SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended SEPTEMBER 30, 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
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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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of common stock, as of
September 30, 2002: 9,115,200
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KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 2002 and June 30, 2002
(Unaudited) 3
Statements of Operations for the Three Months Ended
September 30, 2002 and 2001 (Unaudited) 4
Statements of Cash Flows for the Three Months Ended
September 30, 2002 and 2001 (Unaudited) 5-6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Controls and Procedures 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 2. Changes in Securitie 9
ITEM 3. Defaults Upon Senior Securitie 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 10
Certification 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND JUNE 30, 2002
(Unaudited)
September 30, June 30,
ASSETS 2002 2002
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CURRENT ASSETS:
Cash and cash equivalents $ 60,785 $ 56,548
Accounts receivable 176,714 209,016
Other assets 1,118 1,268
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Total current assets 238,617 266,832
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 215,892 215,892
Proved 10,851,386 11,062,848
Pipeline and facilities 807,851 807,851
Furniture and equipment 111,095 135,387
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11,986,224 12,221,978
Accumulated depreciation and depletion (8,631,564) (8,880,924)
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Net property and equipment 3,354,660 3,341,054
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Investment in related party 271,500 356,125
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$ 3,864,777 $ 3,964,011
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit, bank $ -- $ 516,000
Loan from related party 45,909 58,369
Note payable-other 507,590 --
Accounts payable-trade 318,930 242,207
Accrued Liabilities 71,952 81,268
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Total current liabilities 944,381 897,844
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STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued -- --
Common Stock, no par value; 20,000,000
shares authorized,
9,115,200 issued and outstanding at
September 30, 2002 and June 30, 2002 20,043,907 20,043,907
Accumulated other comprehensive (loss) (458,968) (523,358)
Accumulated (deficit) (16,664,543) (16,454,382)
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Total stockholders' equity 2,920,396 3,066,167
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$ 3,864,777 $ 3,964,011
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See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
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REVENUE:
Oil and gas sales $ 252,331 $ 353,493
COSTS AND EXPENSES:
Lease operating Expenses 111,204 221,195
Dry holes, abandoned and impaired
properties -- 27,717
Exploration expenses 15,522 46,532
Depreciation and depletion 38,958 58,567
General and administrative 234,589 252,701
Interest expense 15,274 38,560
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TOTAL COSTS AND EXPENSES 415,547 645,272
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OTHER INCOME (EXPENSE)
Gain on Sale of property and equipment 20,017 --
Gain (loss) on sale of
available-for-sale securities (92,774) 5,989
Interest income 4,010
2,054
Other, net 21,801 43,869
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(46,946) 51,912
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NET LOSS (210,162) (239,867)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) from
available-for-sale securities 64,390 (739,477)
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Comprehensive loss $ (145,772) $ (979,344)
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NET LOSS PER COMMON SHARE $ (0.02) $ (0.03)
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WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,115,200 7,700,200
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See accompanying notes to financial statements.
4
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(210,162) $(239,867)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Dry holes, abandoned and impaired properties -- 557
(Gain) loss on disposal of property (20,017) --
(Gain) loss on sale of available for sale securities 92,774 (5,989)
Depreciation and depletion 38,958 58,567
(Increase) decrease in accounts receivable 63,801 56,163
(Increase) decrease in other current assets 150 --
Increase (decrease) in accounts payable 76,723 172,932
Increase (decrease) in accounts payable, related party -- (16,200)
Increase (decrease) in accrued liabilities (9,316) (24,167)
Noncash interest expense 7,590 --
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Net cash provided by operating activities 40,501 1,996
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (52,564) (61,229)
Proceeds from sale of securities 24,744 119,945
Proceeds from sale of property 20,017 --
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Net cash (used in) provided by investing activities (7,803) 58,716
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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 (528,460) (427,000)
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Net cash provided by (used in) financing activities (28,460) (77,000)
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Net increase (decrease) in cash and cash equivalents 4,238 (16,288)
Cash and cash equivalents at the beginning of the period 56,547 119,025
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Cash and cash equivalents at the end of the period $ 60,785 $ 102,737
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See accompanying notes to financial statements.
5
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001, CONTINUED
(Unaudited)
2002 2001
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SELECTED NON CASH ACTIVITIES:
Cash paid for interest $ 7,684 $ 42,143
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Unrealized gain (loss) on available-for-sale securities $ 64,390 $(739,477)
========= =========
See accompanying notes to financial statements.
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KESTREL ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
These condensed financial statements should be read in conjunction with
the audited consolidated 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 September 30, 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 September 30, 2002,
the unrealized loss on the investment was $458,968. 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 September
30, 2002, the Company owns 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 promissory agreement with Samson Exploration N.L. and borrowed
$500,000. 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 duration of the loan is 120 days and is due on December 4,
2002. The proceeds from the loan were used to retire and satisfy the
outstanding debt to Wells Fargo.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had a working capital deficit of $705,764.
This compares to the Company's working capital deficit of $631,012 as of June
30, 2002. The increase in working capital deficit of $74,752 was primarily the
result of an increase of $76,723 in trade accounts payable. The Company was
required to pay Wells Fargo Bank $516,000 in principal payments to retire the
line of credit during the quarter, which the Company funded in part by borrowing
$500,000 from Samson Resources N.L., an unrelated party ("Samson"). In order for
the Company to fund its working capital deficit, steps may include further sales
of non-core properties, further reductions of general and administrative
expenses and further equity raising.
7
Net cash provided by operating activities was $40,501 for the three months ended
September 30, 2002, an increase of $38,505 over cash provided by operations of
$1,996 for the same period in 2001. Operating cash flow increased due to an
increase in accounts payable despite an operating loss for the period. Accounts
receivable decreased $32,304, or 18%, to $176,714 during the period as compared
to a decrease of $56,163 a year ago. The decrease in accounts receivable was
attributable to lower oil and gas revenues due to ownership in fewer oil and gas
properties during the quarter. Accounts payable increased $76,723, or 24%, to
$318,930 during the period versus an increase of $172,932, or 142%, during the
same period a year ago. The increase in payables reflects the Company's
liquidity problems during this period of lower oil and gas revenues. Accrued
liabilities decreased $9,316, or 13%, to $71,952 versus a decrease of $24,167.
Several non-core, non-operated properties were sold at auction to partially fund
the Company's working capital deficit.
Net cash used by investing activities was $7,803 for the quarter ended September
30, 2002, versus cash provided of $58,716 for the same period in 2001. The
decrease resulted from the sale of 5,100,000 shares of VP Common Stock during
the quarter, which generated $56,241 in proceeds, of which $31,497 is included
in accounts receivable at September 30, 2002. The Company recognized a loss of
$92,774 on the sale. Gain on disposal of property increased $20,017, or 100%,
during the period. There was no disposal of property for the quarter ended
September 30, 2001. Capital expenditures for the period ended September 30, 2001
of $52,564 included $30,009 for a workover on the Pierce well in Campbell
County, Wyoming, and approximately $22,000 for continued development of various
coalbed methane wells in Wyoming.
Cash used by financing activities totaled $28,460 for the three months ended
September 30, 2002 versus cash used of $77,000 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 $12,460 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 is required to pay
interest at 10% per annum and a financing fee of 10% of the borrowed funds. The
duration of the loan is 120 days and is due on December 4, 2002. The proceeds
from the loan were used to retire and satisfy the outstanding debt to Wells
Fargo.
RESULTS OF OPERATIONS
FIRST QUARTER RESULTS
The Company reported a loss of $210,162, or 2 cents per share, for the three
month period ended September 30, 2002. This compares with a loss of $239,867, or
3 cents per share, for the same period a year ago. The decreased loss in the
current period is a result of lower overall expenses versus a year ago, despite
significantly lower total revenues.
The Company's revenues for the three months ended September 30, 2002 were
$252,331 compared to $353,493 during the same period of 2001, a decrease of
$101,162, or 29%. The decrease in oil and gas revenues is attributable to
disposal of several non-core, non-operated properties throughout the last two
quarters.
The Company's total expenses decreased $229,725, or 36%, to $415,547 as compared
to $645,272 a year ago. The decrease in overall expenses is largely attributable
to lower lease operating expense, abandonment costs, depletion, and exploration
expense as discussed below. Production and operating expenses decreased
$109,991, or 50%, to $111,204 versus $221,195 for the same period a year ago.
The decrease in production and operating expenses was primarily due to disposal
of several high cost, non-core, non-operated properties throughout the last two
quarters.
No dry holes, abandoned and impaired properties expense was recorded for the
three months ended September 30, 2002.
Exploration expenses decreased $31,010, or 66%, to $15,522 from $46,532 a year
ago. The decrease is attributable to lower engineering and contract land
expenses and no geological and geophysical expenses.
General and administrative costs decreased $18,112, or 7%, to $234,589 as
compared to $252,701 for the same period a year ago. The decrease in expenses,
though not attributable to any particular expense item, is representative of the
Company's ongoing program to lower expenses.
8
Interest expense decreased $23,286 to $15,274 from $38,560 a year ago. The
decrease in interest expense is due to the payment in full on the Company's line
of credit on August 8, 2002. Under the terms of the agreement the Company has
signed with Samson Exploration N.L., no interest or principal is due until
December 4, 2002.
Total other income decreased $98,858, or 190%, to a loss of $46,946 versus
income of $51,912 for the same period a year ago. Despite $20,017 in non-core
property sales during the quarter, the Company recorded a $92,774 loss on sale
of securities as result of the sale of 5,100,000 shares of VP Common Stock in
August 2001. (See Footnote 2 to the financial statements.) The decrease was also
attributed to the sale of tubing on the McEntire lease in Kansas for $24,900
during the quarter ended September 30, 2001, with no such sales in the current
period.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
The Company filed a Form 8-K under Item 5 dated August 22, 2002 to
report the change of its accountants, and it filed an amendment on
Form 8-K/A to correct the designation of that report from Item 5 to
Item 4.
9
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: NOVEMBER 14, 2002 /s/BARRY D. LASKER
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Barry D. Lasker, President,
Chief Executive Officer, Principal
Financial Officer and Director
10
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: November 14, 2002
/S/BARRY D. LASKER
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Barry D. Lasker, President,
Chief Executive Officer, Principal
Financial Officer and Director
11