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 quarterly period ended MARCH 31, 2004
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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
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Commission File Number: 0-9261
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KESTREL ENERGY, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-0772451
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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(Issuer's telephone number, including area code)
Check whether the issuer (1) 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, 2004:
9,798,400
1
KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of March 31, 2004 unaudited, and
June 30, 2003. 3
Statements of Operations for the Three Months and
Nine Months Ended March 31, 2004 and 2003, unaudited 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2004 and 2003, unaudited 5
Notes to Financial Statements, unaudited 6
ITEM 2. Management's Discussion and Analysis or Plan of Operation 7
ITEM 3. Controls and Procedures 9
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 10
ITEM 5. Other Information 10
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, 2004 AND JUNE 30, 2003
March 31, June 30,
ASSETS 2004 2003
------------------------------------------ ------------- --------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 68,171 $ 128,604
Accounts receivable 299,706 354,570
Other assets 12,196 18,400
Total current assets 380,073 501,574
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful efforts
method of accounting:
Unproved 260,355 215,892
Proved 11,014,381 10,918,017
Pipeline and facilities 807,851 807,851
Furniture and equipment 53,801 52,703
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12,136,388 11,994,463
Accumulated depreciation and depletion (9,719,130) (9,577,728)
------------- --------------
Net property and equipment 2,417,258 2,416,735
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$ 2,797,331 $ 2,918,309
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable-related party $ - $ 6,556
Accounts payable-trade 410,369 429,663
Accounts payable-related party 36,823 -
Accrued liabilities 66,522 69,998
------------- --------------
Total current liabilities 513,714 506,217
LONG-TERM LIABILITIES:
Note payable-Related party $ 200,000 $ 191,860
Note payable-other 400,000 400,000
Asset retirement obligation 224,365 216,009
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Total long-term liabilities 824,365 807,869
Total Liabilities 1,338,079 1,314,086
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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, 9,798,400 issued and
outstanding at March 31, 2004 and June 30,
2003 20,394,585 20,394,585
Accumulated (deficit) (18,935,333) (18,790,362)
------------- --------------
Total stockholders' equity 1,459,252 1,604,223
------------- --------------
$ 2,797,331 $ 2,918,309
============= ==============
See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH, 2004
AND 2003
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
---------- ---------- ---------- -----------
REVENUE:
Oil and gas sales $ 343,183 $ 326,821 $1,082,630 $ 828,811
COSTS AND EXPENSES:
Lease operating expenses 158,370 154,055 528,776 425,575
Dry holes, abandoned and
impaired properties - - 52,438 -
Exploration expenses 14,432 (193) 28,355 19,222
Depreciation and depletion 52,307 46,060 149,757 115,561
General and administrative 143,150 157,239 520,280 602,512
Interest / loan expense 16,331 14,111 51,866 93,924
---------- ---------- ---------- -----------
TOTAL COSTS AND EXPENSES 384,590 371,272 1,331,472 1,256,794
---------- ---------- ---------- -----------
OTHER INCOME (EXPENSE):
Gain on disposal of property
& equipment - - - 21,869
Loss on disposal of available-
for-sale Securities - (483,119) - (575,893)
Interest income - - 614 4,010
Other, net 17,838 13,996 103,256 50,631
---------- ---------- ---------- -----------
17,838 (469,123) 103,870 (499,383)
---------- ---------- ---------- -----------
NET LOSS $ (23,569) $ (513,574) $ (144,972) $ (927,366)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE $ 0 $ (.06) $ (.01) $ (.10)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,798,400 9,118,280 9,798,400 9,116,212
========== ========== ========== ==========
See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(144,972) $ (927,366)
Adjustments to reconcile net loss to net cash used
in operating activities:
Gain on disposal of property and equipment - (21,869)
Loss on disposal of available-for-sale securities - 575,893
Depreciation and depletion 149,757 115,561
Other 1,584 -
(Increase) decrease in accounts receivable 54,864 (31,957)
(Increase) decrease in other current assets 6,204 (3,242)
Increase (decrease) in accounts payable-trade (19,293) 162,226
Increase in accounts payable-related party 36,823 (38,362)
Non-cash interest and loan fees - 74,492
Increase (decrease) in accrued liabilities (3,475) 45,348
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Net cash provided by (used in) operating
activities 81,492 (49,276)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (141,925) (93,467)
Proceeds from sale of available-for-sale securities - 56,241
Proceeds from sale of properties and equipment - 20,017
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Net cash (used in) investing activities (141,925) (17,209)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants - 15,678
Advances from related parties - 900,000
Repayment of advances from related party - (327,143)
Repayments of borrowings - (516,000)
Borrowings - -
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Net cash provided by financing activities - 72,535
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Net increase (decrease) in cash and cash equivalents (60,433) 6,050
Cash and cash equivalents at the beginning of the period 128,604 56,548
--------- ----------
Cash and cash equivalents at the end of the period $ 68,171 $ 62,598
========= ==========
Cash paid for interest $ 51,867 $ 19,432
========= ==========
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,
2003.
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, 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. Classification of Leasehold Cost
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which requires the purchase method
of accounting for business combinations initiated after June 30, 2001, and
eliminates the pooling-of-interests method. In July 2001, the FASB issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinues
the practice of amortizing goodwill and indefinite lived intangible assets
and initiates an annual review for impairment. Intangible assets with a
determinable useful life will continue to be amortized over the period.
The oil and gas industry is currently discussing the appropriate balance
sheet classification of oil and gas mineral rights held by lease or
contract. The Company classifies these assets as a component of oil and
gas properties in accordance with its interpretation of SFAS No. 19 and
common industry practice. There is also a view that these mineral rights
are intangible assets as defined in SFAS No. 141, "Business Combinations",
and, therefore, should be classified separately on the balance sheet as
intangible assets.
The Company did not change or reclassify contractual mineral rights
included in oil and gas properties on the balance sheet upon adoption of
SFAS No. 141. The Company believes its current accounting of such mineral
rights, as part of oil and gas properties is appropriate under the full
cost method of accounting. However, if the accounting for mineral rights
held by lease or contract is ultimately changed so that costs associated
with mineral rights not held under fee title are, pursuant to the
guidelines of SFAS No. 141, required to be classified as long term
intangible assets, then the reclassified amount as of December 31, 2003
would be approximately $1,769,889 and the reclassified amount as of June
30, 2003 (the end of the Company's last completed fiscal year) would be
approximately $1,723,858. Management does not believe that the ultimate
outcome of this accounting issue will have a significant impact on the
Company's cash flows, results of operations or financial condition.
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 transition adjustment related to adopting SFAS No. 143 on July 1,
2002, was recognized as a cumulative effect of a change in accounting
principle. The cumulative effect on net income of
6
adopting SFAS No. 143 was a net favorable effect of $10,890. At the time
of adoption, total assets increased $117,147, and total liabilities
increased $205,842. 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, 2003 $ 216,009
Liabilities incurred --
Liabilities settled --
Accretion expense (included in depreciation, depletion
and amortization) 8,356
---------
Asset retirement obligations as of March 31, 2004 $ 224,365
=========
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 two excellent high
reward-potential projects under our belt. 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 and revenues.
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, 2003. 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had a working capital deficit of $133,641. This
compares to the Company's working capital deficit of $4,643 as of June 30, 2003.
The increase in working capital deficit of $129,000 was the result of an
increase of $36,823 in Accounts payable-related party along with decreased
accounts receivable and cash on hand. This was partially offset by decreased
accounts payable - trade and accrued liabilities. Accounts payable-related party
consists primarily of deferred salary and unreimbursed expenses since August
2003 due to Barry D. Lasker. Accounts payable trade consists primarily of unpaid
lease operating expenses as a result of higher workover expenses in Wyoming.
Net cash provided by operating activities was $81,492 for the nine months ended
March 31, 2004, an increase of $130,768 from cash used by operating activities
during the same period of 2003. This increase in cash provided by operating
activities resulted primarily from higher profit margins (oil and gas sales less
lease operating expenses) from the Company's oil and gas production activities.
Net cash used by investing activities was $141,925 for the nine months ended
March 31, 2004, versus cash provided of $17,209 for the same period in 2003.
During 2004, the Company had capital expenditures totaling $141,925 during the
nine-months ended March 31, 2004, versus $93,467 during the same period of 2003,
to maintain and enhance the Company's production on several of its core
properties.
There was no cash used or provided by financing activities for the nine months
ended March 31, 2004 versus cash provided of $72,535 a year ago.
7
RESULTS OF OPERATIONS
The Company reported net losses of $23,569 and $144,972 for the three and
nine-month periods ended March 31, 2004, as compared to net losses of $513,574
and $927,366 during the comparable periods of 2003. The Company's results for
the quarter and nine months ended March 31, 2004 improved $490,005 and $782,394,
respectively, as compared to 2003, on the strength of higher oil and gas prices
and lower operating expenses. The figures for the 2003 period earnings were also
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 Victoria Petroleum stock.
The Company's oil and gas revenues for the three months ended March 31, 2004
were $343,183 compared to $326,821 during the same period of 2003, an increase
of $16,362 or 5%. 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 quarters. The Company's revenues for the
nine-month period ended March 31, 2004 were $1,082,630 as compared to $828,811
during the same period in 2003, an increase of $253,819, or 31%. The increase in
revenues was primarily the result of higher oil and gas prices received during
the period. Once again, production levels were not materially different between
the two nine-month periods.
The Company's total expenses for the third quarter ended March 31, 2004
increased $13,318, or 4%, to $384,590 as compared to $371,272 a year ago. The
increase in overall expenses is primarily due to higher lease operating,
exploration, depreciation expenses offset by lower general and administrative
expenses. For the nine months ended March 31, 2004, total expenses increased
$74,678, or 6%, to $1,331,472 as compared to $1,256,794 a year ago. The increase
in expenses was primarily due to higher lease operating, abandoned property,
depreciation and exploration expenses offset by lower general and administrative
and interest expense.
Exploration expenses for the quarter ended March 31, 2004 increased by $14,625
to $14,432 from a year ago. There was no exploration activity during the 2003
period. For the nine months ended March 31, 2004, exploration expenses increased
$9,133, or 48%, to $28,355 versus $19,222 a year ago. The increase in
exploration expenses reflects a higher level of exploration activities in the
current year as the Company currently maintains and enhances its properties.
General and administrative costs for the three months ended March 31, 2004
decreased $14,089, or 9%, to $143,150 as compared to $157,239 for the same
period a year ago. The Company's general and administrative expenses for the
nine months ended March 31, 2004 decreased $82,232, or 14%, to $520,280 from
$602,512. These decreases were primarily attributable to a decrease in rent and
office expenses.
Interest expense and loan fees for the three-month period ended March 31, 2004
increased $2,220, or 16%, to $16,331 from $14,111 a year ago. The increase is
attributable to higher average borrowings outstanding during the period. For the
nine months ended March 31, 2004, interest expense decreased $42,058 or 45%, to
$51,866 from $93,924 a year ago. This decrease is attributable to lower average
borrowings outstanding during the three-month period.
During the quarter, Barry D. Lasker, the Company's President and CEO, 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.
8
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
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
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.
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
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
9
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Amendment to Revolving Credit Loan Agreement with Barry
D. Laker dated February 24, 2004.
10.2 Assignment of Mortgage from Barry D. Lasker to Samson
Exploration N.L. dated February 24, 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
(b) Reports on Form 8-K
1. A report on Form 8-K under Item 12 dated February 12, 2004 was
filed with the Commission on February 13, 2004.
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 13, 2004 /S/BARRY D. LASKER
---------------------------- ----------------------------------
Barry D. Lasker, President,
Chief Executive Officer, Principal
Financial Officer and Director
11
EXHIBIT 31
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
small business issuer and I have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report my conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal controls over financial reporting that occurred during the small
business issuer's third fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control
over financing reporting, to the small business issuer's auditors and the audit
committee of small business issuer's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: May 13, 2004
/S/BARRY D. LASKER
--------------------------------------
Barry D. Lasker
President, Chief Executive Officer and
Principal Financial Officer
12
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kestrel Energy, Inc. (the "Company")
on Form 10-QSB for the fiscal quarter ended March 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. ss.1350, aS adopted pursuant
to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/S/BARRY D. LASKER
--------------------------------------
Barry D. Lasker
President, Chief Executive Officer and
Principal Financial Officer
May 13, 2004
13