Attached files

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

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

                                    FORM 10-K

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

        For the fiscal year ended March 31, 2013

                                       Or

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

         For the transition period from _________ to _____________


                        Commission file number: 000-51425

                               RANCHER ENERGY CORP
                               -------------------
             (Exact name of registrant as specified in its charter)

             Nevada                                        98-0422451
----------------------------------                   ------------------------
 State or other jurisdiction of                          I.R.S. Employer
  incorporation or organization                        Identification No.

                        P.O. Box 40, Henderson, CO 80640
 ------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

               Registrant's telephone number, including area code:

           Securities registered pursuant to Section 12(b) of the Act:

 Title of each class registered                         Name of each exchange
                                                         on which registered
----------------------------------                     ------------------------
         Not Applicable                                    Not Applicable

           Securities registered pursuant to Section 12(g) of the Act:
                                  Common Stock
                                (Title of Class)

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes |_| No |X|


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. |_| 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 Website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One). Large accelerated filer [___] Accelerated filer [___] Non-accelerated filer [___] Smaller reporting company [_X_] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No | | APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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| On June 11, 2013, 89,701,994 shares of common stock were held by non-affiliates and had a value of $12,199,471 based on the average closing bid and ask of $0.136 per share. The number of shares outstanding of the registrant's common stock, $0.00001 par value, as of June 11, 2013 was 119,862,791.
DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS PART I ITEM 1. Business 1 ITEM 1A. Risk Factors 6 ITEM 1B. Unresolved Staff Comments 12 ITEM 2. Description of Properties 12 ITEM 3. Legal Proceedings 13 ITEM 4. Mine Safety Disclosures 13 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 ITEM 6. Selected Financial Data 14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 17 ITEM 8. Financial Statements and Supplementary Data 17 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 ITEM 9A(T). Controls and Procedures 18 ITEM 9B. Other Information 20 PART III ITEM 10. Directors, Executive Officers, and Corporate Governance 21 ITEM 11. Executive Compensation 23 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Related Stockholder Matters 27 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 29 ITEM 14. Principal Accounting Fees and Services 30 PART IV ITEM 15. Exhibits, Financial Statement Schedules 31 SIGNATURES 53
Note about Forward-Looking Statements This Form 10-K contains forward-looking statements, such as statements relating to Rancher Energy Corp.'s ("we" or "our") financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. By making these forward-looking statements, we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the Securities and Exchange Commission under the Federal securities laws. Our actual results may differ materially from our forward-looking statements. PART I ITEM 1. BUSINESS General The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to "Rancher," "we," "our," "us" or the "Company" are to Rancher Energy Corp. HISTORY OF RANCHER ENERGY CORP. We were incorporated on February 4, 2004, as Metalex Resources, Inc., in the State of Nevada. Prior to April 2006, we were engaged in the exploration of a gold prospect in British Columbia, Canada. Metalex found no commercially exploitable deposits or reserves of gold. During April 2006, our stockholders voted to change our name to Rancher Energy Corp. On October 28, 2009, we 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"). On April 30, 2012, the Company filed its 2nd Amended Plan of Reorganization ("the Plan") and Disclosure Statement for 2nd Amended Plan of Reorganization with the Court. On September 10, 2012, the Court approved the Plan and effective September 28, 2012 the Company was discharged from bankruptcy. From January 2007 through March 2011, we operated four fields in the Powder River Basin, Wyoming, which were located in the Rocky Mountain region of the United States. The fields, acquired in December 2006 and January 2007, were the South Glenrock B Field, the Big Muddy Field, the Cole Creek South Field and the South Glenrock A Field. In March 2011, we sold all of our interest in the four fields to Linc Energy Petroleum (Wyoming), Inc. as part of the Plan. 1
COMPANY OVERVIEW Chapter 11 Reorganization On October 15, 2009, a promissory note issued by the Company in October 2007 to GasRock Capital LLC ("GasRock" or the "Lender") (now known as Magma Assets, LLC) became due and payable. We were unable to pay the amount due of approximately $10.2 million on the promissory note, and were unsuccessful in reaching an agreement with GasRock to extend or otherwise modify the terms of the promissory note. Thus, on October 16, 2009, GasRock pursued its rights under the terms of the promissory note and as a result the Company sought protection under the Bankruptcy Code. Therefore, on October 28, 2009, the Company filed a Petition for relief in the Court, District of Colorado. On January 26, 2011, the Court granted the Company's motion to approve Debtor-In-Possession Secured Financing from Linc Energy Petroleum (Wyoming), Inc. ("Linc Energy"). The Debtor-In-Possession Secured Financing provided for the following: o Authorizing the Company to borrow up to a maximum of $14,700,000 from Linc Energy, for the purposes of: (a) paying the GasRock debt in the amount of $13,653,698, in full; (b) funding the Carve-Out Amount of $100,000 to be used to pay administrative expenses; (c) paying pre-petition ad valorem taxes with respect to real property located in Wyoming; (d) funding the escrow amount; and (e) other purposes with the prior written consent of Lender, in its sole and absolute discretion. o In exchange for such funds, the Company granted to Linc Energy valid and perfected first priority security interests in and liens on all of Rancher's assets ("the Collateral"), which Collateral included but was 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 February 24, 2011, the Court granted the Company's motion for order authorizing (I) Sale of Substantially All of the Debtor's Assets; and (II) Assumption and Assignment of Certain Executory Contracts and Unexpired Leases. Effective March 1, 2011, the Company sold substantially all of its assets pursuant to a certain Asset and Purchase Agreement with Linc Energy in exchange for cash of $20 million, future cash consideration of up to $825,000 and certain other adjustments as specified in the Asset and Purchase Agreement. Funds from the sale of the assets were primarily used to pay outstanding principal and accrued interest on the Debtor-In-Possession Secured Financing totaling $14,829,950.As to the future cash consideration of up to $825,000, a Settlement and Release Agreement among Rancher, GasRock and Linc Energy was agreed to on June 15, 2012and subsequently approved by the Court in July 2012 for cash in the amount of only $525,000 plus other considerations as disclosed in Notes 8 and 14 of the financial statements to this filing. The Plan provided for the Company to pay the claims of its creditors as the assets of the Company allowed, and permitted, but did not obligate, the Company to continue in the oil and gas industry with a focus as discussed below on the 2
purchase on non-operating interests in oil and gas producing properties. In addition, the Plan provided for cash to be distributed to all creditor classes in order of priority until they were paid in full or no more cash remained above the amount need to wind up the Company's affairs. The Company's common stockholders did not receive funds after payment of the creditors under the Plan. The rights of the common stockholders were otherwise unimpaired under the Plan. Further, the Plan provided for the convertible promissory notes totaling $140,000 held by officers and directors to be converted into shares of the Company's common stock at exercise prices of $0.02 per share. The holders elected not to convert the notes and as such they were treated as unsecured claims and paid pursuant to the terms for unsecured claims. Warrant holders holding exercisable warrants were cancelled and the holders received one share of the Company's common stock for every 100 shares of common stock the warrant holder would have been entitled to if the warrants were exercised. Therefore, the Company issued 546,068 shares of its common stock to the warrant holders during October 2012. Business Strategy Post Bankruptcy We may seek a business opportunity with entities which have recently commenced operations, or that desire to utilize the public marketplace in order to raise additional capital in order to expand into new products or markets. We may acquire oil and gas assets and establish wholly owned subsidiaries in various businesses or acquire existing businesses as subsidiaries. We expect that the selection of a business opportunity will be complex. Due to general economic conditions, rapid technological advances being made in some industries and shortages of available capital, we believe that there are numerous firms seeking the benefits of an issuer who has complied with the Securities Act of 1934 (the "1934 Act"). Such benefits may include facilitating or improving the terms on which additional equity financing may be sought, providing liquidity for incentive stock options or similar benefits to key employees, providing liquidity (subject to restrictions of applicable statutes) for all stockholders and other factors. Potentially, available business opportunities may occur in many different industries and at various stages of development, all of which will make the task of comparative investigation and analysis of such business opportunities extremely difficult and complex. The analysis of new business opportunities will be undertaken by, or under the supervision of, our Board of Directors. We intend to concentrate on identifying preliminary prospective business opportunities which may be brought to our attention through present associations of our director, professional advisors or by our stockholders. In analyzing prospective business opportunities, we will consider such matters as (i) available technical, financial and managerial resources; (ii) working capital and other financial requirements; (iii) history of operations, if any, and prospects for the future; (iv) nature of present and expected competition; (v) quality, experience and depth of management services; (vi) potential for further research, development or exploration; (vii) specific risk factors not now foreseeable but that may be anticipated to impact the proposed activities of the company; (viii) potential for growth or expansion; (ix) potential for profit; (x) public recognition and acceptance of products, services or trades; (xi) name identification; and (xii) other factors that we consider relevant. As part of our investigation of the business opportunity, we expect to meet personally with management and key personnel. To the extent possible, we intend to utilize written reports and personal investigation to evaluate the above factors. 3
New Prospect Criteria The Company will consider the following criteria when evaluating whether to acquire an oil and gas prospect: o proximity to existing production; o depth of existing production; o location in a known producing region; o whether there is well control data from nearby drill sites; o geologic evaluations by local geologists of production potential; o reasonable cost of acquisition; o term of lease and drilling commitment, if any; and o reasonable drilling cost estimates. COMPETITION, MARKETS, REGULATION AND TAXATION Competition There are a large number of companies and individuals engaged in the exploration for minerals and oil and gas; accordingly, there is a high degree of competition for desirable properties. Many of the companies and individuals so engaged have substantially greater financial resources than does Rancher. Markets The availability of a ready market for oil and gas discovered, if any, will depend on numerous factors beyond the Company's control, including the proximity and capacity of refineries, pipelines, and the effect of state regulation of production and of federal regulations of products sold in interstate commerce, and recent intrastate sales. The market price of oil and gas are volatile and beyond the Company's control. The market for natural gas is also unsettled, and gas prices havefluctuated in the past four years with substantial fluctuation, seasonally and annually. There generally are only a limited number of gas transmission companies with existing pipelines in the vicinity of a gas well or wells. In the event that producing gas properties are not subject to purchase contracts or that any such contracts terminate and other parties do not purchase the Company's gas production, there is no assurance that Rancher will be able to enter into purchase contracts with any transmission companies or other purchasers of natural gas and there can be no assurance regarding the price which such purchasers would be willing to pay for such gas. There presently exists an oversupply of gas in the certain areas of the marketplace due to pipeline capacity, the extent and duration of which is not known. Such oversupply may result in restrictions of purchases by principal gas pipeline purchasers. Effect of Changing Industry Conditions on Drilling Activity Volatile oil and gas prices have caused a decline in drilling activity in the U.S. from time to time. However, such reduced activity has also resulted in a decline in drilling costs, lease acquisition costs and equipment costs, and an improvement in the terms under which drilling prospects are generally available. Rancher cannot predict what oil and gas prices will be in the future 4
and what effect those prices may have on drilling activity in general, or on its ability to generate economic drilling prospects and to raise the necessary funds with which to drill them. Federal and State Regulations Governmental Regulation and Environmental Consideration Numerous Federal and state laws and regulations govern the oil and gas industry. These laws and regulations are often changed in response to changes in the political or economic environment. Compliance with this evolving regulatory burden is often difficult and costly and substantial penalties may be incurred for noncompliance. The following section describes some specific laws and regulations that may affect us. We cannot predict the impact of these or future legislative or regulatory initiatives. Federal and state taxes have in the past affected the economic viability of such properties. The above paragraphs only give a brief overview of potential Federal and state regulations. Because the Company does not have any properties, at the time of this filing, and because of the wide range of activities in which Rancher may participate, it is impossible to set forth in detail the potential impact federal and state regulations may have on the Company. Environmental Laws and Regulations Our operations are subject to various increasingly stringent federal, state, and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, which directly impact oil and gas exploration, development, and production operations and consequently may impact our operations and costs. These regulations include, among others (i) regulations by the EPA and various state agencies regarding approved methods of disposal for certain hazardous and nonhazardous wastes; (ii) the Comprehensive Environmental Response, Compensation and Liability Act, Federal Resource Conservation and Recovery Act, and analogous state laws that regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property contamination (including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean Air Act and comparable state and local requirements, which may result in the gradual imposition of certain pollution control requirements with respect to air emissions from our operations; (iv) the Oil Pollution Act of 1990, which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act, which is the principal Federal statute governing the treatment, storage, and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage, and disposal of naturally occurring radioactive material. Rancher's operations are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date the Company's compliance with these regulations has had no material effect on its operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. The Company is unable to assess or predict at this time what effect additional regulations or legislation could have on its activities. Oil and gas exploration and development are specifically subject to existing federal and state laws and regulations governing environmental quality and pollution control. Such laws and regulations may substantially increase the 5
costs of exploring for, developing, or producing oil and gas and may prevent or delay the commencement or continuation of a given operation. It may be anticipated that future legislation will significantly emphasize the protection of the environment, and that, as a consequence, the Company's activities may be more closely regulated to further the cause of environmental protection. Such legislation, as well as future interpretation of existing laws, may require substantial increases in equipment and operating costs to the Company and delays, interruptions, or a termination of operations, the extent to which cannot now be predicted. Government Contracts The Company has no government contracts. Number of Persons Employed As of March 31, 2013, Rancher had 2 employees. Directors work on an as needed basis. ITEM 1A. RISK FACTORS We have incurred losses from operations in the past and expect to do so in the future. We have never been profitable. We incurred net losses of $214,631 and $882,928 for the fiscal years ended March 31, 2013 and 2012, respectively. We do not expect to be profitable during the fiscal year ending March 31, 2014. Our acquisition and development of prospects will require substantial additional capital expenditures in the future. The uncertainty and factors described throughout this section may impede our ability to economically acquire, develop, and exploit oil reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future. The Company will need additional financing for which Rancher has no commitments, and this may jeopardize execution of the Company's business plan post-acquisition. Rancher has limited funds, and such funds may not be adequate to carry out a business plan, in the oil and gas industry. The Company's ultimate success depends upon ability to raise additional capital. The Company has not investigated the availability, source, or terms that might govern the acquisition of additional capital and will not do so until it determines the exact need for additional financing and what amounts, if any, may be needed. If the Company needs additional capital, it has no assurance that funds will be available from any source or, if available, that they can be obtained on terms acceptable to the Company. If not available, Rancher operations will be limited to those that can be financed with its modest capital. Rancher is not diversified and it will be dependent on only one business. Because of the limited financial resources that the Company has, it is unlikely that the Company will be able to diversify its operations. Rancher's probable inability to diversify its activities into more than one area will subject the Company to economic fluctuations within the energy industry and therefore increase the risks associated with the Company's operations due to lack of diversification. 6
We intend to pursue the acquisition of an operating business. Our sole strategy is to acquire an operating business. Successful implementation of this strategy depends on our ability to identify a suitable acquisition candidate, acquire such company on acceptable terms and integrate its operations. In pursuing acquisition opportunities, we compete with other companies with similar strategies. Competition for acquisition targets may result in increased prices of acquisition targets and a diminished pool of companies available for acquisition. Acquisitions involve a number of other risks, including risks of acquiring undisclosed or undesired liabilities, acquired in-process technology, stock compensation expense, diversion of management attention, potential disputes with the seller of one or more acquired entities and possible failure to retain key acquired personnel. Any acquired entity or assets may not perform relative to our expectations. Our ability to meet these challenges has not been established. Scarcity of and competition for business opportunities and combinations. We believe we are an insignificant participant among the firms which engage in the acquisition of business opportunities. There are many established venture capital and financial concerns that have significantly greater financial and personnel resources and technical expertise than we have. Consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. Moreover, we will also compete in seeking merger or acquisition candidates with numerous other small public companies. In view of our limited financial resources and limited management availability, we will continue to be at a significant competitive disadvantage compared to our competitors. Our failure to maintain effective internal control over financial reporting may not allow us to accurately report our financial results, which could cause our financial statements to become materially misleading and adversely affect the trading price of our stock. In our annual reports on Form 10-K for the fiscal years ended March 31, 2013 and 2012, we reported the determination of our management that we had a material weakness in our internal control over financial reporting. The determination was made by management that we did not adequately segregate duties of different personnel in our accounting department due to an insufficient complement of staff and inadequate management oversight and due to the fact that we do not have any operations. While we have made progress in remediating the weakness, we have not completely remediated them, due to limited resources to add experienced staff. The Company has not implemented a process whereby journal entries are reviewed and approved before being entered into the general ledger, and in general has not implemented comprehensive entity-level internal controls. In addition, management has failed to implement and monitor appropriate period end cutoff procedures and to implement adequate timely approval of bank account reconciliations. Until we obtain sufficient financing we will not be able to correct the material weakness in our internal control over financial reporting, and our business could be harmed and the stock price of our common stock could be adversely affected. The Company has agreed to indemnification of officers and directors as is provided by Nevada Statute. Nevada Statutes provide for the indemnification of the Company's directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which 7
they become a party arising from their association with or activities on Rancher's behalf. The Company will also bear the expenses of such litigation for any of its directors, officers, employees, or agents, upon such person's promise to repay Rancher therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by the Company that it may be unable to recoup. Nevada Corporate Statutes exclude personal liability of the Company's directors and its stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. This provision does not affect the liability of any director under federal or applicable state securities laws. Rancher may depend upon outside advisors. To supplement the business experience of the Company's officer and directors, Rancher may be required to employ accountants, technical experts, appraisers, attorneys, or other consultants or advisors. The Company's Board of Directors will make the selection of any such advisors. Furthermore, the Company anticipates that such persons will be engaged on an "as needed" basis without a continuing fiduciary or other obligation to Rancher. RISK FACTORS RELATING TO THE COMPANY'S BUSINESS Rancher's business, oil and gas exploration and production has numerous risks which could render the Company unsuccessful. The search for new oil and gas reserves frequently results in unprofitable efforts, not only from dry holes, but also from wells which, though productive, will not produce oil or gas in sufficient quantities to return a profit on the costs incurred. There is no assurance the Company will find or produce oil or gas from any of the undeveloped acreage farmed out to Rancher or which may be acquired by the Company, nor are there any assurances that if Rancher ever obtains any production it will be profitable. (See "Business and Properties.") Competition in the oil and gas industry is intense, which may adversely affect our ability to succeed. The oil and gas industry is intensely competitive with respect to acquiring prospects and/or productive properties, marketing oil and natural gas and securing equipment and trained personnel and contractors. We will be competing with companies that are significantly larger and have greater resources. Many of these companies not only explore for and produce oil and gas, but also carry on refining operations and market petroleum and other products on a regional, national, or worldwide basis. These companies may be able to pay more for oil properties and prospects or define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit. Our larger competitors may be able to absorb the burden of present and future Federal, state, local, and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to increase reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. 8
Rancher will be subject to all of the market forces in the energy business, many of which could pose a significant risk to the Company's operations. The marketing of natural gas and oil which may be produced by the Company's prospects will be affected by a number of factors beyond the Company's control. These factors include the extent of the supply of oil or gas in the market, the availability of competitive fuels, crude oil imports, the world-wide political situation, price regulation, and other factors. Current economic and market conditions have created dramatic fluctuations in oil prices. Any significant decrease in the market prices of oil and gas could materially affect the Company's profitability of oil and gas activities. There generally are only a limited number of gas transmission companies with existing pipelines in the vicinity of a gas well or wells. In the event that producing gas properties are not subject to purchase contracts or that any such contracts terminate and other parties do not purchase the Company's gas production, there is no assurance that Rancher will be able to enter into purchase contracts with any transmission companies or other purchasers of natural gas and there can be no assurance regarding the price which such purchasers would be willing to pay for such gas. Rancher proposed business will be subject to significant weather interruptions. The Company's activities may be subject to periodic interruptions due to weather conditions. Weather-imposed restrictions during certain times of the year on roads accessing properties could adversely affect its ability to benefit from production on such properties or could increase the costs of drilling new wells because of delays. We believe shareholders should consider certain negative aspects of our proposed operations. Dry Holes: We may expend substantial funds acquiring and potentially participating in exploring properties which we later determine not to be productive. All funds so expended will be a total loss to us and charged to operations under the successful efforts accounting method. Technical Assistance: We will find it necessary to employ technical assistance (i.e. geologists and/or operators) in the operation of our business. As of the date of this filing, we have not contracted for any technical assistance. Uncertainty of Title: We will attempt to acquire leases or interests in leases by option, lease, farmout or by purchase. The validity of title to oil and gas property depends upon numerous circumstances and factual matters (many of which are not discoverable of record or by other readily available means) and is subject to many uncertainties of existing law and our application. We intend to obtain an oil and gas attorney's opinion of valid title before any significant expenditure upon a lease. Government Regulations: The area of exploration of natural resources has become significantly regulated by state and federal governmental agencies, and such regulation could have an adverse effect on the Company's operations. Compliance with statutes and regulations governing the oil and gas industry 9
could significantly increase the capital expenditures necessary to develop the Company's prospects. Nature of Rancher's Business: Rancher business is highly speculative, involves the commitment of high-risk capital, and exposes the Company to potentially substantial losses. In addition, the Company will be in direct competition with other organizations which are significantly better financed than Rancher. General Economic and Other Conditions: The Company's business may be adversely affected from time to time by such matters as changes in general economic, industrial and international conditions; changes in taxes; oil and gas prices and costs; excess supplies and other factors of a general nature. Competition: The Company anticipates substantial competition in its effort to explore oil and gas properties and may have difficulty in putting together drilling participants and getting prospects drilled and explored. Established companies have an advantage over Rancher because of substantially greater resources to devote to property acquisition and to obtain drilling rigs, equipment and personnel. If the Company is unable to compete for capital, participation and drilling rigs, equipment and personnel, Rancher business will be adversely affected. RISK FACTORS RELATED TO OUR STOCK We may in the future issue more shares which could cause a loss of control by our present management and current stockholders. We may issue further shares as consideration for the cash or assets or services out of our authorized but unissued common stock that would, upon issuance, represent a majority of the voting power and equity of our Company. The result of such an issuance would be those new stockholders and management would control our Company, and persons unknown could replace our management at this time. Such an occurrence would result in a greatly reduced percentage of ownership of our Company by our current shareholders, which could present significant risks to investors. Our Securities are not currently eligible for sale under Rule 144. Rule 144, as promulgated under the Securities Act is not available for the resale of securities, initially issued by a shell company (reporting or non-reporting) or a former shell company, unless certain conditions are satisfied. We are a shell company. As a result, our securities cannot be resold under Rule 144 unless certain conditions are met. These conditions are: o the issuer of the securities has ceased to be a shell company; o the issuer is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; o the issuer has filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other than Form 8-K reports; and o one year has elapsed since the issuer has filed current "Form 10 information" with the Commission reflecting its status as an entity that is no longer a shell company. 10
The only way for our securities to be eligible for resale prior to the conditions of Rule 144 being met, is for us to have registered them with the SEC on a Registration Statement on Form S-1 and such registration being declared effective by the SEC. At the time of this filing, management has no plans to file a registration statement with the SEC. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop. The regulation of "penny stocks" by SEC and FINRA may discourage the tradability of the Company's securities. Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a "penny stock," as any equity security that has a minimum bid price of less than $4.00 per share or with an exercise price of less than $4.00 per share, subject to a limited number of exceptions which are likely not available to us. Based on the recent trading prices of our common stock, we are considered a penny stock and it is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve an investor's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a customer's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the customer and make a reasonable determination that the transactions in penny stocks are suitable for that customer and that they have sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about (a) the risks of investing in penny stock in both public offerings and in secondary trading; (b) commissions payable to both the broker-dealer and the registered representative; (c) current quotations for the securities; and (d) the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Because of these regulations, broker-dealers may not wish to engage in the above-referenced required paperwork and disclosures. In addition, they may encounter difficulties when attempting to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market. These additional sales practices and disclosure requirements may impede the sale of our securities and the liquidity for our securities may decrease, with a corresponding decrease in the price of our 11
securities. Our shares, in all probability, will be considered subject to such penny stock rules for the foreseeable future, and our shareholders may, as a result, find it difficult to sell their securities. Rancher will pay no foreseeable dividends in the future. Rancher has not paid dividends on its common stock and does not anticipate paying such dividends in the foreseeable future. Rancher stock is thinly traded and as a result you may be unable to sell at or near ask prices or at all if you need to liquidate your shares. Our common stock is thinly-traded on the OTC Pink, or the OTC's speculative trading marketplace. The OTC Pink typically offers less liquidity that other trading markets, meaning that the number of persons interested in purchasing the Company's common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if it came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as Rancher or purchase or recommend the purchase of any of our common stock until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in the our common stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the stock price. Rancher cannot give you any assurance that a broader or more active public trading market for the Company's common stock will develop or be sustained, or that any trading levels will be sustained. Due to these conditions, the Company can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if they need money or otherwise desire to liquidate their shares in the Company. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. DESCRIPTION OF PROPERTIES Rancher Energy Corp. is located at PO Box 40, Henderson, Colorado 80640. The Company currently uses space provided by its officers and employees at the rate of $300 per month. DESCRIPTION OF PROPERTIES/ASSETS/OIL AND GAS PROSPECTS: (a) Real Estate. None. (b) Title to properties. None. (c) Oil and Gas Prospects. None. (d) Patents. None. 12
ITEM 3. LEGAL PROCEEDINGS On October 28, 2009, the Company filed its Petition for relief in the Court, District of Colorado under the Bankruptcy Code. On April 30, 2012, the Company filed its Plan and Disclosure Statement for 2nd Amended Plan of Reorganization with the Court. On September 10, 2012, the Court approved the Plan, and effective September 28, 2012, the Company was discharged from bankruptcy. The Bankruptcy proceedings are discussed in further detail in Item 1 of this filing. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Common Stock is quoted on the OTC Bulletin Board and traded under the symbol "RNCHQ." Prior to our filing for protection under the Bankruptcy Code, our stock had been trading under the symbol "RNCH" since October 28, 2009. For the periods indicated, the following table sets forth the high and low bid prices per share of our common stock as reported by the OTC Bulletin Board. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. Fiscal Year 2013 High Bid Low Bid ---------------------------------------------------------------------------- First Quarter $ 0.0087 $ 0.0057 Second Quarter $ 0.0077 $ 0.0130 Third Quarter $ 0.0280 $ 0.0110 Fourth Quarter $ 0.0315 $ 0.0155 Fiscal Year 2012 First Quarter $ 0.069 $ 0.0225 Second Quarter $ 0.050 $ 0.0065 Third Quarter $ 0.010 $ 0.0031 Fourth Quarter $ 0.007 $ 0.0042 Holders There were approximately 264 holders of record of Rancher common stock as of March 31, 2013. This does not include any beneficial owners for whom shares may be held in "nominee" or "street name." Dividend Policy Holders of Rancher common stock are entitled to receive such dividends as may be declared by Rancher board of directors. The Company has not declared or paid any dividends on Rancher common shares and it does not plan on declaring any dividends in the near future. The Company currently intends to use all available funds to finance the operation and expansion of its business. 13
Recent Sales of Unregistered Securities During the fiscal years ended March 31, 2013 and 2012, we did not issue any securities. Issuer Purchases of Equity Securities Rancher did not repurchase any shares of its common stock during the fiscal year ended March 31, 2013. ITEM 6. SELECTED FINANCIAL DATA As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we arenot required to provide information required by this Item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements. The independent registered public accounting firm's report on the Company's financial statements as of March 31, 2013, and for each of the years in the two-year period then ended, includes a "going concern" explanatory paragraph that describes substantial doubt about the Company's ability to continue as a going concern. Organization On October 28, 2009, we filed our Petition for relief in the Court, District of Colorado, under Chapter 11 of the Bankruptcy Code. On April 30, 2012, the Company filed its Plan and Disclosure Statement for 2nd Amended Plan of Reorganization with the Court. The Plan provided for the Company to pay the claims of its creditors as the assets of the Company allowed, and permitted but did not obligate the Company to continue in the oil and gas industry with a focus on the purchase on non-operating interests in oil and gas producing properties. On September 10, 2012, the Court approved the Plan, and effective September 28, 2012, the Company was discharged from bankruptcy. 14
From January 2007 through March 2011, we operated four fields in the Powder River Basin, Wyoming, which were located in the Rocky Mountain region of the United States. The fields, acquired in December 2006 and January 2007, are the South Glenrock B Field, the Big Muddy Field, the Cole Creek South Field, and the South Glenrock A Field. Effective March 1, 2011, we sold all of our interest in the four fields to Linc Energy Petroleum (Wyoming), Inc. as part of the Plan. The sale of such properties has allowed us to eliminate the majority of our debt and also provide financial resources going forward. We intend to seek, investigate, and if such investigation warrants, acquire an interest in business opportunities presented to us by persons or firms which desire to seek the advantages of an issuer who has complied with the 1934 Act. We will not restrict but have focused our search to the oil and gas industry. This discussion of our proposed business is purposefully general and is not meant to be restrictive of our unlimited discretion to search for and enter into potential business opportunities. We anticipate that we may be able to participate in only one potential business venture because of our limited financial resources. We will need substantial additional capital to support our operations after the completion of any acquisition. We have no revenues. We have no committed source for any funds as of the date of this filing. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales or royalty income, and could fail in business as a result of these uncertainties. Results of Operations Results of continuing operations for the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012 Overview. With respect to our continuing operations, for the fiscal year ended March 31, 2013, we reported a net loss of $214,631 compared to a net loss of $893,718 for fiscal year ended March 31, 2012. Discussions of individually significant year-over-year variances follow. Revenues. The Company had no revenues during 2013 or 2012. The Company does not anticipate recognizing any revenues from its limited operations during the next 12 months. General and administrative expenses. General and administrative expenses for 2013 were $531,241 compared to $883,082 for 2012. The decrease of $351,841 was primarily attributable to decreases in employee overhead costs, legal and insurance expenses. Interest expense. Interest expense reflects interest incurred on unsecured convertible promissory notes that were not associated with the assets the Company had sold. For 2013, there was an interest credit of $47,236 as a result of the Court rendering a determination of the amount of interest due on the notes, and therefore the Company recording such adjustment. Interest expense was 24,158 for 2012. These notes originated in October 2009. Interest and other income. Interest and other income decreased to $350,494 in 2013 from $359,704 in 2012.The decrease of $9,210 is primarily due to the CO2 supply agreement being terminated in December 2012. 15
Reorganization expenses. Reorganization items reflecting a credit of $22,274 for the fiscal year ended March 31, 2013 included a credit of $157,149 specifically related to our reorganization following the filing of the Petition for relief under Chapter 11 of the Bankruptcy Code with the Court on October 28, 2009 and the work done toward the resolution of outstanding legal issues with GasRock. This credit consisted entirely of legal and other professional fees for assistance with our reorganization plan and other bankruptcy related matters and this credit was the result of over accruing these legal and other professional fees in prior periods. Thus the amount of $134,875 ($22,274,less the credit of $157,149) compares to the corresponding year, 2012 where we had total expense of $308,306, and we expect these expenses will cease as we have emerged from bankruptcy. Results of Discontinued Operations for the fiscal year ended March 31, 2012 We had no operations and thus no revenues for the fiscal years ended March 31, 2013 and 2012. Overview. With respect to activities related to our discontinued operations for the fiscal year ended March 31, 2012, we reported a net loss of $7,792 for fiscal year ended March 31, 2012. Revenues. Following the sale of all of our oil and gas properties in March 2011, we received no revenues from this source in 2012. Operating expenses. Operating expenses for fiscal year ended March 31, 2012 were $7,792. During 2012, there were no carryover lease operating expenses due to the sale of the properties in March 2011. Gain on sale of discontinued operations. The Company recorded a gain of $4,807,221 in connection with the sale of substantially all of our assets pursuant to the Asset and Purchase Agreement with Linc Energy effective March 1, 2011. Sale consideration was cash of $20 million plus future cash consideration of up to $825,000 and was subject to certain other adjustments as specified in the Asset and Purchase Agreement. Related to the $825,000 in future cash consideration, a Settlement and Release Agreement among Rancher, GasRock and Linc Energy was agreed to on June 15, 2012. The Court subsequently approved this Agreement in July, and on July 18, 2012, $525,000 in cash, representing the full amount of the future cash consideration, was received by Rancher as more fully disclosed in Notes 8 and 14 of the financial statements to this filing. Liquidity and Capital Resources The report of our independent registered public accounting firm on the financial statements for the years ended March 31, 2013 and 2012 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 approximately $91 million for the period from incorporation (February 4, 2004) to March 31, 2013. We do not have any sources of revenue and our projected interest and other income is not sufficient to sustain our ongoing general and administrative, legal and reorganization costs. We had no operations as of April 16
1, 2012 and are not certain at the date of this filing whether there will be any during the 2014 fiscal year. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements nor do we have any unconsolidated subsidiaries. Critical Accounting Policies Use of Estimates. Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses as well as the disclosure of contingent assets and liabilities as of the date of our financial statements. We base our decisions, which affect the estimates we use, on historical experience and various other sources that are believed to be reasonable under the circumstances. Actual results may differ from the estimates we calculate due to changing business conditions or unexpected circumstances. Policies we believe are critical to understanding our business operations and results of operations are detailed below. For additional information on our significant accounting policies see Note 1 - Organization and Summary of Significant Accounting Policies in the Notes to Financial Statements of our audited financial statements included in this Annual Report. Income taxes. We provide for deferred income taxes on the difference between the tax basis of an asset or liability and its carrying amount in our financial statements in accordance with FASB ASC 740 "Income Taxes." This difference will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset is more likely than not. Additionally, our Federal and state income tax returns are generally not filed before the financial statements are prepared, therefore we estimate the tax basis of our assets and liabilities at the end of each period as well as the effects of tax rate changes, tax credits, and net operating and capital loss carry forwards and carrybacks. Adjustments related to differences between the estimates we used and actual amounts we reported are recorded in the period in which we file our income tax returns. These adjustments and changes in our estimates of asset recovery could have an impact on our results of operations. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. To date, we have not recorded any deferred tax assets because of the historical losses that we have incurred. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited financial statements of Rancher for the years ended March 31, 2013 and 2012 appear as pages 32 through 53 at the end of the document and and are incorporated herein by reference. 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective February 27, 2013, Rancher Energy Corporation's ("the Company") Board of Directors dismissed the firm of Borgers & Cutler CPA's PLLC, as its independent registered public accountant. On February 27, 2013, the Company's Board of Directors approved the appointment of BF Borgers CPA PC, as the Company's independent registered public accountant. The action to engage new auditors was approved by the audit committee. In connection with the audit of the fiscal year ended March 31, 2012, and through February 27, 2013, no disagreements exist with Borgers & Cutler CPA's PLLC on any matter of accounting principles or practices, financial statement disclosure, internal control assessment, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Borgers & Cutler CPA's PLLC have caused them to make reference in connection with their report to the subject of the disagreement(s). The audit report from Borgers & Cutler CPA's PLLC for the fiscal year ended March 31, 2012, contained an opinion which included a paragraph discussing uncertainties related to the continuation of the Company as a going concern, but did not include a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. ITEM 9A(T). CONTROLS AND PROCEDURES Controls and Procedures We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Accounting 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 and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We identified multiple material weaknesses in our internal control over financial reporting and, as a result of this material weakness, we concluded as of March 31, 2013, that our disclosure controls and procedures were not effective. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) is defined as a process designed by, or under the supervision of, a company's principal executive and financial officers, or persons performing similar functions, and effected by a company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of 18
financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally acceptable accounting principles and includes those policies and procedures that: a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal Control-Integrated Framework A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. As of March 31, 2013 and as determined in the prior fiscal year ended March 31,2012, the Company identified the following material weakness: We did not adequately segregate the duties of different personnel within our Accounting Department due to an insufficient complement of staff and inadequate management oversight. We have limited accounting personnel with sufficient expertise in generally accepted accounting principles to enable effective segregation of duties with respect to recording journal entries and to allow for appropriate monitoring of financial reporting matters and internal control over financial reporting. Specifically, the Acting Chief Accounting Officer has involvement in the creation and review of journal entries and note disclosures without adequate independent review and authorization. This control deficiency is pervasive in nature and impacts all significant accounts. This control deficiency also affects the financial reporting process including financial statement preparation and the related note disclosures. Other significant control deficiencies at this time are lack of independent review and approval of journal entries before they are entered into the general ledger, not effectively implementing comprehensive entity-level controls, and the Company has not implemented procedures for timely review and approval of bank reconciliations. 19
As a result of the aforementioned material weakness, management concluded that the Company's internal control over financial reporting as of March 31, 2013 was not effective. Management's Planned Corrective Actions In relation to the material weakness identified above, and subject to emerging from bankruptcy and securing permanent financing, our management and the board of directors intend to work to remediate the risk of a material misstatement in financial reporting. Subject to obtaining permanent financing, we intend to implement the following plan to address the risk of a material misstatement in the financial statements: o Engages qualified accounting staff to prepare journal entries and note disclosures thereby enabling our Chief Accounting Officer the opportunity to independently review and authorize such entities and disclosures prior to entering the information into the accounts and financial statement disclosures, o Engage qualified third-party accountants and consultants to assist us in the preparation and review of our financial information, o Ensure employees, third-party accountants and consultants who are performing controls understand responsibilities and how to perform said responsibilities, and o Consult with qualified third-party accountants and consultants on the appropriate application of generally accepted accounting principles for complex and non-routine transactions. Auditors Attestation This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report 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. ITEM 9B. OTHER INFORMATION None. 20
PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Our current directors and executive officers, their respective positions and ages, and the year in which each director was first elected, are set forth in the following table. Name Age Positions Held Beginning of Term of Service President and CEO Oct 2, Jon C. Nicolaysen Director, President, Chief 2009; Director Oct 27, 66 Executive Officer 2009; A.L. Sid Overton 72 Director, Chairman of the Board Sep 30, 2009 Mathijs van Houweninge 47 Director Sep 30, 2009 Jeffrey B. Bennett 58 Director Sep 30, 2009 Rancher's directors hold office until their successors are duly elected and qualified under Rancher's bylaws. The directors named above will serve until the next annual meeting of Rancher's stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors absent any employment agreement. Jon C. Nicolaysen, President, CEO and Director In 1985, Mr. Nicolaysen completed the Atlantic Businessman's Exchange Program. In 1986, he completed the W.K. Kellogg Foundations Fellowship Wyoming Agriculture Leadership Program. In 1970, he received an MS in Business Administration from the University of Wyoming, and in 1968, he earned his BS in Business Administration from Colorado College. From 1970 to the present, Mr. Nicolaysen has been Vice President and President of Cole Creek Sheep Company, Inc., a cattle and sheep ranching and farming operation. From 1989 to June of 2009, he was president of Parkerton Ranch, Inc., a cattle and sheep ranching and farming operation. From 1988 to the present, he's been president of JK Minerals, Inc., an oil production and mineral leasing company. From 1995 to June 2009, he was the President of Cole Creek Outfitters, Inc., a guiding and hunting operation. From 1998 to the present he has been President, and was a founding member of, Seven Cross Ranches, LLC; Wcamp, FLLC; Sagebrush Land Management, FLLC, all of which are real estate development companies. From 2001 to 2008, Mr. Nicolaysen was a unit operator for JK Minerals, Inc. From 2004 - 2007 Mr. Nicolaysen was an operator of Big Muddy Field for Wyoming Mineral Exploration, LLC, of which he was a founding member. From 2007 - 2008, he was a founding member of Muddy Mineral Exploration, LLC in Wyoming. From 2008 to May 1, 2009, he was a board member of Ameriwest Energy Corp. Mr. Nicolaysen and A.L. Sid Overton, Director and Chairman of the Board, are brothers-in-law. 21
A.L. Sid Overton, Director and Chairmen of the Board of Directors In 1964, Mr. Overton received his B.A. from the University of North Dakota. In 1966, he earned his L.L.B. from the University of North Dakota School of Law, and in 1969, he earned his J.D. from the University of North Dakota School of Law. Since 1998, Mr. Overton has worked as a lawyer for Overton & Associates, LLC. Mr. Overton is the brother-in-law of Mr. Nicolaysen. Mathijs Van Houweninge, Director Mr. van Houweninge studied Cognitive Artificial Intelligence at the University of Utrecht, The Netherlands. In 1998, he attended the Young Managers Programme at Insead Business School in Paris. In addition to being self-employed since 1992, Mr. van Houweninge was the founder and CEO of "Effective," a Dutch software and consultancy firm, from 1992 - 2002. From September 2007 to April 2008, Mr. van Houweninge was an associate at Advisor Falcon Capital in London. From May 2008 to December 2008, he was a Partner at Falcon Capital in London. He currently serves as a Director of the following companies and organizations: Nieuwe Regentesseschool, a Dutch primary school (Utrecht, November 2004, non-profit); Blackwater Midstream Corp., a midstream gas storage facility (New Orleans, May 2008, listed); Cybercity 3D, a 3D modeling and marketing company (El Segundo, February 2008, non-listed); SkyPostal Networks, Inc., an air courier services company (Miami, April 2008, listed); IonIP bv, a network and business intelligence technology firm (Amsterdam, June 2008, non-listed); and Skillcity, an ICT support organization (Utrecht, August 2008, non-profit). Jeffrey B. Bennett, Director Mr. Bennett obtained a Bachelor's of Arts from Western State College of Colorado in 1979, majoring in Biology. Mr. Bennett has been a co-owner/partner in TCF Services, Inc. from 2005 to present and a co-owner/partner in Flame Energy, Inc. from May 2005 to present. He was Vice President of Operations of NQL Energy Services in Alberta, Canada from June 2003 through 2005. He was employed by Black Max Downhole Tools, Inc. from May 2001 through 2003, as a Region Manager. From 2000 to 2001, Mr. Bennett was operations manager for the western United States for Sharewell. Conflicts of Interest - General The Company's directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, there exist potential conflicts of interest including, among other things, time, efforts and corporation opportunity, involved in participation with such other business entities. Conflicts of Interest - Corporate Opportunities Presently no requirement contained in the Company's Articles of Incorporation, Bylaws, or minutes which requires officers and directors of the Company's business to disclose to Rancher business opportunities which come to their attention. The Company's officers and directors do, however, have a fiduciary duty of loyalty to Rancher to disclose to it any business opportunities which come to their attention, in their capacity as an officer and/or director or otherwise. Excluded from this duty would be opportunities which the person learns about through his involvement as an officer and director 22
of another company. The Company has no intention of merging with or acquiring an affiliate, associate person or business opportunity from any affiliate or any client of any such person. Code of Business Conduct and Ethics We have adopted a Code of Business Conduct and Ethics for our directors, officers, and employees. The Board expects all directors, as well as officers and employees, to act ethically at all times and to adhere to the policies outlined in our Code of Business Conduct and Ethics. Copies of our Code of Business Conduct and Ethics are available by contacting the Company at the address or phone number contained in this annual report. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid to executive officers during the fiscal years ended March 31, 2013 and 2012. The table sets forth this information for Rancher, including salary, bonus, and certain other compensation to the named executive officers for the past two fiscal years and includes all executive officers as of March 31, 2013. SUMMARY EXECUTIVES COMPENSATION TABLE Non-equity Non-qualified incentive deferred Stock Option plan compensation All other Salary Bonus awards awards compensation earnings compensation Total Name & Position Year ($) ($) ($) ($) ($) ($) ($) ($) Jon C. Nicolaysen, Chief Executive 2013 120,000 0 0 0 0 0 6,000 126,000 Officer (1) 2012 120,000 0 0 0 0 0 6,000 126,000 (1) For Mr. Nicolaysen, Other Compensation represents auto allowances. Mr. Nicolaysen was appointed as Chief Executive Officer and President on October 2, 2009, and as a director on October 27, 2009. He serves as a director for no additional compensation. Employment Agreements; Potential Payments Upon Termination or Change-in-Control On October 27, 2009, we entered into an Executive Employment Agreement with Jon C. Nicolaysen to become our President and Chief Executive Officer. Pursuant to the agreement, Mr. Nicolaysen will receive a base salary of $120,000 per year. The base salary shall thereafter be increased annually at the greater of five percent or such other increase as may be approved by the Board of Directors. In addition, Mr. Nicolaysen: i) shall be eligible to receive incentive compensation or a bonus, payable solely in the discretion of the Board of Directors; ii) he shall be entitled to participate in all benefit programs established by the Company, and; iii) he shall be entitled to a Company-provided vehicle or a monthly allowance of $500. The Agreement may be terminated by 23
either party upon fifteen days written notice. Also on October 27, 2009 we entered into a Management Retention Agreement with Mr. Nicolaysen, under which Mr. Nicolaysen was granted options to purchase 2,500,000 shares of the Company's common stock at $0.035 per share. The Management Retention Agreement shall terminate the earlier of (i) one year; (ii) thirty days after the consummation of a Change in Control; (iii) thirty days following the confirmation of a Reorganization Plan, or: (iv) the date that all obligations of the parties have been satisfied. See the table below for a description of the vesting provisions and term of the stock options. Outstanding Equity Awards at Fiscal Year-end Table The following table sets forth certain information regarding stock options held by the named executive officers as of March 31, 2013. Name Option Awards Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Option Exercise Option Expiration Options Options (#) Price Date (#) Non-exercisable Exercisable ------------------ ------------------ ----------------- -------------------- Jon C. Nicolaysen (A) 2,500,000 -0- $0.035 10/27/19 (A) Mr. Nicolaysen's options vested 10% on the date of grant, October 27, 2009, and 90% on November 1, 2010. Director Compensation During the fiscal year ended March 31, 2013, we compensated our non-employee directors under the following compensation arrangement: Cash Compensation and Equity Compensation In September 2009 the new Board of Directors implemented a new arrangement under which each non-employee director would receive a cash payment of $5,000 per fiscal quarter. In addition, under the terms of Management Retention Agreements entered into with each non-employee director and the President and CEO, each member of the Board of Directors would be granted options to purchase 2,500,000 shares of the Company's common stock at $0.035 per share. The following table sets forth certain information concerning compensation paid to the Company's directors during the fiscal year ended March 31, 2013: 24
Non-equity Non-qualified Fees incentive deferred earned or Stock plan compensation All other paid in awards Option compensation earnings compensation Total Name cash ($) ($) awards ($) ($) ($) ($) ($) Jon C. $ -0- $ -0- $ -0- $ -0- $ -0- $126,000 $126,000 Nicolaysen (1) A.L. Sid Overton $20,000 $ -0- $ -0- $ -0- $ -0- $ -0- $20,000 Mathijs Van $20,000 $ -0- $-0- $ -0- $-0- $ -0- $20,000 Houweninge Jeffrey B. $20,000 $ -0- $-0- $ -0- $-0- $ -0- $20,000 Bennett (1) Mr. Nicolaysen is employed as the Company's Chief Executive Officer. During the fiscal year ended March 31, 2013 he received $126,000 in compensation for his services in that capacity, as discussed in the Executive Compensation Table. All of the Company's executive officers and/or directors will continue to be active in other companies. All executive officers and directors have retained the right to conduct their own independent business interests. Indemnification of Directors and Officers Rancher officers and directors are indemnified as provided by the Nevada Revised Statutes and the bylaws. Under the Nevada Revised Statutes, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company's Articles of Incorporation. The Company's Articles of Incorporation do not specifically limit the directors' immunity. Excepted from that immunity are: (a) a willful failure to deal fairly with Rancher or its shareholders in connection with a matter in which the director has a material conflict of interest; (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful; (c) a transaction from which the director derived an improper personal profit; and (d) willful misconduct. The Company's bylaws provide that it will indemnify the directors to the fullest extent not prohibited by Nevada law; provided, however, that it may modify the extent of such indemnification by individual contracts with the directors and officers; and, provided, further, that the Company shall not be required to indemnify any director or officer in connection with any proceeding, or part thereof, initiated by such person unless such indemnification: (a) is expressly required to be made by law, (b) the proceeding was authorized by the board of directors, (c) is provided by the Company, in sole discretion, pursuant to the powers vested under Nevada law or (d) is required to be made pursuant to the bylaws. The Company's bylaws provide that it will advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or 25
investigative, by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of Rancher as a director or executive officer of another company, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under the bylaws or otherwise. The Company's bylaws provide that no advance shall be made by Rancher to an officer except by reason of the fact that such officer is or was the Company's director in which event this paragraph shall not apply, in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made: (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (b) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the Company's best interests. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information as of March 31, 2013, with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company that are authorized for issuance, aggregated as follows: Number of securities remaining available for Number of securities to be Weighted-average exercise future issuance under issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants and (excluding securities in warrants and rights rights column (a)) Plan Category (a) (b) (c) Equity compensation plans 1,000,000 $0.0375 8,559,000 approved by security holders Equity compensation plans not 10,000,000 $0.035 12,000,000 approved by security holders ---------------------------- ---------------------------- ---------------------------- Total 11,000,000 $0.0352 20,559,000 ---------------------------- ---------------------------- ---------------------------- 2006 Stock Incentive Plan On March 30, 2007, the Company's 2006 Stock Incentive Plan (the "2006 Stock Incentive Plan") was approved by its shareholders and became effective October 2, 2006. Under the 2006 Stock Incentive Plan, the Board of Directors may grant awards of options to purchase common stock, restricted stock, or restricted stock units to officers, employees, and other persons who provide services to the Company or any related company. The participants to whom awards are granted, the type of awards granted, the number of shares covered for each award, and the purchase price, conditions and other terms of each award are determined by the Board of Directors, except that the term of the options shall not exceed 10 years. A total of 10 million shares of the Company's common stock are subject to 26
the 2006 Stock Incentive Plan. The shares issued for the 2006 Stock Incentive Plan may be either treasury or authorized and unissued shares. During the years ended March 31, 2013 and 2012, no options were granted, expired or exercised under the 2006 Stock Incentive Plan. 2013 Stock Incentive Plan Effective March 29, 2013, the Company's 2013 Stock Option and Award Plan (the "2013 Stock Incentive Plan") was approved by its Board of Directors. Under the 2013 Stock Incentive Plan, the Board of Directors may grant options or purchase rights to purchase common stock to officers, employees, and other persons who provide services to the Company or any related company. The participants to whom awards are granted, the type of awards granted, the number of shares covered for each award, and the purchase price, conditions and other terms of each award are determined by the Board of Directors, except that the term of the options shall not exceed 10 years. A total of 12 million shares of the Company's common stock are subject to the 2013 Stock Incentive Plan. The shares issued for the 2013 Stock Incentive Plan may be either treasury or authorized and unissued shares. During the years ended March 31, 2013 and 2012, no options were granted, expired or exercised under the 2013 Stock Incentive Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth information with respect to the beneficial ownership of Rancher outstanding common stock by: o each person who is known by Rancher to be the beneficial owner of five percent (5%) or more of Rancher common stock; o Rancher chief executive officer, its other executive officers, and each director as identified in the "Management -- Executive Compensation" section; and o all of the Company's directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock and options, warrants and convertible securities that are currently exercisable or convertible within 60 days of the date of this document into shares of the Company's common stock are deemed to be outstanding and to be beneficially owned by the person holding the options, warrants or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. 27
The information below is based on the number of shares of our common stock that Rancher believes was beneficially owned by each person or entity as of March 31, 2013. Name and Address of Beneficial Amount and Nature of Title of Class Owner* Beneficial Owner Percent of Class (1) --------------------- ------------------------------------ ----------------------- ------------------------- Common shares Jon C. Nicolaysen, Director, 3,200,000 2.66% President, CEO (2) Common shares A.L. Sid Overton, Director (3) 2,500,000 2.08% Common shares Mathijs van Houweninge, Director 2,500,000 2.08% Common shares Jeffrey B. Bennett, Director (5) 2,503,000 2.08% --------------------- ------------------------------------ ----------------------- ------------------------- Common shares All Directors and Executive 10,703,000 8.92% Officers as a Group(4 persons) --------------------- ------------------------------------ ----------------------- ------------------------- Name and Address of Beneficial Amount and Nature of Title of Class Owner* Beneficial Owner Percent of Class (1) Greater than 5% Holders Sergei Stetsenko Common shares Paradeplatz 4 Zurich 8001 Switzerland 8,896,000 7.42% Common shares Hound Partners LLC (6) 10,561,797 8.81% 101 Park Avenue 48th Floor New York, NY 10178 Hound Partners Offshore Fund, LP c/o Citco Fund Services (Curacao) N.V. Kaya Flamboyan 9 P.O. Box 4774 Willemstad, Curacao Netherland Antilles Jonathan Auerbach 101 Park Avenue 48th Floor New York, NY 10178 28
*The address for officers and directors is PO Box 40 Henderson CO 80640. (1) At March 31, 2013, the Company had 119,862,791shares of its common stock issued and outstanding. (2) Mr. Nicolaysen holds 700,000 shares of common stock. Mr. Nicolaysen also holds an option exercisable into 2,500,000 shares of common stock at $0.035 per share. (3) Mr. Overton holds an option exercisable into 2,500,000 shares of common stock at $0.035 per share. (4) Mr. van Houweninge holds an option exercisable into 2,500,000 shares of common stock at $0.035 per share. (5) Mr. Bennett holds 3,000 shares of common stock. Mr. Bennett also holds an option exercisable into 2,500,000 shares of common stock at $0.035 per share. (6) Hounds Partners, LLC, Hounds Performance, LLC, Hounds Partners Offshore Fund, LP, and Jonathan Auebach have jointly filed a Schedule 13G, Amendment No. 3 on June 26, 2012 showing the entities to have shared voting power of the 10,561,797 shares at December 31, 2011. Rule 13d-3 under the Securities Exchange Act of 1934 governs the determination of beneficial ownership of securities. That rule provides that a beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security. Rule 13d-3 also provides that a beneficial owner of a security includes any person who has the right to acquire beneficial ownership of such security within sixty days, including through the exercise of any option, warrant or conversion of a security. Any securities not outstanding which are subject to such options, warrants or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person. Those securities are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Related Transactions On October 27, 2009, each of the four members of our Board of Directors loaned $25,000 for a total of $100,000 to the Company, under the terms of Convertible Promissory Notes (the "Notes"). The Notes are fully described in Note 6 - Convertible Promissory Notes Payable, of these Notes to Financial Statements. ThePromissory 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.The Convertible Promissory Notes were paid in full during October 2012 plus interest of $102. During the fiscal years ended March 31, 2013 and 2012, the Company incurred legal fees totaling $11,525 and $71,629, respectively, with Overton and Associates, LLC, a law firm in which Mr. Overton, a director of the Company, is a principal. The employment of Overton and Associates as special counsel had been approved by the Bankruptcy Court. The Company has not implemented a formal written policy concerning the review of related party transactions, but compiles information about transactions between the Company and its directors and officers, their immediate family members, and their affiliated entities, including the nature of each transaction and the amount involved. The Board of Directors has responsibility for reviewing these transactions. 29
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Auditor's Fees The following table describes fees for professional audit and tax services rendered by our principal accountants, BF Borgers CPA PC(effective February 27, 2013)and the predecessor firm, Borgers & Cutler CPAs PLLC (effective February 2, 2012) through the date of their termination - for the audit of our annual financial statements and for other services rendered by the respective CPA firms for and during the fiscal years ended March 31, 2013 and March 31, 2012. See Item 9 regarding the change in independent CPA firms during the 2013 fiscal year. March 31, March 31, Type of Fee 2013 2012 (1) -------------------------------------------------------------------------- Audit Fees $ 31,340 $ 91,514 Audit-Related Fees $ - $ - Tax Fees $ - $ 5,500 All Other Fees $ - $ - --------------------------------- Total $ 31,340 $ 97,014 --------------------------------- (1) Audit Fees include the aggregate fees incurred by us for professional services rendered by Hein for the audit of our financial statements included in ourForm 10-K for the fiscal year ended March 31, 2011 and by Hein for the review of our financial statements included in our Forms 10-Qand rendered by Borgers & Cutler, CPAs PLLC for the audit of our annual financial statements and review of financial statements included in our Forms 10-Q and 10-K for the fiscal year ended March 31, 2012. Pre-approval Policies and Procedures The Board of Directors on an annual basis reviews audit and non-audit services performed by the independent auditor. All audit and non-audit services are preapproved by the Board of Directors, which considers, among other things, the possible effect of the performance of such services on the auditors' independence. The Board of Directors has considered the role of BF Borgers CPA PC in providing services to us for the fiscal year ended March 31, 2013and those of Borgers & Cutler PLLC during the fiscal years ended March 31, 2013 and 2012and has concluded that such services are compatible with their independence as our auditors. In 2013and 2012, 100% of the Audit Related Fees, Tax Fees and All Other Fees were pre-approved by the Board of Directors. The Board of Directors approved a change of independent auditors as of February 27, 2013 to BF Borgers CPA PC. The Board has considered the services rendered and fees billed to the date of this report by BF Borgers CPA PC, and are satisfied as to their services being rendered on a basis of independence. 30
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K. Exhibit No. Description 31.1 Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act* 32.1 Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act* *Filed herewith. 31
INDEX TO FINANCIAL STATEMENTS Audited Financial Statements - Rancher Energy Corp. Reports of Independent Registered Public Accounting Firm 33 and 34 Balance Sheets as of March 31, 2013 and 2012 35 Statements of Operations for the Years Ended March 31, 2013 and 2012 36 Statements of Changes in Stockholders' Equity for the Years Ended March 31, 2013 and 2012 37 Statements of Cash Flows for the Years Ended March 31, 2013 and 2012 38 Notes to Financial Statements 39 32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Rancher Energy Corp.: We have audited the accompanying balance sheets of Rancher Energy Corp. ("the Company") as of March 31, 2013 and the related statement of operations, stockholders' equity (deficit) and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rancher Energy Corp., as of March 31, 2013, and the results of its operations and its cash flow for the year then ended, in conformity with generally accepted accounting principles in the United States of America. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion. /s/ B F Borgers CPA PC B F Borgers CPA PC Denver, CO June 17, 2013 33
Borgers & Cutler CPAs PLLC 12650 West 64th Avenue, Unit E504, Arvada, Colorado, 80004 Telephone: 303-888-2082 Fax: 303-463-5416 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Rancher Energy Corp.: We have audited the accompanying balance sheets of Rancher Energy Corp. (the "Company") as of March 31, 2012, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rancher Energy Corp. as of March 31, 2012, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States of America. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, on October 28, 2009, the Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Uncertainties inherent in the bankruptcy process, as well as recurring losses from operations raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Borgers & Cutler CPAs PLLC Borgers & Cutler CPAs PLLC Arvada, Colorado June 17, 2013 34
Rancher Energy Corp. Balance Sheets March 31, 2013 2012 ASSETS Current Assets: Cash and cash equivalents $ 2,076,720 $ 3,229,858 Restricted cash - 500,641 Accounts receivable - 30,958 Accounts receivable, settlement - 525,000 Prepaid expenses and other 37,749 303,104 Total current assets 2,114,469 4589561 Furniture and equipment, net of accumulated depreciation of $190,846 and $164,998, respectively 138838 172684 Deposits and other assets 200000 200350 Total other assets 338838 373034 Total assets $ 2,453,307 $ 4,962,595 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities - post petition $ 15,000 $ 449,224 Accounts payable, settlement - 500,000 Current liabilities of discontinued operations - 112,620 Total current liabilities, not subject to compromise 15,000 1,061,844 Liabilities subject to compromise - 1,259,827 Total liabilities $ 15,000 $ 2,321,671 Stockholders' Equity Common stock, $0.00001 par value; 275,000,000 shares authorized, 119,862,791 and 119,316,723 shares issued and outstanding at March 31, 2013 and 2012, respectively 1,200 1,194 Additional paid-in capital 93,205,016 93,193,008 Accumulated deficit (90,767,909) (90,553,278) Total stockholders' equity 2,438,307 2,640,924 Total liabilities and stockholders' equity $ 2,453,307 $ 4,962,595 See notes to these financial statements. 35
Rancher Energy Corp. Statements of Operations For the Year Ended March 31, 2013 2012 Revenue $ - $ - Operating expenses: General and administrative expenses 531,241 883,082 Depreciation and amortization 33,846 37,336 Total operating expenses 565,087 920,418 (Loss) from operations (565,087) (920,418) Other income (expense): Interest expense and financing costs 47,236 (24,158) Interest and other income 350,494 359,704 Total other income 397,730 335,546 (Loss) before reorganization items and discontinued operations (167,357) (584,872) Reorganization items: Loss on settlement 25,000 (18,042) Professional and other costs, net 22,274 308,306 Total reorganization items 47,274 290,264 (Loss) from continuing operations (214,631) (875,136) Discontinued operations: (Loss) from discontinued operations - (7,792) Total (loss) discontinued operations - (7,792) Net (loss) (214,631) (882,928) Net (loss) per share from continuing operations $ 0.00* $ -0.01 Net (loss) per share from discontinued operations $ 0.00* $ 0.00* Basic and diluted net (loss) per share $ 0.00* $ -0.01 Basic and diluted weighted average shares outstanding 119,565,072 119,316,723 * Less than $0.01 per share See notes to these financial statements. 36
Rancher Energy Corp. Statement of Changes in Stockholders' Equity Additional paid-in Accumulated Shares Amount Capital Deficit Total Balance - March 31, 2012 119,316,723 $ 1,194 $ 93,193,008 $(90,553,278) $ 2,640,924 Shares issued for warrants 546,068 6 12,008 - 12,014 Net (loss) for the period - - - (214,631) - Balance - March 31, 2013 119,862,791 $ 1,200 $ 93,205,016 $(90,767,909) $ 2,438,307 See notes to these financial statements. 37
Rancher Energy Corp. Statements of Cash Flows For the Year Ended March 31, 2013 2012 Cash flows (used in) operating activities: Net (loss) $ (214,631) $ (882,928) Adjustments to reconcile net (loss) from continuing operations to cash used in operating activities, before reorganization items: Loss from discontinued operations - 7,792 Reorganization items, net 47,274 308,306 Depreciation and amortization 33,846 37,336 Changes in operating assets and liabilities: Restricted cash - (575) Accounts receivable and prepaid expenses 296,313 (438,186) Accounts payable and accrued liabilities (434,224) 169,473 ------------ --------------- Net cash used in operating activities, before reorganization items (271,422) (798,782) ------------ --------------- Payments for reorganization items - Professional and other costs rendered in connection with the Chapter 11 proceeding (1,270,087) (560,808) ------------ --------------- Net cash used in operating activities (1,541,509) (1,359,590) ------------ --------------- Cash flows from (used in) investing activities: - - Cash flows from (used in) financing activities: - - Discontinued operations: Cash flows from (used in) discontinued operating activities 388,371 706,220 Cash flows from (used in) discontinued investing activities - - Cash flows from (used in) discontinued financing activities - - ------------ --------------- Net cash provided by discontinued operations 388,371 706,220 ------------ --------------- (Decrease) in cash and cash equivalents (1,153,138) (653,370) Cash and cash equivalents, beginning of period 3,229,858 3,883,228 ------------ --------------- Cash and cash equivalents, end of period $ 2,076,720 $ 3,229,858 ============ =============== SUPPLEMENTAL SCHEDULE OF CASHFLOW INFORMATION Cash paid for interest $ - $ 18,094 ============ =============== See notes to these financial statements. 38
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Note 1 - Business Organization Organization Rancher Energy Corp. ("Rancher Energy" or the "Company"), formerly known as Metalex Resources, Inc. ("Metalex"), was incorporated in Nevada on February 4, 2004. Metalex was formed for the purpose of acquiring, exploring and developing mining properties. On April 18, 2006, the stockholders of Metalex voted to change its name to Rancher Energy Corp. and announced that it changed its business plan and focus from mining to oil and gas. Bankruptcy Filing On October 28, 2009, the Company filed a voluntary petition (the "Petition") for relief in the United States Bankruptcy Court, District of Colorado (the "Bankruptcy Court") under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code"). The Company continued to operate its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Code and orders of the Bankruptcy Court until its plan of reorganization (the "Plan") was approved by the Bankruptcy Court and the Company was discharged from bankruptcy on its effective date of September 28, 2012. See Note 3 - Proceedings Under Chapter 11 of the Bankruptcy Code. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852 "Financial Reporting During Reorganization Proceedings," which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of a Chapter 11 case distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations. The balance sheet must distinguish Prepetition liabilities subject to compromise from both those Prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may settled for lesser amounts. In addition, cash provided by reorganization items, if any, must be disclosed separately in the statement of cash flows. The Company adopted ASC 852-10 effective on October 28, 2010 and will segregate those items as outlined above for all activity prior to September 28, 2012. As the Company emerged from bankruptcy, it reviewed the use of "Fresh-start" accounting and determined that pursuant with ASC 852, the Company does not qualify to use the provisions of "Fresh-start" accounting. The Company's voting shareholders immediately before the confirmation date do not own less than 50% of the voting shares of the emerging entity. Note 2 - Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 39
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Cash and Cash Equivalents The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents include demand deposits and money market funds carried at cost which approximates fair value. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). At March 31, 2013, the Company had $1,826,720 in cash deposits in excess of FDIC insured limits. Restricted cash The restricted cash that was held in an escrow account in the amount of $500,641 was released on July 18, 2012 as part of an agreed upon and Bankruptcy Court approved settlement agreement. See Note 7 - Commitments and Contingencies. Accounts Receivable At July 18, 2012, the Bankruptcy Court approved and the Company received $525,000 as part of a royalty fee arrangement relating to a settlement agreement among Rancher Energy, GasRock and Linc Energy and at March 31, 2013 the balance owed to the Company is $0. See Note 7 - Commitments and Contingencies. Oil and Gas Producing Activities The Company uses the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense. Exploratory dry hole costs are included in cash flows from investing activities as part of capital expenditures within the consolidated statements of cash flows. The costs of development wells are capitalized whether or not proved reserves are found. Costs of unproved leases, which may become productive, are reclassified to proved properties when proved reserves are discovered on the property. Unproved oil and gas interests are carried at the lower of cost or estimated fair value and are not subject to amortization. Geological and geophysical costs and the costs of carrying and retaining unproved properties are expensed as incurred. DD&A of capitalized costs related to proved oil and gas properties is calculated on a property-by-property basis using the units-of-production method based upon proved reserves. The computation of DD&A takes into consideration restoration, dismantlement, and abandonment costs and the anticipated proceeds from salvaging equipment. The Company complies with ASC 932, "Extractive Activities - Oil and Gas". The Company currently does not have any existing capitalized exploratory well costs, and has therefore determined that there are no suspended well costs that should be impaired. The Company reviews its long-lived assets for impairments when events or changes in circumstances indicate that impairment may have occurred. The impairment test for proved properties compares the expected undiscounted future net cash flows on a property-by-property basis with the related net capitalized costs, including costs associated with asset retirement obligations, at the end of each reporting period. Expected future cash flows are calculated on all proved reserves using a discount rate and price forecasts selected by the Company's management. The discount rate is a rate that management believes is representative of current market conditions. The price forecast is based on NYMEX strip pricing, adjusted for basis and quality differentials, for the first 40
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 three to five years and is held constant thereafter. Operating costs are also adjusted as deemed appropriate for these estimates. When the net capitalized costs exceed the undiscounted future net revenues of a field, the cost of the field is reduced to fair value, which is determined using discounted future net revenues. An impairment allowance is provided on unproved property when the Company determines the property will not be developed or the carrying value is not realizable. The sale of substantially of the Company's assets in March 2011 resulted in the Company having no oil and gas properties at March 31, 2013and 2012. Sales of Proved and Unproved Properties The sale of a partial interest in a proved oil and gas property is accounted for as normal retirement, and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production DD&A rate. A gain or loss is recognized for all other sales of producing properties and is reflected in results of operations. The sale of a partial interest in an unproved property is accounted for as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. A gain on the sale is recognized to the extent the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other sales of nonproducing properties and is reflected in results of operations. See the description of the sale of all oil and gas properties as of March 1, 2011 contained in the Item 2 of Part I of this report as a result of the bankruptcy filing. Property and Equipment Property and equipment, such as office furniture and equipment, and computer hardware and software, are recorded at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repair costs are expensed when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets from three to seven years. When other property and equipment is sold or retired, the capitalized costs and related accumulated depreciation are removed from their respective accounts. Depreciation expense for the years ended March 31, 2013 and 2012 was $33,846 and $37.336, respectively. Fair Value of Financial Instruments The Company's financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Revenue Recognition The Company currently has no revenue from continuing or discontinued operations other than payments received for the resale of carbon dioxide under a supply and sales agreement that expired in December 2012 and recorded as other income. Income Taxes The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the accounting bases and the tax bases of the Company's assets and liabilities. The deferred tax assets and liabilities are computed using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The Company adopted the provisions of ASC 740, "Income Taxes" on April 1, 2007. FASB ASC 740 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a "more-likely-than-not" 41
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 recognition threshold at the effective date to be recognized upon the adoption of FASB ASC 740 and in subsequent periods. The adoption of ASC 740 had an immaterial impact on the Company's financial position and did not result in unrecognized tax benefits being recorded. Subsequent to adoption, there have been no changes to the Company's assessment of uncertain tax positions. Accordingly, no corresponding interest and penalties have been accrued. The Company's policy is to recognize penalties and interest, if any, related to uncertain tax positions as general and administrative expense. The Company files income tax returns in the U.S. Federal jurisdiction and various states. Net (Loss) per Share Basic net (loss) per common share of stock is calculated by dividing net (loss) available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted net (loss) per common share is calculated by dividing net (loss) by the weighted-average number of common shares outstanding, including the effect of other dilutive securities. The Company's potentially dilutive securities consist of in-the-money outstanding options and warrants to purchase the Company's common stock. Diluted net loss per common share does not give effect to dilutive securities as their effect would be anti-dilutive. The treasury stock method is used to measure the dilutive impact of stock options and warrants. The following table details the weighted-average dilutive and anti-dilutive securities related to stock options and warrants for the periods presented: For the Year Ended March 31, ------------------------------------- 2013 2012 ----------------- ---------------- Dilutive - - Anti-dilutive 1,507,171 1,921,068 Stock options and warrants were not considered in the detailed calculations as their effect would be anti-dilutive. Share-Based Payments The Company recognizes compensation cost for stock-based awards based on estimated fair value of the award and records compensation expense over the requisite service period. See Note 9 - Share-Based Compensation. Comprehensive Income (Loss) The Company does not have revenue, expenses, gains or losses that are reflected in equity rather than in results of operations. Consequently, for all periods presented, comprehensive (loss) is equal to net (loss). Major Customers The Company's only source of income was from a carbon dioxide resale contract that expired in December 2012 and was reported as other income in the statement of operations for the fiscal years ended March 31, 2013 and 2012. The Company 42
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 had no oil and gas operations during the years ended March 31, 2013 and 2012, and no customers or billings as a result. Off-Balance Sheet Arrangements As part of its ongoing business, the Company has not participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. From its incorporation on February 4, 2004 through March 31, 2013, the Company has not been involved in any unconsolidated SPE transactions. Reclassification Certain amounts in the prior period financial statements have been reclassified to conform to the current period financial statement presentation. Such reclassifications had no effect on the Company's net income (loss). Recent Accounting Pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations. Note 3 - Proceedings under Chapter 11 of the United States Bankruptcy Code On October 28, 2009, the Company filed a Petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. The Petition was filed in order to enable the Company to pursue reorganization efforts under Chapter 11 of the Bankruptcy Code. The Company continued to operate its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Code and orders of the Bankruptcy Court until its Plan was approved by the Bankruptcy Court and the Company was discharged from bankruptcy on its effective date of September 28, 2012. In general, as debtor-in-possession, the Company was authorized under Chapter 11 to continue to operate as an ongoing business, but could not engage in transactions outside of the ordinary course of business without the prior approval of the Bankruptcy Court. Now that the Company has emerged from bankruptcy under its Plan with the availability of cash, the Company's holders of its securities could receive a payment in respect of such securities. However, caution should be exercised with respect to existing and future investments in any of its securities. Subject to certain exceptions under the Bankruptcy Code, the bankruptcy filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Company or its property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, creditor actions to obtain possession of property from the Company, or to create, perfect or enforce any lien against the property of the Company, or to collect on or otherwise exercise rights or remedies with respect to a Prepetition claim were enjoined unless and until the Bankruptcy Court lifted the automatic stay. In order to successfully exit Chapter 11 bankruptcy, the Company needed to propose, and obtain Bankruptcy Court confirmation of, a plan of reorganization that satisfied the requirements of the Bankruptcy Code. The plan of reorganization would, among other things, resolve the Debtors' Prepetition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to exit from bankruptcy. In addition to the need for Bankruptcy Court confirmation and satisfaction of Bankruptcy Code requirements, a plan of reorganization must be accepted by 43
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 classes of holders of impaired claims and equity interests in order to become effective. As such, the Company did satisfy these requirements with its Plan. Under section 365 of the Bankruptcy Code, the Company could assume, assume and assign, or reject executory contracts and unexpired leases, including real property and equipment leases, subject to the approval of the Bankruptcy Court and certain other conditions. Rejection constituted a court-authorized breach of the lease or contract in question and, subject to certain exceptions, relieved the Company of its future obligations under such lease or contract but created a deemed Prepetition claim for damages caused by such breach or rejection. Parties whose contracts or leases were rejected could file claims against the Company for damages. Thus, the Company's leased office space under a non-cancelable operating lease expired during the quarter ended September 30, 2012. As a result of the bankruptcy filing, realization of assets and liquidation of liabilities could be subject to uncertainty. While operating as a debtor-in-possession under the protection of Chapter 11, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the Company could sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed financial statements. As such, the Company recognized a net gain from the settlement and adjustment of liabilities of $25,000 and $18,042 for the years ended March 31, 2013 and 2012, respectively. Further, the Plan could materially change the amounts and classifications reported in the Company's financial statements and as further noted in ASC 852 within the provisions of "Fresh-start" accounting. The Company's historical financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities as a consequence of confirmation of the Plan and, more specifically, since the Company did not qualify to use "Fresh-start" accounting. On October 15, 2010, the Company filed with the Bankruptcy Court its proposed Debtor's Plan of Reorganization and a proposed Disclosure Statement was filed simultaneously with the Plan of Reorganization. On December 13, 2010, the Company filed with the Bankruptcy Court its First Amended Proposed Plan of Reorganization and Disclosure Statement. The Disclosure Statement was first required to be approved by the Bankruptcy Court before creditors and shareholders could be presented with the opportunity to vote on the Plan of Reorganization. Prior to confirmation and approval by the Court, the Proposed Plan of Reorganization could be amended. On December 15, 2010, the Company filed a motion to approve financing from a party not affiliated with its present lender. The purpose of the loan was to repay the existing lender in full and to pay certain past due ad valorem taxes owed to Converse County, Wyoming. Converse County agreed that if it was paid by February 1, 2011, it would waive penalties and interest of approximately $93,000. This loan closed in January 2011. See Note 5 - Short Term Notes Payable. On December 20, 2010, the Company filed a motion to allow the Company to enter into an agreement and approve the sale of substantially all its assets to the same party and provide new financing for the price of approximately $20 million. The sale closed effective March 1, 2011. On April 30, 2012, the Company filed its 2nd Amended Plan of Reorganization and Disclosure Statement with the Bankruptcy Court which eventually became the Plan. The Plan provided for the Company to pay the claims of its creditors as the assets of the Company allowed and permitted, but did not obligate the Company to continue in the oil and gas industry with a focus on the purchase on non-operating interests in oil and gas producing properties. On September 10, 2012, the Bankruptcy Court approved the Plan and the Company was discharged from bankruptcy on its effective date of September 28, 2012. As a result of this approval by the Bankruptcy Court, the Company during the months of September and October 2012 paid $1,258,477 of creditor claims. 44
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Reorganization Items Reorganization items represent the direct and incremental costs related to the Company's Chapter 11 case, such as professional fees incurred, net of interest income earned on accumulated cash during the Chapter 11 process. These restructuring activities could result in additional charges and other adjustments for expected allowed claims (including claims that have been allowed by the Bankruptcy Court) and other reorganization items that could be material to the Company's financial position or results of operations in any given period. Liabilities Subject to Compromise Liabilities subject to compromise at March 31, 2013 and 2012 include the following Prepetition liabilities: March 31, 2013 March 31, 2012 ---------------- ------------------ $ Accounts payable, trade $ - $ 176,726 Other payables and accrued liabilities - 943,101 Convertible notes payable - 140,000 ---------------- ------------------- $ - $ 1,259,827 ---------------- ------------------ Note 4 - Discontinued Operations The financial results of the Company's business related to oil and gas operations have been classified as discontinued operations in its statements of operations for all periods presented. The following summarizes components of income (loss) from the Company's discontinued operations for the year ended March 31, 2012 only as there was no activity of discontinued operations for the year ended March 31, 2013: March 31, 2012 ------------------- Revenue $ - ------------------- Operating expenses (7,792) ------------------- Operating (loss) from discontinued operations (7,792) Other income (expenses) from discontinued operations, net - ------------------- Net (loss) from discontinued operations $ (7,792) =================== 45
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 The assets and liabilities relating to the Company's discontinued oil and gas operations are reflected as assets and liabilities of discontinued operations in the accompanying balance sheets. The following summarizes the components of these assets and liabilities at March 31, 2012 as the Company had no assets and liabilities of discontinued operations at March 31, 2013: March 31, 2012 ----------------- Assets: ------ Current assets of discontinued operations - Accounts receivable $ - Deposits and other assets - ----------------- - ----------------- Other assets Long-term assets of discontinued operations - ----------------- Total assets of discontinued operations $ - ----------------- Liabilities: ----------- Accounts payable and accrued liabilities $ 112,620 ----------------- Total current liabilities of discontinued operations $ 112,620 ----------------- Oil and gas properties As previously noted throughout this report, all oil and gas properties were sold in a transaction on March 1, 2011. There have been no further acquisitions or dispositions of oil and gas properties since that date. Note 5 - Short Term Notes Payable On January 28, 2011 the Company received debtor-in-possession financing ("DIP Financing") pursuant to a credit agreement (the "DIP Credit Agreement") with Linc Energy. The DIP Credit Agreement provided loan advances up to an aggregate of $14.7 million and was scheduled to mature on May 28, 2011 (total term of 120 days from the date of closing). The Company borrowed a total of approximately $14.0 million under the DIP Credit Agreement and the proceeds were used to pay the allowed, secured claims for certain ad valorem property taxes, amounts due to under Prepetition Note (defined below) and to fund $100,000 for the Company's bankruptcy estate. The DIP Credit Agreement specified interest at the rate of 10% per annum for the 60 days following the date of closing and 12% per annum through loan maturity. Accumulated interest and principal was due in full at maturity. The DIP Financing lender obtained a valid and perfected first priority security interest in and liens on all the collateral including, but not limited to: (a) the Company's interests in oil and gas producing properties; (b) accounts receivable; (c) equipment; (d) general intangibles; (e) accounts; (f) deposit accounts; and (g) all other real and personal property of the Company. On February 16, 2011, the Bankruptcy Court approved an order authorizing the sale of substantially all of the Company's assets to Linc Energyfor $20.0 46
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 million. Effective March 1, 2011, the Company sold substantially of its assets to Linc Energy.On March 14, 2011, all outstanding principal and accrued interest totaling $14,829,250 were paid and the DIP Credit Agreement was cancelled. Through January 28, 2011, the Company had a note payable (the "Prepetition Note") outstanding under the terms of a Term Credit Agreement with GasRock(the "Prepetition Lender"). The original principal balance of $12,240,000 outstanding under the Prepetition Note was initially due and payable on October 31, 2008, with interest accruing at a rate equal to the greater of (a) 12% per annum, or (b) the one-month LIBOR rate plus 6% per annum. The Prepetition Note was amended on October 22, 2008 (the "First Amendment"), to extend the maturity date from October 31, 2008 to April 30, 2009. In consideration of the six month extension and other terms included in First Amendment, the Company made a principal payment on the Prepetition Note in the amount of $2,240,000, resulting in a new loan balance of $10,000,000. The maturity date of the Prepetition Note was amended several times after April 30, 2009, with a final maturity date of October 15, 2009. In connection with these amendments to the maturity date of the Prepetition Note, the Company granted the GasRockvarious additional considerations, including overriding royalty interests and net profits interests. Payment of the principal balance of approximately $10,188,000, plus accrued interest, was not made on October 15, 2009, and therefore, an event of default occurred under the Term Credit Agreement, as amended. In connection with the DIP financing, the Prepetition Note was paid in full on January 28, 2011. The Company filed an adversary action in the Bankruptcy Court against GasRockin an effort to avoid certain interests previously assigned to the Prepetition Lender. The Company, GasRock and Linc Energy executed a settlement agreement as of June 15, 2012, that called for the Company to make a payment of $500,000 to GasRock to dismiss all claims in the litigation by GasRock and in return the Company would receive a $525,000 payment form Linc Energy to settle other matters in the litigation. The settlement agreement was approved by the Bankruptcy Court in July 2012 and the respective payments among the parties were made and other issues in the agreement were settled as noted in this filing as of July 18, 2012. As a result of the settlement agreement, the Company incurred a reorganization loss of $25,000 that was written off and reported in the statement of operations for the year ended March 31, 2013. Note 6 - Convertible Promissory Notes Payable On October 27, 2009, the Company issued convertible promissory notes (the "Promissory Notes") totaling $140,000 of which $100,000 of the Promissory Notes were issued to officers and/or directors or $25,000 each. The additional Promissory Notes were issued to existing shareholders. The Promissory Notes carried interest at an annual rate equal to the greater of (i) 12%, or (ii) the prime rate (as published in the Wall Street Journal) plus 3%. The Promissory Notes were convertible, at the holder's option, into shares of the Company's common stock at a conversion price of $0.02 per share and at any time during the term of the Promissory Notes. The Promissory Notes matured on November 1, 2010, and all obligations and payments due under the Promissory Notes were subordinate to the Company's senior debt. As a result of the Company's bankruptcy filing described in Notes 1 and 3 above, the Company was not able to pay principal and accumulated interest on the Promissory Notes when due. Subject to certain exceptions under the Bankruptcy Code, the Company's bankruptcy filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Company or its property to recover on, collect or secure a claim arising prior to the Petition Date. At March 31, 2013 and 2012, the principal outstanding on the Promissory Notes was $0 and $140,000, respectively. At March 31, 2013 and 2012, accrued interest related to these Promissory Notes was $0 and $54,015, respectively. There was a reduction in the accrued interest of $53,300 for the year ended March 31, 2013 as a result of a Bankruptcy Court decision that the amount of the interest related to the Promissory Notes shall be $715. This reduction of $53,300 was reported in the statement of operations as part of "Reorganization items - Professional and other costs, net" for the year ended March 31, 2013. 47
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Note 7 - Commitments and Contingencies Commitments On February 12, 2010, the Company filed an adversary action in the Bankruptcy Court against GasRock, the holder of the then senior secured note payable seeking to avoid certain ownership interests assigned to GasRock in connection with the Term Credit Agreement and amendments thereto. On March 18, 2010, GasRock filed a motion with the Bankruptcy Court to dismiss the complaint. On October 21, 2010, the Bankruptcy Court issued an order on the Motion to Dismiss that dismissed three of the nine claims made in the adversary action. The Company, GasRock and Linc Energy executed a settlement agreement as of June 15, 2012, that called for the Company to make a payment of $500,000 to GasRock to dismiss all claims in the litigation by GasRock and in return the Company would receive a $525,000 payment form Linc Energy to settle other matters in the litigation. The settlement agreement was approved by the Bankruptcy Court in July 2012 and the respective payments among the parties were made and other issues in the agreement were settled as noted in this filing as of July 18, 2012. As a result of the settlement agreement, the Company incurred a reorganization loss of $25,000 that was written off and reported in the statement of operations for the year ended March 31, 2013. Bankruptcy Proceedings On October 28, 2009, the Company filed a Petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the District of Colorado. The Company continued to operate its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Code and orders of the Bankruptcy Court until its Plan was approved by the Bankruptcy Court and became effective September 28, 2012. All pending or threatened litigation or claims involving the Company were automatically stayed as a result of the bankruptcy filing, and all such claims subject to compromise or modification through the terms of any plan of reorganization filed by the Company in the bankruptcy proceedings. On September 10, 2012, the Bankruptcy Court approved the Plan and the Company was discharged from bankruptcy on its effective date of September 28, 2012. See Note 3 - Proceedings Under Chapter 11 of the United States Bankruptcy Code. Litigation A group of persons who purchased $1,776,750 of securities as part of the Company's private placement offering filed suit in 2009 against the Company alleging that securities laws were violated. Subsequently, these cases were dismissed and the Company entered into tolling agreements with thesestockholders to toll the statutes of limitations applicable to any claims related to the private placement. Thesestockholders filed a proof of claim with the Bankruptcy Court in the amount of $1,776,050 plus ancillary amounts purported to be damages attributable to the alleged securities violations and in June 2011 the Bankruptcy Court found that these claims were subordinated to unsecured claims, as such they were settled as part of the Plan approved by the Bankruptcy Court in September 2012. These claims are covered under the Company's D&O insurance policy and at March 31, 2013 no claims have been filed by these stockholders. A law firm that was formerly counsel to the Company filed a Proof of Claim for Prepetition fees, to which the Company objected with the Bankruptcy Court. The Company agreed to a settlement which the Bankruptcy Court approved in September 2012. 48
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 A former officer of the Company filed a proof of claim for wages and benefits to which the Company objected with the Bankruptcy Court. The Company agreed to a settlement of $18,750 with the former officer, which the Bankruptcy Court approved. Two of the Company's employees filed proofs of claim and motions to allow administrative expenses for certain bonus payments. The Company and the employees reached a Bankruptcy Court settlement in the amount of $78,902 which was paid in September 2012. GasRock filed a proof of claim for attorney's fees and costs related to the bankruptcy filing generally and to the litigation pending between GasRock and the Company. The Company objected to these fees on various grounds. Subsequently, as of June 15, 2012, a Settlement and Release Agreement covering these claims and other issues was executed by the Company, GasRock and Linc Energy. This agreement was approved by the Bankruptcy Court in July 2012, and such claims were released and certain payments were made among the parties as of July 18, 2012. Note 8 - Stockholders' Equity The Company's capital stock at March 31, 2013 and 2012 consists of 275,000,000 authorized shares of common stock, par value $0.00001 per share. At March 31, 2013 and 2012, a total of 119,862,791 and 119,316,723 shares of common stock were issued and outstanding, respectively. Issuance of Common Stock During the year ended March 31, 2013 the Company issued 546,068 shares of common stock as compensation for cancellation of 54,632,565 warrants. See Note 8 - Warrants. Warrants As part of the Plan approved by the Bankruptcy Court, warrant holders holding 54,632,565 warrants exercisable for shares of the Company's common stock are to be cancelled and the holders of these warrants will receive one share of the Company's common stock for every 100 shares of common stock the warrant holder would have been entitled to if the warrants were exercised. Therefore, the Company issued 546,068 shares of common stock to the warrant holders during October 2012 valued at $12,014 or $0.022 per share that was recorded as part of "Reorganization items - Professional and other costs, net" in the statement of operations for the year ended March 31, 2013. Note 9 - Share-Based Compensation Share-based awards to employees and directors are accounted for under ASC 718 "share-based payments". ASC 718 requires companies to recognize share-based payments to employees as compensation expense using a fair value method. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the service period on a straight-line basis, which generally represents the vesting period. The Company did not recognize a tax benefit from the stock compensation expense because it is more likely than not that the related deferred tax assets, which have been reduced by a full valuation allowance, will not be realized. The Black-Scholes option-pricing model is used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are the stock price at the valuation date, the expected stock price volatility, and the expected option term (the amount of time from the grant date until the options are exercised or expire). 49
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Prior to the adoption of ASC 718, the Company reflected tax benefits from deductions resulting from the exercise of stock options as operating activities in the statements of cash flows. ASC 718 requires tax benefits resulting from tax deductions in excess of compensation cost recognized for those options (excess tax benefits) be classified and reported as both an operating cash flow and a financing cash flow upon adoption of ASC 718. As a result of the Company's net operating losses, the excess tax benefits, which would otherwise be available to reduce income taxes payable, have the effect of increasing the Company's net operating loss carry forwards. Accordingly, because the Company is not able to realize these excess tax benefits, such benefits have not been recognized in the statements of cash flows for the years ended March 31, 2013 and 2012. Chief Executive Officer (CEO) and Non-Executive Director Non-Qualified Stock Option Grants On October 27, 2009, in conjunction with the execution of Management Retention Agreements, the Company's CEO and each of the Company's three non-executive directors were granted non-qualified stock options to purchase 2.5 million shares of the Company's common stock at an exercise price of $0.035 per share. All of the non-qualified stock options are vested at March 31, 2013 and 2012 and expire on December 31, 2019. During the years ended March 31, 2013 and 2012, the Company did not grant any non-qualified stock options. 2006 Stock Incentive Plan On March 30, 2007, the Company's 2006 Stock Incentive Plan (the "2006 Stock Incentive Plan") was approved by its shareholders and became effective October 2, 2006. Under the 2006 Stock Incentive Plan, the Board of Directors may grant awards of options to purchase common stock, restricted stock, or restricted stock units to officers, employees, and other persons who provide services to the Company or any related company. The participants to whom awards are granted, the type of awards granted, the number of shares covered for each award, and the purchase price, conditions and other terms of each award are determined by the Board of Directors, except that the term of the options shall not exceed 10 years. A total of 10 million shares of the Company's common stock are subject to the 2006 Stock Incentive Plan. The shares issued for the 2006 Stock Incentive Plan may be either treasury or authorized and unissued shares. During the years ended March 31, 2013 and 2012, no options were granted, expired or exercised under the 2006 Stock Incentive Plan. 2013 Stock Incentive Plan Effective March 29, 2013, the Company's 2013 Stock Option and Award Plan (the "2013 Stock Incentive Plan") was approved by its Board of Directors. Under the 2013 Stock Incentive Plan, the Board of Directors may grant options or purchase rights to purchase common stock to officers, employees, and other persons who provide services to the Company or any related company. The participants to whom awards are granted, the type of awards granted, the number of shares covered for each award, and the purchase price, conditions and other terms of each award are determined by the Board of Directors, except that the term of the options shall not exceed 10 years. A total of 12 million shares of the Company's common stock are subject to the 2013 Stock Incentive Plan. The shares issued for the 2013 Stock Incentive Plan may be either treasury or authorized and unissued shares. During the years ended March 31, 2013 and 2012, no options were granted, expired or exercised under the 2013 Stock Incentive Plan. The following table summarizes stock option activity for the years ended March 31, 2013 and 2012. 50
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 2013 2012 Number of Weighted Average Number of Weighted Average Options Exercise Price Options Excercise Price --------- ---------------- --------- ---------------- Outstanding at beginning of year Non-qualified 10,000,000 $ 0.035 10,000,000 $ 0.035 2006 Plan 1,375,000 $ 0.0875 1,441,000 $ 0.154 Granted Non-qualified - $ - - $ - 2006 Plan - $ - - $ - Exercised Non-qualified - $ - - $ - 2006 Plan - $ - - $ - Cancelled Non-qualified - $ - - $ - 2006 Plan (375,000) $ 0.142 (66,000) $ 0.279 Outstanding at March 31, Non-qualified 10,000,000 $ 0.035 10,000,000 $ 0.035 2006 Plan 1,000,000 $ 0.035 1,375,000 $ 0.0875 Exercisable at March 31, Non-qualified 10,000,000 $ 0.035 10,000,000 $ 0.035 2006 Plan 1,000,000 $ 0.035 1,375,000 $ 0.0875 The following table summarizes information for the outstanding and vested options at March 31, 2013: 51
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 Outstanding and Vested Options ------------------- Number of shares Non-qualified 10,000,000 2006 Plan 1,000,000 Weighted average remaining contractual life Non-qualified 1.6 years 2006 Plan 1.6 years Weighted average exercise price Non-qualified $ 0.035 2006 Plan $ 0.035 Aggregate intrinsic value Non-qualified $ 0 2006 Plan $ 0 The aggregate intrinsic value of outstanding securities is the amount by which the fair value of underlying (common) shares exceeds the exercise price of the options issued and outstanding. At March 31, 2013, all outstanding options were fully vested. No options were exercised during the year ended March 31, 2013. The Company did not realize any income tax expense related to the exercise of stock options for the years ended March 31, 2013 and 2012. Note 10 - Income Taxes The effective income tax rate for the years ended March 31, 2013 and 2012 differs from the U.S. Federal statutory rate due to the following: 2013 2012 ---- ---- Federal statutory income tax rate $ 75,000 $ 308,000 State income taxes, net of federal benefit 6,000 26,000 Permanent items (18,000) (132,000) Other, change in rate 241,000 240,000 Change in valuation method (304,000) (443,000) --------- --------- $ - $ - ========== ========= The components of the deferred tax assets and liabilities at March 31, 2013 and 2012 are as follows: 2013 2012 ---- ---- Long-term deferred tax assets: Federal net operating loss carryforwards $ 30,555,000 $ 30,623,000 Stock based compensation 824,000 824,000 Accrued expenses 143,000 143,000 Long-term deferred tax liabilities: Property, plant and equipment (54,000) (66,000) Valuation allowance (31,468,000) (31,164,000) ----------- ----------- Net long--term deferred tax assets $ - $ - =========== =========== The Company has net operating loss carryforwards of approximately $85,809,000 at March 31, 2013 and the Company's net operating losses begin to expire in 2024. 52
RANCHER ENERGY CORP NOTES TO FINANCIAL STATEMENTS MARCH 31, 2013 The Company has provided a full valuation allowance for the deferred tax assets at March 31, 2013 and 2012, based on the likelihood that the deferred tax assets will not be utilized in the future. Note 11 - Related Party Transactions A director of the Company is a partner in the law firm that acts as counsel to the Company. The Company incurred legal fees and expenses to the law firm in the amount of $11,525 and $71,629 during the years ended March 31, 2013 and 2012, respectively that are included in the statement of operations. The amount owed to the law firm was $0 and $9,234 at March 31, 2013 and 2012, respectively. Note 12 - Subsequent Events We have evaluated subsequent events through June 7, 2013. Other than those set forth above, there have been no subsequent events after March 31, 2013 for which disclosure is required. 53
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RANCHER ENERGY CORP. Dated: June 24, 2013 By: /s/ Jon C. Nicolaysen ------------------------------------------- Jon C. Nicolaysen, Chief Executive Officer & Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: June 24, 2013 RANCHER ENERGY CORP. /s/ Jon C. Nicolaysen -------------------------------------- Jon C. Nicolaysen Chief Executive Officer & Director /s/ A.L. Sid Overton -------------------------------------- A.L. Sid Overton, Director /s/ Mathijs van Houweninge -------------------------------------- Mathijs van Houweninge, Director /s/ Jeffrey B. Bennett -------------------------------------- Jeffrey B. Bennett, Director 5