<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
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
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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)
YUKON, 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 December 31, 1997 there were 17,283,248 shares of the
Registrant's Common Stock outstanding.
<PAGE> 2
COTTON VALLEY RESOURCES CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet as of
December 31, 1997 3
Condensed Consolidated Statements of Operations
For the six months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Operations
For the three months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flow
For the six months ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 5. OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS: (U.S. Dollars)
Cash $ 405,430
Accounts receivable 542,425
Prepaid expenses 94,138
Cash deposits 329,750
------------
TOTAL CURRENT ASSETS 1,371,743
RESTRICTED CASH 2,570,280
OIL AND GAS PROPERTIES 20,120,591
OILFIELD EQUIPMENT INVENTORY 2,614,069
OFFICE EQUIPMENT 71,742
------------
TOTAL ASSETS $ 26,748,425
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: (U.S. Dollars)
Accounts payable and accrued liabilities $ 1,172,548
Current portion of long-term debt $ 150,250
------------
TOTAL CURRENT LIABILITIES 1,322,798
LONG TERM DEBT 4,564,710
DEFERRED INCOME TAXES 2,486,812
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, authorized-unlimited, none issued
Common Stock, no par value, authorized-unlimited, 17,283,248 issued 21,513,857
Deficit accumulated in development stage (2,769,155)
Treasury Stock (270,000 shares) (425,000)
Accumulated Earnings 54,403
------------
TOTAL STOCKHOLDERS' EQUITY 18,374,105
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,748,425
============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
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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
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 435,289 $ 41,365
Equipment sales 713,622
Interest Income 8,140
Other Income 934
------------ ------------
TOTAL REVENUE 1,157,985 41,365
------------ ------------
EXPENSES:
Oil and gas production 225,925
Equipment purchase and rework 259,573
General and administrative 515,944 903,319
Interest 27,388 35,162
Depreciation and Depletion 56,618
------------ ------------
TOTAL EXPENSES 1,085,448 938,481
------------ ------------
PROFIT (LOSS) BEFORE INCOME TAXES 72,537 (897,116)
INCOME TAX BENEFIT (PROVISION) (18,134) 295,000
------------ ------------
NET PROFIT (LOSS) $ 54,403 $ (602,116)
============ ============
NET PROFIT (LOSS) PER SHARE $ 0.00 $ (0.05)
============ ============
(Basic and Diluted)
WEIGHTED AVERAGE SHARES 15,457,000 13,390,524
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
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<PAGE> 5
COTTON VALLEY RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Period from Period from
October 1, 1997 to October 1, 1996 to
December 31, 1997 December 31, 1996
------------------ -------------------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 240,088 $ 21,881
Equipment sales 283,622
Interest Income 8,140
Other Income 934
------------ ------------
TOTAL REVENUE 532,784 21,881
------------ ------------
EXPENSES:
Oil and gas production 89,189
Equipment purchase and rework 180,475
General and administrative 334,112 591,881
Interest 6,804 35,162
Depreciation and Depletion 27,430
------------ ------------
TOTAL EXPENSES 638,010 627,043
------------ ------------
PROFIT (LOSS) BEFORE INCOME TAXES (105,226) (605,162)
INCOME TAX BENEFIT (PROVISION) 26,307 151,291
------------ ------------
NET PROFIT (LOSS) $ (78,919) $ (453,871)
============ ============
NET PROFIT (LOSS) PER SHARE $ 0.00 $ (0.03)
============ ============
(Basic and Diluted)
WEIGHTED AVERAGE SHARES 16,620,000 13,390,000
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
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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
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $ 54,403 $ (602,116)
Adjustments to reconcile to net cash used by operating activities:
Deferred income tax provision (benefit) 18,134 (295,000)
Depreciation and depletion 56,618 5,572
Common stock issued for services 322,932
Change in accounts payable and other liabilities 479,511 (85,674)
Change in accounts receivable (456,823)
Increase in deposits (329,750)
Other (27,527) (3,263)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (205,434) (267,676)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (1,917,863) (303,134)
Addition to oilfield equipment inventory (2,614,069)
Increase in restricted cash (2,570,820)
Purchase of other assets -0- (43,831)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (7,102,752) (346,965)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in advances from related parties (20,000)
Sale of common stock and exercise of warrants 3,331,044 455,949
Increase in long-term debt 4,264,710
Costs related to sale of stock and notes (14,600)
Repayment of notes payable (504,750)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,071,004 441,349
DECREASE IN CASH (237,209) (563,165)
CASH - Beginning of period 642,612 803,070
CASH - End of period $ 405,430 $ 239,905
=========== ===========
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
Issuance of common stock for stock offering costs 12,409
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
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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 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 six months ended December 31, 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 for proceeds of
$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 1,716,296 shares of common stock on exercise of options and
warrants for $2,877,042.
(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 (2) 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.
The operations of Aspen are consolidated with the Company beginning on
August 1, 1997.
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(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 83.33% 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 Mustang Well
Servicing Company to operate the rigs and provide well servicing.
(7) SECURED CONVERTIBLE DEBENTURE
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.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST SIX MONTHS FISCAL 1998 AND FIRST SIX MONTHS FISCAL 1997
During the six months ended December 31, 1997, Cotton Valley incurred a
net profit of $54,403, which compares to a loss of $602,116 during the first six
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 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.
Oil and gas sales increased 952% from $41,365 for the six months ended
December 31, 1996 to $435,289 for the six months ended December 31, 1997,
reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions. Oil
and gas production costs increased to $225,925 for the six months ended December
31, 1997, reflecting the addition of the acquisitions and continued remedial
work required at the Alden Field.
Used equipment sales for the first half of fiscal 1998 were $713,622 as
compared to no sales for the comparable quarter of fiscal 1997. Cost of goods
sold for the first half of fiscal 1998 was $259,573.
General and administrative costs were $515,944 in the first half of
fiscal 1998, a decrease of $387,375 or 43% less than the $903,319 incurred in
the first half 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 $18,134 for the first half
of fiscal 1998 as compared to recognition of an income tax benefit of $295,000
for the first half of fiscal 1997. This is directly related to the size of the
profit or loss before income taxes.
2ND QUARTER FISCAL 1998 AND 2ND QUARTER FISCAL 1997
During the three months ended December 31, 1997, Cotton Valley incurred
a net loss of $78,919, which compares to a loss of $453,871 during the 2nd
Quarter 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 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.
Oil and gas sales increased 997% from $21,881 for the three months
ended December 31, 1996 to $240,088 for the three months ended December 31,
1997, reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions.
Oil and gas production costs increased to $89,189
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<PAGE> 10
for the three months ended December 31, 1997, reflecting the addition of the
acquisitions and continued remedial work required at the Alden Field.
Used equipment sales for the 2nd quarter of fiscal 1998 were $283,622
as compared to no sales for the comparable quarter of fiscal 1997. Cost of goods
sold for the 2nd quarter of fiscal 1998 was $180,475.
General and administrative costs were $334,112 in the 2nd quarter of
fiscal 1998, a decrease of $257,769 or 44% less than the $591,881 incurred in
the 2nd 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 an income tax benefit of $26,307 for the 2nd quarter of
fiscal 1998 as compared to an income tax benefit of $151,291 for the 2nd 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 December 31, 1997, Cotton Valley has working capital of $48,945.
In addition Cotton Valley has $2,570,280 of restricted cash which may be used
for acquisition and development of additional assets. Management estimates that
aggregate capital expenditures of approximately $5 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.
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<PAGE> 11
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.
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<PAGE> 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: February 23, 1998
COTTON VALLEY RESOURCES CORPORATION
(Registrant)
-----------------------------------------------
Eugene A. Soltero
Chief Executive Officer and Acting Chief
Financial Officer
-----------------------------------------------
Susan Silva
Chief Accounting Officer
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<PAGE> 13
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,305,460
<SECURITIES> 0
<RECEIVABLES> 636,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,942,023
<PP&E> 22,734,660
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,748,425
<CURRENT-LIABILITIES> 1,322,798
<BONDS> 0
0
0
<COMMON> 21,513,857
<OTHER-SE> (2,714,752)
<TOTAL-LIABILITY-AND-EQUITY> 26,748,425
<SALES> 1,148,911
<TOTAL-REVENUES> 1,157,985
<CGS> 485,498
<TOTAL-COSTS> 1,085,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 72,537
<INCOME-TAX> 18,134
<INCOME-CONTINUING> 54,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,403
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
