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 March 31, 2005
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 March 31, 2005: 20,702,327 shares
================================================================================
CADENCE RESOURCES CORPORATION
Financial Statements
March 31, 2005
================================================================================
CADENCE RESOURCES CORPORATION
C O N T E N T S
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Operations and Comprehensive Loss. . . . . . . . . . . . . . . 3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . 6
Management Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . 9
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
March 31,
2005 September 30,
(Unaudited) 2004 2003
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 2,294,111 $ 1,922,993 $ 3,619,345
Oil & gas revenue receivable 469,465 335,407 84,575
Receivable from working interest owners -- -- 12,873
Notes receivable 23,720 8,720 3,720
Prepaid expenses 36,780 39,410 5,925
Other current assets 425 425 425
------------ ------------ ------------
TOTAL CURRENT ASSETS 2,824,501 2,306,955 3,726,863
------------ ------------ ------------
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 6,017,655 5,731,108 590,747
Unproved properties 676,327 505,501 833,836
Wells and related equipment and facilities 992,663 855,562 202,886
Support equipment and facilities 513,474 506,427 151,963
Prepaid oil and gas leases 501,113 456,219 395,973
Less accumulated depreciation, depletion,
amortization and impairment (5,408,080) (3,911,939) (61,611)
------------ ------------ ------------
TOTAL OIL AND GAS PROPERTIES 3,293,152 4,142,878 2,113,794
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Furniture and equipment 4,785 4,785 1,660
Less accumulated depreciation (2,283) (1,949) (1,451)
------------ ------------ ------------
TOTAL PROPERTY AND EQUIPMENT 2,502 2,836 209
------------ ------------ ------------
OTHER ASSETS
Investments 928,701 238,088 394,454
Mineral properties available for sale 197,406 197,406 246,757
------------ ------------ ------------
TOTAL OTHER ASSETS 1,126,107 435,494 641,211
------------ ------------ ------------
TOTAL ASSETS $ 7,246,262 $ 6,888,163 $ 6,482,077
============ ============ ============
See accompanying condensed notes to interim financial statements.
1
CADENCE RESOURCES CORPORATION
BALANCE SHEETS
March 31,
2005 September 30,
(Unaudited) 2004 2003
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 178,792 $ 358,588 $ 584,866
Revenue distribution payable 36,619 32,387 68,929
Payable to related party -- 300,000 550,000
Accrued dividends payable 11,243 -- --
Accrued compensation 12,500 -- 94,920
Interest payable -- 4,781 15,752
Notes payable -- -- 460,000
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 239,154 695,756 1,774,467
------------ ------------ ------------
LONG-TERM LIABILITIES
Secured notes, net of discount -- 5,071,147 --
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES -- -- --
------------ ------------ ------------
REDEEMABLE PREFERRED STOCK 59,925 59,925 59,925
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; 100,000,000 shares authorized,
20,702,327, 12,892,327 and 12,512,827 shares issued and
outstanding,
respectively 207,023 128,923 125,128
Additional paid-in capital 24,006,490 18,995,458 18,343,422
Stock options 1,642,614 1,642,614 1,210,704
Stock warrants 4,480,387 794,512 51,375
Accumulated deficit (22,926,494) (20,035,605) (14,863,687)
Accumulated other comprehensive income (loss) (462,837) (464,567) (219,257)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,947,183 1,061,335 4,647,685
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 7,246,262 $ 6,888,163 $ 6,482,077
============ ============ ============
See accompanying condensed notes to interim financial statements.
2
CADENCE RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-----------------------------------------------
2005 2004 2003
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
REVENUES
Oil and gas sales net of production taxes $ 536,340 $ 688,368 $ 44,449
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization 871,193 309,173 8,496
Officers' and directors' compensation 78,483 35,000 173,477
Consulting 11,353 82,100 21,425
Professional fees 204,323 150,389 41,393
Oil and gas lease expenses 108,944 114,126 39,095
Oil and gas consulting 70,000 27,500 --
Oil and gas production costs 3,587 33,171 3,587
Exploration & drilling 5,125 12,000 --
Lease operating expenses 103,760 2,410 5,663
Other general and administrative 208,529 60,223 26,222
------------ ------------ ------------
Total expenses 1,665,297 826,092 315,771
------------ ------------ ------------
OPERATING LOSS (1,128,957) (137,724) (271,322)
------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 1,043 213 46
Interest expense (61,837) (8,132) (81,762)
Partnership loss -- -- (159)
Refund of production taxes -- 5,155 --
Miscellaneous income 846 846
Loss on repayemt of debt (660,559) (660,559)
Loss on sale of investments (40,267)
Gain (loss) on disposition and impairment of assets -- (720) (29,969)
------------ ------------ ------------
Total other income (expense) (720,507) (3,484) (111,844)
------------ ------------ ------------
LOSS BEFORE TAXES (1,849,464) (141,208) (383,166)
INCOME TAX BENEFIT -- -- --
------------ ------------ ------------
NET LOSS (1,849,464) (141,208) (383,166)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments (10,254) (103,299) 32,655
------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,859,718) $ (244,507) $ (350,511)
============ ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.10) $ (0.02) $ (0.04)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 18,098,994 12,645,330 9,037,193
============ ============ ============
Six Months Ended
March 31,
-----------------------------------------------
2005 2004 2003
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
REVENUES
Oil and gas sales net of production taxes $ 1,148,260 $ 1,247,752 $ 77,825
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization 1,496,474 542,284 17,131
Officers' and directors' compensation 148,982 90,000 218,477
Consulting 67,986 140,513 99,655
Professional fees 346,409 440,436 49,428
Oil and gas lease expenses 291,339 223,512 59,447
Oil and gas consulting 70,000 42,500 --
Oil and gas production costs 72,650
Exploration & drilling 161,369 12,000 --
Lease operating expenses 132,127 3,658 42,179
Other general and administrative 420,632 195,203 62,425
------------ ------------ ------------
Total expenses 3,138,905 1,762,756 548,742
------------ ------------ ------------
OPERATING LOSS (1,990,645) (515,004) (470,917)
------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 9,870 4,193 126
Interest expense (210,134) (10,313) (83,001)
Partnership loss (8,468)
Refund of production taxes -- 5,155 --
Miscellaneous income
Loss on repayemt of debt
Loss on sale of investments
Gain (loss) on disposition and impairment of assets -- (720) (64,592)
------------ ------------ ------------
Total other income (expense) (900,244) (1,685) (155,935)
------------ ------------ ------------
LOSS BEFORE TAXES (2,890,889) (516,689) (626,852)
INCOME TAX BENEFIT -- -- --
------------ ------------ ------------
NET LOSS (2,890,889) (516,689) (626,852)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on market value of
investments 1,730 (210,593) 41,332
------------ ------------ ------------
COMPREHENSIVE LOSS $ (2,889,159) $ (727,282) $ (585,520)
============ ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.19) $ (0.06) $ (0.07)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 15,495,660 12,630,615 8,721,129
============ ============ ============
See accompanying condensed notes to interim financial statements.
3
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
----------------------------------------------
2005 2004 2003
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,890,889) $ (516,689) $ (626,852)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss (gain) on sale of investments 40,267 720 64,592
Loss on repayment of debt 660,559 --
Partnership loss -- -- 8,468
Amortization of deferred financing fees 268,204 -- --
Depreciation, depletion and amortization 1,496,474 542,284 17,131
Issuance of common stock for services -- 97,175 142,200
Issuance of common stock for loan
consideration -- -- 78,000
Investment given for services -- -- 7,200
Changes in assets and liabilities:
Oil & gas revenue receivable (134,058) (301,065) 9,159
Receivable from working interest owners -- -- 3,164
Prepaid expenses 2,630 (131,300) 15,000
Note receivable (15,000) -- (3,241)
Other current assets -- (27,000) 6
Prepaid mineral leases -- -- 47,258
Deferred working interest -- -- (22,184)
Accounts payable (179,796) 48,908 20,367
Revenue distribution payable 4,272 67,866 1,314
Interest payable (4,781) (2,698) 2,433
Accrued expenses 12,500 (86,755) 39,500
------------ ------------ ------------
Net cash provided (used) by operating activities (739,618) (308,554) (196,485)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (738,644) (6,250) (9,172)
Sale of investments 33,295 4,300 15,279
Purchase of fixed assets (189,042) (375,708) (44,467)
Purchase of proved and unproved properties (457,373) (2,846,068) (177,995)
Purchase of mineral leases -- (376,522) (47,500)
------------ ------------ ------------
Net cash provided (used) by investing activities (1,351,764) (3,600,248) (263,855)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (5,000,000) (425,000) --
Proceeds from notes payable -- 475,000 300,000
Payment on payables to related parties (300,000) (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 7,762,500 275,000 110,000
------------ ------------ ------------
Net cash provided by financing activities 2,462,500 775,000 469,925
------------ ------------ ------------
Net increase (decrease) in cash $ 371,118 $ (3,133,802) $ 9,585
------------ ------------ ------------
See accompanying condensed notes to interim financial statements.
4
CADENCE RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
---------------------------------------------
2005 2004 2003
(Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------
Net increase (decrease) in cash (balance forward) $ 371,118 $ (3,133,802) $ 9,585
Cash, beginning of period 1,922,993 3,619,345 40,011
------------ ------------ ------------
Cash, end of period $ 2,294,111 $ 485,543 $ 49,596
============ ============ ============
Supplemental cash flow disclosure:
Income taxes paid $ -- $ -- $ --
Interest paid $ 150,000 $ -- $ --
Non-cash investing and financing activities:
Common stock issued for services rendered
and accrued compensation $ -- $ 97,175 $ 142,200
Common stock issued for loan consideration $ -- $ -- $ 78,000
Investment given for consulting services $ -- $ -- $ 7,200
Issuance of common stock for loan repayment $ 1,000,000 $ -- $ --
See accompanying condensed notes to interim financial statements.
5
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2005
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, 2004. 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 three month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2005.
NOTE 2 - STOCKHOLDERS' EQUITY
On January 31, 2005, Cadence entered into a purchase agreement with twenty-two
accredited investors pursuant to which the investors purchased 7,810,000 shares
of common stock and common stock warrants enabling the warrant holders to
purchase 14,050,000 shares of common stock at an exercise price of $1.75 per
share. The aggregate proceeds from the security sales were $9,762,500 before
commissions.
NOTE 3 - 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 March 31,
2005, $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.
6
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2005
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 three months ended March 31, 2005, $93,155 of this discount was
written off. Additionally, a related party was granted 76,500 options valued at
$71,910 as a finders fee related to these notes.
On January 31, 2005, Cadence entered into an agreement with the seven accredited
investors (each of whom signed the agreement in its April 2004 private
placement) pursuant to which the Company was permitted to repay the $6,000,000
in notes held by such investors without any prepayment penalties in exchange for
the exercise price of the warrants to purchase 765,000 shares of common stock
issued in the April 2004 private placement being reduced from $4.00 per share to
$1.25 per share. As part of this transaction, $5,000,000 of the notes were
repaid in cash and $1,000,000 of the notes were converted into common stock and
warrants of Cadence (see Note 2). Additionally, all deferred financing costs
associated with these notes were written off, resulting in a loss on repayment
of debt in the amount of $660,559. As of March 31, 2005, the Company has no long
term debt outstanding.
NOTE 4 - REDEEMABLE 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 year ended September 30, 2003, the Company issued
34,950 shares of its preferred stock to investors at prices ranging from $1.50
to $2.00 per share for aggregate proceeds of $59,925. The shares are convertible
to common stock at a price of $1.50 per share under certain terms and
conditions. At September 30, 2003 the shares carried a preferred dividend of 15%
per annum.
The Class A shares mature seven years from the date of issuance. At maturity,
the Class A shares will be redeemed for cash or common stock at Cadence's option
in an amount equal to the amount paid by the investors for the shares plus any
accrued and unpaid dividends. If shares of common stock are to be issued at
maturity, the conversion price shall be determined by the average closing bid
price for the 20 trading days prior to the maturity date.
7
CADENCE RESOURCES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2005
At March 31, 2005, the Company had $11,243 of accrued dividends payable to
preferred shareholders.
NOTE 5 - SUBSEQUENT EVENTS
On November 19, 2004, the Company signed a letter of intent establishing a 60
day exclusivity period in order to conduct due diligence and negotiate terms for
acquisition of all of the outstanding shares of Aurora Energy, Ltd., a privately
held company based in Traverse City, Michigan in exchange for shares of common
stock of Cadence. On January 31, 2005, Cadence, Aurora Acquisition Corp., a
wholly owned subsidiary of Cadence, and Aurora entered into a definitive merger
agreement providing for the acquisition of all of the outstanding shares and
options of Aurora by Cadence. The closing is conditioned upon, among other
things, obtaining approval of Aurora's shareholders and the shares of Cadence's
common stock being issued to Aurora's shareholders being registered on a Form
S-4 registration statement. Upon consummation of the merger, (i) Cadence will
issue two shares of its common stock for each share of Aurora common stock, (ii)
all options and warrants to purchase Aurora common stock shall become options or
warrants to receive shares of Cadence common stock, and (iii) Aurora will become
a wholly owned subsidiary of Cadence. It is contemplated by the parties that if
this effort is successfully consummated, Cadence will relocate its operational
headquarters to Aurora's offices in Traverse City and the board of directors and
management of Cadence will be significantly restructured.
On May 11, 2005, the Company filed Form S-4, registering up to 48,297,694 shares
of its common stock, 10,205,328 shares of which are issuable upon exercise of
options, for issuance to the shareholders and option holders of Aurora Energy,
Ltd. pursuant to the agreement and plan of merger between Cadence, Aurora
Acquisition Corp., Cadence's wholly owned subsidiary, and Aurora Energy, Ltd.
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 report. 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.
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 developing 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 Cadence in non-arms' length transactions.
Recent Developments
On November 19, 2004, Cadence issued a press release announcing that
Cadence signed a letter of intent establishing a 60 day exclusivity period in
order to conduct due diligence and negotiate terms for acquisition of all of the
outstanding shares of Aurora Energy, Ltd., a privately held company based in
Traverse City, Michigan in exchange for shares of common stock of Cadence. On
January 31, 2005, Cadence, Aurora Acquisition Corp., a wholly owned subsidiary
of Cadence, and Aurora entered into a definitive merger agreement providing for
the acquisition of all of the outstanding shares and options of Aurora by
Cadence. Upon consummation of the merger, (i) Cadence will issue two shares of
its common stock for each share of Aurora common stock, (ii) all options and
warrants to purchase Aurora common stock shall become options or warrants to
receive shares of Cadence common stock, and (iii) Aurora will become a wholly
owned subsidiary of Cadence.
On January 31, 2005, Cadence entered into a purchase agreement (the
"Purchase Agreement") with twenty two accredited investors (each of whom is
listed on the schedules of purchasers to the purchase agreement) pursuant to
which the investors purchased 7,810,000 shares of common stock and warrants to
purchase 14,050,000 shares of common stock at an exercise price of $1.75 per
share for $9,762,500. The Nathan A. Low Family Trust dated 4/12/96 and Bear
Stearns as Custodian for Nathan A. Low Roth IRA, both of which are controlled by
Nathan Low, a greater than 10% holder of Cadence's common stock, invested in
Cadence pursuant to the Purchase Agreement. Sunrise Securities Corporation, an
affiliate of Nathan Low, received a commission equal to $926,250 and a
warrant to purchase 2,186,000 shares of Cadence's common stock for services
rendered as the placement agent in the transaction. On May 11, 2005 the Company
filed a registration statement on Form S4 which seeks to register the shares to
be exchanged to the Aurora stockholder in exchange for shares of the Company and
describes in greater detail the reasons for the transaction and the business of
Aurora.
9
Capital Resources and Liquidity
From our reorganization in mid-2001 until the date of this report, 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 and we expect this to continue to be the case for
at least the remainder of 2005. In February 2004, we borrowed $410,000 in short
term notes from three directors of Cadence and a company of which two of
Cadence's officers and directors are also affiliated. These notes bore interest
at the rate of 12% per annum, and were repaid in full in April, 2004.
On April 2, 2004, we issued $6,000,000 of senior secured notes to
seven individual investors. These notes are secured by substantially all of our
assets are due and payable on March 31, 2006 and bear interest at the rate of
10% per annum, payable quarterly. Pre-payments of 10% of the principal are
required on September 30, 2005 and December 31, 2005 if the weighted average
price of our common stock is less than $5 per share. Each $50,000 principal
amount of the notes was accompanied by warrants to purchase 6,375 shares of our
common stock, or an aggregate of 765,000 shares, at a price of $4.00 per share.
The warrants expire on April 2, 2007. During this reporting period these secured
notes were repaid in full. In conjunction with early repayment of the notes, the
exercise price of the warrants was lowered to $1.25.
We realized net proceeds of $941,900 from the sale of our common
stock and warrants during fiscal year 2002, 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. Additionally, we received net proceeds
of $288,500 from the sale of common stock and exercise of warrants during the
year ended September 30, 2004.
In the periods ended September 30, 2002, 2003 and 2004, we received
approximately $86,000, $16,000 and $14,000 respectively 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 $600,000, of which $140,000 was repaid in
cash. As of September 30, 2003, $50,000 was owed to Nathan Low Family Trust, a
shareholder of Cadence, $85,000 was owed to Mr. Crosby, $25,000 was owed to
Kevin Stulp and $300,000 was owed to CGT Management Ltd. All of such amounts
were repaid by in October of 2003. During the year ended September 30, 2004, we
borrowed $410,000 in short-term notes from officers, directors, and other
insiders of Cadence, as well as $1,000,000 of non-interest bearing short-term
notes received in late March 2004. These liabilities were repaid in full in
April 2004.
On January 31, 2005, we entered into a share purchase agreement with
twenty-two accredited investors pursuant to which the investors purchased
7,810,000 shares of common stock and common stock warrants enabling the warrant
holders to purchase 14,050,000 shares of common stock at an exercise price of
$1.75 per share. The aggregate proceeds from the security sales were $9,762,500
before commissions. The proceeds of this financing were used in part to retire
the April 2, 2004 debt financing and all accrued interest thereon.
10
We spent $144,000 in fiscal 2002, $321,000 in fiscal 2003 and
$530,167 in fiscal 2004 for oil and gas lease expenses and lease operating
expenses. In the same periods we spent $134,000, $145,000, and $308,000,
respectively, for oil and gas drilling, production and operating expenses. We
obtain professional oil and gas geologic and engineering services solely on a
consulting basis. We spent approximately $934,000 in fiscal 2002, $591,000 in
fiscal 2003 and $424,873 in fiscal 2004, for consulting services in various
disciplines.
During fiscal 2002, 2003 and 2004, we purchased fixed assets in the
amounts of $172,000, $183,000 and $980,000, respectively. These expenditures
were primarily related to the purchase of well equipment, including pipelines,
tanks, casings and pumping units.
As of March 31, 2005, we had cash and cash equivalents of
approximately $2,824,501. We anticipate funding most of our near-term operating
and administrative overhead out of revenues from the sale of our Texas oil
production and Louisiana and Michigan gas production.
Results of Operations
For the periods ended March 31, 2005 and 2004
Revenues
During the quarter ended March 31, 2005, revenues from the sale of
oil and gas totaled approximately $536,340, primarily from production from our
wells in Texas, Louisiana and Michigan. This revenue came from the sale of 4,455
net barrels of oil at an average price of $48.17 per barrel for revenues of
$214,617 from our wells in Texas. The balance of our revenues of $321,723 came
from the sale of natural gas from our wells in Louisiana and Michigan.
Comparing this to the 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.
Expenses
Our expenses during this reporting period for 2005 and 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, leases,
drilling expenses, 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 quarters ended March 31, 2005 and March 31, 2004,
and the percentages each of these categories comprise of total expenses:
- --------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,
- -------------------------------------------------------------------------------------------------------------
% of 2005 % of 2004
2005 Total Expenses 2004 Total Expenses
- ---------------------------------------------------------------- ------------------------------ --------------
Corporate and Administrative Overhead $502,688 30.25% $327,712 39.10%
- ---------------------------------------------------------------- ------------------------------ --------------
Expenses from Oil and Gas Operations $1,159,022 69.75% $510,380 60.90%
- ---------------------------------------------------------------- ------------------------------ --------------
Total Expenses $1,661,710 100.0% $838,092 100.0%
- ------------------------------------------------================ ============================== ==============
11
When comparing the same reporting periods on a year over year basis,
Cadence's uncategorized general and administrative expenses increased from 2004
to 2005 by approximately $148,306, principally because of increased travel and
other expenses associated with the proposed acquisition of Aurora Energy, and
increased business activity in Texas and Kansas. Professional fees also
increased by about $54,000 due to added legal and accounting work associated
with the proposed acquisition, the equity financing undertaken, and the
retirement of the Company debt facility.
The comparable year to year 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 fiscal 2005 and
2004.
- --------------------------------------------------------- --------------------------------------------------------------------
Quarterly Period Ended March 31,
- --------------------------------------------------------- --------------------------------------------------------------------
2005 2004
- --------------------------------------------------------- ---------------------------------- ---------------------------------
% of Total % of Total
2005 Expenses 2004 Expenses
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Exploration and drilling $5,125 0.44% $12,000 2.35%
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Depreciation, depletion and amortization $871,193 75.17% $309,173 60.58%
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Oil and gas lease expenses $108,944 9.40% $114,126 22.36%
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Oil and gas lease operating expenses $103,760 8.95% $47,581 9.32%
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Oil and gas consulting $70,000 6.04% $27,500 5.39%
- --------------------------------------------------------- ---------------------------------- ---------------- ----------------
Total Expenses from oil and gas operations $1,159,022 100.0% $510,380 100.0%
- --------------------------------------------------------- ================================== ================ ================
Oil and gas lease expenses and lease operating expenses increased by
$50,977 from the 2004 reporting period. The largest increase in oil and gas
related expenses came in the category of depreciation, depletion and
amortization, which increased by $562,020 from the prior year, and as a
percentage, increased from 60.58% to 75.17% of the total.
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. 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.
12
(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 is currently in the process of improving internal
controls relating to transmittal of its financial information to its accountants
in a more timely manner. To achieve this goal, the Company is implementing on a
company-wide basis a computerized system which will automate the process of
collection of financial data.
The Company has not made any other significant changes in the Company's internal
controls or in other factors that could significantly 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.
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
ITEM 1. LEGAL PROCEEDINGS.
The management of the Company is unaware of any other pending or threatened
legal proceedings involving the Company at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
We had 20,702,327 shares of common stock issued and outstanding as of March 31,
2005.
Common Stock
- -------------
As part of the private placement described above the Company issued 7,810,000
shares of common stock.
Options
- -------
The Board of the Company has approved a total of 250,000 options to be issued to
the five members of the Board of Directors as retention options for service in
2005. These director options had not been issued as of the end of the reporting
period and are therefore not reflected in the financial statements attached. The
Company also issued 76,500 broker options as compensation in relation to a
financing.
13
Warrants
- --------
As part of the private placement described above the Company issued warrants to
purchase 14,050,000 shares of common stock at an exercise price of $1.75.
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
None.
- -------------
(b) Reports on Form 8-K.
Current report, items 1.01 and 9.01 2005-02-02 000-25170
---------
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CADENCE RESOURCES CORPORATION
Dated: May 23, 2005
By: /s/ Howard Crosby
- -------------------------
Howard Crosby
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 23, 2005
By: /s/ John P. Ryan
- -------------------------
John P. Ryan
Chief Financial Officer
14