________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
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, 1998
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)
Yukon, Canada 98-0164357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6510 Abrams Road
Suite 300
Dallas, Texas 75231
(Address of principal executive offices)
Telephone Number (214) 221-6500
(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 September 30, 1998 there were 17,608,278 shares of the Registrant's
Common Stock outstanding.
________________________________________________________________________________
COTTON VALLEY RESOURCES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1998 3
Condensed Consolidated Statements of
Operations for the three months ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flow
for the three months ended September 30, 1998 and 1997 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 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8K 8
Signatures 9
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998
(Expressed in U.S. Dollars)
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 226,879
Accounts receivable 305,201
Materials and supplies inventory 604,400
Prepaid expenses 146,516
---------------
Total Current Assets 1,282,996
PROVED OIL and GAS PROPERTIES (full cost method)
Net of accumulated depletion of $447,337 25,171,738
OFFICE FURNITURE and EQUIPMENT
Net of accumulated depreciation of $27,674 108,301
FINANCING COSTS and OTHER ASSETS 626,637
---------------
Total Assets $ 27,189,672
===============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,187,627
Accrued expenses 102,788
Accrued interest 252,190
Accrued well plugging costs 186,640
Notes payable 350,000
--------------
Total Current Liabilities 2,079,245
LONG TERM DEBT 4,983,100
ADVANCES FROM RELATED PARTIES 119,710
DEFERRED INCOME TAXES 1,669,337
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited,
none issued -
Common Stock, no par value, authorized-unlimited,
17,608,278 issued 21,426,630
Warrants and beneficial conversion 823,695
Deficit accumulated in development stage (3,599,756)
Accumulated loss (312,289)
-------------
Total Stockholders' Equity 18,338,280
Total Liabilities and Stockholders' Equity $ 27,189,672
=============
</TABLE>
See accompanying notes to these financial statements
-3-
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1998 to July 1, 1997 to
September 30, 1998 September 30, 1997
---------------- --------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 97,090 $ 299,169
Equipment sales 456,933 330,000
Other income 25,253 -
----------------- --------------
Total Revenue 579,276 629,169
----------------- --------------
EXPENSES:
Oil and gas production 67,947 191,239
Equipment purchase and rework 237,660 183,190
Equipment operations 102,761 39,600
General and administrative 439,529 214,015
Depreciation and depletion 54,278 67,851
----------------- -------------
Total Expenses 902,175 695,895
----------------- -------------
LOSS FROM OPERATIONS (322,899) (66,726)
OTHER INCOME (EXPENSES):
Interest and financing expense (165,053) (30,584)
Interest income - 309
----------------- --------------
Total Other (165,053) (30,275)
LOSS BEFORE INCOME TAXES (487,952) (97,001)
INCOME TAX BENEFIT 175,663 34,920
----------------- --------------
NET LOSS $ (312,289) $ (62,081)
================= ==============
NET LOSS PER SHARE $ (0.02) $ (0.00)
================= ==============
WEIGHTED AVERAGE SHARES 17,377,278 14,567,455
================= ==============
</TABLE>
See accompanying notes to these financial statements
-4-
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1998 July 1, 1997
to September 30, 1998 to September 30, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (312,289) $ (62,081)
Adjustments to reconcile net
cash used by operating activities:
Deferred income tax benefit (175,663) (34,920)
Depreciation and depletion 54,278 67,851
Amortization 35,468 10,000
Common stock issued for services 21,000 -
Change in accounts payable and accrued
liabilities 157,438 (38,314)
Change materials and supplies
inventory 286,959 (74,303)
Change in accounts receivable 163,792 -
Other (9,553) (399,199)
----------------- ----------------
Net Cash Provided Used by Operating
Activities 221,430 (530,966)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related
parties 3,279 (20,000)
Sale of common stock and exercise of
warrants 142,500 2,133,310
Issuance of notes payable 350,000 425,000
Conversion of trade payables to
long term debt 278,291 -
Conversion of debenture to common stock 100,000 -
Conversion of accounts payables to
common stock 44,000 -
Costs related to sale of stock and
notes (86,666) (60,000)
Repayment of notes payable - (349,750)
---------------- ---------------
Net cash provided by financing
activities 831,404 2,128,560
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (891,878) (748,404)
Additions to office furniture and
equipment (19,839) (8,162)
---------------- ----------------
Net cash used by investing activities (911,717) (756,566)
INCREASE (DECREASE) IN CASH 141,117 841,028
CASH - Beginning of period 85,762 642,612
CASH - End of period $ 226,879 $ 1,483,640
=============== ===============
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 4,472 20,584
Debt incurred in acquisition of oil
and gas properties - 300,000
Oil and gas properties acquired with
common stock - 4,700,000
</TABLE>
See accompanying notes to these financial statements
-5-
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 purchases, repairs,
rehabilitates and sells used oilfield production equipment. Also, beginning
in February, 1998, the Company provides well servicing and horizontal
drilling services on its own properties.
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, 1998.
(2) Common Stock
During the three months ended September 30, 1998, the Company issued 285,000
shares of common stock to three entities in a private placement for $142,500,
issued 12,000 shares of common stock for services valued at $6,000, and
issued 74,000 shares of common stock in payment of $59,000 of trade
payables. In August, 1998, a debenture of $100,000 was converted to 222,222
shares of common stock.
(3) Yukon Continuance Contingent Liability
Potential Securities Act Violation
On March 16, 1998, the Company filed with the Commission a Registration
Statement on Form SB-2 (the "March 1998 Registration Statement") for the
purpose of registering up to 10,891,184 shares of the Company's Common Stock
for sale by certain shareholders of the Company, including approximately 5.7
million shares to be issued upon exercise of outstanding warrants and
conversion of the Convertible Debentures. On May 1, 1998, the Company
received a letter of comments from the Staff of the Commission (the "May 1998
Staff Comment Letter") relating to the March 1998 Registration Statement. In
the May 1998 Staff Comment Letter, the Staff advised the Company that it
should have registered the Yukon Continuance under the Securities Act. The
Yukon Continuance was not registered under the Securities Act.
The Company in its supplemental response on May 26, 1998 to the Staff's May
1998 Comment Letter contended, with the concurrence of the Company's U.S.
securities counsel, that the Yukon Continuance was a transaction not subject
to the registration requirements of Section 5 of the Securities Act. The
Staff has advised the Company that is does not agree with the Company and its
U.S. securities counsel's conclusion regarding the Yukon Continuance.
The Company, therefore, may have a contingent liability to certain of its
shareholders, who may sue the Company to recover the consideration paid, if
any, for shares of the Company's Common Stock, with interest thereon, from
the date of the Yukon Continuance to the date of repayment by the Company
less the amount of any income received thereon, upon tender of such
securities, or for damages if the shareholder no longer owns such securities.
The Company intends to vigorously defend any such shareholder lawsuit and
believes that it may have valid defenses, including the running of applicable
statutes of limitations, against claims by some or all of its shareholders.
However, to the extent that any of the Company's shareholders obtain a
judgment for damages against the Company, the Company's net assets and net
worth will be reduced, which in turn could reduce the Company's ability to
obtain financing for its exploration and drilling operations and cause the
Company to curtail operations. The Company is unable to quantify the amount
of such contingent liability.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
First Three Months Fiscal 1999 and First Three Months Fiscal 1998
During the three months ended September 30, 1998, Cotton Valley incurred a
net loss of $312,289 which compares to a loss of $62,081 during the first three
months of fiscal 1998. The decline is a result of lower oil and gas revenue,
higher general and administrative costs and higher interest and finance expense.
Oil and gas sales decreased 68% from $299,169 for the three months ended
September 30, 1997 to $97,090 for the three months ended September 30, 1998,
reflecting lower oil prices, the shutting in of several wells which became
uneconomic to produce as a result of low oil prices, and shut-down of the gas
compressor at Alden for most of the month of September, 1998. Oil and gas
production costs decreased 64% from $191,239 for the three months ended
September 30, 1997 to $67,947 for the three months ended September 30, 1998,
reflecting lower production taxes and maintenance deferred on shut-in uneconomic
wells.
Used equipment sales for the first quarter of fiscal 1999 were $456,933 as
compared to $330,000 for the comparable quarter of fiscal 1998. Cost of goods
sold for the first quarter of fiscal 1999 was $237,660, and general and
operations expense for used equipment sales was $102,761 as compared with
$183,190 and $39,600, respectively, in the first quarter of fiscal 1998.
General and administrative costs were $439,529 in the first quarter of
fiscal 1999, an increase of 105% over the $214,015 incurred in the first quarter
of fiscal 1998. Most of the increase is attributable to higher audit fees,
legal fees associated with a registration statement and related issues, and
increased costs of investor relations consultants.
The Company recognized an income tax benefit of $175,663 for the first
quarter of fiscal 1999 as compared to recognition of an income tax benefit of
$34,920 for the first quarter of fiscal 1998. This is directly related to the
size of the loss before income taxes.
Liquidity and Capital Resources
As of September 30, 1998, Cotton Valley has a working capital deficit of
$796,249 calculated by subtracting current liabilities of $2,079,245 from
current assets of $1,282,996. Approximately $500,000 of accrued liabilities are
expected to be paid with common stock. Management estimates that aggregate
capital expenditures of approximately $4 million will be spent during the
remainder of fiscal 1999 to acquire and develop oil and gas reserves. Cotton
Valley intends to finance its development activities 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.
Year 2000 Issues
The "Year 2000 Problem" arose because many existing computer programs use
only the last two digits to refer to a year. Cotton Valley has purchased all
its computer programs and computers since January 1, 1995, all of which have
been certified as "Year 2000 Compliant." Most of Cotton Valley's principal
suppliers and customers have also certified to Cotton Valley that their computer
systems are "Year 2000 Compliant." Therefore, the Company has determined that
the "Year 2000 Problem" is not likely to have any material effect on the
Company.
-7-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this filing, there are no legal proceedings
pending against Cotton Valley, which would have a material adverse
effect.
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.
Item 6. Exhibits and Reports on Form 8K
In a Form 8-K filed on August 5, 1998, "Effective August 3, 1998, the Board
of Directors of the Company, as well as the Audit Committee of the Board of
Directors of the Company, approved the engagement of Lane Gorman Trubitt L.L.P.
("LGT") as the Company's independent auditors for the fiscal year ending June
30, 1998 to replace the firm of Hein + Associates LLP ("Hein") who declined to
stand for re-election, effective the same date."
-8-
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 16, 1998
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
/s/ Eugene A. Soltero
Eugene A. Soltero
Chief Executive Officer
-9-
EX-27
Financial Data Schedule
<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 1998 10Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 226,879
<SECURITIES> 0
<RECEIVABLES> 305,201
<ALLOWANCES> 0
<INVENTORY> 604,400
<CURRENT-ASSETS> 1,282,996
<PP&E> 25,619,075
<DEPRECIATION> 447,337
<TOTAL-ASSETS> 27,189,672
<CURRENT-LIABILITIES> 2,079,245
<BONDS> 5,102,810
0
0
<COMMON> 21,426,630
<OTHER-SE> (3,088,350)
<TOTAL-LIABILITY-AND-EQUITY> 27,189,672
<SALES> 579,276
<TOTAL-REVENUES> 579,276
<CGS> 408,368
<TOTAL-COSTS> 902,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,053
<INCOME-PRETAX> (487,952)
<INCOME-TAX> 175,663
<INCOME-CONTINUING> (312,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (312,289)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
