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: MAECH 31, 2003
[ ] 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, 2003: 9,162,526 shares
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
FINANCIAL STATEMENTS
MARCH 31, 2003
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. . . . . . . . . . . . . . . . 4
Statement of Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 5
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.) as of March 31, 2003, and the related
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for the six months ended March 31, 2003, 2002 and 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 years ended September 30, 2002 and 2001 were
audited by us and we expressed an unqualified opinion on them in our report
dated January 9, 2003. 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 16, 2003
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
BALANCE SHEETS
March 31, September 30,
2003 ----------------------
(Unaudited) 2002 2001
----------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash $ 49,596 $ 40,011 $191,684
Oil & gas revenue receivable 16,964 26,123 -
Receivable from working interest owners 12,873 16,037 -
Notes receivable 16,319 13,078 18,000
Prepaid expenses 12,500 27,500 1,275
Other current assets 425 431 425
----------- ----------- ---------
TOTAL CURRENT ASSETS 108,677 123,180 211,384
----------- ----------- ---------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 208,694 48,694 -
Unproved properties 96,992 78,997 -
Wells and related equipment and facilities 106,841 67,374 -
Support equipment and facilities 110,108 105,108 -
Prepaid mineral leases 177,419 177,177 82,155
Less accumulated depreciation, depletion,
amortization and impairment (21,444) (4,312) -
----------- ----------- ---------
TOTAL OIL AND GAS PROPERTIES 678,610 473,038 82,155
----------- ----------- ---------
PROPERTY AND EQUIPMENT
Furniture and equipment 1,440 1,440 1,440
Less accumulated depreciation (1,440) (1,440) (1,440)
----------- ----------- ---------
TOTAL PROPERTY AND EQUIPMENT - - -
----------- ----------- ---------
OTHER ASSETS
Investments 403,759 448,793 104,343
----------- ----------- ---------
NONCURRENT ASSETS
Net assets of discontinued operations 246,757 246,757 266,757
----------- ----------- ---------
TOTAL ASSETS $1,437,803 $1,291,768 $664,639
=========== =========== =========
See accountant's review report and accompanying notes to interim financial
statements.
2
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
BALANCE SHEETS
March 31, September 30,
2003 ----------------------------
(Unaudited) 2002 2001
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 140,290 $ 119,923 $ 158,857
Revenue distribution payable 16,149 14,835 -
Payable to related party 2,500 2,500 8,231
Deferred working interest - 22,184 -
Interest payable 2,433 - -
Accrued compensation 105,761 66,261 50,000
Notes payable 300,000 - -
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 567,133 225,703 217,088
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES - - -
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value;
20,000,000 shares authorized, 34,950, -0-
and -0- shares issued and outstanding, respectively 349 - -
Common stock, $.01 par value; 100,000,000 shares
authorized, 9,162,526, 6,866,210 and
2,453,890 shares issued and outstanding,
respectively 91,625 68,662 24,539
Additional paid-in capital 13,829,320 13,291,965 12,198,855
Stock options 626,790 626,790 -
Stock warrants 62,792 233,334 -
Accumulated deficit (13,532,984) (12,906,132) (11,760,681)
Accumulated other comprehensive income (loss) (207,222) (248,554) (150,162)
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 870,670 1,066,065 312,551
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,437,803 $ 1,291,768 $ 664,639
============= ============= =============
See accountant's review report and accompanying notes to interim financial
statements.
3
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------------- ---------------------------------------
2003 2002 2001 2003 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------ -----------
REVENUES $ 44,449 $ - $ - $ 77,825 $ - $ -
------------ ------------ ------------ ------------ ------------ -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization 8,496 - - 17,131 - 402
Officers' and directors' compensation 173,477 40,000 - 218,477 52,510 -
Consulting 21,425 374,904 29,500 99,655 470,518 84,000
Professional fees 41,393 5,366 6,488 49,428 33,222 12,698
Oil and gas lease expenses 39,095 34,870 - 59,447 49,642 -
Lease operating expenses 5,663 - - 42,179 - -
Exploration and drilling - 177,038 - - 177,038 -
General and administrative 26,222 7,396 4,280 62,425 20,317 14,292
------------ ------------ ------------ ------------ ------------ -----------
Total expenses 315,771 639,574 40,268 548,742 803,247 111,392
------------ ------------ ------------ ------------ ------------ -----------
OPERATING LOSS (271,322) (639,574) (40,268) (470,917) (803,247) (111,392)
------------ ------------ ------------ ------------ ------------ -----------
OTHER INCOME (EXPENSES)
Interest income 46 11 20 126 24 49
Interest expense (81,762) (1,329) (1,186) (83,001) (2,389) (4,010)
Partnership loss (159) - - (8,468) - -
Gain on debt forgiveness - - - - 6,109 -
Gain (loss) on disposition and
impairment of assets (29,969) 11,265 (30,209) (64,592) (21,468) (27,797)
------------ ------------ ------------ ------------ ------------ -----------
Total other income (expense) (111,844) 9,947 (31,375) (155,935) (17,724) (31,758)
------------ ------------ ------------ ------------ ------------ -----------
LOSS BEFORE TAXES (383,166) (629,627) (71,643) (626,852) (820,971) (143,150)
INCOME TAX BENEFIT - - - - 66,040 -
------------ ------------ ------------ ------------ ------------ -----------
LOSS FROM CONTINUING OPERATIONS (383,166) (629,627) (71,643) (626,852) (754,931) (143,150)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain (Loss) from mining operations
(net of income taxes) - - (64) - 264,158 (234)
------------ ------------ ------------ ------------ ------------ -----------
NET INCOME (LOSS) (383,166) (629,627) (71,707) (626,852) (490,773) (143,384)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments 32,655 3,215 (47,394) 41,332 13,675 (110,861)
------------ ------------ ------------ ------------ ------------ -----------
COMPREHENSIVE INCOME (LOSS) $ (350,511) $ (626,412) $ (119,101) $ (585,520) $ (477,098) $ (254,245)
============ ============ ============ ============ ============ ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations $ (0.04) $ (0.16) $ (0.05) $ (0.07) $ (0.21) $ (0.11)
Net income (loss) from discontinued
operations nil nil nil nil 0.07 nil
------------ ------------ ------------ ------------ ------------ -----------
NET INCOME (LOSS) PER COMMON SHARE $ (0.04) $ (0.16) $ (0.05) $ (0.07) $ (0.14) $ (0.11)
============ ============ ============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 9,037,193 3,891,433 1,416,520 8,721,129 3,571,614 1,315,771
============ ============ ============ ============ ============ ===========
See accountant's review report and accompanying notes to interim financial
statements.
4
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock
------------------ ------------------ Additional
Number Number Paid-in Stock Stock
of Shares Amount of Shares Amount Capital Options Warrants
--------- ------- --------- ------- ------------ ------------ ---------------
Balance,
September 30, 2000 1,199,607 $11,996 - $ - $11,767,998 $ - $ -
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 - - - - - - -
Unrealized loss on market value
of investments - - - - - - -
--------- ------- --------- ------- ------------ ------------ ---------------
Balance,
September 30, 2001 2,453,890 24,539 - - 12,198,855 - -
Shares issued for cash at $0.24
to $0.50 per share 783,000 7,830 - - 234,070 - -
Shares issued to officer for debt
at $0.30 per share 300,000 3,000 - - 87,000 - -
Shares issued to officers, consultants
and others for services, accrued
compensation and prepaid
expenses at $0.30 to $0.38 per
share 589,184 5,892 - - 205,775 - -
Shares issued for cash with warrants
attached at $0.30 per unit 2,333,336 23,333 - - 443,333 - 233,334
Shares issued to officer for
reimbursement of expenses
paid for Company at $1.03
per share 6,800 68 - - 6,932 - -
Shares issued for investment at
$0.30 per share 400,000 4,000 - - 116,000 - -
Options issued to directors and
consultants for services - - - - - 626,790 -
Net loss for the year ended
September 30, 2002 - - - - - - -
Unrealized loss on market value
of investments - - - - - - -
--------- ------- --------- ------- ------------ ------------ ---------------
Balance
September 30, 2002 6,866,210 68,662 - - 13,291,965 626,790 233,334
Shares issued for cash with warrants
attached at an average of $0.52
per unit 212,500 2,125 - - 61,750 - 46,125
Shares issued to directors and others
for services at $0.78 to $0.85
per share 168,500 1,685 - - 140,515 - -
Shares issued for loan consideration
at $0.78 per share 100,000 1,000 - - 77,000 - -
Shares issued from exercise of
warrants 1,815,316 18,153 - - 198,514 - (216,667)
Preferred shares issued for cash
at $1.50 to $2.00 per share - - 34,950 349 59,576 - -
Net loss for the six months ended
March 31, 2003 (unaudited) - - - - - - -
Unrealized gain on market value of
investments (unaudited) - - - - - - -
--------- ------- --------- ------- ------------ ------------ ---------------
Balance,
March 31, 2003 (unaudited) 9,162,526 $91,625 34,950 $ 349 $13,829,320 $ 626,790 $ 62,792
========= ======= ========= ======= ============ ============ ===============
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit Loss Equity
--------------- ---------- ----------------
Balance,
September 30, 2000 $ (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 - - 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) - (875,215)
Unrealized loss on market value
of investments - (115,773) (115,773)
Balance,
September 30, 2001 (11,760,681) (150,162) 312,551
--------------- ---------- ----------------
Shares issued for cash at $0.24
to $0.50 per share - - 241,900
Shares issued to officer for debt
at $0.30 per share - - 90,000
Shares issued to officers, consultants
and others for services, accrued
compensation and prepaid
expenses at $0.30 to $0.38 per
share - - 211,667
Shares issued for cash with warrants
attached at $0.30 per unit - - 700,000
Shares issued to officer for
reimbursement of expenses
paid for Company at $1.03
per share - - 7,000
Shares issued for investment at
$0.30 per share - - 120,000
Options issued to directors and
consultants for services - - 626,790
Net loss for the year ended
September 30, 2002 (1,145,451) - (1,145,451)
Unrealized loss on market value
of investments - (98,392) (98,392)
--------------- ---------- ----------------
Balance
September 30, 2002 (12,906,132) (248,554) 1,066,065
Shares issued for cash with warrants
attached at an average of $0.52
per unit - - 110,000
Shares issued to directors and others
for services at $0.78 to $0.85
per share - - 142,200
Shares issued for loan consideration
at $0.78 per share - - 78,000
Shares issued from exercise of
warrants - - -
Preferred shares issued for cash
at $1.50 to $2.00 per share - - 59,925
Net loss for the six months ended
March 31, 2003 (unaudited) (626,852) - (626,852)
Unrealized gain on market value of
investments (unaudited) - 41,332 41,332
--------------- ---------- ----------------
Balance,
March 31, 2003 (unaudited) $ (13,532,984) $(207,222) $ 870,670
=============== ========== ================
See accountant's review report and accompanying notes to interim financial
statements.
5
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
--------------------------------------
2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (626,852) $ (490,773) $(143,384)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss (gain) on sale of equipment - - (115)
Loss on sale of investments 64,592 21,468 27,912
Partnership loss 8,468 - -
Gain from mining operations - (330,198) -
Gain on debt forgiveness - 6,109 -
Depreciation and amortization 17,131 - 402
Issuance of common stock for services 142,200 58,500 82,400
Issuance of common stock for loan
consideration 78,000 - -
Investment given for services 7,200 - -
Issuance of stock options for
consulting fees - 324,000 -
Changes in assets and liabilities:
Oil & gas revenue receivable 9,159 - -
Receivable from working interest owners 3,164 (2,752) -
Prepaid expenses 15,000 1,275 -
Notes receivable (3,241) - -
Deposit 6 - -
Prepaid mineral leases 47,258 (88,350) -
Deferred working interest (22,184) 38,527 -
Accounts payable 20,367 (33,980) (2,248)
Revenue distribution payable 1,314 - -
Interest payable 2,433 - -
Accrued expenses 39,500 52,510 -
------------ ------------ ----------
Net cash provided (used) by operating activities (196,485) (443,664) (35,033)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (9,172) (21,677) (4,400)
Sale of investments 15,279 79,124 31,590
Purchase of fixed assets (44,467) (17,086) -
Purchase of proved and unproved properties (177,995) - -
Purchase of mineral leases (47,500) - -
Sale of fixed assets - - 3,000
------------ ------------ ----------
Net cash provided (used) by investing activities (263,855) 40,361 30,190
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable - (35,000) -
Proceeds from notes payable 300,000 - -
Issuance of preferred stock for cash 59,925 - -
Issuance of common stock and warrants for cash 110,000
Issuance of common stock for cash - 374,900 -
------------ ------------ ----------
Net cash provided by financing activities 469,925 339,900 -
------------ ------------ ----------
Net increase (decrease) in cash $ 9,585 $ (63,403) $ (4,843)
------------ ------------ ----------
See accountant's review report and accompanying notes to interim financial
statements.
6
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
-------------------------------------
2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ----------
Net increase (decrease) in cash (balance forward) $ 9,585 $ (63,403) $ (4,843)
Cash, beginning of period 40,011 191,684 15,915
------------ ------------ ---------
Cash, end of period $ 49,596 $ 128,281 $ 11,072
============ ============ =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ - $ - $ -
Interest paid $ - $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services rendered
and accrued compensation $ 142,200 $ 92,500 $ 82,400
Common stock issued for loan consideration $ 78,000 $ - $ -
Common stock issued for debt $ - $ 90,000 $ -
Common stock issued for investment and
stock subscription receivable $ - $ - $124,000
Common stock issued for investment $ - $ 120,000 $ -
Investment received for mining claims $ - $ 350,198 $ -
Investment given for related party payable $ - $ 8,231 $ -
Investment received for note receivable $ - $ 15,000 $ -
Stock options issued for servies $ - $ 324,000 $ -
Investment given for consulting services $ 7,200 $ - $ -
See accountant's review report and accompanying notes to interim financial
statements.
7
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Cadence Resources Corporation (formerly Royal Silver Mines, Inc.) hereinafter
("Cadence" or "the Company") was incorporated in April of 1969 under the laws of
the State of Utah primarily for the purpose of acquiring and developing mineral
properties. The Company changed its name from Royal Silver Mines, Inc. to
Cadence Resources Corporation on May 2, 2001 upon obtaining approval from its
shareholders and filing an amendment to its articles of incorporation. The
Company shall be referred to as "Cadence" or "Cadence Resources Corporation"
even though the events described may have occurred while the Company's name was
"Royal Silver Mines, Inc." The Company has elected a September 30 fiscal
year-end.
On July 1, 2001, Cadence developed a plan for acquisition, exploration and
development of oil and gas properties and accordingly began a new exploration
stage as an energy project development company. Prior to this, Cadence
conducted its business as a "junior" mineral resource company, meaning that it
intended to receive income from property sales or joint ventures of its mineral
projects with larger companies. The Company continues to hold several mineral
properties, which are described in Note 3.
Celebration Mining Company ("Celebration"), 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.
As a result of the Company's entering a new exploration stage as an energy
project development company on July 1, 2001, the Company elected to dispose of
its mineral properties and has accordingly reclassified these properties, which
total $246,757 at March 31, 2003, 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
8
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
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 $177,419 and $177,177, respectively, cost of prepaid mineral leases included
in the accompanying balance sheets as of March 31, 2003 and September 30, 2002
are related to natural gas properties. The Company has not determined whether
the properties contain economically recoverable gas reserves. The ultimate
realization of the Company's investment in oil and gas properties is dependent
upon finding and developing economically recoverable reserves, the ability of
the Company to obtain financing or make other arrangements for development and
upon future profitable production. The ultimate realization of the Company's
investment in oil and gas properties cannot be determined at this time and,
accordingly, no provision for any asset impairment that may result in the event
the Company is not successful in developing these properties, has been made in
the accompanying financial statements.
The Company was in the exploration stage through June 30, 2002. During the
fourth quarter of the year ended September 30, 2002, the Company entered a very
brief development stage and is now considered an operating company.
The Company is seeking additional capital through a private placement of its
stock, or 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, as well as its newly
acquired working interest participation in gas wells in Michigan. See Note 10.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Cadence Resources Corporation
is presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America and have been consistently applied in the preparation of the
financial statements.
Accounting Method
- ------------------
The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America.
9
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Exploration Stage
- ------------------
The Company began a new exploration stage concerning the exploration of oil and
gas leases on July 1, 2001, which ended during July 2002 with the commenced sale
of oil and gas products.
Estimates
- ---------
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
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 their inclusion
would 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 stage, 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, 2003 and September
30, 2002, the cost of the Company's mineral properties are included in net
assets of discontinued operations in the accompanying financial statements, as
the Company has changed its focus from minerals exploration to oil and gas.
Mineral properties are periodically assessed for impairment of value and any
losses are charged to operations at the time of impairment.
Should a property be abandoned, its capitalized costs are charged to operations.
The Company charges to operations the allocable portion of capitalized costs
attributable to properties sold. Capitalized costs are allocated to properties
sold based on the proportion of claims sold to the claims remaining within the
project area.
10
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and Gas Properties
- -------------------------
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, geological and geophysical
costs, and costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives. Property leases are expensed ratably over the
life of the lease.
On the sale or retirement of a complete unit of a proven property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
the retirement or sale of a partial unit of proven property, the cost is charged
to accumulated depreciation, depletion, and amortization with a resulting gain
or loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any unrecorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
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 in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end. A valuation allowance is recorded against
deferred tax assets if management does not believe the Company has met the "more
likely than not" standard imposed by SFAS No. 109 to allow recognition of such
an asset.
At March 31, 2003, the Company had net deferred tax assets of approximately
$1,600,000, principally arising from net operating loss carryforwards for income
tax purposes. During the year ending September 30, 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, 2003.
11
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Provision For Taxes (Continued)
- ----------------------------------
At March 31, 2003, the Company has net operating loss carryforwards of
approximately $8,000,000, which expire in the years 2002 through 2022.
Additionally, the Company has capital loss carryovers of approximately
$4,870,000.
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, 2002, the Company had no accrued
liabilities for compliance with environmental regulations.
Investments
- -----------
Investments, principally consisting of equity securities of private and small
public companies, which are stated at current market value.
Revenue Recognition
- --------------------
Cadence began producing revenues during July 2002. Sales are recognized at the
point of passage of title specified in the underlying contract.
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 in fiscal years 2000
and 2001, the Company does not believe any further adjustments are needed to the
carrying value of its assets at March 31, 2003. See Note 3.
12
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Standards
- ----------------------
The Company has adopted the fair value accounting rules to record all
transactions in equity instruments for goods or services.
Principles of Consolidation
- -----------------------------
The financial statements include those of the Cadence Resources Corporation and
Celebration Mining Company. All significant inter-company accounts and
transactions have been eliminated. The financial statements are not considered
consolidated statements since Cadence Resources Corporation was the successor by
merger to Celebration Mining Company.
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.
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. These standards establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At March 31, 2003, the Company has not engaged in any transactions that would be
considered derivative instruments or hedging activities.
13
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements
- --------------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146," Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS No. 146 was issued in June 2002, effective December 31, 2002 with
early adoption encouraged. The impact on the Company's financial position or
results of operations from adopting SFAS No. 146 has not been determined.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44, 4
and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which
updates, clarifies and simplifies existing accounting pronouncements. FASB No.
4, which required all gains and losses from the extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
tax effect was rescinded. As a result, FASB No. 64, which amended FASB No. 4,
was rescinded as it was no longer necessary. SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers, established the accounting requirements for
the effects of transition to the provisions of the Motor Carrier Act of 1980.
Since the transition has been completed, SFAS No. 44 is no longer necessary and
has been rescinded. SFAS No. 145 amended SFAS No. 13 to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Management has not yet
determined the effects of adopting this Statement on the financial position or
results of operations, except for the need to reclassify debt extinguishments
previously reported as extraordinary.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." This standard establishes a single accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations. SFAS No. 144 requires that these long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or discontinued operations. This statement is effective
beginning for fiscal years after December 15, 2001, with earlier application
encouraged. The Company adopted SFAS No. 144 and the adoption did not have a
material impact on the financial statements of the Company at March 31, 2003.
14
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (Continued)
- ---------------------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 establishes guidelines related to the
retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements issued
for the fiscal years beginning after June 15, 2002 and with earlier application
encouraged. The Company adopted SFAS No. 143 and the adoption did not have a
material impact on the financial statements of the Company at March 31, 2003.
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 did
not have any material effect on the Company's financial statements.
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
adoption of this standard did not have a material effect on the Company's
results of operations or financial position.
New Accounting Pronouncements
- -------------------------------
In December 2002, the "FASB" Financial Accounting Standards Board, issued
Statement of Financial Accounting Standards, No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS 148 amends SFAS
123, Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
15
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (Continued)
- --------------------------------------------
stock-based employee compensation and the effect of the method used on reported
results. The provisions of the statement are effective for financial statements
for fiscal years ending afterDecember 15, 2002. As the Company accounts for
stock-based compensation using the intrinsic value method prescribed in APB No.
25, "Accounting for Stock Issued to Employee's", the adoption of SFAS 148 has no
impact on the Company's financial condition or results of operations.
Going Concern
- --------------
As shown in the accompanying financial statement, the Company had limited
revenues, has incurred a net loss of $626,852 for the six months ended March 31,
2003, and has an accumulated deficit of $13,532,984. Although the Company is
considered an operating entity since July 1, 2002 when one of it exploration
properties began producing reasonable revenue, the current projected revenues
are still substantially less then the Company's historical operating expenses.
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 exploration
stage concerning natural resource properties on July 1, 2001. In the future, the
Company's management may elect to begin a new focus on mineral property
development if conditions are warranted.
Mineral Properties in North Idaho
- -------------------------------------
At March 31, 2003, the Company, directly and through its subsidiary, Celebration
Mining Company, held forty-three unpatented mining claims in the Coeur d'Alene
Mining District in distinct groups called the South Galena Group, Moe Group,
Rock Creek Group and Palisades Group. The Company has undertaken only minimal
exploration and development work on these properties, such as general geological
reconnaissance and claim-staking activities. The majority of these claims were
written off as permanently impaired at September 30, 2001. In April 2003, the
Company sold the South Galena Group to Caledonia Silver-Lead Mines, Inc. in
exchange for 900,000 shares of its common stock valued at $90,000. See Note 5
and Note 17 regarding sale of South Galena Group in April 2003.
16
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 3 - MINERAL PROPERTIES (CONTINUED)
Mineral Properties in North Idaho (Continued)
- --------------------------------------------------
In September 2000, the Company, through its wholly owned subsidiary Celebration
Mining Company, entered into a five-year lease agreement with an affiliated
company, Oxford Metallurgical, Inc. on its eight-claim Palisades Group property.
This lease was rescinded during the year ended September 30, 2002. The lease
called for a semi-annual payment of $3,000, or alternatively, the semi-annual
payment of 10,000 shares of the common stock of Oxford. Oxford had the right to
explore and potentially develop the property under certain conditions.
Utah Property
- --------------
The Company has elected to retain its 25% undivided interest in the Vipont Mine
located in northwest Utah, which is carried on the Company's books at $246,757
as assets of discontinued operations. Although this property has been the
subject of litigation, the Company has and will continue to hold its undivided
25% interest in this property. See Note 13.
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.
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.
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
six months ended March 31, 2003, 2002, and 2001 was $8,703, $-0- and $402,
respectively.
NOTE 5 - INVESTMENTS
The Company's securities investments are classified as available for sale
securities which are recorded at fair value on the balance sheet as investments.
The change in fair value during the period is excluded from earnings and
recorded net of tax as a component of other comprehensive income. The Company
has no securities which are classified as trading securities.
17
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 5 - INVESTMENTS (CONTINUED)
At March 31, 2003 and September 30, 2002, the market values of investments were
as follows:
March 31, September 30,
2003 2002
---------- --------------
Elite Logistics, Inc. $ 874 $ 2,950
Ashington Mining Company 5,709 5,709
Sterling Mining Co. - 4,859
Cadence Resources Corp. LP 6,732 15,200
Exhaust Technology - 2,244
Enerphaze Corporation 2,620 5,400
Caledonia Silver-Lead Mines, Inc. 350,198 350,198
Metalline Mining 1,200 -
Western Goldfields 11,258 866
Williams Companies 9,160 6,800
Trend Mining Company 16,008 54,567
---------- --------------
$ 403,759 $ 448,793
========== ==============
Other information regarding the Company's investments follows:
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 in exchange for 400,000 shares of the Company's common stock. No
gain or loss was recognized on these transactions.
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. Subsequent to the dates of these
financial statements, during April 2003, the Company sold its South Galena
claims to Caledonia for 900,000 shares of its common stock valued at $90,000.
See Note 3. At March 31, 2003, management has determined that there is no
impairment to these securities.
Cadence Resources Corporation Limited Partnership
- -----------------------------------------------------
On August 1, 2002, the Company formed a limited partnership in the state of
Washington whereby the Company became the managing general partner and an
outside individual investor became the initial limited partner. The entity,
Cadence Resources Corporation Limited
18
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 5 - INVESTMENTS (CONTINUED)
Cadence Resources Corporation Limited Partnership (continued)
- ------------------------------------------------------------------
Partnership (hereinafter "CRCLP" or "the Partnership") was formed to invest in
oil and gas properties in Texas and Louisiana.
In connection with the formation of the Partnership, the Company agreed to
contribute $12,500 and its leasehold interest in an oil well ("2B") in Wilbarger
County, Texas and the limited partner contributed $250,000 in cash. During the
six months ended March 31, 2003, the Company realized $8,468 in losses from its
partnership investment. Other provisions of the Partnership are described in
Notes 11, 12 and 14.
NOTE 6 - COMMON STOCK
During the year ended September 30, 2001, the Company issued 284,375 shares of
common stock to officers, directors, consultants and others for services and
532,500 shares of common stock were issued to officers for loan consideration,
investments and cash. The Company also issued 40,000 shares of its common stock
pursuant to terms of a consulting agreement (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 shares to 100,000,000.
During the year ended September 30, 2002, the Company issued 589,184 shares of
its common stock to officers, consultants and others for services and prepaid
expenses valued at $211,667, 400,000 shares of its common stock for an
investment, 6,800 shares of its common stock to an officer for reimbursement of
expenses paid for the Company valued at $7,000 and 300,000 shares of its common
stock to an officer in payment of a note payable. These transactions were valued
in accordance with a plan for stock issuance previously approved by the board of
directors. The Company also sold 783,000 shares of its common stock for
$241,900.
During the year ended September 30, 2002, the Company also sold 2,333,336
"units" to investors, two officers of the Company and another entity under
common control at $0.30 per unit in a private placement. Each unit consists of
one share of common stock and one warrant exercisable at $0.30 per common share
for five years. Sales of these units generated cash proceeds of $700,000. Two
officers of the Company and another entity under common control invested $50,000
in these common stock units. (See Note 9.)
19
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 6 - COMMON STOCK (CONTINUED)
During the six months ended March 31, 2003, the Company sold 212,500 "units" to
investors at prices ranging from $0.50 to $0.80 per unit in a private placement.
Each unit consists of one share of common stock and one warrant exercisable at
$1.35 per common share for three years. Sales of these units generated cash
proceeds of $110,000. Warrants previously issued (2,166,668) were exercised for
1,815,316 shares of common stock in a "cashless" redemption. (See Note 9.) The
Company also issued 168,500 shares of its common stock to directors and a
consultant for services valued at $142,200 and 100,000 shares for loan
consideration valued at $78,000.
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
September 30, 2002. During the six months ended March 31, 2003, the Company
issued 34,950 shares of its preferred stock to investors at prices ranging from
$1.50 to $2.00 per share. The shares bear a preferred dividend of 15% per annum
and are convertible to common stock at a price of $1.50 per share under certain
terms and conditions.
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN
In January 1992, the shareholders of Cadence approved a 1992 Stock Option and
Stock Award Plan under which up to ten percent of the issued and outstanding
shares of the Company's common stock could be awarded based on merit or work
performed. As of September 30, 2002, only 638 shares of common stock had been
awarded under the Plan.
The Company has a stock-based compensation plan whereby the Company's board of
directors may grant common stock to its employees and directors. At September
30, 2001, a total of 72,750 options have been granted under the plan. These
options have been forfeited and none have been exercised through the year ending
September 30, 2002. The old existing options are attributed to the merger of
Celebration Mining Company with Royal in August 1995.
During the year ended September 30, 2002, the Company's board of directors chose
to make option awards to select officers, directors, consultants and
shareholder/investors. These options were not awarded pursuant to a qualified
plan and carry various terms and conditions. The Company granted a total of
750,000 options at an average exercise price of $1.08 per share. These options
were exercisable immediately. The Company's board of directors has reserved the
right to cancel these awards for non-performance or other reasons.
The fair value of each option granted during fiscal 2002 was estimated on the
grant date using the Black-Scholes Option Price Calculation. The following
assumptions were made in
20
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (CONTINUED)
estimating fair value: risk-free interest of 5%, volatility of 100%, expected
life of 3 to 5 years, and no expected dividends. The value of these options in
the amount of $626,790 was included in operating expense in the financial
statements.
Following is a summary of the stock options during the six months ended March
31, 2003 and the years ended September 30, 2002, and 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
=========== =========
Weighted average fair value of options granted during
the year ended 9/30/2001 $ -
===========
Outstanding at 10/1/2001 60,000 $ 18.60
Granted 750,000 1.08
Exercised - -
Expired or forfeited ( 60,000) 18.60
----------- ---------
Outstanding at 9/30/2002 750,000 $ 1.08
=========== =========
Options exercisable at 9/30/2002 750,000 $ 1.08
=========== =========
Weighted average fair value of options granted during
the year ended 9/30/2002 $ 0.84
===========
Outstanding at 10/1/2002 750,000 $ 1.08
Granted - -
Exercised - -
Expired or forfeited - -
----------- ---------
Outstanding at 3/31/2003 750,000 $ 1.08
=========== =========
Options exercisable at 3/31/2003 750,000 $ 1.08
=========== =========
Weighted average fair value of options granted
during the period ended 3/31/2003 $ -
===========
21
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (CONTINUED)
Weighted Average
Exercise Date Number of Shares Price per Share
-------------------------- ---------------- ----------------
On or before June 21, 2005 200,000 $ 1.50
On of before August 1, 2005 50,000 $ 1.50
On or before March 1, 2007 400,000 $ 0.75
On or before July 8, 2007 100,000 $ 1.35
Prior to April 2001, a total of 72,750 options were granted by the board to
officers, directors and other consultants. As shown above, all of these options
have been forfeited with none exercised through the period ending September 30,
2002.
The following table gives information about the Company's common stock that may
be issued upon the exercise of options under all of the Company existing stock
option plans as of March 31, 2003.
Remaining
Exercise Number of Weighted-average contractual life Number Weighted-average
prices options exercise price (in years) exercisable exercise price
- --------- ---------- ----------------- ----------------- ------------ -----------------
0.75 400,000 $ 0.75 4.17 400,000 $ 0.75
1.35 100,000 1.35 4.50 100,000 1.35
1.50 200,000 1.50 2.50 200,000 1.50
1.50 50,000 1.50 2.58 50,000 1.50
---------- ----------------- ----------------- ------------ -----------------
750,000 $ 1.08 3.66 750,000 $ 1.08
Stock Award Plan
- ------------------
During the year ended September 30, 2001, the Company's board of directors
approved the issuance of 15,000 shares of the Company's common stock per quarter
to each entitled director as compensation for service to the Company and 5,000
shares of the Company's common stock per quarter to officers in addition to
their salaried compensation for services.
NOTE 9 - WARRANTS
During the year ended September 30, 2002, the Company issued 2,333,336 shares of
stock with 2,333,336 warrants attached. These warrants were valued at $233,334
using the Black-Scholes Option Price Calculation. The following assumptions were
made in estimating fair value: risk free interest is 5%, volatility is 100% and
expected life is 5 years. These warrants may be used in a cashless exercise to
purchase 2,333,336 shares of the Company's common stock at $0.30 per share. The
warrants remain exercisable through April 15, 2007. During the quarter ended
December 31, 2002, 2,166,668 of these warrants were exercised in a cashless
exercise in accordance with the terms of the warrants and 1,815,316 shares of
the Company's common stock
22
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 9 - WARRANTS (CONTINUED)
were then issued to the warrant holders. As of the date of these financial
statements, 166,668 of these warrants remain outstanding and unexercised.
During the six months ended March 31, 2003, the Company issued 212,500 shares of
stock with 212,500 warrants attached. The warrants were valued at $46,125 using
the Black-Scholes Option Price Calculation. The following assumptions were made
is estimating fair value: risk free interest is 5%, volatility is 100% and
expected life is 3 years. These warrants may be used to purchase 212,500 shares
of the Company's common stock at $1.35 per share. The warrants remain
exercisable through October 15, 2005. As of the date of these financial
statements, all of these warrants remain outstanding and unexercised.
NOTE 10 - OIL AND GAS PROPERTIES
The Company's oil and gas producing activities are subject to laws and
regulations controlling not only their exploration and development, but also the
effect of such activities on the environment. Compliance with such laws and
regulations may necessitate additional capital outlays, affect the economics of
a project, and cause changes or delays in the Company's activities. The
Company's oil and gas properties are valued at the lower of cost or net
realizable value.
Louisiana
- ---------
During the fourth quarter of the year ended September 30, 2001, the Company
began leasing acreage in a natural gas field in Desoto Parish, Louisiana. At
least 51 drilled wells were previously commercially successful in adjacent
acreage. As of the dates of these financial statements, the Company has leased
over 3,000 acres. At March 31, 2003 and September 30, 2002, $129,557 and
$169,077, respectively, of leases in Louisiana are included in the attached
financial statements as prepaid mineral leases. Management has estimated a cost
of $1,250,000 to drill the initial test well on this property. Subsequent to the
date of these financial statements, in April 2003, the Company entered into a
joint venture agreement with Bridas Energy USA for the development of the
Louisiana property. See Note 17.
Texas
- -----
During the year ended September 30, 2002, the Company acquired an exploration
permit and lease option agreement for an oil well project in Wilbarger County,
Texas known as 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 was made to
run electricity to the site, install a pump jack and commence commercial
production. At March 31, 2003 and September 30, 2002, $6,300 and $8,100
respectively is included in the attached financial statements as prepaid mineral
leases relating to Texas property. See Note 13.
23
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 10 - OIL AND GAS PROPERTIES (CONTINUED)
Texas (continued)
- ------------------
During the year ended September 30, 2002, the Company sold 40% of the working
interest in this initial well to private investors and two officers of the
Company for $210,000. The Company's initial cost in the portion of the prospect
sold totaled $3,200. 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 recorded a deferred credit.
The balance of this credit at March 31, 2003 and September 30, 2002 is $-0- and
$22,184, respectively. As exploration and development costs of $22,184 and
$197,476, respectively, during the six months ended March 31, 2003 and the year
ended September 30, 2002 were incurred on this prospect, they were charged
against the original deferred credit. At March 31, 2003 and September 30, 2002,
the Company recorded a receivable from working interest owners in the amount of
$12,873 and $16,037, respectively, to reflect some sales of the prospect's
partial interest. This initial well was placed in production during July 2002.
Two additional exploratory wells have been drilled on the property with the
Company retaining 100% of the working interest. During February 2003, the
Company completed the West Electra Lake Well on the C Lease and had previously
entered into a 50% working interest joint venture agreement with the Waggoner
Ranch for the operations of this well. The other well was converted to a
salt-water disposal well.
Michigan
- --------
During the six months ended March 31, 2003, the Company acquired for cash a
22.5% working interests in four gas wells located in Alpena County, Michigan.
See Note 1. At March 31, 2003, $41,563 of leases in Michigan are included in the
attached financial statements as prepaid mineral leases.
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES
During the six months ended March 31, 2003, the Company purchased a 22.5%
working interest before payout and a 20% after payout in four proved gas wells
located in Alpena County, Michigan with the option to participate in any
proposed subsequent wells.
During September 2002, the Company began exploratory well "2B" which is funded
through CRCLP. The Company acts as the managing general partner and may make
contributions to this well under the same terms and conditions as the limited
partner. Terms of the partnership provide funding traunches in $250,000
increments by the limited partner on selected drilling projects. Subsequent to
the date of these financial statements, CRCLP has determined that well "2B" has
no recoverable reserves and has written off $261,106 on this property. See Notes
5, 12 and 14.
24
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
The Securities and Exchange Commission defines proved oil and gas reserves as
those estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recovered in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods.
The Company has not retained the services of an independent geologist to
estimate its oil and gas reserves. 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.
Proved reserves do not include amounts that may result from extensions of
currently proved areas or from application of enhanced recovery processes not
yet determined to be commercial in specific reservoirs.
Cadence has no supply contracts to purchase petroleum or natural gas from
foreign governments.
The changes in proved reserves for the six months ended March 31, 2003 and the
year ended September 30, 2002 were as follows as estimated by the management of
Cadence:
Petroleum Liquids Natural Gas
(barrels) (cubic feet)
United States United States
------------------ --------------
Reserves at October 1, 2001 - -
Purchases 100,485 -
Sales (3,755) -
------------------ --------------
Reserves at September 30, 2002 96,730 -
================== ==============
Reserves at October 1, 2002 96,730 -
Purchases - 450,000,000
Sales (5,568) -
------------------ --------------
Reserves at March 31, 2003 91,162 450,000,000
================== ==============
25
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
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, 2003 and September 30, 2002 were as follows:
March 31, September 30,
2003 2002
----------- ---------------
Proved properties $ 208,694 $ 48,694
Unproved properties 96,992 78,997
Wells and related equipment
and facilities 106,841 67,374
Support equipment and
facilities 110,108 105,108
Prepaid mineral leases 177,419 177,177
Accumulated depreciation,
depletion and amortization (21,444) (4,312)
----------- ---------------
Total capitalized costs $ 678,610 $ 473,038
=========== ===============
Costs both capitalized and expensed, which were incurred in oil and
gas-producing activities during the six months ended March 31, 2003 and the
years ended September 30, 2002 and 2001, are set forth below. Property
acquisition costs represent costs incurred to purchase or lease oil and gas
properties. Exploration costs include costs of geological and geophysical
activity and drilling exploratory wells. Development costs include costs of
drilling and equipping development wells and construction of production
facilities to extract, treat and store oil and gas.
March 31, September 30, September 30,
2003 2002 2001
---------- -------------- --------------
Property acquisition costs:
Proved properties $ 165,553 $ 8,000 $ -
Unproved properties 11,995 245,483 84,503
Exploration costs - 456,086 -
Development costs 4,465 306,761 -
Operating expenses 42,179 12,279 -
---------- -------------- --------------
Total expenditures $ 224,192 $ 1,028,609 $ 84,503
========== ============== ==============
There were no results of operations for oil and gas producing activities
(including operating overhead) for the six months ended March 31, 2002 and 2001
since exploration and development activities had not commenced.
26
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
Results of operation for oil and gas activities (including operating overhead)
for the six months ended March 31, 2003 were as follows:
Revenues $ 77,825
Exploration and
development costs -
Depreciation, depletion
and amortization ( 17,131)
Oil and gas lease expenses ( 59,447)
Other operating expenses ( 42,179)
------------
Results before income taxes ( 40,932)
Income tax expense -
------------
Results of operation from
oil and gas producing
activities $( 40,932)
============
The standardized measure of discounted estimated future net cash flows related
to proved oil and gas reserves at March 31, 2003 was as follows:
Future cash flows $ 6,720,000
Future development and production costs (1,100,000)
Future income tax expense -
------------
Future net cash flows 5,620,000
10% annual discount 2,690,000
------------
Standardized measure of discounted
future net cash flows $ 2,930,000
============
Future net cash flows were computed using quarter-end prices and gas to
quarter-end quantities of proved reserves. Future price changes are considered
only to the extent provided by contractual arrangements. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is normally
calculated by applying year-end statutory tax rates (adjusted for permanent
differences and tax credits) to estimated future pretax net cash flows related
to proved oil and gas reserves, less the tax basis of the properties involved.
These estimates are furnished and calculated in accordance with requirements of
the Financial Accounting Standards Board and the SEC. Estimates of future net
cash flows presented do not represent management's assessment of future
profitability or future cash flows to Cadence. Management's investments and
operating decisions are based on reserves estimated that include
27
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
proved reserves prescribed by the SEC as well as probable reserves, and on
different price and cost assumptions from those used here.
It should be recognized that applying current costs and prices and a 10%
standard discount rate does not convey absolute value. The discounted amounts
arrived at are only one measure of the value of proved reserves.
NOTE 12 - NOTES PAYABLE
All of the Company's notes payable are considered short-term. At March 31, 2003,
notes payable consisted of the following:
Nathan Low Family Trust (a shareholder of the
Company), secured by assignment of a prorata
interest in gas producing properties located in
Alpena County, Michigan, interest at 8%, dated
February 24, 2003, due on April 5, 2003. $ 100,000
Kevin Stulp (a shareholder of the Company),
secured by assignment of a prorata interest in
gas producing properties located in Alpena County,
Michigan, interest at 8%, dated February 24, 2003,
due on April 5, 2003. 50,000
Howard Crosby (an officer and shareholder of the
Company), secured by assignment of a prorata
interest in gas producing properties located in Alpena,
County, Michigan, interest at 8%, dated February 24,
2003, due on April 5, 2003. 50,000
W. Paul Gatewood (a shareholder of the Company),
unsecured, interest at 5%, dated January 9, 2003,
due on February 28, 2003, delinquent. 30,000
Howard Crosby (an officer and shareholder of the
Company), unsecured, interest at 5%, dated January 9,
2003, due on February 28, 2003, delinquent. 70,000
-----------
Total $ 300,000
===========
28
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
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.
The Company's countersuit, which sought both full title to the aforementioned
mineral property and compensatory damages as well as punitive damages, was
rejected in a jury trial in October 2002. The Company filed an appeal, and in
October 2002, this countersuit was rejected in a jury trial. As a result, the
Company has and will continue to hold an undivided 25% interest in the Vipont
Mine. See Note 3.
Environmental Issues
- ---------------------
The Company is engaged in oil and gas exploration and may become subject to
certain liabilities as they relate to environmental cleanup of well sites or
other environmental restoration procedures as they relate to the drilling of oil
and gas wells and the operation thereof. In the Company's acquisition of
existing or previously drilled 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.
The Company was previously engaged in exploration of mineral properties. These
properties are classified as assets from discontinued operations or were
previously written off as permanently impaired. Although the Company has
discontinued the exploration of mineral properties, the possibility exists that
environmental cleanup or other environmental restoration procedures could remain
to be completed or be mandated by law, causing unpredictable and unexpected
liabilities to arise. At the date of this report, the Company is not aware of
any environmental issues related to any of its assets from discontinued
operations.
Capital Commitments
- --------------------
At March 31, 2003, the Company has estimated capital and investment commitments
of $1,250,000 to drill its initial test well in Louisiana. In Texas and
Michigan, future capital commitments are dependent upon the Company's decision
to proceed with additional well development. See Note 10. No accruals have been
made in the accompanying financial statements for these amounts.
Lease Commitments
- ------------------
The Company began leasing office facilities in Walla Walla, Washington
commencing in June 2001. The agreement is a three-year lease with monthly
payments of $400. Total rent paid for this office space during the six months
ended March 31, 2003 and 2002 was $2,400.
29
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Cadence Resources Corporation Limited Partnership
- -----------------------------------------------------
On August 1, 2002, the Company formed a limited partnership in the State of
Washington whereby the Company became the managing general partner and an
outside individual investor became the initial limited partner. The entity,
Cadence Resources Corporation Limited Partnership ("CRCLP" or "the Partnership")
was formed to invest in oil and gas properties in Texas and Louisiana. See Notes
5 and 10.
In connection with the formation of the Partnership, the Company agreed to
contribute $12,500 in cash and its leasehold interest in an oil well ("2B") in
Wilbarger County, Texas and the limited partner contributed $250,000 in cash.
The terms of the Partnership agreement provide that 90% of initial income and
expenses will be allocated to the limited partner and further provide that,
after the limited partner's receipt of funds invested and an 11% return on his
investment, subsequent Partnership profits and losses will be allocated 90% to
the general partner and 10% to the limited partner. In order to ensure repayment
of the limited partner's investment, Cadence has agreed to grant to the limited
partner a security interest in the equipment and fixtures affixed to wells 1A
and 1B in Wilbarger County and agreed to contribute the Company's share of the
cash flows it receives from these two wells to the Partnership. The Company
holds a 60% working interest in well 1A and a 100% working interest in well 1B.
See Notes 5, 11 and 14.
Consulting Commitments
- -----------------------
In June 2002, the Company entered into an agreement with Memphis Consulting
Group ("Memphis") for financial consulting and public relations services
beginning on August 1, 2002 through August 1, 2003. The agreement called for
$3,000 per month, and an initial 50,000 stock options exercisable through August
1, 2005 at $1.50 per share. See Note 8. This agreement was terminated during the
period ended March 31, 2003.
In September 2001, the Company entered into a consulting agreement with American
Financial Group for promotion to investors. The agreement called for monthly
payments of $2,000 to cover all expenses, 20,000 shares of the Company's common
stock (which were issued in October 2001) and an override of 2.5% of monies
raised in private placements from referrals or directed business. The agreement
was terminated during the period ended March 31, 2003.
Other Commitments
- ------------------
The Company entered into an exploration agreement with the W.T. Waggoner Estate
(Waggoner) and its trustees on August 1, 2002. This agreement calls for
exploration of the West Electra Lake Project located in Wilbarger County, Texas.
The first well on the West Electra Lake Project was drilled and completed in
February 2003. See Note 10.
30
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 13, 2002, the Company entered into a public relations retainer
agreement for one year whereby the Company agreed to issue 60,000 shares of its
common stock during this period for services received. The agreement also calls
for reimbursement of expenses incurred pursuant to terms of this agreement.
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 PARTY TRANSACTIONS
The Company previously sublet office space on a month-to-month basis from one of
its officers in Walla Walla, Washington for $400 per month through May 2001.
Total rent paid for this office space during the six months ended March 31, 2002
was $2,400.
During the year ended September 30, 2002, the Company sold several mineral
properties located in Shoshone County, Idaho to Caledonia Silver-Lead Mines,
Inc. See Note 5.
During the year ended September 30, 2002, the Company loaned $35,000 to Dotson
Exploration Company, a related party. The Company also repaid the amount of
$10,000 due to Dotson pursuant to a loan made to the Company by Dotson. See
Notes 14 and 18. Dotson repaid $33,380 of this loan by transferring marketable
securities to the Company valued at that amount. At September 30, 2002, Dotson
Exploration owed the Company $1,620 which is payable on demand and bears
interest at 10% per annum.
During the quarter ended December 31, 2002, the Company loaned Dotson an
additional amount of $20,000 which is payable on demand and bears interest at
the rate of 10% per annum. During the six months ended March 31, 2003, Dotson
repaid $15,000 of this additional amount.
31
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 15 - RELATED PARTY TRANSACTIONS (CONTINUED)
Because Dotson Exploration Company, 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.
On August 1, 2002, the Company formed a limited partnership whereby the Company
became the managing general partner and an outside individual investor became
the initial limited partner. In connection with the formation of the
Partnership, the Company contributed $12,500 and its leasehold interest in an
oil well ("2B") in Wilbarger County, Texas. See Notes 5, 11 and 13.
During the six months ended March 31, 2003, an officer of the Company advanced
$50,000 to the Company. This is reflected in the attached financial statements
as payable to related party. The amount advanced is unsecured, bears no stated
interest rate, and is due on demand.
Cadence Resources Corporation has notes payable to one officer and shareholders
totaling $300,000. See Note 12.
Other related party transactions are disclosed in Notes 3, 5, 6, 11 and 13.
NOTE 16 - GAIN ON DEBT FORGIVENESS
During the year ended September 30, 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.
NOTE 17 - SUBSEQUENT EVENTS
Joint Venture Agreement
- -------------------------
On April 30, 2003, the Company signed a joint venture agreement with Bridas
EnergyUSA to develop its Louisiana property. Terms of the joint venture
agreement call for Bridas to drill the first well on the property to a total
depth not less than 10,000 feet with the Company carried for a 25% working
interest. On subsequent wells within the 640-acre section containing the first
well, the Company will earn a 25% working interest by funding 25% of the
expenses. On other wells outside of the original 640-acre section, the Company
will earn a 45% working interest by funding 45% of the expenses.
32
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 17 - SUBSEQUENT EVENTS (CONTINUED)
Investment
- ----------
On April 24, 2003, the Company sold its South Galena claim group to Caledonia
Silver-Lead Group, an affiliated company, in exchange for 900,000 shares of its
common stock valued at $90,000. See Notes 3 and 5.
Common Stock
- -------------
On May 13, 2003, the Company sold 250,000 shares of its common stock to a
non-affiliated investor for $1.00 per share.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has had minimal revenues from operations during the last two years.
The Company intends to spend its existing cash on exploration on its existing
oil and gas leases in Texas and Louisiana. The Company may also spend funds on
its working interest rights in shallow natural gas exploration in Michigan. All
of these activities are highly speculative and in most instances, companies
which expend monies on oil and gas exploration do not find wells which are
commercially viable.
As noted, the Company will need additional capital to continue to drill its
wells. The amount of capital required is dependant on the success it has on its
upcoming wells because the Company anticipates funding some future drilling of
wells from cash flow out of these next 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 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 has sold portions of working interest in its wells to finance
drilling. 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 gives 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.
The Company may also enter into joint ventures with Companies whereby another
company provides capital for drilling in exchange for an ownership position in
the well or wells. As noted in the "Subsequent Events" section of this report,
the Company has recently entered into such an agreement with Bridas USA on its
De Soto Parish, Louisiana natural gas property.
The Company management is proposing to spend in excess of several million
dollars on drilling its projects in the next year. The Company has yet to raise
this financing. In the event the Company is unsuccessful in raising these funds,
management will have to scale back on the future business plans of the Company.
This may have the effect of losing its rights, in some circumstances, to drill
and development of some of the properties it now controls or has an interest in.
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 generated only minimal revenues and its operating
costs far exceed its revenues. Further, the Company is indebted to several of
its major shareholders. 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.
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, other than
oilfields equipment necessary to outfit its wells for production. The Company
will hire employees on an as needed basis, however, the Company does not expect
any significant changes in the number of employees.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
The Company's countersuit, which sought both full title to the aforementioned
mineral property and compensatory damages as well as punitive damages, was
rejected in a jury trial in October 2002. The Company filed an appeal, and in
October 2002, this countersuit was rejected in a jury trial. As a result, the
Company has and will continue to hold an undivided 25% interest in the Vipont
Mine.
The Company is unaware of any other pending or threatened litigation at the time
of the filing of this report.
ITEM 2. CHANGES IN SECURITIES.
Common Stock
- ------------
During the six months ended March 31, 2003, the Company issued 212,500 shares of
stock with 212,500 warrants attached. The warrants were valued at $46,125 using
the Black-Scholes Option Price Calculation. The following assumptions were made
in estimating fair value: risk free interest is 5%, volatility is 100% and
expected life is 3 years. These warrants may be used to purchase 212,500 shares
of the Company's common stock at $1.35 per share. The warrants remain
exercisable through October 15, 2005. As of the date of these financial
statements, all of these warrants remain outstanding and unexercised.
Options and Warrants
- --------------------
See above for description of warrants issued during the six months ended March
31, 2003.
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.
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 19th day of May, 2003.
CADENCE RESOURCES CORPORATION
By: /s/ Howard Crosby
-----------------
Howard Crosby
Its: Chief Executive Officer
By: /s/ John Ryan
-------------
John Ryan
Its: Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying 10-QSB of Cadence Resources Corporation for
the period beginning January 01, 2003 and ending March 31, 2003, Howard M.
Crosby, Chief Executive Officer, and John P. Ryan, Chief Financial Officer of
Cadence Resources Corporation, hereby certify pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) such Form 10-QSB of Cadence Resources Corporation, for the period
beginning January 01, 2003 and ending March 31, 2003, fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) the information contained in such Form 10-QSB of Cadence Resources
Corporation for the period beginning January 01, 2003 and ending March 31,
2003, fairly presents, in all material respects, the financial condition
and results of operations of Cadence Resources Corporation.
/s/Howard M. Crosby
-------------------
Howard M. Crosby
Chief Executive Officer
/s/John P. Ryan
---------------
John P. Ryan
Chief Financial Officer