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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 1996
OR
__ Transition report pursuant to Section 13 or 15(d) of Valley's 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.
Yes ___ No X
As of February 1, 1997, there were 11,204,901 shares of the
Registrant's Common Stock outstanding.
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as at
December 31, 1996 3
Condensed Consolidated Statements of Operations
For the six months ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
For the six months ended December 31,1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
December 31, 1996
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSET - Cash $ 239,905
PROVED OIL AND GAS PROPERTIES (full cost method) 11,798,858
OFFICE EQUIPMENT, net of accumulated depreciation of $7,256 33,226
OTHER ASSETS 43,831
---------------
Total Assets $ 12,115,820
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 732,177
Current portion of long-term debt 586,049
---------------
Total Current Liabilities 1,318,226
ADVANCES FROM RELATED PARTIES 171,709
DEFERRED INCOME TAXES 1,293,000
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited, none issued
Common Stock, no par value, authorized-unlimited, 10,404,901 issued 10,697,279
Deficit accumulated in development stage (1,364,394)
---------------
Total Stockholders' Equity 9,332,885
---------------
Total Liabilities and Stockholders' Equity $ 12,115,820
===============
</TABLE>
See accompanying note to theses financial statements
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Period from
Period from July 1, Period from July 1, February 15, 1995
1996 to December 31, 1995 to December to December 31, 1996
1996 31, 1995
---------------------- --------------------- ---------------------
REVENUE - Oil and gas sales $ 41,365 $ - $ 41,365
EXPENSES:
General and administrative 903,319 634,572 1,938,626
Interest 35,162 21,631 174,133
----------------
---------------- ------------------
Total Expenses 938,481 656,203 2,112,759
---------------- ---------------- ------------------
LOSS BEFORE INCOME TAXES (897,116) (656,203) (2,071,394)
INCOME TAX BENEFIT 295,000 230,000 707,000
---------------- ---------------- ------------------
NET LOSS $ (602,116) $ (426,203) $ (1,364,394)
================ ================ ==================
NET LOSS PER SHARE $ (0.05) $ (0.04)
================ ================
WEIGHTED AVERAGE SHARES 13,390,524 9,923,236
================ ================
</TABLE>
See accompanying note to theses financial statements
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Period from July Period from July Period from
1, 1996 to 1, 1995 to February 15, 1995
December 31, 1996 December 31, 1995 to June 30, 1996
-------------------- -------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (602,116) $ (426,203) $ (1,364,394)
Adjustments to reconcile net loss to net cash
used by operating activities:
Deferred income tax benefit (295,000) (230,000) (707,000)
Amortization of debt discount - - 88,000
Depreciation 5,572 - 7,256
Common stock issued for services 322,932 446,950 772,063
Change in accounts payable (85,674) - 201,016
Other (3,263) - 2,580
------------------ ------------------ ------------------
Net Cash Used by Operating Activities (657,549) (209,253) (1,000,479)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties - 112,500 171,709
Sale of common stock 455,949 - 2,555,821
Issuance of convertible debentures - 426,474 426,474
Issuance of note payable subsequently converted
into convertible debentures - 146,300 146,300
Costs related to sale of stock and debentures (14,600) - (423,976)
Issuance of note payable - - 250,000
Repayment of note payable - - (250,000)
------------------ ------------------ ------------------
Net cash provided by financing activities 441,349 685,274 2,876,328
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (303,134) (477,021) (1,554,893)
Purchase of other assets (43,831) - (81,051)
Net cash used by investing activities (346,965) (477,021) (1,635,944)
------------------ ------------------ ------------------
INCREASE (DECREASE) IN CASH (563,165) (1,000) 239,905
CASH - Beginning of period 803,070 1,000 -
CASH - End of $ 239,905 $ nil $ 239,905
period
================== ================== ==================
SUPPLEMENTAL INFORMATION
Cash paid for $ 17,581 $ - $ 54,591
interest
Debt incurred in acquisition of oil and gas - - 1,086,049
properties
Conversion of debentures to common stock - - 426,474
Retirement of debenture upon merger with Arjon - - 146,300
Oil and gas property acquired with note payable 355,000 - 585,000
Oil and gas properties acquired with common stock - - 7,072,914
Issuance of common stock for stock offering costs - - 506,409
</TABLE>
See accompanying note to theses financial statements
<PAGE>
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)
(1) Nature of Business and Basis of Preparation and Presentation
Cotton primary business focus is 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 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
herein for the fiscal year ended June 30, 1996.
(2) Common Stock
During the six months ended December 31, 1996, Cotton Valley issued 36,888
shares of common stock to individuals for services which was recorded at
$30,932, issued 73,750 shares of common stock to settle debts which was
recorded at $53,838, issued 400,000 shares of common stock to Liviakis
Financial Communications, Inc. which was recorded at $292,000, issued
302,667 shares of common stock to former Arjon stockholders on exercise of
warrants for $145,524, issued 300,000 shares of common stock in Canadian
private placements for proceeds of $235,425 (before deducting costs of
$14,600), and issued 100,000 shares of common stock to Liviakis Financial
Communications, Inc. for cash of $75,000.
(3) Liviakis Financial Communications, Inc.
During the period, Cotton Valley entered into an agreement with
Liviakis Financial Communications, Inc. of Sacramento, California ("Liviakis")
to assist and consult with Cotton Valley in matters concerning corporate finance
and to provide investor communications and public relations services. In
consideration of Liviakis' services, Cotton Valley will sell a total of 500,000
shares of common stock to Liviakis and an officer of Liviakis for $.75 per share
and issue 1,490,000 shares of its common stock to Liviakis for services. Cotton
Valley also granted Liviakis and an officer of Liviakis warrants to purchase
500,000 shares of its common stock from January 2, 1998, until November 8, 2001
at $.80 per share.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
First Six Months Fiscal 1997 and First Six Months Fiscal 1996
During the six months ended December 31, 1996, Cotton Valley incurred a net
loss of $602,116. From February 15, 1995 (inception), to December 31, 1996,
Cotton Valley accumulated a deficit of $1,364,394.
The loss of $602,116 for the first six months of 1997 compares to a
loss of $426,203 during the first six months of 1996. There was greater business
activity during the first six months of fiscal 1997 and during this period
Cotton Valley issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. for services. The stock was valued at $.73 per share, based
on trading on the Canadian over-the-counter market, for a total expense of
$292,000.
During the first six months of fiscal 1996, Cotton Valley issued
300,000 shares for services which was recorded at $446,950. Other expenses
during this period were $209,253. The loss before income tax benefit of $230,000
was $656,203.
Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of fiscal 1996 resulted in oil and gas sales of $41,365 during the first
six months of 1997.
Cotton Valley acquired its interest in the Alden Field in December 1996 for
$390,000 of which $35,000 was paid and $355,000 is payable upon closing which is
expected to be in February or March 1997.
During the six months ended December 31, 1996, Cotton Valley issued
36,888 shares of common stock to individuals for services which was recorded at
$30,932, issued 73,750 shares of common stock to settle debts which was recorded
at $53,838, issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. (See "Principal Shareholders--Liviakis") which was recorded
at $292,000, issued 302,667 shares of common stock to former Arjon shareholders
on exercise of warrants for $145,524, issued 300,000 shares of common stock in
Canadian private placements for proceeds of $235,425 (before deducting costs of
$14,600), and issued 100,000 shares of common stock to Liviakis Financial
Services, Inc. for cash of $75,000.
Liquidity and Capital Resources
As of December 31, 1996, Cotton Valley had a working capital deficiency
of $1,078,321 calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Included in
accounts payable is $230,000 representing an unpaid part of the purchase price
of the Movico Filed which is not due until others who hold an interest in the
property decide to commence drilling. The current portion of long-term debt is
described in the following paragraph.
Cotton Valley has promissory notes payable totaling $586,049 for the
unpaid purchase price of the Cheneyboro oil and gas properties. The notes are
collateralized by the properties and are due July 17,1997. Interest is payable
quarterly at 12%. Management believes the notes will be extended if Cotton
Valley is unsuccessful in its initial public offering.
During the first six months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for $390,000.
Cotton Valley paid $35,000 and $355,000 is due on closing which is expected to
happen during the third quarter of fiscal 1997.
Management is currently taking the following action to obtain
short-term financing:
- - it has encouraged warrant holders to exercise warrants,
- - it is actively seeking participation from other oil and gas companies to
fund part of the Cheneyboro Field development,
- - it is in negotiation with three parties for debt financing, in the nature
of a "bridge loan" to be repaid with net proceeds of its intended offering
of securities in the U.S., and
- - it has entered into an agreement with Liviakis Financial Communications,
Inc. of Sacramento, California ("Liviakis") which includes a provision
whereby Liviakis has agreed to purchase 500,000 of Cotton Valley's shares
for $375,000.
Management believes a combination of the above steps will provide
liquidity until an intended offering of securities is completed. There is no
assurance management will be successful.
Management expects to pay the outstanding amount of the Alden Field
purchase of $355,000 from proceeds of a loan it is negotiating. There is no
assurance management will be successful. In the event management cannot obtain
financing to complete the purchase and management cannot find acceptable
alternative financing, Cotton Valley may not be able to close on the Alden Field
purchase.
The net proceeds of an intended U.S. offering of securities and the
anticipated sale of an interest in the offshore California property will not be
sufficient to develop fully the properties. If the cash flow generated from the
first five wells is less than expected, the development of properties may
require capital resources greater than the net proceeds of this offering or
resources otherwise currently available to Cotton Valley. Cotton Valley has no
current arrangements with respect to, or sources of, additional financing. No
assurance can be given that any additional financing will be available to Cotton
Valley on acceptable terms or at all. The inability to obtain additional
financing would have a material adverse effect on Cotton Valley, including
requiring Cotton Valley to curtail significantly its deployment of the
properties. Any additional financing may involve substantial dilution to the
interests of Cotton Valley's then existing shareholders.
<PAGE>
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
development stage oil and gas companies.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
9a) Exhibits
The following documents are filed with this report as exhibits:
Exhibit
Number Description
27.01 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
<PAGE>
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: February 19, 1997
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
Eugene A. Soltero
Chief Executive Officer
Peter Lucas
Chief Financial Officer
(Principal Financial and Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023947
<NAME> Cotton Valley Resources Corp.
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1995
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 239,905 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 239,905 0
<PP&E> 11,883,441 0
<DEPRECIATION> 7,256 0
<TOTAL-ASSETS> 12,115,820 0
<CURRENT-LIABILITIES> 1,318,226 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10,697,279 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 12,115,820 0
<SALES> 41,365 0
<TOTAL-REVENUES> 41,365 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 903,319 634,572
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 35,162 21,631
<INCOME-PRETAX> (897,116) (656,203)
<INCOME-TAX> 295,000 230,000
<INCOME-CONTINUING> (602,116) (426,203)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (602,116) (426,203)
<EPS-PRIMARY> (0.05) (0.04)
<EPS-DILUTED> (0.05) (0.04)
</TABLE>
