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, 2002
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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
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)
999 18TH STREET, SUITE 2490, DENVER, CO 80202
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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, 2002:
9,115,200
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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 December 31, 2002 and June 30, 2002,
unaudited 3
Statements of Operations for the Three Months
Ended December 31, 2002 and 2001, unaudited 4
Statements of Cash Flows for the Six Months Ended
December 31, 2002 and 2001, unaudited 5
Notes to Financial Statements, unaudited 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
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 9
ITEM 5. Other Information 9
ITEM 6. Exhibits and Reports of Form 8-K 9
Signatures 11
Certification 12-13
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS AS OF DECEMBER 31, 2002 AND JUNE 30, 2002
(Unaudited)
December 31, June 30,
ASSETS 2002 2002
------------------------------------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 59,993 $ 56,548
Accounts receivable 170,595 209,016
Other assets 1,118 1,268
Investment in related party 254,250 356,125
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Total current assets 485,956 622,957
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 216,349 215,892
Proved 10,804,439 11,062,848
Pipeline and facilities 807,851 807,851
Furniture and equipment 111,095 135,387
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11,939,734 12,221,978
Accumulated depreciation and depletion (8,616,068) (8,880,924)
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Net property and equipment 3,323,666 3,341,054
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$ 3,809,622 $ 3,964,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit, bank $ 0 $ 516,000
Loan from related party 33,131 58,369
Note payable-other 500,000 -
Accounts payable-trade 390,607 242,207
Accrued liabilities 186,369 81,268
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Total current liabilities 1,110,107 897,844
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued - -
Common Stock, no par value; 20,000,000
shares authorized, 9,115,200 issued and
outstanding at December 31, 2002 and
June 30, 2002, respectively 20,043,907 20,043,907
Accumulated other comprehensive (loss) (476,218) (523,358)
Accumulated (deficit) (16,868,174) (16,454,382)
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Total stockholders' equity 2,699,515 3,066,167
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$ 3,809,622 $ 3,964,011
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See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED
DECEMBER 31, 2002 AND 2001
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
----------- ----------- ----------- ----------
REVENUE:
Oil and gas sales $ 249,659 $ 214,219 $ 501,990 $ 567,712
COSTS AND EXPENSES:
Lease operating Expenses 160,316 169,698 271,520 390,893
Dry holes, abandoned and impaired properties - 1,492 - 29,209
Exploration expenses 3,893 67,632 19,415 114,164
Depreciation and depletion 30,543 59,208 69,501 117,775
General and administrative 210,684 197,604 445,273 450,305
Interest / loan expense 64,539 25,234 79,813 63,794
----------- ----------- ----------- ----------
TOTAL COSTS AND EXPENSES 469,975 520,868 885,522 1,166,140
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of property and equipment 1,852 - 21,869 -
Gain(loss) on sale of available-for-sale
securities - (226,520) (92,774) (220,531)
Interest - 16 4,010 2,070
Other, net 14,834 18,663 36,635 62,532
----------- ----------- ----------- ----------
16,686 (207,841) (30,260) (155,929)
----------- ----------- ----------- ----------
NET LOSS $ (203,630) $ (514,490) $ (413,792) $ (754,357)
----------- ----------- ----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) from available-for-sale
securities (17,250) - 47,140 (565,738)
----------- ----------- ----------- ----------
Comprehensive loss (220,880) (514,490) (366,652) (1,320,095)
=========== =========== =========== ==========
Net Loss Per Common Share $ (0.02) $ (0.07) $ (0.05) $ (0.10)
=========== =========== =========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,115,200 7,700,200 9,115,200 7,700,200
=========== =========== =========== ==========
See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (413,792) $ (754,357)
Adjustments to reconcile net loss to net
cash used in operating activities:
Dry holes, abandoned and impaired properties - 2,050
(Gain) loss on disposal of property (21,869) -
(Gain) loss on sale of available-for-sale securities 92,774 220,531
Depreciation and depletion 69,501 117,775
(Increase) decrease in accounts receivable 38,421 124,168
(Increase) decrease in due from related party - (6,003)
(Increase) decrease in other current assets 150 -
Increase (decrease) in accounts payable, trade 148,400 203,769
Increase (decrease) in accounts payable, related party (25,238) (26,397)
Increase (decrease) in accrued liabilities 34,224 (26,629)
Noncash interest / fee expense 73,537 -
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Net cash (used in) provided by operating activities (3,892) (145,093)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (52,921) (75,096)
Proceeds from sale of securities 56,241 360,921
Proceeds from sale of property 20,017 -
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Net cash (used in) provided by investing activities 23,337 285,825
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CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party - 350,000
Proceeds from issuance of debt 500,000 -
Repayments of borrowings (516,000) (526,000)
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Net cash provided by (used in) financing activities (16,000) (176,000)
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Net increase (decrease) in cash and cash equivalents 3,445 (35,268)
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 $ 59,993 $ 83,757
=========== ===========
Cash paid for interest $ 6,276 $ 76,618
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SELECTED NON CASH ACTIVITIES:
Unrealized gain (loss) on available-for sale securities (17,250) -
=========== ===========
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 December 31, 2002, 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. Investment in Related Party
The investment in Victoria Petroleum, NL ("VP") Common Stock is classified
as available-for-sale. Net unrealized gains and losses on the investment
are recorded to Other Comprehensive Income or Loss. At December 31, 2002,
the unrealized loss on the investment was $476,218. As of June 30, 2002,
there was an unrealized loss on the investment of $523,358. The Company
sold 5,100,000 shares in August 2002, which resulted in a loss on sale of
$92,774. Proceeds of $56,241 were received on the sale. As of December,
2002, the Company owned 25,000,000 shares of VP, which secure the loan
with Samson Exploration N.L.
3. Line of Credit
On February 21, 2000, the Company entered into a Line of Credit agreement
with Wells Fargo Bank West N.A., which provided the Company a borrowing
base of $600,000 with interest at Wells Fargo prime rate plus 2.5%. On
September 27, 2000, the Company and Wells Fargo amended the Line of Credit
Agreement to provide the Company a borrowing base of $2,000,000 and
reduced the interest rate to 1.5% over prime. In May 2001, the Company
restructured its line of credit agreement with Wells Fargo. Under the
prior terms the Company had a borrowing base of $2,000,000 with interest
paid monthly. The new agreement lowered the borrowing base to $1,400,000
and required the Company to reduce the principal balance on the line of
credit to $1,400,000 by October 31, 2001 with interest on the outstanding
balance paid monthly. The Company reduced the outstanding balance to
$1,396,000 by October 31, 2001. The Company finalized the restructuring of
the line of credit with Wells Fargo in November 2001, which called for
principal payments of $1,340,000 by October 31, 2002. On August 8, 2002,
the Company repaid Wells Fargo in full including all accrued interest and
fees. The line of credit was secured by deeds of trust on various oil and
gas producing properties held by us. On August 6, 2002 the Company entered
into a loan agreement with Samson Exploration N.L. and borrowed $500,000,
pursuant to a promissory note. Under the terms of the agreement the
Company is required to pay interest at 10% per annum and a financing fee
of 10% of the borrowed funds. The proceeds from the loan were used to
retire and satisfy the outstanding debt to Wells Fargo. On February 4,
2003, the Company repaid Samson Exploration 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 Victoria Petroleum stock. On
January 24, 2002 the Company entered into a promissory agreement with R&M
Oil and Gas LTD and borrowed $400,000. Under the terms of the agreement
the note is due on January 31, 2005 and the Company is required to pay
interest at 12.5% per annum. The proceeds from the loan were used to
retire and satisfy the outstanding debt to Samson Exploration and reduce
the Company's accounts payable position.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had a working capital deficit of $624,151.
This compares to the Company's working capital deficit of $274,887 as of June
30, 2002. The increase in working capital deficit of $349,264 was largely
attributable to a decrease in value of available for sale securities of
$101,875, a decrease in trade accounts payable of $148,400. In order for the
Company to fund its working capital deficit, steps could include further sales
of existing non-core properties, sale of shares of the Company's common stock,
and further reductions of general and administrative expenses.
Net cash used in operating activities was $3,892 for the six months ended
December 31, 2002, a decrease of $141,201 over cash used by operations of
$145,093 for the same period in 2001. Accounts receivable decreased $38,421, or
18%, to $170,595 during the period as compared to a decrease of $124,168 a year
ago. The decrease in accounts receivable was primarily attributable to lower oil
and gas revenues as a result of lower production levels due to the sale of
several non-core properties during the year. Accounts payable increased
$148,400, or 61%, to $390,607 during the period versus an increase of $203,769,
or 168%, during the same period a year ago. The increase in payables reflects
the Company's liquidity problems as a result of lower oil and gas prices during
the year and its requirement to pay down debt levels. Accrued liabilities
increased $34,224, or 80%, to $77,151 versus a decrease of $26,628 in 2001.
Accounts payable to a related party decreased $25,239, or 100%, as the Company,
through overhead charges, repaid advances from an affiliated Company. The
Company, as a result of these overhead charges, now has a loan to a related
party of $33,131. Pursuant to this arrangement, the Company has billed the
related party approximately $13,950 per quarter for overhead and personnel.
Net cash provided by investing activities was $23,337 for the six months ended
December 31, 2002, versus cash provided of $285,825 for the same period in 2001.
The decrease of $262,488 was primarily due to lower sales of securities of
Victoria Petroleum, NL Common Stock during the six month period. The Company
generated only $56,241 from these sales this period versus $360,921 during the
same period last year. Gain on disposal of property increased $20,017, or 100%,
during the period. There was no gain or loss on the disposal of property for the
6 month period ended September 30, 2001.
Cash used in financing activities totaled $16,000 for the six months ended
December 31, 2002 versus cash used of $176,000 a year ago. The Company made
$516,000 in principal payments to Wells Fargo Bank to satisfy the debt in full.
Additionally, the Company reduced its debt to a related party by $25,238 as a
result of administrative expense charged to them. On August 6, 2002, the Company
entered into a promissory agreement with Samson Exploration N.L. and borrowed
$500,000. Under the terms of the agreement the Company was required to pay
interest at 10% per annum and a financing fee of 10% of the borrowed funds. The
duration of the loan was 120 days and was due on December 4, 2002. The proceeds
from the loan were used to retire and satisfy the outstanding debt to Wells
Fargo. By mutual agreement the loan from Samson Exploration was extended to
January 24, 2003. On February 4, 2003, the Company repaid Samson Exploration in
full including all accrued interest and fees, with $327,143.15 in cash and the
Company's remaining 25,000,000 shares of Victoria Petroleum stock. On January
24, 2002, the Company entered into a promissory agreement with R&M Oil and Gas,
LTD, a limited partnership in which on of the Company's directors, Timothy L.
Hoops, indirectly holds a 60.3% interest, and borrowed $400,000. Under the terms
of the agreement the Company is required to pay interest at 12.5% per annum. The
proceeds from the loan were used to retire and satisfy the outstanding debt to
Samson Exploration and reduce the accounts payable position.
7
RESULTS OF OPERATIONS
The Company reported a loss of $203,630, or 2 cents per share, for the three
month period ended December 31, 2002. This compares with a loss of $514,490, or
7 cents per share, for the same period a year ago. The lower loss in the current
period is the result of slightly higher oil and gas revenues, lower operating
expenses, lower exploration expenditures from year ago levels and a decrease in
the loss on the sale of available securities of $226,520 incurred during the
same period a year ago.
The Company's revenues for the three months ended December 31, 2002 were
$249,659 compared to $214,219 during the same period of 2001, an increase of
$35,410, or 17%. The increase in revenues was a result of higher oil and gas
revenues offset by slightly lower production levels.
The Company's total revenues for the six month period ended December 31, 2002
were $501,990 as compared to $567,712 during the same period in 2001, a decrease
of $65,722, or 12%.
The Company's total expenses for the second quarter ended December 31, 2002
decreased $50,893, or 10%, to $469,975 as compared to $520,868 a year ago. The
decrease in overall expenses this quarter is primarily due to lower lease
operating, exploration and DD&A expenses, and higher loan fees offset by higher
oil and gas revenues. Production and operating expenses for the three month
period decreased $9382, or 6%, to $160,316 versus $169,698 for the same period a
year ago. The decrease in operating expenses for the period was related to the
previous sale of several high operating cost properties and a reduction in
operating expenses at the Pierce water-flood project in Wyoming.
Total expenses for the six months ended December 31, 2002 decreased $280,618, or
24%, to $885,522 versus $1,166,140 a year ago. The decrease in overall expenses
is a result of lower exploration, expense and depreciation and depletion offset
by higher interest expense and financing fees.
No dry holes, abandoned and impaired properties expense was recorded for the
three months or six months ended December 31, 2002.
Exploration expenses for the quarter ended December 31, 2002 decreased $63,739
or 94%, to $3,893 from $67,632 a year ago.
For the six months ended December 31, 2002, exploration expenses decreased
$94,749, or 83%, to $19,415 versus $114,164 a year ago. The decrease in costs
incurred for the quarter reflects the Company's commitment to pay down debt and
minimize the accounts payables position.
General and administrative costs for the three months ended December 31, 2002
increased $13,080 or 7%, to $210,684 as compared to $197,604 for the same period
a year ago. The increase in expenses was largely attributable to an increase in
NASDAQ and registration fees of approximately $15,000. The Company remains
committed to reducing General and Administrative costs as much as possible.
The Company's general and administrative expenses for the six months ended
December 31, 2002 decreased $5,032, or 1%, to $445,273 from $450,305.
Interest expense and fees increased $39,305, or 155%, to $64,539 from $25,234 a
year ago. This increase is to lower interest charges offset by the addition of
loan fees.
For the six months ended December 31, 2002, interest expense and fees increased
$16,019 or 25% to $79,813 from $63,794 a year ago. The increase is attributable
to lower interest charges offset by an increase in loan fees.
8
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
At the Company's annual meeting of shareholders on
December 5, 2002, in Denver, Colorado, the Company's shareholders
elected Barry D. Lasker, Timothy L. Hoops, Robert J. Pett,
Kenneth W. Nickerson, John T. Kopcheff, Mark A. E. Syropoulo and
Neil T. MacLachlan to the Company's Board of Directors. The
shareholders also approved and ratified the selection of Wheeler
Wasoff, P.C. as the Company's independent certified public
accountants and auditors for the year ending June 30, 2003, and
an amendment to the Company's stock option plan to extend the
term of the plan for an additional ten years.
There were 9,115,200 shares of the Company's Common
Stock issued and outstanding, of which 9,115,200 were entitled to
vote at the meeting. Of that number, 4,603,538 were present in
person or by proxy at the meeting. With respect to the election of
directors, the votes were as follows: Mr. Lasker - 4,595,066 in
favor, 8,472 withheld; Mr. Hoops - 4,595,066 in favor, 8,472
withheld; Mr. Pett - 4,595,066 in favor, 8,472 withheld; Mr.
Kopcheff - 4,595,066 in favor, 8,472 withheld; Mr. Nickerson -
4,595,166 in favor, 8,372 withheld; Mr. Syropoulo - 4,595,066 in
favor, 8,472 withheld; and Mr. MacLachlan - 4,595,066 in favor,
8,472 withheld. The selection of Wheeler Wasoff, P.C. received a
vote of 4,597,113 shares for, 3,290 against and 3,135 abstaining.
The amendment to the stock option plan was approved, with 4,544,140
shares for, 54,147 against and 5,251 abstaining. Abstentions and
broker non-votes were counted for purposes of establishing a quorum
only. Only those votes cast for the election of directors and the
other proposals were counted as voted in favor or affirmative votes
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
9
10.1 Stock Option Plan as of December 5, 2002
10.2 Loan Agreement with R&M Oil and Gas, Ltd.
dated January 24, 2003
99.1 Certification of Chief Executive Officer
and Principal Financial Officer
(b) Reports on Form 8-K
A report on Form 8-K dated December 6, 2002 under
Item 9 was filed with the Commission on December
7, 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.
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(Registrant)
Date: FEBRUARY 19, 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: February 19, 2003
/S/BARRY D. LASKER
--------------------------------------
Barry D. Lasker, President,
Chief Executive Officer,
Principal Financial Officer and
Director
12