UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended June 30, 2010
OR
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____________ to _________________
Commission
File Number 000-30563
DELTA
MUTUAL, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
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14-1818394
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
|
incorporation
or organization)
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Identification
No.)
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14362
N. Frank Lloyd Wright Blvd., Suite 1103, Scottsdale, AZ
|
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85260
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|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address and Former Fiscal Year, if changed since last
report)
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
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. (Check
One):
|
Large
accelerated filer
¨
|
|
Accelerated
filer
¨
|
|
|
|
|
|
Non-accelerated
filer
¨
|
|
Smaller
reporting company
x
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
The
number of shares outstanding the issuer's common stock, par value $.0001 per
share, was 27,699,580 as of August 13, 2010.
DELTA
MUTUAL, INC.
INDEX
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Page
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Part
I. Financial Information
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3
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Item
1. Financial Statements.
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3
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Consolidated
Balance Sheets as of June 30, 2010 and as of December 31, 2009
(Restated) (unaudited)
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4
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Consolidated
Statements of Operations for the Six and Three Months Ended June 30, 2010
and 2009 (unaudited)
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5
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Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
(unaudited)
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6-7
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Notes
to Unaudited Consolidated Financial Statements
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8
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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17
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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20
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Item
4T.Controls and Procedures.
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21
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Part
II. Other Information
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21
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Item
1. Legal Proceedings.
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21
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Item
6. Exhibits.
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22
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Signatures
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22
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PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Certain
information and footnote disclosures required under accounting principles
generally accepted in the United States of America have been condensed or
omitted from the following consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. It is suggested
that the following consolidated financial statements be read in conjunction with
the year-end consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
The
results of operations for the six and three months ended June 30, 2010 and 2009
are not necessarily indicative of the results for the entire fiscal year or for
any other period.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
|
June
30,
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December 31,
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|
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2010
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2009
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(Restated)
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ASSETS
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Current
Assets:
|
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|
|
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Cash
|
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$
|
296,549
|
|
|
$
|
102,008
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|
|
Advances
and other receivables
|
|
|
7,926
|
|
|
|
137,776
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|
Total
current assets
|
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|
304,475
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|
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|
239,784
|
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|
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|
|
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Property
and equipment:
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Oil
and gas properties, full cost method of accounting:
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Proved
undeveloped
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688,475
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-
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Unproved
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876,806
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-
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Lithium
production properties
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30,000
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-
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Furniture
and equipment
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|
-
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14,084
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1,595,281
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14,084
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Less
accumulated depreciation, depletion and amortization
|
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|
-
|
|
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(14,084
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)
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|
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|
1,595,281
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|
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-
|
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Investments
in non-consolidating entities
|
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|
225,000
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1,470,714
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Other
assets
|
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6,368
|
|
|
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39,508
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|
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|
|
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TOTAL
ASSETS
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$
|
2,131,124
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|
$
|
1,750,005
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
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Current
Liabilities:
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|
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Accounts
payable
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$
|
124,198
|
|
|
$
|
134,192
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Accrued
expenses
|
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|
297,692
|
|
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267,029
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Notes
payable
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805,605
|
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805,605
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Total
Current Liabilities
|
|
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1,227,495
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|
|
1,206,826
|
|
|
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|
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Stockholders’
Equity:
|
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Preferred
stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and
outstanding at June 30, 2010 and December 31, 2009,
respectively
|
|
|
-
|
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-
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Common
stock $0.0001 par value - authorized 250,000,000 shares; 27,436,663 and
24,211,275 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively
|
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|
2,743
|
|
|
|
2,421
|
|
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Additional
paid-in-capital
|
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|
4,981,440
|
|
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|
4,137,095
|
|
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Accumulated
Deficit
|
|
|
(4,080,554
|
)
|
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|
(3,596,337
|
)
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|
Total
Stockholders' Equity
|
|
|
903,629
|
|
|
|
543,179
|
)
|
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
$
|
2,131,124
|
|
|
$
|
1,750,005
|
|
See Notes
to Unaudited Consolidated Financial Statements
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
Six Months Ended June 30,
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Three Months Ended June 30,
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2010
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2009
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2010
|
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2009
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Revenue:
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$
|
-
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$
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-
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$
|
-
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$
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-
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Costs
and expenses:
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General
and administrative expenses
|
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|
456,240
|
|
|
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734,943
|
|
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180,846
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444,803
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss
from continuing operations
|
|
|
(456,240
|
)
|
|
|
(734,943
|
)
|
|
|
(180,846
|
)
|
|
|
(444,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign
exchange gain (loss)
|
|
|
(4,813
|
)
|
|
|
|
|
|
|
(4,813
|
)
|
|
|
|
|
|
Interest
expense, net
|
|
|
(23,163
|
)
|
|
|
(20,742
|
|
|
|
(12,296
|
)
|
|
|
(10,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision for income
taxes
|
|
|
(484,217
|
)
|
|
|
(755,685
|
)
|
|
|
(197,956
|
)
|
|
|
(455,574
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
(484,217
|
)
|
|
|
(755,685
|
)
|
|
|
(197,956
|
)
|
|
|
(455,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) of disposal of Far East operations and South American Hedge
Fund operations, and United States construction technology
activities
|
|
|
-
|
|
|
|
(6,452
|
)
|
|
|
-
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
loss
|
|
$
|
(484,217
|
)
|
|
$
|
(762,137
|
)
|
|
$
|
(197,956
|
)
|
|
$
|
(455,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
$
|
-
|
|
|
$
|
(0.03
|
)
|
|
$
|
-
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic and diluted
|
|
|
26,081,117
|
|
|
|
22,576,986
|
|
|
|
27,233,293
|
|
|
|
22,659,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.02
|
)
|
|
$
|
(762,137
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(455,513
|
)
|
See Notes to Unaudited Consolidated Financial
Statements
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(484,217
|
)
|
|
$
|
(762,137
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
-
|
|
|
|
339
|
|
|
Issuance
of common stock for services
|
|
|
75,000
|
|
|
|
120,000
|
)
|
|
Compensatory
element of option issuance
|
|
|
-
|
|
|
|
393,490
|
|
|
Changes
in operating assets and liabilities
|
|
|
183,159
|
|
|
|
(72,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(225,558
|
)
|
|
|
(320,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties exploration and development costs
|
|
|
(319,568
|
)
|
|
|
-
|
|
|
Investment
in lithium production properties
|
|
|
(30,000
|
)
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(349,568
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from loans
|
|
|
-
|
|
|
|
311,361
|
|
|
Proceeds
from sale of common stock
|
|
|
769,667
|
|
|
|
-
|
|
|
Contribution
from stockholder
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
769,667
|
|
|
|
310,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
194,541
|
|
|
|
(10,131
|
)
|
|
Cash
- Beginning of period
|
|
|
102,008
|
|
|
|
13,957
|
|
|
Cash
- End of period
|
|
$
|
296,549
|
|
|
$
|
3,826
|
|
See Notes
to Unaudited Consolidated Financial Statements
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Supplementary
information:
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities consists of:
|
|
|
|
|
|
|
|
(Increase)
decrease in other prepaid expenses
|
|
$
|
-
|
|
|
$
|
(5,718
|
|
|
(Increase)
decrease in advances and other receivables
|
|
|
129,850
|
|
|
|
|
|
|
(Increase)
decrease in other assets
|
|
|
33,140
|
|
|
|
|
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
20,669
|
|
|
|
(66,466
|
)
|
|
|
|
$
|
183,159
|
|
|
$
|
(72,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
$
|
75,000
|
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Unaudited Consolidated Financial Statements
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Six Months Ended June 30, 2010 and 2009
1. BASIS
OF PRESENTATION
The
accounting policies followed by Delta Mutual, Inc. and its subsidiaries (“Delta”
or the “Company”) are set forth in the notes to the Company’s audited
consolidated financial statements in the Annual Report on Form 10-K filed for
the year ended December 31, 2009. Such policies have been continued without
change and all material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. Although management believes the unaudited interim related disclosures
in these consolidated financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in annual audited consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. The condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
audited financial statements and the notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009.
In the
opinion of management, all adjustments, including normal recurring adjustments
necessary to present fairly the financial position of the Company with respect
to the interim financial statements and the results of operations for the
interim period ended June 30, 2010, have been included.
The
results of operations and the cash flows for the periods ended June 30, 2010 are
not necessarily indicative of the results to be expected for the full
year.
PRINCIPLES OF
CONSOLIDATION
The
Company's financial statements include the accounts of all majority-owned
subsidiaries where its ownership is more than 50 percent of the common stock.
All significant intercompany amounts have been eliminated.
As of
June 30, 2010, the Company also held a 45% ownership interest in
Delta–Envirotech, Inc., which is engaged in certain business opportunities in
the Middle East related to environmental remediation and other related projects.
These activities are managed and carried out by the majority stockholders of
Delta-Envirotech, Inc., (“Envirotech”), Hi-Tech Consulting and Construction,
Inc. and an unrelated individual. Envirotech has entered into strategic alliance
agreements with several United States-based entities with technologies and
products in the environmental field to support its activities. Envirotech was
consolidated as the variable interest entity (VIE) up until September 30, 2009.
As of December 31, 2009 management determined that Delta-Envirotech, Inc. does
not meet the criteria to be considered a VIE for the year ending December 31,
2009 as the Company does not exercise significant influence over the operations
or financial results of Envirotech. Accordingly, the results of operations and
of financial data have been deconsolidated from the consolidated financial
statements of the Company effective December 31, 2009.
GOING
CONCERN
The
consolidated financial statements for the period ended June 30, 2010 have been
prepared on a going concern basis which contemplates the realization of assets
and settlement of liabilities and commitments in the normal course of business.
The Company has a past history of recurring losses from operations and has an
accumulated deficit of $4,080,554 and working capital deficiency of $923,021 as
of June 30, 2010. Additionally, the Company will require additional funding to
execute its future strategic business plan. Successful business operations and
its transition to attaining profitability is dependent upon obtaining additional
financing and achieving a level of revenue adequate to support its cost
structure.
The
Company's business is subject to the risks of its oil and gas investments in
South America. The likelihood of success of the Company must be considered in
light of the expenses, difficulties, delays and unanticipated challenges
encountered in connection with the operations of the oil and gas concession in
Argentina. There is no assurance that the Company will ultimately achieve a
profitable level of operations.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
USE OF
ESTIMATES
The
preparation of the financial statements requires the Company to make estimates
and judgments that affect the reported amount of assets, liabilities, and
expenses, and related disclosures of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
oil and gas properties, intangible assets, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. In the opinion of management, all normal recurring adjustments
considered necessary for a fair presentation have been included in these
financial statements. Certain amounts for prior periods have been reclassified
to conform to the current presentation.
Management
believes that it is reasonably possible that the following material estimates
affecting the financial statements could happen in the coming year:
|
|
·
|
Proved
oil and gas reserves;
|
|
|
·
|
Expected
future cash flow from proved oil and gas
properties;
|
|
|
·
|
Future
exploration and development costs;
and
|
|
|
·
|
Future
dismantlement and restoration
costs.
|
REVENUE
RECOGNITION
Revenues
are recognized in accordance with SEC staff accounting bulletin, Topic 13,
Revenue Recognition, which specifies that only when persuasive evidence for an
arrangement exists; the fee is fixed or determinable; and collection is
reasonably assured can revenue be recognized.
OIL AND GAS
PROPERTIES
The
Company follows the full cost method of accounting for oil and gas properties.
Under this method, all direct costs and certain indirect costs associated with
acquisition of properties and successful as well as unsuccessful exploration and
development activities are capitalized. Depreciation, depletion, and
amortization of capitalized oil and gas properties and estimated future
development costs, excluding unproved properties, are based on the
unit-of-production method based on proved reserves. Net capitalized costs of oil
and gas properties, less related deferred taxes, are limited to the lower of
unamortized cost or the cost ceiling, defined as the sum of the present value of
estimated future net revenues from proved reserves based on un-escalated prices
discounted at 10 percent, plus the cost of properties not being amortized, if
any, plus the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any, less related income taxes. Costs
in excess of the present value of estimated future net revenues as discussed
above are charged to proved property impairment expense. No gain or loss is
recognized upon sale or disposition of oil and gas properties, except in unusual
circumstances. We apply the full cost ceiling test on a quarterly basis on the
date of the latest balance sheet presented.
As of
June 30, 2010, the Company has not recorded any depletion and impairment, if
any, of its oil and gas properties, as well as, as accrual of assets retirement
obligations pending a complete report on reserve studies and analysis of proved
and unproved oil and gas reserves.
DISCONTINUED
OPERATIONS
During
the quarter ended June 30, 2008, the Company discontinued all its operations in
the Far East (Indonesia). During the quarter ended December 31, 2008, the
Company discontinued all of its construction technology activities that were
carried out by its wholly owned subsidiary, Delta Technologies, Inc. and the
trading of securities by its South American Hedge Fund subsidiary. These
discontinued operations resulted in a loss of $0 and $(6,452) for the six months
ending June 30, 2010 and 2009, respectively and $0 and $61 for the three months
ending June 30, 2010 and 2009, respectively.
Summarized
statement of loss for discontinued operations is as follows:
|
|
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations, net of taxes
|
|
|
—
|
|
|
|
(6,452
|
)
|
|
|
—
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposition of minority interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of taxes
|
|
$
|
(6,452
|
)
|
|
$
|
(6,452
|
)
|
|
$
|
61
|
|
|
$
|
61
|
|
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
RECENT ACCOUNTING
PRONOUNCEMENTS
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 which
is intended to improve disclosures about fair value measurements. The guidance
requires entities to disclose significant transfers in and out of fair value
hierarchy levels, the reasons for the transfers and to present information about
purchases, sales, issuances and settlements separately in the reconciliation of
fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide fair
value measurements for each class of assets and liabilities and disclose the
inputs and valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and significant unobservable
inputs (Level 3). The Company has applied the new disclosure requirements as of
January 1, 2010, except for the disclosures about purchases, sales, issuances
and settlements in the Level 3 reconciliation, which will be effective for
interim and annual periods beginning after December 15, 2010. The adoption of
this guidance has not had and is not expected to have a material impact on the
Company’s consolidated financial statements.
In
February 2010, the FASB issued ASU 2010-09, which requires that an SEC filer, as
defined, evaluate subsequent events through the date that the financial
statements are issued. The update also removed the requirement for an SEC filer
to disclose the date through which subsequent events have been evaluated in
originally issued and revised financial statements. The adoption of this
guidance on January 1, 2010 did not have a material effect on the Company’s
consolidated financial statements.
In April 2010, the Financial Accounting Standards Board’s
(“FASB”) Emerging Issues Task Force (“EITF”) issued an amendment to previously
issued guidance regarding the classification of a share-based payment award as
either equity or a liability. The amendments clarify that a share-based payment
award with an exercise price denominated in the currency of a market in which a
substantial portion of the entity’s equity securities trades should not be
considered to contain a condition that is not a market, performance or service
condition. Therefore, such an award should not be classified as a liability if
it otherwise qualifies as equity. This guidance is effective for fiscal years
and interim periods
within
those fiscal years beginning on or after December 15, 2010. Earlier application
is permitted. This guidance should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings and the cumulative-effect
adjustment should be calculated for all awards outstanding as of the beginning
of the fiscal year in which it is initially applied, as if the guidance had been
applied consistently since the inception of the award. The cumulative-effect
adjustment should be presented separately. The Company is currently evaluating
the impact of this guidance on its operating results, financial position and
cash flows.
I
n January 2009, the SEC issued
revisions to the natural gas and oil reporting disclosures, “Modernization of
Oil and Gas Reporting, Final Rule” (the “Final Rule”). In addition to changing
the definition and disclosure requirements for natural gas and oil reserves, the
Final Rule changed the requirements for determining quantities of natural gas
and oil reserves. The Final Rule also changed certain accounting requirements
under the full cost method of accounting for natural gas and oil activities. The
amendments are designed to modernize the requirements for the determination of
natural gas and oil reserves, aligning them with current practices and updating
them for changes in technology. The Final Rule was effective for annual reports
on Form10-K for fiscal years ending on or after December 31, 2009. In addition,
in
January 2010, the FASB issued an accounting standards update relating to
standards for extractive oil and gas activities. The accounting standards update
amends existing standards to align the proved reserves calculation and
disclosure requirements under US GAAP with the requirements in the SEC rules.
The new standards were to be applied prospectively as a change in estimate. In
April 2010, the FASB issued a further accounting standards update regarding
extractive oil and gas industries to incorporate in accounting standards the
revisions to Rule 4-10 of the SEC’s Regulation S-X. The amendment primarily
consists of the addition and deletion of definitions of terms related to fossil
fuel exploration and production arising from technology changes over the past
several decades. The accounting guidance in Rule 4-10 did not change. The
Company is in the process of determining the impact of this buidance on its
consolidated financial position and results of operations.
Other
ASU’s that are effective after June 30, 2010, are not expected to have a
significant effect on the Company’s consolidated financial position or results
of operations.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
2. VARIABLE
INTEREST ENTITY
FASB ASC
810 “Consolidation” required the consolidation of a variable interest entity
(VIE) if the Company is deemed to be the primary beneficiary of the VIE. FASB
ASC 810 requires an entity to assess its equity investments and certain other
contractual interests to determine whether they are VIEs. As defined in FASB ASC
810, variable interests are contractual, ownership or other interests in an
entity that change with changes in entity’s net asset value. Variable interests
in an entity may arise from financial instruments, service contracts,
guarantees, leases or other arrangements with the VIE. An entity that will
absorb a majority of the VIE’s expected losses or expected residual returns, as
defined in FASB ASC 810, is considered the primary beneficiary of the VIE. The
primary beneficiary should include the VIE’s assets, liabilities and results of
operations in its consolidated financial statements until a reconsideration
event, as defined in FASB ASC 810, occurs to require deconsolidation of the VIE.
At the deconsolidation date, the assets and liabilities of the VIE were removed
from the consolidated financial statements and any assets and liabilities of the
Company that were eliminated in consolidation were restored. The gain recognized
from deconsolidating VIE was recorded in the consolidated statements of
operations as gain on deconsolidation of the VIE.
As of
December 31, 2009, management determined that Delta-Envirotech, Inc. was no
longer considered a variable interest entity (VIE) for the year ending December
31, 2009 and, accordingly, Envirotech has been deconsolidated from the
accompanying consolidated financial statements effective December 31, 2009. As
of December 31, 2009, the majority stockholders of Envirotech are exercising
significant influence over operating and financing policies of Envirotech, as
well as, managing its business activities and therefore it is not considered a
VIE of the Company. As a result of this deconsolidation, the Company removed the
assets and liabilities of the VIE from the consolidated financial statements and
any assets and liabilities of Envirotech that were eliminated in consolidation
were restored at fair value.
Prior to
December 31, 2009, the Company was deemed to be the primary beneficiary of the
Envirotech because of the relatively significant financial support provided to
Envirotech in the form of an investment of $375,000 and notes receivable from
Envirotech of $810,867. Due to the significant operating losses of Envirotech,
and the resulting deconsolidation as of December 31, 2009, the Company’s entire
investment and the note receivable which aggregated approximately $1,186,000 as
of December 31, 2009 were reduced to zero in order to account for the restored
assets at fair value. Furthermore, since the Company is not liable for
Envirotech’s liabilities or operating losses per the agreed terms with
Envirotech, the Company’s historical portion of Envirotech’s operating losses
were reversed and recorded as a net gain on deconsolidation of approximately
$882,000 that was recorded as a separate line item in the accompanying
consolidated financial statements in the fourth quarter of 2009.
3.
PROPERTY AND EQUIPMENT
Oil and Gas
Properties
Jollin and Tonono Oil and
Gas Concessions
The
Company, through SAHF, has a 10% interest concession in the carryover mode ("no
cost obligations to SAHF") in the Jollin and Tonono oil and gas concessions
located in Northern Argentina.
During
the year ended December 31, 2008, the third party owners of the Jollin and
Tonono concessions formed an Argentine-registered joint venture and paid, in the
aggregate, approximately $848,000 of development costs, all of which were
capitalized. Since the Company was not registered as a foreign company in
Argentina, it could not become a member of the joint venture in 2008. The third
party owners of these concessions have agreed that, upon admission of the
Company as a member of the joint venture, the Company will retain its ownership.
However, in exchange for this agreement, the Company’s weighted average pro-rata
portion of the 2008 aggregate development cost, of approximately $223,024, all
of which was included in accounts payable in the Company’s consolidated balance
sheet at December 31, 2008, was to be repaid to the other members from its
pro-rata share of the future earnings of the concession. On September 25, 2009,
the Company sold 13.5% of its ownership interest in the Jollin and Tonono oil
and gas concession to Maxi-Petroleros De Occidente S.A. ("Maxipetrol") for
$206,832. Maxipetrol, prior to the sale, owned 48% of the Jollin and Tonono oil
and gas concession. In connection with the sale, Maxipetrol assumed full
responsibility to develop the oil and gas concession until production is
achieved in the blocks. This obligation includes all future and former costs
incurred for the Jollin and Tonono oil and gas concession, until such time as
the well is producing. All prior unpaid costs accrued by the Company, were
assumed by Maxipetrol. The Company recorded a $157,939 loss on the disposition
of its 13.5% investment to Maxipetrol and the loss is included in its statement
of operations for the year ended December 31, 2009. In addition, as of December
31, 2009, the Company recorded a reversal of $223,024 to adjust balances in
investments and accounts payable as a result of the forgiveness of the aggregate
development cost payable. During the three months ending June 30, 2010 the
Company paid $139,762 in additional canons to maintain its ownership interest in
the concession.
The
Company received its foreign registration in Argentina and was admitted as a
member of the joint venture on July 2, 2010. Accordingly, the Company has
reclassified its concession costs in the amount of $688,475 associated with this
property to proved oil and gas properties as of June 30, 2010 based upon the
reserve report received from the third party working interest owner of the joint
venture. The Company will begin receiving revenue from the Jollin and Tonono
blocks when the first well is approved for commercial production.
The Company has not recorded
impairment and depletion charges for the six months ended June 30, 2010, as the
Company did not arrange a complete report on reserve studies and analysis from
its joint venture operating member of the concessions to determine whether oil
and gas properties were considered unproved and depleted.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
Salta Province Exploration
Rights
During
2008, the Company purchased 40% of the oil and gas exploration rights to five
geographically defined areas in the Salta Province of Northern Argentina from
Ketsal, SA (“Ketstal”) for $697,000 cash. In 2009, SAHF assigned 50% of its
rights to a third party. As of June 30, 2010, SAHF owns 20% of the rights to
this oil and gas concession. The Company expects that in 2010, substantially all
of the exploration costs required to retain the exploration rights will be borne
by Ketstal, the majority owner.
The
Company is responsible for managing the drilling activities in the Salta
Province and bears its pro-rata share of the costs. Exploratory drilling
activities commenced in April 2010 on the Guemes Block and the first well was
spud in June 2010. The Company paid $106,672 for additional concession fees to
become an exploration company in Argentina and incurred $179,806 in exploratory
drilling costs during the three months ended June 30, 2010 that were capitalized
as work-in-progress under the full cost method of accounting. In July 2010, the
Company found positive traces of the presence of natural gas and hydrocarbons of
low-density quality through its analysis of core samples. Well logging while
drilling also confirmed the potential existence of formations with sufficient
hydrocarbons to make the well economically productive. Production testing to
verify the commercial sustainability of the well will commence upon the receipt
of the oil production license from the government during the third quarter,
subject to the weather conditions during the wintertime in Argentina. The
Company has not recorded impairment and depletion charges for the six months
ended June 30, 2010, as the Company has not arranged for a complete report on
reserve studies and analysis to determine whether proved reserves
exist.
Lithium Production
Properties
On April
29, 2010, the Company acquired certain properties from Minera Jujuy from the
Jujuy Province, Argentina located in the Northwest part of Argentina, south of
the border with Bolivia, for $30,000. Management believes that these properties
have high concentrations of lithium and borates brines. The Company now owns 51%
and controls 100% (through an agreement between the parties) of an area of
approximately 147,000 hectares (approximately 350,000 acres) in an area of North
Guayatayoc, Argentina. As these properties are in the initial stage of
development, management did not consider it necessary to assess impairment or
depletion for the six months ended June 30, 2010.
5.
INVESTMENTS IN NON-CONSOLIDATING AFFILIATES
As of
June 30, 2010, the Company, through SAHF, retains 9% of the total concession in
the carryover mode ("no cost obligations to SAHF") in the Tartagal and Morillo
oil and gas concessions located in Northern Argentina.
In March 2009, a Hong Kong
public company purchased 60% of the ownership in the Tartagal and Morillo oil
and gas concessions, from the other majority owners, for total consideration of
approximately $270 million. To date, the working interest owners have expended
approximately $27 million on 2D and 3D seismic surveys and other geological
studies.
The Company
expects to begin receiving
revenue from the Tartagal and Morillo blocks when the first well is approved for
commercial production.
The
Company has applied for its foreign registration in Argentina to be formally
admitted as a member of the joint venture. When this registration in received,
the Company will reclassify the $225,000 concession costs associated with this
property to proved oil and gas properties based upon the reserve report received
from the third party working interest owner of the joint venture. The Company
has not recorded any impairment and depletion charges for this concession as the
Company is in the process of obtaining a reserve report from the operating
member of the joint venture.
6. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC
820”) on January 1, 2008, for all financial assets and liabilities that are
recognized or disclosed at fair value in the condensed consolidated financial
statements on a recurring basis or on a nonrecurring basis during the reporting
period. While the Company adopted the provisions of ASC 820 for non-financial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis, no such assets or liabilities existed
at the balance sheet date. As permitted by ASC 820, the Company delayed
implementation of this standard for all non-financial assets and liabilities
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis and adopted these provisions effective January 1,
2009.
The fair
value is an exit price, representing the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company utilizes market data or
assumptions that market participants would use in pricing the asset or
liability. ASC 820 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers include: Level
1, defined as observable inputs such as quoted market prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable; and Level 3, defined as unobservable
inputs about which little or no market data exists, therefore requiring an
entity to develop its own assumptions.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
As of
June 30, 2010, the Company held certain financial assets that are measured at
fair value on a recurring basis. These consisted of cash and cash equivalents
and investments in non-consolidated affiliates. The fair value of the cash and
cash equivalents is determined based on quoted market prices in public markets
and is categorized as Level 1. The fair value of investments in non-consolidated
affiliates is developed by the Company based upon its own assumptions and is
categorized as Level 3. The Company does not have any financial assets measured
at fair value on a recurring basis as Level 2 and there were no transfers in or
out of Level 2 or Level 3 during the three months ended June 30,
2010.
The
following table sets forth by level, within the fair value hierarchy, the
Company’s financial assets accounted for at fair value on a recurring basis as
of June 30, 2010.
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
296,549
|
|
|
$
|
296,549
|
|
|
$
|
-
|
|
|
$
|
|
|
|
Oil
and gas properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
688,475
|
|
|
|
|
|
|
|
688,475
|
|
|
|
|
|
|
Unproved
|
|
|
876,806
|
|
|
|
|
|
|
|
|
|
|
|
876,806
|
|
|
Lithium
production properties
|
|
|
30,000
|
|
|
|
|
|
|
|
-
|
|
|
|
30,000
|
|
|
Investments
in non-consolidating affiliates
|
|
|
225,000
|
|
|
|
|
|
|
|
225,000
|
|
|
|
|
|
|
Total
|
|
$
|
2,116,830
|
|
|
$
|
296,549
|
|
|
$
|
913,475
|
|
|
$
|
906,806
|
|
The
Company had no financial assets accounted for on a non-recurring basis as of
June 30, 2010.
There
were no changes to the Company’s valuation techniques used to measure asset fair
values on a recurring or nonrecurring basis during the six months ended June 30,
2010, and the Company did not have any financial liabilities as of June 30,
2010. The Company has other financial instruments, such as advances and other
receivables, accounts payable and other liabilities, notes payable and other
assets, which have been excluded from the tables above. Due to the short-term
nature of these instruments, the carrying value of advances and other
receivables, accounts payable and other liabilities, notes payable and other
assets approximate their fair values.
7. NOTES
PAYABLE
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Notes
payable to three investors, interest at 8%, due August 10,
2011
|
|
$
|
150,655
|
|
|
$
|
150,655
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to stockholders and related parties, interest at 6%, due June 20,
2012
|
|
|
401,210
|
|
|
|
401,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to third parties, interest at rates of 4% to 6%, due August
10, 2011
|
|
|
253,740
|
|
|
|
253,740
|
|
|
|
|
$
|
805,605
|
|
|
$
|
805,605
|
|
For
the three and six months ended June 30, 2010 and June 30, 2009, the Company
recorded interest expense of $12,296, $10,771, $23,163
and $20,742, respectively.
8. INCOME
TAXES
The
Company has not made provision for income taxes in the three or six month
periods ended June 30, 2010 and 2009 since the Company has the benefit of net
operating losses carried forward in these periods.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
Due to
uncertainties surrounding the Company’s ability to generate future taxable
income to realize deferred income tax assets arising as a result of net
operating losses carried forward, the Company has not recorded any deferred
income tax asset as of June 30, 2010 or December 31, 2009. The net operating
losses carry forwards will begin to expire in varying amounts from year 2019 to
2029, subject to its eligibility as determined by the respective tax regulatory
authorities.
The
Company is subject to taxation in the United States and certain state
jurisdictions. The Company’s tax years for 2002 and forward are subject to
examination by the United States and applicable state tax authorities due to the
carry forward of unutilized net operating losses.
9.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
|
June
30, 2010
|
|
|
December 31, 2009
|
|
|
Professional
fees
|
|
$
|
41,523
|
|
|
$
|
34,023
|
|
|
Interest
expense
|
|
|
23,163
|
|
|
|
-
|
|
|
Payroll
expense
|
|
|
131,806
|
|
|
|
131,806
|
|
|
Other
accrued expenses
|
|
|
101,200
|
|
|
|
101,200
|
|
|
Total
|
|
$
|
297,692
|
|
|
$
|
267,029
|
|
10.
LOSS PER COMMON SHARE
The
following table sets forth the reconciliation and diluted net loss per common
share computation for the three and six months ended June 30, 2010.
|
|
|
Six Months Ending
|
|
|
Three Months Ending
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
Basic
and diluted EPS:
|
|
|
|
|
|
|
|
Net
loss ascribed to common shareholders - basic and diluted
|
|
$
|
484,217
|
|
|
$
|
197,956
|
|
|
Weighted
shares outstanding - basic and diluted
|
|
|
26,081,117
|
|
|
|
27,233,293
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
11. STOCK-BASED
COMPENSATION
The
Company issued shares of its common stock to non-employees as stock-based
compensation. The Company recorded compensation expense of $0 and $393,490,
respectively, in conjunction with the issuance of these shares.
As of
June 30, 2010, the Company did not have any outstanding employee stock
options.
12. STOCKHOLDERS'
EQUITY
On April
22, 2009, the Company’s board of directors approved amendments to the
Certificate of Incorporation to: (1) effect a 1 for 10 reverse split of all the
outstanding common stock; and (2) authorize a new class of 10,000,000 shares of
preferred stock, par value $0.0001 per share, and to authorize the board of
directors to issue one or more series of the preferred stock with such
designations, rights, preferences and restrictions as determined by majority
vote of the directors. Thereafter on April 23, 2009, the Company received
written consent from stockholders of the Company holding a majority of the
outstanding shares of common stock approving the Amendments. The effective date
of the Amendments was July 6, 2009, the date the reverse stock split was made
effective for trading purposes by the Financial Industry Regulatory Authority.
All share and per share data (except par value) have been adjusted to reflect
the effect of the stock split for all periods presented.
As of
June 30, 2010, the board of directors had not authorized the issuance of any
series of preferred stock.
The
Company issued shares of common stock for services and repayment of debt and
interest valued at fair market value at time of issuance.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
For the
six months ended June 30, 2010 and 2009 the Company issued 534,555, and 200,000
shares of common stock, respectively, valued at $0.14 and $0.60 per share,
respectively, for services valued at $75,000 and $120,000,
respectively.
During six months ended June
30, 2010 and 2009, the Company received $969,667 and $10,000, respectively, from
various unrelated individuals to purchase 2,690,833 and 28,572 shares of common
stock, respectively.
13.
COMMITMENTS AND CONTINGENCIES
POLITICAL
RISK
The
Company is exposed in the inherent risks for the foreseeable future of
conducting business internationally. Language barriers, foreign laws and tariffs
and taxation issues all have a potential effect on the Company’s ability to
transact business. Political instability may increase the difficulties and costs
of doing business. Accordingly, events resulting from changes in the political
climate could have a material effect on the Company.
OPERATING
LEASES
The
Company’s lease for its principal office space in Arizona became effective
December 1, 2009 for a period of 13 months. Future minimum lease payment under
operating leases for the year ending December 31, 2010 will approximate $16,000.
The Company recorded lease rental expenses for the three and six months ended
June 30, 2010, and June 30, 2009, of $4,157, $9,927, $9,093 and $14,536
respectively, in the accompanying unaudited consolidated statements of
operations.
LEGAL
PROCEEDINGS
Former Employee Wage
Claims
On
September 16, 2008, the Company was notified of a complaint filed with the
Pennsylvania Department of Labor & Industry by its former President and CEO
alleging non-payment of wages in the amount of $53,271. The Company also
received notice of a similar complaint filed by a former employee alleging
non-payment of wages in the amount of $17,782. In October 2008, the Company
entered into repayment agreements with both of the former employees. As of the
date of this report, the Company has not made any payments to these two former
employees pursuant to these agreements. In addition, the employee that alleged
non-payment of wages in the amount of $17,782 has obtained a default judgment
against the Company entered on January 8, 2010 in the Court of Common Pleas of
Bucks County, Pennsylvania, Civil Division, in the amount of $29,625.94 as to
this wage claim. As of December 31, 2009, the Company has recorded an accrued
liability of $17,782 in the accompanying consolidated financial statements.
Delta believes that a portion of the claim is without merit, and is vigorously
contesting the claim as of the date of this filing.
The
Company has been notified by letter dated October 9, 2009 of a complaint filed
with the Pennsylvania Department of Labor & Industry by its former Chief
Financial Officer alleging non-payment of wages in the amount of $131,250. The
Company has responded to the Department of Labor & Industry that the wages
owed this former officer are substantially less than alleged in this claim and
is vigorously contesting the claim as of the date of this filing. As of the date
of filing, the Company is awaiting a response from the Department of Labor and
Industry and this matter is disclosed in the contingent liabilities footnote to
the consolidated financial statements.
Legal Fee Collection
Claim
Delta
Technologies, Inc., a wholly-owned subsidiary of the Company and a discontinued
operation (“Delta Technologies”), has been notified by a collection agency on
behalf of Wolf Block LLP, a law firm that had provided intellectually property
legal services to Delta Technologies, that it had been retained in an attempt to
collect a past due amount of approximately $41,000. The Company is in
discussions with the collection agency and believes that the resolution of this
matter will have no material effect on the Company or its
operations.
Former Interim Chief
Financial Officer
On April
20, 2010, the Company gave notice of termination, effective April 30, 2010, of
its agreement with ValuCorp, dated as of November 1, 2009, pursuant to which
ValuCorp had provided Michael Gilburd as the Company’s Interim Chief Financial
Officer. Mr. Gilburd asserted that ValuCorp is entitled to be issued an
unspecified number of shares of common stock in connection with this agreement.
The Company does not believe there is any agreement with ValuCorp regarding the
issuance of stock to ValuCorp.
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2010
EMPLOYMENT
AGREEMENTS
On April
26, 2010, the Company’s Board of Directors approved five-year term executive
employment agreements (“Employment Agreements”) between the Company and Dr.
Daniel R. Peralta, the Company’s Chairman and Chief Executive Officer, and
Malcolm W. Sherman, the Company’s Executive Vice President, effective March 22,
2010 and March 23, 2010, respectively. Dr. Peralta’s Employment Agreement
provides for a fixed annual salary of $500,000; Mr. Sherman’s Employment
Agreement provides for a fixed annual salary of $350,000. Under the Employment
Agreements, both executives are eligible for participation in a bonus pool with
other senior executives, the quarterly bonus amounts being based on financial
performance comparisons with prior fiscal quarters, beginning with the quarterly
reports of the Company for the year 2006 and each subsequent year during the
respective terms of each of the Employment Agreements. Such bonuses will be
pooled with those of other senior executives and be computed based on a total
bonus pool equal to 15% of the net profits of the Company as set forth in the
Company’s SEC filings.
The
Company’s Board of Directors, with the agreement of the two executives,
conditioned approval of the Employment Agreements on limitation of the salary of
Dr. Peralta to $200,000, and the salary of Mr. Sherman to $150,000, until the
cash flow of the Company was sufficient to pay the salaries specified in the
Employment Agreements and meet other operating obligations of the Company.
Further, there would be no accruals of unpaid salaries under this agreement with
the two executives.
14.
SUBSEQUENT EVENTS
Management
evaluated all activities of the Company through the issuance of the Company’s
consolidated financial statements and concluded that no subsequent events have
occurred that would require adjustments or disclosures in the consolidated
financial statements.
|
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
|
The
following is a discussion of our financial condition, results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with our consolidated financial statements and the notes thereto, included in
our Annual Report on Form 10-K filed for the year ended December 31, 2009 filed
with the Securities and Exchange Commission on March 17, 2010. The terms “Delta”
and the terms “we”, “us”, “our” or the “Company” refer to Delta Mutual, Inc. and
all of its consolidated subsidiaries.
As of
June 30, 2010, the Company also held a 45% ownership interest in
Delta–Envirotech, Inc., which is engaged in certain business opportunities in
the Middle East related to environmental remediation and other related projects.
These activities are managed and carried out by the majority stockholders of
Delta-Envirotech, Inc., (“Envirotech”), Hi-Tech Consulting and Construction,
Inc. and an unrelated individual. Envirotech has entered into strategic alliance
agreements with several United States-based entities with technologies and
products in the environmental field to support its activities. Envirotech was
consolidated as the variable interest entity (VIE) up until September 30, 2009.
As of December 31, 2009 management determined that Delta-Envirotech, Inc. does
not meet the criteria to be considered a VIE for the year ending December 31,
2009 as the Company does not exercise significant influence over the operations
or financial results of Envirotech. Accordingly, the results of operations and
of financial data have been deconsolidated from the consolidated financial
statements of the Company effective December 31, 2009.
Certain
statements contained in this report, including, without limitation, statements
containing the words "believes," "anticipates," "expects" and words of similar
import, constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking
statements, as a result of certain factors, including our ability to create,
sustain, manage or forecast our growth; our ability to attract and retain key
personnel; changes in our business strategy or development plans; competition;
business disruptions; adverse publicity; and international, national and local
general economic and market conditions.
GENERAL
We are an
independent energy company primarily engaged in the development and production
of oil and gas through our South American Hedge Fund subsidiary, which has
investments in oil and gas exploration and production in Argentina and a
property for the production of lithium in Argentina. We plan to grow through the
acquisition and subsequent development and exploitation of producing properties,
principally through the identification and development of fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques, as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a number of development opportunities on our
properties. In addition, we intend to expand upon our development activities
with complementary exploration projects in our core areas of operation. Success
in our development and exploration activities is critical in the maintenance and
growth of our current production levels and associated reserves.
Our main
source of revenue will be derived from the sale of crude oil and natural gas
produced from the oil and gas concessions and exploration properties in which we
have made investments. While we are not the operators of these properties, we
expect to have representation on the operating committees that are responsible
for managing the business affairs of these concessions. Our ownership interests
in these concessions range from 9% to 10%, and we have a 20% interest in the
blocks in which we have exploration rights.
Our
current business plan for 2010 and beyond anticipates a substantial increase in
revenue primarily from our investments in oil and gas concessions in Argentina.
If we do not achieve the expected levels of revenue, we may be required to raise
additional capital through equity and/or debt financing.
GOING
CONCERN
During
the six months ended June 30, 2010, we had a net loss of $484,217. The Company
has an accumulated deficit of $4,080,554 and working capital deficiency of
$923,021 as of June 30, 2010. Additionally, the Company may require additional
funding to execute its strategic business plan for 2010. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Successful business operations and its transition to attaining profitability is
dependent upon obtaining additional financing and achieving a level of revenue
adequate to support its cost structure. There can be no assurances that there
will be adequate financing available to the Company, if the Company requires
financing. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Additionally,
the Company will require additional funding to execute its future strategic
business plan. Successful business operations and its transition to attaining
profitability is dependent upon obtaining additional financing and achieving a
level of revenue adequate to support its cost structure.
The
Company's business is subject to the risks of its oil and gas investments in
South America. The likelihood of success of the Company must be considered in
light of the expenses, difficulties, delays and unanticipated challenges
encountered in connection with the operations of the oil and gas concession in
Argentina. There is no assurance that the Company will ultimately achieve a
profitable level of operations.
EXPLORATION AND DEVELOPMENT
ACTIVITY
Our
future oil and gas production, and therefore our success, is highly dependent
upon our ability to find, acquire and develop additional reserves that are
profitable to produce. The rate of production from our oil and gas properties
and our proved reserves will decline as our reserves are produced unless we
acquire additional properties containing proved reserves, conduct successful
development and exploration activities or, through engineering studies, identify
additional behind-pipe zones or secondary recovery reserves. We cannot assure
you that our exploration and development activities will result in increases in
our proved reserves. If our proved reserves decline in the future, our
production may also decline and, consequently, our cash flow from operations and
the amount that we are able to borrow under our credit facility will also
decline. In addition, the vast majority of our estimated proved reserves at June
30, 2010 were undeveloped. By their nature, estimates of undeveloped reserves
are less certain. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. We may be unable to acquire or
develop additional reserves, in which case our results of operations and
financial condition could be adversely affected.
Jollin and Tonono Oil and
Gas Concessions
The
Company, through SAHF, has a 10% interest concession in the carryover mode ("no
cost obligations to SAHF") in the Jollin and Tonono oil and gas concessions
located in Northern Argentina.
During
the year ended December 31, 2008, the third party owners of the Jollin and
Tonono concessions formed an Argentine-registered joint venture and paid, in the
aggregate, approximately $848,000 of development costs, all of which were
capitalized. Since the Company was not registered as a foreign company in
Argentina, it could not become a member of the joint venture in 2008. The third
party owners of these concessions have agreed that, upon admission of the
Company as a member of the joint venture, the Company will retain its ownership.
However, in exchange for this agreement, the Company’s weighted average pro-rata
portion of the 2008 aggregate development cost, of approximately $223,024, all
of which was included in accounts payable in the Company’s consolidated balance
sheet at December 31, 2008, was to be repaid to the other members from its
pro-rata share of the future earnings of the concession. On September 25, 2009,
the Company sold 13.5% of its ownership interest in the Jollin and Tonono oil
and gas concession to Maxi-Petroleros De Occidente S.A. ("Maxipetrol") for
$206,832. Maxipetrol, prior to the sale, owned 48% of the Jollin and Tonono oil
and gas concession. In connection with the sale, Maxipetrol assumed full
responsibility to develop the oil and gas concession until production is
achieved in the blocks. This obligation includes all future and former costs
incurred for the Jollin and Tonono oil and gas concession, until such time as
the well is producing. All prior unpaid costs accrued by the Company, were
assumed by Maxipetrol. The Company recorded a $157,939 loss on the disposition
of its 13.5% investment to Maxipetrol and the loss is included in its statement
of operations for the year ended December 31, 2009. In addition, as of December
31, 2009, the Company recorded a reversal of $223,024 to adjust balances in
investments and accounts payable as a result of the forgiveness of the aggregate
development cost payable. During the three months ending June 30, 2010 the
Company paid $139,762 in additional canons to maintain its ownership interest in
the concession.
The Company received its foreign
registration in Argentina and was admitted as a member of the joint venture on
July 2, 2010. Accordingly, the Company has reclassified its concession costs in
the amount of $688,475 associated with this property to proved oil and gas
properties as of June 30, 2010 based upon the reserve report received from the
third party working interest owner of the joint venture. The Company will begin
receiving revenue from the Jollin and Tonono blocks when the first well is
approved for commercial production.
Salta Province Exploration
Rights
During
2008, the Company purchased 40% of the oil and gas exploration rights to five
geographically defined areas in the Salta Province of Northern Argentina from
Ketsal, SA (“Ketsal”) for $697,000 cash. In 2009, SAHF assigned 50% of its
rights to a third party. As of June 30, 2010, SAHF owns 20% of the rights to
this oil and gas concession. The Company expects that in 2010, substantially all
of the exploration costs required to retain the exploration rights will be borne
by Ketsal, the majority owner.
The
Company is responsible for managing the drilling activities in the Salta
Province and bears its pro-rata share of the costs. Exploratory drilling
activities commenced in April 2010 on the Guemes Block and the first well was
spud in June 2010. The Company paid $106,672 for additional concession fees to
become an exploration company in Argentina and incurred $179,806 in exploratory
drilling costs during the three months ended June 30, 2010 that were capitalized
as work-in-progress under the full cost method of accounting. In July 2010, the
Company found positive traces of the presence of natural gas and hydrocarbons of
low-density quality through its analysis of core samples. Well logging while
drilling also confirmed the potential existence of formations with sufficient
hydrocarbons to make the well economically productive. Production testing to
verify the commercial sustainability of the well will commence upon the receipt
of the oil production license from the government during the third quarter,
subject to the weather conditions during the wintertime in
Argentina.
Tartagal and
Morillo
As of
June 30, 2010, the Company, through SAHF, retains 9% of the total concession in
the carryover mode ("no cost obligations to SAHF") in the Tartagal and Morillo
oil and gas concessions located in Northern Argentina.
In March 2009, a Hong Kong
public company purchased 60% of the ownership in the Tartagal and Morillo oil
and gas concessions, from the other majority owners, for total consideration of
approximately $270 million. To date, the working interest owners have expended
approximately $27 million on 2D and 3D seismic surveys and other geological
studies.
The Company
expects to begin receiving
revenue from the Tartagal and Morillo blocks when the first well is approved for
commercial production.
The
Company has applied for its foreign registration in Argentina to be formally
admitted as a member of the joint venture. When this registration in received,
the Company will reclassify the $225,000 concession costs associated with this
property to proved oil and gas properties based upon the reserve report received
from the third party working interest owner of the joint venture.
Lithium Production
Properties
On April
29, 2010, the Company acquired certain properties from Minera Jujuy from the
Jujuy Province, Argentina located in the Northwest part of Argentina, south of
the border with Bolivia, for $30,000. Management believes that these properties
have high concentrations of lithium and borates brines. The Company now owns 51%
and controls 100% (through an agreement between the parties) of an area of
approximately 147,000 hectares (approximately 350,000 acres) in an area of North
Guayatayoc, Argentina.
RESULTS
OF OPERATIONS
SIX
MONTHS ENDED JUNE 30, 2010 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2009
During
the six months ended June 30, 2010, we incurred a net loss from continuing
operations of $484,217 compared to a loss of $755,685 for the six months ended
June 30, 2009. The decrease in our loss from continuing operations for the six
months ended June 30, 2010 over the comparable period of the prior year is
primarily due to a decrease in general and administrative expenses associated
with the discontinuance of the Company’s equity compensation
programs.
Our net
loss for the six months ended June 30, 2010 was approximately $484,217 compared
to a net loss of $762,137 for the comparable prior year period, which included
$6,452 of loss from discontinued operations.
THREE
MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2009
During
the three months ended June 30, 2010, we incurred a net loss from continuing
operations of $197,956 compared to $455,574 for the three months ended June 30,
2009. The decrease in our loss from continuing operations for the three months
ended June 30, 2010 over the comparable period of the prior year is primarily
due to a decrease in general and administrative expenses associated with the
discontinuance of the Company’s equity compensation programs.
Our net
loss for the three months ended June 30, 2010 was $197,956 compared to a net
loss of $455,513 for the comparable prior year period, which included $61 of
income from discontinued operations.
LIQUIDITY
At June
30, 2010 and December 31, 2009, we had working capital deficits of $923,021 and
$967,042, respectively.
At June
30, 2010, we had total assets of $2,131,124 compared to total assets of
$1,750,005 at December 31, 2009. Cash increased $194,541 for the six months
ending June 30, 2010 compared to year-end 2009 due primarily to the issuance of
common stock. Net cash used in operating activities in the six months ending
June 30, 2010, was $225,558, as compared with $320,492 in the comparable period
in 2009; net cash used in investing activities in the six months ending June 30,
2010 was $349,568 in 2010, as compared with $-0- in the comparable period in
2009. Cash used in operating and investing activities during the six months
ending June 30, 2010 and 2009, was offset by net cash from financing activities
of $769,667 and $310,361, respectively.
CRITICAL
ACCOUNTING POLICIES
There
have been no changes from the Critical Accounting Policies described in our
Annual Report on Form 10-K for the year ended December 31, 2009 except that the
company adopted the full cost method of accounting for its exploration and
development activities.
Under the
full cost method, all direct costs and certain indirect costs associated with
acquisition of properties and successful as well as unsuccessful exploration and
development activities are capitalized. Depreciation, depletion, and
amortization of capitalized oil and gas properties and estimated future
development costs, excluding unproved properties, are based on the
unit-of-production method based on proved reserves. Net capitalized costs of oil
and gas properties, less related deferred taxes, are limited to the lower of
unamortized cost or the cost ceiling, defined as the sum of the present value of
estimated future net revenues from proved reserves based on unescalated prices
discounted at 10 percent, plus the cost of properties not being amortized, if
any, plus the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any, less related income taxes. Costs
in excess of the present value of estimated future net revenues as discussed
above are charged to proved property impairment expense. No gain or loss is
recognized upon sale or disposition of oil and gas properties, except in unusual
circumstances. We apply the full cost ceiling test on a quarterly basis on the
date of the latest balance sheet presented.
USE OF
ESTIMATES
The
preparation of the financial statements requires the Company to make estimates
and judgments that affect the reported amount of assets, liabilities, and
expenses, and related disclosures of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
oil and gas properties, intangible assets, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. In the opinion of management, all normal recurring adjustments
considered necessary for a fair presentation have been included in these
financial statements. Certain amounts for prior periods have been reclassified
to conform to the current presentation.
Management
believes that it is reasonably possible that the following material estimates
affecting the financial statements could happen in the coming year:
|
|
·
|
Proved
oil and gas reserves;
|
|
|
·
|
Expected
future cash flow from proved oil and gas
properties;
|
|
|
·
|
Future
exploration and development costs;
and
|
|
|
·
|
Future
dismantlement and restoration
costs.
|
NEW
FINANCIAL ACCOUNTING STANDARDS
For a
summary of new financial accounting standards applicable to the Company, please
refer to the accompanying notes to the financial statements.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest
Rate Risk - Interest rate risk refers to fluctuations in the value of a security
resulting from changes in the general level of interest rates. Investments that
are classified as cash and cash equivalents have original maturities of three
months or less. Our interest income is sensitive to changes in the general level
of U.S. interest rates.
We do not
have significant short-term investments, and due to their short-term nature, we
believe that there is not a material risk exposure.
Credit
Risk - Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result we do not anticipate any material losses in this
area.
Commodity
Price Risk – We are exposed to market risks related to price volatility of crude
oil and natural gas. The prices of crude oil and natural gas affect our
revenues, since sales of crude oil and natural gas from our South American
investments comprise nearly all of the components of our revenue. A decline in
crude oil and natural gas prices will likely reduce our revenues, unless there
are offsetting production increases. We do not use derivative commodity
instruments for trading purposes.
The
prices of the commodities that the Company produces are unsettled at this time.
At times the prices seem to be drift down and then either increase or stabilize
for a few days. Current price movement seems to be slightly up but with the
prices of the traditionally marketed products (gasoline, diesel, and natural gas
as feed stocks for various industries, power generation, and heating) are not
showing material increases. Although prices are difficult to predict in the
current environment, the Company maintains the expectation that demand for crude
oil and natural gas will continue to increase for the foreseeable future due to
the underling factors that oil and natural gas based commodities are both
sources of raw energy and are fuels that are easily portable.
Foreign
Currency Risk - Our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Because our revenue is reported in U.S. dollars, fluctuating
exchange rates of the local currency, when converted into U.S. dollars, may have
an adverse impact on our revenue and income. We have not hedged foreign currency
exposures related to transactions denominated in currencies other than U.S.
dollars. We do not engage in financial transactions for trading or speculative
purposes.
Item
4T. – CONTROLS AND PROCEDURES
Evaluation of Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive and financial
officer, to allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost- benefit relationship of possible controls and
procedures.
As of
June 30, 2010, an evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and
Principal Financial Officerprincipal financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, our Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were
effective.
Changes in Internal
Controls
There
have been no changes in the Company's internal controls over financial reporting
that occurred during the Company's last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting, except that the
Company increased its internal controls around the issuance and recording of
common stock sales.
Limitations on the
Effectiveness of Controls
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected. The Company's disclosure
controls and procedures are designed to provide reasonable assurance of
achieving its objectives. The Company's chief executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective at that reasonable assurance level.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS.
Former Employee Wage
Claims
On
September 16, 2008, the Company was notified of a complaint filed with the
Pennsylvania Department of Labor & Industry by its former President and CEO
alleging non-payment of wages in the amount of $53,271. The Company also
received notice of a similar complaint filed by a former employee alleging
non-payment of wages in the amount of $17,782. In October 2008, the Company
entered into repayment agreements with both of the former employees. As of the
date of this report, the Company has not made any payments to these two former
employees pursuant to these agreements. In addition, the employee that alleged
non-payment of wages in the amount of $17,782 has obtained a default judgment
against the Company entered on January 8, 2010 in the Court of Common Pleas of
Bucks County, Pennsylvania, Civil Division, in the amount of $29,625.94 as to
this wage claim. As of December 31, 2009, the Company has recorded an accrued
liability of $17,782 in the accompanying consolidated financial statements. We
believe that a portion of the claim is without merit and are vigorously
contesting the claim as of the date of this filing.
The
Company has been notified by letter dated October 9, 2009 of a complaint filed
with the Pennsylvania Department of Labor & Industry by its former Chief
Financial Officer alleging non-payment of wages in the amount of $131,250. The
Company has responded to the Department of Labor & Industry that the wages
owed this former officer are substantially less than alleged in this
claim and are vigorously contesting the claim as of the date of this
filing. As of the date of filing, the Company is awaiting a response from the
Department of Labor and Industry and this matter is disclosed in the contingent
liabilities footnote to the consolidated financial statements.
Legal Fee Collection
Claim
Delta
Technologies, Inc., a wholly-owned subsidiary of the Company and a discontinued
operation (“Delta Technologies”), has been notified by a collection agency on
behalf of Wolf Block LLP, a law firm that had provided intellectually property
legal services to Delta Technologies, that it had been retained in an attempt to
collect a past due amount of approximately $41,000. The Company is in
discussions with the collection agency and believes that the resolution of this
matter will have no material effect on the Company or its
operations.
Former Interim Chief
Financial Officer
On April
20, 2010, the Company gave notice of termination, effective April 30, 2010, of
its agreement with ValuCorp, dated as of November 1, 2009, pursuant to which
ValuCorp had provided Michael Gilburd as the Company’s Interim Chief Financial
Officer. Mr. Gilburd has asserted that ValuCorp is entitled to
be issued an unspecified number of shares of common stock in connection with
this agreement. The Company does not believe there is any agreement
with ValuCorp regarding the issuance of stock to ValuCorp.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
The following table sets forth the sales of
unregistered securities since the Company’s last report filed under this
item.
|
|
|
|
|
|
|
Principal
|
|
Total Offering Price/
|
|
Date
|
|
Title and Amount
(1)
|
|
Purchaser
|
|
Underwriter
|
|
Underwriting Discounts
|
|
|
|
|
|
|
|
|
|
|
|
May
27, 2010
|
|
333,334
shares of common stock.
|
|
Private
investor.
|
|
NA
|
|
$0.32 per
share/NA
|
|
May
27, 2010
|
|
13,333
shares of common stock.
|
|
Private
investor.
|
|
NA
|
|
$0.30 per
share/NA
|
(1) The
issuances to lenders, consultants and investors are viewed by the Company as
exempt from registration under the Securities Act of 1933, as amended
(“Securities Act”), alternatively, as transactions either not involving any
public offering, or as exempt under the provisions of Regulation D, Regulation S
or Rule 701 promulgated by the SEC under the Securities Act.
ITEM
6. EXHIBITS.
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
|
|
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Company has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
DELTA
MUTUAL, INC.
|
|
|
|
|
|
BY:
|
/s/
Daniel R. Peralta
|
|
|
|
|
Daniel
R. Peralta
|
|
|
|
President
and Chief Executive Officer, Principal Financial
Officer
|
Dated:
August 23, 2010
EXHIBIT
INDEX
|
31
|
Certification
of Chief Executive Officer and Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32
|
Certification
of Chief Executive Officer and Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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