SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 2004
-------------------
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: 0-9261
------
KESTREL ENERGY, INC.
----------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0772451
--------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1726 Cole Boulevard, Suite 210 80401
----------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(303)295-0344
---------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of common stock, as of September 30, 2004:
10,133,200
-----------
KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------
Balance Sheets as of September 30, 2004 (Unaudited)
and June 30, 2004 3
Statements of Operations for the Three Months Ended
September 30, 2004 and 2003 (Unaudited) 4
Statements of Cash Flows for the Three Months Ended
September 30, 2004 and 2003 (Unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
------ and Results of Operations 7
Critical Accounting Policies and Estimates 9
Item 3. Controls and Procedures 9
------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
------
Item 3. Defaults Upon Senior Securities 10
------
Item 4. Submission of Matters to a Vote of Security Holders 10
------
Item 5. Other Information 10
------
Item 6. Exhibits 10
------
Signatures 11
Certification 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004
September 30, June 30,
ASSETS 2004 2004
------------------------------------------ --------------- --------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 146,161 $ 162,507
Accounts receivable 412,076 366,278
Other assets 31,862 12,171
--------------- --------------
Total current assets 590,099 540,956
--------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful efforts
method of accounting:
Unproved 260,355 260,355
Proved 11,104,070 11,081,664
Pipeline and facilities 807,851 807,851
Furniture and equipment 62,665 54,207
--------------- --------------
12,234,941 12,204,077
Accumulated depreciation and depletion (9,795,430) (9,754,427)
--------------- --------------
Net property and equipment 2,439,511 2,449,650
--------------- --------------
$ 3,029,610 $ 2,990,606
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-related party $ 50,000 $ 650,000
Accounts payable-trade 189,413 245,198
Accrued Liabilities 117,042 85,582
--------------- --------------
Total current liabilities 356,455 980,780
--------------- --------------
LONG-TERM LIABILITIES:
Notes payable-related party $ 600,000 $ --
Asset retirement obligation 178,910 177,126
--------------- --------------
Total long-term liabilities 778,910 177,126
--------------- --------------
Total Liabilities 1,135,365 1,157,906
--------------- --------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued -- --
Common Stock, no par value; 20,000,000 shares
authorized, 10,133,200 issued and outstanding
at September 30, 2004 and June 30, 2004 20,562,085 20,562,085
Accumulated (deficit) (18,667,840) (18,729,385)
--------------- --------------
Total stockholders' equity 1,894,245 1,832,700
--------------- --------------
$ 3,029,610 $ 2,990,606
=============== ==============
See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
REVENUE:
Oil and gas sales $ 492,110 $ 347,510
----------- ------------
COSTS AND EXPENSES:
Lease operating Expenses 191,532 148,898
Exploration expenses 24,613 12,767
Depreciation and depletion 42,789 47,079
General and administrative 170,599 210,384
------------ -------------
TOTAL COSTS AND EXPENSES 429,533 419,128
------------- ------------
OTHER INCOME (EXPENSE)
Interest income 556 613
Interest expense (18,594) (17,734)
Other, net 17,006 21,941
------------ -------------
Total other income (expense) (1,032) 4,820
------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES 61,545 (66,798)
------------ -------------
Provision for income tax 12,309 --
------------ -------------
Tax benefit of net operating loss carryforward (12,309) --
------------ -------------
NET INCOME (LOSS) $ 61,545 $ (66,798)
============ =============
Basic earnings per share $ 0.01 $ (0.01)
============= =============
Diluted earnings per share $ 0.01 $ (0.01)
============= =============
Basic weighted average number of common 10,133,200 9,798,400
shares outstanding ============ =============
Diluted weighted average number of common 10,151,216 9,798,400
shares outstanding ============ =============
See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 61,545 $ (66,798)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and depletion 42,789 47,079
Other - 1,584
(Increase) decrease in accounts receivable (45,798) 111,449
(Increase) decrease in other current assets (19,691) 10,295
Increase (decrease) in accounts payable (55,785) (116,213)
Increase (decrease) in accrued liabilities 31,460 12,178
--------------- ------------
Net cash (used in) provided by
operating activities 14,520 (426)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (30,866) (67,160)
--------------- ------------
Net cash (used in) investing activities (30,866) (67,160)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt-related 60,000 --
Repayments of borrowings-related (60,000) --
--------------- ------------
Net cash (used in) financing activities -- --
--------------- ------------
Net increase (decrease) in cash and cash
equivalents (16,346) (67,586)
Cash and cash equivalents at the beginning
of the period 162,507 128,604
--------------- ------------
Cash and cash equivalents at the end
of the period $ 146,161 $ 61,018
=============== ============
Cash paid for interest $ 17,632 $ 17,734
=============== ============
See accompanying notes to financial statements.
5
KESTREL ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
These condensed financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
2004.
In the opinion of management, the accompanying interim unaudited financial
statements contain all the adjustments necessary to present fairly the
financial position of the Company as of September 30, 2004, the results of
operations for the periods shown in the statements of operations, and the
cash flows for the periods shown in the statements of cash flows. All
adjustments made are of a normal recurring nature.
2. Property and Equipment
The Company follows the successful efforts method of accounting for its
oil and gas activities. Accordingly, costs associated with the
acquisition, drilling and equipping of successful exploratory wells are
capitalized. Geological and geophysical costs, delay and surface rentals
and drilling costs of unsuccessful exploratory wells are charged to
expense as incurred. Costs of drilling development wells, both successful
and unsuccessful, are capitalized. Upon the sale or retirement of oil and
gas properties, the cost thereof and the accumulated depreciation or
depletion are removed from the accounts and any gain or loss is credited
or charged to operations.
Proved oil and gas properties are assessed for impairment on a well by
well basis or a field-by-field basis where unitized. If the net
capitalized costs of proved properties exceeds the estimated undiscounted
future net cash flows from the property, a provision for impairment is
recorded to reduce the carrying value of the property to its estimated
fair value.
3. Asset Retirement Obligation
In 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement requires
companies to record the present value of obligations associated with the
retirement of tangible long-lived assets in the period in which it is
incurred. The liability is capitalized as part of the related long-lived
asset's carrying amount. Over time, accretion of the liability is
recognized as an operating expense and the capitalized cost is depreciated
over the expected useful life of the related asset. The Company's asset
retirement obligations relate primarily to the plugging, dismantlement,
removal, site reclamation and similar activities of its oil and gas
properties. Prior to adoption of this statement, such obligations were
accrued ratably over the productive lives of the assets through its
depreciation, depletion and amortization for oil and gas properties
without recording a separate liability for such amounts.
The amounts recognized upon adoption are based upon numerous estimates and
assumptions, including future retirement costs, future recoverable
quantities of oil and gas, future inflation rates and the credit-adjusted
risk-free interest rate. Changes in asset retirement obligations during
the year were:
Asset retirement obligations as of July 1, 2004 $ 177,126
Liabilities incurred --
Liabilities settled --
Accretion expense (included in depreciation, depletion 1,784
and amortization) -------
Asset retirement obligations as of September 30, 2004 $ 178,910
========
6
4. Notes Payable
On January 24, 2003, the Company borrowed $400,000 from R&M Oil and Gas,
Ltd., ("R&M") of which Timothy L. Hoops, one of the Company's directors and
its President and CEO, is a partner. That loan is due on January 31, 2005,
bears interest at 12.5% per annum and is secured by the Company's oil and
gas interests in Grady County, Oklahoma. In the event of a default under
the terms of the R&M loan, and the sale of the collateral securing the
loan, the Company would receive any remaining proceeds after payment to R&M
of its expenses in connection with such sale(s) and any indebtedness due
and payable to R&M under the loan. The proceeds from the R&M loan were used
to retire the outstanding debt to Samson Exploration N.L. at that time and
reduce the Company's accounts payable position. The R&M loan was approved
unanimously by the Board of Directors with Mr. Hoops abstaining. On
October 13, 2004, the R&M loan was extended to January 31, 2007 under the
same terms and conditions.
On May 5, 2003, the Company entered into a Line of Credit Agreement with
Barry D. Lasker, the Company's former President and CEO, for a maximum loan
to the Company of $200,000. Under the terms of the agreement all
outstanding amounts were due on May 4, 2005 and bore interest at 10% per
annum. The initial proceeds of the loan consisted of $40,000 cash and the
conversion to debt of approximately $152,000 of unpaid wages and
unreimbursed business expenses owed to Mr. Lasker by the Company. The
Lasker loan was secured by the Company's oil and gas interests in Campbell
County, Wyoming. In the event of a default under the terms of the Lasker
loan, and the sale of the collateral securing the loan, the Company would
receive any remaining proceeds after payment to Mr. Lasker of his expenses
in connection with such sale(s) and the indebtedness due and payable to him
under the loan. On February 5, 2004, Mr. Lasker assigned the $200,000
Lasker Loan to Samson Exploration N.L. (a related party) and Mr. Lasker
was paid off in full. The terms and conditions of the Samson loan are a
continuance of the terms and conditions of the Lasker loan, except for the
deletion of a provision providing for acceleration upon termination of
Mr. Lasker's employment by the Company. The Samson loan, originally due on
May 4, 2005, has been extended until May 4, 2006 also under the same terms
and conditions.
On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest
rate which is to be paid on repayment of the loan. This is an unsecured
loan due on demand. On July 13, the Company borrowed $60,000 from VP with
an 8% interest rate. This loan was repaid in full on August 31, 2004,
including all accrued interest with a total of $60,753.79 cash.
ITEM 2. Management's Discussion and Analysis of Financial Condition or Plan
of Operation.
OVERVIEW
During the quarter the Company has continued its drive to cut costs and maximize
revenues. We are pleased to show continued improvement in our bottom line and we
can now look to the future with a sound asset base and positive cash flow to
pursue additional growth opportunities. In addition, the development of our
Hilight coalbed methane (CBM) play in Campbell County, Wyoming has continued to
provide us with a steady increase in reserves.
This report contains forward-looking statements. We use words such as
"anticipate", "believe", "expect", "future", "may", "will", "should", "plan",
"intend", and similar expressions to identify forward-looking statements. These
statements are based on our beliefs and the assurances we made using information
currently available to us. Because these statements reflect our current views
concerning future events, these statements involve risks, uncertainties and
assumptions. Our actual results could differ materially from the results
discussed in the forward-looking statements. Some, but not all, of the factors
that may cause these differences include those discussed in the risk factors in
the Company's report on Form 10-KSB for the fiscal year ended June 30, 2004. You
should not place undue reliance on these forward-looking statements. You should
also remember that these statements are made only as of the date of this report
and future events may cause them to be less likely to prove to be true.
7
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company had net working capital of $233,644. This
compares to the Company's working capital deficit of $439,824 as of June 30,
2004. The increase in working capital of $673,468 was primarily the result of
the extensions of the loans from R&M Oil & Gas, Ltd. ("R&M") and Samson
Exploration N.L. ("Samson") returning them to the status of long-term loans.
The R&M loan was originally due on January 31, 2005 and has been extended to
January 31, 2007 under the same terms and conditions. The Samson loan,
originally due on May 4, 2005, has been extended until May 4, 2006 also under
the same terms and conditions
Net cash provided by operating activities was $14,520 for the three months ended
September 30, 2004, an increase in provided cash of $14,946 over cash used in
operations of $426 for the same period in 2003. Accounts receivable increased
$45,798, or 13%, to $412,076 during the period. The increase in accounts
receivable was attributable to an increase in Joint Interest Billing
receivables. Accounts payable decreased $55,785, or 23%, to $189,413 during the
period versus a decrease of $116,213, or 27%, during the same period a year ago.
Accrued liabilities increased $31,460, or 38%, to $117,042 during the period
versus an increase of $12,178 for the period ended September 30, 2003.
Net cash used by investing activities was $30,866 for the quarter ended
September 30, 2004, versus cash used of $67,160 for the same period in 2003.
No cash was used by financing activities for the three-months ended
September 30, 2003, or 2004.
RESULTS OF OPERATIONS
First Quarter Results
The Company reported net income of $61,545, or 1 cent per share, for the
three-month period ended September 30, 2004. This compares with a loss of
$66,798, or 1 cent per share, for the same period a year ago. The net income in
the current period is a result of higher oil and gas sales and lower general and
administrative expenses for the three months ended September 30, 2004 as
compared to the same period last year.
The Company's revenues for the three months ended September 30, 2004 were
$492,110 compared to $347,510 during the same period of 2003, an increase of
$144,600, or 42%. The increase in oil and gas revenues is attributable to higher
production in several new wells put in place near the end of fiscal year 2004 in
the Hilight CBM wells located in Campbell Co., Wyoming. Higher production levels
were also attained in the Green River Basin due to better production techniques.
The Company's total expenses increased $10,405, or 2%, to $429,533 as compared
to $419,128 a year ago. The increase in overall expenses is primarily
attributable to higher lease operating expense and exploration expense offset by
lower general and administrative expense as discussed below. Production and
operating expenses increased $42,634, or 29%, to $191,532 versus $148,898 for
the same period a year ago. The increase in production and operating expenses
was largely due to higher revenues that translated into higher tax costs and
higher production costs at the Company's Hilight CBM field due to a larger
number of producing wells.
No dry holes, abandoned and impaired properties expense was recorded for the
three months ended September 30, 2003, or 2004.
Exploration expenses increased $11,846, or 93%, to $24,613 from $12,767 a year
ago. The increase in exploration expense reflects the Company's interest in
continued development at core properties.
General and administrative costs decreased $39,785, or 19%, to $170,599 as
compared to $210,384 for the same period a year ago. The decrease in expenses,
though not attributable to any particular expense item, is representative of the
Company's ongoing program to lower expenses.
Interest expense increased $860 to $18,594 from $17,734 a year ago. The increase
interest is attributable to short-term borrowings of approximately $110,000 from
Victoria Petroleum N.L.
8
Total other income (expense) items decreased $4,935, or 22%, to $17,006 versus
income of $21,941 for the same period a year ago.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company believes the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our Financial
Statements.
Property and Equipment
The Company follows the successful efforts method of accounting for its oil and
gas activities. Accordingly, costs associated with the acquisition, drilling and
equipping of successful exploratory wells are capitalized. Geological and
geophysical costs, delay and surface rentals and drilling costs of unsuccessful
exploratory wells are charged to expense as incurred. Costs of drilling
development wells, both successful and unsuccessful, are capitalized. Upon the
sale or retirement of oil and gas properties, the cost thereof and the
accumulated depreciation or depletion are removed from the accounts and any gain
or loss is credited or charged to operations.
Proved oil and gas properties are assessed for impairment on a well-by-well
basis or a field-by-field basis where unitized. If the net capitalized costs of
proved properties exceeds the estimated undiscounted future net cash flows from
the property, a provision for impairment is recorded to reduce the carrying
value of the property to its estimated fair value.
Pipeline and facilities are stated at original cost. Depreciation of pipeline
and facilities is provided on a straight-line basis over the estimated useful
life of the pipeline of twenty years.
Furniture and equipment are depreciated using the straight-line method over
estimated lives ranging from three to seven years.
Management periodically evaluates capitalized costs of unproved properties and
provides for impairment, if necessary, through a charge to operations.
Asset retirement obligations
We recognize the future cost to plug and abandon wells over the estimated useful
life of the wells in accordance with the provision of SFAS No.143. SFAS No.143
requires that we record a liability for the present value of the asset
retirement obligation increase to the carrying value of the related long-lived
asset. We amortize the amount added to the oil and gas properties and recognize
accretion expense in connection with the discount liability over the remaining
lives of the respective gas wells. Our liability estimate is based on our
historical experience in plugging and abandoning wells, estimated well lives
based on engineering studies, external estimates as to the cost to plug and
abandon wells in the future and federal and state regulatory requirements. The
liability is discounted using a credit-adjusted risk-free rate. Revisions to the
liability could occur due to changes in well lives, or if federal and state
regulators enact new requirements on the plugging and abandonment of wells.
ITEM 3. Controls and Procedures
Disclosure Controls and Procedures
At the end of the period reported on in this report, the Company carried out an
evaluation, under the supervision and participation of the Company's Chief
Executive and Principal Financial Officer (the "Officer") of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the
Officer concluded that the Company's disclosure controls and procedures are
effective in all material respects, with respect to the recording, processing,
summarizing and reporting, within the time periods specified in the SEC's rules
and forms, of information required to be disclosed by the Company in the reports
the Company files or submits under the Exchange Act.
9
Internal Controls
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation described above.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
10.1 Loan Agreement with Victoria Petroleum N.L. dated
June 8, 2004
10.2 Allonge to Promissory Note to R&M Oil and Gas, Ltd.
dated October 13, 2004
10.3 Allonge to Promissory Not to Samson Exploration N.L.
dated October 29, 2004
31 Certificate of Chief Executive and Principal Financial
Officer pursuant to Section 302 of The Sarbanes-Oxley
Act of 2002
32 Certification of Chief Executive and Principal
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KESTREL ENERGY, INC.
------------------------------------
(Registrant)
Date: November 15, 2004 /s/TIMOTHY L. HOOPS
---------------------- ------------------------------------
Timothy L. Hoops
President, Chief Executive Officer
and Principal Financial Officer
11