UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
Amendment No. 2
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2006.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from:
Commission file number: 000-25170
Aurora Oil & Gas Corporation
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(Exact name of small business issuer as specified in its charter)
Utah
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(State or other jurisdiction of incorporation or organization)
87-0306609
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(IRS Employer Identification No.)
4110 Copper Ridge Drive, Suite 100, Traverse City, MI 49684
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(Address of principal executive offices)
(231) 941-0073
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 81,685,017.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I ..................................................................................................... 1
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31 2006 (Unaudited) and December 31, 2005.........2-3
Unaudited Statements of Operations for the Three Months Ended March 31, 2006 and 2005.................4
Unaudited Statements of Shareholders' Equity for the Three Months Ended March 31, 2006................5
Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005.................6
Notes to Unaudited Condensed Consolidated Financial Statements........................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............18
ITEM 3. CONTROLS AND PROCEDURES...........................................................................23
PART II .....................................................................................................24
ITEM 1. LEGAL PROCEEDINGS.................................................................................24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES...........................................................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................25
ITEM 5. OTHER INFORMATION.................................................................................25
ITEM 6. EXHIBITS..........................................................................................25
Explanatory note: The only changes to our original filing may be found at Part
I, Item 3, Controls and Procedures.
PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates", or similar expressions used
in this report.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties. Factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by us in those statements include, among
others, the following:
o the quality of our properties with regard to, among other things,
the existence of reserves in economic quantities;
o uncertainties about the estimates of reserves;
o our ability to increase our production and oil and gas income
through exploration and development;
o the number of well locations to be drilled and the time frame within
which they will be drilled;
o the timing and extent of changes in commodity prices for natural gas
and crude oil;
o domestic demand for oil and natural gas;
o drilling and operating risks;
o the availability of equipment, such as drilling rigs and
transportation pipelines; and
o the adequacy of our capital resources and liquidity including, but
not limited to, access to credit.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. You are cautioned not to place undue reliance on
such statements, which speak only as of the date of this report.
1
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
2006 2005
ASSETS (Unaudited) (Audited)
------------ ------------
Current assets
Cash and cash equivalents $ 17,172,984 $ 11,980,638
Accounts receivable:
Oil and gas sales 2,397,332 2,409,675
Joint interest owners 6,104,381 4,380,606
Notes receivable
Related party 15,000 15,000
Other 229,346 229,346
Prepaid expenses and other current assets 331,525 240,242
------------ ------------
Total current assets 26,250,568 19,255,507
------------ ------------
Oil and gas properties, using full cost accounting
Proved properties 69,092,535 39,643,003
Unproved properties 49,225,334 37,279,889
Pipelines 4,832,977 --
------------ ------------
Total oil and gas properties 123,150,846 76,922,892
Less accumulated depletion and depreciation 9,044,409 7,962,138
------------ ------------
Oil and gas properties, net 114,106,437 68,960,754
------------ ------------
Other assets:
Deposits on purchase of oil and gas properties -- 3,206,102
Property and equipment, (net of accumulated depreciation
of $157,150 and $113,780 respectively) 3,715,551 3,610,138
Goodwill 15,973,346 15,973,346
Intangibles, (net of accumulated amortization of
$1,790,833 and $1,407,083 respectively) 2,814,167 3,197,917
Other investments 781,313 1,855,977
Debt issuance costs (net of accumulated amortization of
$294,072 and $79,096 respectively) 2,895,629 723,993
Other 41,156 38,411
------------ ------------
Total Other Assets 26,221,162 28,605,884
------------ ------------
Total assets $166,578,167 $116,822,145
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
- --------------------------------------------------------------------------------
March 31, December 31,
2006 2005
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Audited)
------------- -------------
Current liabilities
Accounts payable $ 8,172,446 $ 7,053,288
Accrued liabilities 480,634 417,291
Short-term bank borrowings 4,910,000 6,210,000
Current portion of obligations under capital leases 8,823 8,823
Current portion of note payable - related party 69,833 69,833
Current portion of mortgage payable 80,585 72,877
Drilling advances 92,880 --
------------- -------------
Total current liabilities 13,815,201 13,832,112
------------- -------------
Deposit on sale of oil and gas properties -- 3,509,319
------------- -------------
Obligations under capital leases, net of current portion 110 2,262
Asset retirement obligation 827,871 --
Mortgage payable 2,771,450 2,792,600
Senior secured credit facility 35,000,000 --
Mezzanine financing 40,000,000 40,000,000
------------- -------------
Total long-term liabilities 78,599,431 42,794,862
------------- -------------
Total liabilities 92,414,632 60,136,293
------------- -------------
Redeemable Convertible Preferred Stock 19,924 59,925
------------- -------------
Commitments, contingencies and subsequent event
Shareholders' equity
Common stock, $.01 par value; authorized 250,000,000 shares;
issued and outstanding 81,530,017 shares in 2006 815,301 615,363
and 61,536,261 shares in 2005
Additional paid-in capital 76,927,627 58,670,698
Accumulated deficit (3,599,317) (2,660,134)
------------- -------------
Total shareholders' equity 74,143,611 56,625,927
------------- -------------
Total liabilities and shareholders' equity $ 166,578,167 $ 116,822,145
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2006 2005
------------ ------------
Revenues
Oil and gas sales $ 5,416,866 $ 378,621
Interest income 105,658 94,665
Equity in loss of unconsolidated subsidiary (90,738) (14,409)
Other income 151,102 231,326
------------ ------------
Total revenues 5,582,888 690,203
------------ ------------
Expenses
General and administrative 1,566,694 499,048
Pipeline operating expenses 99,828 --
Production and lease operating 1,837,230 274,284
Depletion, depreciation and amortization 1,624,693 58,477
Interest expense 1,379,159 33,010
Taxes 1,667 238,170
------------ ------------
Total expenses 6,509,271 1,102,989
------------ ------------
Loss before minority interest (926,383) (412,786)
Minority interest in (income) loss of consolidated subsidiaries (12,800) 1,282
------------ ------------
Net loss $ (939,183) $ (411,504)
Less dividends on preferred stock -- (1,641)
------------ ------------
Net loss available to common shareholders $ (939,183) $ (413,145)
============ ============
Net loss per common share - basic and diluted $ (0.01) $ (0.01)
============ ============
Weighted average common shares outstanding - basic and diluted 70,265,281 34,223,310
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2006
(Unaudited)
Common Stock Additional Total
------------ Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balances at December 31, 2005 $ 61,536,261 $ 615,363 $ 58,670,698 $ (2,660,134) $ 56,625,927
Cashless exercise of options and warrants 3,125,105 31,251 (31,251) --
Conversion of redeemable convertible preferred
stock to common stock 23,334 233 39,768 40,001
Stock based compensation 370,466 370,466
Exercise of common stock options and warrants 15,375,457 153,755 17,892,645 18,046,400
Issuance of common stock to related party
in lieu of commission relating to exercise
of warrants 1,469,860 14,699 (14,699) --
Net loss -- -- -- (939,183) (939,183)
------------ ------------ ------------ ------------ ------------
Balances at March 31, 2006 $ 81,530,017 $ 815,301 $ 76,927,627 $ (3,599,317) $ 74,143,611
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
2006 2005
---- ----
Cash flows from operating activities:
Net loss $ (939,183) $ (411,504)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,624,693 58,477
Accretion of asset retirement obligation 15,237 --
Stock based compensation 157,392 --
Equity in loss of non-consolidated investees 90,738 14,409
Unrealized gain on investments (1,165) --
Other (21,167) --
Minority interest in income (loss) of subsidiaries 12,800 (1,282)
Changes in operating assets and liabilities, net of effect of merger:
Accounts receivable (1,479,067) (610,825)
Accounts receivable - related parties -- 87,289
Prepaid expenses (91,283) (25,018)
Accounts payable 744,901 (272,580)
Drilling advances 92,880 (108,953)
Accrued liabilities 63,342 147,497
------------ ------------
Net cash (used in) provided by operating activities 270,118 (1,122,490)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 10,500,000 7,373,737
Proceeds from sale of other investments 10,096 --
Capital expenditures for oil and gas development (23,531,312) (5,775,220)
Capital expenditures for property and equipment (148,782) (12,231)
Payments for capitalized merger costs -- (127,579)
Advances of notes receivable -- (72,379)
Payments on notes receivable, related parties -- 85,000
Purchase of Member Interest in Hudson Pipeline (3,354,892) (476,498)
Investment in unconsolidated subsidiary (250,000) --
Other (31,082) --
------------ ------------
Net cash (used in) provided by investing activities (16,805,972) 994,830
------------ ------------
Cash flows from financing activities:
Payments on short-term bank borrowings (1,300,000) (350,000)
Advances on senior secured credit facility net of financing
costs of $2,386,613 4,997,394 --
Payments on mortgage obligation (13,442) --
Payments on capital lease obligations (2,152) (2,021)
Distributions to minority interest members -- (805,000)
Net proceeds from exercise of options and warrants 18,046,400 --
Net proceeds from sales of common stock 11,025,000
Dividends paid -- (44,340)
Amounts paid to lease fund investors and other owners -- 20,177
Repayment of debt to related parties -- (2,948,698)
------------ ------------
Net cash provided by financing activities 21,728,200 6,895,118
------------ ------------
Net increase in cash and cash equivalents 5,192,346 6,767,458
Cash and cash equivalents, beginning of the period 11,980,638 5,179,582
------------ ------------
Cash and cash equivalents, end of the period $ 17,172,984 $ 11,947,040
============ ============
Non-cash financing and investing activities:
Oil and natural gas properties asset retirement obligation $ 812,634 $ -
============ ============
Purchase of oil and gas working interest through bank financing $ 27,615,993 $ -
============ ============
Supplemental disclosure of cash flow information:
Cash paid during period for interest
(including capitalized interest) $ 1,497,856 $ 471,121
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
6
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Cadence Resources Corporation ("Cadence") and its wholly owned
subsidiaries (sometimes referred to as "the Company") is an oil and gas
company engaged in the exploration, acquisition, development,
production and sale of natural gas and crude oil. It generates most of
its revenue from the production and sale of natural gas. Cadence is
currently focused on acquiring and developing operating interests in
unconventional drilling programs in the Michigan Antrim Shale and the
New Albany Shale.
On October 31, 2005, Cadence acquired Aurora Energy, Ltd. ("Aurora")
through the merger of a wholly-owned subsidiary with and into Aurora.
As a result of the merger, Aurora became a wholly-owned subsidiary. The
merger has been accounted for as a reverse acquisition using the
purchase method of accounting. Although the merger was structured such
that Aurora became a wholly-owned subsidiary of Cadence, Aurora has
been treated as the acquiring company for accounting purposes under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", due to the following factors: (1) Aurora's stockholders
received the larger share of the voting rights in the merger; (2)
Aurora received the majority of the members of the board of directors;
and (3) Aurora's senior management prior to the merger dominated the
senior management of the combined company.
As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent on
prevailing prices of natural gas and oil. Historically, the energy
markets have been very volatile and it is likely that oil and gas
prices will continue to be subject to wide fluctuations in the future.
A substantial or extended decline in natural gas and oil prices could
have a material adverse effect on the Company's financial position,
results of operations, cash flows and access to capital, and on the
quantities of natural gas and oil reserves that can be economically
produced.
NOTE 2. BASIS OF PRESENTATION
The financial information included herein is unaudited, except the
balance sheet as of December 31, 2005, which has been derived from our
audited Consolidated Financial Statements as of December 31, 2005.
However, such information includes all adjustments (consisting solely
of normal recurring adjustments), which are in the opinion of
management, necessary for a fair statement of the results of operations
for the interim periods. The results of operations for the interim
period are not necessarily indicative of the results to be expected for
an entire year. Certain 2005 amounts have been conformed to the 2006
financial statement presentation.
Certain information, accounting policies and footnote disclosures
normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States have
been condensed or omitted in this Form 10-QSB Report pursuant to
certain rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction
with the audited consolidated financial statements and notes included
in our Annual Report on Form 10-KSB for the year ended December 31,
2005.
As a result of the reverse acquisition discussed in Note 1, the
historical financial statements presented for periods prior to the
acquisition date are the financial statements of Aurora. The operations
of the former Cadence businesses have been included in the financial
statements from the date of acquisition.
7
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
NOTE 3. ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS
On January 1, 2006, the Company adopted FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations, and FASB
Statement No. 143 Accounting for Asset Retirement." This Interpretation
clarifies that the term "conditional asset retirement obligation"
refers to a legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity.
Accordingly, an entity is required to recognize a liability for the
fair value of a conditional asset retirement obligation if the fair
value can be reasonably estimated. The Company estimated the fair value
of the obligation by identifying costs associated with the future
dismantlement and removal of production equipment and facilities and
the restoration and reclamation of a field's surface lands to
ecological condition similar to that existing before oil and gas
extraction began. Prior to January 1, 2006, such amount was not
considered material.
Effective January 1, 2006, the Company recorded a liability of $812,634
(an "asset retirement obligation" or "ARO") on the consolidated balance
sheet and capitalized the asset retirement cost to oil and gas
properties. In general, the amount of an ARO and the costs capitalized
will be equal to the estimated future cost to satisfy the abandonment
obligation using current prices that are escalated by an assumed
inflation factor up to the estimated settlement date, which is then
discounted back to the date that the abandonment obligation was
incurred using an assumed cost of funds for the company. After
recording these amounts, the ARO is accreted to its future estimated
value using the same assumed cost of funds and the additional
capitalized costs are depreciated on a unit-of-production basis within
the related full-cost pool. The accretion expense is included in
interest expense and the depreciation expense is included in
depreciation, depletion and amortization on the condensed consolidated
statement of operations.
The change in the ARO for the three months ended March 31, 2006 is as
follows:
Beginning balance as of January 1, 2006 $ 812,634
Accretion expense 15,237
-----------
Ending balance as of March 31, 2006 $ 827,871
===========
NOTE 4. ACCOUNTING FOR SHARE-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment," (SFAS No. 123R) to account for stock-based
employee compensation. Among other items, SFAS No. 123R eliminates the
use of APB 25 and the intrinsic value method of accounting and requires
companies to recognize the cost of employee services received in
exchange for stock-based awards based on the grant date fair value of
those awards in their financial statements. The Company elected to use
the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options
beginning in the first quarter of adoption. For stock-based awards
granted or modified subsequent to January 1, 2006, compensation
expenses, based on the fair value on the date of grant, will be
recognized in the financial statements over the vesting period. As a
result of this change, our net loss increased by $157,392 and $213,074
was capitalized in oil and gas properties. The impact on future net
income is estimated to be $160,000 recognized over the applicable
requisite service period. Financial statements for 2005 have not been
restated because the Company has elected to implement the change using
the modified prospective method. The cumulative effect of the change is
insignificant and, therefore, no one time adjustment to income is
reported in the 2006 income statement.
8
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
NOTE 5. NEW ACCOUNTING PRONOUCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard 155, Accounting for
Certain Hybrid Financial Instrument ("SFAS 155") which eliminates the
exemption from applying SFAS 133 to interests in securitized financial
assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. SFAS 155 also allows the
election of fair value measurement at acquisition, at issuance, or when
a previously recognized financial instrument is subject to a
re-measurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal
year that begins after September 15, 2006. Management does not expect
the adoption of this standard to have a material impact on its
consolidated financial position, results of operations, or liquidity.
NOTE 6. RISK MANAGEMENT ACTIVITIES
Derivative Instruments
The Company follows SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and associated standards SFAS
No. 137, SFAS No. 138, and SFAS No. 149. These standards establish
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change.
During the three months ended March 31, 2006 and 2005, the Company
had not engaged in any transactions that would be considered
derivative instruments or hedging activities. Effective April 1,
2006, the Company entered into a financial swap contract for 5,000
mcf per day at a fixed price of $8.59 per mcf covering a 12-month
period.
Financial Instruments
The Company's financial instruments consist primarily of cash,
accounts receivable, loans receivable, accounts payable and accrued
expenses and debt. The carrying amounts of such financial
instruments approximate their respective estimated fair value due
to the short-term maturities and approximate market interest rates
of these instruments.
NOTE 7. ACQUISITIONS AND DISPOSITIONS
2006-Hudson Pipelines and Processing Co., L.L.C.
On January 31, 2006, Aurora Antrim North, L.L.C. ("North"), a
wholly-owned subsidiary of Aurora, completed the acquisition of oil and
gas leases, working interests, and interests in related pipelines and
production facilities that are located in the Hudson Township area of
the Michigan Antrim gas play. The interests acquired are collectively
referred to as the Hudson Properties. In addition, the interests in the
related pipelines and production facilities were acquired through a
membership interest in Hudson Pipelines and Processing Co., L.L.C.
("HPPC"). North previously owned a working interest in the properties
and membership interest in HPPC. This acquisition increased North's
working interest in the Hudson Properties from an average of 49% to 96%
and increased the membership interest in HPPC from 48.75% to 90.94%.
9
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
The total purchase price for the Hudson Properties and HPPC was
$27,500,000 subject to certain adjustments provided for in the purchase
agreement. North also acquired an additional 2.5% membership interest
in HPPC effective January 1, 2006 which increased the membership
interest to 93.44%.
With these increases in membership interest in HPPC, effective January
1, 2006 HPPC was consolidated as a subsidiary into the Company's
accompanying financial statements. Converting from the equity method to
consolidation resulted in the inclusion of the following balances and
transactions in the Company's accompanying financial statements.
The following is condensed financial information concerning HPPC:
Balance Sheet as of December 31, 2005:
Current Assets $ 475,906
Pipelines (net) 2,201,946
Other assets 15,592
---------------
$ 2,693,444
===============
Current Liabilities $ 240,086
Members' Equity 2,453,358
---------------
$ 2,693,444
===============
Results of operations for three months ended March 31, 2006:
Transportation Income $ 303,912
Interest Income 580
Costs & Expenses 140,758
---------------
Net Income $ 163,734
===============
Transportation income of $183,157 was offset in an elimination entry
related to inter-company post production expense, thus reducing the
Company's post production costs by $183,157.
2006-Wabash Project
On February 2, 2006, Aurora closed on two Purchase and Sales Agreements
with respect to certain New Albany Shale acreage located in Indiana,
commonly called the Wabash project. Aurora acquired 64,000 acres of oil
and gas leases from Wabash Energy Partners, L.P. for a purchase price
of $11,840,000. Aurora then sold half its interest in a combined 95,000
acre lease position in the Wabash project to New Albany-Indiana, LLC
("New Albany"), an affiliate of Rex Energy Operating Corporation for a
sale price of $10,500,000. Internal funds of Aurora were used to pay
the net transaction cost of these transactions.
2005-New Albany
On January 3, 2005, El Paso Corporation exercised an option to purchase
95% of the working interest in approximately 90,000 acres in the New
Albany Shale. As result of this transaction, Aurora received gross
proceeds in the amount of $7,373,737. After deducting a distribution to
subsidiary members of $805,000 and an additional $1,000,000 set aside
for the subsidiary's share of anticipated future drilling expense,
approximately $5,500,000 of net proceeds was retained by Aurora.
10
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
NOTE 8. DEBT
Short-Term Bank Borrowings
On October 12, 2005, the Company entered into a $7.5 million
revolving line-of-credit agreement with Northwestern Bank for
general corporate purposes. On January 31, 2006, the credit
availability on this line of credit was reduced to $5.0 million
to meet the requirements of the senior secured credit facility.
To secure this line of credit, a Company executive officer
pledged certain shares of Cadence common stock under his
control. Interest is Wall Street Prime with interest payable
monthly in arrears. Principal is payable at the expiration of
the line of credit, October 15, 2006. For the three months ended
March 31, 2006 interest expense was $106,626.
Note Payable - Related Parties
As of March 31, 2006, the Company is indebted under a note
payable to a minority member of Indiana Royalty Trustory,
L.L.C., an affiliated company, in the amount of $69,833. The
interest rate is 10.5% per year. The maturity date is May 1,
2006.
Mortgage Payable
On October 4, 2005, the Company entered into a mortgage loan
from Northwestern Bank in the amount of $2,925,000 for the
purchase of an office condominium and associated interior
improvements. The security for this mortgage is the office
condominium real estate, plus personal guaranties of three of
the Company's officers. The payment schedule is monthly interest
only for the first three months starting on November 1, 2005,
and beginning on February 1, 2006, principal and interest in 32
monthly payments of $21,969. The interest rate is 6.5% per year.
The maturity date is October 1, 2008. For the three months ended
March 31, 2006, interest expense was $52,465.
Mezzanine Financing
On December 8, 2005, the Company entered into an Amended Note
Purchase Agreement, to increase its five-year mezzanine credit
facility with Trust Company of the West ("TCW") from $30 million
to $50 million for the Michigan Antrim drilling program. The
borrower is North. Upon closing of the BNP senior secured credit
facility discussed below, TCW now holds a second lien position
in the Michigan Antrim natural gas properties. The interest rate
is fixed at 11.5% per year, calculated and payable in arrears.
Beginning September 28, 2006 and quarterly thereafter, the
required principal payment is 75% (100% if coverage deficiency
or default occurs) of Adjusted Net Cash Flow ("ANCF") determined
by deducting applicable operating expenses and capital
expenditures from gross revenue. The maturity date is September
30, 2009. The borrowing base is impacted by, among other
factors, the fair value of the Company's natural gas reserves
that are pledged to TCW. Changes in the fair value of the
natural gas reserves are caused by changes in prices for natural
gas, operating expenses and the results of drilling activity. A
significant decline in the fair value of these reserves could
reduce the borrowing base as the Company may not be able to meet
certain facility covenants.
The mezzanine credit facility contains, among other things,
certain covenants relating to restricted payments (as defined),
loans or advances to others, additional indebtedness, and
incurrence of liens; and provides for the maintenance of certain
financial and operating ratios, including current ratio and
specified coverage ratios (collateral coverage and proved
developed producing reserves coverage ratios).
11
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
For the three months ended March 31, 2006, interest expense for
the mezzanine credit facility was $1,200,972 of which $400,774
was capitalized. For the three months ended March 31, 2005
interest expense was $281,111, all of which was capitalized.
Senior Secured Credit Facility
On January 31, 2006, the Company entered into a senior secured
credit facility with BNP Paribas for drilling, development, and
acquisitions as well as other general corporate purposes. The
borrower is North. The initial borrowing base is $40 million
without hedges. As proved reserves are added, this borrowing
base may increase to $50 million without TCW consent, and $100
million with TCW consent. A required semi-annual reserve report
may result in an increase or decrease in credit availability.
The security for this facility is a first lien position in
certain Michigan Antrim assets; a guarantee from Aurora; and a
guarantee from Cadence secured by a pledge of its stock in
Aurora. This facility matures the earlier of January 31, 2010 or
91 days prior to the maturity of the mezzanine credit facility.
This facility provides for borrowings tied to prime rate or
LIBOR plus 1.25 to 2.0% depending on the borrowing base
utilization, as selected by the Company. For the three months
ended March 31, 2006, interest expense was $392,230.
As of March 31, 2006, the Company was not in compliance with the
interest coverage covenant under the terms of this facility. BNP
issued a waiver of the interest coverage ratio and agreed to
amend the terms of the facility to allow the Company to use an
alternative calculation for the remainder of 2006, until there
is adequate revenue history to insure the Company can meet this
covenant.
Maturities of Long-Term Debt
Aggregate maturities of long-term debt at March 31, 2006 are as
follows:
2006 $ 159,241
2007 63,560
2008 2,708,000
2009 75,000,000
--------------
Total $ 77,930,801
==============
The Company estimates that no principal payments on the
mezzanine financing will be required until maturity because of
the level of anticipated capital expenditures and the senior
secured credit facility entered into on January 31, 2006.
NOTE 9. COMMON STOCK
From late December 2005 through early February 2006, the Company
reduced the exercise price of certain outstanding options and warrants
in order to encourage the early exercise of these securities. Each
holder who took advantage of the reduced exercise price was required to
execute a six-month lock up agreement with respect to the shares issued
in the exercise. As a result of the options and warrants exercised
pursuant to this reduced exercise price arrangement, and pursuant to
other exercises of outstanding options, an additional 19,970,422 shares
were issued during the three months ended March 31, 2006 representing
15,375,457 shares issued for cash proceeds of $18,046,400, and
4,594,956 shares issued pursuant to cashless exercises of the
applicable warrants or options. In December 2005 an additional
2,160,000 shares were issued for cash proceeds of $2,916,000.
12
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
NOTE 10. COMMON STOCK OPTIONS
At December 31, 2005, the Company had two stock-based compensation
plans, which are more fully described in Note 18 in the Annual Report
on Form 10-KSB for the year ended December 31, 2005. Prior to 2006, the
Company accounted for those plans under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related Interpretations. No stock-based employee
compensation cost was reflected in previously reported results, as all
options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
On March 16, 2006, the Company's Board of Directors adopted an
incentive stock option plan as part of a larger equity incentive plan
(the "2006 Stock Incentive Plan") that also provides for non-statutory
stock options, stock bonuses and restricted stock awards. The
stockholders are scheduled to vote on the Plan at the annual meeting of
the stockholders scheduled for May 19, 2006. The purpose of the Plan is
to promote the interests of the Company by aligning the interests of
employees (including directors and officers who are employees) of the
Company, consultants and non-employee directors of the Company and to
provide incentives for such persons to exert maximum efforts for the
success of the Company and affiliates. The 2006 Stock Incentive Plan
provides that no more than 8,000,000 shares of stock may be issued in
equity awards under the plan, the exercise price for incentive stock
options shall not be less than 100% of fair market value on the date of
grant, and unless otherwise determined by the Board, the exercise price
for non-statutory stock options shall be not less than 100% of fair
market value on the date of grant. The maximum term of options granted
is 10 years.
Activity related to the three stock option plans (2006 Stock Incentive
Plan, 2004 Equity Incentive Plan and the 1997 Stock Option Plan) was as
follows for three months ended March 31, 2006 and 2005:
2006 2005
----------- -----------
Options outstanding at beginning of period 1,205,000 344,000
Options granted 370,000 --
Options forfeited and other adjustments (80,266) --
Options exercised (84,734) --
----------- -----------
Options outstanding at end of period 1,410,000 344,000
=========== ===========
13
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
A majority of the Company's outstanding stock options have been issued
outside of the incentive stock option plans. Activity with respect to
all stock options (including options granted under the incentive stock
option plans) is presented below for three months ended March 31, 2006
and 2005:
2006 2005
------------------------------ ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- ----------- ----------- -----------
Options outstanding at beginning of 6,448,468 $ 0.72 2,700,664 $ 0.99
period
Options granted 370,000 4.33 --
Options exercised (3,297,926) 0.65 --
Forfeitures and other adjustments 39,734 3.06 -- --
-------------- -----------
Options outstanding at end of period 3,560,276 $ 1.12 2,700,664 $ 0.99
============== ===========
Exercisable at end of period 3,360,276 $ 0.97
==============
Intrinsic Value $15,226,092
The weighted average remaining life by exercise price as of March 31,
2006 is summarized below:
Range of Outstanding Average Exercisable Average
Exercise Prices Shares Life Shares Life
------------------------ --------------- ----------- ------------- -----------
$0.25 - $0.38 967,996 4.1 967,996 4.1
$0.50 - $0.75 1,580,000 2.7 1,580,000 2.7
$1.35 - $1.75 592,000 5.4 592,000 5.4
$2.45 - $2.55 170,280 5.0 80,280 3.4
$3.55 - $4.60 50,000 6.5 -- --
$5.19 - $5.50 200,000 5.2 140,000 5.0
--------------- -------------
3,560,276 3.8 3,360,276 3.7
=============== =============
Starting in 2006, the Company accounts for the fair value of its grants
under the plans in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment". The compensation cost
that has been charged against income for the plans was $157,392 and the
cost capitalized in oil and gas properties was $213,0740 for 2006.
Prior to 2006, the Company applied Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Under APB 25, the exercise
price of the stock options was more than the market value of the shares
at the date of grant and, accordingly, no compensation cost has been
recognized in the condensed consolidated financial statements.
14
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
The following table illustrates the effect on net loss and loss per
share as if the Company had applied the fair value recognition
provisions of SFAS 123 during the three months ended March 31, 2005:
2005
----------
Net loss available to common shares $ 413,145
Deduct total stock-based compensation expense determined under
fair value based method for all awards, net of relaxed tax effects --
----------
Pro forma net loss $ 413,145
==========
2005
----------
Loss per share - basic and diluted
As reported $ (0.01)
Pro forma $ (0.01)
The weighted average assumptions used in the Black-Scholes
option-pricing model used to determine fair value were as follows:
2006 2005
---------- ----------
Risk-free interest rate 4% --
Expected years until exercise 10 --
Expected stock volatility 41% --
Dividend Yield 0% --
NOTE 11. COMMON STOCK WARRANTS
The following table provides information related to stock warrant
activity for the three months ended March 31, 2006:
Number of Shares
Underlying Warrants
-----------------------
Outstanding at beginning of the period 19,697,500
Granted --
Exercised under early exercise program (14,395,319)
Exercised (2,277,177)
Forfeited (945,504)
---------
Outstanding at the end of the period 2,079,500
=========
As of March 31, 2006, these common stock warrants had an average
remaining contractual life of 2.64 years and weighted average exercise
price per share of $1.71.
15
CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATD FINANCIAL STATEMENTS
March 31, 2006 (continued)
NOTE 12. NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding for the period. The computation of diluted
net income (loss) per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that would then share in the earnings of the Company.
During the three months ended March 31, 2006 and 2005, stock options
and convertible preferred stock were excluded in the computation of
diluted loss per share because their effect was anti-dilutive.
NOTE 13. SUBSEQUENT EVENT
Pending Acquisition
On May 9, 2006, North signed a letter of intent with a third party to
acquire oil and gas leases, working interests, and interests in related
pipelines and production facilities that are located in the Michigan
Antrim. This encompasses two projects that are still in development,
but already are generating some production. North has until June 15,
2006 to conduct due diligence on these assets and the acquisition is
contingent on the bank group review and approval. North contemplates
closing the transaction on or before June 30, 2006.
16
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 contained in our 2005 Annual Report on Form
10-KSB, as well as the consolidated financial statement and notes hereto
included in this quarterly report on Form 10-QSB. 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. For additional risk factors affecting our business, see the
information in Item 1A in our 2005 Annual Report on Form 10-KSB and subsequent
filings.
OVERVIEW
We are an independent oil and gas company engaged in the exploration,
acquisition, development, production and sale of natural gas and crude oil. We
generate most of our revenues from the production and sale of natural gas. We
are currently focused on acquiring and developing operating interests in
unconventional drilling programs in the Michigan Antrim Shale and the New Albany
Shale.
As an independent oil and gas producer, our revenue, profitability and
future rate of growth are substantially dependent on prevailing prices of
natural gas and oil. Historically, the energy markets have been very volatile
and it is likely that oil and gas prices will continue to be subject to wide
fluctuations in the future. A substantial or extended decline in natural gas and
oil prices could have a material adverse effect on the our financial position,
results of operations, cash flows and access to capital, and on the quantities
of natural gas and oil reserves that can be economically produced.
On October 31, 2005, Cadence acquired Aurora through the merger of a
wholly-owned subsidiary with and into Aurora. As a result of the merger, Aurora
became a wholly-owned subsidiary. The merger has been accounted for as a reverse
acquisition using the purchase method of accounting. Although the merger was
structured such that Aurora became a wholly-owned subsidiary of Cadence, Aurora
has been treated as the acquiring company for accounting purposes under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". As a result, the historical financial statements presented for
periods prior to the acquisition date are the financial statements of Aurora.
The operations of the former Cadence businesses have been included in the
financial statements from the date of acquisition.
17
RESULTS OF OPERATION
Operating Statistics
The following table represents significant operating statistics for the
following periods:
Three Months Ended March 31,
-------------------------------
2006 2005
--------------- ------------
Acreage Acquired
Michigan Antrim Shale net acres 7,125 (9,573)
New Albany Shale net acres 102,920 (131,411)
Other net acres 204 435
Total Acreage Held
Michigan Antrim Shale net acres 85,288 45,965
New Albany Shale net acres 374,810 83,076
Other net acres 4,435 3,111
Number of Wells Drilled
Michigan - net wells producing 0.92 1.90
Michigan - net wells waiting hookup 8.73 4.37
Indiana - net wells producing -- --
Indiana - net wells waiting hookup 1.69 0.10
Total Number of Producing Wells
Net producing 131.28 30.63
Net waiting hookup 54.89 25.36
Production:
Natural gas (mcfs) 594,346 53,368
Crude oil (bbls) 6,602 1,452
Average daily production:
Natural gas (mcfs) 6,604 592
Crude oil (bbls) 73 16
Average sales prices
Natural gas (mcfs) $ 8.49 $ 5.83
Crude oil (bbls) 56.27 46.42
Total revenue $5,582,888 $ 690,203
Production revenue
Natural gas $5,045,383 $ 311,221
Crude oil 371,483 67,400
Production expense per mcfe $ 2.90 $ 4.42
Number of employees 44 27
18
Revenues
We generate revenue primarily from the production and sale of oil and
gas. Total revenues for the three months ended March 31, 2006 were $4,892,685
higher than the total revenues for the three months ended March 31, 2005, a 709%
increase. Production revenues for the three months ended March 31, 2006
increased by approximately $5,038,245 from the three months ended March 31,
2005, a 1,331% increase. This increase was due to the ramping up of production
from new wells put on line during 2005 and early 2006, acquisition of additional
working interest in Hudson properties and the producing assets from the Cadence
reverse merger. In addition, favorable market prices of gas and oil were
realized.
Our oil and gas product sales for the three months ended March 31, 2006
and March 31, 2005 were generated primarily from the Hudson properties located
in Michigan. Our production revenue in the first quarter of 2006 was generated
from the sale of 594,346 net mcf of natural gas at an average price of $8.49 per
mcf from wells in the Michigan Antrim and 6,604 barrels of oil at an average
price of $56.27 per barrel primarily from non-operated working interests held by
the Company prior to the reverse merger in wells located in Michigan, Texas,
Kansas and New Mexico.
Expenses
Our expenses break into six general categories: General and
Administrative; Pipeline Operating Expenses, Production and Lease Operating;
Depletion, Depreciation and Amortization; Interest Expense; and Taxes.
Our general and administrative expenses include officer and employee
compensation, rent, travel, audit, tax and legal fees, office supplies,
utilities, insurance, other consulting fees and office related expense. Expenses
from oil and gas operations include services related to producing oil and gas,
such as severance taxes, post production costs (including transportation), and
lease operating expenses.
Our general and administrative expenses for the three months ended
March 31, 2006 increased $1,067,646, or 214%, from the three months ended March
31, 2005 due to the increased consulting fees associated with legal and
accounting services related to SEC filings as well as increased staffing to
accommodate our continued growth in land acquisitions, drilling programs and to
meet SEC filing requirements. In addition, stock-based compensation of $157,392
was recorded due to the adoption of FASB 123R.
Production and lease operating expenses for the three months ended
March 31, 2006 increased $1,562,946 compared to the three months ended March 31,
2005. This increase was due to new wells being added during the first quarter of
2006 as well as additional producing wells acquired during 2005. This increase
of 570% in production costs is offset by the 1331% increase in related
production revenue from the first quarter of 2005 to the first quarter of 2006.
Depletion, depreciation and amortization expense for the three months
ended March 31, 2006 increased $1,566,216 from the three months ended March 31,
2005, or 2,678%, due to the increased production assets of approximately $61.0
million as wells that were placed into production and costs transferred from
unproven properties to proven properties. In addition, there was an increase in
depletion rates associated with the producing assets associated with the
Cadence's reverse merger, since these assets relate to reserves with shorter
lives than the Michigan Antrim Shale.
Interest expense for the three months ended March 31, 2006 increased
$1,346,149, or 4,078%, from the three months ended March 31, 2005. This increase
is due to significantly higher utilization of debt to continue our growth
pattern of acquiring and developing operating interests in unconventional
drilling programs in the Michigan Antrim Shale and the New Albany Shale. This
included a $30 million increase in borrowing under the mezzanine financing and
additional $35 million in borrowing under the new senior credit facility.
Taxes recorded in the three months ended March 31, 2006 and 2005 were
$1,667 and $238,170, respectively. This 99% decrease resulted from a state
income tax accrual computed with information available as of March 31, 2005 and
subsequently reversed at December 31, 2005 based upon final tax review. The
accrual was related to the January 2005 sale of 95% working interest to El Paso
in certain New Albany Shale acreage.
19
CAPITAL RESOURCES AND LIQUIDITY
We will fund our lease acquisition and drilling and development plan,
using a combination of debt, existing cash balances, internally generated cash
flows from natural gas production, and possible proceeds from the sale of
equity. We do not expect the combination of our current capital resources to be
sufficient to fully execute our total 2006 budgeted capital requirements. We are
currently in the process of determining the options available to fund our total
budgeted capital expenditures. The options being evaluated include increased
debt financing and the issuance of equity securities.
Our drilling and development budget for 2006 is approximately $45
million. We plan to continue our Antrim drilling program with a goal of
participating in the drilling of over 150 gross wells, 75 to 100 net wells
(depending on our average working interest) during 2006. We also plan to drill
and test the New Albany Shale project in 2006, with a goal of participating in
the drilling of over 50 gross wells, 25 net wells during 2006. In addition to
our drilling and development program, during 2006 we plan to continue securing
additional acreage in both the Michigan Antrim Shale and the New Albany Shale.
Our budget for lease acquisitions in 2006 is $15 million which is comparable to
lease acquisitions in 2005.
Certain factors such as the increase in production revenues and our
ability to secure equity will impact our ability to complete our 2006 drilling
program. Production revenues are impacted by commodity prices that are subject
to fluctuation. This may impact our ability to both secure additional debt and
to raise capital through the issuance of securities. Natural gas prices were
favorable in 2004 and 2005 and industry analysts expect them to remain strong in
the foreseeable future. If our revenues were to decrease significantly as a
result of unexpected declines in price and/or production volumes, we could be
forced to curtail our drilling and development activities.
Our ability to access equity will depend upon the conditions in the
capital markets and other factors including the price of natural gas and
investment climate for energy companies. We may consider from time to time the
issuance of equity and use the proceeds to refinance current indebtedness or
additional acquisitions or investments in assets or businesses that complement
our existing assets and businesses. Acquisitions, if any, may also be financed
through existing cash on hand or bank borrowings.
There is no assurance that any desired increase in available credit
will be realized, nor is there any assurance that desired sources of equity
financing will be available in 2006. If capital resources are inadequate or
unavailable, we may curtail acquisition, development and other activities or in
severe cases, be forced to sell some of our assets on an untimely or unfavorable
basis.
Financing Arrangements
Borrowings under the TCW credit facility as of March 31, 2006 were $40
million with available borrowing capacity of $10 million. The borrower is Aurora
Antrim North, L.L.C., a wholly owned subsidiary of Aurora. TCW holds a second
lien position in our Michigan Antrim natural gas properties. The interest rate
is fixed at 11.5% per year, calculated and payable in arrears. Additional
consideration includes a 4% overriding royalty interest net to our interest in
all our existing oil and gas leases in Alcona, Alpena, Charlevoix, Cheboygan,
Montmorency and Otsego Counties in the State of Michigan.
The TCW borrowing base is subject to semi-annual re-determination and
certain other re-determinations based upon several factors. The borrowing base
is impacted by, among other factors, the fair value of our gas reserves that are
pledged to TCW. Changes in the fair value of our oil and gas reserves are caused
by changes in prices for natural gas and crude oil, operating expenses and the
results of drilling activity. A significant decline in the fair value of these
reserves could reduce our borrowing base as we may not be able to meet certain
facility covenants. The TCW loan agreement prohibits the declaration or payment
of dividends and contains certain covenants. As of March 31, 2006, we were in
compliance with all of the applicable covenants.
20
On January 31, 2006, we entered into a $100 million senior secured
credit facility with BNP Paribas ("BNP"). The borrower is Aurora Antrim North,
L.L.C. The initial borrowing base under this facility is $40 million. As proved
reserves are added, this borrowing base may increase to $50 million without TCW
consent, and $100 million with TCW consent. A required semi-annual reserve
report may result in an increase or decrease in credit availability. At the
closing, we drew $30 million in loan proceeds, most of which were used to fund
the acquisition of the Hudson project and related financing costs. At March 31,
2006, our total borrowings under this facility were $35.0 million with available
borrowing capacity of $15 million. The security for this facility is a first
lien position in certain Michigan Antrim assets; a guarantee from Aurora; and a
guarantee from Cadence secured by a pledge of its stock in Aurora.
Our interest rate alternatives on the BNP credit facility are either
(i) prime or (ii) LIBOR plus 1.25-2.0% depending upon how much of the credit
availability has been advanced. Interest payments on prime loans are paid
quarterly in arrears on the last day of March, June, September and December.
Interest payments on LIBOR loans are paid in arrears on the last date of the
term of the LIBOR period selected, but no less frequently than every three
months. Principal is payable at maturity with the maturity date defined as the
earlier of January 31, 2010 or 91 days prior to the maturity of the TCW Second
Lien Notes, which are currently due on September 30, 2009 (assuming the TCW
Second Lien Notes are not prepaid). As of March 31, 2006, BNP issued a waiver of
the interest coverage ratio as we were not in compliance with this ratio.
Further BNP agreed to amend the terms of the facility to allow us to use an
alternative calculation for the remainder of 2006, so that there is adequate
revenue history to compute this ratio.
In 2005 we established a $7.5 million revolving line of credit with
Northwestern Bank for general corporate purposes. On January 31, 2006, the
credit availability on this line of credit was reduced to $5 million to meet the
requirements of the BNP facility. To secure this line of credit, one of our
officers pledged certain of the shares of Cadence common stock under his
control. Interest is Wall Street Prime (initially 7.250% per year). Interest is
payable monthly in arrears. Principal is payable at maturity, October 15, 2006.
On October 4, 2005 we secured a loan in the amount of $2,925,000 for
the purchase of an office condominium. The security for this loan is a mortgage
on the office condominium real estate, plus personal guarantees of three of our
officers. The interest rate is 6.5%. Payments began February 1, 2006, with 32
monthly payments of principal and interest in the amount of $21,969. The
maturity date is October 1, 2008.
From late December 2005 through early February 2006, the Company
reduced the exercise price of certain outstanding options and warrants in order
to encourage the early exercise of these securities. Each holder who took
advantage of the reduced exercise price was required to execute a six-month lock
up agreement with respect to the shares issued in the exercise. As a result of
the options and warrants exercised pursuant to this reduced exercise price
arrangement, and pursuant to other exercises of outstanding options, an
additional 19,970,422 shares were issued during the three months ended March 31,
2006 representing 15,375,457 shares issued for cash proceeds of $18,046,400, and
4,594,956 shares issued pursuant to cashless exercises of the applicable
warrants or options. In December 2005 an additional 2,160,000 shares were issued
for cash proceeds of $2,916,000.
As of March 31, 2006 and December 31, 2005, our total capitalization
was as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Short term bank borrowings $ 4,910,000 $ 6,210,000
Obligations under capital lease 8,933 11,085
Related party notes payable 69,833 69,833
Mortgage payable 2,852,035 2,865,477
Mezzanine financing 40,000,000 40,000,000
Senior secured credit facility 35,000,000 --
------------ ------------
Total Debt 82,840,801 49,156,395
============ ============
Stockholders' equity 74,143,611 56,625,927
------------ ------------
Total Capitalization $156,984,412 $105,782,322
============ ============
21
Cash Flows Activities
We generated $270,118 in net cash from operations in the first quarter
of 2006, and $(1,122.491) in net cash used from operations in the first quarter
of 2005. The increase from 2006 from 2005 is the due to increased revenues
generated from increased production and gas prices as discussed above in the
Results of Operations. We expect this revenue trend to continue into the second
quarter of 2006 as our drilling program ramps up in the Michigan Antrim.
Cash flows provided by investing activities for the first quarter of
2006 and 2005 include $10,500,000 and $7,373,737, respectively of proceeds
received from sales of working interest and project interests pursuant to joint
ventures with Rex Energy Operating Corporation and El Paso Corporation,
respectively.
Capital expenditures for our development activities in the first
quarter of 2006 were focused in two areas, with approximately $45,532,348 used
for drilling in the Michigan Antrim Shale, and $5,614,957 used to acquire leases
located primarily in Michigan and Indiana. This activity in the first quarter of
2006 represents an 886% increase in expenditures from the first quarter of 2005.
Capital expenditures for our development activities in the first quarter of 2005
were focused in two areas, with approximately $ 3,661,572 used for drilling in
the Michigan Antrim Shale, and $2,113,650 used to acquire leases located
primarily in Michigan and Indiana.
Cash flows provided by financing activities for the first quarter of
2006 include $32,613,387 senior lending borrowing, net of $2,386,613 financing
costs, and $18,046,400 of proceeds received from exercise of common stock
options and warrants which was offset by pay-down of $1,300,000 in short-term
bank borrowings. Cash flows provided by financing activities for the first
quarter of 2005 include $11,025,000 of proceeds received from sales of common
stock which was offset by pay-off of $2,948,698 of certain related-party notes
and distributions of $805,000 to minority interest members for their
proportionate share of the El Paso sales proceeds.
RECENT ACCOUNTING PRONOUNCEMENTS
Reference is made to Note 5 to the Financial Statements included
elsewhere in this filing for a description of certain recently issued accounting
pronouncements. We do not expect any of such recently issued accounting
pronouncements to have a material effect on our consolidated financial position
or results of operations.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The reported
financial results and disclosures were determined using the significant
accounting policies, practices and estimates described in the notes to the
financial statements. We believe that the reported financial results are
reliable and the ultimate actual results will not differ materially from those
reported. Uncertainties associated with the methods, assumptions and estimates
underlying our critical accounting measurements are discussed below.
Oil and Gas Properties
We employ the full cost method of accounting for our oil and gas
properties. Under the full cost method all costs related to the acquisition,
exploration and development of oil and gas properties, including directly
related overhead costs, are capitalized and accumulated, into a single cost
center referred to as a full cost pool. Gain or loss on the sale or other
disposition of oil and gas properties is applied to adjust the capitalized costs
in the full cost pool with a gain or loss recognized, unless the adjustment
would significantly alter the relationship between capitalized costs and proven
reserves of oil and gas, in which case the gain or loss is recognized in income.
22
Oil and Gas Reserves
Proved oil and gas reserves, as defined by SEC Regulation S-X Rule
4-10(a)(2), (3) and (4), are the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions including prices and costs as
of the date the estimate is made. The price used in the reserve report to
calculate value was $9.89 per mcf, the price at which we sold our gas on
December 31, 2005.
Our estimates of proved reserves are made using available geological
and reservoir data as well as production performance data. These estimates made
by our engineers are reviewed annually and revised, either upward or downward,
as warranted by additional data. Revisions are necessary due to changes in,
among other things reservoir performance, prices, economic conditions and
governmental restrictions. Decreases in prices, for example, may cause a
reduction in some proved reserves due to reaching limits sooner. A material
change in the estimated volumes of reserves could have an impact on the
depletion rate calculation reported in the financial statements.
Ceiling Test
Companies that use the full cost method of accounting for oil and gas
properties are required to perform the ceiling test each quarter. The ceiling is
an impairment test performed as prescribed by SEC Regulation S-X Rule 4-10. The
test determines a limit, or ceiling, on the book value of oil and gas
properties. That limit is the after-tax value of the future net cash flows from
proved natural gas and crude oil reserves discounted at 10% per annum. This
ceiling is compared to the net book value of the oil and gas properties and
reduced by the related net deferred income tax liability and asset retirement
obligations. If the net book value reduced by the related net deferred income
tax liability and asset retirement obligations exceeds the ceiling, impairment
or non-cash write down is required. A charge to income for impairment could give
us a significant loss for a particular period. However, future depletion expense
would be reduced.
The ceiling test is affected by a decrease in net cash flow from
reserves due to higher operating or capital costs or reduction in market prices
for natural gas and crude oil. These changes can reduce the amount of
economically producible reserves. Based upon the December 31, 2005 reserve
reports, we were not required to record a charge for impairment during the three
months ended March 31, 2006.
Income Taxes
Income taxes are provided for based upon the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." Under this approach, deferred income taxes are
recorded to reflect the tax consequences in future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts at
each year-end. A valuation allowance is recorded against deferred tax assets if
we do not believe that we have met the "more likely than not" standard imposed
by SFAS No. 109 to allow recognition of such an asset.
At December 31, 2005, we had net deferred tax assets calculated at an
expected rate of 34% of approximately $10,145,800. Because we cannot determine
to what extent we will realize the benefit of the net deferred tax asset, a
valuation allowance equal to the net deferred tax asset has not been reflected
in our consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in our periodic
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management to allow timely decisions
regarding required disclosure.
Our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934,
as amended) as of March 31, 2006 and have concluded that our disclosure controls
and procedures were not effective because of a material weakness discussed
below. Notwithstanding the material weakness discussed below, our management has
concluded that the condensed consolidated financial statements included in this
Quarterly Report on Form 10-QSB fairly present in all material respects our
financial condition, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles.
Changes in Internal Controls Over Financial Reporting
In the course of reviewing our financial statements for the three
months ended March 31, 2006, our auditors noted that we had not given accounting
recognition to the stock option grants authorized and approved in the March 16,
2006 Unanimous Written Consent of Directors. These grants were for a total of
370,000 shares, of which the grants for 140,000 shares vested immediately,
requiring immediate recognition of compensation for those shares. These
financial statements have been modified to account for all of the stock option
grants in accordance with the applicable provisions of Statement of Financial
Accounting Standards (SFAS) No. 123(R).
Our CEO and CFO have concluded that the failure of responsible parties
to communicate on a timely basis the granting of these stock options to our
employees who are responsible for determining and recording the accounting
implications of these option grants is a material weakness. Under applicable
professional standards, a material weakness is defined as a significant
deficiency that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected.
To remediate this material weakness, we have added staff responsible
for tracking our equity and equity grants, and have put interim procedures in
place to improve the communication processes. We are developing more permanent
policies and procedures to remediate this weakness that we plan to implement
during the second quarter 2006.
Our management team, including our CEO and CFO, do not expect that our
internal controls will prevent or detect all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met with
respect to financial statement preparation and presentation. In addition, any
evaluation of the effectiveness of controls is subject to risks that those
internal controls may become inadequate in future periods because of changes in
business conditions, or because the degree of compliance with the policies or
procedures deteriorates.
As discussed above, there have been changes in our internal control
over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Our management team continues to review our
internal controls and procedures and the effectiveness of these controls.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Our management is unaware of any threatened or pending material legal
claims or procedures of a non-routine nature.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
During the period from January 1, 2006 through March 31, 2006, we
issued 19,993,756 shares of our common stock to various holders of our
outstanding warrants and options. With respect to some of these warrant and
option exercises, we reduced the exercise price for a limited period of time in
order to encourage their early exercise. Each holder who took advantage of the
reduced exercise price was required to pay the exercise price in cash and
execute a six-month lock-up agreement with respect to the shares issued in the
exercise. In connection with certain of these warrant exercises, we paid a
commission to Sunrise Securities Corporation, an affiliate of Nathan Low (a
shareholder of Cadence) in the amount of $1,534,697. This entire amount was used
by Mr. Low to exercise certain of our outstanding warrants, which are included
in the foregoing total of shares issued in warrant and option exercises. Some of
the warrant and option exercises were paid for with cash, and some were
exercised using a net issue election pursuant to which some option shares were
forfeited to pay for the shares issued.
Of the 19,993,756 shares issued, 5,756,149 shares were registered for
issuance by the Company in the S-4 Registration Statement declared effective by
the SEC on September 22, 2005, and the remaining 14,237,607 shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
We did not repurchase any of our outstanding equity securities during
the quarter ending March 31, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders was held on February 9, 2006. The
following matters were voted upon.
o Change the name of the corporation from Cadence Resources
Corporation to Aurora Oil & Gas Corporation, to be effective on
the date the corporation is admitted for listing to the American
Stock Exchange.
Votes were cast as follows: Favor - 35,291,688
Opposed - 619
Abstain - 8,359
Non votes - 638,150
In anticipation of the listing on the American Stock Exchange, the
name change has been submitted for filing with the State of Utah.
o Ratify Article II, Section 6 of the existing Bylaws permitting
stockholders to take action in writing without a formal meeting.
Votes were cast as follows: Favor - 29,690,972
Opposed - 24,516
Abstain - 30,315
Non votes - 1,193,013
o Increase the number of authorized shares of common stock from
100,000,000 to 250,000,000 shares.
Votes were cast as follows: Favor - 35,588,388
Opposed - 145,253
Abstain - 205,174
Non votes - 1
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
3.1 Restated Articles of Incorporation of Cadence Resources
Corporation. (Filed as an exhibit to our Form 10-KSB for the
fiscal year ended December 31, 2005, filed with the SEC on
March 31, 2006.)
3.2 Bylaws of Cadence Resources Corporation (Filed as an exhibit
to our Current Report on Form 8-K, filed with the SEC on
December 9, 2005).
4.1 Articles of Amendment to Articles of Incorporation, relating
to the Class A Preferred Stock (Filed as an exhibit to our
Form 10-KSB for the fiscal year ended September 30, 2003,
filed with the SEC on January 13, 2004.)
31.1* Rule 13a-14(a) Certification of Principal Executive Officer.
31.2* Rule 13a-14(a) Certification of Principal Financial and
Accounting Officer.
32.1* Section 1350 Certification of Principal Executive Officer.
32.2* Section 1350 Certification of Principal Financial and
Accounting Officer.
* Filed with this report.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this amended report to be signed on its behalf by the
undersigned duly authorized.
AURORA OIL & GAS CORPORATION
Date: October 31, 2006 By: /s/ William W. Deneau
------------------------------------------
William W. Deneau, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ronald E. Huff
------------------------------------------
Ronald E. Huff, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
26