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 December 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.
(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., Ste. 210 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)
Check whether the (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the past 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 December 31, 2004: 10,133,200
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1
KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 2004 unaudited, and June 30, 2004 3
Statements of Operations for the Three Month and Six Months
Ended December 31, 2004 and 2003, unaudited 4
Statements of Cash Flows for the Six Months Ended
December 31, 2004 and 2003, unaudited 5
Notes to Financial Statements, unaudited 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-9
Critical Accounting Policies and Estimates 9-10
Item 3. Controls and Procedures 10
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 12-13
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS as of december 31, 2004 and June 30, 2004
December 31, June 30,
2004 2004
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 236,999 $ 162,507
Accounts receivable 340,619 366,278
Other assets 27,739 12,171
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Total current assets 605,357 540,956
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful efforts method
of accounting:
Unproved 260,355 260,355
Proved 11,167,415 11,081,664
Pipeline and facilities 807,851 807,851
Furniture and equipment 64,612 54,207
------------ ------------
12,300,233 12,204,077
Accumulated depreciation and depletion (9,838,895) (9,754,427)
------------ ------------
Net property and equipment 2,461,338 2,449,650
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$ 3,066,695 $ 2,990,606
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable-related party $ 50,000 $ 650,000
Accounts payable-trade 209,575 245,198
Accrued liabilities 86,238 85,582
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Total current liabilities 345,813 980,780
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LONG-TERM LIABILITIES:
Notes payable-related party $ 600,000 $ --
Asset retirement obligation 180,696 177,126
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Total long-term liabilities 780,696 177,126
Total Liabilities 1,126,509 1,157,906
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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,
10,133,200 issued and outstanding at
December 31, 2004 and June 30, 2004 20,562,085 20,562,085
Accumulated (deficit) (18,621,899) (18,729,385)
------------ ------------
Total stockholders' equity 1,940,186 1,832,700
------------ ------------
$ 3,066,695 $ 2,990,606
============ ============
See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS
ENDED December 31, 2004 and 2003
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE:
Oil and gas sales $ 499,854 $ 391,938 $ 991,964 $ 739,447
COSTS AND EXPENSES:
Lease operating Expenses 235,297 221,507 420,227 370,406
Dry holes, abandoned and impaired properties -- 52,438 -- 52,438
Exploration expenses 11,664 1,155 42,879 13,922
Depreciation and depletion 45,251 50,371 88,040 97,450
General and administrative 157,603 166,746 328,200 377,130
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 449,815 492,217 879,346 911,346
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 39 -- 594 614
Interest expense (19,394) (17,802) (37,988) (35,535)
Other, net 15,257 63,477 32,262 85,418
------------ ------------ ------------ ------------
Total other income (expense) (4,098) 45,675 (5,132) 50,497
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES $ 45,940 $ (54,604) $ 107,486 $ (121,402)
------------ ------------ ------------ ------------
Provision for income tax 20,213 -- 47,293 --
------------ ------------ ------------ ------------
Tax benefit of net operating loss carryforward (20,213) -- (47,293) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 45,940 $ (54,604) $ 107,486 $ (121,402)
============ ============ ============ ============
Basic earnings loss per share $ 0.01 $ (0.01) $ 0.01 $ (0.01)
============ ============ ============ ============
Diluted earnings loss per share $ 0.01 $ (0.01) $ 0.01 $ (0.01)
============ ============ ============ ============
Basic weighted average number of common
Shares outstanding 10,133,200 9,798,400 10,133,200 9,798,400
============ ============ ============ ============
Diluted weighted average number of common
Shares outstanding 10,165,957 9,798,400 10,156,519 9,798,400
============ ============ ============ ============
See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED DECEMBER 31, 2004 and 2003
(Unaudited)
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net gain (loss) $ 107,486 $(121,402)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and depletion 88,040 97,450
Other -- 1,584
(Increase) decrease in accounts receivable 25,659 77,952
(Increase) decrease in other current assets (15,568) 9,531
Increase (decrease) in accounts payable (35,623) (37,357)
Increase (decrease) in accounts payable, related party -- 21,725
Increase (decrease) in accrued liabilities 656 17,425
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Net cash (used in) provided by operating activities 170,650 66,908
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (96,158) (131,380)
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Net cash (used in) investing activities (96,158) (131,380)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 60,000 --
Repayments of borrowings (60,000) --
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Net cash provided by financing activities -- --
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Net increase (decrease) in cash and cash equivalents 74,492 (64,472)
Cash and cash equivalents at the beginning of the period 162,507 128,604
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Cash and cash equivalents at the end of the period $ 236,999 $ 64,132
========= =========
Cash paid for interest $ 37,988 $ 35,536
========= =========
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 December 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. 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 and amortization) 3,570
--------
Asset retirement obligations as of December 31, 2004 $180,696
========
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 was originally 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. (a related party) 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. 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 in full. The terms and conditions of the Samson loan are a
continuance of the terms and conditions of the Lasker loan. The Samson
loan, originally due on May 4, 2005, has been extended until May 4, 2006
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, for which no demand has yet been made. On July 13,
2004, 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 in cash.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
During the quarter we have 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 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 December 31, 2004, the Company had net working capital of $259,544. This
compares to the Company's working capital deficit of $439,824 as of June 30,
2004. The increase in working capital of $699,368 was primarily the result of
the extensions of the loans from R&M Oil & Gas, Ltd. ("R&M") and Samson
Exploration N.L. ("Samson"), which returned 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 $170,650 for the six months ended
December 31, 2004, an increase of $103,742 over cash provided by operations of
$66,908 for the same period in 2003, a 155% increase. Accounts receivable
decreased $25,659, or 8%, to $340,619 during the period as compared to a
decrease of $77,952 a year ago. The decrease in accounts receivable was
primarily attributable to lower gas revenues at the Greens Canyon field,
Sweetwater County, Wyoming as a result of slightly lower production levels.
Accounts payable decreased $35,623, or 17%, to $209,575 during the period versus
a decrease of $37,357, or 9%, during the same period a year ago. The decrease in
payables reflects the Company's liquidity improvements as a result of higher oil
and gas prices. Accrued liabilities increased $656, or 1%, to $86,238 versus an
increase of $17,425 in 2003.
Net cash used in investing activities was $96,158 for the six months ended
December 31, 2004, versus cash used of $131,380 for the same period in 2003. The
decrease of $35,222, or 27%, was primarily due to the decelerated development of
the Hilight CBM field, Campbell County, Wyoming. There was no gain or loss on
the disposal of property for the six-month period ended December 31, 2003 or
2004.
There was no cash used in financing activities for the six months ended December
31, 2003 or 2004.
RESULTS OF OPERATIONS
The Company reported income of $45,940, or 1 cent per share, for the three-month
period ended December 31, 2004. This compares with a loss of $54,604, 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 offset by slightly higher lease operating and exploration expenses for
the three-months ended December 31, 2004 as compared to the same period last
year.
The Company reported income of $107,486, or 1 cent per share, for the six-month
period ended December 31, 2004. This compares with a loss of $121,402, or 1 cent
per share, for the same period a year ago. The net income in the six-month
period is again a result of higher oil and gas sales, no abandoned properties
and lower general and administrative expenses offset by slightly higher lease
operating and exploration expenses as compared to the same period last year.
The Company's revenues for the three months ended December 31, 2004 were
$499,854 compared to $391,938 during the same period of 2003, an increase of
$107,916, or 28%. The increase in revenues was a result of higher oil prices
received during the period and slightly higher gas production levels.
The Company's total revenues for the six month period ended December 31, 2004
were $991,964 as compared to $739,447 during the same period in 2003, an
increase of $252,517, or 34%.
The Company's total expenses for the second quarter ended December 31, 2004
decreased $42,402, or 9%, to $449,815 as compared to $492,217 a year ago. The
decrease in overall expenses this quarter is primarily due to slightly higher
lease operating and exploration expenses, offset by lower general and
administrative expenses, and no abandoned property. Production and operating
expenses for the three-month period increased $13,790, or 6%, to $235,297 versus
$221,507 for the same period a year ago. The increase in operating expenses for
the period was primarily due to taxes on higher revenues.
Total expenses for the six months ended December 31, 2004 decreased $32,000, or
4%, to $879,346 versus $911,346 a year ago. The decrease in overall expenses is
primarily attributable to higher lease operating and exploration expenses offset
by lower general and administrative expenses, lower depreciation and depletion
expenses and no abandoned property.
8
No dry holes, abandoned and impaired properties expense was recorded for the
three months or six months ended December 31, 2004. Dry hole, abandoned and
impaired properties for the three months and six months ended December 31, 2003
were $52,438. This was wholly attributed to the abandonment of the Chadron
venture in Dawes County, Nebraska. Exploration expenses for the quarter ended
December 31, 2004 increased $10,509 or 909%, to $11,664 from $1,155 a year ago.
For the six months ended December 31, 2004, exploration expenses increased
$28,957, or 208%, to $42,879 versus $13,922 a year ago. The increase in
exploration expense for both periods reflects the Company's interest in
continued development at core properties.
General and administrative costs for the three months ended December 31, 2004
decreased $9,143 or 5%, to $157,603 as compared to $166,746 for the same period
a year ago. The Company's general and administrative expenses for the six months
ended December 31, 2004 decreased $48,930, or 13%, to $328,200 from $377,130.
The decrease in expenses, for 3 and 6 month results, though not attributable to
any particular expense item, is representative of the Company's ongoing program
to lower expenses.
Interest expense and fees increased $1,592, or 9%, to $19,394 from $17,802 for
the three months ended December 31, 2003. This increase is due to slightly
higher loan balances from those one-year ago.
For the six months ended December 31, 2004, interest expense and fees increased
$2,453, or 7%, to $37,988 from $35,535 a year ago, again due to slightly higher
loan balances.
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.
9
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
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
(a) Exhibits
Exhibit No. Description
----------- -----------
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.
/s/TIMOTHY L. HOOPS
----------------------------------------
Timothy L. Hoops, President,
Chief Executive Officer, Principal
Financial Officer and Director
Date: February 14, 2005
11