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EX-31 - CannAwake Corp | v166766_ex31.htm |
EX-32 - CannAwake Corp | v166766_ex32.htm |
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 September 30, 2009
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
|
14-1818394
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
|
Identification
No.)
|
14301
North 87th
Street, #130, Scottsdale, AZ
|
85260
|
||
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(480)
221-1989
(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 24,307,597 as of November 10, 2009.
DELTA
MUTUAL, INC.
INDEX
Page
|
||
Part
I. Financial Information
|
||
Item
1. Financial Statements
|
||
Consolidated
Balance Sheets as of September 30, 2009 and as of December 31,
2008 (unaudited)
|
1
|
|
Consolidated
Statements of Operations for the Nine and Three Months Ended September 30,
2009 and 2008 (unaudited)
|
2
|
|
Consolidated
Statements of Stockholders’ Equity (Deficiency) as of September 30, 2009
(unaudited)
|
3
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008 (unaudited)
|
4
|
|
Notes to Unaudited Consolidated Financial Statements
|
6
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
23
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
27
|
|
Item
4T.Controls and Procedures.
|
27
|
|
Part
II. Other Information
|
||
Item
1. Legal Proceedings.
|
28
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
|
28
|
|
Item
6. Exhibits.
|
28
|
|
Signatures
|
|
29
|
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,
2008.
The
results of operations for the nine and three months ended September 30, 2009 and
2008 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)
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 16,099 | $ | 13,957 | ||||
Property
and equipment - net
|
295 | 804 | ||||||
Investments
in non-consolidated affiliates
|
1,385,713 | 1,780,024 | ||||||
Other
assets
|
6,368 | 650 | ||||||
TOTAL
ASSETS
|
$ | 1,408,475 | $ | 1,795,435 | ||||
LIABILITIES
AND DEFICIENCY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 162,304 | $ | 363,004 | ||||
Accrued
expenses
|
1,525,245 | 1,363,395 | ||||||
Convertible
debt
|
253,740 | 253,740 | ||||||
Notes
payable
|
582,611 | 461,208 | ||||||
Total
current liabilities
|
2,523,900 | 2,441,347 | ||||||
Deficiency:
|
||||||||
Delta
Mutual Inc. and Subsidiaries Stockholders' Deficiency:
|
||||||||
Preferred
stock $0.0001 par value-authorized
|
||||||||
10,000,000
shares; no shares issued and outstanding
|
||||||||
at
September 30, 2009 and December 31, 2008, respectively
|
||||||||
Common
stock $0.0001 par value - authorized
|
||||||||
250,000,000
shares; 22,418,249 and 221,849,158 shares
|
||||||||
issued
and outstanding at September 30, 2009 and
|
||||||||
December
31, 2008, respectively
|
2,242 | 22,185 | ||||||
Additional
paid-in-capital
|
4,502,009 | 3,762,831 | ||||||
Deficit
|
(5,619,676 | ) | (4,430,928 | ) | ||||
Total
Delta Mutual Inc. and Subsidiaries Stockholders'
Deficiency
|
(1,115,425 | ) | (645,912 | ) | ||||
Noncontrolling
interest
|
- | - | ||||||
Total
Deficiency
|
(1,115,425 | ) | (645,912 | ) | ||||
TOTAL
LIABILITIES AND DEFICIENCY
|
$ | 1,408,475 | $ | 1,795,435 |
See Notes
to Unaudited Consolidated Financial Statements
1
DELTA
MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30,
|
Three Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue:
|
||||||||||||||||
Sales
commissions
|
$ | 14,458 | $ | 22,008 | $ | 14,458 | $ | 22,008 | ||||||||
Costs
and expenses:
|
||||||||||||||||
General
and administrative
|
||||||||||||||||
expenses
|
1,007,303 | 1,153,228 | 272,360 | 155,096 | ||||||||||||
Impairment
of fixed asset
|
- | 138,127 | - | 138,127 | ||||||||||||
Loss
on sale of investments
|
157,939 | 157,939 | ||||||||||||||
Loss
on intellectual property
|
- | 122,742 | - | - | ||||||||||||
1,165,242 | 1,414,097 | 430,299 | 293,223 | |||||||||||||
Loss
from continuing operations operations
|
(1,150,784 | ) | (1,392,089 | ) | (415,841 | ) | (271,215 | ) | ||||||||
Interest
expense
|
(31,512 | ) | 15,935 | (10,770 | ) | (8,325 | ) | |||||||||
Loss
from continuing operations before provision
|
||||||||||||||||
for
income taxes
|
(1,182,296 | ) | (1,376,154 | ) | (426,611 | ) | (279,540 | ) | ||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
loss from continuing operations
|
(1,182,296 | ) | (1,376,154 | ) | (426,611 | ) | (279,540 | ) | ||||||||
Discontinued
operations
|
||||||||||||||||
Gain
(loss) of disposal fo Far East operations
|
||||||||||||||||
and
South American Hedge Fund operations,
|
||||||||||||||||
and
United States construction technology
|
||||||||||||||||
activities
|
(6,452 | ) | (2,046,563 | ) | - | (12,345 | ) | |||||||||
Net
loss
|
(1,188,748 | ) | (3,422,717 | ) | (426,611 | ) | (291,885 | ) | ||||||||
Less:
Net income attributable to noncontrolling
|
||||||||||||||||
interest
|
- | - | - | - | ||||||||||||
Net
loss attributable to Delta Mutual Inc.
|
||||||||||||||||
and
Subsidiaries
|
$ | (1,188,748 | ) | $ | (3,422,717 | ) | $ | (426,611 | ) | $ | (291,885 | ) | ||||
Loss
per common share - basic and diluted
|
||||||||||||||||
Loss
from continuing operations attributable to
|
||||||||||||||||
Delta
Mutual Inc. and Subsidiaries
|
||||||||||||||||
common
shareholders
|
$ | (0.05 | ) | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.01 | ) | ||||
Loss
from discontinued operations attributable
|
||||||||||||||||
to
Delta Mutual Inc. and Subsidiaries
|
||||||||||||||||
common
shareholders
|
$ | (0.00 | ) | $ | (0.09 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
Weighted
average common shares - basic
|
||||||||||||||||
and
diluted
|
22,304,452 | 22,069,376 | 22,398,322 | 22,184,916 | ||||||||||||
Amounts
attributable to Delta Mutual Inc. and
|
||||||||||||||||
subsidiaries
common shareholders:
|
||||||||||||||||
Net
loss
|
$ | (1,188,748 | ) | $ | (3,422,717 | ) | $ | (426,611 | ) | $ | (291,885 | ) |
See Notes
to Unaudited Consolidated Financial Statements
2
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Number
of
|
Deferred
|
|||||||||||||||||||||||||||
Common
|
Common
|
Paid
in
|
Retained Earnings
|
Stock
|
Noncontrolling
|
|||||||||||||||||||||||
Shares
|
Stock
|
Capital
|
(Deficit)
|
Purchase
|
Interest
|
Total
|
||||||||||||||||||||||
Balance,
January 1, 2009
|
221,849,158 | 22,185 | 3,762,831 | (4,430,928 | ) | - | - | (645,912 | ) | |||||||||||||||||||
Effect
of reverse split 1:10
|
(199,664,243 | ) | (19,966 | ) | 19,966 | - | ||||||||||||||||||||||
Contribution
from stockholder
|
- | - | (1,000 | ) | - | - | - | (1,000 | ) | |||||||||||||||||||
Issuance
of common stock for services
|
200,000 | 20 | 119,980 | - | - | - | 120,000 | |||||||||||||||||||||
(valued
at $0.60 per share)
|
||||||||||||||||||||||||||||
Sale
of common stock
|
||||||||||||||||||||||||||||
(valued
at $0.29 - $0.30 per share)
|
33,334 | 3 | 9,997 | - | - | - | - | |||||||||||||||||||||
Stock
based compensation expense
|
- | - | 590,235 | - | - | - | 590,235 | |||||||||||||||||||||
Net
loss
|
- | - | - | (1,188,748 | ) | - | - | (1,188,748 | ) | |||||||||||||||||||
Balance,
September 30, 2009
|
$ | 22,418,249 | $ | 2,242 | $ | 4,502,009 | $ | (5,619,676 | ) | $ | - | $ | - | $ | (1,125,425 | ) |
See Notes
to Unaudited Consolidated Financial Statements
3
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating
|
||||||||
activities:
|
||||||||
Net
loss
|
$ | (1,188,748 | ) | $ | (3,422,717 | ) | ||
Adjustments
to reconcile net loss to
|
||||||||
net
cash used in operating activities:
|
||||||||
Depreciation
and amortization
|
509 | 25,377 | ||||||
Non-cash
compensation
|
120,000 | 245,548 | ||||||
Impairment
of fixed asset
|
- | 138,127 | ||||||
Loss
on sale of investments
|
157,939 | - | ||||||
Loss
on intellectual property
|
122,742 | |||||||
Noncontrolling
interest in income (loss) of
|
||||||||
consolidated
subsidiaries
|
- | (5,131 | ) | |||||
Compensatory
element of option
|
||||||||
issuance
|
590,235 | 590,236 | ||||||
Changes
in operating assets
|
||||||||
and
liabilities
|
(15,044 | ) | (200,243 | ) | ||||
Net
cash used in operating activities
|
(335,109 | ) | (2,506,061 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Increase
in investments
|
- | - | ||||||
Proceeds
from sales of investments
|
206,848 | 2,988,785 | ||||||
Net
cash provided by (used in)
|
||||||||
investing
activities
|
206,848 | 2,988,785 | ||||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from loans
|
321,403 | 219,863 | ||||||
Proceeds
from sale of common stock
|
10,000 | - | ||||||
Repayment
of loan
|
(200,000 | ) | (60,000 | ) | ||||
Contribution
from stockholder
|
(1,000 | ) | - | |||||
Proceeds
from minority interest
|
- | 5,862 | ||||||
Net
cash provided by
|
||||||||
financing
activities
|
130,403 | 165,725 | ||||||
Net
decrease in cash
|
2,142 | 648,449 | ||||||
Cash
- Beginning of period
|
13,957 | 57,633 | ||||||
Cash
- End of period
|
$ | 16,099 | $ | 706,082 |
See Notes
to Unaudited Consolidated Financial Statements
4
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Supplementary
information:
|
||||||||
Changes
in operating assets and
|
||||||||
liabilities
consists of:
|
||||||||
(Increase)
decrease in other prepaid expenses
|
$ | (5,718 | ) | $ | 1,914 | |||
Increase
(decrease) in accounts payable
|
||||||||
and
accrued expenses
|
(9,326 | ) | (202,157 | ) | ||||
$ | (15,044 | ) | $ | (200,243 | ) | |||
Issuance
of common stock for debt
|
$ | - | $ | 143,600 | ||||
Issuance
of common stock for in lieu of
|
||||||||
payment
of accrued expenses
|
$ | - | $ | 7,048 | ||||
Issuance
of common stock for services
|
$ | 120,000 | $ | 238,500 |
See Notes
to Unaudited Consolidated Financial Statements
5
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
consolidated balance sheets as of September 30, 2009 and the consolidated
statements of operations, stockholders’ deficiency and cash flows for the
periods presented herein have been prepared by Delta Mutual, Inc. and
Subsidiaries (the “Company” or “Delta”) and are unaudited. In the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly, the financial position, results of operations,
changes in stockholders’ deficiency and cash flows for all periods presented
have been made. The information for the consolidated balance sheet as of
December 31, 2008 was derived from audited financial statements.
Organization
Delta
Mutual, Inc. and subsidiaries (“Delta” or the “Company”) was incorporated in
Delaware on November 17, 1999. Since 2003, the principal business activities of
the Company were focused on providing environmental and construction
technologies and services to certain geographic reporting segments in the Far
East, Middle East and the United States. During the year ended December 31,
2008, the Company discontinued all its operations in the Far East
(Indonesia) and discontinued its construction technology activities that
were conducted through its wholly owned U.S. subsidiary, Delta
Technologies, Inc. See Notes 1, 4, 5 and 7 for further information
regarding these discontinued operations.
On March
4, 2008, the Company entered into a Membership Interest Purchase Agreement (the
“Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the
Agreement, the Company acquired from Egani all of the issued and outstanding
shares of stock of Altony S.A., an Uruguay Sociedad Anonima (“Altony”), which
owns 100% of the issued and outstanding membership interests in South American
Hedge Fund LLC, a Delaware limited liability company (“SAHF”). At the closing of
the Agreement, the Company issued 13,000,000 shares of its common stock to Egani
for the purchase of all of the outstanding shares of stock in Altony which
constituted, following such issuance, a majority of the outstanding shares of
the Company’s common stock.
Immediately
following the closing of the Agreement, Altony became a wholly owned subsidiary
of the Company. For accounting purposes only, the transaction was treated as a
recapitalization of the Company, as of March 4, 208, with Altony as the
acquirer. The financial statements prior to March 4, 2008 are those of Altony
and reflect the assets and liabilities of Altony at historical carrying amounts.
The financial statements show a retroactive restatement of Altony’s historical
stockholders’ equity to reflect the equivalent number of shares issued to
Egani.
The
principal business activity of Altony is the ownership and management of its
SAHF subsidiary. During the year ended December 31, 2008, SAHF shifted its focus
from investments in securities of Latin American entities to investments in oil
and gas concessions and exploration rights in Argentina and intends to continue
its focus on the energy sector, including the development and supply of energy
and alternate energy sources in Latin America and North America.
In 2007,
SAHF acquired ownership interests in four oil and gas concessions in Argentina.
The majority owners of these concessions have established joint ventures,
registered in Argentina, that are in the process of obtaining the necessary
government and environmental permits to begin operations at these concessions.
SAHF will become a member of the joint ventures in 2009, when it receives its
foreign registration in Argentina. In the first quarter of 2008, SAHF agreed to
exchange half of the ownership interests it held in the concessions to a third
party, that agreed to assume 50% of the SHAF’s subsequent development costs
related to these four concessions. As of December 31, 2008, the Company’s
ownership interests in these concessions ranged from nine to 23.5
percent. In September 2009, SAHF sold 13.5% of one of the concessions
reducing their ownership to 10%.
In 2008,
SAHF acquired 40% of the rights to explore for oil and gas in five geographic
areas located in the Salta Province of Northern Argentina. In 2009,
SAHF assigned 50% of its rights to a third party. As of September 30,
2009, SAHF owns 20% of the rights to this oil and gas
concession.
6
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Following
the acquisition of Altony, the Company continued to pursue selected business
opportunities in the Middle East that are conducted by its joint venture
subsidiary Delta-Envirotech, Inc. (“Envirotech”), headquartered in
Virginia.
BASIS OF
PRESENTATION
The
consolidated financial statements for the period ended September 30, 2009 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. Management recognizes that the Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and revenue to cover expenses as the Company
continues to incur losses.
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 the Company will ultimately achieve a
profitable level of operations.
The
Company presently does not have sufficient liquid assets to finance its
anticipated funding needs and obligations. The Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and achieve a level of oil and gas revenue adequate
to support its cost structure. Management is actively seeking additional capital
to ensure the continuation of its current activities and complete its proposed
activities. However, there is no assurance that additional capital will be
obtained or that the Company’s investments will be profitable. These
uncertainties raise substantial doubt about the ability of the Company to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties should the Company be unable to continue as a going
concern.
On April
22, 2009, the Company's Board of Directors declared a one-for-ten reverse stock
split of its common stock. All share and per share amounts have been
restated to reflect the reverse stock split except for shareholders'
deficiency. See Note 11, "Stockholders' Equity", for further
information.
Net loss
per common share for the nine and three months ended September 30, 2008 have
been revised. See note 12, "Net Loss per Common Share", for further
discussion.
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. The consolidated financial statements also include the accounts of any
Variable Interest Entities ("VIEs") where the Company is deemed to be the
primary beneficiary, regardless of its ownership percentage. All significant
intercompany balances and transactions with consolidated subsidiaries are
eliminated in the consolidated financial statements.
USE OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
7
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
EARNINGS
(LOSS) PER SHARE
Basic
earnings (loss) per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding during the year. Diluted
earnings (loss) per share are computed by dividing net earnings (loss) by the
weighted average number of common shares and potential common shares outstanding
during the period. As the Company experienced a loss during the nine months ended
September 30, 2009, potential common shares are excluded from the loss per share
calculation because the effect would be antidilutive. Potential common shares
relate to the convertible debt and stock options. As of September 30, 2009 and
2008, there were 274,992 potential common shares, respectively, related to
convertible debt and 150,000 and 699,800 common shares, respectively, related to
stock options.
REVENUE
RECOGNITION
The
Company recognized revenue from the results of its investment portfolio as the
difference between proceeds from the sale of securities and their acquisition
cost, less commissions paid to the firm that conducts the securities
transactions. The Company was in the business of trading securities and gains
and losses from the sale of securities are included in the Company’s
consolidated statements of operations.
EVALUATION
OF LONG-LIVED ASSETS
The
Company reviews property and equipment, finite-lived intangible assets and
investments in non-consolidated affiliates for impairment whenever events or
changes in circumstances indicate the carrying value may not be recoverable in
accordance with guidance in Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 360-15-35, "Impairment or Disposal of
Long-Lived Assets" ("ASC 360-15-35"). If the carrying value of the long-lived
asset exceeds the present value of the related estimated future cash flows, the
asset would be adjusted to its fair value and an impairment loss would be
charged to operations in the period identified.
DEPRECIATION
AND AMORTIZATION
Property
and equipment are stated at cost. Depreciation is provided for by the
straight-line method over the estimated useful lives of the related
assets.
INVESTMENTS
At
acquisition, marketable debt and equity securities are designated as trading
securities which are carried at estimated fair value with unrealized gains and
losses reflected in results of operations.
EQUITY
METHOD INVESTMENTS
The
Company accounts for non-marketable investments using the equity method of
accounting if the investment gives it the ability to exercise significant
influence over, but not control of, an investee. Significant influence generally
exists if there is an ownership interest representing between 20% and 50% of the
voting stock of the investee. Under the equity method of accounting, investments
are stated at initial cost and are adjusted for additional investments and their
proportionate share of earnings or losses and distributions. The Company records
its share of the investee’s earnings or losses in earnings (losses) from
unconsolidated entities, net of income taxes, in its consolidated statement of
operations. Equity investments of less than 20% are stated at cost. The cost is
not adjusted for its proportionate share of earnings or losses. The Company
evaluates its equity method investments for impairment when events or changes in
circumstances indicate, in management’s judgment, that the carrying value of
such investments may have experienced an other-than-temporary decline in value.
When evidence of loss in value has occurred, the Company compares fair value of
the investment to its carrying value to determine whether impairment has
occurred. If the estimated fair value is less than the carrying value and
management considers the decline to be other than temporary, the excess of the
carrying value over the estimated fair value is recognized as impairment in the
consolidated financial statements.
8
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
STOCK-BASED
COMPENSATION
The
Company has a stock-based compensation plan under which stock options are
granted to employees. The Company accounts for stock-based compensation under
FASB ASC 718, "Compensation-Stock Compensation" ("ASC 718").
INCOME
TAXES
The
Company accounts for income taxes using an asset and liability approach under
which deferred taxes are recognized by applying enacted tax rates applicable to
future years to the differences between financial statement carrying amounts and
the tax basis of reported assets and liabilities. The principal item giving rise
to deferred taxes are future tax benefits of certain net operating loss
carryforwards.
FOREIGN
CURRENCY TRANSLATION
The
functional currency for some foreign operations is the local currency. Assets
and liabilities of foreign operations are translated at balance sheet date rates
of exchange and income, expense and cash flow items are translated at the
average exchange rate for the period. The functional currency in South America
is the U.S. dollar. Translation adjustments are recorded in Cumulative Other
Comprehensive Income. The translation gains or losses were not material for the
nine and three months ended September 30, 2009 and 2008, and there were no
adjustments to Cumulative Other Comprehensive Income.
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 he 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.
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 gain (loss) of $(6,452) and $(2,046,563)
and $0 and $(12,345), respectively, for the nine and three months ended
September 30, 2009 and 2008, respectively.
9
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Summarized
statement of loss for discontinued operations is as follows:
Nine
Months Ended Sept. 30,
|
Three
Months Ended Sept. 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Impairment
|
— | — | — | — | ||||||||||||
Provision
for income taxes
|
— | — | — | — | ||||||||||||
Loss
from operations, net of taxes
|
(6,452 | ) | (2,046,563 | ) | — | (12,345 | ) | |||||||||
Gain
on disposition of minority interest
|
— | — | — | — | ||||||||||||
Provision
for income taxes
|
— | — | — | — | ||||||||||||
Loss
from discontinued operations, net of taxes
|
$ | (6,452 | ) | $ | (2,046,563 | ) | $ | — | $ | (12,345 | ) |
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 nonfinancial
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 nonfinancial 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.
As of
September 30, 2009, 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
values of the cash and cash equivalents is determined based on quoted market
prices in public markets and is categorized as Level 1. The
investment in non-consolidated affiliates is determined by the Company to
develop 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 nine months ended September 30, 2009.
10
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
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 September 30, 2009.
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
|
$ | 16,099 | $ | 16,099 | $ | - | $ | - | ||||||||
Non-consolidated
affiliates
|
1,385,713 | - | - | 1,385,713 | ||||||||||||
Total
|
$ | 1,401,812 | $ | 16,099 | $ | - | $ | 1,385,713 |
The
Company had no financial assets accounted for on a non-recurring basis as of
September 30, 2009.
There
were no changes to the Company’s valuation techniques used to measure asset fair
values on a recurring or nonrecurring basis during the nine months ended
September 30, 2009 and the Company did not have any financial liabilities as of
September 30, 2009. The
Company has other financial instruments, such as receivables, accounts payable
and other liabilities, notes payable and customer deposits, which have been
excluded from the tables above. Due to the short-term nature of these
instruments, the carrying value of receivables, accounts payable and other
liabilities, notes payable and customer deposits approximate their fair
values.
NEW
FINANCIAL ACCOUNTING STANDARDS
During
the second quarter of 2009, the Company implemented additional interim
disclosures about fair value of financial instruments, as required by FASB ASC
Paragraph 825-10-65-1. Prior to implementation, disclosures about fair values of
financial instruments were only required to be disclosed annually. As the
required modifications only related to additional disclosures of fair values of
financial instruments in interim financial statements, the adoption did not
affect the Company’s financial position or results of operations.
Beginning
in the second quarter of 2009, the Company must disclose the date through which
subsequent events have been evaluated, in accordance with the requirements in
FASB ASC Paragraph 855-10-50-1. With regards to the condensed consolidated
financial statements and notes to those financial statements contained in this
Form 10-Q, the Company has evaluated all subsequent events through November 13,
2009 (the date the Company’s financial statement are issued).
In
September 2009, the FASB implemented certain modifications to FASB ASC Topic
860, Transfers and Servicing, as a means to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets, the effects of a transfer on its financial position, financial
performance, and cash flows, and a transferor’s continuing involvement, if any,
in transferred financial assets. These modifications must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009. The Company does not expect the adoption of this
standard to have an impact on the Company’s results of operations, financial
condition or cash flows.
11
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
During
the third quarter of 2009, the Company adopted the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles in
accordance with FASB ASC Topic 105, “Generally Accepted Accounting Principles”
(the “Codification”). The Codification has become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. Effective with the Company’s adoption on July 1, 2009, the
Codification has superseded all prior non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification has become non-authoritative. As the adoption of
the Codification only affected how specific references to GAAP literature have
been disclosed in the notes to the Company’s condensed consolidated financial
statements, it did not result in any impact on the Company’s results of
operations, financial condition or cash flows.
Updates to the FASB
Codification Applicable to the Company
The FASB
has published FASB Accounting Standards Update No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820)—Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). This Update amends Subtopic 820-10,
Fair Value Measurements and
Disclosures—Overall, to permit a reporting entity to measure the fair
value of certain investments on the basis of the net asset value per share of
the investment (or its equivalent). This Update also requires new disclosures,
by major category of investments, about the attributes of investments included
within the scope of this amendment to the Codification. The guidance in this
Update is effective for interim and annual periods ending after December 15,
2009. The Company does not expect the adoption of this standard to have an
impact on the Company’s results of operations, financial condition or cash
flows.
2.
ACQUISITION
Effective
March 4, 2008, the Company entered into a Membership Interest Purchase
Agreement, pursuant to which the Company acquired from Egani, Inc. all the
shares of stock of Altony SA, an Uruguayan Sociedad Anonima (“Altony”), which
owns 100% of the issued and outstanding membership interests in South American
Hedge Fund LLC, a Delaware limited liability company (sometimes referred to as
“SAHF”). At the closing of the Agreement, the Company issued 13,000,000 shares
of its common stock to Egani, Inc. which constituted, following such issuance, a
majority of the outstanding shares of its common stock. Immediately following
the closing of the Agreement, Altony became a wholly owned subsidiary of the
Company. For accounting purposes, the transaction was treated as a
recapitalization of the Company, as of March 4, 2008, with Altony as the
acquirer.
The
acquired assets and liabilities assumed of Delta Mutual from the reverse
acquisition are as follows:
Cash
|
$ | 57,623 | ||
Prepaid
expenses
|
1,914 | |||
Property
and equipment
|
462,842 | |||
Accumulated
depreciation
|
(94,719 | ) | ||
Intangible
asset-net
|
126,317 | |||
Other
assets
|
650 | |||
Accounts
payable
|
(173,370 | ) | ||
Accrued
expenses
|
(1,225,674 | ) | ||
Convertible
debt
|
(397,340 | ) | ||
Notes
payable
|
(240,655 | ) | ||
Minority
interests
|
(225,797 | ) | ||
Common
stock
|
(7,888 | ) | ||
Deficit
|
1,716,087 | |||
$ | -0- |
12
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
3.
INVESTMENTS
Trading
securities are comprised of public and private securities of Latin American
entities. For the nine and three months ended September 30, 2009 and 2008, the
Company incurred realized gains (losses) of $-0- and $(2,051,672), respectively,
and $-0- and $19,503, respectively. There were no investments in trading
securities as of September 30, 2009 and December 31, 2008.
4.
PROPERTY AND EQUIPMENT
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Equipment
|
$ | 6,277 | $ | 6,277 | ||||
Leasehold
improvements
|
7,807 | 7,807 | ||||||
14,084 | 14,084 | |||||||
Less
accumulated depreciation
|
13,789 | 13,280 | ||||||
$ | 295 | $ | 804 |
During
2008, the Company discontinued its operations in the Far East (Indonesia) and
discontinued its construction technology activities. During the third and fourth
quarters of 2008, the Company wrote off $268,127, the value of the equipment
that was used in its Indonesian operations. During the fourth quarter of 2008,
the Company wrote off $77,125, the value of the manufacturing equipment that was
used to produce its insulating concrete form (ICF) building
product.
Depreciation
expense for the nine and three months ended September 30, 2009 and 2008 amounted
to $509 and $21,802, respectively, and $170 and $265, respectively.
5.
INTANGIBLE ASSETS
Intangible
assets consisted of intellectual property from a patent application. The Company
elected not to pursue the patent application and recorded an impairment charge
of $122,742 of the unamortized amounts during the quarter ended June 30, 2008.
For the nine and three months ended September 30, 2009 and 2008, amortization
expense was $-0- and $3,575, respectively, and $-0- and $-0-, respectively.
There were no intangible assets as of September 30, 2009 and December 31,
2008.
6.
INVESTMENT IN NONCONSOLIDATED AFFILIATES
As of
September 30, 2009 the Company has a 10% ownership interest in the Jollin and
Tonono oil and gas concessions located in Northern Argentina. During 2007, the
Company purchased a 47% ownership of these concessions and paid the purchase
price by issuing a non-interest bearing note in the principal amount of
$1,820,000 to Oxipetrol-Petroleros de Occidente S.A. (Oxipetrol), one of the
other owners, with a maturity date of July 2008. The Company’s purchase price
was based upon the price tendered by the original purchasers of the concessions
that was and accepted by the Argentine government, who formerly owned these
properties. The government uses a number of factors In determining the selling
prices for oil and gas concession in Argentina, including the location and size
of the concession and the current market prices of crude oil and natural gas.
Prior to the maturity date, the Company and Oxipetrol mutually agreed to reduce
the principal amount of the Company’s note primarily because of changes in oil
and gas prices. Based upon the purchase price reduction, the Company repaid
Oxipetrol $1,270,000 at the maturity date. Based on these circumstances, the
Company recorded a one time, retroactive adjustment, reducing the value of this
investment by $550,000 at December 31, 2008.
13
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
During
2008, the Company exchanged 50% of its ownership in this investment with a third
party for no cash consideration, however, the acquirer contractually agreed to
assume 50% of the Company’s obligations with respect to future development
expenses. The Company recorded a $635,000 loss on disposition of this investment
in its consolidated statement of operations.
During
the year ended December 31, 2008, majority owners of the Jollin and Tonono
concessions formed an Argentine-registered joint venture and paid, in the
aggregate, approximately $848,00 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 other
owners of these concessions have agreed that, upon admission of the Company as a
member of the joint venture, the Company will retain its 23.5% ownership.
However, the Company’s weighted average pro-rata portion of the 2008 aggregate
development cost, of approximately $223,024, all of which is included in
accounts payable in the Company’s consolidated balance sheet at December 31,
2008, will be repaid to the other members from its pro-rata share of the future
earnings. The Company has applied for foreign registration in Argentina and was
admitted as a member of the joint venture in September 2009.
On
September 25, 2009, the Company sold 13.5% of its ownership interest in Jollin
and Tonono 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 will assume full responsibility to develop the oil and gas concession
until production is achieved in the blocks. This obligation includes
all costs of the full amount attached to the concession contract with the
government. Any prior unpaid costs accrued by the Company, will also
be assumed by Maxipetrol. The Company through SAHF will retain 10% of
the total concession in the carryover mode ("no cost obligations to SAHF") and
will begin receiving revenue from Jollin and Tonono blocks when the first well
will be approved for commercial exploration. 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 nine months ended
September 30, 2009.
14
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
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
Kestal, SA, a company that acquired 100% of these explorations rights from the
government of Argentina in 2007. Kestal retained a 60% interest. The price
Kestal paid to acquire these rights from the government was determined by the
process described above. In 2009, SAHF assigned 50% of its rights to
a third party. As of September 30, 2009, SAHF owns 20% of the rights
to this oil and gas concession. The Company paid the $697,000
purchase price in cash and incurred no additional costs or expenses related to
this investment in 2008. The Company expects that in 2009 and 2010,
substantially all of the exploration costs required to retain these exploration
rights will be borne by the majority owner.
The
Company has 9% ownership of the Tartagal and Morillo oil and gas
concessions located in Northern Argentina. During 2007, the Company purchased an
18% ownership of these concessions and paid the purchase price by issuing a
non-interest bearing note in the principal amount of $480,000 to Oxipetrol, one
of the other owners, with a maturity date of July 2008. The purchase price for
this investment was based on the original price paid to the Argentine government
to acquire these concessions, following the process described above. Prior to
the maturity date, the Company and Oxipetrol mutually agreed to reduce the
principal amount of the Company’s note primarily because of changes in oil and
gas prices. Based upon the purchase price reduction, the Company repaid
Oxipetrol $450,000 at the maturity date. Based on these circumstances, the
Company recorded a one time, retroactive adjustment reducing the value of this
investment by $30,000 at December 31, 2008.
During
2008, the Company exchanged 50% of its ownership in this investment with a third
party for no cash consideration, however, the acquirer contractually agreed to
assume 50% of the Company’s obligations with respect to future development
expenses. The Company recorded a $225,000 loss on disposition of this investment
in its consolidated financial statements.
In March
2009, a Hong Kong public company purchased 60% of the ownership in the Tartagal
and Morillo Concessions, from the other majority owners, for total consideration
of approximately $270 million. These funds will be used for development and
operating expenses in 2009 and beyond. The Company through SAHF will
retain 9% of the total concession in the carryover mode ("no cost obligations to
SAHF") and will begin receiving revenue from Tartagal and Morillo blocks when
the first well will be approved for commercial exploration.
15
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
The
Company evaluated these investments for impairment and concluded that, except as
described above, no loss in value occurred as of September 30, 2009. The
following table summarizes the Company’s investments in these nonconsolidated
affiliates.
Concession
|
Exploration
|
|||||||||||
Investments
|
Rights
|
Total
|
||||||||||
At
December 31, 2007
|
$ | 2,300,000 | $ | — | $ | 2,300,000 | ||||||
Adjustment
of purchase price
|
(580,000 | ) | — | (580,000 | ) | |||||||
Disposition
of investment, net
|
(860,000 | ) | — | (860,000 | ) | |||||||
Additional
investment in 2008
|
223,024 | 697,000 | 920,024 | |||||||||
Equity
in net earnings (loss)
|
— | — | — | |||||||||
At
December 31, 2008
|
1,083,024 | 697,000 | 1,780,024 | |||||||||
Additional
investments in 2009
|
264,000 | — | 264,000 | |||||||||
Adjustment
of additional investment during 2009 and 2008
|
(293,524 | ) | — | (293,524 | ) | |||||||
Disposition
of investment, net
|
(364,787 | ) | — | (364,787 | ) | |||||||
At
September 30, 2009
|
$ | 688,713 | $ | 697,000 | $ | 1,385,713 |
7.
NONCONTROLLING INTEREST
During
2008, the Company discontinued its operations in the Far East (Indonesia) and
the operations of its Puerto Rico real estate development partnerships. For the
year ended December 31, 2008, the Company wrote off all balances in connection
with these joint ventures and recorded a gain on the disposal of the
discontinued operations of approximately $230,057, which was included in
discontinued operations on the Company’s consolidated statements of operations
for the year ended December 31, 2008.
The
Company continues to maintain a 45% interest in Delta-Envirotech, Inc. which
meets the definition of a Variable Interest Entity as defined in FASB ASC
810-20, ("Consolidation Control of Partnerships and Similar Entities") ("ASC
810-20") requiring the beneficiaries of a variable interest entity to
consolidate the entity. The primary beneficiary of a variable interest entity is
the party that absorbs
the majority of the expected losses of the entity or receives a majority of the
entity's expected residual return, or both, as a result of ownership,
contractual or other financial interest in the entity.
Effective
January 1, 2009, the Company completed its implementation of SFAS No. 160,FASB
ASC 810, ("Consolidations") ("ASC 810").
16
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
8.
SHORT-TERM DEBT
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Notes
payable to three investors,
|
||||||||
interest
at 8%, due November 6,
|
||||||||
2008
(1)
|
$ | 150,655 | $ | 150,655 | ||||
Note
payable to third party, interest
|
||||||||
at
6%, due April 2009 (1)
|
30,000 | 30,000 | ||||||
Notes
payable to stockholders and related
|
||||||||
parties,
interest at 6%, due on demand
|
379,934 | 280,553 | ||||||
Note
payable to stockholder,
|
||||||||
non-interest
bearing, payable on demand
|
22,022 | — | ||||||
$ | 582,611 | $ | 461,208 |
(1) The
Company did not repay these notes at the maturity dates. The Company is
currently negotiating amended terms with the noteholders. If the Company and the
noteholders can not agree upon an amendment to the note, including an extension
of the maturity dates, the Company may receive a notice of default. If the
Company receives a notice of default and fails to repay the notes, the lenders
could initiate legal proceedings and obtain a judgment against the
Company.
Interest
expense for the nine and three months ended September 30, 2009 and 2008 amounted
to $25,699 and $(23,664), respectively, and $8,833 and
$6,386, respectively. Accrued interest at September 30, 2009 and December
31, 2008 amounted to $50,069 and $24,370, respectively, and is included in
accrued expenses on the Company’s consolidated balance sheets.
9.
CONVERTIBLE DEBT
In
connection with the March 4, 2008 merger, the Company assumed convertible debt
obligations of $397,340. A note in the principal amount of $193,740 was not
repaid at its maturity date. The Company is currently negotiating amended terms
with the noteholder. If the Company and the noteholder can not agree upon an
amendment to the note, including an extension of the maturity date, the Company
may receive a notice of default. If the Company receives a notice of default and
fails to repay the note, the lender could initiate legal proceedings and obtain
a judgment against the Company.
In April
2008, the Company issued 230,058 shares of common stock in payment of the
aggregate principal amount of $143,600 of convertible notes and issued 11,564
shares of common stock in payment of the accrued interest of
$7,048.
At
September 30, 2009, the Company's outstanding convertible notes were convertible
into 274,992 shares of common stock.
The
following table shows the maturities by year of total face amount of the
convertible debt obligations at September 30, 2009:
2009
|
$ | 253,740 | ||
$ | 253,740 |
17
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
For the
nine and three months ended June 30, 2009 and 2008, the Company recorded
interest expense of $5,812 and $7,728, respectively, and $1,937
and $1,938, respectively. As of September 30, 2009 and December 31, 2008,
accrued interest of $48,087 and $40,337, respectively, is included in accrued
expenses on the Company's consolidated balance sheets.
10.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Professional
fees
|
$ | 11,000 | $ | 33,000 | ||||
Interest
expense
|
98,156 | 66,664 | ||||||
Payroll
expense
|
758,250 | 644,508 | ||||||
Payroll
expense-officers
|
59,471 | 50,296 | ||||||
Payroll
tax expense
|
56,669 | 45,481 | ||||||
Accrued
consulting fees
|
419,867 | 419,877 | ||||||
Other
accrued expenses
|
121,832 | 103,589 | ||||||
$ | 1,525,245 | $ | 1,363,395 |
During
the year ended December 31, 2008, pursuant to a written agreement with the
former president of the Company, $117,436 of his accrued salary was
eliminated.
Accrued
consulting fees as of September 30, 2009 and December 31, 2008 include $218,667
pursuant to a consulting agreement that had been terminated for cause by the
Company.
Included
in payroll expenses is approximately $672,000 of accrued expenses which is the
responsibility of the company's subsidiary, Delta Envirotech. The
parent company, Delta Mutual Inc., has no obligation if any of the accrued
compensation is not paid.
11. 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 is the date the reverse stock split is made effective for
trading purposes by the Financial Industry Regulatory Authority (FINRA). FINRA
approved the reverse split for trading purposes effective July 6, 2009. See Note
12, "Net Loss per Common Share", for the impact on the Company's loss per share
amounts as a result of the reverse stock split. The reverse stock
split resulted in a reduction of 199,664,243 shares of common stock and was
accounted for by the transfer of $19,966 from common stock to additional paid-in
capital, which is the amount equal to the par value of the reduced number of
shares to effect the reverse stock split.
All share
and per share data (except par value) have been adjusted to reflect the effect
of the stock split for all periods presented except for stockholders'
deficiency. As a result, there is no overall financial effect of the reverse
split, however, the number of outstanding employee stock options has been
reduced from 3,500,000 to 350,000 and the exercise price for the respective
options has increased by a factor of 10.
18
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
As of
September 30, 2009, the board of directors had not authorized the issuance of
any series of preferred stock.
The
Company issues shares of common stock for services and repayment of debt and
interest valued at fair market value at time of issuance.
For the
nine months ended September 30, 2009 and 2008, the Company issued 200,000 and
10,550,000 shares of common stock, respectively, valued at $0.60 and $0.20 -
$0.70 per share, respectively, for services valued at $120,000 and $238,500,
respectively.
For the
three months ended September 30, 2009 and 2008, the Company issued -0-
and -0- shares, respectively, valued at $0.60 and $0.70 per share,
respectively, for services valued at, and $-0- and $-0-,
respectively.
For the
nine months ended September 30, 2009 and 2008, the Company issued –0- and
2,300,571 shares of common stock, respectively, for the repayment of $-0- and
$143,600 principal amount of convertible notes, respectively and issued –0- and
115,634 shares, respectively, as payment of $-0- and $7,048, respectively, of
accrued interest. The shares were valued at $0.50 - $0.70 per
share.
For the
three months ended September 30, 2009 and 2008, the Company issued –0- and -0-
shares of common stock, respectively, for the repayment of $-0- principal amount
of convertible notes, respectively, and issued –0- and -0- shares, respectively,
as payment of $-0- and -0-, respectively, of accrued interest. The shares were
valued at $0.50 - $0.70 per share.
During
the second quarter of 2009, the Company received $10,000 pursuant to
subscription agreements to purchase 33,334 shares of common stock. On August24,
2009, the Company issued these shares.
12.
|
Loss
Per Common Share
|
The
following table sets forth the reconciliation and diluted net loss per common
share computation for the nine and three months ended September 30,
2008.
Nine Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30, 2008
|
September 30, 2008
|
|||||||
Continuing
operations
|
||||||||
Basic
and diluted EPS:
|
||||||||
Net
loss ascribed to common shareholders - basic and diluted
|
$ | (1,376,154 | ) | $ | (279,540 | ) | ||
Weighted
shares outstanding - basic and diluted
|
22,069,376 | 22,186,916 | ||||||
Basic
and diluted net loss per common share
|
$ | (0.06 | ) | $ | (0.01 | ) | ||
Discontinued
operations
|
||||||||
Basic
and diluted EPS:
|
||||||||
Net
loss ascribed to common shareholders - basic and diluted
|
$ | (2,046,563 | ) | $ | (12,345 | ) | ||
Weighted
shares outstanding - basic and diluted
|
22,069,376 | 22,186,916 | ||||||
Basic
and diluted net loss per common share
|
$ | (0.09 | ) | $ | (0.00 | ) |
Net loss
for the nine and three months ended September 30, 2008 has been
revised. The revision was immaterial to the Company's consolidated
results of operations and financial position. See below for further
discussion. All share and per share amounts have been restated to
reflect the one for ten reverse stock split as discussed in Note
11.
19
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
The
amounts previously reported, as revised to reflect the one for ten reverse stock
split in 2008, were as follows:
Nine Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30, 2008
|
September 30, 2008
|
|||||||
Continuing
operations:
|
||||||||
Basic
and diluted loss per common share
|
$ | (0.02 | ) | $ | (0.00 | ) | ||
Discontinued
operations:
|
||||||||
Basic
and diluted loss per common share
|
$ | (0.00 | ) | $ | (0.00 | ) |
13. BUSINESS
SEGMENT INFORMATION
The
Company’s reporting business segments are geographic and
include North America (United States) and South America. The
primary criteria by which financial performance is evaluated and resources
allocated are revenue and operating income.
The
following is a summary of key financial data:
Nine Months Ended
|
Three months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Total
Revenue:
|
||||||||||||||||
North
America
|
$ | 14,458 | $ | 22,008 | $ | 14,458 | $ | 22,008 | ||||||||
South
America
|
— | — | — | — | ||||||||||||
$ | 14,458 | $ | 22,008 | $ | 14,458 | $ | 22,208 | |||||||||
Income
(Loss) from
|
||||||||||||||||
Continuing
Operations:
|
||||||||||||||||
North
America
|
$ | (992,845 | ) | $ | (1,414,097 | ) | $ | (272,360 | ) | $ | (293,223 | ) | ||||
South
America
|
(157,939 | ) | — | (157,939 | ) | — | ||||||||||
$ | (1,150,784 | ) | $ | (1,414,097 | ) | $ | (430,299 | ) | $ | (293,223 | ) |
14. INCOME
TAXES
The
Company adopted the provisions of FASB ASC 740, "Income Taxes", ("ASC 740") on
January 1, 2007. As a result of the implementation of ASC 740, the Company
recognized no adjustment in the net liability for unrecognized income tax
benefits.
15. SHARE
BASED COMPENSATION
The
Company records compensation expense in its consolidated statements of
operations related to employee stock-based options and awards in accordance with
ASC 718.
The
Company recognizes the cost of all employee stock options on a straight-line
attribution basis over their respective contractual terms, net of estimated
forfeitures. The Company has selected the modified prospective method of
transition.
20
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
The
Company also issues shares of its common stock to non-employees as stock-based
compensation. The Company accounts for the services using the fair market value
of the services rendered. For the nine months ended September 30, 2009 and
2008, the Company issued and 200,000 and 1,055,000 shares, respectively, and
recorded compensation expense of $120,000
and $238,500, respectively, in conjunction with the issuance of these shares.
For the three months ended September 30, 2009 and 2008, the Company issued -0-
and -0- shares, respectively, and recorded compensation expense of $-0- and -0-,
respectively, in conjunction with the issuance of these shares.
Stock
Option Plan
In
conjunction with the March 4, 2008 merger, the Company assumed the obligation of
797,800 outstanding stock options at their fair value. As of September 30, 2009,
650,000 shares of common stock remain available for issuance under the stock
option plan.
A summary
of the option activity under the Company’s stock option plan as of December 31,
2008 and changes during the nine months ended September 30, 2009, is presented
below.
Options
|
Shares
|
Weighted-Average
Exercise Share Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||||
Outstanding
at January 1, 2009
|
350,000 | $ | 1.10 | |||||||||||||
Options
granted
|
- | $ | - | |||||||||||||
Options
exercised
|
- | $ | - | |||||||||||||
Options
cancelled/expired
|
(200,000 | ) | $ | 1.10 | ||||||||||||
Outstanding
at September 30, 2009
|
150,000 | $ | 1.10 | 1.9 | $ | (245,000 | ) | |||||||||
Exercisable
at September 30, 2009
|
150,000 | $ | 1.10 | 1.9 | — |
Stock
compensation expense applicable to stock options for the nine and three months
ended September 30, 2009 and 2008 was approximately $590,235 and $196,745,
respectively. The aggregate intrinsic value of options outstanding as of
September 30, 2009 was $(245,000).
All of
the Company’s outstanding options were exercisable as of September 30,
2009. At
September 30 2009, there was $228,800 of total unrecognized compensation cost
related to share-based compensation arrangements granted under the stock option
plan. The cost is expected to be recognized over a weighted average period of
1.9 years.
16.
COMMITMENTS AND CONTINGENCIES
Consulting
Agreements
The
Company had a consulting agreement that expired during the year ended December
31, 2008. As of September 30, 2009 and December 31, 2008, consulting fees of
$201,200 associated with this agreement are included in accrued expenses on the
Company's consolidated balance sheets.
21
DELTA
MUTUAL, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
17. LEGAL
PROCEEDINGS
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. The Company
has not made any payments to these two former employees pursuant to the
agreements. The Company believes the resolution of this matter will not have a
material effect on the Company or its operations.
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.
One June
3, 2009, Delta Technologies, Inc., a wholly-owned subsidiary of the Company and
a discontinued operation (“Delta Technologies”), was notified by a law firm
engaged by Wolf Block LLP (“Wolf Block”), 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. If
Delta Technologies does not make payment arrangements or cannot otherwise
resolve this matter, Wolf Block has authorized a lawsuit to be filed against
Delta Technologies and/or the Company. Delta Technologies has contacted the law
firm retained by Wolf Block to dispute the amount of the past due legal services
provided by Wolf Block, and is attempting to establish the correct amount past
due prior to making repayment arrangements, if any. The Company believes that
the resolution of this matter will have no material effect on the Company or its
operations.
22
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
The
following discussion of our financial condition and results of
operations should be read in conjunction with the financial
statements and notes thereto and other financial information included
elsewhere in this report.
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 were
incorporated in the State of Delaware on November 17, 1999. In 2003, we
established business operations focused on providing environmental and
construction technologies and services in the Far East, the Middle East, and the
United States. As of December 31, 2008, the construction technology activities
and our business in the Far East (Indonesia) were discontinued.
On March
4, 2008, we entered into a Membership Interest Purchase Agreement (the
“Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the
Agreement, we acquired from Egani 100% of the shares of stock held by Egani in
Altony S.A., an Uruguay Sociedad Anonima, (“Altony”) which owns 100% of the
issued and outstanding membership interests in South American Hedge Fund LLC, a
Delaware limited liability company (sometimes herein referred to as “SAHF”). At
the closing of the Agreement, we issued 13,000,000 shares of our Common stock to
Egani for the purchase of Altony which constituted, following such issuance, a
majority of the outstanding shares of our common stock. Immediately following
the closing of the Agreement, Altony became a wholly owned subsidiary of the
Company. For accounting purposes, the transaction was treated as a
recapitalization of the Company with Altony as the acquirer.
The
Company’s principal business at this time is conducted by our subsidiary, South
American Hedge Fund, which has investments in oil and gas concessions in
Argentina and intends to focus its investments in the energy sector, including
development of energy producing investments and alternative energy production in
Latin America and North America. Following the acquisition of SAHF, management
has continued to pursue selected business opportunities in the Middle East These
activities are conducted by our joint venture subsidiary, Delta-Envirotech, Inc.
(“Envirotech”). We have operating control of Envirotech and hold a 45% percent
ownership interest.
Reverse
Stock Split
Effective
July 6, 2009, we effected a 1:10 reverse split (the “Reverse Split”) of our
outstanding common stock, pursuant to a definitive information statement filed
with the Securities and Exchange Commission. Following effectiveness of the
Reverse Split, each ten (10) shares of our common stock outstanding immediately
prior to the effective date was automatically converted into one (1) share of
our common stock. By reason of the Reverse Split, the number of outstanding
shares of our common stock was reduced from 223,849,158 shares to 22,384,916
shares.
RESULTS
OF OPERATIONS
During
the nine months ended September 30, 2009, we incurred a net loss of
$1,188,748 primarily due to a loss from continuing operations of
$1,150,784. Our ability to continue as a going concern is dependent upon our
ability to obtain funds to meet our obligations on a timely basis, obtain
additional financing or refinancing as may be required, and ultimately to attain
profitability. There are no assurances that we will be able to obtain additional
financing or that such financing will be on terms favorable to us. The inability
to obtain additional financing when needed would have a material adverse effect
on our operating results.
23
NINE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
2008
During
the nine months ended September 30, 2009, we incurred a net loss from continuing
operations of $1,182,296 compared to $1,376,154 for the nine months ended
September 30, 2008. The decrease in our loss from continuing operations for the
nine months ended September 30, 2009 over the comparable period of the prior
year was primarily due to a decrease in general and administrative expenses of
approximately $145,000 and the elimination of a loss on intellectual property
that occurred during the prior year period of approximately
$138,000.
Our net
loss for the nine months ended September 30, 2009 was $1,188,748 compared to a
net loss of $3,422,717 for the comparable prior year period. The net
loss for the nine months ended September 30, 2008 included a loss from
discontinued operations of $2,046,563 primarily associated with the liquidation
of the investment portfolio.
THREE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30,
2008
During
the three months ended September 30, 2009, we incurred a net loss from
continuing operations of $426,611 compared to $279,540 for the three months
ended September 30, 2008. The increase in our loss from continuing operations
for the three months ended September 30, 2009 over the comparable period of the
prior year was primarily due an increase in general and administrative expenses
from approximately $155,096 in 2008 to approximately $272,360 in 2009, offset by
an impairment charge of $138,127 in 2008 and a loss on sale of investments of
$157,939 in 2009.
Our net
loss for the three months ended September 30, 2009 was $426,611 compared to a
net loss of $291,885 for the comparable prior year period. The net loss for the
three months ended September 30, 2009 included a loss on sale of investments of
approximately $157,939, and the comparable period in 2008 included an impairment
charge of $138,127.
PLAN OF
OPERATION
The
primary focus of the Company’s business is its South American Hedge Fund
subsidiary that has investments in oil and gas exploration and production in
Argentina and will continue to focus on the energy sector, including the
development and supply of energy and alternative energy sources in Latin America
and North America. As of December 31, 2008, the securities trading activities of
South American Hedge Fund were accounted for as discontinued
operations.
Oil and
Gas Investments
Our main
source of revenue will derive from the sale of crude oil and natural gas
produced form the four oil and gas concessions in which we have made
investments. While we are not the operators of these concessions, 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 nine to 20%.
Jollin
and Tonono Concessions
In 2008,
the majority owners of these concessions formed an Argentine-registered joint
venture to operate these concessions. Since SAHF was not registered in
Argentina, it could not become an official member of the joint venture. The
other owners of the joint venture have agreed that SAHF will be admitted as a
member of the joint venture, upon the registration of SAHF as a foreign company
in Argentina. SAHF applied for foreign registration and was approved in
September 2009.
A well
located in the Tonono Concession became operational for the commercial
production of oil in the first quarter of 2009. Delivery of the commercial
production is currently expected by the end of the fourth quarter. A
well located in the Jollin Concession contains commercial quantities of natural
gas. A natural gas pipeline connecting the Jollin Concession to a major
distribution pipeline is in the pre-construction phase. The connecting pipeline
when completed will be owned by the joint venture. It is expected to be
completed during the second quarter of 2010. Upon completion, it will permit the
joint venture to commence deriving additional revenue from the sale of natural
gas.
Tartagal
and Morillo Concessions
In 2008,
the majority owners of the Tartagal and Morillo Concessions agreed to form an
Argentine-registered joint venture and applied for government approval of the
license to operate the concessions. SAHF received its foreign corporation
registration in 2009 and will join the joint venture when it formed and is
registered with the government.
24
In March
2009, a Hong Kong public company, following approval by its shareholders, agreed
to acquire a 60% participation interest in these concessions for approximately
$280 million. The Company expects that the funds from this acquisition will be
used for development and operating expenses in 2009 and beyond. Deliveries of
crude oil from these concession are expected to begin in 2009.
Exploration
Rights
SAHF
holds a 20% interest in the oil and gas exploration rights to five
geographically defined areas in the Salta Province of Northern Argentina.
Provided certain development activities are under taken by the majority owner,
these exploration rights will remain in effect until the year 2010.
Middle
East
Envirotech
is the Middle East distributor of an organic supplement designed to increase
crop yield. During the second half of 2008, a Saudi Arabian farm operator
purchased sample quantities of the organic supplement for crop testing.
Subsequent purchases in commercial quantities will depend upon the evaluation of
the crop yield that began in the second quarter of 2009 and is currently in
process.
FUNDING
Our
current business plan for 2009 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.
LIQUIDITY
At
September 30, 2009, we had a working capital deficit of approximately $2.5
million, compared with a working capital deficit of approximately $2.4 million
at December 31, 2008. The increase as of September 30, 2009 was due primarily to
a decrease in accounts payable of approximately $200,000 and increases in
accrued expenses of approximately $160,000 and in notes payable of approximately
$120,000.
At
September 30, 2009, we had total assets of approximately $1.4 million compared
to total assets of approximately $1.8 million at December 31, 2008. The decrease
is primarily attributable to a decrease in investments in the amount of
approximately $400,000 made in our oil and gas concessions in
Argentina.
Cash
decreased approximately $2,000 for the nine months ended September
30, 2009. Net cash used in operating activities for the nine months ended
September 30, 2009 was approximately $335,000, as compared with approximately
$2.5 million in 2008; net cash provided by investing activities was
approximately $206,000 in 2009, as compared with approximately $2,988,000 in
2008. The decrease is primarily a higher level of sales of assets and
investments in our oil and gas concessions in 2008. Cash used in operations
activities (primarily a net loss of $1,888,748) was offset by the non-cash
option issuance of $590,235, by net cash provided in investing activities of
approximately $206,000, and by proceeds from loans of approximately
$130,000.
CRITICAL
ACCOUNTING ISSUES
The
Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. 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 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.
25
Other
Matters
NEW
FINANCIAL ACCOUNTING STANDARDS
During
the second quarter of 2009, the Company implemented additional interim
disclosures about fair value of financial instruments, as required by FASB ASC
Paragraph 825-10-65-1. Prior to implementation, disclosures about
fair values of financial instruments were only required to be disclosed
annually. As the required modifications only related to additional
disclosures of fair values of financial instruments in interim financial
statements, the adoption did not affect the Company’s financial position or
results of operations.
Beginning
in the second quarter of 2009, the Company must disclose the date through which
subsequent events have been evaluated, in accordance with the requirements in
FASB ASC Paragraph 855-10-50-1. With regards to the condensed
consolidated financial statements and notes to those financial statements
contained in this Form 10-Q, the Company has evaluated all subsequent events
through November 13, 2009 (the date the Company’s financial statement are
issued).
In
September 2009, the FASB implemented certain modifications to FASB ASC Topic
860, Transfers and Servicing, as a means to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets, the effects of a transfer on its financial position, financial
performance, and cash flows, and a transferor’s continuing involvement, if any,
in transferred financial assets. These modifications must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009. The Company does not expect the adoption of this
standard to have an impact on the Company’s results of operations, financial
condition or cash flows.
During
the third quarter of 2009, the Company adopted the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles in
accordance with FASB ASC Topic 105, “Generally Accepted Accounting Principles”
(the “Codification”). The Codification has become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. Effective with the Company’s adoption on July 1, 2009, the
Codification has superseded all prior non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification has become non-authoritative. As the adoption of
the Codification only affected how specific references to GAAP literature have
been disclosed in the notes to the Company’s condensed consolidated financial
statements, it did not result in any impact on the Company’s results of
operations, financial condition or cash flows.
Updates to the FASB
Codification Applicable to the Company
The FASB
has published FASB Accounting Standards Update No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820)—Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). This Update amends Subtopic 820-10,
Fair Value Measurements and
Disclosures—Overall, to permit a reporting entity to measure the fair
value of certain investments on the basis of the net asset value per share of
the investment (or its equivalent). This Update also requires new disclosures,
by major category of investments, about the attributes of investments included
within the scope of this amendment to the Codification. The guidance in this
Update is effective for interim and annual periods ending after December 15,
2009. The Company does not expect the adoption of this standard to have an
impact on the Company’s results of operations, financial condition or cash
flows.
Critical
Accounting Policies
The
Securities and Exchange Commission recently issued “Financial Reporting Release
No. 60 Cautionary Advice About Critical Accounting Policies” (“FRR 60”),
suggesting companies provide additional disclosures, discussion and commentary
on their accounting policies considered most critical to its business and
financial reporting requirements. FRR 60 considers an accounting policy to be
critical if it is important to the Company’s financial condition and results of
operations, and requires significant judgment and estimates on the part of
management in the application of the policy. For a summary of the Company’s
significant accounting policies, including the critical accounting policies
discussed below, please refer to the accompanying notes to
the financial statements. Foreign currency risk - The functional currency for
some foreign operations is the local currency. Assets and liabilities of foreign
operations are translated at balance sheet date rates of exchange and income,
expense and cash flow items are translated at the average exchange rate for the
period. The functional currency in South America is the U.S. dollar. Translation
adjustments are recorded in Cumulative Other Comprehensive
Income.
26
The
Company assesses potential impairment of its long-lived assets, which include
its property and equipment, investments, and its identifiable intangibles such
as deferred charges under the guidance of SFAS 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets.” The Company must continually
determine if a permanent impairment of its long-lived assets has occurred and
write down the assets to their fair values and charge current operations for the
measured impairment.
Investments
in non-consolidated affiliates – These investments consist of the Company’s
ownership interests in oil and gas development and exploration rights in
Argentina, net of impairment losses if any.
We
evaluate these investments for impairment when indicators of potential
impairment are present. Indicators of impairment include, but are not limited
to, levels of oil and gas reserves, availability of pipeline (or other
transportation) capacity and infrastructure and management of the operations in
which the investments were made.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Commodity
Price Risk – We are exposed to market risks related to price volatility of crude
oil and natural gas. The price 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 our revenue. A decline in crude oil and natural gas
prices will likely effect our revenues, unless there are offsetting production
increases. We do not use derivative commodity instruments for trading
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
September 30, 2009, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our chief
executive and principal financial officer concluded that our disclosure controls
and procedures were ineffective as a result of a significant deficiency and
material weakness as discussed in the following paragraph.
The
reportable condition identified relates to a failure properly to supervise
payments from funds designated for payment of corporate payables. We have
implemented certain internal management changes in the fiscal quarter ended
September 30, 2009 to eliminate any risks associated with this significant
deficiency.
Changes in
Internal Controls
Given
this reportable condition and material weakness, management devoted additional
resources to resolving questions that arose during the period covered by this
report. As a result we are confident our financial statements as of September
30, 2009 and for the three and nine months ended September 30, 2009 and 2008,
fairly present in all material respects our financial condition and results of
operations.
27
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.
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.
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.
One June
3, 2009, Delta Technologies, Inc., a wholly-owned subsidiary of the Company and
a discontinued operation (“Delta Technologies”), was notified by a law firm
engaged by Wolf Block LLP (“Wolf Block”), 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. If
Delta Technologies does not make payment arrangements or cannot otherwise
resolve this matter, Wolf Block has authorized a lawsuit to be filed against
Delta Technologies and/or the Company. Delta Technologies has contacted the law
firm retained by Wolf Block to dispute the amount of the past due legal services
provided by Wolf Block, and is attempting to establish the correct amount past
due prior to making repayment arrangements, if any. The Company believes that
the resolution of this matter will have no material effect on the Company or its
operations.
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
|
||||||
August 24, 2009
|
16,667 shares of common stock.
|
Private Investor
|
NA
|
$ | 5,000/NA | |||||
August 24, 2009
|
16,667 shares of common stock.
|
Private Investor
|
NA
|
$ | 5,000/NA |
(1) The
issuances to 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 promulgated by the SEC under the Securities
Act.
ITEM
6. EXHIBITS.
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 Oxley Act of
2002.
|
28
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
|
Dr.
Daniel R. Peralta
|
|
President
and Chief Executive Officer
|
Dated:
November 17, 2009
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 Oxley Act of
2002.
|
29