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EX-32 - CannAwake Corp | v190747_ex32.htm |
EX-31 - CannAwake Corp | v190747_ex31.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
Amendment
No. 1
to
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 March 31, 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
|
14-1818394
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
14362 N. Frank Lloyd Wright Blvd., Suite 1103,
Scottsdale, AZ
|
85260
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(480)
477-5808
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 27,073,996 as of March 31, 2010.
DELTA
MUTUAL, INC.
INDEX
Page
|
|||
Part I. Financial Information
|
|||
Item 1.
|
Financial
Statements
|
||
Consolidated Balance Sheets as of March 31, 2010 and as of
December 31, 2009 (unaudited)
|
1
|
||
Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (unaudited)
|
2
|
||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)
|
3-4
|
||
Notes to Unaudited Consolidated Financial Statements
|
5-18
|
||
Item 2.
|
Management's Discussion and Analysis of Financial
Condition and Results
of Operations
|
19
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
|
|||
Item 4T.
|
Controls
and Procedures.
|
23
|
|
Part II. Other Information
|
|||
Item 1.
|
Legal
Proceedings.
|
24
|
|
Item 5.
|
Other
Information.
|
24
|
|
Item 6.
|
Exhibits.
|
25
|
|
Signatures
|
25
|
WE
ARE FILING THIS AMENDMENT NO. 1 TO OUR FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2010 (THE “MARCH 31, 2010 FORM 10-Q”) TO AMEND THE NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AND ITEM 4T. “CONTROLS AND
PROCEDURES”. IN THIS AMENDMENT, OUR FINANCIAL STATEMENTS HAVE BEEN
RESTATED AS OF DECEMBER 31, 2009 AND MARCH 31, 2010, DUE TO AN UNDERSTATEMENT OF
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THOSE RESPECTIVE DATES.
IN ORDER TO PRESERVE THE NATURE AND CHARACTER OF THE DISCLOSURES SET FORTH IN
THE MARCH 31, 2010 FORM 10-Q AS OF MAY 24, 2010, THE DATE ON WHICH THE MARCH 31,
2010 10-Q WAS FILED, NO ATTEMPT EXCEPT AS DESCRIBED ABOVE HAS BEEN MADE IN THIS
AMENDMENT NO. 1 TO MODIFY OR UPDATE DISCLOSURES.
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 three months ended March 31, 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)
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
(Restated)
|
(Restated)
|
||||||
Current
Assets:
|
||||||||
Cash
|
$ | 511,644 | $ | 102,008 | ||||
Advances
and other receivables
|
142,917 | 137,776 | ||||||
Total
current assets
|
654,561 | 239,784 | ||||||
Investments
in non-consolidated affiliates
|
1,507,763 | 1,470,713 | ||||||
Other
assets
|
39,458 | 39,508 | ||||||
TOTAL
ASSETS
|
$ | 2,201,782 | $ | 1,750,005 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 121,286 | $ | 134,192 | ||||
Accrued
expenses
|
286,973 | 267,029 | ||||||
Notes
payable
|
805,605 | 805,605 | ||||||
Total
current liabilities
|
1,213,864 | 1,206,826 | ||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock $0.0001 par value-authorized
|
||||||||
10,000,000
shares; no shares issued and outstanding
|
||||||||
at
March 31, 2010 and December 31, 2009, respectively
|
||||||||
Common
stock $0.0001 par value - authorized
|
||||||||
250,000,000
shares; 27,073,996 and 24,211,275 shares
|
||||||||
issued
and outstanding at March 31, 2010 and
|
||||||||
December
31, 2009, respectively
|
2,707 | 2,421 | ||||||
Additional
paid-in-capital
|
4,867,808 | 4,137,095 | ||||||
Accumulated
deficit
|
(3,882,598 | ) | (3,596,337 | ) | ||||
Total
Delta Mutual Inc. and Subsidiaries Stockholders' Equity
|
987,918 | 543,179 | ||||||
Noncontrolling
interest
|
- | - | ||||||
Total
Stockholders' Equity
|
987,918 | 543,179 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 2,201,782 | $ | 1,750,005 |
See Notes
to Unaudited Consolidated Financial Statements
1
DELTA
MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
|
||||||||
March 31,
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Revenue:
|
$ | - | $ | - | ||||
Costs
and expenses:
|
||||||||
General
and administrative expenses
|
275,394 | 290,140 | ||||||
275,394 | 290,140 | |||||||
Loss
from continuing operations
|
(275,394 | ) | (290,140 | ) | ||||
Other
income
|
715 | - | ||||||
Interest
expense
|
(11,582 | ) | (9,971 | ) | ||||
Loss
from continuing operations before provision for income
taxes
|
(286,261 | ) | (300,111 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss from continuing operations
|
(286,261 | ) | (300,111 | ) | ||||
Discontinued
operations
|
||||||||
Gain
(loss) of disposal fo Far East operations and South American Hedge
Fund operations, and United States
construction technology activities
|
- | (6,513 | ) | |||||
Net
loss
|
(286,261 | ) | (306,624 | ) | ||||
Less:
Net loss attributable to noncontrolling
interest
|
- | - | ||||||
Net
loss attributable to Delta Mutual Inc. and
Subsidiaries
|
$ | (286,261 | ) | $ | (306,624 | ) | ||
Net
loss per common share - basic and diluted
|
||||||||
Loss
from continuing operations attributable to Delta Mutual Inc. and
Subsidiaries common
shareholders
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Loss
from discontinued operations attributable to
Delta Mutual Inc. and Subsidiaries common
shareholders
|
$ | (0.00 | ) | $ | (0.00 | ) | ||
Net
income per common share
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted
average common shares - basic and diluted
|
24,928,941 | 22,493,955 | ||||||
Amounts
attributable to Delta Mutual Inc. and subsidiaries common
shareholders:
|
||||||||
Net
loss
|
$ | (286,261 | ) | $ | (306,624 | ) |
See Notes
to Unaudited Consolidated Financial Statements
2
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
|
||||||||
March 31,
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
(Restated)
|
(Restated)
|
||||||
Net
loss
|
$ | (286,261 | ) | $ | (306,624 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
- | 170 | ||||||
Issuance
of common stock for services
|
75,000 | - | ||||||
Compensatory
element of option issuance
|
- | 196,745 | ||||||
Changes
in operating assets and liabilities
|
1,947 | 28,290 | ||||||
Net
cash used in operating activities
|
(209,314 | ) | (81,419 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Increase
in investments
|
(37,050 | ) | (193,500 | ) | ||||
Net
cash used in investing activities
|
(37,050 | ) | (193,500 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from notes payable
|
- | 266,763 | ||||||
Proceeds
from sale of common stock
|
656,000 | - | ||||||
Contribution
from stockholder
|
- | (1,000 | ) | |||||
Net
cash used in financing activities
|
656,000 | 265,763 | ||||||
Net
increase (decrease) in cash
|
409,636 | (9,156 | ) | |||||
Cash
- Beginning of period
|
102,008 | 13,957 | ||||||
Cash
- End of period
|
$ | 511,644 | $ | 4,801 |
See Notes
to Unaudited Consolidated Financial Statements
3
DELTA
MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
Three Months Ended
|
||||||||
March 31,
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
Supplementary
information:
|
(Restated)
|
(Restated)
|
||||||
Changes
in operating assets and liabilities consists
of:
|
||||||||
Increase
(decrease) in advances and other receivables
|
$ | (5,141 | ) | $ | (6,433 | ) | ||
Increase
(decrease) in other assets
|
50 | - | ||||||
Increase
(decrease) in accounts payable and accrued
expenses
|
7,038 | 34,723 | ||||||
$ | 1,947 | $ | 28,290 | |||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | - | $ | - | ||||
Cash
paid for taxes
|
$ | - | $ | - | ||||
Supplementary
information:
|
||||||||
Non-cash
financing and investing activities
|
||||||||
Issuance
of common stock for services
|
$ | 75,000 | $ | 200,000 |
See Notes
to Unaudited Consolidated Financial Statements
4
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Delta
Mutual, Inc. (“Delta” or the “Company”) was incorporated in Delaware
on November 17, 1999. In 2003, the Company established business
operations focused on providing environmental and construction technologies and
services to specific geographic reporting segments in the Far East, the Middle
East, and the United States. During the year ended December 31, 2008, the
Company discontinued all of its operations in the Far East (Indonesia) and its
construction technology activities that were conducted through its wholly owned
U.S. subsidiary, Delta Technologies, Inc. The Company’s construction operations
in Puerto Rico were discontinued in 2008.
Effective
March 4, 2008, Delta entered into a Membership Interest Purchase Agreement,
pursuant to which Delta acquired from, Egani, Inc. all the shares of Altony
SA (“Altony”), an Uruguayan Sociedad Anonima, which owned 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, Delta issued 13,000,000
shares of common stock to Egani, Inc., which constituted, following such
issuance, a majority of the outstanding shares of Delta’s common stock.
Immediately following the closing of the Agreement, Altony became a wholly-owned
subsidiary of Delta. For accounting purposes, the transaction was treated as a
recapitalization of the Company, as of March 4, 2008, with Altony as the
acquirer and Delta as the holding company. The principal business of Altony was
the ownership and management of SAHF, which maintained its business office in
Uruguay and has investments in oil and gas concessions in Argentina and intends
to focus its investment activities in the energy sector. As of
December 30, 2009, Altony closed its business operations and is currently under
a process of dissolution. 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. As of December 31, 2008 the securities trading activities of South
American Hedge Fund were accounted for as a discontinued operation.
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 stockholders' equity
(deficit). See Note 12, "Stockholders' Equity", for
further information.
During
2009, the Delta discontinued the operations, and commenced the dissolution of
the following inactive wholly-owned and majority-owned subsidiaries: Delta
Development Partners, L.P., Delta Development Partners II LP, Guayanilla and
Developers Corp., Delta TA LP and Delta Technologies Inc.
As of
December 31, 2009, Delta also terminated the operation of oil sludge processing
facilities in Bahrain and Kuwait and the manufacture of insulating concrete from
ICF products in Saudi Arabia, which are accounted for as discontinued
operations.
As of
December 31, 2009, 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 (see also Note 3).
Delta
Mutual, Inc. and all of the above referenced subsidiaries are collectively
referred to as “Delta” or “the Company” throughout this filing. All
significant intercompany balances and transactions have been eliminated in
consolidation.
GOING
CONCERN
The
consolidated financial statements for the period ended March 31, 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 $3,882,598 and working capital deficiency of $559,303 as
of March 31, 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.
5
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
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.
INTERIM REVIEW
REPORTING
The
accompanying unaudited consolidated financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC). Certain information and footnote disclosures,
normally included in consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such SEC rules and regulations.
Nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's 2009 Annual Report as
filed on Form 10K.
In the
opinion of management, all adjustments, including normal recurring adjustments
necessary to present fairly the consolidated financial position of the Company
with respect to the interim consolidated financial statements and the results of
its consolidated operations for the interim period ended March 31, 2010, have
been included. The results of consolidated operations for interim periods are
not necessarily indicative of the results for a 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.
USE OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as
of the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of the
Company’s consolidated financial statements; accordingly, it is possible that
the actual results could differ from these estimates and assumptions and could
have a material effect on the reported amounts of the Company’s consolidated
financial position and results of operations.
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.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
Cash,
advances and other receivables, investments in non-consolidated affiliates,
accounts payable and accrued expenses, and notes payable as reflected in the
consolidated financial statements, approximate fair value. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
LONG-LIVED
ASSETS
The
Company reviews property and equipment and finite-lived intangible
assets 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. Because the Company discontinued its operations in the
Far East (Indonesia) as of the quarter ended June 30, 2008 and discontinued its
construction technology activities as of the quarter ended December 31, 2008,
the property and equipment and intangible assets related to these operations
were evaluated for impairment. Based on the results of that analysis, the
Company recorded an impairment charge of $467,995 during the year ended December
31, 2008.
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
6
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
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 statements 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.
Investments
in non-consolidated affiliates consist of the Company’s ownership interests in
oil and gas development and exploration rights in Argentina, net of impairment
losses if any.
The
Company evaluates 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.
INCOME
TAXES
The
Company accounts for income taxes in accordance with the liability method. Under
the liability method, deferred assets and liabilities are recognized based upon
anticipated future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases. The Company establishes a valuation allowance to the
extent that it is more likely than not that deferred tax assets will not be
utilized against future taxable income.
UNCERTAIN TAX
POSITIONS
In July
2006, the Financial Accounting Standards Board (“FASB”) issued guidance codified
in Accounting Standards Codification (“ASC”) Topic 740-10-25 “Accounting for
Uncertainty in Income Taxes”. ASC Topic 740-10-25 supersedes guidance codified
in ASC Topic 450, “Accounting for Contingencies”, as it relates to income tax
liabilities and lowers the minimum threshold a tax position is required to meet
before being recognized in the financial statements from “probable” to “more
likely than not” (i.e., a likelihood of occurrence greater than fifty percent).
Under ASC Topic 740-10-25, the recognition threshold is met when an entity
concludes that a tax position, based solely on its technical merits, is more
likely than not to be sustained upon examination by the relevant taxing
authority. Those tax positions failing to qualify for initial recognition are
recognized in the first interim period in which they meet the more likely than
not standard, or are resolved through negotiation or litigation with the taxing
authority, or upon expiration of the statute of limitations. Reversal of a tax
position that was previously recognized occurs when an entity subsequently
determines that a tax position no longer meets the more likely than not
threshold of being sustained.
The
Company is subject to ongoing tax exposures, examinations and assessments in
various jurisdictions. Accordingly, the Company may incur additional tax expense
based upon the outcomes of such matters. When applicable, the Company adjusts
tax expense to reflect the Company’s ongoing assessment of the valuation
of matters which require judgment, which can materially increase or
decrease its effective rate, as well as impact operating results.
Under ASC
Topic 740-10-25, only the portion of the liability that is expected to be paid
within one year is classified as a current liability. As a result, liabilities
expected to be resolved without the payment of cash (e.g. resolution due to the
expiration of the statute of limitations) or are not expected to be paid within
one year are not classified as current. The Company has recently adopted a
policy of recording estimated interest and penalties as income tax expense and
tax credits as a reduction in income tax expense.
Management
believes that the Company does not have any significant uncertain tax positions
for the years ended December 31, 2009 or 2008, considering its loss making
history since inception.
The
number of years with open tax audits varies depending on the tax jurisdiction.
The Company’s major taxing jurisdictions include the United States (including
applicable states). The Company has never been subject to a tax audit
historically.
7
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
LEGAL COSTS AND
CONTINGENCIES
In the
normal course of business, the Company incurs costs to hire and retain external
legal counsel to advise it on regulatory, litigation and other matters. The
Company expenses these costs as the related services are received. If a loss is
considered probable and the amount can be reasonably estimated, the Company
recognizes an expense for the estimated loss. If the Company has the potential
to recover a portion of the estimated loss from a third party, the Company makes
a separate assessment of recoverability and reduces the estimated loss if
recovery is also deemed probable.
NET INCOME (LOSS) PER
SHARE
Basic and
diluted net income (loss) per common share are presented in accordance with
Accounting Standard Codifications (ASC) Topic 260, “Earning per Share”, for all
periods presented. Stock subscriptions, options and warrants have been excluded
from the calculation of the diluted income (loss) per share for the periods
presented in the statements of operations, because all such securities were
anti-dilutive. The net income (loss) per share is calculated by dividing the net
income (loss) by the weighted average number of shares outstanding during the
periods.
FOREIGN CURRENCY
TRANSLATION
The
functional currency in South America, which is where nearly all of the Company’s
operations take place, is the U.S. dollar. The functional currency for some
foreign operations is the local currency of the foreign operation. 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. Translation adjustments are recorded in Cumulative
Other Comprehensive Income. The translation gains or losses were not material
for the years ended December 31, 2009 and 2008, respectively. Therefore,
there were no adjustments as to Other Comprehensive Income (Loss).
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 $(2,310,473), respectively,
for the years ended December 31, 2009 and 2008, respectively, and $0 and
$(6,513) for the quarters ending March 31, 2010 and 2009,
respectively.
Summarized
statement of loss for discontinued operations is as follows:
|
Three
Months Ended March 31,
|
|||||||
|
2010
|
2009
|
||||||
Net
sales
|
$
|
—
|
$
|
—
|
|
|||
Impairment
|
—
|
—
|
|
|||||
Provision
for income taxes
|
—
|
—
|
||||||
Loss
from operations, net of taxes
|
—
|
(6,513
|
) | |||||
Gain
on disposition of minority interest
|
—
|
—
|
||||||
Provision
for income taxes
|
—
|
—
|
||||||
Loss
from discontinued operations, net of taxes
|
$
|
-0-
|
$
|
(6,513
|
)
|
OTHER 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.
8
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
RECENT ACCOUNTING
PRONOUNCEMENTS
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 required to be disclosed annually only. 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 consolidated financial position or results of
operations.
Beginning
in the second quarter of 2009, the Company is required 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 unaudited consolidated
financial statements and notes to those financial statements contained in this
Form 10-Q, the Company has evaluated all subsequent events through May 24,
2010 (the date the Company’s unaudited consolidated financial
statements 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 consolidated 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 consolidated financial statements,
it did not result in any impact on the Company’s consolidated results of
operations, financial condition or cash flows.
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 consolidated results of operations, financial condition
or cash flows.
In June
2009, the Financial Accounting Standards Board (FASB) amended its accounting
guidance on the consolidation of variable interest entities (VIE). Among other
things, the new guidance requires a qualitative rather than a quantitative
assessment to determine the primary beneficiary of a VIE based on whether the
entity (1) has the power to direct matters that most significantly impact
the activities of the VIE and (2) has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant
to the VIE. In addition, the amended guidance requires an ongoing
reconsideration of the primary beneficiary. The provisions of this new guidance
were effective as of the beginning of our 2010 fiscal year, and the adoption did
not have a material impact on our consolidated financial
statements.
Consolidations: In
December 2009, the FASB issued ASU No. 2009-17 (formerly Statement No. 167),
“Consolidations (Topic 810) –
Improvements to Financial Reporting for Enterprises involved with Variable
Interest Entities”. ASU 2009-17 amends the consolidation guidance
applicable to variable interest entities. The amendments to the consolidation
guidance affect all entities, as well as qualifying special-purpose entities
(QSPEs) that are currently excluded from previous consolidation guidance. ASU
2009-17 was effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. ASU 2009-17 did not have an impact on our
consolidated financial condition, results of operations, or
disclosures.
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.
9
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
2.
RESTATEMENT
In the
second quarter of 2010, the Company identified the number of common shares
issued and outstanding was understated by approximately 974,000 shares, or 3.7%
as of March 31, 2010. The Company also determined that approximately, 564,000
shares had been issued in lieu of payment for services performed by third
parties, and approximately 37,000 shares had been issued to third parties for
cash that was used for travel expenses by the Company. Accordingly, the Company
recorded additional expense amounts of $75,000 for the three months ending March
31, 2010 and $15,500 for the year ending December 31, 2009, respectively. This
adjustment resulted in an increase of net loss from $211,261, as previously
reported, to $286,261 as restated for the three months ending March 31, 2010 and
a reduction of net income from $850,091, as previously reported, to $834,591 as
restated for the year ending December 31, 2009. Furthermore, the number of
shares issued in other stock sales for cash was understated by 64,000 shares and
an increase of approximately 309,000 in shares outstanding is attributable to
the net impact of the reverse merger in 2008 and, accordingly, approximately $30
was reclassified from additional paid in capital to common stock. The Company
has reflected the impact of these adjustments and the increase in shares
outstanding in its Consolidated Financial Statements for the three months ending
March 31, 2009 and 2008 and the year ended December 31, 2009.
3. 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.
4.
PROPERTY AND EQUIPMENT
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
Equipment
|
$
|
6,277
|
$
|
6,277
|
||||
Leasehold
improvements
|
7,807
|
7,807
|
||||||
14,084
|
14,084
|
|||||||
Less
accumulated depreciation
|
(14,084
|
)
|
(14,084
|
)
|
||||
$
|
0
|
$
|
0
|
10
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
Depreciation
expense for the three months ended March 31, 2010 and March 31, 2009
was $0 and
$170, respectively.
5.
INVESTMENT IN NONCONSOLIDATED AFFILIATES
Jollin and Tonono Oil and
Gas Concessions
At March
31, 2010 the Company has a 10% ownership interest in the Jollin and Tonono oil
and gas concessions located in Northern Argentina. During 2007, SAHF 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
accepted by the Argentine government, who formerly owned these properties. The
government uses a number of factors In determining the selling prices for an 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 of the note payable, 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 agreed purchase price reduction,
the Company repaid Oxipetrol $1,270,000 at the maturity date. As a result of
this transaction, the Company recorded a one time, retroactive adjustment,
reducing the value of this investment by $550,000 at December 31,
2008.
During
2008, SAHF 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 for all future development expenses. The
Company recorded a $635,000 loss on disposition of 50% of this investment in its
consolidated statement of operations for the year ended December 31,
2008.
Subsequently,
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 is 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, must be repaid to the
other members from its pro-rata share of the future earnings of the concession.
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. The Company has applied for foreign
registration in Argentina and should be admitted as a member of the joint
venture during the second quarter of 2010.
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 will assume 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 through SAHF will retain 10% of
the total concession in the carryover mode ("no cost obligations to SAHF") and
will begin receiving revenue from the Jollin and Tonono blocks when the first
well is 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 year ended December 31,
2009.
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
Kestal, SA (“Kestal”) for $697,000 cash. Kestal retained a 60%
interest. Kestal had originally acquired 100% of these explorations
rights from the government of Argentina in 2007, at a price that was accepted by
the Argentine government for the oil and gas concession.
In 2009,
SAHF assigned 50% of its rights to a third party. The
Company incurred no additional costs or expenses related to this investment in
2009. As of March 31, 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
Kestal, the majority owner.
11
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
Tartagal and Morillo Oil and
Gas Concessions
During
2007, the Company purchased an 18% ownership in the Tartagal and Morillo oil and
gas concessions located in Northern Argentina 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 by the original owners. 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 of the note. As a result of this
transaction, the Company recorded a one time, retroactive adjustment reducing
the value of this investment by $30,000 at December 31, 2008.
During
2008, SAHF 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 all future development
expenses. The Company recorded a $225,000 loss on disposition of this investment
in its consolidated financial statements for the year ended December 31,
2008.
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. These funds will be used for
development and operating expenses in 2009 and beyond.
As of
March 31, 2009, the Company, through SAHF, retains 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 is approved for
commercial exploration.
The
Company evaluated each of these investments in the foregoing nonconsolidated
affiliates for impairment and concluded that, except as described above, no loss
in value occurred as of March 31, 2010 and December 31, 2009, respectively.
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
|
349,000
|
—
|
349,000
|
|||||||||
Adjustment
of additional investment during 2009 and 2008
|
(293,540
|
)
|
—
|
(293,540
|
)
|
|||||||
Disposition
of investment, net
|
(364,771
|
)
|
—
|
(364,771
|
)
|
|||||||
At
December 31, 2009
|
$
|
773,713
|
$
|
697,000
|
$
|
1,470,713
|
||||||
Additional
investments in 2010
|
37,050 |
|
37,050
|
|||||||||
At
March 31, 2010
|
$
|
810,763
|
$
|
697,000
|
$
|
1,507,763
|
12
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
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 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
March 31, 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 March 31, 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 March 31, 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
|
$
|
511,644
|
$
|
511,644
|
$
|
-
|
$
|
-
|
||||||||
Non-consolidated
affiliates
|
1,507,763
|
-
|
-
|
$
|
1,507,763
|
|||||||||||
Total
|
$
|
2,019,407
|
$
|
511,644
|
$
|
-
|
$
|
1,507,763
|
The
Company had no financial assets accounted for on a non-recurring basis as of
March 31, 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 three months ended March
31, 2010, and the Company did not have any financial liabilities as of March 31,
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.
13
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
7. NOTES
PAYABLE
|
March 31,
|
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 months ended March 31, 2010 and March 31, 2009, the Company recorded
interest expense of $11,582 and $9,971,
respectively.
8. INCOME
TAXES
The
Company has not made provision for income taxes in the three month period ended
March 31, 2010 and the year ended December 31, 2009, respectively, since the
Company has the benefit of net operating losses carried forward in these
periods.
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 December 31, 2009 and 2008, respectively. 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.
14
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
9.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
March 31, 2010
|
December 31, 2009
|
|||||||
Professional
fees
|
$ | 41,523 | $ | 34,023 | ||||
Interest
expense
|
11,582 | - | ||||||
Payroll
expense
|
131,806 | 131,806 | ||||||
|
||||||||
|
||||||||
|
||||||||
Other
accrued expenses
|
102,062 | 101,200 | ||||||
Total
|
$ | 286,973 | $ | 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 months ended March 31, 2010.
Three Months
|
||||
Three Months Ended
|
||||
March 31, 2010
|
||||
Continuing
operations
|
||||
Basic
and diluted EPS:
|
||||
Net
loss ascribed to common shareholders - basic and diluted
|
$ | (286,261 | ) | |
Weighted
shares outstanding - basic and diluted
|
24,211,275 | |||
Basic
and diluted net loss per common share
|
$ | (0.01 | ) | |
Discontinued
operations
|
||||
Basic
and diluted EPS:
|
||||
Net
loss ascribed to common shareholders - basic and diluted
|
$ | 0 | ||
Weighted
shares outstanding - basic and diluted
|
24,211,275 | |||
Basic
and diluted net loss per common share
|
$ | 0 |
15
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
11. STOCK-BASED
COMPENSATION
The
Company 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 years ended December 31, 2009 and 2008, the
Company issued 330,000 and 1,055,000 shares, respectively, and recorded
compensation expense of $139,500 and $238,500, respectively, in conjunction with
the issuance of these shares.
The
Company had outstanding employee stock options of 350,000 that were exercisable
as of January 1, 2009. As of December 31, 2009, none of the eligible
employees exercised such options and therefore the options either were cancelled
or expired upon termination of employee stock option plan through a resolution
of the board of directors. As of March 31, 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.
See accompanying Consolidated Statements of Operations for the impact on the
Company's loss per share amounts as a result of the reverse stock split. By
reason of the reverse split, the number of outstanding shares of our common
stock was reduced from 227,225,270 to 22,722,527.
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' deficit.
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 (see Note 10).
As of
March 31, 2010, 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 year ended
December 31, 2008, the Company issued 230,057 shares of common stock upon the
conversion of convertible notes in the principal amount of $143,600, valued at
$0.50 - $0.70 per share; and issued 11,563 shares of common stock for payment of
accrued interest in the amount of $7,048, valued at $0.50 - $0.70 per
share.
For the
year ended December 31, 2009, the Company issued 60,000 shares to an unrelated
individual, valued at $0.58 per share towards conversion of notes payable and
accrued interest of $35,000 in common stock.
For the three months ended March
31, 2010 and the year ended December 31, 2009, the Company issued 534,555 and
358,582 shares of common stock, respectively, valued at $0.14 and $0.15 - $0.60
per share, respectively, for services valued at $75,000 and $149,500,
respectively.
During
the year 2009, the Company received $170,000 pursuant to subscription agreements
to purchase 1,298,748 shares of common stock from various unrelated
individuals.
During
the three months ended March 31, 2010, the Company received $656,000 pursuant to
subscription agreements to purchase 2,328,166 shares of common stock from
various unrelated
individuals.
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.
16
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
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 months ended March 31,
2010, and March 31, 2009, of $4,935 and $30,577 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 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.
14.
SUBSEQUENT EVENTS
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.
17
DELTA
MUTUAL, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31, 2010 and 2009
Acquisition of 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, which management believes to 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 (approx.
350,000 acres) in an area of North Guayatayoc, Argentina.
Appointment of Interim Chief
Financial Officer
On May
14, 2010, our Board of Directors approved an agreement with Tatum LLC, a
executive services consulting firm, for Kristen Magnuson to serve as our Interim
Chief Financial Officer effective May 18, 2010.
18
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
Delta
Mutual, Inc. (“Delta” or the “Company”) was incorporated in Delaware
on November 17, 1999. In 2003, the Company established business
operations focused on providing environmental and construction technologies and
services to specific geographic reporting segments in the Far East, the Middle
East, and the United States. During the year ended December 31, 2008, the
Company discontinued all of its operations in the Far East (Indonesia) and its
construction technology activities that were conducted through its wholly owned
U.S. subsidiary, Delta Technologies, Inc. The Company’s construction operations
in Puerto Rico were discontinued in 2008.
Effective
March 4, 2008, Delta entered into a Membership Interest Purchase Agreement,
pursuant to which Delta acquired from, Egani, Inc. all the shares of Altony
SA (“Altony”), an Uruguayan Sociedad Anonima, which owned 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, Delta issued 13,000,000
shares of common stock to Egani, Inc., which constituted, following such
issuance, a majority of the outstanding shares of Delta’s common stock.
Immediately following the closing of the Agreement, Altony became a wholly-
owned subsidiary of Delta. For accounting purposes, the transaction was treated
as a recapitalization of the Company, as of March 4, 2008, with Altony as the
acquirer and Delta as the holding company. The principal business of Altony was
the ownership and management of SAHF, which maintained its business office in
Uruguay and has investments in oil and gas concessions in Argentina and intends
to focus its investment activities in the energy sector. As of
December 30, 2009, Altony closed its business operations and is currently under
a process of dissolution. 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. As of December 31, 2008 the securities trading activities of South
American Hedge Fund were accounted for as a discontinued operation.
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 stockholders' equity
(deficit).
During
2009, the Delta discontinued the operations, and commenced the dissolution of
the following inactive wholly-owned and majority-owned subsidiaries: Delta
Development Partners, L.P., Delta Development Partners II LP, Guayanilla and
Developers Corp., Delta TA LP and Delta Technologies Inc.
As of
December 31, 2009, Delta also terminated the operation of oil sludge processing
facilities in Bahrain and Kuwait and the manufacture of insulating concrete from
ICF products in Saudi Arabia, which are accounted for as discontinued
operations.
As of
December 31, 2009, 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.
19
Delta
Mutual, Inc. and all of the above referenced subsidiaries are collectively
referred to as “Delta” or “the Company” throughout this
filing.
GOING
CONCERN
The
consolidated financial statements for the period ended March 31, 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 $3,882,598 and working capital deficiency of $559,303 as
of March 31, 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.
Note 1 of
the Notes to Consolidated Financial Statements accompanying this report
state that substantial doubt has been raised about our ability to continue as a
going concern.
RESULTS
OF OPERATIONS
During
the quarter ended March 31, 2010, we had a loss from continuing operations of
$(286,261). The Company has an accumulated deficit of $3,882,598 and working
capital deficiency of $559,303 as of March 31, 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.
THREE
MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2009
During
the three months ended March 31, 2010, we incurred a net loss from continuing
operations of $(286,261) compared to $(290,140) for the three months ended March
31, 2009. The decrease in our loss from continuing operations for the three
months ended March 31, 2010 over the comparable period of the prior year was
primarily due the discontinuance of operations of Delta Development Partners,
L.P., Delta Development Partners IILP, Guayanilla and Developers Corp., Delta TA
LP and Delta Technologies Inc., and the termination of the operation of oil
sludge processing facilities in Bahrain and Kuwait and ICF products, and
deconsolidation of Delta-Envirotech, Inc., which were included in the
Company’s general and administrative expense in 2009. In addition, we
had other income of $715 in the three months ending March 31, 2010 compared to
$0 in the comparable prior year period due to an increase in cash of $409,636
year over year received from sales of common stock. In the quarter
ending March 31, 2009 we had interest expense of $9,971 compared to $11,582 in
the quarter ending March 31, 2010.
Our net
loss for the three months ended March 31, 2010 was $(286,261) compared to a net
loss of $(306,624) for the comparable prior year period. The net loss for the
three months ended March 31, 2009 included a loss on disposal of discontinued
operations of $(6,513).
20
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 of a property for the production of lithium in Argentina, and
development and supply of energy and alternative energy sources in Latin America
and North America.
Oil and
Gas Investments
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.
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 has applied for foreign registration and expects to become a
member during the second quarter of 2010.
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 to begin in 2010. 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, which is expected to
be completed during the scond quarter of 2010, will be owned by the joint
venture. Upon completion, it will permit the joint venture to commence deriving
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.
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 2010. Deliveries of
crude oil from these concessions are expected to begin in the second half of
2010.
Salta
Province 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 through the year 2010. The
partners to the joint venture are fulfilling their financial obligations as
agreed.
FUNDING
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.
21
LIQUIDITY
At March
31, 2010 and December 31, 2009, we had working capital deficits of $559,303 and
$967,042, respectively.
At March
31, 2010, we had total assets of $2,201,782 compared to total assets of
$1,750,005 at December 31, 2009. Cash increased $409,636 for the three
months ended March 31, 2010 compared to year end 2009 due to the issuance of
common stock. Net cash used in operating activities in the three months ended
March 31, 2010, was $209,314, as compared with $81,419 in the comparable period
in 2009; net cash used in investing activities was $37,050 in 2010, as compared
with $193,500 in 2009. Cash used in operating activities was offset by net
cash from financing activities of approximately $656,000.
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.
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.
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
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.
22
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
March 31, 2010, 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 not effective. Specifically,
our chief executive and principal financial officer determined that certain
stock issuances were not recorded correctly for financial statement reporting
purposes in our first quarter. Subsequent to March 31, 2010, the Company has
taken steps to ensure that stock issuances are recorded correctly in our
financial statements, and the Company believes that the financial statements in
this report accurately present the Company’s financial position and results of
operations as of the date of such financial statements.
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.
23
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.
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
5. OTHER
INFORMATION.
On May
14, 2010, our Board of Directors approved an agreement with Tatum LLC, a
recruiting firm, for Kristen Magnuson to serve as our Interim Chief Financial
Officer effective May 18, 2010.
Kristen
L. Magnuson, 54, has been a member of the board of directors of
Convio, Inc. since January 2008. Since October 2009, Ms. Magnuson has been a
Partner at Tatum LLC. From September 1997 to August 2009, Ms. Magnuson served as
Chief Financial Officer of JDA Software Group, Inc., a provider of enterprise
software solutions for supply chain processes, and was promoted to Executive
Vice President in March 2001. From 1990 to 1997, Ms. Magnuson served as Vice
President of Financial Planning for Michaels Stores Inc., an arts and crafts
retailer. From March 1987 to August 1990, she served as Senior Vice President
and Controller of MeraBank N.A., a federal savings bank. Ms. Magnuson is a
C.P.A. and holds a B.B.A. in Accounting from the University of
Washington.
24
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.
|
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
|
Dated: July
21, 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 Oxley Act of
2002.
|
25