UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10QSB
Under Section 12(b) or Section 12(g) of
The Securities Exchange Act of 1934
For the quarter ended June 30, 2004
COMMISSION FILE NUMBER: 0-25170
CADENCE RESOURCES CORPORATION
(Name of Small Business Issuer in its Charter)
Utah 87-0306609
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6 East Rose Street, P.O. Box 2056
Walla Walla, WA 99362
(Address of principal executive office)
Issuer's telephone number: (509) 526-3491
Securities to be registered under Section 12(b) of the Act:
None
(Title of Class)
Securities to be registered under Section 12(g) of the Act:
Common
(Title of Class)
================================================================================
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 [ ]
Transitional Small Business Disclosure: Yes [ ] No [ X ]
The number of shares outstanding at June 30, 2004: 12,789,827 shares
CADENCE RESOURCES CORPORATION
(FORMERLY ROYAL SILVER MINES, INC.)
C O N T E N T S
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations and Comprehensive Loss. . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . 7
Management Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . 9
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
June 30, September 30,
2004 ----------------------------
(Unaudited) 2003 2002
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 2,903,028 $ 3,619,345 $ 40,011
Oil & gas revenue receivable 558,443 84,575 26,123
Receivable from working interest owners 12,873 12,873 16,037
Notes receivable 5,295 3,720 13,078
Prepaid expenses 137,225 5,925 27,500
Other current assets 110,035 425 431
------------ ------------ ------------
TOTAL CURRENT ASSETS 3,726,899 3,726,863 123,180
------------ ------------ ------------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 638,969 590,747 48,694
Unproved properties 5,409,870 1,229,809 78,997
Wells and related equipment and facilities 665,196 202,886 67,374
Support equipment and facilities 337,237 151,963 105,108
Prepaid mineral leases -- -- 177,177
Less accumulated depreciation, depletion,
amortization and impairment (792,816) (61,611) (4,312)
------------ ------------ ------------
TOTAL OIL AND GAS PROPERTIES 6,258,456 2,113,794 473,038
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Furniture and equipment 4,785 1,660 1,440
Less accumulated depreciation (1,781) (1,451) (1,440)
------------ ------------ ------------
TOTAL PROPERTY AND EQUIPMENT 3,004 209 --
------------ ------------ ------------
OTHER ASSETS
Investments 184,528 394,454 448,793
------------ ------------ ------------
NONCURRENT ASSETS
Net assets of discontinued operations 246,757 246,757 246,757
------------ ------------ ------------
TOTAL ASSETS $ 10,419,644 $ 6,482,077 $ 1,291,768
============ ============ ============
See accompanying condensed notes to interim financial statements
2
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
June 30, September 30,
2004 ----------------------------
(Unaudited) 2003 2002
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 947,340 $ 584,866 $ 119,923
Revenue distribution payable 48,962 68,929 14,835
Payable to related party -- 550,000 2,500
Deferred working interest -- -- 22,184
Interest payable 13,135 15,752 --
Accrued compensation 48,165 94,920 66,261
Notes payable - related parties 75,000 460,000 --
Notes payable -- -- --
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 1,132,602 1,774,467 225,703
------------ ------------ ------------
LONG-TERM LIABILITIES
Secured notes, net of discount 5,277,918 -- --
------------ ------------ ------------
TOTAL LIABILITIES 6,410,520 1,774,467 225,703
------------ ------------ ------------
REDEEMABLE PREFERRED STOCK 59,925 59,925 --
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 100,000,000 shares
authorized, 12,789,827, 12,512,827 and
6,866,210 shares issued and outstanding,
respectively 127,898 125,128 68,662
Additional paid-in capital 18,907,258 18,343,422 13,291,965
Stock options 1,210,704 1,210,704 626,790
Stock warrants 794,512 51,375 233,334
Accumulated deficit (16,638,474) (14,863,687) (12,906,132)
Accumulated other comprehensive income (loss) (452,699) (219,257) (248,554)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,949,199 4,647,685 1,066,065
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,419,644 $ 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 Nine Months Ended
June 30, June 30,
------------------------------------------ -------------------------------------------
2004 2003 2002 200 4 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------ ------------ ------------ ------------- -------------
REVENUES $ 638,513 $ 110,955 $ -- $ 1,886,265 $ 188,780 $ --
------------- ------------ ------------ ------------ ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion
and amortization 189,133 19,234 -- 731,417 36,365 --
Officers' and
directors' compensation 254,950 55,000 45,000 344,950 273,477 97,510
Consulting 10,040 378,015 68,082 150,553 477,670 538,600
Professional fees 223,935 59,782 21,092 664,371 109,210 54,314
Oil and gas lease expenses 103,010 26,568 36,047 326,522 86,015 85,689
Oil and gas consulting 25,500 -- -- 68,000 -- --
Oil and gas production costs 65,114 -- -- 137,764 -- --
Exploration and drilling 6,758 74,438 1,731 18,758 74,438 178,769
Lease operating expenses 4,090 146,561 -- 7,748 188,740 --
General and administrative 185,548 46,473 20,231 380,751 108,898 40,548
------------- ------------ ------------ ------------ ------------- -------------
Total expenses 1,068,078 806,071 192,183 2,830,834 1,354,813 995,430
------------- ------------ ------------ ------------ ------------- -------------
OPERATING LOSS (429,565) (695,116) (192,183) (944,569) (1,166,033) (995,430)
------------- ------------ ------------ ------------ ------------- -------------
OTHER INCOME (EXPENSES)
Interest income 8,154 10 3 12,347 136 27
Interest and financing expense (253,944) (5,629) (2,333) (264,257) (88,630) (4,722)
Partnership loss -- (6,732) -- -- (15,200) --
Other Income 4,037 -- -- 9,192 -- --
Debt forgiveness -- (1,699) -- -- (1,699) 6,109
Gain (loss) on disposition
and impairment of assets (587,382) (2,428) 1,180 (588,102) (67,020) (20,288)
------------- ------------ ------------ ------------ ------------- -------------
Total other income (expense) (829,135) (16,478) (1,150) (830,820) (172,413) (18,874)
------------- ------------ ------------ ------------ ------------- -------------
LOSS BEFORE TAXES (1,258,700) (711,594) (193,333) (1,775,389) (1,338,446) (1,014,304)
INCOME TAX BENEFIT -- -- -- -- -- 66,040
------------- ------------ ------------ ------------ ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,258,700) (711,594) (193,333) (1,775,389) (1,338,446) (948,264)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
Gain from mining operations
(net of income taxes) -- -- -- -- -- 264,158
------------- ------------ ------------ ------------ ------------- -------------
NET INCOME (LOSS) (1,258,700) (711,594) (193,333) (1,775,389) (1,338,446) (684,106)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on
market value of investments (22,850) 211,715 (22,584) (233,442) 253,047 (8,909)
------------- ------------ ------------ ------------ ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (1,281,550) $ (499,879) $ (215,917) $ (2,008,831) $ (1,085,399) $ (693,015)
============= ============ ============ ============ ============= =============
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED:
Net loss from continuing operations$ (0.10) $ (0.05) $ (0.03) $ (0.14) $ (0.12) $ (0.22)
Net income (loss)
from discontinued operations nil nil nil nil nil 0.06
------------- ------------ ------------ ------------ ------------- -------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.10) $ (0.05) $ (0.03) $ (0.14) $ (0.12) $ (0.16)
============= ============ ============ ============ ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 12,741,660 9,463,691 5,903,443 12,678,605 8,976,820 4,348,048
============= ============ ============ ============ ============= =============
See accompanying condensed notes to interim financial statements
4
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
--------------------------------------
2004 2003 2002
(Unaudited) (Unaudited) (Unaudited)
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,775,389) $(1,338,446) $ (684,106)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss (gain) on sale of investments 6,204 65,220 (20,288)
Impairment of long-lived assets 581,899 -- --
Partnership loss -- 15,200 --
Gain from mining operations -- -- (330,198)
Gain on debt forgiveness -- 1,699 6,109
Depreciation, depletion and amortization 731,535 36,365 --
Issuance of common stock for services 107,555 271,200 169,667
Issuance of common stock for expenses 169,200 -- 7,000
Issuance of common stock for loan
consideration -- 78,000 --
Amortization of deferred financing fees 103,155 -- --
Investment given for services -- 7,200 --
Issuance of stock options for
consulting fees -- 222,343 324,000
Changes in assets and liabilities:
Oil & gas revenue receivable (473,868) 2,701 --
Receivable from working interest owners -- 3,164 (18,830)
Prepaid expenses (131,300) 22,500 1,275
Notes receivable 1,575 3,058 (40,000)
Other current assets (109,610) -- --
Deposits -- 6 --
Prepaid mineral leases -- 73,925 (72,603)
Deferred working interest -- (22,184) 42,565
Accounts payable 362,474 12,975 (43,940)
Revenue distribution payable (19,967) (850) --
Interest payable (2,617) 6,733 --
Accrued expenses (46,755) 38,100 30,261
---------- ---------- ----------
Net cash provided (used) by operating activities (495,909) (501,091) (629,088)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (18,685) (10,147) (22,527)
Sale of investments 23,440 16,614 80,499
Purchase of fixed assets (679,705) (54,872) (101,601)
Purchase of proved and unproved properties (4,814,609) (169,210) (124,424)
Purchase of mineral leases -- (47,500) --
Sale of fixed assets -- -- --
---------- ---------- ----------
Net cash provided (used) by investing activities (5,489,559) (265,115) (168,053)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes and loans payable (1,050,000) (140,000) (35,000)
Proceeds from notes and loans payable 115,000 300,000 --
Payments of preferred stock dividends (2,249) (4,290) --
Proceeds from secured notes payable 5,920,000 -- --
Issuance of redeemable preferred stock for cash -- 59,925 --
Issuance of common stock and warrants for cash -- 110,000 233,334
Issuance of common stock for cash 286,400 480,000 678,566
---------- ---------- ----------
Net cash provided by financing activities 5,269,151 805,635 876,900
---------- ---------- ----------
Net increase (decrease) in cash $ (716,317) $ 39,429 $ 79,759
---------- ---------- ----------
See accompanying condensed notes to interim financial statements
5
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
----------------------------------------
2004 2003 2002
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
Net increase (decrease) in cash (balance forward) $ (716,317) $ 39,429 $ 79,759
Cash, beginning of period 3,619,345 40,011 191,684
----------- ----------- -----------
Cash, end of period $ 2,903,028 $ 79,440 $ 271,443
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ -- $ -- $ --
Interest paid $ -- $ -- $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services rendered
and accrued compensation $ 276,755 $ 271,200 $ 176,677
Common stock issued for loan consideration $ -- $ 78,000 $ --
Common stock issued for debt $ -- $ -- $ 90,000
Common stock issued for investment $ -- $ -- $ 120,000
Common stock issued for reimbursement of
expenses paid $ -- $ -- $ 7,000
Common stock issued for related party payable $ -- $ 120,000 $ --
Investment received for mining claims $ -- $ -- $ 350,198
Investment given for related party payable $ -- $ -- $ 8,231
Investment given for accrued compensation $ -- $ 7,500 $ --
Investment received for note receivable $ -- $ -- $ 15,000
Stock options issued for services $ -- $ 222,343 $ 324,000
Investment given for consulting services $ -- $ 7,200 $ --
Payable to related party issued for fixed assets,
proved and uproved properties $ -- $ 299,000 $ --
Warrants issued for loan consideration $ 745,237 $ -- $ --
6
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 nine month period ended June 30, 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 nine months ended June 30, 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 157,000 shares of common stock were issued at $1.40 to $2.50 per share for
services valued at $276,755, and 10,000 warrants were exercised for cash in the
amount of $13,500. Also in the same period, the Company paid cash dividends
aggregating $2,249.
During the nine months ended June 30, 2004, 765,000 warrants were issued to
secured debtholders. (See Note 4.) There were no stock options issued during the
nine months ended June 30, 2004.
7
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 3 - NOTES PAYABLE
At June 30, 2004, the Company had short-term notes payable to related parties in
the amount of $75,000.
NOTE 4 - LONG-TERM DEBT
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. A financing
fee of $80,000 was paid in connection with the securing of this debt. This
financing fee has been recorded as a discount on long-term debt, and will be
written off ratably over the life of the debt. For the period ending June 30,
2004, $10,000 of this financing fee was written off. 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 $745,237 has been recorded as a
discount on long-term debt, and will be written off ratably over the life of the
debt. For the period ended June 30, 2004, $93,155 of this discount was written
off.
NOTE 5 - IMPAIRMENT OF LONG-LIVED ASSETS
During the period ended June 30, 2004, the Company determined that two of its
natural gas wells located in Louisiana were 75% impaired. This impairment was
determined based upon the future anticipated cash flows expected from these
wells. An impairment expense of $581,898 is recorded in the accompanying
financial statements representing 75% of those costs directly associated with
the two affected wells.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements, together with the notes to those statements, included elsewhere in
this prospectus. 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 Factors."
OVERVIEW
We were formed in 1969 as Royal Resources, Inc. to acquire and develop
mineral properties and we pursued mining operations under several different
names until mid-2001 when we changed our name to Cadence Resources Corporation,
split our stock on a 1-for-20 reverse basis, and changed our business to
acquiring, exploring and developing oil and gas properties. The current
management of Cadence, Mr. Crosby and Mr. Ryan, assumed control of Cadence in
1996, in connection with the acquisition of Cadence by an entity they
controlled. Although the management of Cadence has been reduced in size since
1996, our key executives, Mr. Crosby and Mr. Ryan, have remained with Cadence.
Following a corporate reorganization in May 2001 to shift our focus to oil
and gas exploration, we began to lease oil and gas properties in Louisiana in
the fall of 2001, and in both Texas and Louisiana in fiscal 2002, but did not
produce commercial quantities of oil and gas until the fourth quarter of the
fiscal year ended September 30, 2002, when production began from our properties
in Texas. During the fourth quarter of 2003, we began to produce gas from our
properties in Louisiana that we are exploring together with Bridas Energy USA,
Inc.
As a result of our change from a mineral exploration company to an oil and
gas exploration company, in 2001 our Board determined to write-off and dispose
of our inventory of mineral properties to the greatest extent possible. Because
mineral properties at the exploration stage have limited marketability, and
because the management of Cadence does not have the extensive time it would take
to attempt to reach the limited number of buyers for our properties, we have not
been successful at disposing of our properties in outright arms' length sales,
but have chosen to write-down the carrying value of a substantial majority of
our properties to zero, or to sell the properties to other entities controlled
by the management of the Company in non-arms' length transactions.
RECENT DEVELOPMENTS
During September 2003, and to a minor extent in October 2003, we received
net proceeds of approximately $3.88 million from the sale of 1,721,140 shares of
our common stock on a private placement basis to a small group of individuals
and entities. Approximately $967,000 of these net proceeds were used to repay
indebtedness and approximately $75,000 was used to payoff nearly all of our
existing accounts payable, with the remainder to be used for our exploration and
development drilling through fiscal 2004.
9
Also in the fourth quarter of fiscal 2003, we began to generate greater
revenues from our oil wells in Texas as a result of the successful completion of
two new wells and the reworking of an existing well which quintupled our
production. As a result, we received net revenues of $83,433 and $59,519 from
our Texas production in the months of August and September, 2003, respectively,
as compared to net revenues of $18,704 and $18,481 from Texas production in the
months of June and July 2003, respectively.
CAPITAL RESOURCES AND LIQUIDITY
From our reorganization in mid-2001 until the present we have funded our
operations principally through the private sale of equity securities, borrowings
from officers, directors and shareholders, and borrowings from third party
individuals or institutions. On April 2, 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.
We realized net proceeds of $123,000 from the sale of our common stock
during our 2001 fiscal year, net proceeds of $941,900 from the sale of our
common stock and warrants during fiscal year 2002, and net proceeds of
approximately $4,830,000 from the sale of our common stock, preferred stock and
warrants during the year ended September 30, 2003. 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.
In our fiscal years ended September 30, 2001 and 2002, we received
approximately $92,000 and $86,000 from the sale of investments in various public
companies. The sales of these investments were made to fund our working capital
needs. Prior to our refocus upon the exploration and development of oil and gas
properties, we would from time to time make investments in public companies.
These investments were passive in nature and were generally relatively small.
Given our focus on oil and gas, future investments of this nature are likely to
be limited to opportunities that are of some strategic value to our core oil and
gas business and are likely to be less passive in nature.
In our 2001 fiscal year, we borrowed $125,000 from Howard Crosby, (an
officer and shareholder of Cadence) and $10,000 from Dotson Exploration, a
related party which is 48% owned by Messrs. Crosby and Ryan. These amounts were
repaid in fiscal 2002 for cash of $45,000, and 300,000 shares of our common
stock. In fiscal 2002, we had no net borrowings, and in the year ended September
30, 2003, we had total borrowings of $300,000, of which $140,000 was repaid in
cash and $50,000 of which was repaid by the issuance of 50,000 shares of stock
prior to the fiscal year-end. As of September 30, 2003, $50,000 of the balance
of $110,000 was owed to Nathan A. Low, a shareholder of Cadence, while the
remaining $60,000 was owed to Mr. Crosby. As of November 30, 2003, these
balances had been repaid. During the six months ended March 31, 2004, we
borrowed $510,000 in short-term notes 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. These borrowings were repaid in
April, 2004 form the proceeds of the sale of Senior Secured Notes.
10
We spent $19,000 in fiscal 2001, $144,000 in fiscal 2002 and $321,000 in
the year ended September 30, 2003, for oil and gas lease expenses and lease
operating expenses. In the same periods we spent $0, $134,000 and $145,000,
respectively, for oil and gas drilling, production and operating expenses. For
the nine months ended June 30, 2004 and 2003, we spent $334,000 and $275,000,
respectively on oil and gas lease expenses and lease operating expenses and
$157,000 and $74,000, respectively in oil and gas drilling, production and
operating expenses. Furthermore, given our capital constraints, we have been
unable to employ full time technical and professional people, a small portion of
which is for geologists and other oil and gas professionals. Consequently, we
have obtained services largely on a consulting basis. We spent approximately
$114,000 in fiscal 2001, $934,000 in fiscal 2002, and $591,000 in the year ended
September 30, 2003 and $219,000 and $478,000 in the nine months ended June 30,
2004 and 2003, respectively, for consulting services in various disciplines.
During fiscal 2002 and fiscal 2003, we purchased fixed assets in the
amounts of $172,000 and $183,000, respectively. These expenditures were
primarily related to the purchase of well equipment, including pipelines, tanks,
casings and pumping units. During the nine months ended June 30, 2004 we
invested $4,767,000 in unproved properties, $48,000 in proved properties, and
$679,000 in fixed assets, including well equipment, pipelines, tanks, casings
and pumping units. A portion of this was funded from existing cash balances, a
portion was funded from our borrowings from related parties (which were
subsequently repaid), and a portion was funded from our borrowings of
$6,000,000.
As of June 30, 2004, we had cash and cash equivalents of approximately
$2.9 million and at March 31, 2004, we had cash and cash equivalents of
approximately $485,000. The net proceeds remaining from our April 2004 sale of
senior secured notes will be used for drilling new wells in Texas, for possible
acquisition of additional producing properties, and for general corporate
purposes . We anticipate funding our operating and administrative overhead out
of revenues from the sale of our Texas oil production and Louisiana natural gas
production.
For the years ending September 30, 2002 and 2001, our auditors expressed a
going concern qualification on our audited financial statements. Subsequent to
the date of those financial statements, in September and October 2003 we raised
approximately $4.3 million in a private placement of our common stock, with a
substantial portion of the net proceeds to be used to fund future operations. We
believe that the proceeds received from our recent stock and senior note sales,
together with internally generated funds expected from our oil and gas
production during the next year, should be sufficient to meet our working
capital and capital expenditure requirements through the end of calendar 2004.
Accordingly, there is no going concern qualification from our auditors on our
financial statements for the year ended September 30, 2003.
11
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2004 AND 2003
Revenues
During the nine months ended June 30, 2004, we had revenues totaling
$1,886,000 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 gas production from our working interests in Michigan. During the
same period in 2003, revenues were $189,000, all of which was from the sale of
oil production from our oil wells in Texas.
Of our net revenue from the nine months ended June 30, 2004, approximately
$649,000 came from the sale of oil produced from our Texas properties, $115,000
came from the sale of natural gas at our Michigan properties, and $1,122,000
came from the sale of natural gas produced from our Louisiana properties. We
also accrued a revenue receivable in the amount of about $558,000.
The decline curve of the typical well from our natural gas production from
Louisiana is rapid. Additionally, several of the wells which were drilled have
not produced at an economic rate. Accordingly, effective June 30, 2004, we have
taken an impairment charge of $582,000 on two of the wells in Louisiana which
reflects the likelihood that we will be unable to recover our investment in
these wells in full. We may take further impairment charges in the future as
production rates from other wells stabilize and we are more accurately able to
predict what the expected revenue from the wells will be.
Expenses
Our expenses during the nine months ended June 30, 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.
12
The following table is a comparison of Cadence's two general categories of
expenses for the nine months ended June 30, 2004 and 2003, and the percentages
each of these categories comprise of total expenses:
Nine Months Ended June 30,
--------------------------------------------------
% of 2004 % of 2003
Total Total
2004 Expenses 2003 Expenses
---------- ---------- ---------- ----------
Corporate and Administrative Overhead $1,540,000 54% $ 970,000 72%
Expenses from Oil and Gas Operations $1,290,000 46% $ 385,000 28%
---------- ---------- ---------- ----------
Total Expenses $2,830,000 100% $1,355,000 100%
========== ========== ========== ==========
The Company's corporate and administrative expenses for the nine month
period ended June 30, 2004 increased approximately 60% over the same period in
2003. This increase was principally due to increases in professional fees
(primarily for legal services). General and administrative expenses increased
$570,000, but officer and director compensation declined $71,000 due principally
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
nine-month periods ended June 30, 2004 and 2003. These expenses increased
three-fold from year-to-year, due to the increased level of oil and gas
exploration and production activity.
Nine Months Ended June 30,
--------------------------------------------------
2004 2003
----------------------- -----------------------
% of Total % of Total
2004 Expenses 2003 Expenses
---------- ---------- ---------- ----------
Depreciation, depletion and amortization $ 731,000 57% $ 36,000 9%
Oil and gas lease expenses $ 327,000 55% $ 86,000 22%
Oil and gas lease operating expenses $ 164,000 13% $ 263,000 69%
Oil and gas consulting $ 68,000 5% -- --
---------- ---------- ---------- ----------
Total Expenses from
oil and gas operations $1,290,000 100.0% $ 385,000 100.0%
========== ========== ========== ==========
Our depreciation, depletion and amortization expense increased to $731,000
during the nine months ended June 30, 2004, from $36,000 during the same period
in 2003 as our production increased from 10,261 barrels of oil during the 2003
period to 29,956 barrels of oil and about 160,000 Mcf of gas during the same
period in 2004.
13
We spent $491,000 in the nine months ended June 30, 2004 for oil and gas
lease expenses and lease operating expenses, compared to $349,000 in the same
period last year. These lease operating expenses were primarily for developing
and maintaining our oil and gas operations in Texas, Louisiana and Michigan.
Item 3: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Within the 90 days prior
to the filing of this Quarterly Report on Form 10-Q (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.
(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.
However, the Company has not made any significant changes in the Company's
internal controls or in other factors that could affect these controls
subsequent to the date of their last evaluation.
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.
14
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 is unaware of any pending or threatened litigation at the time of
the filing of this report.
ITEM 2. CHANGES IN SECURITIES.
Common Stock
During the three months ended June 30, 2004, 75,000 shares valued at $120,950
were issued to Directors for quarterly fees and sign-on bonuses, 25,000 shares
valued at $48,250 were issued to officers for compensation, 6,000 shares valued
at $10,380 were issued for services rendered, and 10,000 shares were issued upon
exercise of warrants valued at $13,500.
Options and Warrants
During the three months ended June 30, 2004, 765,000 warrants were issued to
secured debtholders and no stock options were issued
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
During the reporting period the Company filed an 8-K report on 4/5/04 in
connection with the issuance of a news release item. Also, the Company filed an
8-K report on 6/29/04 in connection with the issuance of a news release item.
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 18th day of August, 2004.
CADENCE RESOURCES CORPORATION
By: /s/ Howard Crosby
- -----------------------------
Howard Crosby
Its: Chief Executive Officer
By: /s/ John Ryan
- -----------------------------
John Ryan
Its: Chief Financial Officer