SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM:
COMMISSION FILE NUMBER: 0-25170
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(Exact name of registrant as specified in its charter)
UTAH 87-0306609
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or organization)
6 EAST ROSE STREET, P.O. BOX 2056
WALLA WALLA, WASHINGTON 99362
(Address of Principal Executive Offices, including Zip Code.)
509-526-3491
(Registrant's telephone number, including area code.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding at December 31, 2001: 3,541,890 SHARES
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
C O N T E N T S
Accountant's Review Report. . . . . . . . . . . . . . . . . . . 1
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations and Comprehensive Loss . . . . . . . . 3
Statement of Stockholders' Equity . . . . . . . . . . . . . . . 4
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 6
Notes to the Financial Statements . . . . . . . . . . . . . . . 8
The Board of Directors
Cadence Resources Corp.
(Formerly Royal Silver Mines, Inc.)
(An Exploration Stage Company)
Walla Walla, Washington
ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying balance sheet of Cadence Resources Corporation
(formerly Royal Silver Mines, Inc.) (an exploration stage company) as of
December 31, 2001, and the related statements of operations and comprehensive
loss, stockholders' equity, and cash flows for the three months ended December
31, 2001, and for the period from July 1, 2001 (inception of exploration stage)
through December 31, 2001. 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, 2001 were audited by
us and we expressed an unqualified opinion on them in our report dated January
8, 2001. We have not performed any auditing procedures since that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern.
Management's plans are also discussed in Note 15. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
February 12, 2002
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
December 31,
2001 September 30,
(Unaudited) 2001
---------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 141,822 $ 191,684
Receivable from working interest owners 74,120 -
Notes receivable 3,000 18,000
Prepaid rent - 1,275
Deposit 425 425
---------------- -----------------
TOTAL CURRENT ASSETS 219,367 211,384
---------------- -----------------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Prepaid mineral leases 186,253 82,155
---------------- -----------------
PROPERTY AND EQUIPMENT
Furniture and equipment 1,440 1,440
Less accumulated depreciation (1,440) (1,440)
---------------- -----------------
TOTAL PROPERTY AND EQUIPMENT - -
---------------- -----------------
OTHER ASSETS
Investments 423,212 104,343
---------------- -----------------
NON CURRENT ASSETS
Net assets of discontinued operations 246,757 266,757
---------------- -----------------
TOTAL ASSETS $ 1,075,589 $ 664,639
================ =================
See accountant's review report and accompanying notes.
2
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
December 31,
2001 September 30,
(Unaudited) 2001
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 139,182 $ 158,857
Payable to related party - 8,231
Deferred working interest 42,632 -
Accrued compensation 62,510 50,000
---------------- -----------------
TOTAL CURRENT LIABILITIES 244,324 217,088
---------------- -----------------
LONG-TERM DEBT
Notes payable - related parties 40,000 135,000
---------------- -----------------
COMMITMENTS AND CONTINGENCIES - -
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 20,000,000 shares
authorized, -0- shares issued and outstanding - -
Common stock, $.01 par value; 40,000,000 shares
authorized, 3,541,890 and 2,453,890 shares
issued and outstanding, respectively 35,419 24,539
Additional paid-in capital 12,517,375 12,198,855
Accumulated deficit before exploration stage (11,102,595) (11,102,595)
Deficit accumulated during exploration stage (519,232) (658,086)
Accumulated other comprehensive income (loss) (139,702) (150,162)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 791,265 312,551
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,075,589 $ 664,639
================ =================
See accountant's review report and accompanying notes.
3
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF OPERATIONS
Period from
July 1, 2001
Three Months Ended (Inception of
December 31, Exploration Stage)
------------------------------------- through
2001 2000 1999 December 31, 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------------
REVENUES - - - -
----------- ----------- ----------- -----------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation and amortization - 402 3,163 -
Officers' and directors' compensation 12,510 - 15,000 79,010
Consulting 95,614 - - 95,614
Professional fees 27,856 - - 27,856
Oil and gas lease expenses 14,772 - - 14,772
General and administrative 12,921 70,722 38,882 105,639
----------- ----------- ----------- -----------------
Total expenses 163,673 71,124 57,045 322,891
----------- ----------- ----------- -----------------
OPERATING LOSS (163,673) (71,124) (57,045) (322,891)
----------- ----------- ----------- -----------------
OTHER INCOME (EXPENSES)
Interest income 13 29 83 36
Interest expense (1,060) (2,824) - (21,285)
Gain on debt forgiveness 6,109 - - 6,109
Gain (loss) on disposition and impairment of assets (32,733) 2,412 (109,186) (71,790)
----------- ----------- ----------- -----------------
Total other income (expense) (27,671) (383) (109,103) (86,930)
----------- ----------- ----------- -----------------
LOSS BEFORE TAXES (191,344) (71,507) (166,148) (409,821)
INCOME TAX BENEFIT 66,040 - - 66,040
----------- ----------- ----------- -----------------
LOSS FROM CONTINUING OPERATIONS (125,304) (71,507) (166,148) (343,781)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain (Loss) from mining operations (net of income
tax benefit of $66,040) 264,158 (170) - (175,451)
----------- ----------- ----------- -----------------
NET INCOME (LOSS) 138,854 (71,677) (166,148) (519,232)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments 10,460 (63,467) (33,143) 31,613
----------- ----------- ----------- -----------------
COMPREHENSIVE INCOME (LOSS) 149,314 (135,144) (199,291) (487,619)
=========== =========== =========== =================
NET GAIN (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations (0.04) (0.06) (0.16) (0.13)
Net gain (loss) from discontinued operations 0.08 nil nil (0.07)
----------- ----------- ----------- -----------------
NET INCOME (LOSS) PER COMMON SHARE 0.04 (0.06) (0.16) (0.20)
=========== =========== =========== =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 3,258,749 1,217,212 1,017,529 2,570,703
=========== =========== =========== =================
See accountant's review report and accompanying notes.
4
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
Common Stock Accumulated Accumulated
------------------- Additional During Other Total
Number Paid-in Accumulated Exploration Comprehensive Stockholders'
of Shares Amount Capital Deficit Stage Income Equity
---------- ------- ------------ ------------- ------------- ------------- -------------
Balance, September 30, 1999 $1,014,982 $10,150 $11,621,519 ($10,457,146) $ 0 $ 0 $ 1,174,523
Shares issued to consultants
for services at $1.00
per share 3,125 31 3,094 - - - 3,125
Shares issued to officers for
debt at $0.80 per share 110,000 1,100 86,900 - - - 88,000
Shares issued to officers for
investment at $0.80 per share 71,500 715 56,485 - - - 57,200
Net loss for the year ended
September 30, 2000 - - - (428,320) - (34,389) (462,709)
---------- ------- ------------ ------------- ------------- ------------- -------------
Balance,
September 30, 2000 1,199,607 11,996 11,767,998 (10,885,466) - (34,389) 860,139
Shares issued to consultants and
others for services at prices
varying from $0.30 to $1.40
per share 174,375 1,744 95,656 - - - 97,400
Shares issued to officers for
investments at $0.40 per share 310,000 3,100 120,900 - - - 124,000
Shares issued to officers for
investment and cash at $0.25
per share 160,000 1,600 38,400 - - - 40,000
Shares issued to officers and
directors for services at $0.25
to $0.30 per share 110,000 1,100 29,150 - - - 30,250
Adjustment for fractional shares
issued 4,074 41 (41) - - - -
Shares issued for loan
consideration
at $0.30 per share 62,500 625 18,125 - - - 18,750
Shares issued for cash at $0.30
per share 393,334 3,933 114,067 - - - 118,000
Shares issued for marketing
servies at
$0.30 per share 40,000 400 14,600 - - - 15,000
Net loss for year ended
September 30, 2001 - - - (217,129) (658,086) - (875,215)
Unrealized loss on market
value of investments - - - - - (115,773) (115,773)
---------- ------- ------------ ------------- ------------- ------------- -------------
Balance,
September 30, 2001 2,453,890 24,539 12,198,855 (11,102,595) (658,086) (150,162) 312,551
Shares issued for cash at $0.30
per share 713,000 7,130 206,770 - - - 213,900
Shares issued to officer for
debt at $0.30 200,000 2,000 58,000 - - - 60,000
per share
Shares issued to consultants
and others for services at
$0.30 to $0.38 per share 175,000 1,750 53,750 - - - 55,500
Net income for the period ended
December 31, 2001 - - - - 138,854 - 138,854
(unaudited)
Unrealized gain on market value
of investments - - - - - 10,460 10,460
---------- ------- ------------ ------------- ------------- ------------- -------------
Balance
December 31, 2001 (unaudited) 3,541,890 $35,419 $12,517,375 ($11,102,595) ($519,232) ($139,702) $ 791,265
========== ======= ============ ============= ============= ============= =============
(unaudited)
See accountant's review report and accompanying notes.
5
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Period from
July 1, 2001
Three Months Ended (Inception of
December 31, Exploration Stage
-------------------------------------- through
2001 2000 1999 December 31, 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ----------- ----------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 138,854 ($71,677) ($166,148) ($519,232)
Discontinued operations - - - 439,609
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss (gain) on sale of equipment - (115) 113,686 -
Loss (gain) on sale of investments 32,733 (2,297) - 71,790
Gain from mining operations (330,198) - - (330,198)
Gain on debt forgiveness 6,109 - - 6,109
Equipment traded for services - - 4,137 -
Depreciation and amortization - 402 3,163 -
Issuance of common stock for services 55,500 52,900 3,125 102,000
Issuance of common stock for loan
consideration - - - 18,750
Changes in assets and liabilities:
Note receivable - - (3,000) (15,000)
Deposit - - (150) -
Prepaid expenses (103,423) - - (184,303)
Deferred working interest (30,889) - - (30,889)
Accounts payable (25,784) 5,734 15,913 18,446
Accrued expenses 12,510 - - 62,510
Payable to related parties - 1,057 32,000 8,231
------------ ----------- ---------- -------------------
Net cash provided (used) by operating activities (244,588) (13,996) 2,726 (352,177)
------------ ----------- ---------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (13,224) - (14,400) (16,732)
Sale of investments 29,050 9,863 5,500 71,592
Sale of fixed assets - 3,000.00 - -
------------ ----------- ---------- -------------------
Net cash provided (used) by investing activities 15,826 12,863 (8,900) 54,860
------------ ----------- ---------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issuance and offering costs - - - -
Payments of notes payable (35,000) - - (35,000)
Proceeds from notes payable - - - 135,000
Issuance of common stock for cash 213,900 - - 331,900
------------ ----------- ---------- -------------------
Net cash provided by financing activities 178,900 - - 431,900
------------ ----------- ---------- -------------------
Net increase (decrease) in cash ($49,862) ($1,133) ($6,174) $ 134,583
------------ ----------- ---------- -------------------
6
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
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. The Company intends to either sell
or lease these projects to third parties, but there is no guarantee that the
Company will be successful in this endeavor.
Celebration Mining Company ("Celebration"), currently 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 planned 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.
8
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
As a result of the Company's entering a new exploration stage as an energy
project development company on July 1, 2001, the Company has elected to dispose
of its mineral properties and has accordingly reclassified these properties,
which totaled $266,757 at September 30, 2001, as net assets of discontinued
operations. 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 for any asset impairment that may result in the event
the Company is not successful in selling these properties has been made in the
accompanying financial statements. See Note 3.
The $186,253 and $82,155 cost of prepaid mineral leases included in the
accompanying balance sheet as of December 31, 2001 and September 30, 2001,
respectively, is related to oil and natural gas properties. The Company has not
determined whether the properties contain economically recoverable 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 is seeking additional capital through a private placement of its
stock, or other debt. Management plans to use the majority of such financing
proceeds for landhold acquisition, and on drilling and possible completion of an
oil well project in Texas. Management also plans to conduct a second financing,
larger than the first, the proceeds of which will be used for drilling of wells
on the Company's leased oil and gas property in Louisiana. Management believes
that such financing proceeds will enable the Company to continue its operations.
However, there are inherent uncertainties in fund raising and in the sales of
excess assets and management cannot provide assurances that it will be
successful in these endeavors. Furthermore, the Company is in the exploration
stage, as it has not realized any significant revenues from its planned
operations.
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.
9
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Method
- ------------------
The Company's financial statements are prepared using the accrual method of
accounting.
Exploration Stage
- ------------------
The Company began a new exploration stage concerning the exploration of oil and
gas leases on July 1, 2001 and has not commenced the sale of any 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.
Loss Per Share
- ----------------
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 the exercise price
of the outstanding warrants is higher than the market price of the stock,
thereby causing the warrants to be antidilutive.
Cash Equivalents
- -----------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
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 state, 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, 2001, the cost of
the Company's mineral properties is included in net assets of discontinued
operations in the accompanying financial statements, as the Company has changed
its focus from mining 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.
10
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mineral Properties
- -------------------
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.
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.
Provision For Taxes
- ---------------------
Income taxes are provided based upon the liability method of accounting pursuant
to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred
income taxes are recorded to reflect the tax consequences on 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
11
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Provision For Taxes (Continued)
- ----------------------------------
not believe the Company has met the "more likely than not" standard imposed by
SFAS No. 109 to allow recognition of such an asset.
At December 31, 2001, the Company had net deferred tax assets of approximately
$880,000, principally arising from net operating loss carryforwards for income
tax purposes. During the three months ending December 31, 2001, the Company
utilized $66,040 of the net deferred taxes from previous net operating losses in
the offset of the gain associated with the sale of mining property. 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, 2001.
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $5,877,000, which expire in the years 2001 through 2021.
Additionally, the Company has capital loss carryovers of approximately
$4,844,000.
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 remediating contaminated sites, other companies' clean-up
experience and data released by The Environmental Protection Agency (EPA) 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 reports an
asset separately from the associated liability. At December 31, 2001, the
Company had no accrued liabilities for compliance with environmental
regulations.
12
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
Impaired Asset Policy
- -----------------------
The Company adopted Financial Accounting Standard Board statement SFAS No. 121
titled "Accounting for Impairment of Long-Lived Assets," which has been replaced
by SFAS No. 144, "Accounting for Impairment or 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
amounts whenever events or changes in circumstances indicate that an asset may
not be recoverable. Because of write-downs and write-offs taken throughout
fiscal 1999, fiscal 2000, and fiscal 2001, the Company does not believe any
further adjustments are needed to the carrying value of its assets at December
31, 2001. See Note 3.
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, consisting of equity securities of private and small public
companies, are stated at current market value.
Revenue Recognition
- --------------------
As noted in its statement of operations, Cadence has not produced any revenue in
the most recent quarter or in the years ended September 30, 2001, 2000 or 1999.
When the Company does produce revenue, sales will be recognized at the point of
passage of title specified in the contract.
Principles of Consolidation
- -----------------------------
The financial statements include those of 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.
Reclassifications
- -----------------
Certain amounts from prior periods have been reclassified to conform with the
current period presentation. This reclassification has resulted in no changes
to the Company's accumulated deficit and net losses presented.
13
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts for cash, receivables, deposits, payables, and advances
from related parties approximate their fair value.
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", which is effective for the Company as of January 1,
2001. This standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires 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, 2001, the Company has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
Accounting Pronouncements
- -------------------------
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 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This new standard establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations.
Statement 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 144 and does not believe that the adoption will have a
material impact on the financial statements of the Company at December 31, 2001.
14
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (continued)
- ---------------------------------------
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000, and is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company believes that the adoption of this standard will not have a
material effect on the Company's results of operations or financial position.
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 does not believe that the
adoption will have a material impact on the financial statements of the Company
at December 31, 2001.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". 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 is
not anticipated to have any material effect on the Company's financial
statements.
15
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Risk
- -----------------------
The Company maintains cash balances at several financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. Although the financial institutions are considered creditworthy
and have not experienced any losses on its deposits, at December 31, 2001, the
Company's cash balance at one financial institution exceeded Federal Deposit
Insurance Corporation (FDIC) limits by $20,076.
NOTE 3 - MINERAL PROPERTIES
The Company's mineral properties are being disposed of as discontinued
operations pursuant to the Company's adoption of the plan for a new exploration
stage concerning natural resource properties on July 1, 2001.
Mineral Properties in North Idaho
- -------------------------------------
The Company, directly and through its subsidiary Celebration Mining Company,
holds forty-three unpatented mining claims in the Coeur d'Alene Mining District
in four distinct groups called the Kil Group, West Mullan Group, South Galena
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. The majority of these claims were
written off as permanently impaired at September 30, 2001.
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. on its eight-claim Palisades Group property.
The lease calls 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 has
the right to explore and potentially develop the property under certain
conditions.
The Company, on October 31, 2001, sold its Kil Group and West Mullan Group
claims to Caledonia Silver-Lead Mines, Inc., an affiliated company. The
combined sale price for these claims was 3,501,980 shares of the common stock of
Caledonia, having an estimated par value of $0.10 per share and valued at
$350,198. The net effect of the transaction was a gain of $330,198. See Note
5.
16
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3 - MINERAL PROPERTIES (CONTINUED)
Mineral Properties in North Idaho (continued)
- --------------------------------------------------
In October 1994, the Company entered into a lease agreement with Fausett
International, Inc. covering the Crescent Mine located in Shoshone County,
Idaho. The validity of this lease was challenged by both the Environmental
Protection Agency and Shoshone County who claimed to have an ownership interest
in the property. After considerable legal deliberation, in June 2001, the
Company delivered a quitclaim deed to the Crescent Mine, which in turn
subsequently disposed of its interest in the mine. See Note 14.
Other Domestic Properties
- ---------------------------
In the fourth quarter of the year ended September 30, 2001, the Company elected
to write off all of its interest in mineral properties except for the ViPont
Mine, Kil Group Claims and West Mullan Group Claims. The net effect of this
write down was to record a loss on asset impairment of $432,090. This amount
was included in loss from discontinued operations at September 30, 2001.
NOTE 4 - 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 years. Depreciation expense for the
periods ended December 31, 2001, 2000 and 1999 was $-0-, $402 and $3,163,
respectively.
NOTE 5 - INVESTMENTS
The Company's securities investments are classified as available for sale
securities which are recorded at fair value in investments on the balance sheet,
with the change in fair value during the period excluded from earnings and
recorded net of tax as a component of other comprehensive income. The Company
has no securities which are classified as trading securities.
At December 31, 2001 and September 30, 2001, the market values of investments
were as follows:
17
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5 - INVESTMENTS (CONTINUED)
December 31, September 30,
2001 2001
------------- --------------
Elite Logistics, Inc. $ 13,703 $ 35,632
Integrated Pharmaceuticals, Inc. - 4,444
Ashington Mining Company 7,200 7,200
Caledonia Silver-Lead Mines, Inc. 350,198 -
Enerphaze Corporation 3,200 -
Metalline Mining Co., Inc. 13,965 -
Oxford Metallurgical, Inc. - 600
Sterling Mining Co. 6,279 6,300
Trend Mining Company 28,667 50,167
------------- --------------
$ 423,212 $ 104,343
============= ==============
Other information regarding the Company's investments follows:
Metalline Mining
- -----------------
During May 2000, the Company traded equipment for 15,000 restricted common
shares of Metalline Mining Company which were then trading at $4.12 per share.
The Company sold these Metalline Mining Company shares during the year ended
September 30, 2001.
Rigid Airship USA, Inc.
- --------------------------
On June 26, 1998, the Company traded six patented mining claims acquired in
Shoshone County, Idaho in 1995 for 50,000 shares of SynFuels Technology, Inc.,
which was then trading at $8.00 per share. The Company acquired an additional
10,000 shares of SynFuels Technology, Inc. common stock in September 1998 in
exchange for another mining property. SynFuel Technology, Inc. changed its name
to Rigid Airship in November 1998. As of December 31, 2001, there was no market
for this stock.
Envirogold, LLC
- ----------------
During January 2000, the Company announced that together with Nuvotec, Inc.
(Nuvotec), it had formed Envirogold LLC (Envirogold). Envirogold was 50% owned
by each and had signed a technology licensing agreement with Integrated
Environmental Technologies (Integrated) for the development and use of certain
patented technology for applications in the mining and mineral processing
industries.
The Company received notification on February 27, 2001 that the technology
license assigned by Integrated Environmental Technologies had been withdrawn.
After further investigation, it was mutually determined by all parties that
Envirogold had no ongoing business without the license and a determination was
made to dissolve Envirogold LLC.
18
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5 - INVESTMENTS (CONTINUED)
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,
approximates its fair value. The carrying value of these shares will be
reevaluated at each reporting period and adjustments, if appropriate, will be
made to the carrying value of these securities. The net effect of the
transaction resulted in a gain of $330,198. See Note 3.
Enerphaze Corporation
- ----------------------
During October 2001, the Company received 8,000 shares of Enerphaze Corporation
common stock in payment of a $15,000 note receivable. No gain or loss was
recognized on this transaction.
NOTE 6 - COMMON STOCK
During the year ended September 30, 2000, the Company issued 3,125 shares of
common stock for services, 110,000 shares of common stock for payment of related
party payables and 71,500 shares of common stock for investments. The shares
were valued at their fair market value at the date of issuance, which ranged
from $0.80 to $1.00.
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 marketing agreement (Note 12) 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 to 100,000,000 shares.
During the quarter ended December 31, 2001, the Company issued 175,000 shares of
its common stock to consultants and others for services valued at $55,500 and
200,000 shares of its common stock to an officer in partial 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
713,000 shares of its common stock for $213,900.
19
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 7 - 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
December 31, 2001.
NOTE 8 - COMMON STOCK OPTIONS AND WARRANTS
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 of work
performed. As of December 31, 2001, only 638 shares of common stock have been
awarded under the Plan.
NOTE 9 - COMPANY STOCK OPTION AND AWARD 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 have been granted under the plan, of which
12,750 options have been forfeited and none have been exercised through the year
ending September 30, 2001. The old existing options are attributed to the
merger of Celebration Mining Company with Royal in August 1995.
Following is a summary of the stock options during the period ended December 31,
2001 and the year ended September 30, 2001.
Weighted
Number Average
of Exercise
Options Price
-------- ---------
Outstanding at 10/1/2000 60,000 $ 18.60
Granted - -
Exercised - -
Forfeited - -
-------- ---------
Outstanding at 9/30/2001 60,000 $ 18.60
======== =========
Options exercisable at 9/30/2001 60,000 $ 18.60
======== =========
Weighted average fair value of options granted during
the year ended 9/30/2001 $ -
========
20
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 9 - COMPANY STOCK OPTION AND AWARD PLAN (continued)
Outstanding at 10/1/2001 60,000 $ 18.60
Granted - -
Exercised - -
Forfeited - -
-------- ---------
Outstanding at 12/31/2001 60,000 $ 18.60
======== =========
Options exercisable at 12/31/2001 60,000 $ 18.60
======== =========
Weighted average fair value of options granted
during the period ended 12/31/2001 $ -
========
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
for 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 the
salaried compensation for services.
NOTE 10 - OIL AND GAS PROPERTIES
The Company's proposed future oil and gas producing activities will be 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 period ended December 31, 2001, the Company completed acquisition of
oil & gas leases in Desoto Parish, Louisiana. The Company currently has
approximately 2000 acres under lease in three sections of land. At December 31,
2001 and September 30, 2001, $171,853 and $82,155, respectively is shown in the
attached financial statements as prepaid mineral leases. Management has
estimated a cost of $3,000,000 to $5,000,000 to drill the initial wells to begin
development of this property.
21
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 10 - OIL AND GAS PROPERTIES (CONTINUED)
Texas
- -----
Subsequent to the year ended September 30, 2001, the Company acquired an
exploration permit and lease option agreement for an oil well project in north
Texas known as Pinnacle Reef. The Company has projected the possibility of 4
wells on this structure with expected test well cost of $180,000 plus an
additional $75,000 to complete the test well if efforts prove successful. At
December 31, 2001, $14,400 is shown in the attached financial statements as
prepaid mineral leases.
In December 2001, the Company sold a partial interest in a portion of its
Pinnacle Reef prospect for $146,000. The Company's cost in the portion of the
prospect sold totaled $1,600; however, since the Company anticipates incurring
over $153,000 in exploration and development costs relating to the interest
retained in the prospect, the Company originally recorded a deferred credit of
$144,400. As exploration and development costs of $101,768 during the three
months ended December 31, 2001 were incurred on this prospect, they were charged
against the deferred credit. At December 31, 2001, the Company recorded a
receivable in the amount of $74,121 to reflect some sales of the prospect's
partial interest, which were collected by the Company in January 2002.
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES
The Securities and Exchange Commission (SEC) 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.
Should the Company prove successful in its exploratory drilling of its
properties, natural gas reserves and petroleum reserves would then be estimated
by an independent geological engineer. The estimates would include reserves in
which Cadence holds an economic interest under lease and operating agreements.
The Company has no proven reserves at December 31, 2001.
Reserves attributable to certain oil and gas discoveries are not considered
proved as of December 31, 2001 due to geological, technical or economic
uncertainties. 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.
22
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
Cadence has no supply contracts to purchase petroleum or natural gas from
foreign governments.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and amortization
as of December 31, 2001 and September 30, 2001 were as follows:
December 31, September 30,
2001 2001
------------- --------------
Unproved properties $ - $ -
Prepaid mineral leases 186,253 82,155
Accumulated depreciation,
depletion and amortization - -
------------- --------------
Total capitalized costs $ 186,253 $ 82,155
============= ==============
Costs, both capitalized and expensed, incurred in oil and gas-producing
activities during the three months and year ended December 31, 2001 and
September 30, 2001, respectively, 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.
December 31, September 30,
2001 2001
------------- --------------
Property acquisition costs:
Unproved properties $ 104,470 $ 84,503
Exploration costs 101,768 -
Development costs - -
------------- --------------
Total expenditures $ 206,238 $ 84,503
============= ==============
There were no results of operations for oil and gas producing activities
(including operating overhead) for the three months and year ended December 31,
2001 and September 30, 2001 since the Company had no proven reserves.
23
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The 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.
In its countersuit, the Company is seeking both full title to the aforementioned
mineral property and compensatory damages as well as punitive damages. The
Company believes its countersuit will prevail.
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 well bores, 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.
Capital Commitments
- -------------------
At December 31, 2001, the Company has estimated capital and investment
commitments of $3,000,000 to $5,000,000 to begin development of its leased
property in Louisiana and $180,000 estimated per well test costs on property in
Texas with an additional $75,000 estimated cost per well to bring the Texas
property to production if well tests are successful. See Note 10. No accruals
have been made in the accompanying financial statements for these amounts.
Other Commitments
- ------------------
During July 2001, the Company entered into an agreement with ceoHeadlines.com to
promote itself for an initial three month period on their website. The Company
paid $900 and issued 40,000 shares of its common stock valued at $15,000 for
payment of this initial period. (See Note 6.) The agreement calls for options
to extend this agreement three times for a total of twelve months. Each
extension is subject to an additional payment of $900 and $15,000 worth of the
Company's common stock. During the quarter ended December 31, 2001, the Company
issued 40,000 shares of its common stock pursuant to this agreement. The stock
is to be valued at its fair market value on the date of issuance.
24
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Commitments (continued)
- -------------------------------
During September 2001, the Company entered into a consulting agreement with
American Financial Group for promotion to investors. The agreement calls 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 Company leased office facilities in Walla Walla, Washington from Coldwell
Banker Commercial 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, 2001 was $1,200.
NOTE 13 - NOTES PAYABLE
At December 31, 2001 and September 30, 2001, notes payable consisted of the
following:
December 31, September 30,
Creditor and Conditions 2001 2001
- ------------------------------------------- ------------- --------------
Howard Crosby, (an officer and shareholder
of the Company), unsecured, interest at 6%,
due on January 1, 2003. $ 30,000 $ 125,000
Dotson Exploration, (a related party),
unsecured, interest at 6%, due on
January 1, 2003. 10,000 10,000
------------- --------------
Total $ 40,000 $ 135,000
============= ==============
25
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - SETTLEMENT AGREEMENT
Fausett International, Inc.
- -----------------------------
During June 2001, the Company entered into a settlement agreement wherein the
Company relinquished all claims to the Crescent Mine (located in Shoshone
County, Idaho) under a previously executed lease and delivered to counsel for
Fausett International, Inc. (Fausett), a quitclaim deed to the Crescent Mine.
Upon receipt of the quitclaim deed, Fausett transferred all interest in the
Crescent Mine to Shoshone County and delivered to the Company for cancellation
certificates for 8,600 shares of the Company's common stock held by Fausett and
an officer of Fausett. The settlement agreement released the Company from
further obligations under the lease agreement. It also contained a general
release in favor of the Company from the Environmental Protection Agency and
from Shoshone County.
NOTE 15 - GOING CONCERN
As shown in the accompanying financial statement, the Company has no revenues,
has incurred a net loss from continuing operations of $125,304 for the period
ended December 31, 2001, has a pre-exploration stage accumulated deficit of
$11,102,595 and a deficit accumulated during exploration stage of $519,232.
These factors indicate that the Company may be unable to continue in existence.
The financial statements do not include any adjustments related to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
The Company's management has strong beliefs that significant and imminent
private placements will generate sufficient cash for the Company to operate for
the next few years. The Company also believes that the occasional sale of its
equity investments will provide cash as needed for operations.
NOTE 16 - RELATED PARTIES
The Company sublets office space on a month-to-month basis from one of its
officers in Walla Walla, Washington for $400 per month through May 2001.
The Company entered into a mineral lease agreement with Oxford Metallurgical,
Inc. for the five-year period ending September 1, 2005. Under this agreement,
Oxford receives a leasehold interest in certain mining properties in Kootenai
County, Idaho in exchange for semi-annual lease payments of $300 and the
maintenance of property and liability insurance on the lease properties.
Other related party transactions are disclosed in Notes 5, 6 and 13.
26
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 17 - GAIN ON DEBT FORGIVENESS
During the quarter ended December 31, 2001, an accounts payable vendor chose to
reverse interest charges on their delinquent account. This transaction resulted
in the recognition of other income of $6,109.
NOTE 18 - SUBSEQUENT EVENTS
Oil and Gas Leases
- ---------------------
Subsequent to the date of these financial statements, the Company has completed
the logging of its initial well in north Texas. Initial results of the log
indicate zones bearing petroleum. The Company plans to move a completion rig
onsite and conduct an initial flow test to further determine the estimated
recoverable reserves. Upon completion of this well, the Company plans to begin
drilling the second well.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has not had revenues from operations during the last two years.
The Company intends to spend its existing cash on exploration on its existing
oil and gas lease in Texas. The Company does not intend to acquire any
additional oil and gas leases until it completes exploration operations on its
existing leases in Texas and Louisiana. The Company has initiated drilling and
completion operations on its first oil well in Texas. The Company intends to
continue drilling new wells in Texas as funding permits. The time schedule for
drilling and completion of wells is dependant upon raising sufficient capital to
fund these activities. Currently, the Company does not have adequate funds to
commence drilling of its second well.
As noted, the Company will need additional capital to drill its wells. The
amount of capital required is dependant on the success it has on its earliest
wells because the Company anticipates funding some future drilling of wells from
cash flow out of these earlier wells if they are commercially successful. The
Company hopes to reduce its dependence on new finances by completing its initial
drilling operation. Income from the sale of oil or natural gas will then be
applied to the Company's plan to drill and complete other wells. There is no
assurance, however, the Company's initial drilling operations will prove
successful. If they do not prove successful, the Company will have to rely upon
future new finances from outside sources in order to continue its operations.
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The Company sold 40% of the working interest in its first well to raise funds to
drill and complete the well. It may sell a portion of the working interest in
future wells to investors in order to raise the capital to drill such wells.
Selling a portion of the working interest enables the Company to raise some of
the risk capital to drill wells from outside investors and thus the "dry hole
risk" to the Company is reduced and may be totally eliminated. The major
disadvantage is that the Company will give up a percentage of its future cash
flow to the working interest investors which will reduce Company revenues and
profits in the future from successful wells. After weighing the overall
advantages and disadvantages of "working interest financing", the Board has
chosen to make use of such technique on its initial wells and may continue to
use this tool on a broad scale in the future.
The Company's auditors have issued a going concern opinion. This means that the
Company's auditors believe there is substantial doubt that the Company can
continue as an on-going business for the next twelve months unless it obtains
additional capital. This is because the Company has not generated any revenues
and no revenues are anticipated until it successfully completes at least one
producing oil or gas well. Accordingly, the Company must raise cash from sources
other than from the sale of oil or gas found on its property. That cash must be
raised from other outside sources. The Company's only other source for cash at
this time are investments or loans by others in the Company.
The Company has inadequate cash to maintain operations during the next twelve
months. In order to meet its cash requirements the Company may have to raise
additional capital through the sale of securities or loans. As of the date
hereof, the Company has no firm commitments for loans or for purchases of
additional securities and there is no assurance that it will be able to raise
additional capital through loans or the sale of securities in the future. In the
event that the Company is unable to raise additional capital, it may have to
suspend or cease operations.
The Company does not intend to conduct any research or development during the
next twelve months other than as described herein. See "Business."
The Company does not intend to purchase a plant or significant equipment. The
Company will hire employees on an as needed basis, however, the Company does not
expect any significant changes in the number of employees.
The Company does not expect to earn revenues until it begins recovering oil
and/or natural gas.
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 listed in the section captioned
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"Management's Discussion and Analysis or Plan of Operation," 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
or Plan of Operation" section and elsewhere in this Form 10-QSB could have a
material adverse effect on our business, operating results and financial
condition.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to a lawsuit regarding the Vipont mining property located
in Box Elder County, Utah. A lawsuit was initially filed by the plaintiff
alleging breach of contract and various other causes of action against the
Company. In June 1999, Box Elder County Superior Court rejected the plaintiff's
lawsuit and let stand the Company's counter-suit alleging fraudulent
misrepresentation and other claims. The plaintiffs then filed an appeal of this
dismissal with the Utah Supreme Court. On July 31, 2001, the Utah Supreme Court
found in favor of the Company and against the plaintiffs. The Company has
elected to continue to pursue its counter-suit against the plaintiffs and is
seeking full and clear title to the disputed mining property as well as monetary
damages. The Company cannot predict, however, the outcome of its countersuit and
there is no assurance that the Company will be successful.
ITEM 2. CHANGES IN SECURITIES.
Common Stock
- ------------
During the period ended December 31, 2001, the Company issued 713,000 shares of
its $.01 par value common stock for cash at $.30 per share, issued 200,000
shares of its $.01 par value common stock for debt repayment at $.30 per share,
and issued 175,000 shares of its $.01 par value common stock at prices ranging
from $.30 to $.38 to consultants and others for services rendered.
We had 3,541,890 shares of common stock issued and outstanding as of December
31, 2001. The issuances discussed under this section are exempted from
registration under Rule 506 of the Securities Act ("Rule 504") or Section 4(2)
of the Securities Act ("Section 4(2)"), as provided. All purchasers of the
securities acquired the shares for investment purposes only and all stock
certificates reflect the appropriate legends. No underwriters were involved in
connection with the sales of securities referred to in this section.
Options and Warrants
- --------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
none
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
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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.
Dated this 14th day of February, 2002.
CADENCE RESOURCES CORPORATION
By: /s/ Howard Crosby
Howard Crosby
Its: Chief Executive Officer
By: /s/ John Ryan
John Ryan
Its: Chief Financial Officer
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