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, 1998
( ) 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 0-15078
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.)
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: 6,274,131
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 6,318
Accounts receivable:
Oil and gas 1,898
Other 4,011
Current maturities of note receivable 70,200
Prepaid expenses and other 5,570
_________
Total current assets 87,997
OIL AND GAS PROPERTIES, at cost
(using the full
cost method of accounting):
Unproved properties not being amortized 11,806
Properties being amortized 5,986,639
_________
5,998,445
Accumulated depreciation, depletion
and amortization (5,949,310)
___________
Net oil and gas properties 49,135
MINERAL PROPERTIES, at cost 171,915
OTHER ASSETS:
Note receivable, net of current maturities 237,662
Furniture and technical equipment,
net of accumulated depreciation
of $127,399 680
_______
Total other assets 238,342
_______
TOTAL ASSETS $ 547,389
=======
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET, CONTINUED
DECEMBER 31, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 14,441
Accounts payable 45,392
Accrued expenses 57,849
_________
Total current liabilities 117,682
_________
LONG TERM DEBT, less current maturities 268,164
_________
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1.00
par value; 3,000,000 shares
authorized; 1,792,267 shares
issued and outstanding,
liquidation preference $1,792,267 1,792,267
Common stock, $.10 par value;
17,000,000 shares authorized;
6,274,131 shares issued and
outstanding; 627,413
Additional paid-in capital 7,198,376
Accumulated deficit (9,456,513)
___________
Total Stockholders' equity 161,543
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 547,389
=======
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
______ ______
REVENUES:
Mineral sales:
Kaolin $ - $ 584
Gravel Royalties - 1,320
Oil and gas sales 8,787 20,767
_________ _________
Total revenues 8,787 22,671
_________ _________
COSTS AND EXPENSES:
Oil and gas production costs 3,505 21,165
Depletion, depreciation, and
amortization 3,153 4,384
Mining property abandonments - 5,813
General and administrative 20,023 86,993
_________ _________
Total costs and expenses 26,681 118,355
_________ _________
OPERATING LOSS (17,894) (95,684)
OTHER INCOME (EXPENSES):
Interest income 8,550 11,817
Interest expense (7,897) (7,226)
Other income 6,246 -
_________ ________
6,899 4,591
_________ _________
NET LOSS $ (10,995) $ (91,093)
========== =========
NET LOSS PER SHARE (.00) (.02)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,274,131 5,788,939
========= =========
See accompanying notes to these financial statements
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
______ ______
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,995) $ (91,093)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization 3,153 4,384
Gain on sale of assets -- --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 13,456 15,318
Prepaid expenses and other 4,658 (1,640)
Deposits -- --
Increase (decrease) in:
Accounts payable 3,142 (53,132)
Accrued expenses 7,017 53,324
_________ ________
Net cash provided by (used in) operating activities 20,431 (72,839)
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- 13,890
Capital expenditures (6,259) (16,991)
Collection of principal on note receivable 38,425 36,366
_________ _________
Net cash provided by (used in) investing activities 32,166 33,265
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (45,148)
Principal payments on long-term debt -- (4,670)
Purchase and retirement of common and preferred stock -- (16,458)
_________ ________
Net cash provided by (used in) financing activities (45,148) (21,128)
_________ ________
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 7,449 (60,702)
_________ ________
CASH AND EQUIVALENTS, at beginning of year (1,131) 150,485
_________ ________
CASH AND EQUIVALENTS, at end of year $ 6,318 $ 89,783
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 880 $ --
========= ========
<FN>
See accompanying notes to these financial statements.
</FN>
</TABLE>
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Three Months Ended December 31, 1998 and 1997
(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, 1998 and the results of operations for
the three month period ended December 31, 1998 and 1997. Certain amounts have
been reclassified for comparability with the 1997 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, 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, 1998,
previously filed with the Securities and Exchange Commission.
(2) During fiscal 1997, the Company offered to purchase common shares from
shareholders desiring to sell for $.04 per share. Through September 30, 1997
the Company purchased and retired 13,700 shares for $548. In October 1997, an
additional 411,447 shares were purchased for $16,458 and retired.
(3) 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. Common share equivalents including convertible preferred
stock, stock options, and convertible debentures were not included in the
computation of diluted earnings per share as their effect was anti-dilutive for
1998 and 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Managements discussion of anticipated future operations contains
predictions and projections which may constitute forward looking
statements. The Private Securities Litigation Reform Act of 1995,
including provisions contained in Section 21E of the Securities Exchange
Act of 1934, provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes that
a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include, but are not
limited to, the following:
(a) The Company may not be able to enter into an agreement with a new
partner to assist the Company in carrying its paper-grade kaolin project to
the commercial feasibility stage on terms acceptable to Nova, or otherwise
fund this project on an interim basis.
(b) The paper-grade kaolin project may encounter difficulties, currently
unforeseen, which will prevent attainment of commercial feasibility.
(c) The Company may not be able to find industry partners to evaluate its
oil & gas prospects. Low oil and gas prices have resulted in reduced
exploration budgets, which have made it much more difficult to put together
drilling arrangements on exploratory prospects than has previously been the
case.
(d) Present and anticipated sources of funds may be insufficient to meet
the Company's working capital needs.
RESULTS OF OPERATIONS
The Company realized an operating loss for the first quarter of fiscal
1999, the three month period ended December 31, 1998 of $17,894 compared to
an operating loss of $95,684 for the same period in 1997. A $66,970
reduction in General and Administrative costs was chiefly responsible for
the lower operating loss in the fiscal 1999 quarter coupled with reduced
oil and gas production costs. The lower G&A costs reflect the elimination
of staff salaries and a continual campaign to reduce costs in every area of
the Company's operations.
No mineral product sales were recorded for the three months ended
December 31, 1998 compared to mineral sales of $584 for the same period in
1997. In July, 1997 the Company obtained shareholder approval for the sale
of its cement-grade Kaolin mine. The sale of this mine accounts for the
drop in mineral sales. The Company has also sold its gravel royalty, and
no longer realizes income from gravel sales.
Oil and gas sales for the three months ended December 31, 1998
decreased $11,980 or 58% to $8,787 compared to $20,767 for the three months
ended December 31, 1997. The Company sold several oil & gas producing
assets during the first quarter of fiscal 1997 (as of November 1, 1996),
primarily overriding royalty interests in producing oil & gas wells in the
Wyoming Overthrust Belt, and sold other smaller production interests during
the 1998 fiscal year. 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 these sales, and to the substantial
decrease in the price of oil during the past year, which has resulted in
severely depressed oil prices during the three months ended December 31,
1998. The Company's future oil and gas production volumes and sales
revenues will be at this substantially reduced level, less the effect of
normal production decline unless new production can be brought on stream
from as yet undrilled properties, and unless there is an improvement in the
price of oil, which is speculative. The sale volumes and average sales
prices during the quarterly periods were as follows:
Three Months Ended
December 31, December 31,
1998 1997
Sales
Oil (bbls) 620 1,015
Gas (MCF) 350 435
Average Sales Price
Oil $ 7.86 $ 15.77
Gas $ 1.88 $ 1.70
Oil and Gas production costs decreased 83% or $17,660 for the three
months ended December 31, 1998 as compared to 1997. The decrease is
primarily attributable to the lower production volume in the 1998 period as
a result of the production sales.
General and administrative expenses decreased 77% or $66,970 to
$20,023 for the three months ended December 31, 1998 as compared to the
same period in 1997. This decrease was primarily due to across-the-board
reductions, including the elimination of staff salaries.
Depletion, depreciation, and amortization decreased 28% to $3,153 in
the three months ended December 31, 1998 as compared to $4,384 in the
1997 fiscal period. This decrease was primarily the result of the sale of
producing assets, which substantially reduced the full-cost pool. Mining
property abandonments in the 1997 first quarter were $5,813. There were no
such abandonments in the 1998 quarter.
During fiscal 1997, NovaChek LLC commenced dredging operations on its
gold properties in Alaska, but management determined that it was not
possible to operate economically. In December 1997, the managers of
NovaChek LLC decided to liquidate the LLC by the end of 1997 and they
determined that the net realizable value of NovaChek LLC's assets would not
be sufficient to satisfy all of the liabilities. In September 1997, the
Company wrote its investment in NovaChek down to $4,000, which it received
in February, 1998.
Interest income decreased to $8,550 in the three months ended
December 31, 1998, compared to $11,817 in 1997. The decrease is due to the
accrued interest on the note receivable from the sale of the cement grade
kaolin mine. Since a portion of this installment note was collected during
the past year, the remaining principal is less, and thus the accrued
interest at December 31, 1998 is proportionally smaller. Interest expense
in the quarter increased slightly to $7,897 in the three months ended
December 31, 19987, compared to $7,226 in 1997 due to interest payments on
a line of credit which was not in place in the 1997 period. The balance on
the line of credit was fully paid prior to December 31, 1998.
Other income consisted of $6,246 in proceeds received from the
settlement of a lawsuit. There was no such item in the comparable period.
No lawsuits remain outstanding.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary sources of cash flow during the three months
ended December 31, 1998 were the collection of accounts receivable,
proceeds from oil and gas sales, income of $6,246 from the settlement of a
lawsuit, and collection of principal on the note receivable associated with
the sale of the kaolin mine. Cash provided by operations totaled $20,431
for the three month period ended December 31, 1998 as compared to cash used
by operations of $72,839 for the same period in 1997. The increase in cash
and cash equivalents for the period was $7,449 resulting in cash on hand at
December 31, 1998 of $6,318, compared to cash on hand at December 31, 1997
of $89,783. In the 1997 period, cash on hand was enhanced by the proceeds
from the asset sales.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the three month period ended December 31, 1998 the Company
increased accounts payable by $3,142. Collection of principal on the note
receivable was $38,425 resulting in cash provided by investing activities
of $32,166. In the comparable period, net cash provided by investing
activities was $33,265. 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, from existing cash balances, and from
the proceeds of a contemplated loan against future accounts receivable from
the mine sale.
LIQUIDITY
At December 31, 1998, the Company's working capital deficit totaled
$29,685 as compared to $55,343 at September 30, 1998. Liquidity for the
three months ended December 31, 1998 was provided by the collection of
principal on a note receivable and the receipt of proceeds from the
settlement of a lawsuit; however, liquidity was reduced by a reduction in
accounts payable and capital expenditures.
Based on cash flow projections through 1999 it is anticipated that the
Company will be required to borrow against its receivable from the mine
sale.
DEBT RESTRUCTURING
The Company has debt outstanding in the form of Convertible
Subordinated Debentures in the Principal Amount of $250,000. Interest is
payable semi-annually on these debentures at the rate of 10% per annum.
They are convertible into common shares at a conversion price of $.15 per
share, and are due and payable, unless redeemed sooner by the Corporation,
on April 1, 2001. An interest payment in the amount of $12,500 is due on
February 28, 1999. The Company does not have sufficient funds to make this
interest payment, which, if not made, would cause the debentures to be in
default, upon which event the entire unpaid and unredeemed balance of the
Principal Amount and all interest accrued and unpaid, at the election of
the holder, would become immediately due and payable, subject to a curative
period and other provisions.
The Company has made an offer to all of the holders of its Convertible
Subordinated Debentures to restructure this debt. The Company has offered
to exchange restricted common shares of the Corporation for 50% of the
Principal Amount (i.e. $125,000), at a price per share of $.04, and to
replace the other 50% of the Principal Amount with notes secured by a
portion of a $125,000 installment payment relating to the sale of its
kaolin mine to be received in December 2001. The notes would have a due
date of December 31, 2001, and would pay interest at 10% per annum, with
payments to be made on August 31 and December 31 of each year, to coincide
with the receipt of installment payments from the mine sale. No interest
payment would be made on February 28, 1999. However the August 31, 1999
interest payment would include interest computed at an annual rate of 10%
on the notes, as if the note had been outstanding from September 1, 1998.
Management will recommend to the shareholders at the next shareholders
meeting that shares sufficient to allow conversion of these notes to common
shares at a conversion price of $.4 per share be authorized. The Company
would have the right to call the notes prior to the due date, and the
holders of such notes would have the right to either be paid cash and
accrued interest or convert the notes to common shares. The holders would
also have the right to exercise this conversion privilege at any time
subsequent to approval of such conversion rights and prior to the due date
of the note.
If accepted by all of the holders of the debentures, Nova would issue
3,125,000 authorized but unissued common shares, and another 3,125,000 such
shares would be issuable should 1) shareholders authorize sufficient shares
to provide for conversion of the $125,000 principal amount of the notes
into common stock, and 2) should all of the holders of the notes elect to
so convert. In addition, the Company's debt will be reduced by $125,000
and the annual interest cost will be reduced to $12,500 from $25,000.
As/of February 12, 1999, 89% of the holders of the Company's Convertible
Subordinated Debentures had agreed to these terms. The other 11% have not
yet responded to the offer. No one has notified the Company that they will
reject the offer, and the Company is extending the offer through at least
the end of February, 1999. Accordingly, it appears this offer will be
successful. 100% acceptance of this offer would result in substantial
dilution. Common shares outstanding on a fully-diluted basis will increase
from approximately 15,000,000 shares to approximately 16,460,000 shares,
and if the notes are converted, to approximately 19,581,000 shares.
Nova's officers and Directors hold $46,875 or 18.8% of the Principal
Amount of these debentures, which they acquired on identical terms as those
not affiliated with the Company. All of the officers and directors holding
such debentures have agreed to accept the Company's offer.
FUTURE TRENDS
The Company asked its partner in its Minnesota paper kaolin
exploration project to withdraw from the project, and an agreement of
termination was signed on January 9, 1998. It is the Company's intent to
replace its former partner with a new partner who will financially support
the work needed to bring the project to final feasibility. The Company and
its partner have expended in excess of $3.3 Million on this project. The
further cost of reaching final feasibility has been estimated by the
Company at an additional $4.4 Million, which it is contemplated would be
expended over the next 2-3 years. The Company now controls 100% of the
interest in the project, but must make a $300,000 future payment to its
former partner by December 31, 2001 to retain that interest or the
properties will revert to its former partner.
Nova is proposing a program of development to potential industry
partners, which proposal includes overhead and management fees which the
Company would receive in return for operating the program. It is proposed
that an industry partner would earn a majority interest in the project by
expending these funds, and would either finance or arrange financing for a
processing plant which would be required to initiate production on the
properties committed to the project, which would require an estimated
investment of $41 Million in adition to the $4.4 Million to reach final
feasibility. It is the Company's goal to enter into an agreement with a
new partner and profitably put the properties into production. While the
Company believes it will be successful in entering into an agreement with
a new partner on reasonable terms, that the project will prove to be
economically feasible, and that it will be put into profitable production,
there can be no assurance that any of these events will occur.
It is contemplated that the Company's efforts will be concentrated
primarily on this project over the next several years, and that overhead
and management fees connected with this project will be adequate to cover
the Company's costs and prevent any further deterioration in its working
capital. However, until an acceptable industry partner is located, or
additional funding for this project if obtained, the Company expects a
continuing decline in working capital.
The Company is evaluating the creation of a wholly-owned subsidiary,
tentatively to be called Minnesota Kaolin Corporation (MINKA), into which
it would transfer all of its paper kaolin assets. The Company would then
seek investments in this entity within the State of Minnesota, selling
stock in MINKA on a private basis to provide interim funding for the paper
kaolin project. These funds would be used to complete the drilling
necessary to convert sufficient of the Company's large kaolin resource base
to proven reserves to provide an adequate proven reserve for the processing
plant, as well as to conduct other work which will move the project forward
toward commercial feasibility. Although an industry partner would still be
sought, the feasibility of downstream public financing would also be
considered, which would reduce the Company's ownership of the paper kaolin
project in exchange for funding to develop it.
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.
OIL & GAS PROSPECTS
The Company holds a 50% interest in the Luman prospect, an exploratory
gas prospect in the State of Wyoming. The other 50% interest is held by
the Robert E. McDonald Family Trust. Robert E. McDonald is the Company's
largest shareholder and a Director. The Company and the Trust are seeking
an industry partner to drill this prospect, and while the Company believes
such a partner will be found, there is no certainty that one will be found,
nor can it be determined at this time when this prospect will be drilled.
A second prospect, also in Wyoming, was sold to an industry partner, but
the leases expired on December 31, 1997, before it could be drilled. The
industry partner has agreed to grant Nova an overriding royalty interest in
the expired leases should they be reacquired. A portion of these leases
have been so reacquired. The Luman prospect leases have considerable time
remaining before they are subject to expiration.
The Company holds a similar interest in leases in the Great Salt Lake
in Utah, also jointly owned with the Trust. These leases will expire in
August 1999 if not held by production or extended prior to expiration.
Significant effort has been expended with third parties to sell this lease
position to an industry partner with the capability to develop them. It
cannot be determined at this time whether these efforts will be successful.
NOME PROSPECT
The Company has reduced its lease position offshore Nome, Alaska, and
has entered into royalty arrangements on all of the remaining leases
whereby an unaffiliated third party will pay the rentals and other costs
associated with these leases, and attempt to establish commercial gold
production on them. The Company intends to retain a royalty interest in
any gold production from these leases, with a maximum royalty amount of
$360,000. No royalties have been received to date, and there is no
certainty that royalty income will result from these arrangements, nor as
to the amount should the Company realize income from them. The Company
intends to incur no further costs in connection with these leases.
A more complete description of these prospects is contained in the
Company's report on Form 10-KSB for fiscal 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit 27, Financial Data Schedule (Submitted only in
electronic format.
(b) Reports on Form 8-K. None
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 17, 1999 By: /s/ Brian B. Spillane
Brian B. Spillane,
President, Director, and
Chief Executive Officer
Date: February 17, 1999 By: /s/ James R. Schaff
James R. Schaff,
Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 6,318
<SECURITIES> 0
<RECEIVABLES> 81,679
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 87,997
<PP&E> 6,298,439
<DEPRECIATION> 6,076,709
<TOTAL-ASSETS> 547,389
<CURRENT-LIABILITIES> 117,682
<BONDS> 250,000
0
1,792,267
<COMMON> 627,413
<OTHER-SE> (2,258,137)
<TOTAL-LIABILITY-AND-EQUITY> 547,389
<SALES> 8,787
<TOTAL-REVENUES> 23,583
<CGS> 0
<TOTAL-COSTS> 26,681
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,897
<INCOME-PRETAX> (10,995)
<INCOME-TAX> (10,995)
<INCOME-CONTINUING> (10,995)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,995)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
