net
revenues. An impairment allowance is provided on unproved property when the
Company determines the property will not be developed or the carrying value is
not realizable. The sale of substantially of the Company's assets in March 2011
resulted in the Company having no oil and gas properties at September 30, 2012
or March 31, 2012.
Sales of Proved and Unproved Properties
---------------------------------------
The sale of a partial interest in a proved oil and gas property is accounted for
as normal retirement, and no gain or loss is recognized as long as this
treatment does not significantly affect the units-of-production DD&A rate. A
gain or loss is recognized for all other sales of producing properties and is
reflected in results of operations. The sale of a partial interest in an
unproved property is accounted for as a recovery of cost when substantial
uncertainty exists as to recovery of the cost applicable to the interest
retained. A gain on the sale is recognized to the extent the sales price exceeds
the carrying amount of the unproved property. A gain or loss is recognized for
all other sales of nonproducing properties and is reflected in results of
operations. See the description of the sale of all oil and gas properties as of
March 1, 2011 contained in the Item 2 of Part I of this report as a result of
the bankruptcy filing.
Property and Equipment
----------------------
Property and equipment, such as office furniture and equipment, and computer
hardware and software, are recorded at cost. Costs of renewals and improvements
that substantially extend the useful lives of the assets are capitalized.
Maintenance and repair costs are expensed when incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets from three to seven years. When other property and equipment is sold or
retired, the capitalized costs and related accumulated depreciation are removed
from their respective accounts. Depreciation expense for the three and six
months ended September 30, 2012 was $8,616 and $17,232 and for the three and six
months ended September 30, 2011 was $8,616 and $20,104, respectively.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable, are carried at cost, which
approximates fair value due to the short-term maturity of these instruments.
Revenue Recognition
-------------------
The Company currently has no revenue from continuing or discontinued operations,
other than payments received for the resale of carbon dioxide under a supply and
sales agreement that is due to expire at the end of 2012.
Income Taxes
------------
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company assessed the likelihood of utilization of the deferred tax assets in
light of recent and expected continuing losses. As a result of this review, the
deferred tax asset of $12,716,000 and $12,407,000 has been fully reserved at
September 30, 2012 and March 31, 2012, respectively. At September 30, 2012, the
Company had net operating loss carryforwards of approximately $37,400,000 that
begin to expire in the year 2023.
10
The Company adopted the provisions of ASC 740, "Income Taxes" on April 1, 2007.
FASB ASC 740 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the
financial statements. Tax positions must meet a "more-likely-than-not"
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods. The adoption of ASC 740 had an
immaterial impact on the Company's financial position and did not result in
unrecognized tax benefits being recorded. Subsequent to adoption, there have
been no changes to the Company's assessment of uncertain tax positions.
Accordingly, no corresponding interest and penalties have been accrued. The
Company's policy is to recognize penalties and interest, if any, related to
uncertain tax positions as general and administrative expense. The Company files
income tax returns in the U.S. Federal jurisdiction and various states.
Net Income (Loss) per Share
---------------------------
Basic net income (loss) per common share of stock is calculated by dividing net
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding during each period.
Diluted net income (loss) per common share is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding, including
the effect of other dilutive securities. The Company's potentially dilutive
securities consist of in-the-money outstanding options and warrants to purchase
the Company's common stock. Diluted net loss per common share does not give
effect to dilutive securities as their effect would be anti-dilutive.
The treasury stock method is used to measure the dilutive impact of stock
options and warrants. The following table details the weighted-average dilutive
and anti-dilutive securities related to stock options and warrants for the
periods presented:
For the Six Months Ended
September 30,
2012 2011
Dilutive 60,111,454 -
Anti-dilutive - 66,073,564
Stock options and warrants were not considered in the detailed calculations as
their effect would be anti-dilutive except for the three and six months ended
September 30, 2012.
Share-Based Payments
--------------------
The Company recognizes compensation cost for stock-based awards based on
estimated fair value of the award and records compensation expense over the
requisite service period. See Note 9 - Share-Based Compensation.
Comprehensive Income (Loss)
---------------------------
The Company does not have revenue, expenses, gains or losses that are reflected
in equity rather than in results of operations. Consequently, for all periods
presented, comprehensive income (loss) is equal to net income (loss).
Major Customers
---------------
The Company's only source of income was from a carbon dioxide resale contract
that will expire at the end of 2012. The Company had no oil and gas operations
during the three and six months ended September 30, 2012 and 2011, and no
customers or billings as a result.
11
Off-Balance Sheet Arrangements
------------------------------
As part of its ongoing business, the Company has not participated in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. From its incorporation on February 4, 2004 through
September 30, 2012, the Company has not been involved in any unconsolidated SPE
transactions.
Reclassification
----------------
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period financial statement presentation. Such
reclassifications had no effect on the Company's net income (loss).
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
Note 3 - Proceedings Under Chapter 11 of the United States Bankruptcy Code
--------------------------------------------------------------------------
On October 28, 2009, the Company filed a Petition for relief under Chapter 11 of
the Bankruptcy Code with the Bankruptcy Court. The Petition was filed in order
to enable the Company to pursue reorganization efforts under Chapter 11 of the
Bankruptcy Code. The Company continued to operate its business as
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Code and orders of the
Bankruptcy Court until its Plan was approved by the Bankruptcy Court and the
Company was discharged from bankruptcy on its effective date of September 28,
2012. In general, as debtor-in-possession, the Company was authorized under
Chapter 11 to continue to operate as an ongoing business, but could not engage
in transactions outside of the ordinary course of business without the prior
approval of the Bankruptcy Court.
As the Company emerges from bankruptcy under its Plan with the availability of
cash, the Company's holders of its securities could receive a payment in respect
of such securities. However, caution should be exercised with respect to
existing and future investments in any of its securities.
Subject to certain exceptions under the Bankruptcy Code, the bankruptcy filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Company or its property
to recover on, collect or secure a claim arising prior to the Petition Date.
Thus, for example, creditor actions to obtain possession of property from the
Company, or to create, perfect or enforce any lien against the property of the
Company, or to collect on or otherwise exercise rights or remedies with respect
to a Prepetition claim were enjoined unless and until the Bankruptcy Court
lifted the automatic stay.
In order to successfully exit Chapter 11 bankruptcy, the Company needed to
propose, and obtain Bankruptcy Court confirmation of, a plan of reorganization
that satisfied the requirements of the Bankruptcy Code. The plan of
reorganization would, among other things, resolve the Debtors' Prepetition
obligations, set forth the revised capital structure of the newly reorganized
entity and provide for corporate governance subsequent to exit from bankruptcy.
In addition to the need for Bankruptcy Court confirmation and satisfaction of
Bankruptcy Code requirements, a plan of reorganization must be accepted by
classes of holders of impaired claims and equity interests in order to become
effective. As such, the Company did satisfy these requirements with its Plan.
Under section 365 of the Bankruptcy Code, the Company could assume, assume and
assign, or reject executory contracts and unexpired leases, including real
property and equipment leases, subject to the approval of the Bankruptcy Court
and certain other conditions. Rejection constituted a court-authorized breach of
the lease or contract in question and, subject to certain exceptions, relieved
the Company of its future obligations under such lease or contract but created a
deemed Prepetition claim for damages caused by such breach or rejection. Parties
whose contracts or leases were rejected could file claims against the Company
for damages. Thus, the Company's leased office space under a non-cancelable
operating lease expired during the quarter ended September 30, 2012.
12
The ability of the Company to continue as a going concern is dependent upon,
among other things, its ability (i) to reduce administrative, operating and
interest costs and liabilities as a result of the bankruptcy process; (ii) to
generate sufficient cash flow from operations; and (iii) to obtain financing
and/or acquire producing assets as it emerges from bankruptcy. Uncertainty as to
the outcome of these factors raises substantial doubt about the Company's
ability to continue as a going concern. The Company is currently evaluating
various courses of action to address the operational issues it is facing. There
can be no assurance that any of these efforts will be successful. The
accompanying financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
As a result of the bankruptcy filing, realization of assets and liquidation of
liabilities could be subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company could sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
financial statements. As such, the Company recognized a net gain from the
settlement and adjustment of liabilities of $18,042 and $85,750 for the years
ended March 31, 2012 and 2011, respectively.
Further, the Plan could materially change the amounts and classifications
reported in the Company's financial statements and as further noted in ASC 852
within the provisions of "Fresh-start" accounting. The Company's historical
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities as a consequence of confirmation of the Plan
and, more specifically, since the Company as it emerges from bankruptcy did not
qualify to use "Fresh-start" accounting.
The adverse publicity associated with the bankruptcy filing and the resulting
uncertainty regarding the Company's future prospects could hinder the Company's
ongoing business activities and its ability to operate, fund and execute its
Plan by impairing relations with property owners and potential lessees, vendors
and service providers; negatively impacting the ability of the Company to
attract, retain and compensate key executives and employees and to retain
employees generally; limiting the Company's ability to obtain trade credit; and
limiting the Company's ability to maintain and exploit existing properties and
acquire and develop new properties.
On October 15, 2010, the Company filed with the Bankruptcy Court its proposed
Debtor's Plan of Reorganization and a proposed Disclosure Statement was filed
simultaneously with the Plan of Reorganization. On December 13, 2010, the
Company filed with the Bankruptcy Court its First Amended Proposed Plan of
Reorganization and Disclosure Statement. The Disclosure Statement was first
required to be approved by the Bankruptcy Court before creditors and
shareholders could be presented with the opportunity to vote on the Plan of
Reorganization. Prior to confirmation and approval by the Court, the Proposed
Plan of Reorganization could be amended.
On December 15, 2010, the Company filed a motion to approve financing from a
party not affiliated with its present lender. The purpose of the loan was to
repay the existing lender in full and to pay certain past due ad valorem taxes
owed to Converse County, Wyoming. Converse County agreed that if it was paid by
February 1, 2011, it would waive penalties and interest of approximately
$93,000. This loan closed in January 2011. See Note 5 - Short Term Notes
Payable.
On December 20, 2010, the Company filed a motion to allow the Company to enter
into an agreement and approve the sale of substantially all its assets to the
same party and provide new financing for the price of approximately $20 million.
The sale closed effective March 1, 2011. See Note 4 - Discontinued Operations.
On April 30, 2012, the Company filed its 2nd Amended Plan of Reorganization and
Disclosure Statement with the Bankruptcy Court which eventually became the Plan.
The Plan provided for the Company to pay the claims of its creditors as the
assets of the Company allowed and permitted, but did not obligate the Company to
continue in the oil and gas industry with a focus on the purchase on
non-operating interests in oil and gas producing properties. On September 10,
2012, the Bankruptcy Court approved the Plan and the Company was discharged from
bankruptcy on its effective date of September 28, 2012. As a result of this
approval by the Bankruptcy Court, the Company during September of 2012 paid
$1,118,477 of creditor claims.
13
Reorganization Items
--------------------
Reorganization items represent the direct and incremental costs related to the
Company's Chapter 11 case, such as professional fees incurred, net of interest
income earned on accumulated cash during the Chapter 11 process. These
restructuring activities could result in additional charges and other
adjustments for expected allowed claims (including claims that have been allowed
by the Bankruptcy Court) and other reorganization items that could be material
to the Company's financial position or results of operations in any given
period.
Liabilities Subject to Compromise
---------------------------------
Liabilities subject to compromise at September 30, 2012 and March 31, 2012
include the following Prepetition liabilities:
September 30,
2012 March 31, 2012
------------- --------------
Accounts payable, trade $ - $ 176,726
Other payables and accrued liabilities 131,734 943,101
Convertible note payable 140,000 140,000
------------- --------------
$ 271,734 $1,259,827
------------- --------------
Note 4 - Discontinued Operations
In March 2011, the Company completed the sale of all of its oil and gas
properties and substantially all fixed assets for approximately $20 million
consisting of cash of $3,503,000, a receivable of $250,000, secured note and
accrued interest payoff in the amount of $14,829,250, including purchase price
adjustments and allowances of $1,417,750. Significant purchase price adjustments
and allowances included the Company retaining performance bonds for properties
in Wyoming of $814,000, asset valuation adjustments of $130,000 and production
tax allowance of $395,000. For the year ended March 31, 2011, the Company
recorded a gain on the sale of discontinued operations of $4,807,221, which was
determined as follows:
Total sales price $20,000,000
Adjustments to sales price for assets
retained (945,367)
Transaction expenses from sale of assets (508,195)
------------
Adjusted sales price 18,546,438
Summary of assets sold:
Fixed assets, net 126,712
Oil and gas properties, net 13,630,945
Other liabilities (18,8440)
------------
Total basis in assets sold 13,739,217
------------
Gain on disposition of assets, net $ 4,807,221
------------
The financial results of the Company's business related to oil and gas
operations have been classified as discontinued operations in its statements of
operations for all periods presented. The following summarizes components of
income (loss) from the Company's discontinued operations for the three and six
months ended September 30, 2011 only as there was no activity of discontinued
operations for the three and six months ended September 30, 2012:
14
Three months Six months
September 30, September 30,
2011 2011
------------- -------------
Revenue $ - $ -
Operating income 4,392 2,109
Operating income from discontinued operations 4,392 2,109
Other income (expenses) from discontinued
operations, net - (4,040)
Net income (loss) from discontinued operations 4,392 $ (1,931)
The assets and liabilities relating to the Company's discontinued oil and gas
operations are reflected as assets and liabilities of discontinued operations in
the accompanying balance sheets. The following summarizes the components of
these assets and liabilities at March 31, 2012 as the Company had no assets and
liabilities of discontinued operations at September 30, 2012:
March 31, 2012
--------------
Assets:
------
Current assets of discontinued operations -
Accounts receivable $ -
Deposits and other assets $ -
--------------
$ -
--------------
Other assets
Long-term assets of discontinued operations -
--------------
Total assets of discontinued operations $ -
--------------
Liabilities:
-----------
Current liabilities of discontinued operations:
Accounts payable and accrued liabilities $ 112,620
--------------
Total current liabilities of
discontinued operations $ 112,620
--------------
Oil and gas properties
----------------------
As previously noted throughout this report, all oil and gas properties were sold
in a transaction as of March 1, 2011. There have been no further acquisitions or
dispositions of oil and gas properties since that date.
Note 5 - Short Term Notes Payable
On January 28, 2011 the Company received debtor-in-possession financing ("DIP
Financing") pursuant to a credit agreement (the "DIP Credit Agreement") with
Linc Energy. The DIP Credit Agreement provided loan advances up to an aggregate
of $14.7 million and was scheduled to mature on May 28, 2011 (total term of 120
14
days from the date of closing). The Company borrowed a total of approximately
$14.0 million under the DIP Credit Agreement and the proceeds were used to pay
the allowed, secured claims for certain ad valorem property taxes, amounts due
to under Prepetition Note (defined below) and to fund $100,000 for the Company's
bankruptcy estate.
The DIP Credit Agreement specified interest at the rate of 10% per annum for the
60 days following the date of closing and 12% per annum through loan maturity.
Accumulated interest and principal was due in full at maturity. The DIP
Financing lender obtained a valid and perfected first priority security interest
in and liens on all the collateral including, but not limited to: (a) the
Company's interests in oil and gas producing properties; (b) accounts
receivable; (c) equipment; (d) general intangibles; (e) accounts; (f) deposit
accounts; and (g) all other real and personal property of the Company.
On February 16, 2011, the Bankruptcy Court approved an order authorizing the
sale of substantially all of the Company's assets to Linc Energy for $20.0
million. Effective March 1, 2011, the Company sold substantially of its assets
to Linc Energy. On March 14, 2011, all outstanding principal and accrued
interest totaling $14,829,250 were paid and the DIP Credit Agreement was
cancelled. See Note 4 - Discontinued Operations.
Through January 28, 2011, the Company had a note payable (the "Prepetition
Note") outstanding under the terms of a Term Credit Agreement with GasRock (the
"Prepetition Lender"). The original principal balance of $12,240,000 outstanding
under the Prepetition Note was initially due and payable on October 31, 2008,
with interest accruing at a rate equal to the greater of (a) 12% per annum, or
(b) the one-month LIBOR rate plus 6% per annum. The Prepetition Note was amended
on October 22, 2008 (the "First Amendment"), to extend the maturity date from
October 31, 2008 to April 30, 2009. In consideration of the six month extension
and other terms included in First Amendment, the Company made a principal
payment on the Prepetition Note in the amount of $2,240,000, resulting in a new
loan balance of $10,000,000. The maturity date of the Prepetition Note was
amended several times after April 30, 2009, with a final maturity date of
October 15, 2009. In connection with these amendments to the maturity date of
the Prepetition Note, the Company granted the GasRock various additional
considerations, including overriding royalty interests and net profits
interests. Payment of the principal balance of approximately $10,188,000, plus
accrued interest, was not made on October 15, 2009, and therefore, an event of
default occurred under the Term Credit Agreement, as amended. In connection with
the DIP financing, the Prepetition Note was paid in full on January 28, 2011.
The Company filed an adversary action in the Bankruptcy Court against GasRock in
an effort to avoid certain interests previously assigned to the Prepetition
Lender. See Note 7 - Commitments and Contingencies.
Note 6 - Convertible Promissory Notes Payable
On October 27, 2009, the Company issued convertible promissory notes (the
"Promissory Notes") totaling $140,000 of which $100,000 of the Promissory Notes
were issued to officers and/or directors or $25,000 each. The additional
Promissory Notes were issued to existing shareholders. The Promissory Notes
carry interest at an annual rate equal to the greater of (i) 12%, or (ii) the
prime rate (as published in the Wall Street Journal) plus 3%. The Promissory
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $0.02 per share and at any time during the
term of the Promissory Notes. The Promissory Notes matured on November 1, 2010,
and all obligations and payments due under the Promissory Notes were subordinate
to the Company's senior debt. As a result of the Company's bankruptcy filing
described in Notes 1 and 3 above, the Company was not able to pay principal and
accumulated interest on the Promissory Notes when due. Subject to certain
exceptions under the Bankruptcy Code, the Company's bankruptcy filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Company or its property
to recover on, collect or secure a claim arising prior to the Petition Date. At
September 30, 2012 and March 31, 2012, the principal outstanding on the
Promissory Notes is $140,000. The $100,000 of Promissory Notes due to the
officers and/or directors were paid on October 9, 2012 and the remaining $40,000
of Promissory Notes due to shareholders were paid on October 17, 2012. At
September 30, 2012, accrued interest related to these Promissory Notes is $715
and $54,015, respectively. The reduction in the accrued interest of $53,300 from
15
March 31, 2012 to September 30, 2012 was the result of a Bankruptcy Court
decision that the amount of the interest related to the Promissory Notes shall
be $715. This reduction of $53,300 was reported in the statement of operations
for the three and six months ended September 30, 2012.
Note 7 - Commitments and Contingencies
Commitments
-----------
On February 12, 2010, the Company filed an adversary action in the Bankruptcy
Court against GasRock, the holder of the then senior secured note payable
seeking to avoid certain ownership interests assigned to GasRock in connection
with the Term Credit Agreement and amendments thereto. On March 18, 2010,
GasRock filed a motion with the Bankruptcy Court to dismiss the complaint. On
October 21, 2010, the Bankruptcy Court issued an order on the Motion to Dismiss
that dismissed three of the nine claims made in the adversary action. The
Company, GasRock and Linc Energy executed a settlement agreement as of June 15,
2012, that called for the Company to make a payment of $500,000 to GasRock to
dismiss all claims in the litigation by GasRock and in return the Company would
receive a $525,000 payment form Linc Energy to settle other matters in the
litigation. The settlement agreement was approved by the Bankruptcy Court in
July 2012 and the respective payments among the parties were made and other
issues in the agreement were settled as noted in this report as of July 18,
2012. As a result of the settlement agreement, the Company incurred a loss of
$25,000 that was written off and reported in the statement of operations for the
three and six months ended September 30, 2012.
Bankruptcy Proceedings
----------------------
On October 28, 2009, the Company filed a Petition for reorganization under
Chapter 11 in the United States Bankruptcy Court for the District of Colorado.
The Company continued to operate its business as "debtor-in-possession" under
the jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Code and orders of the Bankruptcy Court until its Plan was
approved by the Bankruptcy Court and became effective September 28, 2012. All
pending or threatened litigation or claims involving the Company were
automatically stayed as a result of the bankruptcy filing, and all such claims
subject to compromise or modification through the terms of any plan of
reorganization filed by the Company in the bankruptcy proceedings. On September
10, 2012, the Bankruptcy Court approved the Plan and the Company was discharged
from bankruptcy on its effective date of September 28, 2012. See Note 3 -
Proceedings Under Chapter 11 of the United States Bankruptcy Code.
Litigation
----------
In a letter dated February 18, 2009 sent to each of the Company's directors,
attorneys representing a group of persons who purchased approximately $1.8
million of securities (in the aggregate) in the Company's private placement
offering commenced in late 2006, alleged that securities laws were violated in
that offering. In April 2009, the Company entered into tolling agreements with
the purchasers to toll the statutes of limitations applicable to any claims
related to the private placement. The Company's Board of Directors directed the
Special Committee to investigate these allegations. The Company denies the
allegations and believes they are without merit. The Company cannot predict the
likelihood of a lawsuit being filed, its possible outcome, or estimate a range
of possible losses, if any, that could result in the event of an adverse verdict
in any such lawsuit. Any suit against the Company is stayed by the bankruptcy
filing, and, insofar as these claims are asserted against the Company, they are
subject to the claim process imposed by the Bankruptcy Code and the possible
subordination under Section 510(b) of the Bankruptcy Code. The purchasers have
filed a Proof of Claim with the Bankruptcy Court in the amount of $1,776,050
plus ancillary amounts purported to be damages attributable to the alleged
securities violations. These claims are covered under the Company's D & O
insurance policy. In June 2011, the Bankruptcy Court rendered a decision that
these claims are subordinated to unsecured claims. If management believes that a
loss arising from this matter is probable and can reasonably be estimated, the
Company would record the amount of the loss, or the minimum estimated liability
when the loss is estimated using a range, and no point within the range is more
probable than another. As additional information becomes available, any
potential liability related to this matter will be assessed and the treatment
revised, if necessary. Based on current available information, management is
unable to make a determination as to the probability of a gain or loss regarding
this suit at this time.
16
A law firm that was formerly counsel to the Company filed a Proof of Claim for
Prepetition fees, to which the Company objected with the Bankruptcy Court. The
Company agreed to a settlement which the Bankruptcy Court approved in September
2012.
A former officer of the Company filed a proof of claim for wages and benefits to
which the Company objected with the Bankruptcy Court. The Company agreed to a
settlement of $18,750 with the former officer, which the Bankruptcy Court
approved.
Two of the Company's employees filed proofs of claim and motions to allow
administrative expenses for certain bonus payments. The Company and the
employees reached a Bankruptcy Court settlement in the amount of $78,902 which
was paid in September 2012.
GasRock filed a proof of claim for attorney's fees and costs related to the
bankruptcy filing generally and to the litigation pending between GasRock and
the Company. The Company objected to these fees on various grounds.
Subsequently, as of June 15, 2012, a Settlement and Release Agreement covering
these claims and other issues was executed by the Company, GasRock and Linc
Energy. This agreement was approved by the Bankruptcy Court in July 2012, and
such claims were released and certain payments were made among the parties as of
July 18, 2012.
Note 8 - Stockholders' Equity
The Company's capital stock at September 30, 2012 and March 31, 2012 consists of
275,000,000 authorized shares of common stock, par value $0.00001 per share. At
September 30, 2012 and March 31, 2012, a total of 119,326,723 common stock
shares were issued and outstanding.
Issuance of Common Stock
------------------------
During the six months ended September 30, 2012 there were no issuances or
cancellations of common stock.
Warrants
--------
As part of the Plan approved by the Bankruptcy Court, warrant holders holding
warrants exercisable for 54,632,565 shares of the Company's common stock are to
be cancelled and the holders of these warrants will receive one share of the
Company's common stock for every 100 shares of common stock the warrant holder
would have been entitled to if the warrants were exercised. Therefore, the
Company will be issuing approximately 546,326 shares of common stock to the
warrant holders during October 2012. See Note 11 - Subsequent Events.
Note 9 - Share-Based Compensation
During the six months ended September 30, 2012 and 2011, the Company did not
issue any stock options and all outstanding stock options were fully-vested.
2006 Stock Incentive Plan
-------------------------
On March 30, 2007, the 2006 Stock Incentive Plan (the 2006 Stock Incentive Plan)
was approved by the shareholders and was effective October 2, 2006. The 2006
Stock Incentive Plan had previously been approved by the Company's Board of
Directors. Under the 2006 Stock Incentive Plan, the Board of Directors may grant
awards of options to purchase common stock, restricted stock, or restricted
stock units to officers, employees, and other persons who provide services to
the Company or any related company. The participants to whom awards are granted,
the type of awards granted, the number of shares covered for each award, and the
purchase price, conditions and other terms of each award are determined by the
Board of Directors, except that the term of the options shall not exceed 10
years. A total of 10 million shares of the Company's common stock are subject to
the 2006 Stock Incentive Plan. The shares issued for the 2006 Stock Incentive
Plan may be either treasury or authorized and unissued shares. During the six
months ended September 30, 2012, no options were granted, expired or exercised
under the 2006 Stock Incentive Plan.
17
The following table summarizes information related to the outstanding and vested
options at September 30, 2012:
Outstanding and
Vested Options
------------------------
Number of shares
Non-qualified 10,000,000
2006 Plan 1,375,000
Weighted average remaining contractual life
Non-qualified 2.6 years
2006 Plan 2.5 years
Weighted average exercise price
Non-qualified $ 0.035
2006 Plan $ 0.875
Aggregate intrinsic value
Non-qualified $ 0
2006 Plan $ 0
The aggregate intrinsic value of outstanding securities is the amount by which
the fair value of underlying (common) shares exceeds the exercise price of the
options issued and outstanding.
At September 30, 2012, all outstanding options were fully vested. No options
were exercised during the six months ended September 30, 2012. The Company did
not realize any income tax expense related to the exercise of stock options for
the six months ended September 30, 2012 and 2011.
Note 10 - Related Party Transactions
A director of the Company is a partner in the law firm that acts as counsel to
the Company. The Company incurred legal fees and expenses to the law firm in the
amount of $6,325 and $54,474 during the six months ended September 30, 2012 and
2011, respectively that are included in the statement of operations. The amount
owed to the law firm was approximately $9,234 at September 30, 2012 and March
31, 2012, respectively.
Note 11 - Subsequent Events
The Company issued 546,326 shares of its common stock during the month of
October 2012 in exchange for warrants held by warrants holders as part of the
Plan approved by the Bankruptcy Court.
We have evaluated subsequent events through November 6, 2012. Other than those
set forth above, there have been no subsequent events after September 30, 2012
for which disclosure is required.
18
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q that are not
historical are "forward-looking statements", as that term is defined in Section
21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that
involve a number of risks and uncertainties. These forward-looking statements
include, among others, the following:
o Business strategy;
o Ability to develop a plan of reorganization acceptable to the
Bankruptcy Court and to emerge from bankruptcy;
o Ability to obtain any additional financial resources needed to
continue operations, to repay secured debt, and to purchase additional
oil and gas properties;
o Inventories, projects, and programs;
o Other anticipated capital expenditures and budgets;
o Future cash flows and borrowings;
o The availability and terms of financing;
o Ability to obtain permits and governmental approvals;
o Financial strategy;
o General and administrative costs;
o Future operating results; and
o Plans, objectives, expectations, and intentions.
These statements may be found under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and other sections of this
Quarterly Report on Form 10-Q. Forward-looking statements are typically
identified by use of terms such as "may", "could", "should", "expect", "plan",
"project", "intend", "anticipate", "believe", "estimate", "predict",
"potential", "pursue", "target" or "continue", the negative of such terms or
other comparable terminology, although some forward-looking statements may be
expressed differently.
The forward-looking statements contained in this Quarterly Report are largely
based on our expectations, which reflect estimates and assumptions made by our
management. These estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors. Although we believe such
estimates and assumptions to be reasonable, they are inherently uncertain and
involve a number of risks and uncertainties that are beyond our control. In
addition, management's assumptions about future events may prove to be
inaccurate. Management cautions all readers that the forward-looking statements
contained in this Quarterly Report on Form 10-Q are not guarantees of future
performance, and we cannot assure any reader that such statements will be
realized or the forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied in the
forward-looking statements due to the factors listed in the "Risk Factors"
section and elsewhere in our Annual Report on Form 10-K for the year ended March
31, 2012. All forward-looking statements speak only as of the date of this
Quarterly Report on Form 10-Q. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events or
otherwise. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
Organization
We are an independent energy company. Since October 28, 2009, we continued to
operate our business as "debtor-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the Code
and orders of the Bankruptcy Court until our Plan was approved by the Bankruptcy
Court when we were discharged from bankruptcy effective September 28, 2012.
Effective March 1, 2011, we sold all of our oil and gas properties, which
allowed us to eliminate the majority of our debt and also provide financial
resources during our reorganization.
The following summarizes our goals and objectives for the next twelve
months:
19
o Minimize our operating and administrative expenses;
o Emerge from bankruptcy under the provisions of our approved Plan; and
o Pursue and analyze any and all oil and gas related opportunities.
Proceedings under Chapter 11
On October 28, 2009, we filed a Petition for relief in the United States
Bankruptcy Court under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. As a
result of the bankruptcy filing, we continued to operate our business as
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and the order
of the Bankruptcy Court until we emerged from bankruptcy in September 2012. We
devoted efforts to resolve our liquidity problems and develop a reorganization
plan that was finally approved by the Bankruptcy Court. As of the date of filing
this quarterly report, no creditor has a lien on our cash.
From January 2007 through March 2011, we operated four fields in the Powder
River Basin, Wyoming, which were located in the Rocky Mountain region of the
United States. The fields, acquired in December 2006 and January 2007, were the
South Glenrock B Field, the Big Muddy Field, the Cole Creek South Field and the
South Glenrock A Field. Effective March 1, 2011, we sold all of our interest in
the four fields to Linc Energy Petroleum (Wyoming), Inc. as part of the
bankruptcy proceedings. The sale of such properties allowed us to eliminate the
majority of our debt and also provide financial resources during our
reorganization.
On April 30, 2012, we filed our Plan with the Bankruptcy Court. The Plan
provided for us to pay the claims of our creditors as the assets of the Company
allowed, and permitted but did not obligate us to continue in the oil and gas
industry with a focus on the purchase on non-operating interests in oil and gas
producing properties. On September 10, 2012, the Bankruptcy Court approved the
Plan and the Plan became effective September 28, 2012. As a result of this
approval by the Bankruptcy Court, we during September of 2012 paid $1,118,477 of
creditor claims.
Results of Operations
With the sale of substantially all of our assets in March 2011, our results of
operations are presented as follows:
Continuing operations
o Results of the Company's continuing operations for the three and six
months ended September 30, 2012 as compared to the three and six
months ended September 30, 2011; and
Discontinued operations
o Results of the Company's discontinued operations for the three and six
months ended September 30, 2012 as compared to the three and six
months ended September 30, 2011.
Continuing Operations
Three months ended September 30, 2012 compared to three months September 30,
2011 - continuing operations.
The following is a comparative summary of our results from continuing
operations:
20
Three Months Ended
September 30,
------------------
2012 2011
---- ----
Revenues $ - $ -
=========== ==========
Operating expenses:
General and administrative 152,838 289,865
Depreciation and amortization 8,616 8,616
----------- ----------
Total operating expenses 161,454 298,481
----------- ----------
Other income (expense):
Interest expense and financing costs 53,300 (6,064)
Interest and other income 148,754 88,254
----------- ----------
Total other income 202,054 82,190
----------- ----------
Income (loss) before reorganization items 40,600 (216,291)
Reorganization items 81,550 (133,509)
----------- ----------
Net income (loss) from continuing operations $ 122,150 $(349,800)
=========== ==========
Overview. For the three months ended September 30, 2012, we reported a net
income from continuing operations of $122,150 or $0.00 per basic and
fully-diluted share, compared to a net loss of $349,800 or $0.00 per basic and
fully-diluted share, for the three months ended September 30, 2011. Discussions
of individually significant period to period variances follow.
General and administrative expense. For the three months ended September 30,
2012, we incurred general and administrative expenses of $152,838 as compared to
$289,865 for the corresponding three months ended September 30, 2011. The
decrease in our general and administrative resulted primarily from decreases in
compensation and office expenses. Office expenses decreased primarily as a
result of lower rent expense associated with the April 2012 relocation of the
Company's headquarters.
Reorganization items. Reorganization items totaling a credit of $81,550 for the
three months ended September 30, 2012 included those items of credit
specifically related to our reorganization following the filing of the Petition
for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on
October 28, 2009. This credit consisted entirely of professional fees and legal
counsel for assistance with our reorganization plan and other bankruptcy related
matters and this credit was the result of over accruing these costs in the prior
periods. This credit compares to the corresponding three months in 2011 where we
had total expense of $133,509 and we expect these expenses will diminish
significantly as we emerge from the bankruptcy process.
Interest and other income. The Company entered into an agreement to assign
interests in a CO2 supply agreement to Merit Energy Company ("Merit"), beginning
in December 2010. In return for this assignment, the Company receives a fee of
$.03 per Mcf purchased by Merit under this supply agreement, which expires at
the end of 2012. During the three months ended September 30, 2012, the Company
recognized income of approximately $147,718 for purchases made under this supply
agreement. Also, during the three months ended September 30, 2012, the Company
adjusted the amount of interest it owed on the $140,000 in Promissory Notes and
as a result a credit adjustment was recorded to interest expense in the amount
of $57,343.
Six months ended September 30, 2012 compared to six months September 30, 2011 -
continuing operations.
The following is a comparative summary of our results from continuing
operations:
Six Months Ended
September 30,
------------------
2012 2011
---- ----
Revenues $ - $ -
=========== ==========
Operating expenses:
General and administrative 275,395 512,679
Depreciation and amortization 17,232 20,104
----------- ----------
Total operating expenses 292,627 532,783
----------- ----------
Other income (expense):
Interest expense and financing costs 47,236 (11,998)
Interest and other income 237,150 188,739
----------- ----------
Total other income 284,386 176,741
----------- ----------
Income (loss) before reorganization items (8,241) (356,042)
Reorganization items 51,173 (231,105)
----------- ----------
Net income (loss) from continuing operations $ 42,932 $(587,147)
=========== ==========
Overview. For the six months ended September 30, 2012, we reported a net income
from continuing operations of $42,932 or $0.00 per basic and fully-diluted
share, compared to a net loss of $587,147 or $0.00 per basic and fully-diluted
share, for the six months ended September 30, 2011. Discussions of individually
significant period to period variances follow. General and administrative
expense. For the six months ended September 30, 2012, we incurred general and
administrative expenses of $275,395 as compared to $512,679 for the
corresponding six months ended September 30, 2011. The decrease in our general
and administrative resulted primarily from decreases in compensation and office
expenses. Office expenses decreased primarily as a result of lower rent expense
associated with the April 2012 relocation of the Company's headquarters.
Reorganization items. Reorganization items totaling a credit of $51,173 for the
six months ended September 30, 2012 included those items of credit specifically
related to our reorganization following the filing of the Petition for relief
under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on October 28,
2009. This credit consisted entirely of professional fees and legal counsel for
assistance with our reorganization plan and other bankruptcy related matters and
this credit was the result of over accruing these costs in the prior periods.
This credit compares to the corresponding three months in 2011 where we had
total expense of $231,105 and we expect these expenses will diminish
significantly as we emerge from the bankruptcy process.
Interest and other income. The Company entered into an agreement to assign
interests in a CO2 supply agreement to Merit Energy Company ("Merit"), beginning
in December 2010. In return for this assignment, the Company receives a fee of
$.03 per Mcf purchased by Merit under this supply agreement, which expires at
the end of 2012. During the six months ended September 30, 2012, the Company
recognized income of approximately $234,536 for purchases made under this supply
agreement. Also, during the six months ended September 30, 2012, the Company
adjusted the amount of interest it owed on the $140,000 in Promissory Notes and
as a result a credit adjustment was recorded to interest expense in the amount
of $57,343.
Discontinued Operations
Three and six months ended September 30, 2012 compared to three and six months
ended September 30, 2011 - discontinued operations.
For the three and six months ended September 30, 2012, we did not report a net
income or loss from our discontinued operations, compared to a net income of
$4,392 and a net loss of $1,931, for the corresponding three and six months of
2011, respectively. With the sale of all of the Company's oil and gas properties
in March 2011, the Company had no revenue or notable expenses relating to
discontinued operations during the three and six months ended September 30,
2012.
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Liquidity and Capital Resources
The report of our independent registered public accounting firm on the financial
statements for the years ended March 31, 2012 and 2011 includes an explanatory
paragraph relating to the uncertainty of our ability to continue as a going
concern. As we emerge from bankruptcy, we have incurred a cumulative net loss of
approximately $93 million for the period from inception (February 4, 2004) to
September 30, 2012.
In March 2011, we sold all of our oil and gas income producing assets which
enabled us to pay off all secured debt and left us with net cash proceeds of
approximately $3,500,000 and a receivable from the transaction of $250,000. We
did not have any sources of revenue and our projected interest and other income
sufficient to sustain our ongoing general and administrative, legal and
reorganization costs. We received proceeds from the return of funds we had on
deposit for oil and gas environmental and performance bonds with the State of
Wyoming. These amounts totaled approximately $279,000 and were returned to the
Company in October 2011. As we emerge from bankruptcy, we expect that our
monthly operating expenses will exceed monthly operating income by approximately
$10,000 until we are able to pursue other business activities. Nonetheless, we
will have net cash of approximately $2.2 million in the bank.
As a result of the approval by the Bankruptcy Court on September 10, 2012, the
Company during September of 2012 paid $1,118,477 of creditor claims. We have
prepared and filed all required financial and operating reports and other
documents with the Bankruptcy Court. There is no assurance that as the Company
emerges from bankruptcy that we will be able to raise the capital or funds
necessary to analyze and pursue other oil and gas related opportunities and thus
in the meantime we will rely on our net cash of approximately $2.2 million in
the bank.
Cash flows used for continuing operations decreased in the six months ended
September 30, 2012 as compared to the six months ended September 30, 2012
primarily due to a decrease in the Company's operational activities and a
decrease in the fees associated with its administrative activities.
Off-Balance Sheet Arrangements
------------------------------
We have no material off-balance sheet arrangements nor do we have any
unconsolidated subsidiaries.
Critical Accounting Policies and Estimates
------------------------------------------
Critical accounting policies and estimates are provided in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Item 8 - Financial Statements and Supplementary Data, both of which are included
in Part II of our Annual Report on Form 10-K for the fiscal year ended March 31,
2012. Additional disclosures are provided in Notes to Financial Statements
(unaudited) which are included in Item 1 - Financial Statements to this
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are
not required to provide information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
----------------------------------
We conducted an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. The term
"disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act),
means controls and other procedures of a company that are designed to ensure
22
that information required to be disclosed by the company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures also include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. The conclusion by our Chief Executive Office is the identification
of the following material weakness in our internal control over financial
reporting and, as a result of this material weakness, we concluded as of March
31, 2012 and as of the end of the period covered by this Quarterly Report that
our disclosure controls and procedures were not effective.
We did not adequately segregate the duties of different personnel within our
Accounting Department due to an insufficient complement of staff and inadequate
management oversight.
We have limited accounting personnel with sufficient expertise in generally
accepted accounting principles to enable effective segregation of duties with
respect to recording journal entries and to allow for appropriate monitoring of
financial reporting matters and internal control over financial reporting.
Specifically, the Acting Chief Accounting Officer has involvement in the
creation and review of journal entries and note disclosures without adequate
independent review and authorization. This control deficiency is pervasive in
nature and impacts all significant accounts. This control deficiency also
affects the financial reporting process including financial statement
preparation and the related note disclosures. However, the Company has retained
the services of a certified public accountant to assist the Acting Chief
Accounting Officer in the preparation of books and records as well as the
Company's Form 10-Q.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
There have been no changes in our internal control over financial reporting
during the most recently completed fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 28, 2009, the Company filed a Petition for relief in the Bankruptcy
Court under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On September 10,
2012, the Bankruptcy Court approved the Plan and the Plan became effective
September 28, 2012. The bankruptcy proceedings are discussed in further detail
in Item 1 of this filing.
On February 12, 2010, the Company filed an adversary proceeding in the
Bankruptcy Court against GasRock Capital LLC, Case No. 10-01173-MER. The
complaint seeks to recover the 10% NPI conveyed to GasRock ("The Lender") in
connection with the Eighth Amendment to the Term Credit Agreement and the
additional 1% ORRI conveyed to the Lender in October 2008 in connection with an
extension of the short term note. The primary basis of the complaint is that the
Lender gave less than fair equivalent value for the conveyances at a time when
the Company was insolvent, or when the conveyances left the Company with
insufficient capital. In other words, the Company has claimed that the value of
the conveyances was in excess of a reasonable fee for the extensions, and, as a
result, the conveyances were "constructively fraudulent" under both applicable
Bankruptcy law and the Uniform Fraudulent Transfers Act.
In addition, the Company has challenged the conveyance of the NPI and the 1%
ORRI, together with the original 2% ORRI conveyed to Lender when its loan was
first made, on the grounds that they should be characterized as security
interests and not outright transfers of title. The Bankruptcy Court has granted
GasRock's motion to dismiss these claims. The Company has also claimed that the
conveyances rendered the loan usurious under Texas law. Further, the Company has
sought to have the NPI and 1% ORRI avoided as preferences under ss. 547 of the
Bankruptcy Code and to equitably subordinate the Lender's claim. Although the
23
Company believes its claims are well-taken, the Lender is vigorously defending
against the complaint, and no assurance can be given that the Company will be
successful in whole or in part.
On June 15, 2012, the Company entered into a settlement agreement with GasRock
and Linc Energy to resolve the adversary proceeding against GasRock. In July,
the Bankruptcy Court approved the settlement agreement and on July 18, 2012 the
Company:
a. received the disputed NPI, which the Company conveyed to Linc Energy;
b. released all claims to the funds held in escrow pursuant to the terms
of the sale of substantially all of its assets to Linc Energy;
c. received from Linc Energy $525,000 plus an amount of $35,523 for final
settlement of Rancher's litigation costs due under the Litigation
Agreement with Linc Energy;
d. Dismissed the adversary proceeding against GasRock with prejudice; and
e. Paid to GasRock $500,000 from an existing escrow account, and was
released from GasRock's claim for attorneys' fees and costs that
GasRock asserted it was owed for defending itself in the adversary
proceeding.
In a letter dated February 18, 2009, sent to each of our then directors,
attorneys representing a group of persons who purchased approximately $1,800,000
of securities (in the aggregate) in our private placement offering commenced in
late 2006 alleged that securities laws were violated in that offering. In April
2009, we entered into tolling agreements with the purchasers to toll the
statutes of limitations applicable to any claims related to the private
placement. In February 2009, our Board of Directors established a Special
Committee of the Board (the "Special Committee") to investigate the allegations.
Following the completion of the investigation, the Special Committee recommended
no action be taken. We deny the allegations and believe they are without merit.
The claimants have filed Proof of Claims with the Bankruptcy Court in the amount
of $1,776,050 plus ancillary amounts purported to be damages attributable to the
alleged securities violations. The Company objected to the claims and asked the
Bankruptcy Court to subordinate the claims to the level of equity. In June 2011,
the Bankruptcy Court rendered a decision that these claims are subordinated to
unsecured claims and at the date of this filing and as the Company emerges from
bankruptcy no clear determination can be assessed.
If management believes that a loss arising from this matter is probable and can
reasonably be estimated, the Company would record the amount of the loss, or the
minimum estimated liability when the loss is estimated using a range, and no
point within the range is more probable than another. As additional information
becomes available, any potential liability related to this matter will be
assessed and the treatment revised, if necessary. As such, based on current
available information, management is unable to make a determination as to the
probability of a gain or loss regarding the suit at this time.
ITEM 1A. Risk Factors
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are
not required to provide information required by this Item.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. MINE AND SAFETY DISCLOSURE
NOT APPLICABLE.
24
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
The following is a complete list of exhibits filed as part of this Form 10-Q.
Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit 31.1 Certification of Chief Executive Officer and Acting
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive Officer and Acting
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
101.INS XBRL Instance Document (1)
101.SCH XBRL Taxonomy Extension Schema Document (1)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)
(1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of Section 18 of the Securities Exchange Act of 1934,
and otherwise is not subject to liability under these sections.
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RANCHER ENERGY CORP.
Dated: November 12, 2012 By: /s/ Jon C. Nicolaysen
--------------------------------
Jon C. Nicolaysen, President,
Chief Executive Officer, and
Acting Chief Accounting Officer