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, 2003
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.
(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 BOULEVARD, SUITE 210 80401
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(Address of principal executive offices) (Zip Code)
(303) 295-0344
(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, 2003: 9,798,400
KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 2003 (Unaudited) and
June 30, 2003 3
Statements of Operations for the Three Months Ended
September 30, 2003 and 2002 (Unaudited) 4
Statements of Cash Flows for the Three Months Ended
September 30, 2003 and 2002 (Unaudited) 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
ITEM 3. Controls and Procedures 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 2. Changes in Securities 8
ITEM 3. Defaults Upon Senior Securities 8
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
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND JUNE 30, 2003
September 30, June 30,
ASSETS 2003 2003
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CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 61,018 $ 128,604
Accounts receivable 243,121 354,570
Other assets 8,105 18,400
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Total current assets 312,244 501,574
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful efforts method
of accounting:
Unproved 260,355 215,892
Proved 10,940,054 10,918,017
Pipeline and facilities 807,851 807,851
Furniture and equipment 53,363 52,703
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12,061,623 11,994,463
Accumulated depreciation and depletion (9,622,022) (9,577,728)
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Net property and equipment 2,439,601 2,416,735
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$ 2,751,845 $ 2,918,309
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-related party $ - $ 6,556
Accounts payable-trade 313,450 429,663
Accrued Liabilities 82,176 69,998
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Total current liabilities 395,626 506,217
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LONG-TERM LIABILITIES:
Line of credit-related party 200,000 191,860
Note payable-related party 400,000 400,000
Asset retirement obligation 218,794 216,009
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Total long-term liabilities 818,794 807,869
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Total Liabilities 1,214,420 1,314,086
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STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued - -
Common Stock, no par value; 20,000,000
shares authorized, 9,798,400 issued and
outstanding at September 30, 2003 and
June 30, 2003 20,394,585 20,394,585
Accumulated (deficit) (18,857,160) (18,790,362)
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Total stockholders' equity 1,537,425 1,604,223
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$ 2,751,845 $ 2,918,309
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See accompanying notes to financial statements.
3
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
(Unaudited)
2003 2002
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REVENUE:
Oil and gas sales $ 347,510 $ 252,331
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COSTS AND EXPENSES:
Lease operating Expenses 148,898 111,204
Dry holes, abandoned and impaired properties - -
Exploration expenses 12,767 15,522
Depreciation and depletion 47,079 38,958
General and administrative 210,384 234,589
Interest expense 17,734 15,274
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TOTAL COSTS AND EXPENSES 436,862 415,547
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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)
Interest income 613 4,010
Other, net 21,941 21,801
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22,554 (46,946)
NET LOSS (66,798) (210,162)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) from available-
for-sale securities - 64,390
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Comprehensive loss $ (66,798) $ (145,772)
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NET LOSS PER COMMON SHARE $ (0.01) $ (0.02)
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WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,798,400 9,115,200
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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, 2003 AND 2002
(Unaudited)
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (66,798) $ (210,162)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
(Gain) loss on disposal of property - (20,017)
(Gain) loss on sale of available for sale
securities - 92,774
Depreciation and depletion 47,079 38,958
Other 1,584 -
(Increase) decrease in accounts receivable 111,449 63,801
(Increase) decrease in other current assets 10,295 150
Increase (decrease) in accounts payable (116,213) 76,723
Increase (decrease) in accrued liabilities 12,178 (9,316)
Noncash interest expense - 7,590
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Net cash (used in) provided by operating
activities (426) 40,501
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (67,160) (52,564)
Proceeds from sale of securities - 24,744
Proceeds from sale of property - 20,017
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Net cash (used in) investing activities (67,160) (7,803)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - 500,000
Repayments of borrowings - (528,460)
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Net cash (used in) financing activities - (28,460)
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Net increase (decrease) in cash and cash
equivalents (67,586) 4,238
Cash and cash equivalents at the beginning
of the period 128,604 56,547
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Cash and cash equivalents at the end of the
period $ 61,018 $ 60,785
=============== ==============
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 September 30, 2003, the results of
operations for the periods shown in the statements of operations, and the
cash flows for the periods shown in the statements of cash flows. All
adjustments made are of a normal recurring nature.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had a working capital deficit of $83,382.
This compares to the Company's working capital deficit of $4,643 as of June 30,
2003. The increase in working capital deficit of $78,739 was primarily the
result of a decrease of $189,330 in total current assets including cash and
accounts receivable offset by a decrease in trade accounts payable of $116,213.
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.
Net cash used by operating activities was $426 for the three months ended
September 30, 2003, a decrease of $40,927 over cash provided by operations of
$40,501 for the same period in 2002. Accounts receivable increased $66,407, or
38%, to $243,121 during the period. The increase in accounts receivable was
attributable to higher oil and gas revenues during the quarter. Accounts payable
decreased $5,480, or 7%, to $313,450 during the period versus an increase of
$76,723, or 24%, during the same period a year ago. Accrued liabilities
increased $10,224, or 14%, to $82,176 during the period versus a decrease of
$9,316 for the period ended September 30, 2002.
Net cash used by investing activities was $67,160 for the quarter ended
September 30, 2003, versus cash used of $7,803 for the same period in 2002. The
increase in cash used resulted from the continued development program of various
coalbed methane wells in Wyoming.
No cash was used by financing activities for the three months ended September
30, 2003. For the same period a year ago, $28,460 of cash was used.
RESULTS OF OPERATIONS
FIRST QUARTER RESULTS
The Company reported a loss of $66,798, or 1 cent per share, for the three month
period ended September 30, 2003. This compares with a loss of $210,162, or 2
cents per share, for the same period a year ago. The decreased loss in the
current period is a result of higher oil and gas sales versus a year ago along
with no loss on sale of available for sale securities for the three months ended
September 30, 2003.
The Company's revenues for the three months ended September 30, 2003 were
$347,510 compared to $252,331 during the same period of 2002, an increase of
$95,179, or 38%. The increase in oil and gas revenues is attributable to higher
oil and gas prices for the quarter ended September 30, 2003 versus the same
period one year ago.
The Company's total expenses increased $21,315, or 5%, to $436,862 as compared
to $415,547 a year ago. The increase in overall expenses is largely attributable
to higher lease operating expense, depletion
6
and interest expense offset by lower exploration expense and general and
administrative expense as discussed below. Production and operating expenses
increased $37,694, or 34%, to $148,898 versus $111,204 for the same period a
year ago. The increase in production and operating expenses was primarily due to
higher costs at the Company's Hilight CBM field due to a higher number of
producing wells.
No dry holes, abandoned and impaired properties expense was recorded for the
three months ended September 30, 2003.
Exploration expenses decreased $2,755, or 18%, to $12,767 from $15,522 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 $24,205, or 10%, to $210,384 as
compared to $234,589 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.
Interest expense increased $2,460 to $17,734 from $15,274 a year ago. The
increase in interest expense is due to the conversion of the previous Wells
Fargo debt into the current loan from R&M Oil and Gas, Ltd., of which Timothy L.
Hoops, one of the Company's directors and its Operations Manager, is a partner,
effective January 24, 2003, and the $200,000 Line of Credit owed to Barry D.
Lasker, President and CEO of Kestrel, effective May 15th 2003.
Total other income (expense) items increased $69,500, or 148%, to a gain of
$22,554 versus a loss of $46,946 for the same period a year ago. The increase is
attributed to loss on available for sale securities during the quarter ended
September 30, 2002, with no such loss on sales in the current period.
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
7
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
The Company previously disclosed that, in May of 2000, it received a notice
letter from the U.S. Environmental Protection Agency ("EPA") stating that the
Company is a potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") for
the Casmalia Waste Disposal Site in Santa Barbara County, California. The
Company also disclosed that it does not believe that it has any liability under
CERCLA for wastes disposed at Casmalia and that the EPA's notice was issued in
error. In particular, the Company believes that the EPA contacted Kestrel
because it was concerned that the Company was the successor in interest to Royal
Resources, Inc. and related companies which were alleged to have participated in
dumping at the Casmalia site. In fact, the Company is not a successor to Royal
Resources or any such related company and has so informed the EPA.
The Company has not received any further communications from the EPA concerning
this alleged liability since 2001 when it denied any successor liability and
declined to sign an agreement proffered by the EPA which would have tolled the
statute of limitations for any such claims. The Company believes that the actual
successor in interest to Royal Resources ("Royal"), which has agreed to
indemnify the Company for any losses the Company may incur a result of this
matter, did sign such a tolling agreement. Moreover, the Company has recently
learned that Royal and 35 other companies who were, like the Company and Royal,
contacted by the EPA in 2000 as potentially responsible parties ("PRPs") entered
into a Partial Consent Decree in September of 2002 with the EPA calling for the
payment of $25.3 million in remediation costs and that a similar settlement for
$12.5 million is anticipated with the State of California.
Based on (1) the actual non-involvement of the Company and its predecessors in
the activity at the Casmalia site, (2) the failure of the EPA to bring any
action against the Company notwithstanding the Company's refusal to agree to an
extension of the statute of limitations, (3) the indemnification of the Company
by Royal, and (4) the settlement by Royal with the EPA, the Company 's
management believes that any further action against the Company by the EPA is
very unlikely. Management also believes that the likelihood of an material
adverse effect on the Company's financial position, results of operations, or
cash flows from this matter is remote.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
8
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
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
(b) Reports on Form 8-K - None
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.
(Registrant)
Date: NOVEMBER 13, 2003 /S/BARRY D. LASKER
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Barry D. Lasker, President,
Chief Executive Officer, Principal
Financial Officer and Director
10