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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
Commission file number 0-25170
Cadence Resources Corporation
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Utah 87-0306609
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6 East Rose Street, P.O. BOX 2056, Walla Walla, WA 99362
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(509) 526-3491
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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
The number of shares of common stock outstanding as of February 20, 2004 was
12,593,827.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
CADENCE RESOURCES CORPORATION
Form 10-QSB
Index
PART I.FINANCIAL INFORMATION......................................................................................1
Item 1. Financial Statements.............................................................................1
Item 2. Management's Discussion and Analysis or Plan of Operations......................................35
Item 3. Controls and Procedures.........................................................................38
PART II.OTHER INFORMATION........................................................................................40
Item 1. Legal Proceedings...............................................................................40
Item 2. Changes in Securities...........................................................................40
Item 3. Defaults Upon Senior Securities.................................................................40
Item 4. Submission of Matters to a Vote of Security Holders.............................................40
Item 5. Other Information...............................................................................40
Item 6. Exhibits and Reports on Form 8-K................................................................41
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Accountant's Review Report................................................................................1
Balance Sheets - December 31, 2003 (unaudited) and September 30, 2003 and 2002............................2
Statements of Operations - three months ended December 31, 2003, 2002
and 2001 (unaudited)...................................................................................4
Statement of Stockholders' Equity (Deficiency) - years ended September 30, 2002
and 2003 and three months ended December 31, 2003 (unaudited)..........................................5a
Statements of Cash Flows - three months ended December 31, 2003, 2002 and
2001 (unaudited).......................................................................................6
Notes to the Financial Statements.........................................................................8
i
Board of Directors
Cadence Resources Corporation
Walla Walla, Washington
ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying balance sheet of Cadence Resources
Corporation, as of December 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the three months then ended. All
information included in these financial statements is the representation of the
management of Cadence Resources Corporation.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States of
America.
The financial statements for the year ended September 30, 2003 were audited by
us and we expressed an unqualified opinion on it in our report dated December
10, 2003. We have not performed any auditing procedures since that date.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
February 20, 2004
1
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
December 31 September 30,
2003 --------------------------------------
(Unaudited) 2003 2002
------------------- ------------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 754,133 $ 3,619,345 $ 40,011
Oil & gas revenue receivable 377,834 84,575 26,123
Receivable from working interest owners 12,873 12,873 16,037
Notes receivable 3,720 3,720 13,078
Prepaid expenses 20,925 5,925 27,500
Other current assets 15,425 425 431
------------------- ------------------- -----------------
TOTAL CURRENT ASSETS 1,184,910 3,726,863 123,180
------------------- ------------------- -----------------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 637,717 590,747 48,694
Unproved properties 2,430,612 833,836 78,997
Wells and related equipment and facilities 326,569 202,886 67,374
Support equipment and facilities 254,284 151,963 105,108
Prepaid mineral leases 368,876 395,973 177,177
Less accumulated depreciation, depletion,
amortization and impairment (295,875) (61,611) (4,312)
------------------- ------------------- -----------------
TOTAL OIL AND GAS PROPERTIES 3,722,183 2,113,794 473,038
------------------- ------------------- -----------------
PROPERTY AND EQUIPMENT
Furniture and equipment 4,226 1,660 1,440
Less accumulated depreciation (1,462) (1,451) (1,440)
------------------- ------------------- -----------------
TOTAL PROPERTY AND EQUIPMENT 2,764 209 -
------------------- ------------------- -----------------
OTHER ASSETS
Investments 293,411 394,454 448,793
Mineral properties available for sale 246,757 246,757 246,757
------------------- ------------------- -----------------
TOTAL OTHER ASSETS 540,168 641,211 695,550
------------------- ------------------- -----------------
TOTAL ASSETS $ 5,450,025 $ 6,482,077 $ 1,291,768
=================== =================== =================
See accountant's review report and accompanying notes to interim financial statements.
2
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
December 31, September 30,
2003 -----------------------------------------
(Unaudited) 2003 2002
------------------- -------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 721,895 $ 584,866 $ 119,923
Revenue distribution payable 88,606 68,929 14,835
Payable to related party - 550,000 2,500
Deferred working interest - - 22,184
Accrued compensation 3,165 94,920 66,261
Interest payable 11,522 15,752 -
Notes payable 100,000 460,000 -
------------------- -------------------- ------------------
TOTAL CURRENT LIABILITIES 925,188 1,774,467 225,703
------------------- -------------------- ------------------
COMMITMENTS AND CONTINGENCIES - - -
------------------- -------------------- ------------------
REDEEMABLE PREFERRED STOCK 59,925 59,925 -
------------------- -------------------- ------------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 100,000,000
shares authorized, 12,632,827, 12,512,827,
and 6,866,210 shares issued and outstanding,
respectively 126,328 125,128 68,662
Additional paid-in capital 18,642,222 18,343,422 13,291,965
Stock options 1,210,704 1,210,704 626,790
Stock warrants 51,375 51,375 233,334
Accumulated deficit (15,239,167) (14,863,687) (12,906,132)
Accumulated other comprehensive income (loss) (326,550) (219,257) (248,554)
------------------- -------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 4,454,912 4,647,685 1,066,065
------------------- -------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,450,025 $ 6,482,077 $ 1,291,768
=================== ==================== ==================
See accountant's review report and accompanying notes to interim financial statements.
3
CADENCE RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
------------------------------------------------------
2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
---------------- ----------------- -----------------
REVENUES
Oil and gas sales $ 559,384 $ 33,376 $ -
---------------- ----------------- -----------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization 233,111 8,635 -
Officers' and directors' compensation 55,000 45,000 12,510
Consulting 58,413 78,230 95,614
Professional fees 290,047 8,035 27,856
Oil and gas lease expenses 109,386 20,352 14,772
Oil and gas consulting 15,000 - -
Oil and gas production costs 39,479
Lease operating expenses 1,248 36,516 -
Other general and administrative 134,980 36,203 12,921
---------------- ----------------- -----------------
TOTAL EXPENSES 936,664 232,971 163,673
---------------- ----------------- -----------------
OPERATING LOSS (377,280) (199,595) (163,673)
---------------- ----------------- -----------------
OTHER INCOME (EXPENSES)
Interest income 3,980 80 13
Interest expense (2,181) (1,239) (1,060)
Partnership loss - (8,309) -
Gain on debt forgiveness - - 6,109
Loss on disposition and impairment of assets - (34,623) (32,733)
---------------- ----------------- -----------------
TOTAL OTHER INCOME (EXPENSE) 1,799 (44,091) (27,671)
---------------- ----------------- -----------------
LOSS BEFORE TAXES (375,481) (243,686) (191,344)
INCOME TAX BENEFIT - - 66,040
---------------- ----------------- -----------------
LOSS FROM CONTINUING OPERATIONS (375,481) (243,686) (125,304)
GAIN FROM DISCONTINUED OPERATIONS
Gain from mining operations (net of income
tax benefit of $66,040) - - 264,158
---------------- ----------------- -----------------
NET INCOME (LOSS) (375,481) (243,686) 138,854
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments (107,293) 8,677 10,460
---------------- ----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (482,774) $ (235,009) $ 149,314
================ ================= =================
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations $ (0.03) $ (0.03) $ (0.04)
Net gain (loss) from discontinued operations nil nil 0.08
--------------- ----------------- -----------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ (0.03) $ 0.04
================ ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 12,602,175 8,411,936 3,258,749
================ ================= =================
See accountant's review report and accompanying notes to interim financial statements.
4
CADENCE RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
--------------------------- Additional
Number Paid-in Stock
of Shares Amount Capital Options
--------- -------- ------------ ---------
Balance, September 30, 2001 2,453,890 $ 24,539 $ 12,198,855 $ -
Shares issued for cash at $0.24
to $0.50 per share 783,000 7,830 234,070 -
Shares issued to officer for debt
at $0.30 per share 300,000 3,000 87,000 -
Shares issued to officers, consultants
and others for services, accrued
compensation and prepaid
expenses at $0.30 to $0.38 per
share 589,184 5,892 205,775 -
Shares issued for cash with warrants
attached at $0.30 per share 2,333,336 23,333 443,333 -
Shares issued to officer for
reimbursement of expenses
paid for Company at $1.03
per share 6,800 68 6,932 -
Shares issued for investment at
$0.30 per share 400,000 4,000 116,000 -
Options issued to directors and
consultants for services - - - 626,790
Net loss for the year ended
September 30, 2002 - - - -
Unrealized loss on market value
of investments - - - -
--------- -------- ------------ ---------
Balance, September 30, 2002 6,866,210 $ 68,662 $ 13,291,965 $ 626,790
--------- -------- ------------ ---------
See accountant's review report and accompanying notes to interim financial statements.
5a
CADENCE RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Stock Accumulated Comprehensive Stockholders'
Warrants Deficit Income/(Loss) Equity
---------------- ----------------- ----------------- ----------------
Balance, September 30, 2001 $ - $(11,760,681) $ (150,162) $ 312,551
Shares issued for cash at $0.24
to $0.50 per share - - - 241,900
Shares issued to officer for debt
at $0.30 per share - - - 90,000
Shares issued to officers, consultants
and others for services, accrued
compensation and prepaid
expenses at $0.30 to $0.38 per
share - - - 211,667
Shares issued for cash with warrants
attached at $0.30 per share 233,334 - - 700,000
Shares issued to officer for
reimbursement of expenses
paid for Company at $1.03
per share - - - 7,000
Shares issued for investment at
$0.30 per share - - - 120,000
Options issued to directors and
consultants for services - - - 626,790
Net loss for the year ended
September 30, 2002 - (1,145,451) - (1,145,451)
Unrealized loss on market value
of investments - - (98,392) (98,392)
---------------- ----------------- ---------------- ----------------
Balance, September 30, 2002 $ 233,334 $(12,906,132) $ (248,554) $ 1,066,065
---------------- ---------------- --------------- ----------------
See accountant's review report and accompanying notes to interim financial statements.
5b
CADENCE RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
-------------------------- Additional
Number Paid-in Stock
of Shares Amount Capital Options
---------- -------- ------------ ----------
Balance, September 30, 2002 6,866,210 $ 68,662 $ 13,291,965 $ 626,790
Shares issued for cash with warrants
attached at an average of $0.52
per unit 212,500 2,125 56,500 -
Shares issued to officers, directors
and others for services at $0.78
to $1.80 496,500 4,965 535,710 -
Shares issued for loan consideration
at $1.08 per share 220,000 2,200 204,800 -
Shares issued for exercise of options
at $0.75 per share 100,000 1,000 142,100 (68,100)
Shares issued from cashless exercise
of warrants 1,956,984 19,569 213,765 -
Shares issued for cash at $0.80 to
$2.50 per share, net of financing
fee of $347,850 2,525,183 25,252 4,216,347 -
Options issued for financing - - (429,671) 429,671
Shares issued for related party loan
fee at $1.00 per share 120,000 1,200 118,800 -
Conversion of shares of Celebration
for shares of Cadence common stock 14,250 143 (143) -
Options issued to consultants for
services - - - 222,343
Miscellaneous adjustment 1,200 12 (12) -
Dividends paid on preferred stock - - (6,739) -
Net loss for the year ended
September 30, 2003 - - - -
Unrealized gain on market value of
investments - - - -
---------- -------- ------------ ----------
Balance, September 30, 2003 12,512,827 $125,128 $ 18,343,422 $1,210,704
---------- -------- ------------ ----------
See accountant's review report and accompanying notes to interim financial statements.
5c
CADENCE RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Stock Accumulated Comprehensive Stockholders'
Warrants Deficit Income/Loss Equity
--------------- ----------------- ---------------- ---------------
Balance, September 30, 2002 $ 233,334 $ (12,906,132) $ (248,554) $ 1,066,065
Shares issued for cash with warrants
attached at an average of $0.52
per unit 51,375 - - 110,000
Shares issued to officers, directors
and others for services at $0.78
to $1.80 - - - 540,675
Shares issued for loan consideration
at $1.08 per share - - - 207,000
Shares issued for exercise of options
at $0.75 per share - - - 75,000
Shares issued from cashless exercise
of warrants (233,334) - - -
Shares issued for cash at $0.80 to
$2.50 per share, net of financing
fee of $347,850 - - - 4,241,599
Options issued for financing - - - -
Shares issued for related party loan
fee at $1.00 per share - - - 120,000
Conversion of shares of Celebration
for shares of Cadence common stock - - - -
Options issued to consultants for
services - - - 222,343
Miscellaneous adjustment - - - -
Dividends paid on preferred stock - - - (6,739)
Net loss for the year ended
September 30, 2003 - (1,957,555) - (1,957,555)
Unrealized gain on market value of
investments - - 29,297 29,297
--------------- ----------------- ---------------- -------------
Balance, September 30, 2003 $ 51,375 $ (14,863,687) $ (219,257) $ 4,647,685
--------------- ----------------- ---------------- -------------
See accountant's review report and accompanying notes to interim financial statements.
5d
CADENCE RESOURCES CORPORATION
STATEMETN OF STOCKHOLDERS' EQUITY
Common Stock
-----------------------------
Additional
Number Paid-in Stock
of Shares Amount Capital Options
------------- --------------- -------------- ---------------
Balance, September 30, 2003 12,512,827 $ 125,128 $ 18,343,422 $ 1,210,704
Shares issued for cash at $2.50 110,000 1,100 273,900 -
Shares issued for services at $2.50 10,000 100 24,900 -
Net loss for the three months ended
December 31, 2003 (unaudited) - - - -
Unrealized loss on market value of
investments (unaudited) - - - -
------------- --------------- -------------- ---------------
Balance, December 31, 2003 (unaudited) 12,632,827 $ 126,328 $ 18,642,222 $ 1,210,704
============= =============== ============== ===============
See accountant's review report and accompanying notes to interim financial statements.
5e
CADENCE RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Stock Accumulated Comprehensive Stockholders'
Warrants Deficit Income/Loss Equity
--------- ---------------- ------------ -------------
Balance, September 30, 2003 $ 51,375 $ (14,863,687) $ (219,257) $ 4,647,685
Shares issued for cash at $2.50 - - - 275,000
Shares issued for services at $2.50 - - - 25,000
Net loss for the three months ended
December 31, 2003 (unaudited) - (375,480) - (375,480)
Unrealized loss on market value of
investments (unaudited) - - (107,293) (107,293)
--------- ---------------- ----------- -------------
Balance, December 31, 2003 (unaudited) $ 51,375 $ (15,239,167) $ (326,550) $ 4,464,912
========= ================ =========== =============
See accountant's review report and accompanying notes to interim financial statements.
5f
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended
December 31,
--------------------------------------------------------------
2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
------------------- --------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (375,481) $ (243,686) $ 138,854
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on sale of investments - 34,623 32,733
Gain from mining operations - - (330,198)
Loss on debt forgiveness - - 6,109
Depreciation, depletion and amortization 233,111 8,635 -
Issuance of common stock for services 25,000 10,800 55,500
Investment given for services - 7,200 -
Changes in assets and liabilities:
Oil & gas revenue receivable (293,259) 3,275 -
Receivable from working interest owners - 2,601 -
Note receivable (18,994) -
Other current assets (15,000) 1 -
Prepaid expenses (9,518) 7,500 (103,423)
Deferred working interest - 12,826 (30,889)
Accounts payable 137,029 31,494 (25,784)
Revenue distribution payable 19,677 (4,140) -
Accrued expenses (99,150) 30,000 12,510
------------------- --------------------- -----------------
Net cash provided (used) by operating activities (377,591) (117,865) (244,588)
------------------- --------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (6,250) (5,860) (13,224)
Sale of investments - 4,389 29,050
Purchase and development of proved and
unproved properties (1,598,752) (18,005) -
Purchase of mineral leases (21,615) (47,500) -
Purchase of fixed assets (226,004) (4,466) -
------------------- --------------------- -----------------
Net cash provided (used) by investing activities (1,852,621) (71,442) 15,826
------------------- --------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (360,000) - (35,000)
Proceeds on payables to related parties - 50,000 -
Payments on payables to related parties (550,000) - -
Issuance of preferred stock for cash - 30,000 -
Issuance of common stock and warrants for cash 275,000 110,000 213,900
------------------- --------------------- -----------------
Net cash provided (used) by financing activities (635,000) 190,000 178,900
------------------- --------------------- -----------------
Net increase (decrease) in cash $ (2,865,212) $ 693 $ (49,862)
------------------- --------------------- -----------------
See accountant's review report and accompanying notes to interim financial statements.
6
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended
December 31,
-------------------------------------------------------------
2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
-------------------- ------------------ ------------------
Net increase (decrease) in cash (balance forward) $ (2,865,212) $ 693 $ (49,862)
Cash, beginning of period 3,619,345 40,011 191,684
-------------------- ------------------ ------------------
Cash, end of period $ 754,133 $ 40,704 $ 141,822
==================== ================== ==================
Supplemental cash flow disclosure:
Income taxes paid $ - $ - $ -
Interest paid $ - $ - $ -
Non-cash investing and financing activities:
Common stock issued for services rendered $ 25,000 $ 10,800 $ 55,500
Common stock issued for debt $ - $ - $ 60,000
Investment received for mining claims $ - $ - $ 350,198
Investment given for related party payable $ - $ - $ 8,231
Investment received for note receivable $ - $ - $ 15,000
Investment given for consulting services $ - $ 7,200 $ -
See accountant's review report and accompanying notes to interim financial statements.
7
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Cadence Resources Corporation (formerly Royal Silver Mines, Inc.) hereinafter
("Cadence" or "the Company") was incorporated in April of 1969 under the laws of
the State of Utah primarily for the purpose of acquiring and developing mineral
properties. The Company changed its name from Royal Silver Mines, Inc. to
Cadence Resources Corporation on May 2, 2001 upon obtaining approval from its
shareholders and filing an amendment to its articles of incorporation. The
Company shall be referred to as "Cadence" or "Cadence Resources Corporation"
even though the events described may have occurred while the Company's name was
"Royal Silver Mines, Inc." The Company has elected a September 30 fiscal
year-end.
On July 1, 2001, Cadence developed a plan for acquisition, exploration and
development of oil and gas properties and accordingly began a new exploration
stage as an energy project development company. Prior to this, Cadence conducted
its business as a "junior" mineral resource company, meaning that it intended to
receive income from property sales or joint ventures of its mineral projects
with larger companies. The Company continues to hold several mineral properties,
which are described in Note 3.
Celebration Mining Company ("Celebration"), a wholly owned subsidiary of
Cadence, was incorporated for the purpose of identifying, acquiring, exploring
and developing mining properties. Celebration was organized on February 17, 1994
as a Washington corporation. Celebration has not yet realized any revenues from
its operations.
On August 8, 1995, Cadence and Celebration completed an agreement and plan of
reorganization whereby the Company issued 207,188 shares of its common stock and
72,750 warrants in exchange for all of the outstanding common stock of
Celebration. Pursuant to the reorganization, the name of the Company was changed
to Royal Silver Mines, Inc. Immediately prior to the agreement and plan of
reorganization, the Company had 118,773 common shares issued and outstanding.
The acquisition was accounted for as a purchase by Celebration of Cadence,
because the shareholders of Celebration controlled the Company after the
acquisition. Therefore, Celebration is treated as the acquiring entity. There
was no adjustment to the carrying value of the assets or liabilities of Cadence
in the exchange as the market value approximated the net carrying value. Cadence
is the acquiring entity for legal purposes and Celebration is the surviving
entity for accounting purposes.
As a result of the Company's entering a new exploration stage on July 1, 2001,
the Company elected to dispose of its mineral properties and has accordingly
reclassified those remaining properties, which total $246,757 at December 31,
2003, as other assets. The Company has not determined whether these mineral
exploration properties contain ore reserves that are economically recoverable,
and is in the process of disposing of these properties. The ultimate realization
of the Company's investment in these properties cannot be determined at this
time and, accordingly, no provision has been made in the accompanying financial
statements for any
8
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)
asset impairment that may result in the event the Company is not successful in
selling these properties. See Note 3.
The costs of prepaid oil and gas leases ($368,876 and $395,973, respectively)
included in the accompanying balance sheets as of December 31, 2003 and
September 30, 2003 are principally related to natural gas properties. The
Company has not determined whether the properties contain economically
recoverable gas reserves. The ultimate realization of the Company's investment
in oil and gas properties is dependent upon finding and developing economically
recoverable reserves, the ability of the Company to obtain financing or make
other arrangements for development and upon future profitable production. The
ultimate realization of the Company's investment in oil and gas properties
cannot be determined at this time and, accordingly, no provision for any asset
impairment that may result in the event the Company is not successful in
developing these properties, has been made in the accompanying financial
statements.
The Company was in the exploration stage through most of the year ending
September 30, 2002. During the fourth quarter of the year ended September 30,
2002, the Company entered a very brief development stage and has since been
considered an operating company. For the years ending September 30, 2002 and
2001, the Company's auditors expressed a going concern qualification on the
Company's audited financial statements.
In September and October 2003, the Company obtained significant additional
capital through a private placement of its stock and paid off all of its
substantial debts. Management plans to use the majority of the proceeds from the
financing for lease acquisition, and for drilling of wells on the Company's
leased oil and gas property in Louisiana, Michigan, and Kansas. The Company has
demonstrated that it now has sufficient funds from operations and investments to
continue its committed development plans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Cadence Resources Corporation
is presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America and have been consistently applied in the preparation of the
financial statements.
Accounting Method
- -----------------
The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America.
9
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
- ----------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Exploration Stage
- -----------------
The Company began a new exploration stage with the acquisition of oil and gas
leases on July 1, 2001. This stage ended during July 2002 with the commenced
sale of oil and gas products.
Estimates
- ---------
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Income/Loss Per Share
- ---------------------
Income/loss per share was computed by dividing the net loss by the weighted
average number of shares outstanding during the year. The weighted average
number of shares was calculated by taking the number of shares outstanding and
weighting them by the amount of time they were outstanding. Outstanding warrants
were not included in the computation of diluted loss per share because their
inclusion would be antidilutive.
Mineral Properties
- ------------------
Costs of acquiring, exploring and developing mineral properties are capitalized
by project area. Costs to maintain the mineral rights and leases are expensed as
incurred. When a property reaches the production stage, the related capitalized
costs will be amortized, using the units of production method on the basis of
periodic estimates of ore reserves. At December 31, 2003, September 30, 2003,
and 2002, the cost of the Company's mineral properties are included in other
assets in the accompanying financial statements, as the Company has changed its
focus from minerals exploration to oil and gas.
Mineral properties are periodically assessed for impairment of value and any
losses are charged to operations at the time of impairment.
Should a property be abandoned, its capitalized costs are charged to operations.
The Company charges to operations the allocable portion of capitalized costs
attributable to properties sold. Capitalized costs are allocated to properties
sold based on the proportion of claims sold to the claims remaining within the
project area.
10
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil and Gas Properties
- ----------------------
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives. Property leases are expensed ratably over the life
of the lease.
On the sale or retirement of a complete unit of a proven property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proven property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any unrecorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Environmental Remediation and Compliance
- ----------------------------------------
Expenditures for ongoing compliance with environmental regulations that relate
to current operations are expensed or capitalized as appropriate. Expenditures
resulting from the remediation of existing conditions caused by past operations
that do not contribute to future revenue generations are expensed. Liabilities
are recognized when environmental assessments indicate that remediation efforts
are probable and the costs can be reasonably estimated.
Estimates of such liabilities are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other societal and economic factors, and
include estimates of associated legal costs. These amounts also reflect prior
experience in remediation of contaminated sites, other companies' clean-up
experience and data released by The Environmental Protection Agency or other
organizations. Such estimates are by their nature imprecise and can be expected
to be revised over time because of changes in government regulations,
operations, technology and inflation. Recoveries are evaluated separately from
the liability and, when recovery is assured, the Company records and report an
asset separately from the associated liability. At December 31, 2003, the
Company had no accrued liabilities for compliance with environmental
regulations.
11
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts for cash, receivables, prepaids, payables, and payables to
related parties approximate their fair value.
Fair Value Standards
- --------------------
The Company has adopted the fair value accounting rules to record all
transactions in equity instruments for goods or services.
Investments
- -----------
Investments, principally consisting of equity securities of private and small
public companies, are stated at current market value.
Impaired Asset Policy
- ---------------------
The Company adopted Statement of Financial Accounting Standards No. 144 titled
"Accounting for Impairment of Disposal of Long-Lived Assets." In complying with
this standard, the Company reviews its long-lived assets quarterly to determine
if any events or changes in circumstances have transpired which indicate that
the carrying value of its assets may not be recoverable. The Company determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by its assets to their respective carrying amount whenever events or
changes in circumstances indicate that an asset may not be recoverable. Because
of write-downs and write-offs taken in prior years, the Company does not believe
any further adjustments are needed to the carrying value of its assets at
December 31, 2003. See Note 3.
Principles of Consolidation
- ---------------------------
The financial statements include those of the Cadence Resources Corporation and
Celebration Mining Company. All significant inter-company accounts and
transactions have been eliminated. The financial statements are not considered
consolidated statements since Cadence Resources Corporation was the successor by
merger to Celebration Mining Company.
Provision for Income Taxes
- --------------------------
Income taxes are provided based upon the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." Under this approach, deferred income taxes are recorded to reflect the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end. A
valuation allowance is recorded against deferred tax assets if management does
not believe the Company has met the "more likely than not" standard imposed by
SFAS No. 109 to allow recognition of such an asset.
Reclassifications
- -----------------
Certain amounts from prior periods have been reclassified to conform with the
current period presentation. These reclassifications have resulted in no changes
to the Company's accumulated deficit and net losses presented.
12
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative Instruments
- ----------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" and SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." These standards establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
They require that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At December 31, 2003 and for the periods covered in these statements, the
Company has not engaged in any transactions that would be considered derivative
instruments or hedging activities.
Revenue Recognition
- -------------------
Cadence began producing revenues during July 2002. Oil and gas revenues are
recorded using the sales method. Under this method, the Company recognizes
revenues based on actual volumes of oil and gas sold to purchasers.
Recent Accounting Pronouncements
- --------------------------------
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that there was no impact on the Company's financial statements
from the adoption of this statement.
13
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
- -------------------------------------------
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149").
SFAS No. 149 amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on
the financial position or results of operations of the Company.
In December 2002, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards, No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of the statement are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company currently reports stock issued to employees under the rules of SFAS No.
123. Accordingly there is no change in disclosure requirements due to SFAS No.
148.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and termination benefits provided to employees
that are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 was issued in June 2002, effective
December 31, 2002 with early adoption encouraged. There has been no impact on
the Company's financial position or results of operations from adopting SFAS No.
146.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44, 4
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145"), which updates, clarifies and simplifies existing accounting
pronouncements. FASB No. 4, which required all gains and losses from the
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related tax effect was rescinded. As a result, FASB
No. 64, which amended FASB No. 4, was rescinded as it was no longer necessary.
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", established
the accounting requirements for the effects of transition to the provisions of
the Motor Carrier Act of 1980. Since the transition has been
14
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
- -------------------------------------------
completed, SFAS No. 44 is no longer necessary and has been rescinded. SFAS No.
145 amended SFAS No. 13 to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company adopted SFAS No. 145, which has not had
a material effect on the Company's financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." This standard establishes a single accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations. SFAS No. 144 requires that these long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or discontinued operations. This statement is effective
beginning for fiscal years after December 15, 2001, with earlier application
encouraged. The Company adopted SFAS No. 144 and the adoption did not have a
material impact on the financial statements of the Company at December 31, 2003.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 establishes guidelines related to
the retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements issued
for the fiscal years beginning after June 15, 2002 and with earlier application
encouraged. The Company adopted SFAS No. 143 and the adoption did not have a
material impact on the financial statements of the Company at December 31, 2003.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(hereinafter "SFAS No. 141" and "SFAS No. 142"). SFAS No. 141 provides for the
elimination of the pooling-of-interests method of accounting for business
combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142
prohibits the amortization of goodwill and other intangible assets with
indefinite lives and requires periodic reassessment of the underlying value of
such assets for impairment. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. An early adoption provision exists for companies with
fiscal years beginning after March 15, 2001. The adoption of these standards did
not have a material effect on the Company's financial statements.
15
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
- -------------------------------------------
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (hereinafter "FIN 46"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. The provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of FIN 46.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others"
(hereinafter "FIN 45"). FIN 45 requires a company, at the time it issues a
guarantee, to recognize an initial liability for the fair value of obligations
assumed under the guarantee and elaborates on existing disclosure requirements
related to guarantees and warranties. The initial recognition requirements of
FIN 45 are effective for guarantees issued or modified after December 31, 2002
and do not have an impact on the financial statements of the Company. The
Company does not anticipate issuing any guarantees which would be required to be
recognized as a liability under the provisions of FIN 45 and thus does not
expect the adoption of this interpretation to have an impact on its results of
operations or financial position.
NOTE 3 - MINERAL PROPERTIES
Over the last three years, the Company's mineral properties have for the most
part been disposed of or written off as the Company's focus and direction have
shifted to oil and gas production.
Utah Property
- -------------
The Company has elected to retain its 25% undivided interest in the Vipont Mine
located in northwest Utah. This interest is carried on the Company's books at
$246,757 and is included in other assets. (See Note 13)
Mineral Properties in North Idaho
- ---------------------------------
At December 31, 2003, the Company, directly and through its subsidiary,
Celebration Mining Company, held forty-three unpatented mining claims in the
Coeur d'Alene Mining District in distinct groups called the South Galena Group,
Moe Group, Rock Creek Group and Palisades Group. The Company has undertaken only
minimal exploration and development work on these properties, such as general
geological reconnaissance and claim-staking activities. All of these claims have
been written off as permanently impaired.
16
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 3 - MINERAL PROPERTIES (Continued)
In September 2000, the Company, through its wholly owned subsidiary Celebration
Mining Company, entered into a five-year lease agreement with an affiliated
company, Oxford Metallurgical, Inc. ("Oxford") on its eight-claim Palisades
Group property. The lease called for a semi-annual payment of $3,000, or
alternatively, the semi-annual payment of 10,000 shares of the common stock of
Oxford. Oxford had the right to explore and potentially develop the property
under certain conditions. This lease was rescinded during the year ended
September 30, 2002.
NOTE 4 - INVESTMENTS
The Company's investment securities are classified as available for sale
securities which are recorded at fair value on the balance sheet as investments.
The change in fair value during the period is excluded from earnings and
recorded net of tax as a component of other comprehensive income. The Company
has no investments which are classified as trading securities.
At December 31, 2003, September 30, 2003 and 2002, the market values of stock
investments were as follows:
December 31, September 30, September 30,
2003 2003 2002
----------- ------------ ------------
Elite Logistics, Inc. $ 611 $ 656 $ 2,950
Ashington Mining Company 5,709 5,709 5,709
Cadence Resources Corp. LP - - 15,200
Enerphaze Corporation 982 982 5,400
Exhaust Technology - - 2,244
Integrated Pharmaceuticals, Inc. 9,406 9,406 -
Metalline Mining Company 875 925 -
Nevada-Comstock (formerly
Caledonia Silver-Lead Mines, Inc.) - - 350,198
Rigid Airship Tech 310 310 -
Sterling Mining Co. - - 4,859
The Williams Companies, Inc. - - 6,800
Trend Mining Company 25,858 24,483 54,567
Western Goldfields, Inc. 249,660 351,373 866
Other investments - 610 -
---------- --------- ---------
Total $ 293,411 $ 394,454 $ 448,793
========== ========= =========
17
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 4 - INVESTMENTS (continued)
The carrying value of these shares is reevaluated at each reporting period and
adjustments, if appropriate, are made to the carrying value of these securities.
Of all the aforementioned investments owned by the Company at December 31, 2003,
only Trend Mining Company, Metalline Mining Company, and Western Goldfields,
Inc. are public companies with a trading market.
Other information regarding the Company's investments follows:
Enerphaze Corporation
- ---------------------
In October 2001, the Company received 8,000 shares of Enerphaze Corporation
common stock in payment of a $15,000 note receivable. In January and February
2002, the Company received 65,000 shares of Enerphaze Corporation common stock
in exchange for 400,000 shares of the Company's common stock. No gain or loss
was recognized on these transactions.
Nevada-Comstock Mining Company (formerly Caledonia Silver-Lead Mines, Inc.)
- ---------------------------------------------------------------------------
The Company on October 31, 2001 received 3,501,980 shares of the $0.10 par value
common stock of Caledonia Silver-Lead Mines, Inc. (an affiliated company) in
exchange for its Kil Group and West Mullan Group claims. The stock received was
recorded at its par value of $350,198 which, in the opinion of management,
approximated its fair value. The net effect of the transaction resulted in a
gain of $330,198. At September 30, 2003, this investment was written off as the
investment company is dormant and there is no way to value the shares.
Western Goldfields, Inc.
- ------------------------
In 2002, the Company exchanged fully depreciated mining equipment for shares of
a privately held business, Calumet Mining Company, which was eventually acquired
by Western Goldfields, Inc. Upon completion of the acquisition the Company
received 160,000 shares of Western's common stock. At the time, Western's stock
had experienced minimal trading and had a limited market for its stock. During
the year ended September 30, 2003, Western's trading volume substantially
increased. The current value of this stock is included in the attached financial
statements as investments. In addition during 2003, the Company acquired an
additional 21,200 shares of Western stock for $24,730.
Cadence Resources Corporation Limited Partnership
- -------------------------------------------------
On August 8, 2002, the Company formed a limited partnership in the State of
Washington whereby the Company became the managing general partner and an
outside individual investor became the initial limited partner. In connection
with the formation of the Partnership, the Company agreed to contribute $12,500
and its leasehold interest in an oil well ("2B", which ultimately was a dry
hold) in Wilbarger County, Texas and the limited partner contributed $250,000 in
cash. The entity, Cadence Resources Corporation Limited Partnership (hereinafter
"CRCLP" or "the Partnership") was formed to invest in oil and gas properties in
Texas and Louisiana. The limited partner's interest was purchased by the Company
in a transaction with an effective date of September 30, 2003, at which time the
Company held all of the general partner interests and limited partner interests
in the Partnership. See Note 13.
18
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 4 - INVESTMENTS (Continued)
Other Limited Partnerships
- --------------------------
During the year ended September 30, 2003, the Company formed four other limited
partnerships in the State of Washington whereby the Company became the managing
general partner and an outside individual investor became the initial limited
partner. The entities, Cadence West Electra Partners LP, Cadence Antrim Partners
1 LP, Cadence Antrim Partners 2 LP and Cadence Antrim Partners 3 LP were formed
to invest in oil and gas properties. As of December 31, 2003, these entities
have not begun activities.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major additions and improvements
are capitalized. Minor replacements, maintenance and repairs that do not
increase the useful life of the assets are expensed as incurred. Depreciation of
property and equipment is determined using the straight-line method over the
expected useful lives of the assets of five to ten years. Depreciation expense
for the three months ended December 31, 2003, and the year ended September 30,
2002, and 2001 was $11,007, $21,222 and $4,303 respectively.
NOTE 6 - COMMON STOCK
During the year ended September 30, 2001, the Company issued 284,375 shares of
common stock to officers, directors, consultants and others for services and
532,500 shares of common stock were issued to officers for loan consideration,
investments and cash. The Company also issued 40,000 shares of its common stock
pursuant to terms of a consulting agreement and sold 393,334 shares of its
common stock for cash. The shares were valued at their fair market value at the
date of issuance, which ranged from $0.25 to $1.40.
On April 23, 2001, the Company's board of directors authorized a 1-for-20
reverse stock split of the Company's $0.01 par value common stock. All
references in the accompanying financial statements and notes to the number of
common shares and per-share amounts have been restated to reflect the reverse
stock split. The Company also approved an increase in the number of its
authorized common stock shares to 100,000,000.
During the year ended September 30, 2002, the Company issued 589,184 shares of
its common stock to officers, consultants and others for services and prepaid
expenses valued at $211,667, 400,000 shares of its common stock for an
investment, 6,800 shares of its common stock to an officer for reimbursement of
expenses valued at $7,000 and 300,000 shares of its common stock to an officer
in payment of a note payable. These transactions were valued in accordance with
a plan for stock issuance previously approved by the board of directors. The
Company also sold 783,000 shares of its common stock for $241,900.
19
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 6 - COMMON STOCK (continued)
During the year ended September 30, 2002, the Company also sold 2,333,336
"units" to investors, two officers of the Company and another entity under
common control at $0.30 per unit in a private placement. Each unit consists of
one share of common stock and one warrant exercisable at $0.30 per common share
for five years. Sales of these units generated cash proceeds of $700,000. Two
officers of the Company and another entity under common control invested $50,000
in these common stock units. (See Note 9)
During the year ended September 30, 2003, the Company sold 212,500 "units" to
investors at prices ranging from $0.50 to $0.80 per unit in a private placement.
Each unit consists of one share of common stock and one warrant exercisable at
$1.35 per common share for three years. Sales of these units generated cash
proceeds of $110,000. Warrants previously issued (2,320,175) were exercised for
1,956,984 shares of common stock in "cashless" redemptions. (See Note 9.) During
this same period the Company sold 2,625,183 shares of its common stock for
$4,316,599 net of expenses of $347,850. The Company also issued 496,500 shares
of its common stock to officers, directors and consultants for services valued
at $540,675 and 220,000 shares for loan consideration valued at $207,000. In
addition, the Company issued to a related party an additional 120,000 shares
valued at $120,000 as an inducement for a loan. The value of this inducement was
used to reduce the payable to related party.
During the quarter ended December 31, 2003, the Company issued 10,000 shares of
its common stock to consultants and others for services valued at $25,000.
NOTE 7 - REDEEMABLE PREFERRED STOCK
On April 23, 2001, the Company's board of directors authorized 20,000,000 shares
of preferred stock with a par value of $0.01 per share and rights and
preferences to be determined. No shares were issued and outstanding as of
September 30, 2002. During the year ended September 30, 2003, the Company issued
34,950 shares of its preferred stock to investors at prices ranging from $1.50
to $2.00 per share for aggregate proceeds of $59,925. The shares bear a
preferred dividend of 15% per annum and are convertible to common stock at a
price of $1.50 per share under certain terms and conditions.
The Class A shares mature seven years from the date of issuance. At maturity,
the Class A shares will be redeemed for cash or common stock at Cadence's option
in an amount equal to the amount paid by the investors for the shares plus any
accrued and unpaid dividends. If shares of common stock are to be issued at
maturity, the conversion price shall be determined by the average closing bid
price for the 20 trading days prior to the maturity date.
At December 31, 2003, the Company had no accrued dividends payable to preferred
shareholders.
20
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN
In January 1992, the shareholders of Cadence approved a 1992 Stock Option and
Stock Award Plan under which up to ten percent of the issued and outstanding
shares of the Company's common stock could be awarded based on merit or work
performed. As of September 30, 2003, only 638 shares of common stock had been
awarded under the Plan.
The Company has a stock-based compensation plan whereby the Company's board of
directors may grant common stock to its employees and directors. At September
30, 2001, a total of 72,750 options had been granted under the plan. These
options were forfeited and none been exercised through the year ending September
30, 2002. The old existing options were attributed to the merger of Celebration
Mining Company with Royal in August 1995.
During the year ended September 30, 2002, the Company's board of directors chose
to make option awards to select officers, directors, consultants and
shareholder/investors. These options were not awarded pursuant to a qualified
plan and carry various terms and conditions. The Company granted a total of
750,000 options at an average exercise price of $1.08 per share. These options
were exercisable immediately. The Company's board of directors has reserved the
right to cancel these awards for non-performance or other reasons.
The fair value of each option granted during fiscal 2002 and 2003 was estimated
on the grant date using the Black-Scholes Option Price Calculation. The
following assumptions were made in estimating fair value during fiscal 2002:
risk-free interest rate of 5%, volatility of 100%, expected life of 3 to 5
years, and no expected dividends. The value of these options in the amount of
$626,790 was included in operating expense in the financial statements. The
following assumptions were made in estimating fair value during the year ended
September 30, 2003: risk-free interest rate of 3% to 4%, volatility of 106% to
337%, expected life of 4 to 5 years and no expected dividends. The value of
these options in the amount of $222,343 was included in the Company's statement
of operations for 2003.
The value of options issued for financing fees in the amount of $429,671 is
deducted against additional paid in capital, as a cost of selling common stock.
In July 2003, 100,000 of the outstanding options were exercised for the purchase
of 100,000 shares of the Company's common stock.
Prior to April 2001, a total of 72,750 options were granted by the board to
officers, directors and other consultants. As shown above, the 60,000 options
remaining were forfeited during the fiscal year ending September 30, 2002.
21
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (Continued)
Following is a summary of the stock options during the quarter ended December
31, 2003 and the years ended September 30, 2003 and 2002:
Weighted
Number Average
of Exercise
Options Price
-------------- -------------
Outstanding at 10/1/2001 60,000 $ 18.60
Granted 750,000 1.08
Exercised - -
Expired or forfeited (60,000) (18.60)
-------------- -------------
Outstanding at 9/30/2002 750,000 $ 1.08
============== =============
Options exercisable at 9/30/2002 750,000 $ 1.08
============== =============
Weighted average fair value of options granted
during the year ended 9/30/2002 $ 0.84
==============
Outstanding at 10/1/2002 750,000 $ 1.08
Granted 287,140 2.23
Exercised (100,000) (0.68)
Expired or forfeited - -
-------------- -------------
Outstanding 9/30/03 937,140 $ 1.47
============== =============
Options exercisable at 9/30/03 937,140 $ 1.47
============== =============
Weighted average fair value of options granted
during the year ended 9/30/2003 $ 2.27
==============
Outstanding at 10/1/2003 937,140 $ 1.47
Granted - -
Exercised - -
Expired or forfeited - -
-------------- -------------
Outstanding 12/31/03 937,140 $ 1.47
============== =============
Options exercisable at 12/31/03 937,140 $ 1.47
============== =============
Weighted average fair value of options granted
during the three months ended 12/31/03 $ -
==============
22
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (Continued)
Weighted Average
Exercise Date Number of Shares Price per Share
------------------------------------------- ----------------------- ----------------------
On or before June 21, 2005 200,000 $ 1.50
On of before August 1, 2005 50,000 $ 1.50
On or before March 1, 2007 300,000 $ 0.75
On or before July 8, 2007 100,000 $ 1.35
On or before June 18, 2007 50,000 $ 1.70
On or before June 1, 2007 75,000 $ 2.00
On or before September 30, 2008 162,140 $ 2.50
Stock Award Plan
- ----------------
During the year ended September 30, 2001, the Company's board of directors
approved the issuance of 15,000 shares of the Company's common stock per quarter
to each entitled director as compensation for service to the Company and 5,000
shares of the Company's common stock per quarter to officers in addition to
their salaried compensation for services.
NOTE 9 - WARRANTS
During the year ended September 30, 2002, the Company issued 2,333,336 shares of
stock with 2,333,336 warrants attached. These warrants were valued at $233,334
using the Black-Scholes Option Price Calculation. The following assumptions were
made in estimating fair value: risk free interest rate is 5%, volatility is 100%
and expected life is 5 years. These warrants may be used in a cashless exercise
to purchase 2,333,336 shares of the Company's common stock at $0.30 per share.
The warrants remain exercisable through April 15, 2007. During the year ended
September 30, 2003, all of these warrants were exercised in cashless exercises
in accordance with the terms of the warrants and 1,956,984 shares of the
Company's common stock were then issued to the warrant holders.
During the year ended September 30, 2003, the Company issued 212,500 shares of
stock with 212,500 warrants attached, and 25,000 warrants related to a July 2002
purchase. The warrants were valued at $51,375 using the Black-Scholes Option
Price Calculation. The following assumptions were made is estimating fair value:
risk free interest rate is 5%, volatility is 100% and expected life is 3 years.
These warrants may be used to purchase 237,500 shares of the Company's common
stock at $1.35 per share. The warrants remain exercisable through October 15,
2005. As of the date of these financial statements, all of these warrants remain
outstanding and exercisable.
23
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 10 - OIL AND GAS PROPERTIES
The Company's oil and gas producing activities are subject to laws and
regulations controlling not only their exploration and development, but also the
effect of such activities on the environment. Compliance with such laws and
regulations may necessitate additional capital outlays, affect the economics of
a project, and cause changes or delays in the Company's activities. The
Company's oil and gas properties are valued at the lower of cost or net
realizable value.
Louisiana
- ---------
During the fourth quarter of the year ended September 30, 2001, the Company
began leasing acreage in a natural gas field in Desoto Parish, Louisiana. As of
the date of these financial statements, the Company has leased over 4,250 acres.
At December 31, 2003, September 30, 2003 and September 30, 2002, Louisiana
leases of $201,684, $350,675 and $169,077, respectively, are included in the
attached financial statements as prepaid mineral leases. In June 2003, under the
terms of a joint operating agreement with Bridas Energy USA, Bridas commenced
drilling. The first three wells are now in the process of being completed with
small amounts of production being generated. The Company has a 25% working
interest in and 20% net revenue interest in the first two wells drilled and a
45% working interest and 36% net revenue interest in the third, fourth and fifth
wells. Bridas is the operator of all of Cadence's properties in Louisiana.
Texas
- -----
During the year ended September 30, 2002, the Company acquired an exploration
permit and lease option agreement for an oil well project in Wilbarger County,
Texas known as the Waggoner Ranch Project. During the quarter ended March 31,
2002 under the terms of a joint operating agreement with the W.T. Waggoner
Estate, Waggoner drilled an initial test well. By September 30, 2003, Waggoner
had drilled a total of seven wells in Wilbarger County, of which five were
producing oil. The W.T. Waggoner Estate is the operator of all of Cadence's
properties in Wilbarger County and the sole purchaser of all production from
these properties.
During the year ended September 30, 2002, the Company sold 40% of the working
interest in its initial well in this area (known as the "1A" well) to private
investors and two officers of the Company for $210,000. The Company's initial
cost in the portion of the prospect sold totaled $3,200.
At December 31, 2003 September 30, 2003 and September 30, 2002, the Company
recorded a receivable from third party working interest owners in the amount of
$12,873, $12,873 and $16,037, respectively, to reflect some sales of the
prospect's partial interest. This well was placed in production during July
2002. Two additional exploratory wells (the "2A" and "1B") were drilled by
Waggoner on the property with the Company retaining 100% of the working
interest. The 1B was successfully placed in production and the 2A was converted
to a salt-water disposal well. Subsequent efforts were made to drill the "2B"
well (the Company's fourth well) which was funded through the Cadence Resources
Corporation Limited Partnership. This well was unsuccessful.
24
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 10 - OIL AND GAS PROPERTIES (Continued)
Texas (continued)
- -----------------
During February 2003, the Company completed the West Electra Lake Well on the
Waggoner Ranch Project. The Company entered into a 45% working interest joint
operating agreement with the Waggoner Ranch for the operations conducted on this
acreage. In the quarter ending September 30, 2003, the Company drilled and
completed two additional wells on the West Electra Lake joint venture operating
area on the Waggoner Ranch. The Company owns a 50% working interest in these
last two wells.
At December 31, 2003, September 30, 2003 and 2002, prepaid oil and gas leases
relating to Texas property of, $4,500, $4,500 and $8,100, respectively, are
included in the attached financial statements.
Michigan
- --------
In December 2002, the Company began participating in a natural gas drilling
program in Alpena County, Michigan with Aurora Energy, Ltd. As of December 31,
2003, Cadence had a 22.5% working interest (before payout, 20% after payout),
18% net revenue interest (before payout, 16% after payout), in six producing
wells in Alpena County. Production commenced from this field in June 2003.
Aurora is the operator of all of Cadence's properties in Alpena County. At
December 31, 2003, Michigan leases totaling $96,374 are included in the attached
financial statements as prepaid mineral leases.
Kansas
- ------
During the year ended September 30, 2003, the Company leased 2,270 acres of land
in the Anadarko Basin in west central Kansas. No drilling has commenced on any
of this acreage. Cadence holds a 100% working interest and 82% net revenue
interest in these leases. At December 31, 2003, $66,318 of leases in Kansas are
included in the attached financial statements as prepaid mineral leases.
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES
The Securities and Exchange Commission defines proved oil and gas reserves as
those estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recovered in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods.
The Company has retained the services of an independent petroleum consultant to
estimate its oil reserves in Texas at September 30, 2003. Natural gas reserves
have not been estimated because there has been no independent study performed of
the Company's reserves of natural gas. The oil reserve estimates include
reserves in Texas in which Cadence holds an economic interest under lease and
operating agreements.
25
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (Continued)
Proved reserves do not include amounts that may result from extensions of
currently proved areas or from application of enhanced recovery processes not
yet determined to be commercial in specific reservoirs.
Cadence has no supply contracts to purchase petroleum or natural gas from
foreign governments.
The changes in proved reserves for the years ended September 30, 2003 and 2002
including the reserves at September 30, 2002 were as follows and as estimated by
the management of Cadence:
Petroleum Liquids Natural Gas
(Mbarrels) (MMCF)
United States United States
--------------------- ----------------
Reserves at October 1, 2001 - -
Extensions and discoveries 101 -
Production/sales (3) -
--------------------- ----------------
Reserves at September 30, 2002 98 -
===================== ================
Reserves at October 1, 2002 98 -
Revision of previous estimate (21) -
Production/sales (11) -
--------------------- ----------------
Reserves at September 30, 2003 66 -
===================== ================
All reserves shown at September 30, 2003 are proved developed reserves.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and amortization
as of September 30, 2003 and 2002 were as follows:
September 30, September 30,
2003 2002
-------------- -------------
Proved properties $ 290,747 $ 48,694
Unproved properties 1,133,836 78,997
Wells and related equipment and facilities 202,886 67,374
Support equipment and facilities 151,963 105,108
Prepaid oil and gas leases 395,971 177,177
Accumulated depreciation,
depletion and amortization (61,611) (4,312)
-------------- -------------
Total capitalized costs $ 2,113,792 $ 473,038
============== =============
26
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (Continued)
Costs both capitalized and expensed, which were incurred in oil and
gas-producing activities during the years ended September 30, 2003, 2002 and
2001, are set forth below. Property acquisition costs represent costs incurred
to purchase or lease oil and gas properties. Exploration costs include costs of
geological and geophysical activity and drilling exploratory wells. Development
costs include costs of drilling and equipping development wells and construction
of production facilities to extract, treat and store oil and gas.
September 30, September 30,
2003 2002
-------------------- --------------------
Property acquisition costs:
Proved properties $ - $ 8,000
Unproved properties 319,188 245,483
Exploration costs 139,010 456,086
Development costs 1,479,030 306,761
Operating expenses 281,143 12,279
-------------------- --------------------
Total expenditures $ 2,218,371 $ 1,028,609
==================== ====================
Results of operations for oil and gas producing activities (including operating
overhead) for the year ended September 30, 2003 were as follows:
Revenues $ 387,355
--------------
Depreciation, depletion and amortization (57,310)
Oil & gas lease expenses (302,204)
Exploration and drilling (109,968)
Oil and gas production expenses (34,577)
Other operating expenses (79,334)
--------------
Total expenses 583,393
--------------
Results before income taxes (196,038)
Income tax expense -
--------------
Results of operations from oil and gas producing activities $ (196,038)
--------------
Standardized Measure of Future Net Cash Flows
---------------------------------------------
Future cash flows $ 1,930,539
Future development and production costs (469,039)
Future income tax expense -
--------------
Future net cash flows 1,461,500
10% annual discount 213,000
--------------
Standardized measure of discounted future net cash flows $ 1,248,500
==============
27
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (Continued)
Future net cash flows were computed using fiscal year-end prices of West Texas
Intermediate crude. Future price changes are considered only to the extent
provided by contractual arrangements. Estimated future development and
production costs are determined by estimating the expenditures to be incurred in
developing and producing the proved oil and gas reserves at the end of the
fiscal year, based on year-end costs and assuming continuation of existing
economic conditions. Estimated future income tax expense is normally calculated
by applying fiscal year-end statutory tax rates (adjusted for permanent
differences and tax credits) to estimated future pretax net cash flows related
to proved oil and gas reserves, less the tax basis of the properties involved.
These estimates are furnished and calculated in accordance with requirements of
the Financial Accounting Standards Board and the SEC. Estimates of future net
cash flows presented do not represent management's assessment of future
profitability or future cash flows to Cadence. Management's investments and
operating decisions are based on reserves estimated that include proved reserves
prescribed by the SEC as well as probable reserves, and on different price and
cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10%
standard discount rate does not convey absolute value. The discounted amounts
arrived at are only one measure of the value of proved reserves.
NOTE 12 - NOTES PAYABLE - RELATED PARTIES
All of the Company's notes payable are considered short-term. At December 31,
2003, notes payable consisted of the following:
Nathan Low Family Trust (a shareholder of the
Company), secured by assignment of a prorata
interest in gas producing properties located in
Alpena County, Michigan, interest at 8%, dated
February 24, 2003, originally due on April 4, 2003,
Extended to December 31, 2003. $ 50,000
Kevin Stulp (a shareholder of the Company),
interest at 8%, dated February 24, 2003,
originally due on April 5, 2003, extended to
December 31, 2003. 25,000
Howard Crosby (an officer and shareholder of the
Company), interest at 8%, dated February 24,
2003, originally due on April 5, 2003, extended to
December 31, 2003. 25,000
Total $ 100,000
============
28
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Prospective Penalty
- -------------------
In September and October 2003, the Company sold 1,721,400 shares of its common
stock for a total of $4,303,500. In the securities purchase agreement for the
stock, Cadence committed to pay the purchasers in the offering a monthly penalty
equal to 1% of the total proceeds raised in the offering if the Securities and
Exchange Commission did not declare effective by December 14, 2003 a
registration statement (Form SB-2) which Cadence filed on October 30, 2003.
Because the registration statement was declared effective in January 2004,
Cadence accrued a penalty of $43,035 at December 31, 2003. This amount is
included in accounts payable.
Litigation
- ----------
he Company was a defendant in a lawsuit alleging that the Company failed to
transfer common stock in exchange for a mining property interest. In June 1999,
Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand
the Company's countersuit alleging fraudulent misrepresentation. Although the
plaintiff filed an appeal (regarding the originally filed lawsuit), the Utah
Supreme Court rejected the appeal in a judgment rendered on July 31, 2001.
The Company's countersuit, which sought both full title to the aforementioned
mineral property and compensatory damages as well as punitive damages, was
rejected in a jury trial in October 2002. Although the Company filed an appeal,
it expects the jury verdict will stand. As a result, the Company has and will
continue to hold an undivided 25% interest in the Vipont Mine. See Note 3.
Environmental Issues
- --------------------
The Company is engaged in oil and gas exploration and may become subject to
certain liabilities as they relate to environmental cleanup of well sites or
other environmental restoration procedures as they relate to the drilling of oil
and gas wells and the operation thereof. In the Company's acquisition of
existing or previously drilled wells, the Company may not be aware of what
environmental safeguards were taken at the time such wells were drilled or
during such time the wells were operated.
The Company could incur significant costs, including cleanup costs resulting
from a release of hazardous material, third-party claims for property damage and
personal injuries fines and sanctions, as a result of any violations or
liabilities under environmental or other laws. Changes in or more stringent
enforcement of environmental laws could also result in additional operating
costs and capital expenditures. In the course of routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials do occur, and the Company may incur costs for waste handling and
environmental compliance.
The Company was previously engaged in exploration of mineral properties. These
properties are classified as assets from discontinued operations or were
previously written off as permanently impaired. Although the Company has
discontinued the exploration of mineral properties, the possibility exists that
environmental cleanup or other environmental restoration procedures could remain
to be completed or be mandated by law, causing unpredictable and unexpected
liabilities to arise. At the date of this report, the Company is not aware of
any environmental issues related to any of its assets from discontinued
operations.
29
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES (continued)
Capital Commitments
- -------------------
At December 31, 2003 the Company's future capital commitments are dependent upon
the Company's decision to proceed with additional well development. See Note 10.
No accruals have been made in the accompanying financial statements for these
amounts.
Lease Commitments
- -----------------
The Company began leasing office facilities in Walla Walla, Washington
commencing in June 2001. The agreement is a three-year lease with monthly
payments of $400. Total rent paid for this office space during the quarter ended
December 31, 2003 was $1,200.
The Company began leasing additional office space in Hilton Head Island, South
Carolina in August 2003. The one-year lease calls for monthly rental payments of
$550. For the quarter ended December 31, 2003, the Company expended $1,616 for
this rental space.
Cadence Resources Corporation Limited Partnership
- -------------------------------------------------
On August 8, 2002, the Company formed a limited partnership in the State of
Washington whereby the Company became the managing general partner and an
outside individual investor became the initial limited partner. The entity,
Cadence Resources Corporation Limited Partnership ("CRCLP" or the "Partnership")
was formed to invest in oil and gas properties in Texas and Louisiana. See Notes
4 and 11.
In connection with the formation of the Partnership, the Company agreed to
contribute $12,500 in cash and its leasehold interest in an oil well ("2B",
which ultimately was a dry hole) in Wilbarger County, Texas and the limited
partner contributed $250,000 in cash.
The terms of the Partnership agreement provide that 90% of initial income and
expenses will be allocated to the limited partner and further provide that,
after the limited partner's receipt of funds invested and an 11% return on his
investment, subsequent Partnership profits and losses will be allocated 90% to
the general partner and 10% to the limited partner. In order to ensure repayment
of the limited partner's investment, Cadence agreed to grant to the limited
partner a security interest in the equipment and fixtures affixed to wells 1A
and 1B in Wilbarger County and agreed to contribute the Company's share of the
cash flows it receives from these two wells to the Partnership. The Company
holds a 60% working interest in well 1A and a 100% working interest in well 1B.
See Notes 4 and 11.
Effective September 30, 2003, Cadence purchased the limited partner's interest
in the Partnership and thereby terminated the limited partner's aforementioned
security interest. In this transaction, Cadence made a cash payment of $250,000
in October 2003 to the limited partner and received, from the limited partner
his 5% working interest in the West Electra Lake #1 oil well in Wilbarger,
Texas.
During October 2003, Cadence also repaid to the limited partner the unsecured
sum of $300,000 in connection with the aforementioned transaction. These funds
were previously advanced to the Partnership in June 2003 for the exploration of
natural gas interests in the Black Bean Unit in Michigan in return for the
limited partner's receiving 120,000 shares of Cadence stock and a
30
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Cadence Resources Corporation Limited Partnership (continued)
- -------------------------------------------------------------
working interest in each well drilled in the unit. Upon repayment of the
$300,000 advance, the limited partner's working interest in each well drilled in
the Black Bean Unit was fixed at 2%.
Consulting Commitments
- ----------------------
In June 2002, the Company entered into an agreement with Memphis Consulting
Group ("Memphis") for financial consulting and public relations services
beginning on August 1, 2002 through August 1, 2003. The agreement called for
monthly payments of $3,000, and an initial 50,000 stock options exercisable
through August 1, 2005 at $1.50 per share. See Note 8. This agreement was
terminated during the quarter ended March 31, 2003.
In September 2001, the Company entered into a consulting agreement with American
Financial Group for promotion to investors. The agreement called for monthly
payments of $2,000 to cover all expenses, 20,000 shares of the Company's common
stock (which were issued in October 2001) and an override of 2.5% of monies
raised in private placements from referrals or directed business. The agreement
was terminated during the quarter ended March 31, 2003.
In June 2003, the Company entered into a corporate advisory agreement with
Proteus Capital Corp. calling for a monthly fee of $3,000 in cash and 2,000
restricted shares of the common stock of the Company. Additionally, Proteus
received an option for 50,000 shares exercisable at $1.75 for a period of four
years, such shares bearing certain registration rights should the Company file a
registration statement on behalf of other shareholders.
Lucius C. Geer, a consultant to the Company who manages its acquisition,
exploration and production operations, has entered into several agreements with
Cadence and has contractually received a 2% overriding royalty interest in oil,
gas and mineral leases in Wilbarger County, Texas and a 1% overriding royalty
interest in oil and gas leases in Desoto Parish, Louisiana. Effective August 1,
2003, an agreement provides that Geer will work for Cadence for $7,500 per month
plus an overriding royalty interest of 2% of the sales price received for all
oil, gas and minerals from leases which Geer acquires for Cadence.
Other Limited Partnerships
- --------------------------
During the quarter ended June 30, 2003, the Company formed four other limited
partnerships in the state of Washington whereby the Company became the managing
general partner and an outside individual investor became the initial limited
partner. The entities, Cadence West Electra Partners LP, Cadence Antrim Partners
1 LP, Cadence Antrim Partners 2 LP and Cadence Antrim Partners 3 LP were formed
to invest in oil and gas properties. As of December 31, 2003, these entities
have not begun activities. See Note 4.
Other Commitments
- -----------------
The Company entered into an exploration agreement with the W.T. Waggoner Estate
(Waggoner) and its trustees on August 1, 2002. This agreement calls for
exploration of the West Electra Lake Project located in Wilbarger County, Texas.
See Note 10.
31
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
On August 13, 2002, the Company entered into a public relations retainer
agreement for one year whereby the Company agreed to issue 60,000 shares of its
common stock during this period for services received. The agreement also calls
for reimbursement of expenses incurred pursuant to terms of this agreement. This
agreement was terminated in the quarter ending September 30, 2003.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company previously sublet office space on a month-to-month basis from one of
its officers in Walla Walla, Washington for $400 per month through May 2001.
During the year ended September 30, 2002, the Company sold several mineral
properties located in Shoshone County, Idaho to Caledonia Silver-Lead Mines,
Inc., later renamed Nevada-Comstock Mining Company. Two officers of the Company
collectively own 2.4% of this entitity and Cadence owns 35%. See Note 4.
Two officers of the Company collectively own in excess of 40% of the stock of
Dotson Exploration Company and they are the sole officers and directors of
Dotson. Dotson owns 109,000 shares of the Company's common stock. During fiscal
year 2002 and 2003, Cadence repaid Dotson a loan in the amount of $10,000 and
made two new loans to Dotson, one for $35,000 and one for $20,000, each at an
interest rate of 10% per annum. Dotson transferred to Cadence marketable
securities in the form of common stock of two unaffiliated companies, Enerphaze
Corporation and The Williams Companies, Inc., valued by Cadence's board of
directors at $33,380, as partial payment of the amount loaned. During the nine
months ended June 30, 2003, Dotson repaid the $20,000 loan in cash. At September
30, 2003, Dotson owed Cadence $3,720, which amount is payable on demand and
bears interest at 10% per annum.
Because Dotson Exploration Company, Oxford Metallurgical, Inc. and
Nevada-Comstock Mining Company are controlled by two officers of Cadence, these
transactions cannot be considered to be the product of an arms-length
negotiation.
In October 2001, Cadence issued 200,000 shares of its common stock to Mr. Crosby
for cash in the amount of $60,000. On January 15, 2002, Cadence issued 100,000
shares of its common stock to Mr. Crosby in payment of a loan made to Cadence in
the principal amount of $30,000 in November 2001. On January 22, 2002, Mr.
Crosby made an additional loan of $30,000 bearing interest at 8% for which
Cadence issued him 15,000 shares valued at $4,500 as an inducement to making the
loan.
In January 2002, Cadence transferred 41,667 shares of the common stock it owned
in Trend Mining Company, of which Mr. Ryan is a director, to Mr. Ryan in payment
of past due salary of $16,000. Further, in October 2001, Mr. Ryan transferred
marketable securities of Enerphaze Corporation valued at $90,000 to Cadence in
exchange for 300,000 shares of Cadence, which shares are held by J.P. Ryan
Company, Inc. held 100% by John Ryan, Andover Capital Corporation held 100% by
John Ryan, and Dotson Exploration Company.
32
NOTE 14 - RELATED PARTY TRANSACTIONS (Continued)
In April 2002, Mr. Crosby purchased 83,334 Cadence investment units and Mr. Ryan
purchased 43,334 Cadence investment units at $0.30 per unit consisting of one
share of common stock and one warrant exercisable at $0.30. The warrants
contained a provision which allowed cashless exercise when and if Cadence common
stock traded at or above $1.50 per share. Also, in April 2002, Cadence issued to
Mr. Ryan 6,800 shares of its common stock in repayment of 6,800 Cadence shares
owned by Mr. Ryan that he had transferred to third parties to pay Cadence
invoices.
On August 8, 2002, the Company formed a limited partnership whereby the Company
became the managing general partner and an outside individual investor became
the initial limited partner. In connection with the formation of the
Partnership, the Company contributed $12,500 and agreed to contribute its
leasehold interest in an oil well ("2B", which ultimately was a dry hole) in
Wilbarger County, Texas. See Notes 4, 11 and 13. During the year ended September
30, 2003, the limited partner advanced $300,000 to the limited partnership in
exchange for a note payable. This note is unsecured and bears interest at 10%.
The proceeds from this note were used to purchase an interest in the Company's
Michigan properties. This amount reflected in the attached financial statements
as a payable to related party was repaid in October 2003.
During fiscal 2003, Mr. Crosby made two loans to Cadence. One loan in December
2002 was in the principal amount of $70,000, bearing interest at 5% and the
other loan made in February 2003 was in the principal amount of $50,000 bearing
interest at a rate of 8%. Cadence issued 14,000 shares of its common stock
valued at $10,920, as an inducement to making the $70,000 loan and 20,000 shares
valued at $15,600, as an inducement to making the $50,000 loan. Cadence repaid
$60,000 and has agreed to issue 4,000 shares of its common stock in repayment of
the remaining $10,000 principal amount outstanding on the $70,000 loan. Cadence
repaid $25,000 of the $50,000 loan in cash and has offered to issue 25,000
shares of its common stock to repay the remaining $25,000 principal amount
outstanding.
In February 2003, Mr. Kevin Stulp, a director, made a bridge loan to Cadence in
the principal amount of $50,000, bearing interest of 8% per annum. Cadence
issued 20,000 shares of its stock valued at $15,600 to Mr. Stulp as an
inducement to making the loan. Cadence later repaid $25,000 of the $50,000 loan.
In July 2003, Mr. Stulp exercised a warrant to purchase 100,000 shares of common
stock at $.75 per share.
In October 2002, the Nathan A. Low Roth IRA and various entities controlled by
Thomas Kaplan, shareholders of Cadence, exercised warrants in separate cashless
transactions whereby each party surrendered a total of 175,676 shares of common
stock valued at $325,000 to exercise warrants for the acquisition of 1,083,334
shares of Cadence common stock.
Other related party transactions are disclosed in Notes 3, 4, 6, 10, 12, 13 and
17.
33
CADENCE RESOURCES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2003
NOTE 15 - GAIN ON DEBT FORGIVENESS
During the year ended September 30, 2002, a vendor of the Company chose to
forgive interest charges on its delinquent account. This transaction resulted in
the recognition of other income of $6,109.
NOTE 16 - INCOME TAXES
At September 30, 2003, the Company had net deferred tax assets calculated at an
expected rate of 34% of approximately $5,134,000 as indicated below. As
management of the Company cannot determine that it is more likely than not that
the Company will realize the benefit of the net deferred tax asset, a valuation
allowance equal to the net deferred tax asset has been established at September
30, 2003.
The significant components of the deferred tax asset at December 31, 2003 and
September 30, 2003 and 2002 were as follows:
September 30,
December 31, --------------------------------------------
2003 2003 2002
------------------- ------------------- ------------------
Net operating loss carryforwards $ 2,924,000 $ 2,829,000 $ 1,423,000
Stock options and warrants issued 622,000 622,000 172,000
Section 1231 loss carryforwards 151,000 151,000 89,000
Capital loss carryforwards 1,532,000 1,532,000 887,000
------------------ ------------------ -----------------
Total deferred tax asset 5,229,000 5,134,000 2,571,000
Less valuation allowance 5,229,000 5,134,000 2,571,000
------------------ ------------------ -----------------
Net deferred tax asset $ - $ - $ -
================== ================== =================
At December 31, 2003, the Company has net operating loss carryforwards of
approximately $8,600,000, which expire in the years 2009 through 2023. In
addition, the Company has net Section 1231 loss carryforwards of approximately
$446,000, which expire in the years 2005 through 2006, and net capital loss
carryforwards of approximately $4,506,000, which expire in the years 2004
through 2008. The change in the allowance account from September 30, 2003 to
December 31, 2003 was $95,000, which was primarily attributable to increased
operating losses.
The Company may have had a control change as defined under the Internal Revenue
Code, because of new stock issuances and changes in ownership. The effect of
such control changes have not been calculated but may limit the future use of
net operating losses.
NOTE 17 - SUBSEQUENT EVENTS
In February 2004, three of the Company's directors loaned a total of $345,000 to
the Company. Under the related loan agreements, interest of 12% is to be paid
monthly on the obligations, which matures on December 31, 2004 and are secured
by receipts from the Company's oil and gas production in Louisiana and Texas.
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with "Management's
Discussion and Analysis" included in our Form 10-KSB for the fiscal year ended
September 30, 2003, including our audited financial statements, together with
the notes to those statements.
Risks Related to Our Business
The following discussion contains forward-looking statements that involve
risks, uncertainties, and assumptions such as statements of our plans,
objectives, expectations, and intentions. Our actual results may differ
materially from those discussed in these forward-looking statements because of
the risks and uncertainties inherent in future events, particularly those
identified in "Risk Related to our Business" in our Form 10-KSB, summarized as
follows:
o If we continue to experience significant operating losses, we may not be
able to continue as a going concern.
o We have no full-time employees and are dependent on our directors, officers
and third-party contractors.
o We lack experience in the oil and gas industry and must rely on third
parties to conduct our oil and gas exploration activities.
o Our drilling activities may be unsuccessful.
o We do not operate any of our oil and gas properties.
o We may be unable to make acquisitions of producing properties or prospects
or successfully integrate them into our operations.
o The failure to develop reserves could adversely affect our production and
cash flows.
o We may have difficulty financing our planned growth.
o Oil and gas prices are volatile. A substantial decrease in oil and natural
gas prices could adversely affect our business.
o We may not have good and marketable title to our properties.
o Competition in our industry is intense, and we are smaller and have a more
limited operating history than most of our competitors.
o Oil and natural gas operations involve various risks.
o We lack insurance that would lower risks to our investors.
o We are subject to complex federal, state and local laws and regulations
that could adversely affect our business.
35
Capital Resources and Liquidity
As of December 31, 2003, we had cash and cash equivalents of $754,133, a
decrease of approximately 84% from September 30, 2003 levels. Most of our $3.6
million cash balance at September 30, 2003 was from the sale of approximately
1,621,400 shares of our common stock in September 2003. In the past, we have
derived our working capital from the sale of our stock and from loans from
officers, directors, shareholders and related parties. We also raised $275,000
of equity capital during the quarter ended December 31, 2003, of which $200,000
came from an additional investor from the September/October offering of common
stock and $75,000 came from the issuance of common stock upon the exercise of
warrants by one of our directors. Although we have begun to receive
significantly higher revenues due to our Louisiana gas production during the
quarter ended December 31, 2003, given the level of our overhead and drilling
activity, we are still dependent upon outside capital resources to provide
liquidity, and we expect this to be the case for the remainder of fiscal 2004.
Our cash balance at September 30, 2003 was used principally to fund our
exploration and development drilling, particularly the costs of drilling and
completing wells on our DeSoto Parish Louisiana acreage with Bridas Energy.
During the three months ended December 31, 2003 we invested $1,598,752 in
unproved properties and $226,004 in fixed assets, including well equipment,
pipelines, tanks, casings and pumping units. We also used approximately $910,000
to repay indebtedness to shareholders and related parties who had funded our
operations prior to our sale of common stock in September and October 2003.
Since December 31, 2003, we have used substantially all of our $754,133
cash balance as of that date to fund our drilling and production operations,
primarily in De Soto Parish, Louisiana. In addition, as of February 16, 2004, we
have borrowed $345,000 from three of our directors to help meet our working
capital needs. As of February 16, 2004, our cash and cash equivalents were
approximately $355,000.
We received our first substantial revenues from our gas production in De
Soto Parish, Louisiana during the quarter ended December 31, 2003. On a
month-to-month basis, our revenues from our Louisiana gas production have
steadily increased as we complete additional wells in that area. Furthermore,
during the second fiscal quarter of 2004 we plan to accelerate our drilling rate
in Louisiana from its current level of one well per month, which will increase
our need for capital. Although we expect revenue from our Louisiana gas
production to be sufficient to cover our operating and administrative overhead,
we anticipate that we will continue to need infusions of capital, principally
from loans from officers, directors, shareholders or related parties, to fund
our Louisiana drilling program for at least the remainder of 2004.
All of our five producing wells in De Soto Parish as of December 31, 2003
were drilled to the Cotton Valley formation to depths of in excess of 10,000
feet. Although our current plans are to accelerate the rate of drilling wells
for at least the remainder of 2004, we expect that our drilling costs per well
will generally decrease because we are planning to complete these new wells only
to the Hosston sand formation, which lies between 6,450 and 8,950 feet. If we
are unable to raise the needed capital for this accelerated drilling program, or
even to continue our current rate of drilling, we may not be able to participate
in all new wells in Louisiana drilled by Bridas Energy, our joint venture
partner, which would further contribute to our dependence on outside capital
resources, or reduce or eliminate our interest in new wells they drill.
36
Results of Operations
Three months ended December 31, 2003 and 2002
Revenues
In addition to our Texas production, during the three months ended December
31, 2003, we received our first significant revenues from gas production from
our DeSoto Parish, Louisiana properties. During the 2003 quarter, revenues from
the sale of oil and gas totaled approximately $559,400. During the same period
in 2002, revenues were $33,376, all of which was from the sale of oil production
from our Texas wells. Of our revenue from the quarter ended December 31, 2003,
approximately $243,000 came from the sale of oil produced from our Texas
properties at an average price of $29.96 per barrel. Revenues of approximately
$296,000 came from the sale of natural gas produced from our Louisiana
properties at an average price of $5.07 per Mcf. During the 2003 quarter we also
received our first revenues of approximately $20,000 from our gas production in
Michigan.
Our Louisiana gas revenues have been growing steadily as we drill, complete
and place into production an increasing number of wells. Although we are
planning to accelerate our rate of drilling in Louisiana, the decline curve of
our current production from the Cotton Valley sands is rapid, dropping from peak
initial production of approximately 1,500 Mcf/day to a level of approximately
600 Mcf/day after about 60 days. If this decline curve holds true of production
from our planned new wells in the Hosston sand formation, revenues may not
increase at the same pace as our older wells level off.
Expenses
Our expenses during the three months ended December 31, 2003 break into two
general categories: corporate and administrative overhead and expenses from oil
and gas operations. Our overall general and administrative expenses include
officer compensation, rent, travel, audits and legal fees associated with SEC
filings, directors fees, investor relations and related consulting fees, stock
transfer fees and other items associated with the costs of being a public
entity. Expenses from oil and gas operations include consulting fees for
technical and professional services related to oil and gas activities, lease
acquisition costs, exploitation costs, production expenses, depletion,
depreciation and amortization of oil and gas properties and related equipment,
and other expenses related to the procurement and development of oil and gas
properties.
The following table is a comparison of Cadence's two general categories of
expenses for the three months ended December 31, 2003 and 2002, and the
percentages each of these categories comprise of total expenses:
Three Months Ended December 31,
--------------------------------------------------------------------
% of 2003 % of 2002
Total Total
2003 Expenses 2002 Expenses
-------------- ---------------- -------------- -------------
Corporate and Administrative Overhead $538,440 57.5% $167,468 71.9%
Expenses from Oil and Gas Operations 398,224 42.5% 65,503 28.1%
-------------- ---------------- -------------- -------------
Total Expenses $936,664 100.0% $232,971 100.0%
============== ================ ============== =============
The Company's corporate and administrative expenses for the three month
period ended December 31, 2003 increased $370,972 over the level of these
expenses for the same period in 2002. This increase was principally due to fees
paid to our attorneys and accountants in connection with the registration for
resale of over 3.5 million shares of our common stock, including the 1,721,400
shares privately placed in September and October of 2003. The increase of
37
$282,012 in professional fees in the 2003 quarter over the 2002 quarter
represented approximately 76% of the $370,972 increase in corporate and
administrative expenses from period to period. The largest other component of
the increase was a $98,779 increase in other general and administrative
expenses.
The comparable period-to-period increases in oil and gas related
expenditures are summarized in the following table, which reflects the major
expense categories for expenses from oil and gas operations for the respective
three month periods ended December 31, 2003 and 2002. These expenses increased
over six-fold from year-to-year, due to the increased level of oil and gas
exploration and production activity.
Three months Ended December 31,
-----------------------------------------------------------------
2003 2002
-------------------------------- ---------------------------
2003 % of Total 2002 % of Total
Expenses Expenses
-------------- -------------- ----------- ------------
Depreciation, depletion and amortization $233,111 58.5% $ 8,635 13.2%
Oil and gas lease expenses 109,386 27.5% 20,352 31.1%
Oil and gas production costs 39,479 9.9%
Lease operating expenses 1,248 0.3% 36,516 55.7%
Oil and gas consulting 15,000 3.8% -0-
--------------
Total Expenses from oil and gas operations $398,224 100.0% $65,503 100.0%
============== ============== =========== ============
Our depreciation, depletion and amortization expense increased to $233,111
during the quarter ended December 31, 2003, from $8,635 during the same period
in 2002 as our production increased dramatically from period to period. We spent
$150,113 in the three months ended December 31, 2003 for oil and gas lease,
production and operating expenses, compared to $56,868 in the same period last
year. While our oil and gas lease expenses increased from period to period due
to increased activity associated with obtaining leases in the Anadarko Basin in
Kansas, our lease operating expenses decreased over the same period. These
expenses decreased because our producing wells in Texas had matured by the
December 2003 quarter and had begun operating at consistent levels without the
need for the additional operating expenses that were required to bring the wells
onto production in the December 2002 quarter when the wells were newer.
Recent Accounting Pronouncements
There have been no recently issued accounting pronouncements which we
expect to have a material effect on our consolidated financial position or
results of operations.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this quarterly report (the "Evaluation Date"), the Company
carried out an evaluation, under the supervision and with the participation of
its management, including its Chief Executive Officer and its Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Exchange Act). Based upon that evaluation, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that material
information required to be disclosed by it in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms. It should be noted, however, that the design of any system of
38
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements that involve
substantial risks and uncertainties. Investors and prospective investors in our
common stock can identify these statements by forward-looking words such as
"may," "will," "expect," "intend," "anticipate," believe," "estimate,"
"continue" and other similar words. Statements that contain these words should
be read carefully because they discuss our future expectations, make projections
of our future results of operations or of our financial condition or state other
"forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, there may be events in the future that we are not able
to predict accurately or control. The factors referenced in the section
captioned "Management's Discussion and Analysis and Results of Operations" as
well as any cautionary language in this Form 10-QSB, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Investors
and prospective investors in our common stock should be aware that the
occurrence of the events described in the "Management's Discussion and Analysis
and Results of Operations " section and elsewhere in this Form 10-QSB could have
a material adverse effect on our business, operating results and financial
condition.
39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the quarter ended December 31, 2003, there were no material changes
in pending legal proceedings and no legal proceedings against the Company were
initiated.
Item 2. Changes in Securities and Use of Proceeds
At the time of issuance, each investor or recipient of unregistered
securities was either an accredited investor or a sophisticated investor. Each
investor had access to Cadence's most recent Form 10-KSB, all quarterly and
periodic reports filed subsequent to such Form 10-KSB and Cadence's most recent
proxy materials.
On October 22, 2003, an accredited investor paid the Company $200,000 in
exchange for 100,000 shares of its common stock. The Company paid a finder
11,000 shares of common in connection with the sale of these securities. The
shares were issued in reliance upon the exemption from registration provided by
Section 4 (2) of the Securities Act of 1933, as amended (the "Securities Act").
On November 21, 2003, the Company issued 100,000 shares of its common stock
to Kevin Stulp, a director of the Company, upon the exercise of warrants. The
Company received $75,000 upon the exercise of such warrants. No sales
commissions were paid in connection with this transaction. The shares were
issued in reliance upon the exemption from registration provided by Section 4
(2) of the Securities Act of 1933, as amended (the "Securities Act").
On November 21, 2003, the Company issued 10,000 shares of its common stock
to Shai Stern, a sophisticated investor, in consideration of consulting services
provided to the Company. No sales commissions were paid in connection with this
transaction. The shares were issued in reliance upon the exemption from
registration provided by Section 4 (2) of the Securities Act of 1933, as amended
(the "Securities Act").
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
40
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under items 7 and 9 of Form 8-K,
dated October 21, 2003, related to updated drilling results.
41
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 by the
undersigned thereunto duly authorized.
Cadence Resources Corporation
Date: February 20, 2004 By: /s/ Howard M. Crosby
---------------------
Howard M. Crosby
Chief Executive Officer
Cadence Resources Corporation
(Registrant)
Date: February 20, 2004 By: /s/ John P. Ryan
---------------------
John P. Ryan
Chief Financial Officer
42