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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the quarterly period ended March 31, 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)
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Ontario, Canada 98-0164357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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 X No ___
As of March 31, 1997, there were 11,708,881 shares of the Registrant's
Common Stock outstanding.
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COTTON VALLEY RESOURCES CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION Page No.
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as at
March 31, 1997 3
Condensed Consolidated Statements of Operations
For the nine months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flow
For the nine months ended March 31, 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 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
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2
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PART I. FINANCIAL INFORMATION
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
March 31, 1997
(Unaudited)
ASSETS
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CURRENT ASSETS:
Cash $ 57,145
Accounts receivable 64,145
Prepaid expenses 32,651
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Total Current Assets 153,941
PROVED OIL AND GAS PROPERTIES (full cost method) 12,033,974
OFFICE EQUIPMENT, net of accumulated depreciation of $10,900 44,562
OTHER ASSETS 101,520
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Total Assets $ 12,333,997
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 710,184
Current portion of long-term debt 586,049
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Total Current Liabilities 1,296,233
ADVANCES FROM RELATED PARTIES 149,710
DEFERRED INCOME TAXES 1,088,000
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited, none issued
Common Stock, no par value, authorized-unlimited, 11,708,881 11,527,749
issued
Deficit accumulated in development stage (1,727,695)
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Total Stockholders' Equity 9,800,054
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Total Liabilities and Stockholders' Equity $ 12,333,997
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See accompanying notes to these financial statements
3
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COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
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Period from
Period from Period from July February 15,
July 1, 1996 to 1, 1995 to March 1995 to March
March 31, 1997 31, 1996 31, 1997
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REVENUE - Oil and gas sales $ 131,986 $ - $ 131,986
EXPENSES:
Direct costs 80,757 - 80,757
General and administrative 1,462,532 741,467 2,497,839
Interest 54,115 41,874 193,085
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Total Expenses 1,597,404 783,341 2,771,681
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LOSS BEFORE INCOME TAXES (1,465,418) (783,341) (2,639,695)
INCOME TAX BENEFIT 500,000 275,000 912,000
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NET LOSS $ (965,418) $ (508,341) $ (1,727,695)
============== ============== ===============
NET LOSS PER SHARE $ (0.07) $ (0.04)
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WEIGHTED AVERAGE SHARES
13,390,524 9,923,236
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See accompanying notes to these financial statements
4
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COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
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<CAPTION>
Period from
Period from July Period from February 15,
1, 1996 to March July 1, 1995 to 1995 to March
31, 1997 March 31, 1996 31, 1997
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (965,418) $ (508,341) $ (1,727,695)
Adjustments to reconcile net loss to net
cash used by operating activities:
Deferred income tax benefit (500,000) (275,000) (912,000)
Amortization of debt discount - - 88,000
Depreciation 9,216 - 10,900
Common stock issued for services 863,862 446,950 1,312,993
Change in accounts payable 193,495 107,759 480,184
Other (204,800) - (198,957)
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Net Cash Used by Operating Activities (603,645) (228,632) (946,575)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties (21,999) 171,709 149,710
Sale of common stock 889,089 - 2,988,961
Issuance of convertible debentures - 415,650 426,474
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)
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Net cash provided by financing activities 852,490 733,659 3,287,469
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (893,250) (506,027) (2,182,229)
Purchase of other assets (101,520) - (101,520)
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Net cash used by investing activities (994,770) (506,027) (2,283,749)
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INCREASE (DECREASE) IN CASH (745,925) (1,000) 57,145
CASH - Beginning of period 803,070 1,000 -
CASH - End of period $ 57,145 $ nil $ 57,145
============== ========== =============
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 35,162 $ 18,920 $ 72,172
Debt incurred in acquisition of oil and - - 1,086,049
gas 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
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See accompanying notes to these financial statements
5
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COTTON VALLEY RESOURCES CORPORATION
(a development stage company)
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 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 nine months ended March 31, 1997, 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 1,141,000 shares of common stock to Liviakis
Financial Communications, Inc. which was recorded at $832,930, issued
416,667 shares of common stock to former Arjon stockholders on exercise of
warrants for $200,449, issued 300,000 shares of common stock in Canadian
private placements for proceeds of $235,425 (before deducting costs of
$14,600), issued 500,000 shares of common stock to Liviakis Financial
Communications, Inc. for cash of $375,000, and issued 48,980 shares of
common stock to the agent involved in Canadian financings on exercise of
agent's options for $78,215.
(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, mergers
and acquisitions, and to provide investor communications and public relations
services. In consideration of Liviakis' services, Cotton Valley issued a total
of 500,000 shares of common stock to Liviakis and an officer of Liviakis for
$.75 per share and will issue 1,490,000 shares of its common stock to Liviakis
for services of which 1,141,000 shares were issued during this period. 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.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
First Nine Months Fiscal 1997 and First Nine Months Fiscal 1996
During the nine months ended March 31, 1997, Cotton Valley incurred a
net loss of $965,418. From February 15, 1995 (inception), to March 31, 1997,
Cotton Valley accumulated a deficit of $1,727,695.
The loss of $1,465,418 for the first nine months of 1997 compares to a
loss of $783,341 during the first nine months of 1996. There was greater
business activity during the first nine 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 nine 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 $74,473 during the first
nine months of 1997.
Cotton Valley acquired its interest in the Alden Field in December 1996
for $416,328 of which $35,000 was paid in December 1996 and $381,328 was paid
upon closing on March 3, 1997.
During the nine months ended March 31, 1997, 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 1,141,000 shares of common stock to Liviakis Financial
Communications, Inc. which was recorded at $832,930, issued 416,667 shares of
common stock to former Arjon shareholders on exercise of warrants for $200,449,
issued 300,000 shares of common stock in Canadian private placements for
proceeds of $235,425 (before deducting costs of $14,600), issued 500,000 shares
of common stock to Liviakis Financial Services, Inc. for cash of $375,000, and
issued 48,980 shares of common stock to the agent involved in Canadian
Financings on exercise of agent's options for $78,215.
Liquidity and Capital Resources
As of March 31, 1997, Cotton Valley had a working capital deficiency of
$1,142,292 calculated by subtracting accounts payable of $710,184 and the
current portion of long-term debt of $586,049 from current assets of $153,941.
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. Management believes
$115,000 of this amount will be converted to equity in the intended public
offering. The current portion of long-term debt is described in the following
paragraph.
7
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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, and the extended notes
would be converted to equity in the intended public offering.
During the first nine months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for cash of
$416,328. Cotton Valley spent $62,000 in remedial work in the Alden Field. Net
monthly production was worth approximately $55,000 in March 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, and
- 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.
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.
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.
8
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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
development stage oil and gas companies.
9
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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) Reports filed on Form 8-K.
On February 20, 1997, Cotton Valley filed a report on Form 8-K which
announced management's decision to delay an intended reincorporation into
Canada's Yukon Territory until after Cotton Valley completes its intended public
offering of securities in the United States and then only after obtaining
approval of Cotton Valley's stockholders.
10
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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: May 14, 1997
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
/s/Eugene A. Soltero
Eugene A. Soltero
Chief Executive Officer and Acting Chief Financial Officer
