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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
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Commission file number 0-25170
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Cadence Resources Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Utah 87-0306609
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6 East Rose Street, P.O. Box 2056, Walla Walla, WA 99362
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(Address of Principal Executive Offices)
(509) 526-3491
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
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The number of shares of common stock outstanding as of May 17, 2004 was
12,698,827.
Transitional Small Business Disclosure Format (check one):
Yes No x
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CADENCE RESOURCES CORPORATION
Form 10-QSB
Index
PART I.. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . 6
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission Of Matters To A Vote Of Security Holders. . . . . . . . . . . . . . 6
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 6
i
PART I. FINANCIAL INFORMATION
ITEM 1.
[Financial Statements and Notes]
CADENCE RESOURCES CORPORATION BALANCE SHEETS
BALANCE SHEETS
March 31, September 30,
2004 --------------------------------
(Unaudited) 2003 2002
------------ --------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ 485,543 $ 3,619,345 $ 40,011
Oil & gas revenue receivable 385,640 84,575 26,123
Receivable from working interest owners 12,873 12,873 16,037
Notes receivable 3,720 3,720 13,078
Prepaid expenses 137,225 5,925 27,500
Other current assets 27,425 425 431
------------ --------------- ---------------
TOTAL CURRENT ASSETS 1,052,426 3,726,863 123,180
------------ --------------- ---------------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 638,917 590,747 48,694
Unproved properties 3,785,555 833,836 78,997
Wells and related equipment and facilities 474,312 202,886 67,374
Support equipment and facilities 331,858 151,963 105,108
Prepaid mineral leases 540,013 395,973 111,111
Less accumulated depreciation, depletion,
amortization and impairment (604,885) (61,611) (4,312)
------------ --------------- ---------------
TOTAL OIL AND GAS PROPERTIES 5,165,770 2,113,794 473,038
------------ --------------- ---------------
PROPERTY AND EQUIPMENT
Furniture and equipment 4,226 1,660 1,440
Less accumulated depreciation (1,625) (1,451) (1,440)
------------ --------------- ---------------
TOTAL PROPERTY AND EQUIPMENT 2,601 209 -
------------ --------------- ---------------
OTHER ASSETS
Investments 185,092 394,454 448,793
------------ --------------- ---------------
NONCURRENT ASSETS
Net assets of discontinued operations 246,757 246,757 246,757
------------ --------------- ---------------
TOTAL ASSETS $ 6,652,646 $ 6,482,077 $ 1,291,768
============ =============== ===============
See accompanying condensed notes to interim financial statements.
2
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
March 31, September 30, September 30,
2004 --------------------------------
(Unaudited) 2003 2002
------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 633,774 $ 584,866 119,923
Revenue distribution payable 136,795 68,929 14,835
Payable to related party - 550,000 2,500
Deferred working interest - - 22,184
Interest payable 13,054 15,752 -
Accrued compensation 8,165 94,920 66,261
Notes payable - related parties 510,000 460,000 -
Notes Payable 1,000,000 - -
------------- --------------- ---------------
TOTAL CURRENT LIABILITIES 2,301,788 1,774,467 225,703
------------- --------------- ---------------
REDEEMABLE PREFERRED STOCK 59,925 59,925 -
------------- --------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 100,000,000 shares
authorized, 12,673,800,12,512,827 and
6,866,210 shares issued and outstanding,
respectively 126,738 125,128 68,662
Additional paid-in capital 18,711,738 18,343,422 13,291,965
Stock options 1,210,704 1,210,704 626,790
Stock warrants 51,375 51,375 233,334
Accumulated deficit (15,379,773) (14,863,687) (12,906,132)
Accumulated other comprehensive income (loss) (429,849) (219,257) (248,554)
------------- --------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 4,290,933 4,647,685 1,066,065
------------- --------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,652,646 6,482,077 $ 1,291,768
============= =============== ===============
See accompanying condensed notes to interim financial statements.
3
CADENCE RESOURCES CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------------- ----------------------------------------
2004 2003 2002 2004 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------ ------------
REVENUES $ 688,368 $ 44,449 $ - $ 1,247,752 $ 77,825 $ -
------------ ------------ ------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization 309,173 8,496 - 542,284 17,131 -
Officers' and directors' compensation 35,000 173,477 40,000 90,000 218,477 52,510
Consulting 82,100 21,425 374,904 140,513 99,655 470,518
Professional fees 150,389 41,393 5,366 440,436 49,428 33,222
Oil and gas lease expenses 114,126 39,095 34,870 223,512 59,447 49,642
Oil and gas consulting 27,500 - - 42,500 - -
Oil and gas productions costs 33,171 - - 72,650 - -
Exploration and drilling 12,000 - 177,038 12,000 - 177,038
Lease operating expenses 2,410 5,663 - 3,658 42,179 -
General and administrative 60,223 26,222 7,396 195,203 62,425 20,317
------------ ------------ ------------ ------------ ------------ ------------
Total expenses 826,092 315,771 639,574 1,762,756 548,742 803,247
------------ ------------ ------------ ------------ ------------ ------------
OPERATING LOSS (137,724) (271,322) (639,574) (515,004) (470,917) (803,247)
------------ ------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 213 46 11 4,193 126 24
Interest expense (8,132) (81,762) (1,329) (10,313) (83,001) (2,389)
Partnership loss - (159) - - (8,468) -
Refund of production taxes 5,155 - - 5,155 - -
Gain on debt forgiveness - - - - - 6,109
Gain (loss) on disposition and impairment
of assets (720) (29,969) 11,265 (720) (64,592) (21,468)
------------ ------------ ------------ ------------ ------------ ------------
Total other income (expense) (3,484) (111,844) 9,947 (1,685) (155,935) (17,724)
------------ ------------ ------------ ------------ ------------ ------------
LOSS BEFORE TAXES (141,208) (383,166) (629,627) (516,689) (626,852) (820,971)
INCOME TAX BENEFIT - - - - - 66,040
------------ ------------ ------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (141,208) (383,166) (629,627) (516,689) (626,852) (754,931)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain from mining operations (net of income
taxes) - - - - - 264,158
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) (141,208) (383,166) (629,627) (516,689) (626,852) (490,773)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments (103,299) 32,655 3,215 (210,593) 41,332 13,675
------------ ------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (244,507) $ (350,511) $ (626,412) $ (727,282) $ (585,520) $ (477,098)
============ ============ ============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED
Net loss from continuing operations $ (0.02) (0.04) $ (0.16) $ (0.06) $ (0.07) $ (0.21)
Net income (loss) from discontinued
operations nil nil nil nil nil $ 0.07
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.02) $ (0.04) $ (0.05) $ (0.06) $ (0.07) $ (0.14)
============ ============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 12,645,330 9,037,193 3,891,433 12,630,615 8,721,129 3,571,614
============ ============ ============ ============ ============ ============
See accompanying condensed notes to interim financial statements.
4
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
-------------------------------------
2004 2003 2002
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (516,689) (626,852) (490,773)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on sale of investments 720 64,592 21,468
Partnership loss - 8,468 -
Gain from mining operations - - (330,198)
Gain on debt forgiveness - - 6,109
Depreciation, depletion and amortization 542,284 17,131 -
Issuance of common stock for services 97,175 142,200 58,500
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 (301,065) 9,159 -
Receivable from working interest owners - 3,164 (2,752)
Prepaid expenses (131,300) 15,000 1,275
Notes receivable - (3,241) -
Other current assets (27,000) 6 -
Prepaid mineral leases - 47,258 (88,350)
Deferred working interest - (22,184) 38,527
Accounts payable 48,908 20,367 (33,980)
Revenue distribution payable 67,866 1,314 -
Interest payable (2,698) 2,433 -
Accrued expenses (86,755) 39,500 52,510
----------- ----------- -----------
Net cash provided (used) by operating activities (308,554) (196,485) (443,664)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (6,250) (9,172) (21,677)
Sale of investments 4,300 15,279 79,124
Purchase of fixed assets (375,708) (44,467) (17,086)
Purchase of proved and unproved properties (2,846,068) (177,995) -
Purchase of mineral leases (376,522) (47,500) -
Sale of fixed assets - - -
----------- ----------- -----------
Net cash provided (used) by investing activities (3,600,248) (263,855) 40,361
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (425,000) - (35,000)
Proceeds from notes payable 475,000 300,000 -
Payments on payables to related parties (550,000) - -
Proceeds from secured notes payable 1,000,000 - -
Issuance of redeemable preferred stock for cash - 59,925 -
Issuance of common stock and warrants for cash 275,000 110,000 -
Issuance of common stock for cash - - 374,900
----------- ----------- -----------
Net cash provided by financing activities 775,000 469,925 339,900
----------- ----------- -----------
Net increase (decrease) in cash (3,133,802) 9,585 (63,403)
----------- ----------- -----------
See accompanying condensed notes to interim financial statements.
5
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Six Month Ended
March 31,
----------------------------------------
2004 2003 2002
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
Net increase (decrease) in cash (balance forward) $(3,133,802) $ 9,585 $ (63,403)
Cash, beginning of period $ 3,619,345 $ 40,011 $ 191,684
------------ ------------ ------------
Cash, end of period $ 485,543 $ 49,596 $ 128,281
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ - $ - $ -
Interest paid $ - $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services rendered
and accrued compensation $ 97,175 $ 142,200 $ 92,500
Common stock issued for loan consideration $ - $ 78,000 $ -
Common stock issued for debt $ - $ - $ 90,000
Common stock issued for investment and
stock subscription receivable $ - $ - $ -
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 accompanying condensed notes to interim financial statements.
6
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 - BASIS OF PRESENTATION
The foregoing unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B as
promulgated by the Securities and Exchange Commission ("SEC"). Accordingly,
these financial statements do not include all of the disclosures required by
generally accepted accounting principles in the United States of America for
complete financial statements. These unaudited interim financial statements
should be read in conjunction with the audited financial statements for the year
ended September 30, 2003. In the opinion of management, the unaudited interim
financial statements furnished herein include all adjustments, all of which are
of a normal recurring nature, necessary for a fair statement of the results for
the interim period presented.
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to exist as
of the date the financial statements are published, and the reported amounts of
revenues and expenses during the reporting period. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of the Company's
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions and could have a material effect on
the reported amounts of the Company's financial position and results of
operations.
Operating results for the six month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2004.
NOTE 2 - STOCKHOLDERS' EQUITY
During the six months ended March 31, 2004, a total of 110,000 shares of common
stock were issued at $2.50 per share for cash proceeds of $275,000 and a total
of 51,000 shares of common stock were issued at $1.40 to $2.50 per share for
services valued at $97,175. Also in the same period, the Company paid cash
dividends aggregating $2,249.
During the six months ended March 31, 2004, no stock options or warrants were
issued or exercised.
7
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 3 - NOTES PAYABLE
At March 31, 2004, the Company had short-term notes payable to related parties
in the amount of $510,000, of which $345,000 was received in the quarter just
ended. In April 2004, these liabilities were paid in full. Additionally, the
Company received $1,000,000 in short-term financing in late March 2004 from
unrelated parties. These amounts were repaid from the proceeds of the long-term
notes payable in early April 2004. No interest was accrued on these short-term
loans.
NOTE 4 - SUBSEQUENT EVENTS
In April 2004, the Company completed a private placement of $6,000,000 of senior
secured notes from a group of institutional and individual lenders. These notes
payable accrue interest at the rate of 10% per year (subject to increase under
certain conditions), payable quarterly, with the principal due and payable on
March 31, 2006. The Company is obligated however, to make principal repayments
equivalent to 10% of the principal amount of the notes on each of September 30
and December 31 of 2005 if the Company's weighted average share price falls
below $5.00 per share at such times. The notes are secured by all of the assets
of Cadence.
As part of the private placement, the noteholders received warrants to purchase
a total of 765,000 shares of common stock, exercisable at $4 per share, expiring
in three years. Both the number of warrants and the exercise price per share are
adjustable, dependent upon certain future equity transactions of the Company.
The value of the warrants upon issuance of $688,500, will be recorded as a
discount on long term debt.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Management's
Discussion and Analysis" included in our Form 10-KSB for the fiscal year ended
September 30, 2003, including our audited financial statements, together with
the notes to those statements. The following discussion contains forward-looking
statements that involve risks, uncertainties, and assumptions such as statements
of our plans, objectives, expectations, and intentions. Our actual results may
differ materially from those discussed in these forward-looking statements
because of the risks and uncertainties inherent in future events, particularly
those identified in "Risk Related to our Business" in our Form 10-KSB,
summarized as follows:
- - If we continue to experience significant operating losses, we may not be
able to continue as a going concern.
- - We have no full-time employees and are dependent on our directors, officers
and third-party contractors.
- - We lack experience in the oil and gas industry and must rely on third
parties to conduct our oil and gas exploration activities.
- - Our drilling activities may be unsuccessful.
- - We do not operate any of our oil and gas properties.
- - We may be unable to make acquisitions of producing properties or prospects
or successfully integrate them into our operations.
- - The failure to develop reserves could adversely affect our production and
cash flows.
- - We may have difficulty financing our planned growth.
- - Oil and gas prices are volatile. A substantial decrease in oil and natural
gas prices could adversely affect our business.
- - We may not have good and marketable title to our properties.
- - Competition in our industry is intense, and we are smaller and have a more
limited operating history than most of our competitors.
- - Oil and natural gas operations involve various risks.
- - We lack insurance that would lower risks to our investors.
1
- - We are subject to complex federal, state and local laws and regulations
that could adversely affect our business.
CAPITAL RESOURCES AND LIQUIDITY
As of March 31, 2004, we had cash and cash equivalents of $485,543, a
decrease of approximately 87% from September 30, 2003 levels of $3,619,345, and
36% from December 31, 2003. Most of our $3.6 million cash balance at September
30, 2003 was from the sale of approximately 1,621,400 shares of our common stock
in September 2003. In the past, we have derived our working capital from the
sale of our stock and from loans from officers, directors, shareholders and
related parties. We also raised $275,000 of equity capital during the quarter
ended December 31, 2003, of which $200,000 came from an additional investor from
the September/October offering of common stock and $75,000 came from the
issuance of common stock upon the exercise of warrants by one of our directors.
Although we began to receive significantly higher revenues from our Louisiana
gas production during the quarter ended December 31, 2003, given the level of
our operating activity, we are still dependent upon outside capital resources to
provide liquidity and expect this to be the case for the remainder of fiscal
2004.
Our cash balance at September 30, 2003 was used principally to fund our
exploration and development drilling, particularly the costs of drilling and
completing wells on our DeSoto Parish Louisiana acreage with Bridas Energy.
During the six months ended March 31, 2004 we invested $2,951,719 in unproved
properties, $48,170 in proved properties, and $451,321 in fixed assets,
including well equipment, pipelines, tanks, casings and pumping units. A portion
of this was funded from existing cash balances and a portion was funded from
short-term loans of $510,000 received from officers, directors, and other
insiders of the Company, as well as $1,000,000 of non-interest bearing
short-term notes received in late March 2004.
Subsequent to the quarter ending March 31, 2004, we closed $6,000,000 of
senior secured notes from a group of investors. These notes are secured by
substantially all of the assets of the Company and are payable in two years and
bear interest at the rate of 10% per annum, payable quarterly. Pre-payments of
10% of the principal shall be required on each of September 30, 2005 and
December 31, 2005 if the share price of the Company is less than $5 per share.
In conjunction with this financing, the note holders also received warrants
to purchase 765,000 shares of the Company common stock which are exercisable at
$4 and expire in three years. The shares underlying the warrants bear
registration rights and the Company is committed to the filing of a registration
statement covering these shares no later than June 1, 2004.
We received our first substantial revenues from our gas production in De
Soto Parish, Louisiana during the quarter ended December 31, 2003. On a
month-to-month basis, our revenues from our Louisiana gas production have
increased as we complete wells in that area. In the quarter ended March 31,
2004 we drilled five new wells in this area and completed four of these. We have
experienced a lower rate of production from two of these wells than we
anticipated and are studying methods to enhance the production by completing or
re-completing other indicated pay zones in the wells.
All of our five producing wells in De Soto Parish as of December 31, 2003
were drilled to Cotton Valley formation to depths of in excess of 10,000 feet.
During the quarter ended March 31, 2004 we drilled two wells to the shallower
Hosston sand formation, which lies between 6,450 and 8,950 feet. As noted
above, we have generally been disappointed at the rate of production from the
Hosston formation wells and we are currently assessing the situation. In light
of this, our most recent well has been drilled to the Cotton Valley formation in
which we have had better success at completion. We are in active discussions
with our joint venture partner in determining our future drilling plans in this
area.
2
Results of Operations
Three months ended March 31, 2004 and 2003
REVENUES
During the three months ended March 31, 2004, we had revenues totaling
$688,368, which came from production of oil from our property in Wilbarger
County, Texas, and from gas production from our De Soto Parish property in
Louisiana, and our property in Michigan. During the same period in 2003,
revenues were $44,449, all of which was from the sale of oil production from our
oil wells in Texas.
Of our net revenue from the quarter ended March 31, 2004, approximately
$249,815 came from the sale of oil produced from our Texas properties, $52,494
came from the sale of natural gas at our Michigan properties, and $375,997 came
from the sale of natural gas produced from our Louisiana properties. We also
accrued a revenue receivable in the amount of about $10,060.
The decline curve from our past production from Louisiana is rapid,
dropping from an initial peak of approximately 1,500 Mcf/day to a level of
approximately 600 Mcf/day after about 60 days and a level of about 450 Mcf/day
after 120 days. Production from our new wells in the Hosston sand formation
has, to date, failed to offset this decline, and therefore revenues are not
increasing at the same pace as our older wells level off.
EXPENSES
Our expenses during the three months ended March 31, 2004 break into two
general categories: corporate and administrative overhead and expenses from oil
and gas operations. Our overall general and administrative expenses include
officer compensation, rent, travel, audits and legal fees associated with SEC
filings, directors fees, investor relations and related consulting fees, stock
transfer fees and other items associated with the costs of being a public
entity. Expenses from oil and gas operations include consulting fees for
technical and professional services related to oil and gas activities, lease
acquisition costs, drilling costs, exploitation costs, exploration expenses,
depletion, depreciation and amortization of oil and gas properties and related
equipment, and other expenses related to the procurement and development of oil
and gas properties.
The following table is a comparison of Cadence's two general categories of
expenses for the three months ended March 31, 2004 and 2003, and the percentages
each of these categories comprise of total expenses:
THREE MONTHS ENDED MARCH 31,
------------------------------------------
% of 2004 % of 2003
Total Total
2004 Expenses 2003 Expenses
-------- ---------- -------- ----------
Corporate and Administrative Overhead $327,712 40% $241,092 76%
Expenses from Oil and Gas Operations $498,380 60% $ 74,679 24%
-------- ---------- -------- ----------
Total Expenses $826,092 100% $315,771 100%
======== ========== ======== ==========
3
The Company's corporate and administrative expenses for the three month
period ended March 31, 2004 increased $86,620 over the level of these expenses
for the same period in 2003. This increase was principally due to increases in
professional fees (primarily for legal services). General and administrative
expenses increased $34,001, but officer and director compensation declined
$138,477 due to the reduction in the amount of quarterly restricted stock awards
to officers and directors as compensation for their services.
The comparable period-to-period increases in oil and gas related
expenditures are summarized in the following table, which reflects the major
expense categories for expenses from oil and gas operations for the respective
three-month periods ended March 31, 2004 and 2003. These expenses increased
over six-fold from year-to-year, due to the increased level of oil and gas
exploration and production activity.
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2004 2003
------------------- -------------------
% of % of
Total Total
2004 Expenses 2003 Expenses
-------- --------- ------- ----------
Depreciation, depletion and amortization $309,173 62.0% $ 8,496 11.4%
Oil and gas lease expenses $114,126 22.9% $39,095 52.3%
Oil and gas lease operating expenses $ 47,581 9.6% $ 5,663 7.6%
Oil and gas consulting $ 27,500 5.5% $21,425 28.7%
-------- --------- ------- ----------
Total Expenses from oil and gas operations $498,380 100.0% $74,679 100.0%
======== ========= ======= ==========
Our depreciation, depletion and amortization expense increased to $309,173
during the quarter ended March 31, 2004, from $8,496 during the same period in
2003 as our production increased from 2,061 barrels of oil to 8,082 barrels of
oil and about 71,896 Mcf of gas.
We spent $161,707 in the three months ended March 31, 2004 for oil and gas
lease expenses and lease operating expenses, compared to $44,758 in the same
period last year. These lease operating expenses were primarily for the
acquisition of acreage in the State of Kansas.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recently issued accounting pronouncements which we
expect to have a material effect on our consolidated financial position or
results of operations.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the
end of the period covered by this quarterly report (the "Evaluation Date"), the
Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and its
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act). Based upon that evaluation, the Company's
Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective to ensure that
material information required to be disclosed by it in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms. It should be noted, however, that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
4
(b) Changes in Internal Controls. The Company evaluates its
internal controls for financial reporting purposes on a regular basis. Based
upon the results of these evaluations, the Company considers what revisions,
improvements and/or corrective actions are necessary in order to ensure that its
internal controls are effective. The Company has improved its internal controls
by hiring a part-time outside bookkeeper and implementing a new bookkeeping
system that is computerized and has automated the process of collection of
financial data.
(c) Audit Committee. During the quarter ended March 31, 2004 the
Company established an audit committee consisting of the three independent
directors of the Company. The function of the audit committee shall be to
oversee the accounting and financial reporting processes of the Company and the
audits of the financial statements of the Company and to assist the Board in
fulfilling the Board's oversight responsibilities with respect to:
- the integrity of the Company's financial statements;
- the Company's compliance with legal and regulatory requirements;
- the independent auditors' qualifications and independence; and
- the performance of the independent auditors.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements that involve
substantial risks and uncertainties. Investors and prospective investors in our
common stock can identify these statements by forward-looking words such as
"may," "will," "expect," "intend," "anticipate," believe," "estimate,"
"continue" and other similar words. Statements that contain these words should
be read carefully because they discuss our future expectations, make projections
of our future results of operations or of our financial condition or state other
"forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, there may be events in the future that we are not able
to predict accurately or control. The factors referenced in the section
captioned "Management's Discussion and Analysis and Results of Operations" as
well as any cautionary language in this Form 10-QSB, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Investors
and prospective investors in our common stock should be aware that the
occurrence of the events described in the "Management's Discussion and Analysis
and Results of Operations " section and elsewhere in this Form 10-QSB could have
a material adverse effect on our business, operating results and financial
condition.
5
CADENCE RESOURCES CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended March 31, 2004, there were no material changes in
pending legal proceedings and no legal proceedings against the Company were
initiated.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At the time of issuance, each investor or recipient of unregistered
securities was either an accredited investor or a sophisticated investor. Each
investor had access to Cadence's most recent Form 10-KSB, all quarterly and
periodic reports filed subsequent to such Form 10-KSB and Cadence's most recent
proxy materials.
On April 2, 2004, the Company completed a placement of $6,000,000 of
secured notes and warrants exercisable for 765,000 shares of the Company's
common stock to seven accredited investors. The Company received $6,000,000 in
exchange for such notes and warrants. The notes are not convertible or
exercisable into the Company's common stock. In exchange for certain services
provided by Sunrise Securities Corp. to the Company, the Company paid Nathan A.
Low a note in the aggregate principal amount of $300,000 (which is in addition
to $6,000,000 of notes issued in the placement) and warrants to purchase 76,500
shares of the Company's common stock. All of the warrants described in this
paragraph are exercisable at $4.00 per share and expire on April 2, 2007. All of
the notes described in this paragraph bear interest at the rate of 10% and
mature on March 31, 2006. The notes and warrants were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended.
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
(a) Exhibits:
Exhibit
Number. Description
- ------- -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-
14(a) of the Securities Exchange Act of 1934, as amended
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under items 7 and 9 of Form 8-K,
dated 3/01/04.
6
CADENCE RESOURCES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADENCE RESOURCES CORPORATION
By:
Date: May 17, 2004 /S/ Howard M. Crosby
------------ ---------------------
Howard M. Crosby
Chief Executive Officer
Date: May 17, 2004 /s/ John P. Ryan
------------ ----------------
John P. Ryan
Chief Financial Officer
7