SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-9261
KESTREL ENERGY, INC.
--------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0772451
------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, 1999: 6,336,000
KESTREL ENERGY, INC.
AND SUBSIDIARIES
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 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 10
PART I. FINANCIAL INFORMATION
-------------------------------
ITEM 1. Financial Statements
- -----------------------------
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of September 30, 1999 and June 30, 1999
(Unaudited)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1999 1999
- ------------------------------------------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 589,082 $ 394,980
Short term investments 1,094,292 -
Accounts receivable 190,788 110,880
Due from related party 125,552 60,006
Other assets 90,707 87,278
------------ ------------
Total current assets 2,090,421 653,144
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PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 749,418 761,101
Proved 6,576,876 5,465,748
Furniture and equipment 158,061 139,516
------------ ------------
7,484,355 6,366,365
Accumulated depreciation and
depletion (2,992,697) (2,960,275)
------------ ------------
Net property and equipment 4,491,658 3,406,090
------------ ------------
$ 6,582,079 $ 4,059,234
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 76,761 $ 47,752
Related party 20,018 20,172
Property acquisition costs 399,337 -
Accrued liabilities 25,999 25,013
Current portion of lease obligation 6,175 -
------------ ------------
Total current liabilities 528,290 92,937
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Lease obligation less current portion 3,087 -
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STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none - -
issued at September 30, 1999
Common Stock, no par value; 20,000,000
shares authorized, 6,336,000 and
4,456,000 issued and outstanding at
September 30, 1999 and June 30, 1999,
respectively 15,450,081 13,148,724
Accumulated deficit (9,399,379) (9,182,427)
------------ ------------
Total stockholders' equity 6,050,702 3,966,297
------------ ------------
$ 6,582,079 $ 4,059,234
============ ============
</TABLE>
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED September
30, 1999 and 1998
(Unaudited)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 261,407 $ 206,421
Interest 21,270 27,355
Other income 13,509 21,072
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TOTAL REVENUES 296,186 254,848
------------ ------------
COSTS AND EXPENSES:
Lease operating expenses 97,153 66,034
Dry holes, abandoned and impaired
properties 13,029 17,106
Exploration expenses 115,374 170,258
Depreciation and depletion 32,423 57,495
General and administrative 255,159 161,625
------------ ------------
TOTAL COSTS AND EXPENSES 513,138 472,518
------------ ------------
NET LOSS $ (216,952) $ (217,670)
------------ ------------
NET LOSS PER COMMON SHARE $ (0.04) $ (0.05)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,763,826 4,434,260
============ ============
</TABLE>
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED September
30, 1999 and 1998
(Unaudited)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (216,952) $ (217,670)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Dry holes, abandoned and impaired
properties 12,128 12,373
Depreciation and depletion 32,423 57,495
Non cash compensation expense 2,319 -
(Increase) decrease in accounts
receivable relating to operations (79,908) (22,705)
(Increase) decrease in due from
related party (65,546) (67,840)
(Increase) decrease in other current
assets (3,429) (22,949)
Increase (decrease) in accounts
payable, trade 29,009 13,462
Increase (decrease) in accounts
payable, related party (154) -
Increase (decrease) in accrued
liabilities 986 1,263
------------ ------------
Net cash (used) by operating
activities (289,124) (246,571)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of
properties (718,432) (494,283)
Redemption (purchase) of short-term
investments (1,094,292) 598,530
------------ ------------
Net cash provided (used) by investing
activities (1,812,724) 104,247
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of offering costs 2,299,038 -
Payments on lease obligations (3,088) -
------------ ------------
Net cash provided by financing
activities 2,295,950 -
------------ ------------
Net increase (decrease) in cash and
cash equivalents 194,102 (142,324)
Cash and cash equivalents at the
beginning of the period 394,980 372,194
------------ ------------
Cash and cash equivalents at the end
of the period $ 589,082 $ 229,870
============ ============
SELECTED NON CASH ACTIVITIES:
Total property acquisitions $ 1,130,119 $ 503,658
Lease obligation used to acquire
property (12,350) -
Common stock used to acquire property - (9,375)
Accounts payable used to acquire
property (399,337) -
------------ ------------
Net cash used to acquire property $ 1,117,769 $ 494,283
============ ============
Cash paid for interest $ 247 $ -
------------ ------------
</TABLE>
KESTREL ENERGY, INC.
- --------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Management Opinion
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-K for the fiscal year ended
June 30, 1999.
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,
1999, 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. In August, 1999 the Company completed a private offering of 1,880,000
shares of its common stock at $1.25 per share. Net proceeds to the
Company were $2,299,038 after offering and related expenses of
$50,962. The private placement of shares provided the Company with
resources to drill and complete the UPRC 27-3 test well on the Greens
Canyon Prospect. The shares sold in the offering were sold to
offshore purchasers in accordance with SEC Regulation S but the
Company has since registered the shares with the SEC on Form S-2 for
resale in the United States.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- -------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At September 30, 1999, the Company had working capital of $1,562,131. This
compares to the Company's working capital of $560,207 as of June 30, 1999.
The increase in working capital of $1,001,924 was a result of a private
placement of the Company's stock in July 1999, less amounts expended on
drilling and operating activities.
Net cash used by operating activities was $289,124 for the three months
ending September 30, 1999, an increase of $42,553 over cash used for
operations of $246,571 for the same period in 1998. Operating cash flows
decreased during the first quarter due to higher accounts receivables and
accounts payable. The Company's accounts receivable increased $79,908 or
72% to $190,788 during the period as compared to an increase of $22,705,
or 14% for the same period in 1998. The increase in receivables is
primarily due to higher oil and gas prices and a receivable of $54,567
from a drilling contractor. Amounts due from related party increased
$65,546 to $125,552 during the current quarter. The increase is a result
of joint interest billings to Victoria Petroleum USA, Inc. for the San
Joaquin Joint Venture. The Company's accounts payable trade increased
$29,009, or 61%, to $76,761 during the period versus an increase of
$13,462, or 10%, a year ago. Accounts payable relating to property
acquisition costs were $399,337 as of September 30, 1999. All of these
costs relate to the UPRC 27-3 test well in Wyoming. The well costs are
being capitalized under the Company's accounting methods and therefore are
reflected as an investing activity on the Company's cash flow statement.
The increase is due to higher general and administrative costs.
Net cash used by investing activities was $1,812,724 for the quarter ended
September 30, 1999, versus cash provided of $104,247 for the same period
in 1998. The decrease in cash flow from investing activities was
attributable to purchases by the Company of some short-term investments in
the amount of $1,094,292 and the acquisition of various property and
equipment for $718,432. Major expenditures included $18,545 on computer
software and equipment and $675,012 to finish drilling the UPRC 27-3 on
the Greens Canyon Prospect in Wyoming. The Company anticipates completing
this well during the second quarter ending December 31, 1999 at an
approximate cost of $400,000. The Company also acquired additional leases
on the Greens Canyon Prospect in the amount of $19,120. Approximately
$5,755 was spent on various properties during the quarter.
Cash provided by financing activities was $2,295,950 for the current
quarter. The increase in cash from financing activities was a result of
the Company's private placement of 1,880,000 shares of its common stock at
$1.25 per share for gross proceeds of $2,350,000 less offering and related
expenses. The Company also leased geological software in the amount of
$12,350 which requires the Company to make eight quarterly payments of
$1,667, including interest, beginning July 1999 and maturing in July,
2001. The Company made two payments on the lease obligation during the
current quarter.
RESULTS OF OPERATIONS
---------------------
First Quarter Results
- ---------------------
The Company reported a loss of $216,952, or 4 cents per share, for the
three month period ended September 30, 1999. This compares with a loss of
$217,670, or 5 cents per share, for the same period a year ago. The loss
in the current period is a result of higher general and administrative
expenses as the Company increases its exploration activity on the Greens
Canyon Prospect in Wyoming offset by increased revenues from oil and gas
sales.
The Company's revenues for the three months ended September 30, 1999 were
$296,186 compared to $254,848 during the same period of 1998, an increase
of $41,338, or 16%. Revenues from oil and gas sales were $261,407 for the
quarter ended September 30, 1999, an increase of $54,986, or 27%, as
compared to $206,407 for the same period in 1998. The increase in oil and
gas revenues is attributable to higher oil and gas prices and slightly
higher gas volumes compared to a year ago. Interest income decreased
$6,085, or 22%, to $21,270 from $27,355 a year ago. The decrease in
interest income is attributable to the reduction in short-term investments
because the Company invested the proceeds from the Reg S offering late in
the current quarter. Other income decreased $7,563, or 36%, to 13,509
during the quarter as compared to $21,072 a year ago.
The Company's total expenses increased $40,620, or 9%, to $513,138 as
compared to $472,518 a year ago. The increase in overall expenses is
primarily due to higher general and administrative expenses, reflecting
the higher activity level of the Company as it expands its exploration and
completion of wells on the Greens Canyon Prospect in Wyoming. The Company
anticipates that the higher expense level will continue in the near term.
Production and operating expenses increased $31,119, or 47%, to $97,153
versus $66,034 for the same period a year ago. The increase in production
and operating expenses was primarily due to higher lease operating
expenses on the Dines Unit in Wyoming and higher production taxes on the
increased oil and gas revenue.
Dry holes, abandoned and impaired properties decreased $4,077, or 24%, to
$13,029 from $17,106 a year ago. The decrease from year ago levels was
attributable to lower dry hole expense. During the period, the Company
impaired certain international permits at a cost of $12,128 and recorded
plugging and abandonment expense of $900.
Exploration expenses decreased $54,884, or 32%, to $115,374 from $170,258
a year ago. The decrease is attributable to lower geological and
geophysical costs and delay rentals. The lower costs reflect a lower
activity level in the San Joaquin Prospect versus a year ago.
General and Administrative costs increased $93,534, or 59%, to $255,159 as
compared to $161,625 for the same period a year ago. The increase in
expenses is attributable to higher salaries for exploration, higher
director fees, and generally higher costs reflecting the increase in
activity level at the Company during the quarter.
THE YEAR 2000 ISSUE
-------------------
THE PROBLEM. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
As a result, any of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations of the Company and its
suppliers and customers.
THE COMPANY'S STATE OF READINESS. The Company has instituted a year 2000
project. As a part of the Company's year 2000 project, the Company has
evaluated its current computer systems, software and embedded
technologies. The Company's internal systems and or programs are
predominantly "off-the-shelf" products with year 2000 versions now
available. The Company's internal network, e-mail system and accounting
and business process software have been updated to be year 2000 compliant
utilizing vendor provided upgrades.
During the period ended March 31, 1999, the Company completed its Year
2000 survey of its significant vendors and suppliers. The Company
surveyed 36 companies in all, and 23, or 64%, responded. Overall results
of the Company's survey indicated that a significant number of those
suppliers and vendors who responded are currently compliant or had taken
steps to become internally compliant regarding operating systems by
October of 1999. Additionally, most respondents indicated that they could
not make any guarantees for outside and third party suppliers and vendors
regarding their Year 2000 compliance. However, there can be no guarantee
that the systems of other companies on which the Company's business relies
will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not
have a material adverse effect on the Company operations.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Expenditures through
September 30, 1999 that can be attributed, at least in part, to the year
2000 project were to approximately $40,000 for a new accounting program
and internal network, both of which are year 2000 compliant based on
vendor assertions. Management does not expect that the completion of its
year 2000 project will result in significant additional expenditures but
cannot accurately quantify these costs at this time.
THE RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES. The Company's
failure to resolve year 2000 issues on or before December 31, 1999 could
result in system failures or miscalculations causing disruption in
operations, including among other things, a temporary inability to process
transactions, send invoices, send and/or receive external e-mail, or
engage in normal business activities utilizing its existing computerized
systems. Additionally, failure of third parties upon whom the Company's
business relies to timely remediate their year 2000 issues could result in
disruptions in the Company's field operations, late, missed, or unapplied
payments, and other general problems related to the Company's daily
operations. While the Company believes its year 2000 project will
adequately address the Company's internal year 2000 issues, until the
Company receives responses from a significant number of the Company's
suppliers and customers, the overall risks associated with the year 2000
issue remain difficult to accurately describe and quantify, and there can
be no guarantee that the year 2000 issue will not have a material adverse
effect on the Company and its operations.
THE COMPANY'S CONTINGENCY PLAN. As a contingency plan, which the Company
believes it is highly unlikely to need to utilize, the Company is prepared
to operate on the basis of manual systems and paper record keeping for a
period of up to 30 days after the new year 2000 while its computer system
failures related to Y2K, if any, are corrected.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
- -------------------------------------------------------------------------
The Company does not invest in or hold market risk sensitive or interest
rate sensitive instruments. The only currency exchange rate risk borne by
the Company is minimal, stemming from the Company's obligations to fund
its international drilling in Australian dollars.
FORWARD LOOKING STATEMENTS
--------------------------
This report includes one or more statements, which state or otherwise
indicate the Company's present belief or expectation concerning future
events. Such statements are forward looking statements on which investors
should not rely because they are subject to a wide variety of
contingencies and based on a number of assumptions, which may not prove to
be true. In particular, the Company's future success is highly dependent
on the success of its exploratory drilling efforts, which cannot be safely
predicted. In addition, the Company is highly dependent upon prevailing
prices for petroleum products, its ability to attract and retain qualified
personnel, as well as other risk factors affecting business generally,
such as overall economic conditions, changes in tax and other laws and the
effect of actions taken by competitors and regulatory authorities.
INFLATION AND CHANGING PRICES
-----------------------------
Inflation has not had a significant effect on the Company's results of
operations. However, the constantly fluctuating price of crude oil and
natural gas materially affects the Company's cash flow, either positively
or negatively.
PART II OTHER INFORMATION
-----------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 20, 1999, the Registrant sold 1,880,000 shares of
its no par value Common Stock pursuant to an offering by
the Registrant under Regulation S to qualified non-U.S.
investors for an aggregate of $2,350,000. An aggregate of
$35,755 was paid in commissions to five persons for
placement of the offering.
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
27 Financial Data Schedule
(b) Reports on Form 8-K - None
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 12, 1999 /s/TIMOTHY L. HOOPS
----------------------------------
Timothy L. Hoops
President, Principal Executive
Officer, and Director
Date: November 12, 1999 /s/MARK A. BOATRIGHT
----------------------------------
Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer, and Director
EXHIBIT INDEX
No. Method of Filing
- --- ----------------
27 Financial Data Schedule Filed herewith electronically
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