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: MARCH 31, 2002
[ ] 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 ID 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 March 31, 2002: 4,778,724 shares
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
FINANCIAL STATEMENTS
MARCH 31, 2002
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.)
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 March
31, 2002, and the related statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the six months ended March 31, 2002,
2001 and 2000, and for the period from July 1, 2001 (inception of exploration
stage) through March 31, 2002. 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 years ended September 30, 2001 and 2000 were
audited by us and we expressed an unqualified opinion on them in our report
dated January 8, 2002. 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 2 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 2. 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
May 14, 2002
1
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
March 31, September 30,
2002 ------------------------
(Unaudited) 2001 2000
------------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 128,281 $ 191,684 $ 15,915
Receivable from working interest owners 2,752 - -
Notes receivable 3,000 18,000 14,628
Prepaid rent - 1,275 -
Deposit 425 425 150
------------- ----------- -----------
TOTAL CURRENT ASSETS 134,458 211,384 30,693
------------- ----------- -----------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Prepaid mineral leases 170,505 82,155 -
------------- ----------- -----------
PROPERTY AND EQUIPMENT
Well equipment 17,086 - -
Furniture and equipment 1,440 1,440 1,440
Less accumulated depreciation (1,440) (1,440) (1,404)
------------- ----------- -----------
TOTAL PROPERTY AND EQUIPMENT 17,086 - 36
------------- ----------- -----------
OTHER ASSETS
Investments 518,469 104,343 236,428
------------- ----------- -----------
NONCURRENT ASSETS
Net assets of discontinued operations 246,757 266,757 702,097
------------- ----------- -----------
TOTAL ASSETS $ 1,087,275 $ 664,639 $ 969,254
============= =========== ===========
See accountant's review report and accompanying notes.
2
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
March 31, September 30,
2002 ------------------------------------
(Unaudited) 2001 2000
---------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 118,768 $ 158,857 $ 109,115
Payable to related party - 8,231 -
Deferred working interest 53,144 - -
Accrued compensation 68,510 50,000 -
---------------- ----------------- -----------------
TOTAL CURRENT LIABILITIES 240,422 217,088 109,115
---------------- -----------------
LONG-TERM DEBT
Notes payable - related parties 10,000 135,000 -
---------------- ----------------- -----------------
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, 4,778,724, 2,453,890, and
1,199,607 shares issued and outstanding,
respectively 47,787 24,539 11,996
Additional paid-in capital 12,853,007 12,198,855 11,767,998
Stock options 324,000 - -
Accumulated deficit before exploration stage (11,102,595) (11,102,595) (10,885,466)
Deficit accumulated during exploration stage (1,148,859) (658,086) -
Accumulated other comprehensive income (loss) (136,487) (150,162) (34,389)
---------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 836,853 312,551 860,139
---------------- ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,087,275 $ 664,639 $ 969,254
================ ================= =================
See accountant's review report and accompanying notes.
3
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------------- --------------------------
2002 2001 2000 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
REVENUES $ - $ - $ - $ - $ -
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation and amortization - - 3,139 - 402
Officers' and directors' compensation 40,000 - - 52,510 -
Consulting 374,904 29,500 - 470,518 84,000
Professional fees 5,366 6,488 8,622 33,222 12,698
Oil and gas lease expenses 34,870 - - 49,642 -
Exploration and drilling 177,038 - - 177,038 -
General and administrative 7,396 4,280 2,203 20,317 14,292
------------ ------------ ------------ ------------ ------------
Total expenses 639,574 40,268 13,964 803,247 111,392
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (639,574) (40,268) (13,964) (803,247) (111,392)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 11 20 99 24 49
Interest expense (1,329) (1,186) - (2,389) (4,010)
Gain on debt forgiveness - - - 6,109 -
Gain (loss) on disposition and impairment of assets 11,265 (30,209) 57,409 (21,468) (27,797)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 9,947 (31,375) 57,508 (17,724) (31,758)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE TAXES (629,627) (71,643) 43,544 (820,971) (143,150)
INCOME TAX BENEFIT - - - 66,040 -
------------ ------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (629,627) (71,643) 43,544 (754,931) (143,150)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain (Loss) from mining operations (net of income
taxes) - (64) (5,095) 264,158 (234)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) (629,627) (71,707) 38,449 (490,773) (143,384)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments 3,215 (47,394) 305,284 13,675 (110,861)
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (626,412) $ (119,101) $ 343,733 $ (477,098) $ (254,245)
============ ============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations $ (0.16) $ (0.05) $ 0.04 $ (0.21) $ (0.11)
Net income (loss) from discontinued operations - nil (0.01) 0.07 nil
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.16) $ (0.05) $ 0.03 $ (0.14) $ (0.11)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 3,891,433 1,416,520 1,018,103 3,571,614 1,315,771
============ ============ ============ ============ ============
Period from
Six Months July 1, 2001
Ended (Inception of
March 31, Exploration Stage)
------------ through
2000 March 31, 2002
(Unaudited) (Unaudited)
------------ ------------------
REVENUES $ - $ -
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation and amortization 6,302 -
Officers' and directors' compensation 15,000 119,010
Consulting 6,536 470,518
Professional fees 31,778 33,222
Oil and gas lease expenses - 49,642
Exploration and drilling - 177,038
General and administrative 11,393 113,035
------------ ------------------
Total expenses 71,009 962,465
------------ ------------------
OPERATING LOSS (71,009) (962,465)
------------ ------------------
OTHER INCOME (EXPENSES)
Interest income 182 47
Interest expense - (22,614)
Gain on debt forgiveness - 6,109
Gain (loss) on disposition and impairment of assets (51,777) (60,525)
------------ ------------------
Total other income (expense) (51,595) (76,983)
------------ ------------------
LOSS BEFORE TAXES (122,604) (1,039,448)
INCOME TAX BENEFIT - 66,040
------------ ------------------
LOSS FROM CONTINUING OPERATIONS (122,604) (973,408)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain (Loss) from mining operations (net of income
taxes) (5,095) (175,451)
------------ ------------------
NET INCOME (LOSS) (127,699) (1,148,859)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments 272,141 34,828
------------ ------------------
COMPREHENSIVE INCOME (LOSS) $ 144,442 $ (1,114,031)
============ ==================
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations $ (0.12)
Net income (loss) from discontinued operations (0.01)
------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.13)
============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 1,017,815
============
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
Number Paid-in Stock Accumulated Exploration Comprehensive
of Shares Amount Capital Options Deficit Stage Income
--------- ------- ------------ -------- ------------- ------------- ---------------
Balance, September 30, 1999 1,014,982 $10,150 $11,621,519 $ - $(10,457,146) $ - $ -
Shares issued to consultants
for services at $1.00
per share 3,125 31 3,094 - - - -
Shares issued to officers for
debt at $0.80 per share 110,000 1,100 86,900 - - - -
Shares issued to officers for
investment at $0.80 per share 71,500 715 56,485 - - - -
Net loss for the year ended
September 30, 2000 - - - - (428,320) - (34,389)
--------- ------- ------------ -------- ------------- ------------- ---------------
Balance,
September 30, 2000 1,199,607 11,996 11,767,998 - (10,885,466) - (34,389)
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 - - - -
Shares issued to officers for
investments at $0.40 per share 310,000 3,100 120,900 - - - -
Shares issued to officers for
investment and cash at $0.25
per share 160,000 1,600 38,400 - - - -
Shares issued to officers and
directors for services at $0.25
to $0.30 per share 110,000 1,100 29,150 - - - -
Adjustment for fractional shares
issued 4,074 41 (41) - - - -
Shares issued for loan consideration
at $0.30 per share 62,500 625 18,125 - - - -
Shares issued for cash at $0.30
per share 393,334 3,933 114,067 - - - -
Shares issued for marketing services
at $0.30 per share 40,000 400 14,600 - - - -
Net loss for year ended
September 30, 2001 - - - - (217,129) (658,086) -
Unrealized loss on market value
of investments - - - - - - (115,773)
--------- ------- ------------ -------- ------------- ------------- ---------------
Balance,
September 30, 2001 2,453,890 24,539 12,198,855 - (11,102,595) (658,086) (150,162)
Shares issued for cash at $0.24
to $0.30 per share 1,326,334 13,263 361,637 - - - -
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
and accrued compensation at
$0.30 to $0.38 per share 298,500 2,985 89,515 - - - -
Shares issued for investment at
$0.30 per share 400,000 4,000 116,000 - - - -
Options issued to consultants
for services - - - 324,000 - - -
Net loss for the period ended
March 31, 2002 (unaudited) - - - - - (490,773) -
Unrealized gain on market value
of investments - - - - - - 13,675
--------- ------- ------------ -------- ------------- ------------- ---------------
Balance
March 31, 2002 (unaudited) 4,778,724 $47,787 $12,853,007 $324,000 $(11,102,595) $ (1,148,859) $ (136,487)
========= ======= ============ ======== ============= ============= ===============
Total
Stockholders'
Equity
---------------
Balance, September 30, 1999 $ 1,174,523
Shares issued to consultants
for services at $1.00
per share 3,125
Shares issued to officers for
debt at $0.80 per share 88,000
Shares issued to officers for
investment at $0.80 per share 57,200
Net loss for the year ended
September 30, 2000 (462,709)
---------------
Balance,
September 30, 2000 860,139
Shares issued to consultants and
others for services at prices
varying from $0.30 to $1.40
per share 97,400
Shares issued to officers for
investments at $0.40 per share 124,000
Shares issued to officers for
investment and cash at $0.25
per share 40,000
Shares issued to officers and
directors for services at $0.25
to $0.30 per share 30,250
Adjustment for fractional shares
issued -
Shares issued for loan consideration
at $0.30 per share 18,750
Shares issued for cash at $0.30
per share 118,000
Shares issued for marketing services
at $0.30 per share 15,000
Net loss for year ended
September 30, 2001 (875,215)
Unrealized loss on market value
of investments (115,773)
---------------
Balance,
September 30, 2001 312,551
Shares issued for cash at $0.24
to $0.30 per share 374,900
Shares issued to officer for debt
at $0.30 per share 90,000
Shares issued to officers,
consultants and others for services
and accrued compensation at
$0.30 to $0.38 per share 92,500
Shares issued for investment at
$0.30 per share 120,000
Options issued to consultants
for services 324,000
Net loss for the period ended
March 31, 2002 (unaudited) (490,773)
Unrealized gain on market value
of investments 13,675
---------------
Balance
March 31, 2002 (unaudited) $ 836,853
===============
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
Six Months Ended July 1, 2001
March 31, (Inception of
-------------------------------------- through
2002 2001 2000 March 31, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ---------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (490,773) $ (143,384) $(127,699) $ (1,148,859)
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 on sale of investments 21,468 27,912 - 60,525
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 6,302 -
Issuance of common stock for services 58,500 82,400 3,125 105,000
Issuance of common stock for loan
consideration - - - 18,750
Issuance of stock options for
consulting fees 324,000 - - 324,000
Changes in assets and liabilities:
Receivable from working interest owners (2,752) - - (2,752)
Prepaid rent 1,275 - - 1,275
Note receivable - - (3,000) (15,000)
Deposit - - (150) -
Prepaid mineral leases (88,350) - - (169,230)
Deferred working interest 38,527 - - 38,527
Accounts payable (33,980) (2,248) 13,218 10,250
Accrued expenses 52,510 - - 102,510
Payable to related parties - - 27,000 8,231
------------ ------------ ---------- ----------------
Net cash provided (used) by operating activities (443,664) (35,033) 36,619 (551,253)
------------ ------------ ---------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (21,677) (4,400) (128,215) (25,185)
Sale of investments 79,124 31,590 119,246 121,666
Purchase of fixed assets (17,086) - - (17,086)
Sale of fixed assets - 3,000 - -
------------ ------------ ---------- ----------------
Net cash provided (used) by investing activities 40,361 30,190 (8,969) 79,395
------------ ------------ ---------- ----------------
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 374,900 - - 492,900
------------ ------------ ---------- ----------------
Net cash provided by financing activities 339,900 - - 592,900
------------ ------------ ---------- ----------------
Net increase (decrease) in cash $ (63,403) $ (4,843) $ 27,650 $ 121,042
------------ ------------ ---------- ----------------
See accountant's review report and accompanying notes.
6
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Period from
July 1, 2001
Six Months Ended (Inception of
March 31, Exploration Stage)
---------------------------------------- through
2002 2001 2000 March 31, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------------
Net increase (decrease) in cash (balance forward) $ (63,403) $ (4,843) $ 27,650 $ 121,042
Cash, beginning of period 191,684 15,915 28,147 7,239
------------ ------------ ------------ ------------------
Cash, end of period $ 128,281 $ 11,072 $ 55,797 $ 128,281
============ ============ ============ ==================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ - $ - $ - $ -
Interest paid $ - $ - $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for services rendered
and accrued compensation $ 92,500 $ 82,400 $ 3,125 $ 122,500
Common stock issued for loan consideration $ - $ - $ - $ 18,750
Common stock issued for debt $ 90,000 $ - $ - $ 90,000
Common stock issued for investment and
stock subscription receivable $ - $ 124,000 $ - $ -
Common stock issued for investment $ 120,000 $ - $ - $ 120,000
Investment received for mining claims $ 350,198 $ - $ - $ 350,198
Investment given for related party payable $ 8,231 $ - $ - $ 8,231
Investment received for note receivable $ 15,000 $ - $ - $ 15,000
Stock options issued for servies $ 324,000 $ - $ - $ 324,000
See accountant's review report and accompanying notes.
7
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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
MARCH 31, 2002
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 total $246,757 at March 31, 2002, 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 $170,505 and $82,155, respectively, cost of prepaid mineral leases included
in the accompanying balance sheet as of March 31, 2002 and September 30, 2001 is
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 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
MARCH 31, 2002
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 March 31, 2002 and September
30, 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
MARCH 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mineral Properties (Continued)
- --------------------------------
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
MARCH 31, 2002
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 March 31, 2002, the Company had net deferred tax assets of approximately
$1,360,000, principally arising from net operating loss carryforwards for income
tax purposes. During the six months ending March 31, 2002, 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 March 31, 2002.
At March 31, 2002, the Company has net operating loss carryforwards of
approximately $6,840,000, which expire in the years 2002 through 2022.
Additionally, the Company has capital loss carryovers of approximately
$4,830,000.
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 March 31, 2002, 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
MARCH 31, 2002
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 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 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 March 31,
2002. 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 periods ended March 31, 2002, 2001 or 2000. 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.
Fair Value of Financial Instruments
- ---------------------------------------
The carrying amounts for cash, receivables, deposits, payables, and advances
from related parties approximate their fair value.
13
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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", 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 March 31, 2002, 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 March 31, 2002.
14
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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 March 31, 2002.
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.
Interim Financial Statements
- ------------------------------
The interim financial statements as of and for the nine months ended June 30,
2001 included herein have been prepared for the Company without audit. They
reflect all adjustments, which are, in the opinion of management, necessary to
present fairly the results of operations for these periods. All such
adjustments are normal recurring adjustments. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full fiscal year.
15
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Going Concern
- --------------
As shown in the accompanying financial statement, the Company has no revenues,
has incurred a net loss of $490,773 for the period ended March 31, 2002, has a
pre-exploration stage accumulated deficit of $11,102,595 and a deficit
accumulated during exploration stage of $1,148,859. 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 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 development
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.
On October 31, 2001, the Company 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 market 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
MARCH 31, 2002
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 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 interests 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 during the year
ended 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 March 31, 2002, 2001 and 2000 was $-0-, $402 and $6,302,
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 March 31, 2002 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
MARCH 31, 2002
NOTE 5 - INVESTMENTS (CONTINUED)
March 31, September 30,
2002 2001
---------- --------------
Elite Logistics, Inc. $ 5,463 $ 35,632
Integrated Pharmaceuticals, Inc. - 4,444
Ashington Mining Company 7,200 7,200
Oxford Metallurgical, Inc. - 600
Sterling Mining Co. 6,300 6,300
Metalline Mining Co., Inc. 3,975 -
Enerphaze Corporation 80,000 -
Caledonia Silver-Lead Mines, Inc. 350,198 -
Trend Mining Company 65,333 50,167
---------- --------------
$ 518,469 $ 104,343
========== ==============
Other information regarding the Company's investments follows:
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 March 31, 2002, 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.
Enerphaze Corporation
- ----------------------
During October 2001, the Company received 8,000 shares of Enerphaze Corporation
common stock in payment of a $15,000 note receivable. During January and
February 2002, the Company received 65,000 shares of Enerphaze Corporation
common stock for 400,000 shares of the Company's common stock. No gain or loss
was recognized on these transactions.
18
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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.
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 six months ended March 31, 2002, the Company issued 298,500 shares of
its common stock to officers, consultants and others for services valued at
$92,500, and also issued 400,000 shares of its common stock for investment 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 1,326,334
shares of its common stock for $374,900.
19
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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 March
31, 2002.
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 March 31, 2002, only 638 shares of common stock had 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
period ending March 31, 2002. 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 March 31,
2002 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 - -
Expired or forfeited - -
------- ---------
Outstanding at 9/30/2001 60,000 $ 18.60
------- ---------
Options exercisable at 9/30/2001 60,000 $ 18.60
------- ---------
20
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 9 - COMPANY STOCK OPTION AND AWARD PLAN (CONTINUED)
Weighted average fair value of options granted during
the year ended 9/30/2001 $ -
========
Outstanding at 10/1/2001 60,000 $18.60
========
Granted 400,000 .75
Exercised - -
Expired or forfeited 60,000 18.60
-------- ------
Outstanding at 3/31/2002 400,000 $ .75
======== ======
Options exercisable at 3/31/2002 400,000 $ .75
======== ======
Weighted average fair value of options granted
during the period ended 3/31/2002 $ 0.81
========
========
Weighted Average
Exercise Date Number of Shares Price per Share
-------------- ------------------ -----------------
On or before January 22, 2007 400,000 $ 0.75
NOTE 9 - COMPANY STOCK OPTION AND AWARD PLAN
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 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 lease in a natural gas field in Desoto Parish, Louisiana.
At least 51 drilled wells were previously commercially successful in adjacent
acreage. As of the dates of these financial statements, the Company has leased
a total of 1,920 acres. At March 31, 2002 and September 30, 2001, $156,105 and
$82,155, respectively, of leases in Louisiana are included in the attached
financial statements as prepaid mineral leases. Management has estimated a cost
of $1,100,000 to drill the initial test well on this property.
21
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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
Wilbarger County, Texas known as Pinnacle Reef. During the period ended March
31, 2002, the Company drilled its initial test well to a total depth of 4,237
feet and encountered four pay zones. The two lowest pay zones were completed
and initial drill stem tests and flow tests were run. At March 31, the decision
had been made to run electricity to the site, install a pump jack and commence
commercial production. At March 31, 2002, $14,400 is included in the attached
financial statements as prepaid mineral leases relating to Texas property.
During the six months ended March 31, 2002, 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. The Company anticipates
incurring over $230,000 in exploration and development costs relating to the
interest retained in the prospect. Because the Company has received proceeds
from the sales of the working interests in excess of exploration and development
costs attributable to those working interests, the Company originally recorded a
deferred credit of $53,144. As exploration and development costs of $227,592
during the six months ended March 31, 2002 were incurred on this prospect, they
were charged against the deferred credit. At March 31, 2002, the Company
recorded a receivable in the amount of $2,752 to reflect some sales of the
prospect's partial interest, which were collected by the Company subsequent to
March 31, 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.
Natural gas reserves and petroleum reserves are estimated by management. The
estimates include reserves in which Cadence holds an economic interest under
lease and operating agreements and are considered unproved at March 31, 2002.
Reserves attributable to certain oil and gas discoveries are not considered
proved as of March 31, 2002 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.
Cadence has no supply contracts to purchase petroleum or natural gas from
foreign governments.
22
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and amortization
as of March 31, 2002 and September 30, 2001 were as follows:
March 31, September 30,
2002 2001
---------- --------------
Unproved properties $ 17,086 $ -
Prepaid mineral leases 170,505 82,155
Accumulated depreciation,
depletion and amortization - -
---------- --------------
Total capitalized costs $ 187,591 $ 82,155
========== ==============
Costs, both capitalized and expensed, incurred in oil and gas-producing
activities during the period ended March 31, 2002 and the year ended September
30, 2001 are set forth below.
Costs both capitalized and expensed, incurred in oil and gas-producing
activities during the period ended March 31, 2002 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.
March 31, September 30,
2002 2001
---------- --------------
Property acquisition costs:
Unproved properties $ 192,972 $ 84,503
Exploration costs 271,441 -
Development costs - -
---------- --------------
Total expenditures $ 464,413 $ 84,503
========== ==============
There were no results of operations for oil and gas producing activities
(including operating overhead) year ended September 30, 2001 since exploration
and development activities had not commenced. Results of operation for oil and
gas activities (including operating overhead) for the six months ended March 31,
2002 were as follows:
23
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
Revenues $ -
Exploration costs 271,441
Depreciation, depletion
and amortization -
Other operating expenses -
----------
Results before income taxes $(271,441)
Income tax expense -
----------
Results of operation from
oil and gas producing
activities $(271,441)
==========
The Company has not determined that reserves are proven as of March 31, 2002,
and therefore has not estimated future net cash flows. Upon determination that
reserves are proven, future net cash flows will be computed using period-end
prices and period-end quantities of such proved reserves. 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 period, based on period-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense will be
calculated by applying 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.
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.
24
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Environmental Issues (Continued)
- ----------------------------------
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 cause
certain liabilities to arise. The company is not aware of any environmental
issues related to any of its assets from discontinued operations.
Capital Commitments
- --------------------
At March 31, 2002, the Company has estimated capital and investment commitments
of $1,100,000 to drill its initial test well in Louisiana. In Texas, future
capital commitments are dependant 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.
Other Commitments
- ------------------
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 period ended March 31, 2002 was $2,400.
NOTE 13 - NOTES PAYABLE
At March 31, 2002 and September 30, 2001, notes payable consisted of the
following:
March 31, September 30,
Creditor and Conditions 2002 2001
- ----------------------- ---------- --------------
Howard Crosby, (an officer and shareholder
of the Company), unsecured, interest at 6%,
due on January 1, 2003. $ - $ 125,000
Dotson Exploration, (a related party),
unsecured, interest at 6%, due on
January 1, 2003. 10,000 10,000
---------- --------------
Total $ 10,000 $ 135,000
========== ==============
25
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
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. (hereinafter "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 - RELATED PARTIES
The Company 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. Total
rent paid for this office space during the period ended March 31, 2001 was
$1,800.
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.
During the period ended March 31, 2002, the Company sold several mineral
properties located in Shoshone County, Idaho to Caledonia Silver-lead Mines,
Inc. See Note 3.
Because both Oxford Metallurgical, Inc. and Caledonia Silver-Lead are controlled
by two officers of Cadence, these transactions cannot be considered to be the
product of an arms-length negotiation.
Other related party transactions are disclosed in Notes 5, 6 and 13.
NOTE 16 - GAIN ON DEBT FORGIVENESS
During the period ended March 31, 2002, an accounts payable vendor chose to
reverse interest charges on its delinquent account. This transaction resulted
in the recognition of other income of $6,109.
26
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 17 - SUBSEQUENT EVENTS
Oil and Gas Leases
- ---------------------
Subsequent to the date of these financial statements the Company has completed
two other wells on its leased property in Wilbarger County, Texas. The Company
is currently anticipating completing these wells on or about the first of June ,
2002 and expects both of these wells to be commercially viable.
Sale of Stock "Units"
- ------------------------
Subsequent to the date of these financial statements, the Company sold 2,166,668
"units" to investors at $0.30 per unit in a private placement. Each unit
consisted 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
$500,000 and a subscription receivable for $150,000. Two officers of the
Company and another entity under common control invested $50,000 in these same
common stock units.
27
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 three oil wells 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.
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 sufficient
wells to fund new wells out of cash flow. Due to the declining nature of oil &
gas production, the Company must continue to explore and drill new wells to
maintain its sources of revenue. There is no assurance, however, the Company's
initial wells will provide sufficient revenue to fund other future wells. If
they do not prove successful, the Company will have to rely upon future new
finances from outside sources in order to both continue exploring for new oil
and gas deposits, and to continue its operations.
The Company sold 40% of the working interest in its first and third wells to
raise funds to drill and complete these wells. 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 drilled and intends to complete its second well entirely from its
own funds.
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 to the Company.
28
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
"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.
29
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 six months ended March 31, 2002, the Company issued 298,500 shares of
its common stock to officers, consultants and others for services valued at
$92,500, and also issued 400,000 shares of its common stock for investment 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 1,326,334
shares of its common stock for $374,900.
We had 4,778,724 shares of common stock issued and outstanding as of March 31,
2002. 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
- ----------------------
The Company issued an option pursuant to its stock option plan to a Director of
the Company in the amount of 200,000 shares at $.75 exercisable until January
22, 2007.
The Company also issued an option pursuant to its stock option plan to a
Consultant of the Company in the amount of 200,000 shares at $.75 exercisable
until January 22, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
30
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 16th day of May, 2002.
CADENCE RESOURCES CORPORATION
By: /s/ Howard Crosby
--------------------------------
Howard Crosby
Its: Chief Executive Officer
By: /s/ John Ryan
--------------------------------
John Ryan
Its: Chief Financial Officer