U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from N/A to N/A
Commission file number 33-81944
NOVA NATURAL RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 481388
789 Sherman Street, Suite 550
Denver, Colorado 80248
(Address of principal executive offices)
(303) 863-1997
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,496,188
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
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PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
December 31, September 30,
1996 1996
(Unaudited)
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ASSETS
Current assets:
Cash $ 329,453 $ 79,827
Accounts receivable:
Kaolin operations 0 376,392
Oil and gas operations(Note 2) 8,922 24,867
Other 38,038 31,273
Total 46,960 432,532
Prepaid expenses 6,030 3,941
Total current assets 382,443 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 529,880 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,902,164(Note 2) 104,646 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,155 38,649 38,851
Investment in and advances to NovaChek
Limited Liability Company 188,943 136,717
Deposits 51,550 51,000
_______ _______
$ 1,296,111 $ 1,545,920
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 65,909 $ 282,087
Accrued liabilities 10,417 35,576
Total current liabilities 76,326 317,663
Convertible debentures 250,000 250,000
Total liabilities 326,326 567,663
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding(Note 3) 2,687,682 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding(Note 3) 649,619 649,619
Additional paid-in capital 6,454,297 6,454,296
Accumulated deficit (8,821,813) (8,813,314)
Total stockholders' equity 969,785 978,257
Total Liabilities and Stockholders' Equity 1,296,111 1,545,920
========= =========
(fn)
See accompanying notes to condensed financial statements.
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NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended
December 31, December 31,
1996 1995
<S> <C> <C>
Revenue:
Mineral sales $ 191,556 $ 142,508
Oil and gas sales 41,616 44,638
_________ _________
233,172 187,146
Costs and expenses:
Mining costs, including transportation
and royalties 154,567 94,914
Oil and gas lease operating including
production taxes 30,415 32,615
Depletion, depreciation,
and amortization 9,492 18,146
Mineral property abandonments 60 --
General and administrative 112,220 92,193
_______ _______
306,754 237,868
Operating loss (73,582) (50,722)
Other income(expenses):
Share of losses of NovaChek Limited
Liability Company (6,290) --
Interest income 3,176 2,099
Interest expense (8,333) --
Gain on sale of assets 76,557 --
_______ _______
65,110 2,099
Net loss (8,472) (48,623)
Loss per share (Note 4) .00 (.01)
Weighted average common shares outstanding 6,496,188 6,496,188
(fn)
See accompanying notes to condensed financial statements.
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<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
December 31, December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (8,472) $ (48,623)
Adjustments to reconcile net
loss) to net cash provided
by operating activities:
Depletion and depreciation 9,492 18,146
Gain on sale of assets (76,557) --
Change in operating assets and liabilities:
Decrease in accounts receivable 385,572 228,081
(Increase) in prepaid expenses (2,089) (3,703)
(Increase) in deposits (550) (2,058)
(Decrease) in accounts payable (216,178) (108,816)
(Decrease) in accrued liabilities (25,159) (12,827)
Net cash provided by operating
activities 66,059 70,200
Cash flows from investing activities:
Proceeds from sale of assets 229,957 --
Investments in and advances to NovaChek
Limited Liability Company (52,226) --
Capital expenditures-mineral properties 9,624 (6,617)
Capital expenditures-oil and gas
properties (3,788) --
Capital expenditures-office and
technical equipment -- --
Net cash provided (used) by
investing activities 183,567 (6,617)
Cash flows from financing activities:
Principal payments on notes payable -- --
Proceeds from notes payable -- --
Net cash provided (used) by
financing activities -- --
Increase in cash 249,626 63,583
Cash, beginning of year 79,827 70,820
Cash, end of year 329,453 134,403
Supplemental cash flow information -
cash paid for interest -- --
(fn)
See accompanying notes to condensed financial statements.
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NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Three Months Ended December 31, 1996 and 1995
(1) The condensed financial statements included herein are unaudited.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made which are necessary for a fair
presentation of the financial position of the Company at December 31,
1996 and 1995 and the results of operations for the three month period
ended December 31, 1996 and 1995. Certain amounts have been reclassified
for comparability with the 1995 presentation. Quarterly results are not
necessarily indicative of expected annual results because of fluctuations
in the price received for oil and gas products, demand for natural gas,
kaolin and other factors. For a more complete understanding of the
Company's operations and financial position, reference is made to
Management's Discussion and Analysis of Financial Condition and Results
of Operations herein and the financial statements of the Company, and
related notes thereto, filed with the Company's annual report on Form
10-KSB for the year ended September 30, 1996, previously filed with the
Securities and Exchange Commission.
(2) On November 14, 1996, the Registrant sold at an auction conducted by
the Oil & Gas Asset Clearinghouse in Houston Texas several oil and gas
producing assets and leasehold interests, primarily overriding royalty
interests in producing oil & gas wells in the Wyoming Overthrust Belt.
Proceeds from this sale, net of commissions and direct selling costs were
$229,957. The gain on the sale was $76,550. The sale was effective as
of November 1, 1996. The bulk of the interests were sold to a Denver,
Colorado based firm not affiliated with the Company, which was the
successful bidder among a group of bidders at the auction for the greater
portion of the oil & gas assets and interests referred to above.
(3) In December, 1986 the Company issued 2,687,682 shares of Convertible
Preferred Stock to the Company's Chairman and to a principal shareholder
in settlement of $1,700,000 in convertible debentures plus related
accrued interest of $426,682 and $561,000 in bank debt repaid by the
Chairman and the principal shareholder on behalf of the Company. The
Preferred Stock is convertible into 5,375,364 shares of the Company's
Common Stock. The Preferred Shares contain 2 for 1 voting privileges,
have a $1.00 liquidation preference and have no stated dividend rate. In
February, 1997 the Company repurchased 510,342 shares of common stock and
895,415 shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash to be paid at closing, and
additional payments based on revenues from either the operation of or the
sale of its cement-grade kaolin mine of up to an aggregate value of
$70,008 over a period of years. The Company may also purchase a portion
of its common stock in the event of the sale of its kaolin mine upon the
assertion of appraisal rights by shareholders who dissent from a vote to
approve such sale.
(4) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of common
shares outstanding during each period. A fully diluted loss per share is
not computed because conversion of the Preferred Shares mentioned above,
and outstanding options would be antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company realized an operating loss for the three month period
ended December 31, 1996 of $73,582 compared to an operating loss of
$50,722 for the same period in 1995. A one-time gain on the sale of oil
and gas assets of $76,557 reduced the net loss for the 1996 period to
$8,472 compared to a net loss of $48,623 for the same period in 1995.
Mineral product sales increased $49,048 to $191,556 for the three
months ended December 31, 1996 compared to mineral sales of $142,508 for
the same period in 1995. The Company's customer for its kaolin clay
purchased more kaolin in the 1996 period that in the prior year's period,
when lengthy rail turn-around times limited the Company's ability to
deliver the quantity of kaolin desired by the customer. Turn-around
times returned to normal in the 1996 period.
Oil and gas sales for the three months ended December 31, 1996
decreased $3,022 to $41,616 compared to $44,638 for the three months
ended December 31, 1995. The Company sold several oil & gas producing
assets as of November 1, 1996, primarily overriding royalty interests in
producing oil & gas wells in the Wyoming Overthrust Belt. The decrease
in oil and gas sales is primarily attributable to the lower volume of oil
and gas produced net to the Company's interest as a result of this sale,
which more than offset the positive effect of higher oil and gas prices
in the quarter compared to the comparable quarter,and normal production
decline. The Company's future oil and gas production volumes will be at
a substantially reduced level as a result of this sale unless new
production can be brought on stream from as yet undrilled properties,
which is speculative. The sales volumes and average sales prices during
the periods were as follows:
Three Months Ended
December 31, December 31,
1996 1995
Sales
Oil (bbls) 1,283 2,040
Gas (MCF) 615 9,711
Average Sales Price
Oil $ 19.41 $ 15.39
Gas $ 1.17 $ 1.01
Mining costs including transportation and royalties were $154,567
for the three months ended December 31, 1996 as compared to $94,914 for
the same period in 1995. The increase is due to higher transportation
and mining costs associated with the higher volume of production and
sales in 1996 as compared to 1995, and to timing differences in the
billing of transportation costs.
Lease operating expenses including production taxes decreased $2,200
for the three months ended December 31, 1996 as compared to 1995. The
decrease is primarily attributable to the lower production volume in the
1996 period as a result of the production sale.
General and administrative expenses increased $20,027 for,the three
months ended December 31, 1996 as compared to the same period in 1995.
This increase was primarily due to higher legal expenses associated with
the possible sale of the Company's kaolin mine, as well as legal costs
incurred in connection with the repurchase of common and preferred stock
from a major shareholder, both one-time events. Accounting expenses were
also higher, due primarily to the need to review the Company's share of
the results of operations of NovaChek Limited Liability Company
("NovaChek"), which did not exist in the 1995 period.
Depletion, depreciation, and amortization decreased 48% to $9,492 in
the three months ended December 31, 1996 as compared to $18,146 in 1995.
This decrease was primarily the result of the sale of producing assets,
which substantially reduced the full-cost pool.
The Company's share of losses of NovaChek in the three months ended
December 31, 1996 were $6,290. NovaChek had not been formed in the 1995
period. The Company will record additional losses in future periods from
its interest in NovaChek unless NovaChek is able to establish profitable
operations, which cannot be determined at this time.
Interest income increased to $3,176 in the three months ended
December 31, 1996, compared to $2,099 in 1995, reflecting more cash on
hand invested in short-term obligations. Interest income will decline in
future periods due to the investment of cash in the repurchase of stock.
The Company may also invest cash in assets which are expected to generate
cash flow in the future, but which are likely to result in a net cash
outlay in the short term. Interest expense in the quarter increased to
$8,333 due to the issuance of interest-bearing convertible subordinated
debentures earlier in the fiscal year. There were no such debentures
outstanding in the 1995 period.
A gain of $76,557 on the one-time sale of producing assets was
recorded in the 1996 period. There was no such sale in the 1995 quarter.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the three months
ended December 31, 1996 were the collection of accounts receivable, and
proceeds from the non-recurring sale of oil & gas properties. Cash
provided by operations totaled $66,059 for the three month period ended
December 31, 1996 as compared to cash provided by operations of $70,200
for the same period in 1995. The increase in cash and cash equivalents
for the period was $249,626 resulting in cash on hand at December 31,
1996 of $329,453, compared to cash on hand at December 31, 1995 of
$134,403.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the three month period ended December 31, 1995, the Company
reduced accounts payable by $216,178. Proceeds from the sale of
properties were $235,793, and investment in and advances to NovaChek
Limited Liability Company were $52,226, resulting in cash generated by
investing activities of $183,567. In the comparable period, net cash
used by investing activities was $6,617. All funds for capital
expenditures for the remainder of the year are expected to be provided by
operating cash flow, from property or asset sales, if any, and from
existing cash balances. All funds for capital expenditures for the
remainder of the year are expected to be provided by operating cash flow,
from property or asset sales, if any, and from existing cash balances.
The Company has agreed to repurchase 510,342 shares of common stock and
895,415 shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash to be paid at closing, and
additional payments based on revenues from either the operation of or the
sale of its cement-grade kaolin mine of up to an aggregate of $70,008
over a period of years. The Company may also purchase a portion of its
common stock in the event of the sale of its kaolin mine upon the
assertion of appraisal rights by shareholders who dissent from a vote to
approve such sale. It is the Company's present intention to finance
these events from internal cash flow and cash resources, but the Company
may offer to sell preferred and/or common stock in a private placement to
replace all or a portion of these funds and provide additional capital to
acquire new sources of cash flow. Regardless of whether any such sale of
stock takes place, the Company will endeavor to acquire cash-flow
generating assets to replace the cash flow formerly provided by the
kaolin mine, the success of which endeavors cannot be predicted.
LIQUIDITY
At December 31, 1996, the Company's working capital surplus totaled
$306,117 as compared to a surplus of $198,637 at September 30, 1996.
Liquidity for the three months ended December 31, 1996 was provided by
the sale of several oil & gas producing assets and leasehold interests,
primarily overriding royalty interests in producing oil & gas wells in
the Wyoming Overthrust Belt, and by operations; however, liquidity was
reduced by reductions in accounts payable, accrued liabilities and
prepaid expenses and by investment in NovaChek Limited Liability Company.
Based on cash flow projections through 1997, it is anticipated that
the Company will have adequate cash resources if it continues to operate
at current levels. Because the Company has sold a portion of its oil &
gas producing assets, and oil and gas sales from its other properties
continue to decline, and the Company has only one customer for its
kaolin, the cash flow generated by oil, gas, and kaolin sales is not
sufficient to generate positive cash flow. In the event the sale of its
kaolin mine takes place, cash resources will be further enhanced over the
next twelve months, and further payments pursuant to the sale will be
received over the next five years, on a guaranteed basis. Cash flow in
the 1997 fiscal year would exceed that expected to be generated from the
Company's single contracted customer for its kaolin mine, but future
payments would provide a lesser amount of cash flow than in 1997. The
Company presently has no contracts for its kaolin mine which extend past
December 31, 1997. The Registrant has permitted a gravel pit on two
leases in Minnesota. A local contractor mined and marketed the gravel in
1996 and will pay the Company a royalty based on gravel sold. It is
anticipated that further gravel royalties may be realized from this
property in 1997. The Company will aggressively seek other sources of
cash flow in 1997 in both industrial minerals and oil and gas projects,
where risk is low to moderate.
FUTURE TRENDS
Kaolin sales are seasonal in nature and the mining of kaolin is
dependent on favorable weather conditions, demand by cement companies for
this product, and other factors over which the Company has no control.
The Company has a sales contract with a cement company which expires in
December, 1997. The fact that the Company has only one purchaser for its
kaolin has had and will continue to have a significant negative impact on
the Company's cash flow and operations. In addition, the short line
railroad which directly serves the mine is in need of rehabilitation to
increase the reliability of the line and make it less susceptible to
weather delays. There is no such rehabilitation planned at present.
However, rehabilitation of this line has been needed for a number of
years, and an acceptable level of service has been maintained on the line
through normal maintenance procedures. This rail line is currently being
offered for sale by the owner/operator, and should such a sale take
place, the level of service which will be offered by the new owner cannot
be determined.
The prices the Company receives for its oil and gas products will
continue to fluctuate, although current prices are generally higher than
those obtained last year. The Company's largest producing oil field, the
North Rainbow Ranch Unit, produces a heavy, sour crude. The price paid
for this crude is significantly less than from a higher quality crude.
Since most of the Company's oil sales are from this field, and it is in
the latter stages of its lifetime, it takes a significant increase in oil
prices for oil sales to increase. In addition, much of the company's gas
is sold on the spot market and such sales are subject to both price and
market demand fluctuations.
It cannot be determined at this time whether NovaChek Limited
Liability Company will be successful in raising the funds necessary to
initiate gold mining operations on its property in Alaska, nor can it be
determined whether these operations, if so initiated, will be successful.
If commercial operations can be established on this property, the Company
will generate cash flow from this investment in future years, the level
of which cannot be determined with certainty until such operations have
been established and maintained for two or more seasons.
The Company has reduced its overhead substantially over the past two
years, and further reductions would be difficult to achieve without
impairing the Company's ability to operate efficiently, manage its assets
and pursue its growth objectives. Nova Natural Resources Corporation
intends to explore all avenues whereby it can strengthen its balance
sheet, develop its assets, acquire additional assets and add to its
ability to generate revenues, achieve profitability, and create value for
its shareholders, including the acquisition of assets or of other
companies, mergers, and private and/or public financing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None
(b) Form 8-K. A report on Form 8-K was filed November 14, 1996,
and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of
the undersigned thereunto duly authorized.
NOVA NATURAL RESOURCES CORPORATION
Date: February 24, 1996 By: /s/ Brian B. Spillane
Brian B. Spillane,
President, Director, and
Chief Executive Officer
Date: February 24, 1996 By: /s/ James R. Schaff
James R. Schaff,
Secretary-Treasurer
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 329453
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<RECEIVABLES> 46960
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<PP&E> 6799795
<DEPRECIATION> 6126620
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<CURRENT-LIABILITIES> 76326
<BONDS> 250000
0
2687682
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