UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended February 28, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) for the transition period from
____________________ to _____________________.
Commission file number: 0-17371
HYTK INDUSTRIES, INC.
----------------------
(Name of Small Business Issuer in Its Charter)
Nevada 88-0182808
- --------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
701 East Main, Benedict, Kansas 66714
---------------------------------------
(Address of Principal Executive Offices)(Zip Code)
316-698-2250
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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.
Yes [XX] No [ ]
The number of shares outstanding of Registrant's common stock ($0.001 par value)
as of April 14, 1999, was 4,823,343.
Total of Sequentially Numbered Pages: 14
Exhibit Index on Page: 8
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PART I - FINANCIAL INFORMATION....................................................................................3
Item 1. Financial Statements............................................................................3
Item 2. Management's Discussion And Analysis ..........................................................4
Expansion Plans.................................................................................4
Results of Operations...........................................................................5
Capital Resources and Liquidity.................................................................5
Year 2000 Concerns..............................................................................5
PART II - OTHER INFORMATION.......................................................................................6
Item 2. Changes in Securities and Use of Proceeds.......................................................6
Item 6. Exhibits and Reports on Form 8-K................................................................6
SIGNATURES...............................................................................................7
INDEX TO EXHIBITS........................................................................................8
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unless otherwise indicated, the term "Company" refers to HYTK Industries, Inc.,
and its current and former subsidiaries and predecessors. Unaudited interim
financial statements including a balance sheet for the Company as of the fiscal
quarter ended February 28, 1999 and statements of operations and statements of
cash flows for the interim period up to the date of such balance sheet and the
comparable period of the preceding fiscal year are attached hereto as Pages F-1
through F-6 and are incorporated herein by this reference.
[ THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK ]
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
and wholly owned subsidiary
Quest Resource Corporation
Unaudited Statement of Operations
For the Quarters and Nine Month Period
February 28, 1999 and 1998
Quarter Ended Nine Months Ended
Feb. 28, 1999 Feb. 28, 1998 Feb. 28, 1999 Feb 28, 1998
<S> <C> <C> <C> <C>
Revenue
Oil & Gas Well Servicing Revenue ...... $ 59,501 $ 0.00 $ 328,986 $ 0.00
Pipeline Transportation Revenue ....... 66,143 185,392
Pipeline Operating Revenue ............ 107,070 295,133
Oil & Gas Production Revenue .......... 98,472 169,111
Oil & Gas Marketing Revenue ........... 10,854 41,764
Other Revenue ......................... 750 8,260
--------- --------- ----------- --------
Total Revenues .......... $ 342,790 $ 0.00 $ 1,028,646 $ 0.00
Cost of Revenues
Purchases & Outside Services .......... $ 78,333 $ 0.00 $ 225,953 $ 0.00
Lease Operating Expenses .............. 52,448 106,298
Pipeline Operating Expenses ........... 19,037 151,213
Wages ................................. 81,473 251,142
Payroll Taxes ......................... 7,149 21,248
Utilities-Leases ...................... 16,327 57,897
Tags, License, & Equipment Repairs .... 12,022 16,015
Fuel, Oil, Etc ........................ 8,230 33,277
--------- --------- ----------- --------
Total Cost of Revenues .. $ 275,019 $ 0.00 $ 863,043 $ 0.00
--------- --------- ----------- --------
Gross Profit ............ $ 67,771 $ 0.00 $ 165,603 $ 0.00
General and Administrative Expenses
Interest .............................. $ 49,277 $ 0.00 $ 125,754 29
Depreciation & Amortization ........... 38,984 116,952
Insurance ............................. 13,827 55,843
Repairs ............................... 8,400 20,101
Legal & Professional .................. 24,786 33,973
Depletion ............................. 14,771 22,239
Supplies .............................. 1,626 4,464
Telephone ............................. 4,999 14,446
Utilities ............................. 1,979 5,436
Other Expenses ........................ 17,617 30,572
--------- --------- ----------- --------
Total General & Administrative Expenses $ 176,266 $ 0.00 $ 429,780 $ 29
--------- --------- ----------- --------
Net Income (Loss) from Operations ..... ($ 108,495) $ 0.00 ($ 264,177) ($ 29)
Page F-1
</TABLE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
and wholly owned subsidiary
Quest Resource Corporation
Unaudited Statement of Operations
For the Quarters and Nine Month Period
February 28, 1999 and 1998
Quarter Ended Nine Months Ended
Feb 28, 1999 Feb 28, 1998 Feb 28, 1999 Feb 28, 1998
<S> <C> <C> <C> <C>
Net Income (Loss) from Operations (con't) ($108,495) $ 0.00 ($ 264,177) ($ 29)
Extraordinary Items:
Sale of Assets .......................... $ 0.00 $ 0.00 $ 15,286 $ 0.00
Interest Income ......................... 108 259
--------- --------- ----------- --------
Total Extraordinary Items ............... $ 108 $ 0.00 $ 15,545 $ 0.00
--------- --------- ----------- --------
Net Income Before Income Taxes .......... ($ 108,387) $ 0.00 ($ 248,632) ($ 29)
Provision for Income Taxes:
Current Tax Expense ..................... $ 0.00 $ 0.00 $ 0
Deferred Tax Expense .................... -25,520 0.00 -61,454 0
--------- --------- ----------- --------
Provision for Income Taxes .............. ($ 25,520) $ 0.00 ($ 61,454) $ 0.00
Net Income (Loss) ....................... ($ 82,867) $ 0.00 ($ 187,178) ($ 29)
F-2
</TABLE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
and wholly owned subsidiary
Quest Resource Corporation
Balance Sheet
As of February 28, 1999
A S S E T S
<S> <C> <C>
Current Assets
Cash .............................................................. ($ 5,035)
Accounts Receivable ............................................... 300,303
Notes Receivable .................................................. 99,500
Inventory ......................................................... 23,140
-----------
Total Current Assets ................................ $ 417,908
Fixed Assets
Equipment ......................................................... $ 283,329
Pipeline Assets ................................................... 2,502,684
Oil & Gas Well Equipment .......................................... 385,084
Office Equipment .................................................. 20,369
Buildings ......................................................... 40,159
Land .............................................................. 5,000
Gas Service Contract .............................................. 25,000
Less: Allowance for Depreciation .................................. ($ 1,508,442)
-----------
$ 1,753,183
Other Assets
Contracts & Right of Way, net ..................................... $ 103,938
Oil & Gas Leasehold Interests ..................................... 772,977
Organization Costs, net ........................................... 61,242
Deferred Tax Credit ............................................... 183,380
-----------
$ 1,121,537
Total Assets ........................................ $ 3,292,628
-----------
Page F-3
</TABLE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
and wholly owned subsidiary
Quest Resource Corporation
Balance Sheet
As of February 28, 1999
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
<S> <C> <C>
Current Liabilities
Accounts Payable .................................................. $ 163,510
Oil & Gas Payable ................................................. 129,707
Accrued Interest .................................................. 147,155
Notes Payable, Current Portion .................................... 249,607
Accrued Expenses .................................................. 3,851
-----------
Total Current Liabilities $ 693,830
Non-Current Liabilities
Notes Payable ..................................................... $ 1,664,045
Less Portion Shown as Current ..................................... ($ 249,607)
-----------
$ 1,414,438
Stockholders' Equity
Common Stock, 20,000,000 Shares Authorized
4,823,343 shares outstanding
Paid In Surplus ................................................... $ 1,746,683
Retained Earnings ................................................. -562,323
-----------
$ 1,184,360
Total Liabilities and Stockholders' Equity .......... $ 3,292,628
Page F-4
</TABLE>
<TABLE>
<CAPTION>
HYTK Industries, Inc.
and wholly owned subsidiary
Quest Resource Corporation
Unaudited Statement of Stockholder's Equity
February 28, 1999
Par Paid-In Retained
Shares Value Capital Earnings Total
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance June 1, 1997 .... 52,266 $ 52 $ 1,108,846 ($1,123,882) ($ 14,984)
Issuance of Stock ........ 2,000,000 $ 2,000 ($ 2,000) $ 0
Net Income ............... ($ 29) ($ 29)
---------- ----------- ----------- ----------- ----------
Balance May 31, 1998 .... 2,052,266 $ 2,052 $ 1,108,846 ($1,125,911) ($ 15,013)
Stock Merger ............. 4,771,077 $ 4,771 $ 633,014 $ 748,766 $ 1,386,551
Stock Cancellation ....... -2,000,000 ($ 2,000) $ 0 $ 2,000 $ 0
Net Income (Loss) ........ ($ 187,178) ($ 187,178)
---------- ----------- ----------- ----------- ----------
Balance February 28, 1999 4,823,343 $ 4,823 $ 1,741,860 ($ 562,323) $1,184,360
========== =========== =========== =========== ==========
Page F-5
</TABLE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
and wholly owned subsidiary
Quest Resource Corporation
Unaudited Statement of Cash Flows
For the Quarters and Nine Month Period
February 28, 1999 and 1998
Nine Months Ended
February 28, February 29,
1999 1998
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income ........................................................ ($ 187,178) $ 0.00
Adjustments to Reconcile Excess Contributions to cash
provided from operations:
Depreciation ........................................ $ 110,482 $ 0.00
Amortization ........................................ 6,470
Accounts Receivable ................................. -12,805
Inventory ........................................... 0
Accounts Payable .................................... 13,895
Oil & Gas Payable ................................... 9,521
Notes Receivable .................................... -73,000
Deferred Tax Credit ................................. -25,520
Accrued Interest Payable ............................ 77,379
Accrued Expenses .................................... -84,349
--------- --------
Total Adjustments ................................... $ 22,073 $ 0.00
Net Cash used in Operating Activities ............................. ($ 165,105) $ 0.00
Cash flows from Investing Activities:
Fixed Assets ........................................ ($ 699,288) $ 0.00
--------- --------
Net Cash used in Investing Activities ............................. ($ 699,288) $ 0.00
Cash flows from Financing Activities
Net Long-Term Borrowing ............................. $ 58,127 $ 0.00
Common Stock
Paid-In-Capital ..................................... 794,670
--------- --------
Net Cash used in Financing Activities ............................. $ 852,797 $ 0.00
Net Increase (Decrease) in Cash ................................... ($ 11,596) $ 0.00
Cash Balance, Begin of Period ..................................... $ 6,561 $ 0.00
Cash Balance, End of Period ....................................... ($ 5,035) $ 0.00
Page F-6
</TABLE>
Item 2. Management's Discussion And Analysis
This quarterly report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
On December 30, 1998, the Company, through its wholly owned subsidiary, HYTK
Holding Co., Inc., a Kansas corporation ("HYTK Holding"), effected a
Reorganization Agreement and Plan of Merger (the "Agreement") by which it
acquired Quest Resource Corporation, a Kansas corporation ("Quest"). Pursuant to
the Agreement, HYTK Holding merged with and into Quest, which survived the
merger. HYTK Holding was incorporated for the purpose of facilitating the
Merger. The Agreement and acquisition of Quest was more fully described in the
Form 10-QSB filed by the Company for its fiscal quarter ended November 30, 1998,
which is incorporated herein by this reference.
Quest was incorporated on November 3, 1997 to facilitate the consolidation of a
number of related entities. Quest has integrated the operations of two sister
companies, Quest Energy Service, Inc., a Kansas corporation ("QES"), and
Ponderosa Gas Pipeline Company, Inc., a Kansas corporation ("PGPC"), which have
thus become wholly owned subsidiaries of the Company.
The PGPC pipelines are currently operating at about 50% capacity and near
breakeven cash flows at such levels. Quest intends to attempt to develop new gas
reserves in the area of the PGPC pipelines which will increase the pipelines'
usage. Since a portion of pipeline operating costs are of a fixed nature,
additional gas volumes should create new revenues without proportionate
increases in expense and thereby increase net operating profit significantly.
The pipelines serve areas where additional gas volumes are available from proven
and probable yet undeveloped gas reserves. Quest therefore has a strong
expectation of increased gas volumes in PGPC's pipelines which should result in
increased profitability. In the event Quest is capable of conducting future gas
development efforts, it anticipates such efforts will provide significant
additional revenue.
Although Quest owns several oil properties with substantial oil reserves, some
of the oil properties have had negative cash flow with the recently depressed
oil prices and have been shut down.
QES provides all of the service activities required for the operation and
development of Quest's oil and gas properties and the gas pipelines. Its assets
include trucks, well service rigs, construction equipment and a shop with repair
and fabrication equipment. QES derives approximately 90% of its revenues from
servicing PGPC assets. Quest believes that all fees QES earns from PGPC are
equitable for both entities and are directly competitive with other such service
providers.
<PAGE>
Expansion Plans
To achieve significant profitability, the Company believes it must expand its
gas reserves. For this to occur, the Company must secure additional funding. No
assurances can be given that the Company will be successful in obtaining
additional financing, and, if it does not, the Company expects to operate at
near break even levels.
In January 1999, an abandoned oil well was successfully converted into a
producing gas well in Wilson County, Kansas by PGPC. This well conversion cost
less than $20,000 and, based on its current rate of production is expected to
achieve 100% payback within six months. The well is located on a Quest pipeline
which also benefits from the additional gas being produced by this newly
converted well. The Company hopes to effect more gas well conversions along its
existing pipeline network during the remainder of 1999.
Quest's well completion success rate is over 90% during the past three years.
These wells have provided positive returns on their respective investments in
addition to increasing the pipeline profitability. Quest has identified numerous
gas development opportunities in its pipeline operating region which it believes
can potentially add positive cash flow and gas reserves. Such opportunities have
not been properly developed due to a lack of capital and lack of unity among
splintered ownership with numerous entities unable or unwilling to finance
additional projects. During 1998 much of this splintered ownership was
consolidated in PGPC through an exchange of assets for Quest stock.
Results of Operations
The Company was essentially dormant of operational activity until the merger
with Quest in December, 1998 so there are no previous periods with comparable
operations for the quarter and the nine months ended on February 28th. The only
operational financial activity for the nine months ended February 28, 1998 was
interest expense of $29 which resulted in a net loss of that amount for the
period since there was no income.
Revenue from operations for the quarter and the nine month period ended February
28, 1999 was $342,790 and $1,028,646 respectively which resulted in a net loss
after provision for income taxes of $82,867 and $187,178. Legal and professional
fees related to the merger contributed to higher expenses for the quarter ended
February 28, 1999. Depreciation, amortization and depletion expenses included in
these net loss amounts were $53,755 and $139,191 respectively.
Capital Resources and Liquidity
The Company had a deficit in working capital of $275,922 at February 28, 1999
which is primarily comprised of accrued interest and the current portion of
Notes Payable. Until the anticipated development of area gas reserves is begun,
the Company is expected to continue operating at near break even cash flow
levels. Such was the case during the nine month period ended February 28, 1999
in which the cash balance began with $8,581 and ended with ($5,035). No
assurance can be given that the Company will be successful in obtaining the
additional funding required for the development of gas reserves in the Quest
pipeline area.
<PAGE>
Year 2000 Concerns
The Company has addressed the concerns of potential year 2000 computing
problems, both internally and with external parties and believes that
significant additional costs will not be incurred because of this circumstance.
The Company has performed an evaluation of its computer hardware and software
and has determined that recent enhancements and upgrades have brought its
systems significantly into compliance with the year 2000 phenomenon and that
existing support agreements are adequate to cope with any remaining issues.
Based upon equipment evaluations and analysis by consulting parties, management
does not believe that significant operational equipment modifications are
necessary.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended February 28, 1999, the Company issued a total of
3,571,077 shares of its common stock pursuant to exemptions from registration.
On December 31, 1998, 3,421,077 shares were issued to the holders of 100% of the
outstanding equity of Quest Resource Corporation, pursuant to a Reorganization
Agreement and Plan of Merger (the "Agreement") discussed more fully in Part I,
Item 2 above. These shares were issued pursuant to Sections 3(b) and 4(2), and
Rule 505 under the Securities Act of 1933, as amended (the "Act").
On January 4, 1999, Richard H. and/or Bonnie Mogg received 50,000 shares and
Kenneth O'Neal received 100,000 shares of the Company's common stock in
transactions exempt from registration under Sections 3(b) and 4(2) of the Act.
These shares were issued in consideration for services previously rendered by
Richard Mogg and Kenneth O'Neal.
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits. Exhibits required to be attached by Item 601 of
Regulation S-B are listed in the Index to Exhibits beginning on page 8 of this
Form 10-QSB. The Index to Exhibits is incorporated herein by this reference.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during
the quarter ended February 28, 1999.
[THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK]
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized this 20th day of April 1999.
HYTK Industries, Inc.
/s/ Douglas L. Lamb
-------------------------------
Douglas L. Lamb, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Douglas L. Lamb President and Director April 20, 1999
- ----------------------------
Douglas L. Lamb
/s/ Richard M. Cornell Secretary and Director April 20, 1999
- ----------------------------
Richard M. Cornell
Treasurer and Director April 20, 1999
- ----------------------------
John Garrison
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
Page No. No. Description
- -------- ----------- -----------
o 3(i) The Company's Articles of Incorporation (incorporated
herein by reference to the Exhibits to the Company's
Registration Statement on Form S-18, Registration No.
2-99737-LA ).
o 3(ii) The Company's Bylaws, as amended (incorporated herein
by reference to the Exhibits to the Company's
Registration Statement on Form S-18, Registration No.
2-99737-LA).
o 2 Reorganization Agreement and Plan of Merger dated
December 31, 1998, between and among HYTK Holding Co.,
Inc., Quest Resource Corporation and HYTK Industries,
Inc. (Incorporated herein by reference to the Company's
Form 10-QSB for the quarter ended November 30, 1998).
* 16 January 14, 1999 Letter Seller's and Associates
regarding the change of certifying accountant of HYTK
Industries, Inc. (Incorporated herein by reference from
the Company's Form 10-QSB for the quarter ended
November 30, 1998).
