Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2010
OR
[x] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ___________________.
Commission file number: 000-51425
Rancher Energy Corp.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 98-0422451
-------------------- ------------
999 - 18th Street, Suite 3400
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 [ ] 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]
1
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [x]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [x]
As of February 14, 2011, 119,316,723 shares of Rancher Energy Corp. common
stock, $.00001 par value, were outstanding.
2
Rancher Energy Corp.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheets as of December 31, 2010 and March 31, 2010.............................. 4
Unaudited Statements of Operations for the Three and Nine Months ended
December 31, 2010 and 2009.................................................................. 6
Unaudited Statement of Changes in Stockholders' Equity (Deficit) for the Nine Months ended
December 31, 2010............................................................................ 8
Unaudited Statements of Cash Flows for the Nine Months ended
December 31, 2010 and 2009................................................................... 9
Notes to Financial Statements.................................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 29
Item 4. Controls and Procedures.......................................................................... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 30
Item 1A. Risk Factors................................................................................... 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................... 31
Item 3. Defaults Upon Senior Securities................................................................. 31
Item 4. Rescinded and Reserved.......................................................................... 31
Item 5. Other Information............................................................................... 31
Item 6. Exhibits....................................................................................... 31
SIGNATURES............................................................................................... 32
3
Part I. Financial Information.
Item 1. Financial Statements
Rancher Energy Corp.
Debtor in Possession
Balance Sheets
Unaudited
ASSETS
December 31, 2010 March 31, 2010
----------------- --------------
Current assets:
Cash and cash equivalents $ 307,178 $ 372,286
Accounts receivable and prepaid expenses 671,007 615,602
---------------------- -------------------
Total current assets 978,185 987,888
---------------------- -------------------
Oil and gas properties at cost (successful efforts method):
Unproved 53,073,689 53,030,814
Proved 19,572,699 19,432,703
Less: Accumulated depletion, depreciation, amortization and impairment (57,299,336) (56,355,224)
---------------------- -------------------
Net oil and gas properties 15,347,052 16,108,293
---------------------- -------------------
Other assets:
Furniture and equipment net of accumulated depreciation of $683,731 and $568,529
respectively 461,622 574,938
Other assets 878,895 914,097
---------------------- -------------------
Total other assets 1,340,517 1,489,035
---------------------- -------------------
Total assets $17,665,754 $18,585,216
====================== ===================
(Continued)
The accompanying notes are an integral part of these financial statements.
4
Rancher Energy Corp.
Debtor in Possession
Balance Sheets
Unaudited
(Continued)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
December 31, 2010 March 31, 2010
----------------- --------------
Current liabilities:
Accounts payable and accrued liabilities - post petition $ 4,845,033 $ 1,698,488
Asset retirement obligation 126,334 174,332
Note payable 10,089,987 10,089,987
--------------------- ---------------------
Total current liabilities 15,061,354 11,962,807
--------------------- ---------------------
Long-term liabilities:
Asset retirement obligation 1,370,629 1,255,497
--------------------- ---------------------
Total long-term liabilities 1,370,629 1,255,497
--------------------- ---------------------
Total liabilities not subject to compromise 16,431,983 13,218,304
Liabilities subject to compromise 1,462,043 1,336,133
--------------------- ---------------------
Total liabilities 17,894,026 14,554,437
--------------------- ---------------------
Contingencies (Notes 2, 4, 7 and 8)
Stockholders' (deficit) equity:
Common stock, $0.00001 par value, 275,000,000 shares authorized, 119,316,700
shares issued and outstanding at December 31, 2010 and March 31, 2010 1,194 1,194
Additional paid-in capital 93,193,008 93,025,876
Accumulated deficit (93,422,474) (88,996,291)
--------------------- ---------------------
Total stockholders' (deficit) equity (228,272) 4,030,779
--------------------- ---------------------
Total liabilities and stockholders' (deficit) equity $17,665,754 $18,585,216
===================== =====================
The accompanying notes are an integral part of these financial statements.
5
Rancher Energy Corp.
Debtor In Possession
Statements of Operations
(Unaudited)
Three Months Ended December 31,
Revenues: 2010 2009
---- ----
Oil & gas sales $ 1,211,679 $ 970,502
Derivative losses - (6,809)
------------------------ -------------------------
1,211,679 963,693
------------------------ -------------------------
Operating expenses:
Production taxes 149,295 143,769
Lease operating 545,150 411,150
Depreciation, depletion and amortization 338,678 299,184
Accretion 43,650 38,821
Impairment of unproved properties - 13,525,642
Exploration 6,568 3,340
General and administrative 420,848 568,717
------------------------ -------------------------
Total operating expenses 1,504,189 14,990,623
------------------------ -------------------------
Loss from operations (292,510) (14,026,930)
------------------------ -------------------------
Other income (expense):
Amortization of deferred finance costs and discount on note payable - (239,106)
Interest expense (735,733) (460,165)
Interest and other income 5,684 7
------------------------ -------------------------
Total other income (expense) (730,049) (699,264)
------------------------ -------------------------
Loss before reorganization items (1,022,559) (14,726,194)
Reorganization items:
Professional and legal fees 418,804 158,727
------------------------ -------------------------
Net loss $ (1,441,363) $ (14,884,921)
======================== =========================
Basic and diluted net loss per share $(0.01) $(0.12)
======================== =========================
Basic and diluted weighted average shares outstanding 119,316,700 119,316,700
======================== =========================
The accompanying notes are an integral part of these financial statements
6
Rancher Energy Corp.
Debtor In Possession
Statements of Operations
(Unaudited)
Nine Months Ended December 31,
Revenues: 2010 2009
---- ----
Oil & gas sales $ 3,536,968 $ 2,498,376
Derivative losses - (357,582)
------------------------- -------------------------
3,536,968 2,140,794
------------------------- -------------------------
Operating expenses:
Production taxes 444,303 338,547
Lease operating 1,837,267 1,088,163
Depreciation, depletion and amortization 1,065,425 868,263
Accretion 130,207 119,480
Impairment of unproved properties - 13,525,642
Exploration 25,655 15,172
General and administrative 1,656,417 2,066,226
------------------------- -------------------------
Total operating expenses 5,159,274 18,021,493
------------------------- -------------------------
Loss from operations (1,622,306) (15,880,699)
------------------------- -------------------------
Other income (expense):
Amortization of deferred finance costs and discount on note payable - (1,770,789)
Interest expense (1,682,787) (1,250,859)
Interest and other income 17,250 731
------------------------- -------------------------
Total other income (expense) (1,665,537) (3,020,917)
------------------------- -------------------------
Loss before reorganization items (3,287,843) (18,901,616)
Reorganization items:
Professional and legal fees 1,138,340 158,727
------------------------- -------------------------
Net loss $(4,426,183) $(19,060,343)
========================= =========================
Basic and diluted net loss per share $(0.04) $(0.16)
========================= =========================
Basic and diluted weighted average shares outstanding 119,316,700 119,357,245
========================= =========================
The accompanying notes are an integral part of these financial statements
7
Rancher Energy Corp.
Debtor In Possession
Statement of Changes in Stockholders' (Deficit) Equity
For the Nine Months Ended December 31, 2010
(Unaudited)
Total
Additional Stockholders'
Paid-In Accumulated (Deficit)
-
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance, April 1, 2010 119,316,700 $1,194 $93,025,876 $(88,996,291) $4,030,779
Stock-based compensation - - 167,132 - 167,132
Net loss - - - (4,426,183) (4,426,183)
---------------- ---------- --------------- ----------------- -----------------
Balance, December 31, 2010 119,316,700 $1,194 $93,193,008 $(93,422,474) $ (228,272)
================ ========== =============== ================= =================
The accompanying notes are an integral part of these financial statements.
8
Rancher Energy Corp.
Debtor In Possession
Statements of Cash Flows
(Unaudited)
Nine Months Ended December 31,
2010
2009
Cash flows from operating activities:
Net loss $(4,426,183) $(19,060,343)
Adjustments to reconcile net loss to cash used for operating activities:
Depreciation, depletion, and amortization 1,065,425 868,263
Impairment of unproved properties - 13,525,642
Reorganization items, net 1,138,340 158,727
Accretion expense 130,207 119,480
Interest expense converted to short-term debt - 188,112
Interest expense beneficial conversion feature, convertible notes payable - 105,000
Amortization of deferred financing costs and discount on note payable - 1,665,789
Unrealized losses on derivative activities - 455,960
Stock-based compensation expense 167,132 210,829
Services exchanged for common stock - directors - 51,700
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses (55,405) (199,375)
Other assets 29,130 19,205
Accounts payable and accrued liabilities 2,761,740 1,154,390
Asset retirement obligation settlements (63,074) -
-------------------- -------------------------
Net cash from (used for) operating activities, before reorganization 747,312 (736,621)
Cash effect of reorganization items (627,662) (56,519)
-------------------- -------------------------
Net cash from (used for) operating activities 119,650 (793,140)
-------------------- -------------------------
Cash flows from investing activities:
Capital expenditures for oil and gas properties (182,872) (3,805)
Proceeds from sale of other assets - 10,760
Increase in furniture and equipment (1,885) -
-------------------- -------------------------
Net cash (used for) from investing activities (184,757) 6,955
-------------------- -------------------------
Cash flows from financing activities:
Repayment of debt - (98,125)
Proceeds from issuance of convertible notes payable - 140,000
Proceeds from issuance of common stock upon exercise of stock options - 5
-------------------- -------------------------
Net cash from financing activities - 41,880
-------------------- -------------------------
Decrease in cash and cash equivalents (65,107) (744,305)
Cash and cash equivalents, beginning of period 372,285 917,160
-------------------- -------------------------
Cash and cash equivalents, end of period $307,178 $172,855
==================== =========================
Supplemental Statement of Cash Flow Information:
Cash paid for interest - $613,479
==================== =========================
Non-cash investing and financing activities:
Deferred finance costs, conveyance net profits interest - $1,500,000
==================== =========================
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Rancher Energy Corp.
Debtor in Possession
Notes to Financial Statements
For the Nine Months Ended December 31, 2010
(Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Rancher Energy Corp. ("Rancher Energy" or the "Company") was
incorporated in the state of Nevada on February 4, 2004. The Company acquires,
explores for, develops and produces oil and natural gas, concentrating on
applying secondary and tertiary recovery technology to older, historically
productive fields in North America.
Basis of Presentation
The accompanying unaudited financial statements include the accounts of
the Company's wholly owned subsidiary, Rancher Energy Wyoming, LLC, a Wyoming
limited liability company that was formed on April 24, 2007. In management's
opinion, the Company has made all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations, and cash flows. The financial statements should be read
in conjunction with financial statements included in the Company's Annual Report
on Form 10-K for the year ended March 31, 2010. The accompanying financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements. However, except as disclosed
herein, there has been no material change in the information disclosed in the
notes to financial statements included in the Company's Annual Report on Form
10-K for the year ended March 31, 2010. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the full year.
Bankruptcy Filing
On October 28, 2009, the Company filed a voluntary petition (the
"petition") for reorganization relief ("the Bankruptcy Filing") in the United
States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of
the U.S. Bankruptcy Code (the "Bankruptcy Court"). The Company will continue to
operate its business as "debtor-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the Code
and orders of the Bankruptcy Court. See Note 2 "Proceedings Under Chapter 11 of
the Bankruptcy Code" for details regarding the Bankruptcy Filing and the Chapter
11 case.
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. However, the petition raises substantial doubt about the Company's
ability to remain a going concern. The Company's continuation as a going concern
may be contingent upon, among other things, its ability (i) to obtain
Debtor-in-Possession financing; (ii) to reduce administrative, operating and
interest costs and liabilities through the bankruptcy process; (iii) to generate
sufficient cash flow from operations; (iv) to obtain confirmation of a plan of
reorganization under the Bankruptcy Code; and (v) to obtain financing to
facilitate an exit from bankruptcy. We are currently evaluating various courses
of action to address the operational and liquidity issues the Company is facing
and are in the process of formulating plans for improving operations. There can
be no assurance that any of these efforts will be successful. The accompanying
financial statements do not include any adjustments that might result should we
be unable to continue as a going concern. In the event the Company's
restructuring activities are not successful, additional significant adjustments
in the carrying value of assets and liabilities, the revenues and expenses
reported and the balance sheet classifications used may be necessary.
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (FASB ASC) 852-10 "Financial Reporting During Reorganization
Proceedings," which is applicable to companies in Chapter 11, generally does not
change the manner in which financial statements are prepared. However, it does
10
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 beginning in the period ending December 31, 2009. The balance sheet
must distinguish pre-petition liabilities subject to compromise from both those
pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by a plan of
reorganization must be reported at the amounts expected to be allowed, even if
they may settled for lesser amounts. In addition, cash provided by
reorganization items, if any, must be disclosed separately in the statement of
cash flows. The Company adopted FASB ASC 852-10 effective on October 28, 2009
and currently segregates those items as outlined above for all reporting periods
subsequent to such date.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of oil and gas
reserves, assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Estimates of oil and gas reserve quantities provide the
basis for calculations of depletion, depreciation, and amortization (DD&A) and
impairment, each of which represents a significant component of the financial
statements.
Oil and Gas Producing Activities
The Company uses the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well does not find proved reserves, the costs of
drilling the well are charged to expense. Exploratory dry hole costs are
included in cash flows from investing activities as part of capital expenditures
within the statements of cash flows. The costs of development wells are
capitalized whether or not proved reserves are found. Costs of unproved leases,
which may become productive, are reclassified to proved properties when proved
reserves are discovered on the property. Unproved oil and gas interests are
carried at the lower of cost or estimated fair value and are not subject to
amortization.
Geological and geophysical costs and the costs of carrying and
retaining unproved properties are expensed as incurred. DD&A of capitalized
costs related to proved oil and gas properties is calculated on a
property-by-property basis using the units-of-production method based upon
proved reserves. The computation of DD&A takes into consideration restoration,
dismantlement, and abandonment costs and the anticipated proceeds from salvaging
equipment.
The Company complies with FASB ASC932-360 "Extractive Activities - Oil
and Gas." The Company currently does not have any existing capitalized
exploratory well costs, and has therefore determined that no suspended well
costs should be impaired.
The Company reviews its long-lived assets for impairments when events
or changes in circumstances indicate that impairment may have occurred. The
impairment test for proved properties compares the expected undiscounted future
net cash flows on a property-by-property basis with the related net capitalized
costs, including costs associated with asset retirement obligations, at the end
of each reporting period. Expected future cash flows are calculated on all
proved reserves using a discount rate and price forecasts selected by the
Company's management. The discount rate is a rate that management believes is
representative of current market conditions. The price forecast is based on
NYMEX strip pricing, adjusted for basis and quality differentials, for the first
three to five years and is held constant thereafter. Operating costs are also
adjusted as deemed appropriate for these estimates. When the net capitalized
costs exceed the undiscounted future net revenues of a field, the cost of the
field is reduced to fair value, which is determined using discounted future net
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.
11
Capitalized Interest
The Company's policy is to capitalize interest costs to oil and gas
properties on expenditures made in connection with exploration, development and
construction projects that are not subject to current DD&A and that require
greater than six months to be readied for their intended use ("qualifying
projects"). Interest is capitalized only for the period that such activities are
in progress. To date the Company has had no such qualifying projects during
periods when interest expense has been incurred. Accordingly the Company has
recorded no capitalized interest.
Commodity Derivatives
As of December 31, 2010, the Company has no hedges or other derivative
positions in place.
Net Profits Interest
The Company assigned a 10% Net Profits Interest (NPI) to its Lender,
under the terms of the Eighth Amendment to the Term Credit Agreement (see NOTE 6
- Short-Term Note Payable). Net profit is defined as the excess of the sum of
crude oil proceeds plus hedge settlements, over the sum of lease operating,
marketing, transportation and production tax expenses. The Company is obligated
to pay to the Lender 10% of such excess, if any, on a monthly basis, so long as
the NPI remains in effect. The Company records amounts due under the NPI as
operating expense. For the nine months ended December 31, 2010 and 2009 the
Company recognized $143,710 and $107,681 respectively as NPI expense, including
such amount as lease operating expense in its Statement of Operations.
Net Loss Per Share
Basic net loss per common share of stock is calculated by dividing net
loss available to common stockholders by the weighted-average of common shares
outstanding during each period. Diluted net income per common share is
calculated by dividing adjusted net loss by the weighted-average of common
shares outstanding, including the effect of other dilutive securities. The
Company's potentially dilutive securities consist of in-the-money outstanding
options and warrants to purchase the Company's common stock. Diluted net loss
per common share does not give effect to dilutive securities as their effect
would be anti-dilutive.
The treasury stock method is used to measure the dilutive impact of
stock options and warrants. The following table details the weighted-average
dilutive and anti-dilutive securities related to stock options and warrants for
the periods presented:
For the Nine Months Ended December 31,
--------------------------------------
2010 2009
---- ----
Dilutive - -
Anti-dilutive 66,523,564 57,961,019
Reclassification
Certain amounts in the fiscal 2010 financial statements have been re-
classified to conform to the fiscal 2011 financial statement presentation. Such
reclassifications had no effect on net loss.
Other Significant Accounting Policies
Other accounting policies followed by the Company are set forth in Note
1 to the Financial Statements included in its Annual Report on Form 10-K for the
year ended March 31, 2010, and are supplemented in the Notes to Financial
Statements in this Quarterly Report on Form 10-Q for the nine months ended
December 31, 2010. These unaudited financial statements and notes should be read
in conjunction with the financial statements and notes included in the Annual
Report on Form 10-K for the year ended March 31, 2010.
12
Recent Accounting Pronouncement
In January 2010, ASC guidance for fair value measurements and
disclosure was updated to require additional disclosures related to transfers in
and out of level 1 and 2 fair value measurements and enhanced detail in the
level 3 reconciliation. The guidance was amended to clarify the level of
disaggregation required for assets and liabilities and the disclosures required
for inputs and valuation techniques used to measure the fair value of assets and
liabilities that fall in either level 2 or level 3. The updated guidance was
effective for the Company's fiscal year beginning April 1, 2010, with the
exception of the level 3 disaggregation which is effective for the Company's
fiscal year beginning April 1, 2011. The adoption had no impact on the Company's
consolidated financial position, results of operations or cash flows. Refer to
Note 5 "Fair Value Measurement" herein for further details regarding the
Company's assets and liabilities measured at fair value.
There were various other accounting standards and interpretations issued in 2010
and 2009, none of which had a material impact on the Company's financial
position, operations or cash flows.
Note 2 - Proceedings Under Chapter 11 of the Bankruptcy Code
As discussed in Note 1 above, on October 28, 2009 (the "Petition
Date"), the Company filed a voluntary petition for reorganization relief under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. The Chapter 11 Case
is being administered under the caption Rancher Energy Corp., Debtor, Chapter 11
Case No. 09-32943-MER.
The Company continues to operate its business as debtor-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
As debtors-in-possession, the Debtors are authorized to continue to operate as
ongoing businesses, and may pay all debts and honor all obligations arising in
the ordinary course of their businesses after the Petition Date. However, the
Debtors may not pay creditors on account of obligations arising before the
Petition Date or engage in transactions outside the ordinary course of business
without approval of the Bankruptcy Court, after notice and an opportunity for a
hearing.
Subject to certain exceptions under the Bankruptcy Code, the Bankruptcy
Filing automatically enjoins, or stays, the continuation of any judicial or
administrative proceedings or other actions against the Company or its property
to recover on, collect or secure a claim arising prior to the Petition Date.
Thus, for example, creditor actions to obtain possession of property from the
Company, or to create, perfect or enforce any lien against the property of the
Company, or to collect on or otherwise exercise rights or remedies with respect
to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts
the automatic stay with respect thereto.
Under the Bankruptcy Code, the Company may assume, assume and assign,
or reject certain executory contracts and unexpired leases, including, without
limitation, leases of real property and equipment, subject to the approval of
the Bankruptcy Court and certain other conditions. As of the date of the filing
of the Chapter 11 Case, no party, subject to certain exceptions, may take any
action, also subject to certain exceptions, to recover on pre-petition claims
against the Debtors.
Under the priority scheme established by the Bankruptcy Code, unless
creditors agree otherwise, post-petition liabilities and pre-petition
liabilities must be satisfied in full before shareholders of the Company are
entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery, if any, to creditors and shareholders of
the Company will not be determined until confirmation and consummation of a plan
of reorganization. No assurance can be given as to what values, if any, will be
ascribed in the Chapter 11 case to each of these constituencies or what types or
amounts of distributions, if any, they would receive.
At this time, it is not possible to predict with certainty the effect
of the Chapter 11 Case on the Company's business or various creditors, or when
the Company will emerge from these proceedings. The Company's future results
depend upon the confirmation and successful implementation, on a timely basis,
of a Plan of Reorganization.
The ability of the Company to continue as a going concern may depend
upon, among other things, (i) the Company's ability to comply with the terms and
conditions of the cash collateral orders entered by the Bankruptcy Court in
13
connection with the Bankruptcy Case; (ii) the ability of the Company to generate
cash from operations; (iii) the ability of the Company to maintain adequate cash
on hand; (iv) the ability of the Company to obtain confirmation of and to
consummate a plan of reorganization under the Bankruptcy Code; and, (v) the
cost, duration and outcome of the reorganization process. Uncertainty as to the
outcome of these factors raises substantial doubt about the Company's ability to
continue as a going concern. The Company has initiated specific actions related
to obtaining Debtor in Possession (DIP) financing and sale of assets. While
there can be no assurance that these efforts will be successful, the
accompanying unaudited financial statements do not include any adjustments that
might result should the Company be unable to continue as a going concern. (See
Note 11 - Subsequent Events)
The uncertainty resulting from the Bankruptcy Filing may hinder the
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with property owners and
potential lessees, vendors and service providers; negatively impact the ability
of the Company to attract, retain and compensate key executives and employees
and to retain employees generally; limit the Company's ability to obtain trade
credit; and limit the Company's ability to maintain and exploit existing
properties and acquire and develop new properties.
As a result of the Bankruptcy Filing, realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
financial statements. Our historical financial statements do not give effect to
any adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of confirmation of a plan of reorganization.
In order to successfully exit Chapter 11 bankruptcy, the Company will
need to obtain Bankruptcy Court confirmation of, a plan of reorganization that
satisfies the requirements of the Bankruptcy Code. A plan of reorganization
would, among other things, resolve the Debtors' pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity and provide
for corporate governance subsequent to exit from bankruptcy.
On October 15, 2010, the Company filed with the Court its proposed
Debtor's Plan of Reorganization and a proposed Disclosure Statement was filed
simultaneously with the Plan. On December 13, 2010, the Company filed with the
Court its First Amended Proposed Plan of Reorganization and Disclosure
Statement. The Disclosure Statement must be first approved by the Bankruptcy
Court before creditors and shareholders are presented with the opportunity to
vote on the Plan. Prior to confirmation and approval by the Court, the Proposed
Plan of Reorganization is subject to amendment.
On December 15, 2010, the Company filed a Motion to approve financing
from a party not affiliated with its present lender. The purpose of the loan is
to repay the existing lender in full and to pay certain past due ad valorem
taxes owed to Converse County, Wyoming. Converse County has agreed that if it is
paid by February 1, 2011, it will waive penalties and interest of approximately
$93,000 (See Note 11 - Subsequent Events).
On December 20, 2010, the Company filed a Motion to allow the Company to
enter into an agreement and approve the sale of substantially all its assets to
the same party providing the new financing for the price of approximately $20.0
million. (See Note 11 - Subsequent Events).
Reorganization Items
Reorganization items represent the direct and incremental costs related
to the Company's Chapter 11 case, such as professional fees incurred, net of
interest income earned on accumulated cash during the Chapter 11 process. These
restructuring activities may result in additional charges and other adjustments
for expected allowed claims (including claims that have been allowed by the
Court) and other reorganization items that could be material to the Company's
financial position or results of operations in any given period.
Liabilities Subject to Compromise
Liabilities subject to compromise at December 31, 2010 and March 31,
2010 include the following pre-petition liabilities:
December 31, March 31,
2010 2010
----------------------------------------------------------------------------------------------------
Accounts payable, trade $176,726 $164,390
Damages pursuant to claim settlements 375,000 -
Other payables and accrued liabilities 243,358 265,516
Property and ad valorem taxes payable 526,959 766,227
Convertible notes payable 140,000 140,000
-------------------------------------------
Total liabilities subject to compromise $1,462,043 $1,336,133
===========================================
14
Note 3--Oil and Gas Properties
The Company's oil and gas properties are summarized in the following table:
December 31, March 31,
2010 2010
Proved properties $19,572,699 $19,432,703
Unproved properties excluded from DD&A 52,738,557 52,716,480
Equipment and other 335,132 314,334
------------------ --------------------
Total oil and gas properties 72,646,388 72,463,517
Less accumulated depletion, depreciation, amortization and
impairment (57,299,336) (56,355,224)
------------------ --------------------
$15,347,052 $16,108,293
================== ====================
Note 4 - Asset Retirement Obligations
The Company recognizes an estimated liability for future costs
associated with the abandonment of its oil and gas properties. A liability for
the fair value of an asset retirement obligation and a corresponding increase to
the carrying value of the related long-lived asset are recorded at the time a
well is completed or acquired. The increase in carrying value is included in
proved oil and gas properties in the balance sheets. The Company depletes the
amount added to proved oil and gas property costs and recognizes accretion
expense in connection with the discounted liability over the remaining estimated
economic lives of the respective oil and gas properties. Cash paid to settle
asset retirement obligations are included in the operating section of the
Company's statements of cash flows.
The Company's estimated asset retirement obligation liability is based
on historical experience in abandoning wells, estimated economic lives,
estimates as to the cost to abandon the wells in the future, and federal and
state regulatory requirements. The liability is discounted using a
credit-adjusted risk-free rate estimated at the time the liability is incurred
or revised, as appropriate. Revisions to the liability result from changes in
estimated abandonment costs, changes in well economic lives, or if federal or
state regulators enact new requirements regarding the abandonment of wells.
A reconciliation of the Company's asset retirement obligation liability
during the nine months ended December 31, 2010 and 2009 is as follows:
2010 2009
---- ----
Beginning asset retirement obligations $1,429,830 $1,280,680
Liabilities incurred - -
Liabilities settled (63,074) -
Changes in estimates - -
Accretion expense 130,207 119,480
------------------- -----------------
Ending asset retirement obligation $1,496,963 $1,400,160
=================== =================
Current $126,334 $122,269
Long-term 1,370,629 1,277,891
------------------- -----------------
$1,496,963 $1,400,160
=================== =================
15
Note 5 -- Fair Value Measurements
The Company complies with FASB ASC 820-10 "Fair Value Measurements and
Disclosures" which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures about fair
value measurements. The Statement establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company's assumptions of what market participants would use in
pricing the asset or liability developed based on the best information available
in the circumstances. The hierarchy is broken down into three levels based on
the reliability of the inputs as follows:
o Level 1: Quoted prices are available in active markets for identical
assets or liabilities;
o Level 2: Quoted prices in active markets for similar assets and
liabilities that are observable for the asset or liability; or
o Level 3: Unobservable pricing inputs that are generally less
observable from objective sources, such as discounted cash flow models
or valuations.
FASB ASC 820-10 requires financial assets and liabilities to be
classified based on the lowest level of input that is significant to the fair
value measurement. The Company's assessment of the significance of a particular
input to the fair value measurement requires judgment, and may affect the
valuation of the fair value of assets and liabilities and their placement within
the fair value hierarchy levels.
As of December 31, 2010, the Company has no hedge or other derivative
positions in place.
The Company's sole derivative financial instrument, a participating cap
costless collar agreement expired during in the prior fiscal year ended March
31, 2010. Prior to expiration, the fair value of the costless collar agreement
was determined based on both observable and unobservable pricing inputs and
therefore, the data sources utilized in these valuation models were considered
level 3 inputs in the fair value hierarchy. In the Company's adoption of FASB
ASC 820-10-05, it considered the impact of counterparty credit risk in the
valuation of its assets and its own credit risk in the valuation of its
liabilities that are presented at fair value. The Company established the fair
value of its derivative instruments using a published index price, the
Black-Scholes option-pricing model and other factors including volatility, time
value and the counterparty's credit adjusted risk free interest rate. The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy:
2010 2009
------------ -------------
Balance as of April 1 $ - $455,960
Total gains (losses) (realized or unrealized):
Included in earnings - (357,582)
Included in other comprehensive income - -
Purchased, issuances and settlements - (98,378)
Transfers in and out of Level 3 - -
------------ -------------
Balance as of December 31 $ - $ -
============ =============
Note 6- Short-Term Note Payable
On October 16, 2007, the Company issued a Note Payable (the "Note") in
the amount of $12,240,000 pursuant to a Term Credit Agreement with a financial
institution (the "Lender"). All amounts outstanding under the Note were
originally due and payable on October 31, 2008 (the "Maturity Date") and bore
interest at a rate equal to the greatest of (a) 12% per annum and (b) the
16
one-month LIBOR rate plus 6% per annum. The Note was amended on October 22,
2008, (the "First Amendment"), to extend the Maturity Date by six months 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 to the Lender in the amount of $2,240,000, resulting in a new loan
balance of $10,000,000. The Note was amended six times between April 30, and May
27, 2009 to extend the Maturity Date for short periods of time while the Lender
and the Company finalized the terms of a longer extension.
On June 3, 2009 the Note was again amended (the "Eighth Amendment") to
among other things extend the maturity date until October 15, 2009. The Company
did not make payment of the principal and accrued interest on the maturity date,
October 15, 2009.
The Company's obligations under the Term Credit Agreement, as amended,
are collateralized by a first priority security interest in its properties and
assets, including all rights under oil and gas leases in its three producing oil
fields in the Powder River Basin of Wyoming and all of its equipment on those
properties. Under the terms of the original Term Credit Agreement, the Company
granted the Lender a 2% Overriding Royalty Interest (ORRI), proportionally
reduced when the Company's working interest is less than 100%, in all crude oil
and natural gas produced from its three Powder River Basin fields. The First
Amendment granted an increase in the proportionate overriding royalty interests
("ORRI") assigned to the Lender from 2% to 3%. The Company estimated the fair
value of the 2% ORRI granted to the Lender to be approximately $4,500,000 and
the value of the increase ORRI to be approximately $1,050,000. These amounts
were recorded as discounts to the Note Payable and as decreases of oil and gas
properties. The Eighth Amendment granted a Conveyance of Net Profits to the
Lender. The Company estimated the fair value of the 10% NPI to be approximately
$1,500,000. This amount was recorded as deferred finance costs and was amortized
over the term of the Note, as amended.
As noted above, the Note Payable issued by the Company on October 16,
2007, matured on October 15, 2009. Payment of the principal balance of
approximately $10,188,000, plus accrued interest, was not made on the maturity
date, and therefore, an event of default occurred under the Term Credit
Agreement, as amended. On November 16, 2009, the Lender presented to the Company
a Notice of Event of Default, a Demand for Payment and a Notice of Intent to
Foreclose (collectively "the Notice"). The Notice declared all of the
obligations immediately due and payable and demands that the Company promptly
pay to Lender all of the obligations within ten days of receipt of the Notice,
and states that if the Company fails to pay the obligations in full as demanded,
the Lender intends to foreclose on the secured properties under the terms of the
Term Credit Agreement and other agreements. Effective as the date of the Notice,
the Lender has claimed that interest under the Credit agreement will accrue at
the default rate, 18% compounded monthly, and the percentage of net revenue to
be applied for debt service and other obligations shall be 100%. (See Note 11 -
Subsequent Events)
On October 16, 2009, the Lender gave instructions to the Company's bank
(the "Instruction") that under the terms of the Restricted Account and
Securities Control Agreement executed in conjunction with the Term Credit
Agreement, that as of the date of the Instruction, the Company shall no longer
have access to any funds held in identified accounts, and the Lender now had
exclusive right to direct the disposition of such funds. On October 21, 2009 the
Company's bank transferred the all remaining funds from the Company's account to
the Lender.
Under the terms of the Term Credit Agreement, the Company is obligated
to reimburse the Lender for all expenses, including reasonable legal fees
incurred in connection with the administration, amendment, enforcement of the
Agreement or Lender's rights and remedies under the Loan Documents. In
connection with the Company's bankruptcy proceedings, the Lender has incurred
legal fees and other expenses that could be covered by the above provisions. As
of December 31, 2010 the Company had received invoices from the Lender
requesting reimbursement of $673,000. These expenses are reported in
reorganization expense for professional and legal fees in the consolidated
statement of operations. A portion of these costs are being disputed by the
Company and pending determination by the Bankruptcy Court, may become a part of
the secured claim of the Lender, become a general unsecured claim, or disallowed
as a claim against the Company.
As discussed in Note 1 and Note 2 above, on October 28, 2009, the
Company filed a voluntary petition (the "petition") for relief in the United
States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of
the U.S. Bankruptcy Code. Subject to certain exceptions under the Bankruptcy
Code, the Bankruptcy Filing automatically enjoins, or stays, the continuation of
any judicial or administrative proceedings or other actions against the Company
17
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 pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay.
Note 7- Convertible Promissory Notes Payable
On October 27, 2009, the Company issued Convertible Promissory Notes
(the "Promissory Notes") totaling $140,000 in consideration for money loaned to
the Company of equal amount. One hundred thousand dollars of the Promissory
Notes were issued to four officers and/or directors ($25,000 each). The
remainder of the Promissory Notes were issued to existing shareholders. The
Promissory Notes bear interest at an annual rate equal to the greater of (i)
12%, or (ii) the prime rate (as published in the Wall Street Journal) plus 3%.
The Promissory Notes matured on November 1, 2010, and all obligations and
payments due under the Promissory Notes are subordinate to the Company's senior
debt. Principal and accrued interest were due on maturity date. The Promissory
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $0.02 per share, at any time during the
term of the Promissory Notes. The Company defaulted on these notes by failure to
pay principal and accumulated interest when due. As discussed in Note 1 and Note
2 above, on October 28, 2009, the Company filed a voluntary petition (the
"petition") for relief in the United States Bankruptcy Court, District of
Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Subject to
certain exceptions under the Bankruptcy Code, the Bankruptcy Filing
automatically enjoins, or stays, the continuation of any judicial or
administrative proceedings or other actions against the Company or its property
to recover on, collect or secure a claim arising prior to the Petition Date.
Note 8 - Contingencies
Pending Litigation
On February 12, 2010, the Company filed an adversary action in the
Bankruptcy Court against the holder of the senior secured note payable (see NOTE
6 - Short Term Note Payable) seeking to avoid certain ownership interests
assigned to the Lender in connection with the Term Credit Agreement and
amendments thereto. On March 18, 2010, the Lender filed a motion with the Court
to dismiss the complaint. On October 21, 2010, the Court issued an order on the
Motion to Dismiss dismissing three of the nine claims made in the adversary
action. The Company plans to pursue the remaining six claims. The Company is
unable to predict a likely outcome or estimate the possible benefit should the
Company prevail in the litigation.
Bankruptcy Proceedings:
On October 29, 2009, the Company filed a voluntary petition for
reorganization under Chapter 11 in the United States Bankruptcy Court for the
District of Colorado During the pendency of the Chapter 11 proceedings, the
Company operates the business as a debtor-in-possession in accordance with the
provisions of Chapter 11, and will be subject to the jurisdiction of the
Bankruptcy Court. All pending or threatened litigation or claims involving the
Company were automatically stayed as a result of this Bankruptcy Filing, and all
such claims may be subject to compromise or modification through the terms of
any Plan of Reorganization filed by the Company in the Chapter 11 proceedings.
Threatened Litigation
In a letter dated February 18, 2009 sent to each of the Company's
Directors, attorneys representing a group of persons who purchased approximately
$1,800,000 of securities (in the aggregate) in the Company's private placement
offering commenced in late 2006, alleged that securities laws were violated in
that offering. In April 2009, the Company entered into tolling agreements with
the purchasers to toll the statutes of limitations applicable to any claims
related to the private placement. The Company's Board of Directors directed the
Special Committee to investigate these allegations. The Company denies the
allegations and believes they are without merit. The Company cannot predict the
likelihood of a lawsuit being filed, its possible outcome, or estimate a range
of possible losses, if any, that could result in the event of an adverse verdict
in any such lawsuit. Any suit against the Company is stayed by the Chapter 11
case, and, insofar as these claims are asserted against the Company, they are
subject to the claim process imposed by the Bankruptcy Code and the possible
subordination under Section 510(b) of the Bankruptcy Code.
18
Note 9 - Income Taxes
As of December 31, 2010, because the Company believes that it is more
likely than not that its net deferred tax assets, consisting primarily of net
operating losses, will not be utilized in the future, the Company has fully
provided for a valuation of its net deferred tax assets.
The Company is subject to United States federal income tax and income
tax from multiple state jurisdictions. Currently, the Internal Revenue Service
is not reviewing any of the Company's federal income tax returns, and agencies
in states where the Company conducts business are not reviewing any of the
Company's state income tax returns. All tax years remain subject to examination
by tax authorities, including for the period from February 4, 2004 through March
31, 2010.
Note 10--Share-Based Compensation
Grant of Options to Directors
On October 27, 2009, in conjunction with the execution of Management
Retention Agreements (the "Retention Agreement"), each of the Company's four
directors was granted options to purchase 2,500,000 share of the Company's
common stock at an exercise price of $0.035 per share.
The Company recognized stock based compensation expense relating to
the Director's options of $133,628 for the nine months ended December 31, 2010.
There is no remaining compensation expense relating to the unvested options as
of December 31, 2010.
2006 Stock Incentive Plan
As of December 31, 2010, there were 1,441,000 options outstanding under
the 2006 Stock Incentive Plan and 8,559,000 options are available for issuance.
Total estimated unrecognized compensation cost from unvested stock options
issues under the Plan as of December 31, 2010 was approximately $0.
Note 11--Subsequent Events
On January 26, 2011, the Court granted the Company's Motion to Approve
Debtor-In-Possession Secured Financing.
On January 28, 2011 the Company received debtor-in-possession financing ("DIP
financing") pursuant to a credit agreement (the "DIP Credit Agreement") with a
lender not related to the pre-petition credit facility provider. The DIP Credit
Agreement provides for loan advances up to an aggregate of $14,700,000, and
matures May 28, 2011 (120 days after closing date).. The proceeds of the loan
were used to pay the allowed, secured claim for past due ad valorem property
taxes, pay the allowed, secured claim of the current lender (see note 6) and
fund $100,000 to be retained to the close the Bankruptcy Estate if no plan or
reorganization is successful.
The DIP Credit Agreement specifies interest at the rate of 10% for the 60 days
following closing and 12% interest for the period commencing on the 61st day
through loan maturity. Accumulated interest and principal is due in full at
maturity. The Lender obtained a valid and perfected first priority security
interest in and liens on all the collateral including, but not limited to: (a)
Rancher's interests in oil and gas producing properties; (b) accounts
receivable; (c)equipment; (d) general intangibles; (e) accounts; (f) deposit
accounts; and (g) all other real and personal property of the Company. The
Lender has the right to credit bid the loan balance against the purchase price
of Rancher's assets.
On February 16, the Bankruptcy Court approved the order authorizing the sale of
substantially all of the Company's assets for a purchase price of approximately
$20 million. The closing and settlement dates for the sale are yet to be
determined.
19
Note 12--Related Party Transactions
A director of the Company is a partner in the law firm that acts as counsel to
the Company. The Company paid legal fees and expenses to the law firm in the
amount of approximately $61,000 and $2,000 during the nine months ended
December 31, 2010 and 2009, respectively. The amount owed to the law firm was
$59,000 and $0 as of December 31, 2010 and 2009, respectively.
A director of the Company is a partner in a firm that provides field
supervision and consulting services to the Company. The Company paid fees and
expenses to the firm in the amount of approximately $84,000 and $9,000 during
the nine months ended December 31, 2010 and 2009, respectively. The amount owed
to the firm was $43,000 and $28,000 as of December 31, 2010 and 2009,
respectively.
20
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations - Need to update from here forward 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 raise debtor in possession financing and the terms thereof;
o ability to develop a plan of reorganization acceptable to the
Bankruptcy Court and to emerge from bankruptcy;
o ability to complete a sale of the Company, all or a significant
portion of its assets or financing or other strategic alternatives;
o ability to obtain the financial resources to continue operations, to
repay secured debt, to enhance current production and to conduct the
EOR projects;
o water availability and waterflood production targets;
o carbon dioxide (CO2) availability, deliverability, and tertiary
production targets;
o construction of surface facilities for waterflood and CO2 operations
and a CO2pipeline;
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 oil reserves;
o reservoir response to water and CO2 injection;
o ability to obtain permits and governmental approvals;
o technology;
o financial strategy;
o realized oil prices;
o production;
o lease operating expenses, general and administrative costs, and
finding and development costs;
o availability and costs of drilling rigs and field services;
o future operating results;
o plans, objectives, expectations, and intentions; and
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.
21
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, 2010. 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.
Proceedings under Chapter 11
We acquired our oilfields in late 2006 and early 2007 with the
intention of significantly increasing crude oil production through an enhanced
oil recovery (EOR) project utilizing modern CO2 injection techniques. The
planned EOR project required a significant amount of capital to carry out. In
October 2007, we borrowed $12.24 million from GasRock Capital LLC (GasRock), an
investment bank, to serve as a "bridge loan" to enable us to complete plans for
the EOR project while we sought a larger, longer-term source of capital to
conduct the project. At least partially due to the severe disruptions in credit
and financial markets, coupled with extreme volatility in crude oil prices, we
were not successful in raising the capital to repay the bridge loan and commence
the project. Following a series of amendments to the GasRock loan agreement and
extensions of the maturity date, we were unable to repay the loan on the amended
due date of October 15, 2009. On October 16, 2009, GasRock notified us the
failure to repay the loan constituted an event of default and notified us of
their intention to foreclose on the assets pledged as collateral for the loan.
GasRock instructed our bank to transfer all cash we had on deposit to GasRock,
leaving us without funds to operate the oilfields or pay overhead.
On October 28, 2009, we filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of Colorado (the "Court") (Case
number 09-32943) We will continue to operate our business as
"debtor-in-possession" under the jurisdiction of the Court and in accordance
with the applicable provisions of the Bankruptcy Code and the order of the
Court, as we devote renewed efforts to resolve our liquidity problems and
develop a reorganization plan.
In November 2009, the Court granted our motion for interim use of cash
collateral. We immediately took steps to reduce operating costs and overhead,
including salary cuts of 10% - 20% for employees and the rejection of the office
lease for our corporate headquarters. In addition we implemented a program of
repair and remediation on a number wells that had become non-producing ,
resulting in a 25% increase in daily crude oil production as compared to
pre-petition production levels.
On October 15, 2010, the Company filed with the Court its proposed
Debtor's Plan of Reorganization ("Proposed Plan of Reorganization"). A proposed
Disclosure Statement was filed simultaneously with the Plan. On December 13,
2010, the Company filed with the Court its First Amended Proposed Plan of
Reorganization and Disclosure Statement for the amended Plan. The Disclosure
Statement must be first approved by the Bankruptcy Court before it may be sent
to creditors along with the proposed Plan for voting on the Plan. Prior to
confirmation and approval by the Court, the Proposed Plan of Reorganization is
subject to amendment.
On December 15, 2010, the Company filed a Motion to approve financing
from a party not affiliated with its present lender. The purpose of the loan is
to repay the existing lender in full and to pay certain past due ad valorem
taxes
On December 20, 2010, the Company filed a Motion to approve the sale of
substantially all its assets to the same third party providing the loan for the
price of approximately $20.0 million. On February 16, 2011, the Bankruptcy Court
issued an order approving the Motion to sell substantially all of the Company's
assets. A closing and settlement date for the sale has not been determined, at
the time of this filing.
22
On January 26, 2011, the Court granted the Company's Motion from
December 15, 2010 to Approve Debtor-In-Possession Secured Financing ("DIP
Financing"). The DIP Financing Agreement authorizes the Company to borrow up to
a maximum of $14,700,000 from the lender, for the limited purposes of: (a)
paying the prior lender secured debt in full; (b) holding a Carve-Out Reserve
Amount ($100,000 to be used to pay actual administrative expenses) in a
Carve-Out Account until the close of the Sale; (c) paying pre-petition ad
valorem taxes with respect to property located in Wyoming; (d) funding the
Escrow Amount into an interest bearing account to be maintained and disbursed
pursuant to the terms and conditions of an Escrow Agreement; and (e) other
purposes with the prior written consent of Lender, in its sole and absolute
discretion. In exchange for such funds, the Company will grant to the Lender
valid and perfected first priority security interests in and liens on all of
Rancher's assets ("the Collateral"), which Collateral includes but is not
limited to (a) Rancher's interests in oil and gas producing properties; (b)
accounts receivable; (c) equipment; (d) general intangibles; (e) accounts; (f)
deposit accounts; and (g) all other real and personal property of Rancher,
except for the Carve-Out Amount.
On January 28, 2011, the DIP Credit Agreement
was closed and funded. On the date of loan closing proceeds of the loan were
disbursed in accordance with the DIP Credit Agreement as follows:
o To pay the allowed, secured claim for past due ad valorem property
taxes in the amount of $532,000.
o To pay the secured claim of the current lender in the amount of
$13,653,698 (see note 6) representing principal outstanding, unpaid
interest, and all fees and expenses allowed per the terms of the
credit agreement.
o To fund an escrow account established per the Order issued by the
Bankruptcy Court granting the motion to approve debtor in possession
secured financing. The escrow account was established with the
Company, prior lender, and current lender as parties until the
Bankruptcy Court enters a final order regarding certain fees and costs
claimed by the prior lender.
o The remaining balance was used to fund a portion of the Lender loan
fees and expenses of $186,235.
Organization
We are an independent energy company that explores for and develops
produces, and markets oil and gas in North America. We operate four oil fields
in the Powder River Basin, Wyoming. Our long term business plan is to use CO2
injection to increase oil production in these oil fields.
Since August 2008 we have been exploring alternatives to improve
liquidity, including raising capital, refinancing outstanding debt, applying for
a Department of Energy Grant under the American Recovery and Reinvestment Act,
or the potential sale of the Company or a significant portion of its assets. Due
to volatile commodity prices and the global financial crisis, we have been
unsuccessful to date.
We did not repay our short term debt on its maturity date, October 15,
2009 resulting in an event of default and the commencement of foreclosure
proceedings by GasRock Capital, the Lender. On October 28, 2009, we filed a
voluntary petition for relief in the United States Bankruptcy Court, District of
Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the "Code").
We continued to operate our business as a "debtor-in-possession" in accordance
with the applicable provisions of the Code and orders of the Bankruptcy Court.
We have submitted a plan of reorganization and, with Bankruptcy Court approval,
emerge from bankruptcy and pursue our business plan.
The following summarizes our goals and objectives for the next twelve
months:
o Minimize operating and administrative expenses to maximize return to
the Company;
o Increase crude oil production by repairing or rehabilitating existing
wellbores that have experienced mechanical or other problems;
o Successfully emerge from Chapter 11 Bankruptcy under the provisions of
a Bankruptcy Court approved plan of reorganization.
23
Results of Operations
Three months ended December 31, 2010 Compared to Three Months December 31, 2009.
The following is a comparative summary of our results of operations:
Three Months Ended
December 31,
2010 2009
---- ----
Revenues:
Oil production (in barrels) 16,242 14,484
Net oil price (per barrel) $ 74.60 $ 67.01
Oil sales $ 1,211,679 $ 970,502
Derivative gains (losses) - (6,809)
------------------------------------------------
Total revenues 1,211,679 963,693
------------------------------------------------
Operating expenses:
Production taxes 149,295 143,769
Lease operating 545,150 411,150
Depreciation, depletion, amortization and accretion 382,328 338,005
Impairment of unproved properties - 13,525,642
Exploration 6,568 3,340
General and administrative 420,848 568,717
------------------------------------------------
Total operating expenses 1,504,189 14,990,623
------------------------------------------------
Loss from operations (292,510) (14,026,930)
------------------------------------------------
Other income (expense):
Interest expense and financing costs (735,733) (699,271)
Interest and other income 5,684 7
------------------------------------------------
Total other income (expense) (730,049) (699,264)
------------------------------------------------
Loss before reorganization items (1,022,559) (14,726,194)
Reorganization items 418,804 158,727
---------------------- -----------------------
Net loss $ (1,441,363) $ (14,884,921)
===================================================
Overview. For the three months ended December 31, 2010, we reported a
net loss of $1,441,363, or $0.01 per basic and fully-diluted share, compared to
a net loss of $14,884,921 or $0.02 per basic and fully-diluted share, for the
corresponding three months of 2009. Discussions of individually significant
period to period variances follow.
Revenue, production taxes, and lease operating expenses. For the three
months ended December 31, 2010, we recorded crude oil sales of $1,211,679 on
16,242 barrels of oil at an average price of $74.60, as compared to revenues of
$963,693 on 14,484 barrels of oil at an average price of $67.01 per barrel in
2009. The year-to-year variance reflects a volume variance of $117,800 and a
price variance of $123,400. The increased volume in 2010 reflects the positive
results of repair and remediation work performed on non-productive wells
following the bankruptcy filing and reaching agreement with our secured lender
for the use of cash. Production taxes (including ad valorem and property taxes)
of $149,295 in 2010 compared to $143,769 in 2009 remained constant at
approximately 12.5% of crude oil sales revenues. Lease operating expenses
increased to $545,150 ($33.56/bbl) in 2010 as compared to $411,150 ($28.39/bbl)
in 2009. The year to year variance reflects a volume variance of $(49,900) and a
cost variance of $(84,100). The per barrel increase in 2010 compared to 2009
reflects costs incurred in the aforementioned repair and remediation work to
increase production.
24
Derivative losses. In connection with short term debt financing entered
into in October 2007, we entered into a crude oil derivative contract with an
unrelated counterparty to set a price floor of $63 per barrel for 75% of our
estimated crude oil production for the next two years, and a price ceiling of
$83.50 for 45% of the same level of production. A loss on derivative activities
of $6,809 consisting of realized losses was recorded for the three months ended
December 31, 2009. The derivative contract expired in October 2009 and was not
renewed.
Depreciation, depletion, amortization and accretion. For the three
months ended December 31, 2010, we reflected total depreciation, depletion,
amortization and accretion of $382,328 comprised of $299,239 ($18.42/bbl)
related to oil and gas properties, $39,439 related to other assets and accretion
of the asset retirement obligation of $43,650. The comparable amounts for the
2009 period were $338,005 comprised of $252,368 ($17.42/bbl) related to oil and
gas properties, $46,816 related to other assets and accretion of asset
retirement obligation of $38,821. The year to year increase in DD&A per barrel
reflects downward revisions to reserve estimates in 2010 compared to 2009.
Reorganization items. The $418,804 of costs reflected as reorganization
items in the three months ended December 31, 2010, include, those items of
expense specifically related our reorganization following the filing of a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court on October 28, 2009. These costs consist primarily of $185,000
in reimbursable lender fees and $233,800 of professional fees to legal counsel
for assistance with the filing process and the development of a reorganization
plan. We expect these expenses to continue to be significant as we progress
through the bankruptcy process.
General and administrative expense. For the three months ended December
31, 2010, we reflected general and administrative expenses of $420,848 as
compared to $568,716 for the corresponding three months ended December 31, 2009.
Period to period comparisons and explanations of significant variances follow:
Three Months Ended
December 31,
----------------------------------- ---------------------------- -------------------------------------------------------------------
Expense Category 2010 2009 Discussion
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Salaries, payroll taxes and Decrease in 2010 reflects reduced staff count and pay cuts for
benefits $ 184,467 $242,081 remaining employees following bankruptcy filing.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Consultants 85,052 28,369 Increase in 2010 reflects costs associated with accounting, finance
and land consultants to replacing employees.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Travel & entertainment 1,424 10,244 Decrease in 2010 reflects utilization of communication technology
instead of travel for Board of Director meetings.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
IT 19,289 17,970 2010 costs are comparable to 2009.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Legal fees 50,259 103,822 Dramatic decrease in 2010 reflects new management's efforts to
curtail legal fees. 2009 amount includes cost to investigate
strategies and filing of Bankruptcy.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Audit, SOX and tax compliance 24,771 12,250 Increase in 2010 reflects quarterly financial procedures and annual
tax preparation services compared to 2009 that included only
quarterly financial services.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Investor relations, shareholders 3,942 6,856 Decrease in 2010 reflects reduction in shareholder correspondence
meeting and mailings due to bankruptcy period.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Office rent, communication & 132,518 129,084 2010 costs are comparable to 2009.
other office expenses
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Insurance 24,404 32,988 Decrease in 2010 reflects lower D&O premiums reflecting reduced
coverage in 2010.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Stock based compensation 21,667 84,066 Decrease in 2010 reflects completion of compensation related to
vesting in stock options.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Director fees 15,000 15,000 Decrease in 2010 reflects changes to director compensation
arrangements following election of new slate of directors in
September 2009.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
Field overhead recoveries (141,945) (114,013) Increased recoveries in 2010 reflect higher number of producing
wells following repair and remediation work carried out.
----------------------------------- ------------- -------------- -------------------------------------------------------------------
TOTAL G&A $420,848 $568,717
----------------------------------- ------------- -------------- -------------------------------------------------------------------
25
Interest expense and financing costs. For the three months ended
December 31, 2010, we reflected interest expense and financing costs of $735,733
as compared to $699,271 for the corresponding three months ended December 31,
2009. The 2010 amount is comprised of interest accrued on the Note Payable
issued in October 2007, as amended. The 2009 amount consists of $459,878 of
interest on the Note Payable and $239,106 of deferred finance and discount
amortization. The higher interest on Note Payable reflects the default interest
rate (additional 2%) computed and compounded monthly since the occurrence of the
event of default in October 2009.
Nine months ended December 31, 2010 Compared to Nine Months December 31, 2009.
The following is a comparative summary of our results of operations:
Nine Months Ended
December 31,
2010 2009
---- ----
Revenues:
Oil production (in barrels) 50,609 41,447
Net oil price (per barrel) $ $ 69.89 $ 60.24
Oil sales $ 3,536,968 $ 2,498,376
Derivative gains (losses) - (357,582)
------------------------------------------------
Total revenues 3,536,968 2,140,794
Operating expenses:
Production taxes 444,303 338,547
Lease operating 1,837,267 1,088,163
Depreciation, depletion, amortization and accretion 1,195,632 987,742
Impairment of unproved properties - 13,525,642
Exploration 25,655 15,173
General and administrative 1,656,417 2,066,226
------------------------------------------------
Total operating expenses 5,159,274 18,021,493
------------------------------------------------
Loss from operations (1,622,306) (15,880,699)
------------------------------------------------
Other income (expense):
Interest expense and financing costs (1,682,787) (3,021,648)
Interest and other income 17,250 731
------------------------------------------------
Total other income (expense) (1,665,537) (3,020,917)
------------------------------------------------
Loss before reorganization items (3,287,843) (18,901,616)
Reorganization items 1,138,340 158,727
---------------------- -----------------------
Net loss $ (4,426,183) $ (19,060,343)
===================================================
Overview. For the nine months ended December 31, 2010, we reported a
net loss of $4,426,183 or $0.04 per basic and fully-diluted share, compared to a
net loss of $19,060,343 or $0.14 per basic and fully-diluted share, for the
corresponding nine months of 2009. Discussions of individually significant
period to period variances follow.
Revenue, production taxes, and lease operating expenses. For the nine
months ended December 31, 2010, we recorded crude oil sales of $3,536,968 on
50,609 barrels of oil at an average price of $69.89, as compared to revenues of
$2,498,376 on 41,477 of oil at an average price of $60.24per barrel in 2009. The
year-to-year variance reflects a volume variance of $550,068 and a price
variance of $488,524. The increased volume in 2010 reflects the positive results
26
of repair and remediation work performed on non-productive wells following the
bankruptcy filing and reaching agreement with our secured lender for the use of
cash. Production taxes (including ad valorem and property taxes) of $444,303 in
2010 as compared to $338,547 in 2009 remained constant at approximately 12.6% of
crude oil sales revenues. Lease operating expenses increased to $1,837,267
($36.30/bbl) in 2010 as compared to $1,088,163 ($26.25/bbl) in 2009. The year to
year variance reflects a volume variance of $(239,582) and a cost variance of
$(509,522). The per barrel increase in 2010 compared to 2009 reflects costs
incurred in the aforementioned repair and remediation work to increase
production.
Derivative losses. In connection with short term debt financing entered
into in October 2007, we entered into a crude oil derivative contract with an
unrelated counterparty to set a price floor of $63 per barrel for 75% of our
estimated crude oil production for the next two years, and a price ceiling of
$83.50 for 45% of the same level of production. A loss on derivative activities
of $316,409 consisting of a realized gain of $95,113 and unrealized losses of
$411,522 were recorded for the nine months ended December 31, 2009. The
derivative contract expired in October 2009 and was not renewed.
Depreciation, depletion, amortization and accretion. For the nine
months ended December 31, 2010, we reflected total depreciation, depletion,
amortization and accretion of $1,195,632 comprised of $944,112 ($18.66/bbl)
related to oil and gas properties, $121,313 related to other assets and
accretion of the asset retirement obligation of $130,207. The comparable amounts
for the 2009 period were $987,742 comprised of $722,290 ($17.41/bbl) related to
oil and gas properties, $145,973 related to other assets and accretion of asset
retirement obligation of $119,480. The year to year increase in DD&A per barrel
reflects downward revisions to reserve estimates in 2010 compared to 2009.
Reorganization items. The $1,138,340 of costs reflected as
reorganization items in the nine months ended December 31, 2010, include, those
items of expense specifically related our reorganization following the filing of
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court on October 28, 2009. These costs consist primarily of $673,500
in reimbursable lender fees and $464,840 of professional fees to legal counsel
for assistance with the filing process and the development of a reorganization
plan. We expect these expenses to continue to be significant as we progress
through the bankruptcy process.
General and administrative expense. For the nine months ended December
31, 2010, we reflected general and administrative expenses of $1,656,417 as
compared to $2,066,226 for the corresponding nine months ended December 31,
2009. Period to period comparisons and explanations of significant variances
follow:
----------------------------------- ----------------------------- ------------------------------------------------------------------
Nine Months Ended December
31,
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Expense Category 2010 2009 Discussion
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Salaries, payroll taxes and Decrease in 2010 reflects reduced staff count and pay cuts for
benefits $606,794 $ 825,239 remaining employees following bankruptcy filing.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Consultants 178,463 98,983 Increase in 2010 reflects costs associated with accounting and
finance consultants to replace chief accounting officer and
engineering consultants to review well files and identify
production increase opportunities.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Travel & entertainment 15,400 21,525 Decrease in 2010 reflects utilization of communication technology
instead of travel for Board of Diretor meeting.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
IT 55,638 55,619 2010 costs are comparable to 2009.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Legal fees 122,430 398,308 Decrease in 2010 reflects new management's efforts to curtail
legal fees. 2009 amount includes cost to manage proxy and annual
meeting process, not carried out in 2010.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Audit, SOX and tax compliance 70,053 96,430 Decrease in 2009 reflects lower level of activity to be reviewed
by audit staff, coupled with increased efficiency in audit process
in 4th year of audit, and lack of outside spending on SOX
consultants in as compared to 2009.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Investor relations, shareholders 6,931 18,919 Decrease in 2010 reflects reduction in shareholder correspondence
meeting and mailings due to bankruptcy period.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
27
Office rent, communication & 357,652 346,538 2010 costs are comparable to 2009.
other office expenses
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Insurance 76,252 130,364 Decrease in 2010 reflects an $8,000 refund received from carrier
on prior year general liability coverage, coupled with lower D&O
premiums reflecting reduced coverage in 2010.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Stock based compensation 167,132 262,529 Decrease in 2010 reflects completion of compensation related to
vesting in stock options.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Director fees 45,000 164,500 Decrease in 2010 reflects changes to director compensation
arrangements following election of new slate of directors in
September 2009.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Damages pursuant to pending claim 375,000 - Increase in 2010 reflects an expense for a pending claim settle-
settlement ment of $375,000. This amount results from a dispute from a
supplier that has negotiated and pending settlement by allowing
the claim as a non-priority, unsecured claim in the bankcruptcy.
The settlement is subject to approval by the bankruptcy court,
which the Company has not yet requested.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Field overhead recoveries (420,328) (352,728) Increased recoveries in 2010 reflect a higher number of producing
wells following repair and remediation work carried out.
----------------------------------- -------------- -------------- ------------------------------------------------------------------
TOTAL G&A $1,656,417 $2,066,226
----------------------------------- -------------- -------------- ------------------------------------------------------------------
Interest expense and financing costs. For the nine months ended December 31,
2010, we reflected interest expense and financing costs of $1,682,787 as
compared to $3,021,648 for the corresponding nine months ended December 31,
2009. The 2010 amount is comprised of interest accrued on the Notes Payable. The
2009 amount consists of $1,250,859 of interest on Notes Payable and $1,770,789
of deferred finance and discount amortization. The higher interest on Note
Payable reflects the default interest rate (additional 2%) in effect since the
occurrence of the event of default in October 2009.
Liquidity and Capital Resources
The report of our independent registered public accounting firm on the
financial statements for the years ended March 31, 2010 and 2009 includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern. We have incurred a cumulative net loss of $93.4 million for the
period from inception (February 4, 2004) to December 31, 2010, have a working
capital deficit of $12.8 million and have defaulted on our senior secured debt.
On October 15, 2009, short term debt in the amount of approximately
$10,188,000 matured. We were unable to repay the short term debt, which
constituted an Event of Default under the terms of the Term Credit Agreement. On
October 16, 2009 we received notice of the Event of Default from GasRock and
notice of their intent to foreclose on the properties securing the debt. On
October 21, 2009, GasRock swept the remaining $98,000 from our operating bank
account, leaving us without the ability to meet operating expense obligations,
or pay staff or other administrative expenses.
On October 27, 2009, we raised $140,000 in cash through the issuance
of convertible promissory notes to certain of our officers, directors and
shareholders and used the funds to retain counsel to provide debtor advice and
to provide working capital. The promissory notes matured on November 1, 2010 and
bear interest at an annual rate equal to the greater of (i) 12%, or (ii) the
prime rate (as published in the Wall Street Journal) plus 3%. All obligations
and payments due under the promissory notes are subordinate to the Company's
senior debt. Principal and accrued interest was due on the maturity date. The
promissory notes are convertible, at the holder's option, into shares of the
Company's common stock at a conversion price of $0.02 per share, at any time
during the term of the promissory notes. The Company defaulted on these notes by
failure to pay principal and accumulated interest when due.
On October 28, 2009, we filed a voluntary petition for relief in the
United States Bankruptcy Court, District of Colorado under Chapter 11 of Title
11 of the U.S. Bankruptcy Code. We reached agreement with GasRock, and the
Bankruptcy Court approved an order for use of cash collateral. Under the terms
28
of the order we have been receiving the proceeds from crude oil sales and have
been able to pay operating, and administrative costs in accordance with the
approved cash collateral budget. This arrangement has enabled us to meet all
allowable operating and administrative obligations and to build an operating
cash reserve totaling $307,178 as of December 31, 2010.
On January 28, 2011 the Company received debtor-in-possession financing
("DIP financing") pursuant to a credit agreement (the "DIP Credit Agreement")
with a lender not related to the pre-petition credit facility provider. The DIP
Credit Agreement provides for loan advances up to an aggregate of $14,700,000,
and matures May 28, 2011 (120 days after closing date).. The proceeds of the
loan were used to pay the allowed, secured claim for past due ad valorem
property taxes, pay the allowed, secured claim of the current lender (see note
6) and fund $100,000 to be retained to the close the Bankruptcy Estate if no
plan or reorganization is successful
We continue 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. As
debtors-in-possession, the Company is authorized to continue to operate as an
ongoing business, and may pay all debts and honor all obligations arising in the
ordinary course of its business after the Petition Date. However, the Company
may not pay creditors on account of obligations arising before the Petition Date
or engage in transactions outside the ordinary course of business without
approval of the Bankruptcy Court, after notice and an opportunity for a hearing.
On February 16, 2011, the Bankruptcy Court issued an order approving a
motion to sell substantially all assets of the Company for $20 million. No sale
closing date has been set, at the time of this filing, and the Company
anticipates that such sale will occur within the next 30 to 45 days. Proceeds
from the sale will be used to repay the principal and accrued interest on the
DIP financing loan, bankruptcy administration costs and creditors.
The following is a summary of Rancher Energy's comparative cash flows:
For the Nine Months Ended
December 31,
-----------------------------------------
2010 2009
--------------------- -------------------
Cash flows from (used for):
$ 119,650 $(793,140)
Operating activities, including reorganization items
184,757
Investing activities 6,955
-
Financing activities 41,880
Positive cash flows from operating activities in 2010 reflects general
and administrative as discussed above, coupled with stay on interest payments
during the bankruptcy process.
Funds used for investing activities in 2010 includes the cost of work
performed to establish oil production in a new zone of an existing well as
compared to a modest positive cash flow resulting from the sale of surplus field
equipment in the period, in the 2009 period.
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 Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, to the Annual Report on Form 10-K for the fiscal year ended March
31, 2010. Additional footnote disclosures are provided in Notes to Consolidated
Financial Statements in Part I, Financial Information, Item 1, Financial
Statements to this Quarterly Report on Form 10-Q for the three months ended
December 31, 2010.
29
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Commodity Price Risk
Because of our relatively low level of current oil and gas production,
we are not exposed to a great degree of market risk relating to the pricing
applicable to our oil production. However, our ability to raise additional
capital at attractive pricing, our future revenues from oil and gas operations,
our future profitability and future rate of growth depend substantially upon the
market prices of oil and natural gas, which fluctuate widely. With increases to
our production, exposure to this risk will become more significant. We expect
commodity price volatility to continue.
Financial Market Risk
The debt and equity markets have recently exhibited adverse conditions.
The unprecedented volatility and upheaval in the capital markets impacted our
ability to refinance or extend our existing short term debt when it matured on
October 15, 2009. Alternatively, market conditions may affect the availability
of capital for prospective purchasers of our assets or equity. Item 4. Controls
and Procedures.
Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. The term "disclosure controls and procedures," as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. The conclusion by our Chief Executive Office is the
identification of the following material weakness in our internal control over
financial reporting and, as a result of this material weakness, we concluded as
of March 31, 2010 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 Chief Accounting Officer resigned during the
current fiscal year resulting in the creation and review of journal entries and
note disclosures without adequate independent review and authorization. This
control deficiency is pervasive in nature and impacts all significant accounts.
This control deficiency also affects the financial reporting process including
financial statement preparation and the related note disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during the most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
30
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings
On October 28, 2009, the Company filed a voluntary petition (the
"petition") for relief in the United States Bankruptcy Court (the "Court"),
District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code
(the "Bankruptcy Code"). The Bankruptcy proceedings are discussed in further
detail in Part 1 of this filing.
On February 12, 2010, the Company filed an adversary proceeding in the
Bankruptcy Court against GasRock Capital LLC, Case No. 10-01173-MER. The
complaint seeks to recover the 10% NPI conveyed to GasRock in connection with
the Eighth Amendment to the Term Credit Agreement and the additional 1% ORRI
conveyed to the Lender in October 2008 in connection with an extension of the
short term note. The primary basis of the complaint is that the Lender gave less
than fair equivalent value for the conveyances at a time when the Company was
insolvent, or when the conveyances left the Company with insufficient capital.
In other words, the Company has claimed that the value of the conveyances was in
excess of a reasonable fee for the extensions, and, as a result, the conveyances
were "constructively fraudulent" under both applicable Bankruptcy law and the
Uniform Fraudulent Transfers Act. In addition, the Company has challenged the
conveyance of the NPI and the 1% ORRI, together with the original 2% ORRI
conveyed to Lender when its loan was first made, on the grounds that they should
be recharacterized as security interests and not outright transfers of title.
The Company has also claimed that the conveyances rendered the Loan usurious
under Texas law. Further, the Company has sought to have the NPI and 1% ORRI
avoided as preferences under Sections 547 of the Bankruptcy Code and to
equitably subordinate the Lender's claim. Although the Company believes its
claims are well-taken, the Company expects the Lender to vigorously defend
against the complaint, and no assurance can be given that the Company will be
successful in whole or in part. On October 21, 2010, the Court issued an order
dismissing three of nine claims made in the adversary action regarding
recharacterization. The Company plans to pursue the remaining claims and may
move to have the Bankruptcy Court reconsider the dismissal of the
recharacterization claims.
See also Note 8 - Contingencies, of Part 1 - Financial Information, of
this quarterly filing for a description of threatened litigation Item 1A. Risk
Factors Not applicable to smaller reporting companies.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. RESERVED AND RESCINDED.
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
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.
31
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
32
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., Registrant
Dated: February 18, 2011 By: /s/ Jon C. Nicolaysen
-----------------------------------
Jon C. Nicolaysen, President, Chief
Executive Officer, and Acting Chief
Accounting Officer
33
