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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
COMMISSION FILE NUMBER: 0-28814
COTTON VALLEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 98-0164357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8350 N. CENTRAL EXPRESSWAY
SUITE M2030
DALLAS, TEXAS 75206
(Address of principal executive offices)
TELEPHONE NUMBER (214) 363-1968
(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.
Yes No X
--- ---
As of September 30, 1997, there were 16,511,367 shares of the
Registrant's Common Stock outstanding.
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COTTON VALLEY RESOURCES CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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<S> <C> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet as at
September 30, 1997 3
Condensed Consolidated Statements of Operations
For the nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flow
For the three months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 8
ITEM 5. OTHER INFORMATION 8
SIGNATURES 9
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
(U.S. Dollars)
<S> <C>
CURRENT ASSETS:
Cash $ 1,483,640
Accounts receivable 564,568
Prepaid expenses 25,195
------------
TOTAL CURRENT ASSETS 2,073,403
OIL & GAS PROPERTIES net of accumulated depletion of $56,188 18,340,872
OILFIELD EQUIPMENT INVENTORY 69,500
OFFICE EQUIPMENT, net of accumulated depreciation of $14,813 48,811
OTHER ASSETS 43,453
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TOTAL ASSETS $ 20,576,039
============
LIABILITIES AND STOCKHOLDERS' EQUITY
(U.S. Dollars)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 415,554
Current portion of long-term debt 729,250
------------
TOTAL CURRENT LIABILITIES 1,144,804
ADVANCES FROM RELATED PARTIES 119,710
LONG TERM DEBT 125,000
DEFERRED INCOME TAXES 1,769,000
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited, none issued Common
Stock, no par value, authorized-unlimited, 16,511,367 issued
(including 270,000 shares held in treasury) 19,972,124
Deficit accumulated in development stage (2,773,402)
Accumulated Earnings 218,803
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TOTAL STOCKHOLDERS' EQUITY 17,417,525
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,576,039
============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
3
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COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Period from Period from
July 1, 1997 to July 1, 1996 to
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 195,201 $ 19,484
Equipment sales 430,000
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TOTAL REVENUE 625,201 19,484
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EXPENSES:
Oil and gas production 136,736 12,502
Equipment purchase and rework 79,098
General and administrative 181,832 290,586
Interest 20,584 17,581
Depreciation and Depletion 29,188
------------------ ------------------
TOTAL EXPENSES 447,438 320,369
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PROFIT (LOSS) BEFORE INCOME TAXES 177,763 (300,885)
INCOME TAX BENEFIT (PROVISION) (44,441) 95,000
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NET PROFIT (LOSS) $ 133,322 $ (205,885)
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NET PROFIT (LOSS) PER SHARE $ 0.01 $ (0.02)
================== ==================
WEIGHTED AVERAGE SHARES 14,567,455 9,186,000
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
4
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COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Period from Period from
July 1, 1997 to July 1, 1996 to
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $ 133,322 $ (205,885)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred income tax provision (benefit) 44,441 (95,000)
Depreciation 29,188 2,786
Common stock issued for services 7,207
Change in accounts payable 4,860 (73,521)
Change in accruals and other liabilities (85,337)
Change in accounts receivable (564,568)
------------------ ------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (438,094) (267,676)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties (20,000)
Sale of common stock 454,000 4,015
Issuance of secured notes payable 125,000
Issuance of acquisition notes payable 300,000
Costs related to sale of stock and notes (60,000)
Exercise of warrants 1,679,310
Repayment of notes payable (349,750)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,128,560 4,015
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (752,798) (182,199)
Purchase of other assets (96,640) (35,000)
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NET CASH USED BY INVESTING ACTIVITIES (849,438) (217,199)
------------------ ------------------
INCREASE (DECREASE) IN CASH 841,028 (580,860)
CASH - Beginning of period 642,612 803,070
CASH - End of period $ 1,483,640 $ 222,210
================== ==================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 34,584 $ 37,010
Debt incurred in acquisition of oil and gas properties 300,000 586,049
Conversion of debentures to common stock 426,474
Retirement of debenture upon merger with Arjon 146,300
Oil and gas properties acquired with common stock 4,700,000
Issuance of common stock for stock offering costs 12,409
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
5
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COTTON VALLEY RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
(1) NATURE OF BUSINESS AND BASIS OF PREPARATION AND PRESENTATION
Cotton Valley Resources Corporation (the "Company") has its primary
business focus in the acquisition of ownership interests in, and the
production of oil and gas from, existing oil and gas fields that indicate a
potential for increased production through rehabilitation. The Company also
purchases, repairs, rehabilitates and sells used oilfield production
equipment.
The condensed consolidated financial statements of Cotton Valley Resources
Corporation and subsidiaries (collectively "Cotton Valley") included herein
have been prepared by Cotton Valley without audit. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted, since Cotton Valley believes that the disclosures
included are adequate to make the information presented not misleading. In
the opinion of management, the condensed consolidated financial statements
include all adjustments consisting of normal recurring adjustments
necessary to present fairly the financial position, results of operations,
and cash flows as of the dates and for the periods presented. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included
for the fiscal year ended June 30, 1997.
(2) COMMON STOCK
During the three months ended September 30, 1997, Cotton Valley issued
2,511,317 shares of common stock to four individuals to purchase Aspen
Energy Corporation ("Aspen") which was recorded at $4,700,000, issued
272,700 shares of common stock in a private placement which was recorded at
$454,000 (before deducting costs of $45,400), issued 9,447 shares of common
stock for acquisition of an oil and gas well which was recorded at $35,000,
and issued 1,117,430 shares of common stock on exercise of options and
warrants for $1,679,310.
(3) ACQUISITION OF ASPEN ENERGY CORPORATION
During the period, Cotton Valley acquired Aspen for $5,200,000, consisting
of $500,000 cash and notes and 2,511,317 shares of common stock of which
270,000 shares were returned to Cotton Valley by two Aspen shareholders in
settlement of notes payable to Aspen in the amount of $425,000. The
acquisition closed on July 31, 1997 and was accounted for as a purchase.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST THREE MONTHS FISCAL 1998 AND FIRST THREE MONTHS FISCAL 1997
During the three months ended September 30, 1997, Cotton Valley
incurred a net profit of $133,332 which compares to a loss of $205,885 during
the first three months of 1996. The improvement results from the first used
equipment sales by Cotton Valley's wholly-owned subsidiary, Mustang Oilfield
Equipment Company, oil and gas production during August and September from the
Aspen Energy Corporation properties, and continued production from the Company's
Alden Field property.
Oil and gas sales increased 1002% from $19,484 for the three months
ended September 30, 1996 to $195,201 for the three months ended September 30,
1997, reflecting the addition of the Aspen and Alden acquisitions. Oil and gas
production costs increased 1093% from $12,502 for the three months ended
September 30, 1996 to $136,736 for the three months ended September 30, 1997,
reflecting the addition of the acquisitions and continued remedial work required
at the Alden Field.
Used equipment sales for the first quarter of fiscal 1997 were $430,000
as compared to no sales for the comparable quarter of fiscal 1996. Cost of goods
sold for the first quarter of fiscal 1997 was $79,098.
General and administrative costs were $181,832 in the first quarter of
fiscal 1998, a decrease of $120,956 or 40% less than the $302,788 incurred in
the first quarter of fiscal 1997. Much of the decrease was due to an
administrative cost reduction program instituted by management in mid-June,
1997.
The Company has provided for income taxes of $44,441 for the first
quarter of fiscal 1998 as compared to recognition of an income tax benefit of
$95,000 for the first quarter of fiscal 1997. This is directly related to the
size of the profit or loss before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, Cotton Valley has a working capital of
$927,599 calculated by subtracting accounts payable of $415,554 and the current
portion of long-term debt of $729,250 from current assets of $2,072,403.
Management estimates that aggregate capital expenditures of approximately $15
million will be spent during the remainder of fiscal 1998 to acquire and develop
oil and gas reserves. Cotton Valley intends to finance this acquisition and
development with the proceeds from private placements, exercise of warrants,
traditional bank debt and institutional mezzanine reserves based financing. No
assurance can be given that the Company will be successful in these efforts.
7
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, there are no legal proceedings pending
against Cotton Valley.
ITEM 5. OTHER INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995:
Certain statements in this filing, and elsewhere (such as in other
filings by Cotton Valley with the Commission, press releases, presentations by
Cotton Valley or its management and oral statements) constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Cotton Valley to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, (i)
significant variability in Cotton Valley's quarterly revenues and results of
operations as a result of variations in the Cotton Valley's production in a
particular quarter while a significant percentage of its operating expenses are
fixed in advance, (ii) changes in the prices of oil and gas, (iii) Cotton
Valley's ability to obtain capital, (iv) other risk factors commonly faced by
small oil and gas companies.
8
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SIGNATURES
Pursuant to the requirement 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.
DATED: November 19, 1997
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
/s/ EUGENE A. SOLTERO
---------------------------------------------------
Eugene A. Soltero
Chief Executive Officer and Chief Financial Officer
/s/ SUSAN M. SILVA
---------------------------------------------------
Susan M. Silva
Chief Accounting Officer
9
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONDENSED CONSOLIDATED BALANCE
SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEPTEMBER 1997 10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,483,640
<SECURITIES> 0
<RECEIVABLES> 589,763
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,073,403
<PP&E> 18,573,637
<DEPRECIATION> (71,001)
<TOTAL-ASSETS> 20,576,039
<CURRENT-LIABILITIES> 1,144,804
<BONDS> 2,013,710
0
0
<COMMON> 19,972,124
<OTHER-SE> (2,554,599)
<TOTAL-LIABILITY-AND-EQUITY> 20,576,039
<SALES> 625,201
<TOTAL-REVENUES> 625,201
<CGS> 447,438
<TOTAL-COSTS> 447,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 177,763
<INCOME-TAX> (44,441)
<INCOME-CONTINUING> 133,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,322
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
