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| KYUS.OB > SEC Filings for KYUS.OB > Form 10-Q on 22-Sep-2008 | All Recent SEC Filings |
22-Sep-2008
Quarterly Report
Statement Regarding Forward-Looking Information
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical facts included in
this Quarterly Report on Form 10-Q, including without limitation, statements in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding our financial position, estimated working capital, business
strategy, the plans and objectives of our management for future operations and
those statements preceded by, followed by or that otherwise include the words
"believe", "expects", "anticipates", "intends", "estimates", "projects",
"target", "goal", "plans", "objective", "should", or similar expressions or
variations on such expressions are forward-looking statements. We can give no
assurances that the assumptions upon which the forward-looking statements are
based will prove to be correct. Because forward-looking statements are subject
to risks and uncertainties, actual results may differ materially from those
expressed or implied by the forward-looking statements. There are a number of
risks, uncertainties and other important factors that could cause our actual
results to differ materially from the forward-looking statements, including, but
not limited to, the availability and pricing of additional capital to finance
operations, including the drilling of our initial gas wells, longer term
drilling programs and additional leasehold acquisitions, the viability of the
shale gas fields in the Illinois Basin in western Kentucky, our ability to build
and maintain a successful operations infrastructure and to effectively drill and
develop producing wells, the successful negotiation and execution of
cost-effective third-party gas drilling and distribution agreements, the
continued commitment of drill rig operators and future economic conditions and
energy prices.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Background
Kentucky USA Energy, Inc. (the "Company" or "we") was incorporated in the State of Delaware on September 29, 2006 under the name Las Rocas Mining Corp. On October 26, 2007, the Company changed its name to Kentucky USA Energy, Inc. to facilitate the merger discussions with KY USA Energy, Inc. ("KY USA"). On May 2, 2008, the Company, KY Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Sub"), and KY USA entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), which closed on May 2, 2008. Pursuant to the terms of the Merger Agreement, Acquisition Sub merged with and into KY USA, which became a wholly-owned subsidiary of the Company (the "Merger").
KY USA was incorporated in the Commonwealth of Kentucky on October 5, 2007 to acquire, explore and develop oil and gas resource properties, with a primary focus initially on shale gas in the Illinois Basin in western Kentucky. KY USA has secured a 75% net revenue interest in a leasehold in Western Kentucky covering 2,092 acres targeting gas extraction from the New Albany Shale. We have identified approximately 40-50 drilling locations on this leasehold. Estimated net recoverable "proved undeveloped reserves1 ", as determined by an independent petroleum engineer, are 499.8 million cubic feet of gas ("MMCF") per well or 19.992 billion cubic feet of gas ("BCF") based on 40 locations with 40 acre spacing. This leasehold is directly adjacent to producing wells.
Prior to the Merger our fiscal year end was February 28 and the fiscal year end of KY USA was October 31. Following published SEC accounting and financial reporting interpretations and guidance and in connection with the Merger, we have changed our fiscal year end to October 31 to match that of KY USA. As a result of this change, we are filing this quarterly report with the SEC for the quarter ended July 31, 2008.
Following the closing of the Offering (defined below), we began drilling activities at our initial well locations previously identified. We have continued these drilling efforts using the net proceeds from our initial loan under the Credit Facility (defined below).
Results of Operations for the Three and Nine Month Period Ended July 31, 2008
We are still in our exploration stage and have generated no revenues to date.
We incurred operating expenses of $266,945 and $335,720 for the three and nine month periods ended July 31, 2008, respectively. These expenses consisted of general operating expenses incurred in connection with the day to day operation of our business, amortization of loan fees, our costs relating to the Merger and the preparation and filing of our periodic reports.
We have generated no revenues and our net operating loss from inception through July 31, 2008 was $4,710,836. As KY USA was incorporated on October 5, 2007, there are no comparative figures from previous years.
Liquidity and Capital Resources
Our cash and cash equivalents balance as of July 31, 2008 was $2,142,100.
On May 9, 2008, KY USA borrowed $100,000 from one individual as a bridge loan to be used for working capital purposes. In addition, upon the closing of the Merger, this lender received warrants to purchase 200,000 shares of our Common Stock, such warrants having an initial exercise price of $1.00 per share and expiring five years after issuance.
On May 29, 2008 we closed a private offering (the "Offering") of an 8% senior secured convertible note (the "Note") and warrants (the "Warrants") to purchase 2,500,000 shares of the Company's common stock, $0.0001 par value per share (the "Common Stock"), to one institutional investor (the "Investor") for aggregate gross proceeds of $2.5 million, as more fully described in our Form 8-K filed with the SEC on June 4, 2008. We have used the net proceeds of the Offering of approximately $1,857,600 (after expenses of the Offering) to repay bridge loans made to KY USA, to begin drilling at one or more of the five locations that, as previously disclosed, we have identified for initial wells, and for general working capital purposes.
On June 27, 2008, KY USA closed on a senior secured credit facility (the "Credit Facility") with NSES 12, LLC, a funding vehicle of New Stream Capital (the "Lender"), pursuant to which KY USA may borrow up to $10,000,000 in the aggregate, under certain conditions, as more fully described in our Form 8-K filed with the SEC on July 1, 2008. Under the Credit Facility, KY USA borrowed $2,500,000 on June 27, 2008 (the "Initial Loan") and may borrow up to an additional aggregate amount of $7,500,000 in installments of a minimum of $2,500,000 each, solely at the discretion of the Lender. The proceeds of the Initial Loan amount, net after expenses of the transaction, including a $200,000 credit facility fee paid to the Lender at closing and a $200,000 consulting fee paid to one consultant, will be used by KY USA for ongoing working capital purposes, including the costs and expenses relating to the drilling of gas wells in the New Albany shale on KY USA's leasehold in western Kentucky.
Including the net proceeds from the Offering and the Credit Facility, we have sufficient funds to conduct our operations for approximately three to six months.
If we are not successful in generating sufficient liquidity from KY USA operations or in raising sufficient capital resources on terms acceptable to us, our business, results of operations, liquidity and financial condition could suffer materially.
We presently do not have any available credit, bank financing or other external sources of liquidity, other than the net proceeds from the Offering and the Credit Facility. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.
Critical Accounting Policies
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing the Company's financial statements and the uncertainties that could impact the Company's results of operations, financial condition and cash flows.
Revenue Recognition
The Company recognizes revenues based on actual volumes of natural gas sold and delivered to its customers. Natural gas meters are placed at the customers' location and usage is billed each month. Crude oil is stored and at the time of delivery to the customers, revenues are recognized. The Company is presently in the exploratory stage and has not recognized any revenue to date.
Full Cost Method of Accounting
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and non-productive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, day rate rentals and the costs of drilling, completing and equipping oil and gas wells. Costs, however, associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties. Gains or losses are recognized only upon sales or dispositions of significant amounts of oil and gas reserves representing an entire cost center. Proceeds from all other sales or dispositions are treated as reductions to capitalized costs. The capitalized oil and gas property, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future
Commodity Risk
The Company's major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas production. Historically for the industry, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. As of July 31, 2008, the Company has not entered into any hedging agreements to limit exposure to oil and gas price fluctuations.
Forward-Looking Statements And Risk
Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company's control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict.
There are numerous uncertainties inherent in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can also affect these risks. Additionally, fluctuations in oil and gas prices, or a prolonged period of low prices, may substantially adversely affect the Company's financial position, results of operations, and cash flows.
We have no off-balance sheet arrangements.
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