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 March 31, 2003
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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.
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(Exact name of registrant as specified in its charter)
COLORADO 84-0772451
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1726 COLE BLVD. SUITE 210, LAKEWOOD, CO 80401
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(Address of principal executive offices) (Zip Code)
(303) 295-0344
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(Registrant's telephone number, including area code)
999 18TH ST., STE. 2490, DENVER, CO 80202
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(Former address of principal executive offices) (Zip 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 March 31, 2003:
9,128,400
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KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of March 31, 2003 and June 30, 2002,
unaudited 3
Statements of Operations for the Three Months and Nine
Months Ended March 31, 2003 and 2002, unaudited 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2003 and 2002, unaudited 5
Notes to Financial Statements, unaudited 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
ITEM 3. Controls and Procedures 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 2. Changes in Securities 9
ITEM 3. Defaults Upon Senior Securities 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
ITEM 5. Other Information 9
ITEM 6. Exhibits and Reports of Form 8-K 10
Signatures 11
Certifications 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS AS OF MARCH 31, 2003
AND JUNE 30, 2002
(Unaudited)
March 31, June 30,
ASSETS 2003 2002
------------------------------------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 62,598 $ 56,548
Accounts receivable 262,405 209,016
Other assets 4,510 1,268
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Total current assets 329,513 266,832
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful efforts
method of accounting:
Unproved 236,139 215,892
Proved 10,744,612 11,062,848
Pipeline and facilities 807,851 807,851
Furniture and equipment 111,148 135,387
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11,899,750 12,221,978
Accumulated depreciation and depletion (8,619,054) (8,880,924)
------------ ------------
Net property and equipment 3,280,696 3,341,054
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INVESTMENT IN RELATED PARTY - 356,125
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$ 3,610,209 $ 3,964,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit, bank $ - $ 516,000
Accounts payable-related party 20,008 58,368
Accounts payable-trade 395,444 242,208
Accrued liabilities 116,920 81,268
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Total current liabilities 532,372 897,844
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LONG TERM DEBT:
Note payable to related party 400,000 -
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Total long term debt 400,000 -
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STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued - -
Common Stock, no par value; 20,000,000
shares authorized, 9,128,400 and
9,115,200 issued and outstanding at
March 31, 2003 and June 30, 2002
respectively 20,059,585 20,043,907
Accumulated other comprehensive loss - (523,358)
Accumulated deficit (17,381,748) (16,454,382)
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Total stockholders' equity 2,677,837 3,066,167
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$ 3,610,209 $ 3,964,011
============ ============
See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH, 2003
AND 2002 (Unaudited)
Three months ended Nine months ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ----------- -----------
REVENUE:
Oil and gas sales $ 326,821 $ 185,013 $ 828,811 $ 752,725
COSTS AND EXPENSES:
Lease operating expenses 154,055 144,956 425,575 535,849
Dry holes, abandoned and impaired properties - - - 29,209
Exploration expenses (193) 24,088 19,222 138,252
Depreciation and depletion 46,060 59,312 115,561 177,087
General and administrative 157,239 209,147 602,512 659,452
---------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES 357,161 437,503 1,162,870 1,539,849
---------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on disposal of property & equipment - 2,258 21,869 2,258
Loss on disposal of available-for-sale
Securities (483,119) (183,417) (575,893) (403,947)
Interest income - - 4,010 2,069
Interest expense / loan fees (14,111) (34,678) (93,924) (98,471)
Other, net 13,996 28,535 50,631 91,067
---------- ---------- ----------- -----------
(483,234) (187,302) (593,307) (407,024)
---------- ---------- ----------- -----------
NET LOSS (513,574) (439,792) (927,366) (1,194,148)
---------- ---------- ----------- -----------
OTHER COMPREHENSIVE LOSS
Unrealized loss from available-for-sale
securities - (20,369) - (586,108)
---------- ---------- ----------- -----------
OTHER COMPREHENSIVE LOSS $ (513,574) $ (460,161) $ (927,366) $(1,780,256)
========== ========== =========== ===========
NET LOSS PER COMMON SHARE $ (.06) $ (.06) $ (.10) $ (.23)
========== ========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,118,280 7,718,034 9,116,212 7,705,879
========== ========== =========== ===========
See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (927,366) $ (1,194,148)
Adjustments to reconcile net loss to net
cash used in operating activities:
Dry holes, abandoned and impaired properties - 2,050
Gain on disposal of property and equipment (21,869) (2,258)
Loss on disposal of available-for-sale securities 575,893 403,947
Depreciation and depletion 115,561 177,087
Non-cash interest and loan fees 74,492 -
(Increase) decrease in accounts receivable (31,957) 129,035
Increase in due from related party - (21,303)
(Increase) decrease in other current assets (3,242) 5,957
Increase in accounts payable-trade 162,226 203,162
Decrease in accounts payable-related party (38,362) (26,397)
Increase (decrease) in accrued liabilities 45,348 (28,750)
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Net cash used in operating activities (49,276) (351,618)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (93,467) (78,302)
Proceeds from sale of available-for-sale securities 56,241 544,997
Proceeds from sale of properties and equipment 20,017 -
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Net cash provided by (used in) investing
activities (17,209) 466,695
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 379,000
Proceeds from exercise of warrants 15,678 -
Advances from related parties 900,000 97,940
Repayment of advances from related party (327,143) -
Repayments of borrowings (516,000) (906,000)
Borrowings - 255,382
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Net cash provided by (used in) financing
activities 72,535 (173,678)
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Net increase (decrease) in cash and cash equivalents 6,050 (58,601)
Cash and cash equivalents at the beginning of
the period 56,548 119,025
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Cash and cash equivalents at the end of the period $ 62,598 $ 60,424
========== =============
Cash paid for interest $ 19,432 $ 107,356
========== =============
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,
2002.
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 March 31, 2003, 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 and recurring nature.
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 financial statement presentation.
2. Investment in Related Party
The Investment in Related Party at June 30, 2002 represented the Company's
investment in Victoria Petroleum, NL ("VP") and was classified as
available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Net unrealized gains and losses on the investment were
recorded to Other Comprehensive Loss. During the nine months ended March
31, 2003, the Company sold 5.1 million shares of VP for net proceeds of
$56,241. In addition, during the quarter ended March 31, 2003, the Company
repaid its borrowings from Samson Exploration N.L. (See Note 3 below) by
tendering the Company's remaining 25 million-share ownership of VP and
additional cash consideration. As a result of these transactions, the
Company recognized a cumulative loss of $575,893 on the disposal of VP
shares during the nine-months ended March 31, 2003.
3. Borrowings
A. As of June 30, 2002, the Company had an outstanding balance due on
its Wells Fargo Line of Credit totaling $516,000, secured by deeds of
trust on various of the Company's oil and gas producing properties.
The Line of Credit bore interest at an annual rate of 1.5% over prime,
paid monthly. On August 6, 2002 the Company entered into a loan
agreement with Samson Exploration N.L. (a related party) and borrowed
$500,000. Under the terms of the agreement the Company was required to
pay interest at 10% per annum and paid a financing fee of 10% of the
borrowed funds. The proceeds from the loan were used to retire the
outstanding Line of Credit balance with Wells Fargo.
B. On January 24, 2003 the Company borrowed $400,000 from R&M Oil and
Gas LTD (a related party). Under the terms of the loan agreement, the
note is due on January 31, 2005 and bears interest at 12.5% per annum
and is secured by the Company's oil and gas interests in Grady County,
Oklahoma. The proceeds from the loan were used to retire and satisfy
the outstanding debt to Samson Exploration N.L. and reduce the
Company's accounts payable position at the time.
C. On February 4, 2003, the Company repaid Samson Exploration N.L. in
full including all accrued interest and fees with $327,143.15 in cash
and the transfer of the Company's remaining 25,000,000 shares of VP
common stock (see Note 2 above).
D. On May 5th, 2003, the Company entered into a Line of Credit
Agreement with Barry D. Lasker, President and CEO, and borrowed
$200,000. Under the terms of the agreement all outstanding amounts are
due on May 4th, 2005 and bear interest at 10% per annum. The proceeds
of the loan consisted of $50,000 cash and the forgiveness of
approximately $150,000 of unpaid
6
wages and unreimbursed business expenses. The loan is secured by the
Company's oil and gas interests in Campbell County, Wyoming.
4. Recent Accounting Pronouncements
Effective July 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) 143 "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The Company is currently
assessing the impact of this statement and, at this time, cannot
reasonably estimate the effect of the adoption of SFAS 143 on its
financial position, results of operations or cash flows.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had a working capital deficit of $202,859. This
compares to the Company's working capital deficit of $631,012 as of June 30,
2002. The decrease in working capital deficit of $428,153 was primarily the
result of the repayment of the Company's short-term obligation to Wells Fargo,
and then Samson Exploration N.L., with long-term borrowings from R&M Oil and Gas
LTD. This benefit, along with increased accounts receivable and cash on hand,
was partially offset by increased accounts payable - trade and accrued
liabilities. Accounts payable trade consists primarily of unpaid lease operating
expenses and increased as a result of higher workover expenses in Wyoming, of
which $73,000 remains unpaid at March 31, 2003. As all costs associated with
this field are being paid entirely by the non-operating well participants, the
funds are accounted for in our increased receivables. Accrued liabilities
consist primarily of deferred salary and unreimbursed expenses since May of 2002
due to Barry D. Lasker. These amounts were converted to a line of credit bearing
interest at 10% per annum in May, 2003. In order for the Company to fund its
working capital deficit, possible steps could include the sale of oil and gas
properties or additional issuances of the Company's common stock. The Company
continues to rationalize its overhead requirements and is significantly affected
by market fluctuations in the prices it receives for sales of its crude oil and
natural gas production. Although the Company has restructured a significant
current obligation, its liquidity and ability to fund ongoing operations is
contingent upon the prices it receives for its commodity production. A decrease
in the market price for crude oil or natural gas, or a decrease in production
levels on the Company's oil and gas properties, could have a materially adverse
impact on the Company's working capital, results of operations and financial
condition.
Net cash used by operating activities was $49,276 for the nine months ended
March 31, 2003, a decrease of $302,342 from cash used by operating activities
during the same period of 2002. This decrease in cash used by operating
activities resulted primarily from higher margins (oil and gas sales less lease
operating expenses) from the Company's oil and gas production activities.
Net cash used in investing activities was $17,209 for the nine months ended
March 31, 2003, versus cash provided of $466,695 for the same period in 2002.
During 2003, the Company received $56,241 from the sale of Victoria Petroleum NL
("VP") common stock, versus $544,997 during 2002, and received an additional
$20,017 from the sale of non-core, fully depreciated, properties. The Company
had capital expenditures totaling $93,467 during the nine-months ended March 31,
2003, versus $78,302 during the same period of 2002, to maintain and enhance the
Company's production on several of its core properties.
Cash provided by financing activities totaled $72,535 for the nine months ended
March 31, 2003 versus cash used of $173,678 a year ago. During fiscal 2003, the
Company repaid Wells Fargo its outstanding indebtedness of $516,000 and borrowed
and repaid, with accrued interest and financing fee, $574,492 from Samson
Exploration N.L. pursuant to a line of credit agreement entered into on August
6, 2002. The repayment to Samson Exploration N.L. consisted of $327,143.15 in
cash, obtained through a subsequent borrowing of $400,000 from R&M Oil and Gas
LTD, and the transfer of the Company's remaining interest in VP. The agreement
with R&M Oil and Gas LTD calls for interest at 12.5% per annum and has a
maturity date of January 31, 2005. In addition, on May 8th, 2003, the Company
entered into a Line of Credit Agreement with Barry D. Lasker, President and CEO,
and borrowed $200,000. Under the terms of the
7
agreement, all amounts outstanding are due on May 4th, 2005 and bear interest at
10% per annum. The proceeds of the loan consisted of $50,000 cash and the
forgiveness of approximately $150,000 of unpaid wages and unreimbursed business
expenses.
RESULTS OF OPERATIONS
The Company reported net losses of $513,574 and $927,366 for the three and
nine-month periods ended March 31, 2003, as compared to net losses of $439,792
and $1,194,148 during the comparable periods of 2002. Current period earnings
were significantly affected by the realization of $483,119 and $575,893 of
losses during the three and nine months ended March 31, 2003, respectively,
resulting from the sale of the Company's remaining interests in VP. These losses
had been predominately reflected as part of the Company's Accumulated Other
Comprehensive Loss on its Balance Sheet at June 30, 2002. These amounts reflect
increases of $299,702 and $171,946 over losses recognized on sales of VP shares
during the comparable three and nine month periods of 2002. Excluding these
items, the Company's results for the quarter and nine months ended March 31,
2003 improved $225,920 and $438,728, respectively, as compared to 2002, on the
strength of higher oil and gas prices and lower operating expenses.
The Company's oil and gas revenues for the three months ended March 31, 2003
were $326,821 compared to $185,013 during the same period of 2002, an increase
of $141,808 or 77%. The increase in revenues was primarily the result of higher
oil and gas prices received during the quarter. Oil and gas production levels
were fairly consistent between the two periods. The Company's revenues for the
nine-month period ended March 31, 2003 were $828,811 as compared to $752,725
during the same period in 2002, an increase of $76,086, or 10%. The increase in
revenues was primarily the result of higher oil and gas prices received during
the period. Oil and gas production levels were fairly consistent between the two
periods.
The Company's total expenses for the third quarter ended March 31, 2003
decreased $80,342, or 18%, to $357,161 as compared to $437,503 a year ago. The
decrease in overall expenses is primarily due to lower exploration, general and
administrative costs and lower interest expenses offset by slightly higher lease
operating expenses. For the nine months ended March 31, 2003, total expenses
decreased $376,979, or 24%, to $1,162,870 as compared to $1,539,849 a year ago.
The decrease in expenses was primarily due to lower lease operating and
exploration expenses. No expense for dry holes, abandoned or impaired properties
was incurred for the three or nine months ended March 31, 2003.
Exploration expenses for the quarter ended March 31, 2003 decreased $24,281. The
decrease in costs incurred for the quarter is a result of no exploration
activity during the period. For the nine months ended March 31, 2003,
exploration expenses decreased $119,030, or 86%, to $19,222 versus $138,252 a
year ago. The decrease in exploration expenses reflects a lower level of
exploration activities as the Company's current liquidity difficulties have
limited its ability to spend discretionary capital.
General and administrative costs for the three months ended March 31, 2003
decreased $51,908, or 25%, to $157,239 as compared to $209,147 for the same
period a year ago. The Company's general and administrative expenses for the
nine months ended March 31, 2003 decreased $56,940, or 8%, to $602,512 from
$659,452. These decreases were primarily attributable to a decrease in salaries
and office expenses.
Interest expense and loan fees for the three-month period ended March 31, 2003
decreased $20,567, or 59%, to $14,111 from $34,678 a year ago. The decrease is
attributable to lower average borrowings outstanding during the period. For the
nine months ended March 31, 2003, interest expense decreased $4,547 or 5%, to
$93,924 from $98,471 a year ago. Decreases in interest expense associated with
lower average borrowing during this period were offset by loan fees incurred.
CRITICAL ACCOUNTING POLICIES
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
8
accumulated depreciation or depletion are removed from the accounts and any gain
or loss is credited or charged to operations.
Depreciation and depletion of capitalized oil and gas properties is computed on
the units-of-production method by individual fields as the related proved
reserves are produced. A reserve is provided for estimated future costs of site
restoration, dismantlement, and abandonment activities, net of residual salvage
value, as a component of depletion.
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.
Proved oil and gas properties are assessed for impairment on a field-by-field
basis. 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.
ITEM 3. Controls and Procedures
Disclosure Controls and Procedures
Within the 90 days prior to the date of 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 timely alerting him to material information relating to the Company
required to be included in the Company's periodic SEC filings, including this
report.
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 his evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
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
9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and
Principal Financial Officer
(b) Reports on Form 8-K
None
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: MAY 15, 2003 /S/BARRY D. LASKER
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Barry D. Lasker
President, Chief Executive Officer,
Principal Financial Officer and
Director
11
CERTIFICATIONS
I, Barry D. Lasker, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Kestrel Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/BARRY D. LASKER
----------------------------------------
Barry D. Lasker, President, Chief
Executive Officer, Principal Financial
Officer and Director
12