Add
KYUS.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| KYUS.OB > SEC Filings for KYUS.OB > Form 10-Q on 19-Jun-2009 | All Recent SEC Filings |
19-Jun-2009
Quarterly Report
Statement Regarding Forward-Looking Information
This report contains forward-looking statements. 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 the volatility and decreases in 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 approximately 3,000 acres targeting gas extraction from the New Albany Shale. We have identified approximately 40-50 drilling locations on this leasehold. Our net recoverable "proved developed producing reserves1" as of October 31, 2008, are estimated at 1.825 billion cubic feet of gas ("Bcf"), while "proved undeveloped primary reserves2" are estimated at 23.725 Bcf, for a total proved developed and undeveloped reserves of 25.550 Bcf. 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.
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 Six Month Periods Ended April 30, 2009 and 2008
We are still in our exploration stage and have generated no revenues to date.
All productive and non-productive costs incurred in connection with the acquisitions of, exploration for and development of our gas reserves are capitalized using the full cost method of accounting. These costs include lease acquisitions, geological and geophysical work, and the costs of drilling, completing and equipping our gas wells. For the three month periods ended April 30, 2009 and 2008, we incurred such total capitalized costs of $537,716 and $0, respectively. For the six month periods ended April 30, 2009 and 2008, we incurred such total capitalized costs of $2,696,968 and $8,910 respectively. The increases from 2008 to 2009 were the result of our beginning to drill our first wells.
We incurred general and administrative expenses of $501,158 and $4,450 for the three month periods ended April 30, 2009 and 2008, respectively, and of $1,019,485 and $68,775 for the six month periods ended April 30, 2009 and 2008, respectively. These expenses consisted of costs incurred in connection with the start-up and day to day operation of our business.
Amortization of loan fees for the three and six month periods ended April 30, 2009 totaled $91,099 and $182,198 respectively. These costs are related to the Note and the Loan. We had no such costs for the three and six month periods ended April 30, 2008.
We incurred professional expenses of $384,605 and $56,776 for the three month periods ended April 30, 2009 and 2008, respectively, and of $770,960 and $61,225 for the six month periods ended April 30, 2009 and 2008, respectively. The increase in these expenses primarily resulted from consulting agreements and annual SEC filing requirements.
Our interest expense for the three month periods ended April 30, 2009 and 2008, were $205,169 and $20,382 respectively, and for the six month periods ended April 30, 2009 and 2008, were $279,305 and $43,013 respectively. This cost is attributable to interest due and paid on the Note and on the Loan. During the three and six month periods ended April 30, 2009, we recognized a net gain on a derivative liability relating to the Note in the amount of $327,427 and $261,143 respectively, due to a revaluation of the derivative liability to market at October 31, 2008.
We have generated no revenues to date. Our net operating loss from inception through April 30, 2009 was $4,405,472.
Liquidity and Capital Resources
Our cash and cash equivalents balance as of April 30, 2009 was $778,481.
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 (each, an "Installment Loan"), 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, have been used by KY USA for ongoing working capital purposes, including the costs and expenses relating to the drilling of our initial gas wells in the New Albany shale on KY USA's leasehold in western Kentucky.
On February 12, 2008, we received the first Installment Loan in an amount of $2.5 million. To date, we have received $5,000,000 under the Credit Facility.
Including the net proceeds from the Offering and the Credit Facility, we have sufficient funds to conduct our operations for approximately the next six to nine 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 New Stream 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 Consolidated 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.
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 expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties excluded from the costs being amortized. No ceiling write-downs have been recorded to date.
Oil and Gas Reserves
The Company's proved gas reserves as of October 31, 2008 were developed from information provided by Glenn Robinson - Robinson Engineering. Projecting the effects of commodity prices on production, and timing of development expenditures includes many factors beyond the Company's control. The future estimates of net cash flows from the Company's proved reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows being materially different from the estimates.
Derivative Instruments
We value derivative instruments in accordance with the interpretative guidance of SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, Accounting Principles Board Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, EITF 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments and associated pronouncements related to the classification and measurement of warrants and instruments with embedded conversion features. We make certain assumptions and estimates to value our derivative liabilities. Factors affecting these liabilities and values include changes in the stock price and other assumptions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
|
|