________________________________________________________________________________
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 March 31, 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 March 31, 1998 there were 17,073,248 shares of the Registrant's Common
Stock outstanding.
________________________________________________________________________________
COTTON VALLEY RESOURCES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Restated Condensed Consolidated Financial Statements:
Restated Condensed Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997 3
Restated Condensed Consolidated Statements of
Operations and Comprehensive Income
For the nine months ended March 31, 1998 and 1997 4
Restated Condensed Consolidated Statements of
Operations and Comprehensive Income
For the three months ended March 31, 1998 and 1997 5
Restated Condensed Consolidated Statements of Cash Flow
For the nine months ended March 31, 1998 and 1997 6
Notes to Restated Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Uses of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Securities Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8K 12
Signatures 13
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
RESTATED CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1998
(Expressed in U.S. Dollars)
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 1,536,875
Accounts receivable 417,509
Materials and supplies inventory 528,305
Prepaid expenses 77,191
---------------
Total Current Assets 2,559,880
PROVED OIL AND GAS PROPERTIES (full cost method)
Net of Accumulated depletion of $283,683 23,037,206
OFFICE FURNITURE AND EQUIPMENT
Net of Accumulated depreciation of $14,813 80,226
DEBENTURE FINANCING COST AND OTHER ASSETS 682,471
---------------
Total Assets $ 26,359,783
===============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,263,618
--------------
Total Current Liabilities 1,263,618
LONG TERM DEBT 4,345,000
ADVANCES FROM RELATED PARTIES 119,710
DEFERRED INCOME TAXES 2,070,098
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited,
none issued -
Common Stock, no par value, authorized-unlimited,
17,073,248 issued 20,941,357
Warrants and beneficial conversion feature 823,695
Deficit accumulated in development stage (2,769,155)
Accumulated earnings (loss) (434,540)
-------------
Total Stockholders' Equity 17,737,662
Total Liabilities and Stockholders' Equity $ 26,359,783
=============
</TABLE>
See accompanying notes to these financial statements
-3-
COTTON VALLEY RESOURCES CORPORATION
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1997 to July 1, 1996 to
March 31, 1998 March 31, 1997
---------------- --------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 712,522 $ 131,986
Equipment Sales 574,551 -
Other Income 2,357 -
----------------- --------------
Total Revenue 1,289,430 131,986
EXPENSES:
Oil and gas production 540,248 -
Cost of equipment sold 343,788 -
Operating expenses 68,945 -
General and administrative 922,678 1,462,532
Depreciation and depletion 256,683 80,757
Other expenses 540 -
----------------- -------------
Total Expenses 2,132,882 1,543,289
LOSS FROM OPERATIONS (843,452) (1,411,303)
OTHER INCOME (EXPENSES):
Interest and financing expense (511,152) -
Gain on sale of assets 636,881 (54,115)
Interest income 43,889 -
----------------- --------------
Total Other 169,618 (54,115)
LOSS BEFORE INCOME TAXES (673,834) (1,465,618)
INCOME TAX BENEFIT 242,580 500,000
----------------- --------------
NET AND COMPREHENSIVE LOSS $ (431,254) $ (965,418)
================= ==============
NET AND COMPREHENSIVE LOSS
PER SHARE (Basic and Diluted) $ (0.03) $ (0.07)
================= ==============
WEIGHTED AVERAGE SHARES 16,263,265 13,390,524
================= ==============
</TABLE>
See accompanying notes to these financial statements
-4-
COTTON VALLEY RESOURCES CORPORATION
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
January 1, 1998 January 1, 1997
to March 31, 1998 to March 31, 1997
----------------- -----------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 160,686 $ 90,621
Equipment sales 152,929 -
Other Income 1,423 -
----------------- -----------------
Total Revenue 315,038 90,621
EXPENSES:
Oil and gas production 203,275 -
Cost of equipment sold 87,643 -
Operating expense 18,350 -
General and administrative 383,274 559,213
Depreciation and depletion 98,657 80,757
Other expense 540 -
----------------- -----------------
Total Expenses 791,739 639,970
LOSS FROM OPERATIONS (476,701) (549,349)
OTHER INCOME (EXPENSE)
Interest and financing expense (434,204) (18,953)
Gain on sale of Assets 636,881 -
Interest income 27,609 -
----------------- -----------------
Total Other Income Expense 230,286 (18,953)
LOSS BEFORE INCOME TAX (246,415) (568,302)
INCOME TAX BENEFIT (PROVISION) 88,709 205,000
NET AND COMPREHENSIVE (LOSS) $ (157,706) $ (363,302)
================= =================
NET AND COMPREHENSIVE (LOSS) PER SHARE
(Basic and Diluted) $ (0.01) $ (0.03)
================= =================
WEIGHTED AVERAGE SHARES 17,238,924 13,390,000
================= =================
</TABLE>
See accompanying notes to these financial statements
-5-
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
Period from Period from
July 1, 1997 July 1, 1996
to March 31, 1998 to March 31, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (434,540) $ (965,418)
Adjustments to reconcile to net
cash used by operating activities:
Deferred income tax benefit (242,580) (500,000)
Depreciation and depletion 256,683 9,216
Amortization 374,185 -
Common stock issued for services - 863,862
Change in accounts payable and other
liabilities 470,581 193,495
Change in materials and supplies
inventory (533,108) -
Change in accounts receivable (331,907) -
Other 84,325 (204,800)
----------------- ----------------
Net cash provided (used) by operating
activities (356,361) (603,645)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (5,610,327) (893,250)
Additions to office furniture and
equipment (39,577) (101,520)
---------------- ----------------
Net cash used by investing activities (5,649,904) (994,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in advances from related
parties (20,000) (21,999)
Sale of common stock and exercise of
warrants 3,553,092 889,089
Issuance of convertible debenture 4,320,000 -
Costs related to sale of stock and
notes (443,274) (14,600)
Issuance of notes payable 489,710 -
Repayment of notes payable (999,000) -
---------------- ---------------
Net cash provided by financing
activities 6,900,528 852,490
INCREASE (DECREASE) IN CASH 894,263 (745,925)
CASH - Beginning of period 642,612 803,070
CASH - End of period $ 1,536,875 $ 57,145
=============== ===============
SUPPLEMENTAL INFORMATION
Debt incurred in acquisition of oil
and gas properties $ 300,000 355,000
Oil and gas properties acquired with
common stock 4,530,000 -
Conversion of debt to common stock 100,000 -
Issuance of common stock for stock offering
costs - 12,409
Cash paid for interest 107,407 35,162
Prepaid expense acquired with common stock 48,525 -
Beneficial conversion feature on
convertible debentures 479,162 -
</TABLE>
See accompanying notes to these financial statements
-6-
NOTES TO RESTATED 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 and for
other operators.
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 nine months ended March 31, 1998, 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 for proceeds of
$454,000, issued additional shares for the acquisition of an oil and gas
well, and for the conversion of $100,000 of a note payable to common
stock, and issued approximately 1,677,000 shares of common stock on
exercise of options and warrants for approximately $2,920,000. Also
270,000 shares were retired, which were received in payment of $425,000 of
indebtedness.
(3) Acquisition of Aspen Energy Corporation
During the period, Cotton Valley acquired Aspen for $4,995,000, 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 (2) Aspen
shareholders in settlement of notes payable to Aspen in the amount of
$425,000. The acquisition was accounted for as a purchase and the
operations of Aspen are consolidated with the Company beginning on August
1, 1997.
-7-
(4) Acquisition of Sears Ranch Prospect
During the period, Cotton Valley acquired the 6,600 acre Sears Ranch Prospect
in Nolan and Fisher Counties, Texas, for $400,000.
(5) Acquisition of Horizontal Drilling Equipment
During the period, Cotton Valley acquired substantially all the business and
equipment of M&M Directional Services Consultants for $550,000, through a
newly formed 100% subsidiary, Mustang Horizontal Services, Inc.
(6) Acquisition of Well Service Rigs and Equipment
During the period, Cotton Valley acquired two (2) well service rigs and
related well service equipment for $1,220,000, and formed the 100%
subsidiary, Mustang Well Servicing Company to operate the rigs and provide
well servicing.
(7) Secured Convertible Debentures
During the period, Cotton Valley sold $4,320,000 of 7% Secured Convertible
Debentures to a group of private investors. Portions of the proceeds were
used to complete the acquisition of the well service rigs and related
equipment.
The amount of the beneficial conversion feature related to the secured
convertible debentures in the amount of $479,162 is being amortized over a
ten month period using an accelerated amortization method. For the three
month and nine month periods ended March 31, 1998, $301,245 of this amount
was amortized and is included in financing expenses in the accompanying
financial statements. As the conversion price of the debentures is at a
discount of the trading price of the common stock, the amount of the
conversion feature that was "in the money" at the date of issue is being
amortized to increase the effective interest rate of the debentures.
(8) Zama Lake Acquisition and Sale
During the period Cotton Valley completed the acquisition of substantially
all of the oil and gas interests in the Zama Lake area in Alberta, Canada
owned by a Canadian independent producer. The purchase price was $6.9
million. Immediately following the purchase, the Company sold all of its
interests to Phillips Petroleum Resources, Ltd. and certain of its
affiliates for $7.5 million. The company recognized a gain on sale of
assets of approximately $636,881 from the transactions.
-8-
(9) Means-(Queen) Waterflood Development Financing
During the period Cotton Valley has entered into a letter of intent for a
$10,000,000 mezzanine financing facility with Cambrian Capital
Corporation. The funds are to be used primarily for the development of
the Means-(Queen) waterflood and in-fill development project in Andrews
County, Texas.
(10)Contingent Liability
On February 9, 1998, the Company continued from Ontario to Yukon
Territory, Canada (the "Continuance") in accordance with applicable
Canadian law. The Continuance was approved by the shareholders of the
Company at a meeting held on December 10, 1996, for which proxies were
solicited in accordance with applicable Canadian laws, but the transaction
was not registered under the Securities Act of 1933, as amended (the
"Act"), which may have been a violation of Section 5 of the Act. As a
result, the Company may have a contingent liability to certain of its
shareholders, which the Company is presently unable to quantify.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
First Nine Months Fiscal 1998 and First Nine Months Fiscal 1997
During the first nine months ended March 31, 1998, Cotton Valley
incurred a net loss of $431,254, which compares to a net loss of $965,418
during the first nine months of 1997. The improvement results from a $636,881
gain on the sale of a Canadian property, the first used equipment sales by
Cotton Valley's subsidiary, Mustang Oilfield Equipment Company and oil and
gas production beginning August, 1997, from the Aspen Energy Corporation
properties, oil and gas production beginning November, 1997, from the Sears
Ranch Prospect, and continued production from the Company's Alden Field and
Cheneyboro properties, offset by $511,152 financing and interest expense in
the first nine months of fiscal 1998 as compared with $54,115 interest
expense during the first nine months of fiscal 1997.
Oil and gas sales increased 440% from $131,986 for the nine months
ended March 31, 1997 to $712,522 for the nine months ended March 31, 1998,
reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions.
Oil and gas production costs increased to $540,248 for the nine months ended
March 31, 1998, reflecting the addition of the acquisitions and continued
remedial work required at the Alden Field.
Used equipment sales for the first nine months of fiscal 1998 were
$574,551 as compared to no sales for the comparable nine months of fiscal
1997. Cost of goods sold for the first nine months of fiscal 1998 was
$343,788.
General and administrative costs were $922,678 in the first nine months
of fiscal 1998, a decrease of $539,854 or 37% less than the $1,462,532
incurred in the first nine months of fiscal 1997. Much of the decrease was
due to lower executive compensation and investor relations costs. In
addition, the Company allocated approximately $300,000 of general and
administrative expenses that were directly associated with oil and gas
acquisition and development activities during the nine months ended March 31,
1998 to oil and gas properties.
The Company has recognized an income tax benefit of $242,580 for the
first nine months of fiscal 1998 as compared to recognition of an income tax
benefit of $500,000 for the first nine months of fiscal 1997. This is
directly related to the size of the profit or loss before income taxes.
3rd Quarter Fiscal 1998 and 3rd Quarter Fiscal 1997
During the three months ended March 31, 1998, Cotton Valley incurred a
net loss of $157,706, which compares to a net loss of $363,302 during the
third Quarter of 1997. The improvement results from a $636,881 gain on sale
of a Canadian property, used equipment sales by Cotton Valley's subsidiary,
Mustang Oilfield Equipment Company, and increased oil and gas production from
the Aspen Energy Corporation properties, oil and gas production from the
Sears Ranch Prospect, and continued production from the Company's Alden Field
-10-
and Cheneyboro properties, offset by $434,204 of financing and interest costs
in third quarter of fiscal 1998 as compared with $18,953 of interest expense
in third quarter of fiscal 1997.
Oil and gas sales increased 77% from $90,621 for the three months ended
March 31, 1997 to $160,686 for the three months ended March 31, 1998,
reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions.
Oil and gas production costs increased to $203,275 for the three months ended
March 31, 1998, reflecting the addition of the acquisitions and continued
remedial work required at the Alden Field.
Used equipment sales for the 3rd quarter of fiscal 1998 were $152,929
as compared to no sales for the comparable quarter of fiscal 1997. Cost of
goods sold for the 3rd quarter of fiscal 1998 was $87,643.
General and administrative costs were $383,274 in the third quarter of
fiscal 1998, a decrease of $175,939 or 32% less than the $559,213 incurred in
the third quarter of fiscal 1997. Much of the decrease was due to reductions
in investor relations costs. In addition, the Company allocated
approximately $100,000 of general and administrative expenses that were
directly associated with oil and gas acquisition and development activities
during the three months ended March 31, 1998 to oil and gas properties.
The Company has an income tax benefit of $88,709 for the 3rd quarter of
fiscal 1998 as compared to an income tax benefit of $205,000 for the 3rd
quarter of fiscal 1997. This is directly related to the profit or loss
before income taxes.
Liquidity and Capital Resources
As of March 31, 1998, Cotton Valley has working capital of $1,296,262.
Management estimates that aggregate capital expenditures of approximately
$3.5 million will be spent during the remainder of fiscal 1998 to acquire and
develop oil and gas reserves. The majority of this capital will be derived
from a mezzanine financing facility from Cambrian Capital, which management
expects to close by June 15, 1998. No assurance can be given that the Company
will be successful in these efforts.
-11-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 1998, there are no legal proceedings pending against Cotton
Valley.
Item 2. Changes in Securities and uses of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
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.
Item 6. Exhibits and Reports on Form 8K
In a Form 8-K filed on February 26, 1998, "Effective June 30, 1997, Cotton
Valley Resources Corporation (the "Registrant") acquired Aspen Energy
Corporation, a New Mexico corporation ("Old Aspen"), by merger with a
wholly-owned Nevada subsidiary corporation. The acquisition closed on July
31, 1997 and has been accounted for as purchase. The purchase price for the
acquisition consisted of $500,000 cash and short-term notes and 2,511,317
shares of the Registrant's common stock, no par value, of which 270,000
shares were returned to the Registrant by two Old Aspen shareholders in
settlement of notes payable to Old Aspen in the amount of $425,000. The
principal asset acquired was an interest in the Means (Queen Sand) Unit in
Andrews County, Texas. The acquisition also included an interest, having less
than $500,000 in value, in two wells in Utah, which have been sold for
$200,000, two wells in Latimer County, Oklahoma, one well in Harrison County,
Texas and several shallow wells in Gregg County, Texas.
On February 18, 1998, Leon A. Romero, former president of Old Aspen, was
elected to the Registrant's Board of Directors to serve until the next
meeting of shareholders at which directors are elected or his sooner death,
resignation or removal.
-12-
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 5, 1998
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
/s/ Eugene A. Soltero
Eugene A. Soltero
Chief Executive Officer
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 MARCH 1998 10Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,536,875
<SECURITIES> 0
<RECEIVABLES> 417,509
<ALLOWANCES> 0
<INVENTORY> 528,305
<CURRENT-ASSETS> 2,559,880
<PP&E> 23,037,206
<DEPRECIATION> 283,683
<TOTAL-ASSETS> 26,359,783
<CURRENT-LIABILITIES> 1,263,618
<BONDS> 4,464,710
0
0
<COMMON> 20,941,357
<OTHER-SE> (3,203,695)
<TOTAL-LIABILITY-AND-EQUITY> 26,359,783
<SALES> 1,289,430
<TOTAL-REVENUES> 1,289,430
<CGS> 884,036
<TOTAL-COSTS> 2,132,882
<OTHER-EXPENSES> (169,618)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511,152
<INCOME-PRETAX> (673,834)
<INCOME-TAX> 242,580
<INCOME-CONTINUING> (431,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (431,254)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
