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EX-31 - EXHIBIT 31 - Delta International Oil & Gas Inc.v243257_ex31.htm
EX-32 - EXHIBIT 32 - Delta International Oil & Gas Inc.v243257_ex32.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 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 No. 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)

Registrant’s Telephone Number, Including Area Code:  (480) 477-5808

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.0001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes  ¨   No x

Indicate by checkmark if the registrant is not required to file reports to Section 13 or 15(d)Of the Act.              ¨ Yes  x No

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.    x  Yes      ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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    o
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 aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was $4,657,857.

Number of shares of Common Stock outstanding as of April 26, 2011: 29,828,691.
 
 
 

 

TABLE OF CONTENTS

PART I
1
Item 1. Business.
 
Item 1A. Risk Factors
 
Item 1B. Unresolved Staff Comments
 
Item 2. Properties
 
Item 3. Legal Proceedings
 
Item 4. [Removed and Reserved.]
 
PART II
 
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Item 6. Selected Financial Data
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Item 8. Financial Statements and Supplementary Data
8
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A. Controls and Procedures
 
Item 9B. Other Information
 
PART III
 
Item 10. Directors, Executive Officers, and Corporate Governance
 
Item 11. Executive Compensation
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
Item 14.  Principal Accountant Fees and Services
 
Item 15. Exhibits and Financial Statement Schedules
41
 
 
ii

 

EXPLANATORY NOTE

Delta Mutual, Inc. (referred to in this report as "we", “Delta” or the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed May 16, 2011 (the "2010 Annual Report") as a result of the review of the Company’s financial statements included in its 2008, 2009 and 2010 Annual Reports by the Securities and Exchange Commission (the "Commission").

The Company's consolidated audited financial statements for the fiscal year ended December 31, 2010 and the notes thereto (the "2010 Financial Statements") are being modified to reflect responses to the Commission's comments in respect of restatements of the Company’s financial statements for its December 31, 2008 and 2009 fiscal years.
 
This Form 10-K/A for the fiscal year ended December 31, 2010, is being amended solely to reflect certain changes in Part II, Item 8, Financial Statements and Supplementary Data, to set forth the above modifications, as well as to set forth certain related revised disclosure in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, the discussion in which has been updated where necessary solely to reflect adjustments made to the financial statements as a result of the restatement for fiscal years 2008 and 2009. The other items of the 2010 Annual Report are not included in this Form 10-K/A. Any forward-looking statements included in this Form 10-K/A for the fiscal year ended December 31, 2010, represent management's view as of the original filing date of the 2010 Annual Report as explained above.

PART II
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto and the 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.
 
 
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GENERAL
 
On March 4, 2008, we entered into a Membership Interest Purchase Agreement (the “Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the Agreement, we acquired from Egani 100% of the shares of stock held by Egani in Altony S.A., an Uruguay Sociedad Anonima, (“Altony”) which owns 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company (sometimes herein referred to as “SAHF”). At the closing of the Agreement, we issued 13,000,000 shares of our Common stock to Egani for the purchase of Altony which constituted, following such issuance, a majority of the outstanding shares of our common stock. Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. For accounting purposes, the transaction was treated as a recapitalization of the Company with Altony as the acquirer.

Overview

We are a development stage independent oil and gas company engaged in oil and gas acquisition, exploitation, production and exploration activities primarily in Argentina.  In addition, we have ownership interests in certain mineral rights that are located in Argentina.  Our current investments in oil and gas properties were purchased by SAHF and contributed to the Company as part of the reverse merger transaction in March, 2008.  Subsequently, SAHF sold working interests rights in two of its oil and gas interests to carrying parties to fund the drilling and development activities for the properties.  These properties are expected to reach the time of payout in the second half of 2011.  The Company retained its working interest in the third oil and gas property (Salta Province) and sold equity in a series of private placement transactions to fund the initial drilling and development second half of 2010.

We intend to use the proceeds from the production revenues from existing properties to seek property acquisitions that complement and geographically diversify our core investments in energy related properties.  Our goal is to generate meaningful growth in shareholder value through the discovery and development of proved oil and gas reserves or other mineral, and we have focused on concessions where there are shut-in, plugged or abandoned wells that have, in our assessment, a high probability of additional recovery of reserves through the revitalization of the wells using standard oil and gas industry practices to bring back wells into production or to enhance production. In addition, our growth plan is centered upon the pursuit of energy related development projects that we believe will generate attractive rates of return while maintaining a balanced portfolio of lower risk, long-lived oil and gas properties that provide stable cash flows.

As of April 29, 2011, we have approximately $252,880 in cash.  We believe that this cash will provide us with the necessary liquidity during the remainder of our pre-revenue stage.  However, in the event that the revenues are delayed, we believe that the value of the reserves underlying our oil and gas investments is sufficient to allow us to generate additional liquidity through the sale of equity or borrowings, or through the sale of portions of our carried interests in the properties.
 
 
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GOING CONCERN

The consolidated financial statements for the period ended December 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 in the development stage of approximately $184,000 and working capital deficiency of approximately $1,106,000 as of December 31, 2010.   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. 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.

The Company will require additional funding to execute its future strategic business plan. Successful business operations and its transition to attaining profitability is dependent upon obtaining additional financing and achieving a level of revenue adequate to support its cost structure.

The Company's business is subject to the risks of its oil and gas investments in South America. The likelihood of success of the Company must be considered in light of the expenses, difficulties, delays and unanticipated challenges encountered in connection with the operations of the oil and gas concession in Argentina. There is no assurance that the Company will ultimately achieve a profitable level of operations.

EXPLORATION AND DEVELOPMENT ACTIVITY

Our future oil and gas production, and therefore our success, is highly dependent upon our ability to find, acquire and develop additional reserves that are profitable to produce. The rate of production from our oil and gas properties and our proved reserves will decline as our reserves are produced unless we acquire additional properties containing proved reserves, conduct successful development and exploration activities or, through engineering studies, identify additional behind-pipe zones or secondary recovery reserves. We cannot assure you that our exploration and development activities will result in increases in our proved reserves. If our proved reserves decline in the future, our production may also decline and, consequently, our cash flow from operations and the amount that we are able to borrow under our credit facility will also decline. In addition, the vast majority of our estimated proved reserves at December 31, 2010 were undeveloped. By their nature, estimates of undeveloped reserves are less certain. Recovery of such reserves will require significant capital expenditures and successful drilling operations. We may be unable to acquire or develop additional reserves, in which case our results of operations and financial condition could be adversely affected.
 
 
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Jollin and Tonono Oil and Gas Concessions
The Company, through SAHF, has a 10% interest concession in the carryover mode ("no cost obligations to SAHF") in the Jollin and Tonono oil and gas concessions located in Northern Argentina.

During the year ended December 31, 2008, the third party owners of the Jollin and Tonono concessions formed an Argentine-registered joint venture and paid, in the aggregate, approximately $848,000 of development costs, all of which were capitalized. Since SAHF was not registered as a foreign company in Argentina, it could not become a member of the joint venture in 2008. The third party owners of these concessions have agreed that, upon admission of SAHF as a member of the joint venture, SAHF will retain its ownership. However, in exchange for this agreement, SAHF’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 SAHF’s consolidated balance sheet at December 31, 2008, was to be repaid to the other members from its pro-rata share of the future earnings of the concession. On September 25, 2009, SAHF sold 13.5% of its ownership interest in the Jollin and Tonono oil and gas concession to Maxi-Petroleros De Occidente S.A. ("Maxipetrol") for $206,832. Maxipetrol, prior to the sale, owned 48% of the Jollin and Tonono oil and gas concession. In connection with the sale, Maxipetrol assumed full responsibility to develop the oil and gas concession until production is achieved in the blocks. This obligation includes all future and former costs incurred for the Jollin and Tonono oil and gas concession, until such time as the well is producing. All prior unpaid costs accrued by SAHF, were assumed by Maxipetrol. The Company recorded a $157,939 loss on the disposition of its 13.5% investment to Maxipetrol and the loss is included in its statement of operations for the year ended December 31, 2009. In addition, as of December 31, 2009, the Company recorded a reversal of $223,024 to adjust balances in investments and accounts payable as a result of the forgiveness of the aggregate development cost payable. During the three months ending December 31, 2010 SAHF paid $139,762 in additional canons to maintain its ownership interest in the concession.

SAHF received its foreign registration in Argentina and was admitted as a member of the joint venture on July 2, 2010. Accordingly, the Company has reclassified its concession costs in the amount of $688,475 associated with this property to proved oil and gas properties as of December 31, 2010 based upon the reserve report received from the third party working interest owner of the joint venture. The Company will begin receiving revenue from the Jollin and Tonono blocks when the first well is approved for commercial production.

Salta Province Exploration Rights
During 2008, SAHF purchased 40% of the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina from Ketsal, SA (“Ketsal”) for $697,000 cash. In 2009, SAHF assigned 50% of its rights to a third party. As of December 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 Ketsal, the majority owner.
 
 
4

 

SAHF is responsible for managing the drilling activities in the Salta Province and bears its pro-rata share of the costs. Exploratory drilling activities commenced in April 2010 on the Guemes Block and the first well was spud in September 2010. SAHF paid $106,672 for additional concession fees to become an exploration company in Argentina and incurred $179,806 in exploratory drilling costs during the nine months ended September 30, 2010 that were capitalized as work-in-progress under the full cost method of accounting. In July 2010, SAHF found positive traces of the presence of natural gas and hydrocarbons of low-density quality through its analysis of core samples. Well logging while drilling also confirmed the potential existence of formations with sufficient hydrocarbons to make the well economically productive. Production testing to verify the commercial sustainability of the well will commence, subject to weather conditions following the winter season in Argentina.

On April 29, 2011, SAHF was granted a Decree approving a Private Initiative Proposal to explore and eventually produce oil and natural gas in the Block known as “Valle de Lerma”. The Valle de Lerma concession is an area in the Salta province in the northwestern region of Argentina. It was formerly known as Coronel Moldes Block and was oil productive. A tender will follow based on the SAHF proposal. SAHF partnered the proposal with Grasta Refinery, a local mid-size gasoline refinery located in Buenos Aires, Argentina.
 
Tartagal and Morillo
As of December 31, 2010, the Company, through SAHF, retained 9% of the total concession in the carryover mode ("no cost obligations to SAHF") in the Tartagal and Morillo oil and gas concessions located in Northern Argentina. SAHF’s participation was increased to 18% in March 2011, through the purchase of an additional 9% interest in the concession from Ambika S.A. In March 2009, a Hong Kong public company purchased 60% of the ownership in the Tartagal and Morillo oil and gas concessions, from the other majority owners, for total consideration of approximately $270 million. To date, the working interest owners have expended approximately $27 million on 2D and 3D seismic surveys and other geological studies. The Company expects to begin receiving revenue from the Tartagal and Morillo blocks when the first well is approved for commercial production.

On May 11, 2011, SAHF received the Argentinian Salta Government’s approval for its 18% ownership share for the Tartagal and Morillo concessions. The Company will reclassify the $225,000 concession costs associated with this property to proved oil and gas properties based upon the reserve report received from the third party working interest owner of the joint venture.

Lithium Production Properties

On March 1, 2010, we signed a purchase option agreement with Minera Jujuy from the Jujuy Province, Argentina related to the acquisition of approximate 143,000 hectares with 29 mines located in the Northwest part of Argentina, south of the border with Bolivia, with high lithium and borates brines concentration. Currently, we are performing sampling and geological conclusions with a local geological company in order to determine value to the property. For a one-time payment of $30,000, SAHF purchased control of 51% of the Project Delta-Guayatayoc, pursuant to a partnership agreement with Oscar Chedrese and Servicios Mineros SA, which property is held a concession for a period of 20 years.
 
 
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RESULTS OF OPERATIONS
 
YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE YEAR ENDED DECEMBER 31, 2009

During the year ended December 31, 2010, we incurred a net loss of $873,481 compared to net income of $736,850 for the year ended December 31, 2009. The decrease in our net income for the year ended December 31, 2010 over the comparable period of the prior year is primarily due to a $330,660 increase in general and administrative expenses, a $5,455 foreign exchange loss on the Company’s US dollar denominated advances to SAHF, and a $70,226 increase in interest expense.  Furthermore, in 2009, the Company had a gain of approximately $882,000 on the deconsolidation of Envirotech and other income of approximately $582,000, consisting of write-down of payroll and consulting accruals and settled accounts payable originating several years ago and considered no longer payable.

2009 COMPARED TO 2008

For accounting and financial reporting purposes only, our acquisition of Altony on March 4, 2008 was treated as a reverse merger, with Altony as the acquirer. Our consolidated financial statements for the year ended December 31, 2007 are those of Altony (including its SAHF subsidiary on a consolidated basis). In 2009, we had a gain from continuing operations of approximately $835,000, primarily as a result of again of approximately $882,000 on the deconsolidation of Envirotech, compared to a net loss from continuing operations of approximately $2,270,000 in the year ended December 31, 2008. Our general and administrative expenses decreased in the year ended December 31, 2009, to approximately $636,000, from approximately $1,490,000 in 2008.  In 2008, we also had a loss on the sale of investments of $860,000, as compared with approximately $158,000 in 2009.  In the year ended December 31, 2009, we also had other income of approximately $582,000, consisting of write-down of payroll and consulting accruals and settled accounts payable originating more than two years ago and were considered no longer payable.

LIQUIDITY

At December 31, 2010, we had a working capital deficit of approximately $1,116,000, compared with working capital deficits of approximately $1,065,000 million and $2,427,000 at December 31, 2009 and December 31, 2008, respectively.

At December 31, 2010, we had total assets of approximately $2,293,000 compared to total assets of approximately $1,750,000 and $1,795,000 at December 31, 2009 and 2008, respectively. Cash increased approximately $107,000 for the year ended December 31, 2010, compared to $88,000 and $14,000 in 2009 and 2008, respectively. Net cash used in operating activities in 2010 was approximately $478,000, as compared with approximately $359,000 in 2009 and $2.5 million in 2008; net cash used in investing activities was approximately $635,000 in 2010, as compared with cash generated of approximately $151,000 in 2009 and cash generated of approximately $2.3 million in 2008. Cash used in operations activities was offset by net cash provided from financing activities of approximately $1,219,000 in 2010 compared to approximately $296,000 in 2009 and approximately $226,000 in 2008.

Estimated 2011 Capital Requirements

In the case of the Jollin and Tonono and Tartagal and Morillo oil and gas properties, we have carried interests; therefore, no further capital expenditures are required on our part.  For the exploration rights in Salta Province, we have completed the drilling and development of one well in Guemes that is expected to begin producing once the rainy season in Argentina is over.  We have sufficient funds for our portion (20%) of the costs of installation of the battery storage facility to complete the Guemes production and storage facilities.   In the event our revenue expectations for 2011 are not met, we are not required to make any additional capital investment to protect our assets.
 
 
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USE OF ESTIMATES

The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to oil and gas properties, intangible assets, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements. Certain amounts for prior periods have been reclassified to conform to the current presentation.

Management believes that it is reasonably possible that the following material estimates affecting the financial statements could happen in the coming year:

 
·
Proved oil and gas reserves;
 
·
Expected future cash flow from proved oil and gas properties;
 
·
Future exploration and development costs; and
 
·
Future dismantlement and restoration costs.

NEW FINANCIAL ACCOUNTING STANDARDS

For a summary of new financial accounting standards applicable to the Company, please refer to the accompanying notes to the financial statements.

Critical Accounting Policies

The Securities and Exchange Commission recently issued “Financial Reporting Release No. 60 Cautionary Advice About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosures, discussion and commentary on their accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements. Foreign currency risk - The functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange rate for the period. The functional currency in South America is the U.S. dollar. Translation adjustments are recorded in Cumulative Other Comprehensive Income.

 
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The Company assesses potential impairment of its long-lived assets, which include its property and equipment, investments, and its identifiable intangibles such as deferred charges under the guidance of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment.

Investments in non-consolidated affiliates – These investments consist of the Company’s ownership interests in oil and gas development and exploration rights in Argentina, net of impairment losses if any.

We evaluate these investments for impairment when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, levels of oil and gas reserves, availability of pipeline (or other transportation) capacity and infrastructure and management of the operations in which the investments were made.
 
Item 8. Financial Statements and Supplementary Data.
 
 
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DELTA MUTUAL, INC. AND SUBSIDIARIES
 
INDEX TO FINANCIAL STATEMENTS

 
Page
   
Reports of Independent Registered Public Accounting Firms
10
   
Consolidated balance sheets as of December 31, 2010, 2009 and 2008
16
   
Consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008 and for the period from inception of development stage (January 1, 2009) to December 31, 2009
17
   
Consolidated statement of stockholders’ equity for the years ended December 31, 2010, 2009 and 2008
18
   
Consolidated statements of cash flows for the years ended December 31, 2010, 2009 and 2008, and for the period from inception of development stage (January 1, 2009) to December 31, 2009
19
   
Notes to consolidated financial statements
22
 
 
9

 
 
Madsen & Associates, CPA
 
684 East Vine Street
 
Murray, UT 84107
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors of
Delta Mutual, Inc. and Subsidiaries  

We have audited the accompanying consolidated balance sheet of Delta Mutual, Inc. and Subsidiaries (collectively, the “Company”) (a development stage company) as of December 31, 2010 and the related consolidated statements of operations, equity, comprehensive income (loss) and cash flows for the year then ended and for the period January 1, 2009 (inception of the development stage) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We also audited the adjustments described in Note 2 that were applied to restate the consolidated financial statements as of and for the year ended December 31, 2009. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the December 31, 2009 financial statements other than with respect to the adjustments, and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2009 financial statements taken as a whole. The December 31, 2009 financial statements were audited by another auditor whose opinion is dated April 15, 2010, except for Note 2 as to which the date is July 19, 2010. The predecessor auditor reported on such financial statements before the restatement.
 
We also audited the adjustments in Note 2 that were applied to restate the consolidated financial statements as of and for the year ended December 31, 2008.  In our opinion, such adjustments are appropriate and have been properly applied.  We were not engaged to audit, review, or apply any procedures to the December 31, 2008 financial statements other than with respect to the adjustments, and accordingly, we do not express an opinion or any other form of assurance on the December 31, 2008 financial statements taken as a whole.  The December 31, 2008 financial statements were audited by another auditor whose opinion is dated April 13, 2009.  The predecessor auditor reported on such financial statements before the restatement.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
 
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In our opinion, the consolidated financial statements as of and for the year ended December 31, 2010, referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2010, and the consolidated results of its operations and its cash flows for the year then ended and for the period January 1, 2009 (inception of the development stage) to December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements referred to above have been prepared assuming the Company will continue as a going concern. As more fully described in Note 1, the Company has an accumulated deficit of $4,566,559 and working capital deficiency of $1,116,116 as of December 31, 2010. Additionally, the Company is not generating cash flows to meet its working capital requirements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans as to these matters are described in Note 1. The consolidated statements do not include any adjustments that might result from the outcome of this uncertainty.   

/s/ Madsen & Associates, CPA

Murray, Utah
May 16, 2011, except for Note 2, which is as of December 9, 2011

 
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REPRINTED

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Delta Mutual, Inc. and Subsidiaries:

We have audited the accompanying restated consolidated balance sheet of Delta Mutual, Inc. and Subsidiaries (the “Company”), as of December 31, 2009, and the restated related consolidated statement of operations, changes in consolidated stockholders’ equity (deficit) and consolidated cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We also audited the adjustments described in Note 2 that were applied to restate the consolidated financial statements as of and for the year ended December 31, 2008. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the December 31, 2008 consolidated financial statements other than with respect to the adjustments, and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2008 financial statements taken as a whole. The consolidated financial statements of Delta Mutual, Inc. and Subsidiaries for the year ended December 31, 2008, were audited by other auditors whose report thereon, dated April 13, 2009, expressed an unqualified opinion with an emphasis of matter as to going concern. The predecessor auditor reported on such financial statements before the restatement.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provided a reasonable basis for our opinion.
 
In our opinion, the restated consolidated financial statements as of and for the year ended December 31, 2009, referred to above present fairly, in all material respects, the restated consolidated financial position of Delta Mutual, Inc. and Subsidiaries as of December 31, 2009, and the restated consolidated results of its operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
 
12

 

As discussed in Note 2 to the consolidated financial statements, the Company restated its financial statements as of and for the year ended December 31, 2008 presented on a comparative basis. The restatement relates to an increase of approximately 309,000 shares outstanding (par value, $0.0001) which is attributable to the net impact of the reverse merger in 2008 and, accordingly, $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 year ending December 31, 2008.
 
The accompanying restated consolidated financial statements referred to above have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 1, the Company has an accumulated deficit of $3,596,337 and working capital deficiency of $967,042 as of December 31, 2009. Additionally, the Company is not generating sufficient cash flows to meet its regular working capital requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans as to these matters are also described in Note 1.  The restated consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/Jewett, Schwartz, Wolfe & Associates
 
Hollywood, Florida
 
April 15, 2010, except for Note 2 as to which the date is July 19, 2010.

200 South Park Road, Suite 150  •  Hollywood, Florida 33021  •  Main 954.922.5885  •  Fax 954.922.5957  •  www.jsw-cpa.com
Member - American Institute of Certified Public Accountants • Florida Institute of Certified Public Accountants
Private Companies Practice Section of the AICPA • Registered with the Public Company Accounting Oversight Board of the SEC

 
13

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Delta Mutual Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Delta Mutual, Inc. and subsidiaries (“Delta” or the “Company”) as of December 31, 2008 and the related consolidated statement of operations, stockholders’ deficiency and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  The financial statements of Delta Mutual Inc. and Subsidiaries, for the year ended December 31, 2007, were audited by other auditors whose report dated June 20, 2008, expressed an unqualified opinion on those statements.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

Subsequent to our auditor’s report dated April 13, 2009, additional documentation was provided to us in connection with the oil and gas concessions owned by the Company.  Consequently, as described in Note 18 to the consolidated financial statements, the Company has restated its 2008 consolidated financial statements.

In our opinion, the 2008 financial statements present fairly, in all material respects, the financial position of Delta Mutual, Inc. and subsidiaries as of December 31, 2008 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 
14

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  Company management has embarked upon a new mission and strategic direction, by establishing a series of subsidiaries and joint ventures, primarily engaged in providing environmental and construction technologies and services to certain geographic reporting segments.  During 2008, the Company has again changed direction and has invested in oil and gas concessions in South America.  As more fully explained in Note 1 to the financial statements, the Company has a deficiency in working capital at December 31, 2008, incurred losses from operations, needs to obtain additional financing to meet its obligations on a timely basis and to fulfill its proposed activities and ultimately achieve a level of sales adequate to support its cost structure.

These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans are also described in Note 1.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.

Wiener, Goodman & Company, P.C.

Eatontown, New Jersey
May 15, 2009
 
 
15

 
 
DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

   
December 31,
 
   
2010
   
2009
   
2008
 
         
(As Restated)
   
(As Restated)
 
                   
ASSETS
 
 
   
 
       
                   
Current Assets:
 
 
   
 
       
Cash
  $ 209,004     $ 102,008     $ 13,957  
Advances and other receivables
    7,753       137,776       -  
Total current assets
    216,757       239,784       13,957  
                         
Property and equipment, net
    -       -       804  
Investments in non-consolidated affiliates
    -       -       1,780,024  
Investment in mineral properties
    98,260       -       -  
Investments in unproved oil and gas properties
    1,972,050       1,470,713       -  
Other assets
    6,368       39,508       650  
                         
TOTAL ASSETS
  $ 2,293,444     $ 1,750,005     $ 1,795,435  
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Current Liabilities:
                       
Accounts payable
  $ 109,960     $ 134,192     $ 363,004  
Accrued expenses
    414,548       364,770       1,363,395  
Convertible debt
    -       -       253,740  
Notes payable
    808,365       805,605       461,208  
Total current liabilities
    1,332,873       1,304,567       2,441,347  
                         
Commitments and Contingencies
                       
                         
Stockholders' Equity:
                       
Preferred stock $0.0001 par value authorized 10,000,000 shares; no shares issued and outstanding at December 31, 2010 ,2009 and 2008, respectively
    -       -       -  
Common stock $0.0001 par value authorized 250,000,000 shares; 28,647,687, 24,211,475 and22,493,955 shares issued and outstanding at December 31, 2010,2009 and 2008, respectively
    2,864       2,421       2,249  
Additional paid-in capital
    5,560,099       4,137,095       3,782,767  
Earnings (deficit) accumulated during the development stage
    (136,631 )     736,850       -  
Accumulated deficit
    (4,430,928 )     (4,430,928 )     (4,430,928 )
Accumulated other comprehensive loss
    (34,833 )     -       -  
Total stockholders' equity (deficit)
    960,571       445,438       (645,912 )
                         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 2,293,444     $ 1,750,005     $ 1,795,435  

The accompanying notes are an integral part of the consolidated financial statements

 
16

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Years Ending December 31,
   
For the period from
January 1, 2009
 (inception of the
 development stage) to
 
   
2010
   
2009
   
2008
   
December 31, 2010
 
         
(As Restated)
             
Revenue:
                       
Sales commissions
  $ -     $ -     $ 43,365     $ -  
                                 
Costs and expenses:
                               
General and administrative expenses
    824,570       493,904       1,490,333       1,318,474  
Loss on sale of investments
    -       157,939       860,000       157,939  
      824,570       651,843       2,350,333       1,476,413  
Loss from continuing operations
    (824,570 )     (651,843 )     (2,306,968 )     (1,476,413 )
                                 
Foreign exchange loss
    (5,445 )     -       -       (5,445 )
Interest income
    -       37,696       26,386       37,696  
Interest expense
    (43,466 )     (113,712 )     (6,746 )     (157,178 )
Other income
            582,441       -       582,441  
Gain on deconsolidation of variable interest entity
            882,268       -       882,268  
Income (loss) from continuing operations before provision for income taxes
    (873,481 )     736,850       (2,287,328 )     (136,631 )
Provision for income taxes
    -       -       -       -  
Net income (loss) from continuing operations
    (873,481 )     736,850       (2,287,328 )     (136,631 )
Discontinued operations:
                               
Loss on disposal of Far East operations and South American Hedge Fund operations, and United States construction technology activities
    -       -       (2,310,473 )     -  
Net income (loss)
  $ (873,481 )   $ 736,850     $ (4,597,801 )   $ (136,631 )
Net income (loss) per common share:
                               
Basic and Diluted
                               
Net income (loss) from continuing operations
  $ (0.03 )   $ 0.03     $ (0.11 )        
                                 
Net loss from discontinued operations
  $ -     $ -     $ (0.11 )        
                                 
Net income (loss) per common share
  $ (0.03 )   $ 0.03     $ (0.22 )        
                                 
Weighted average common shares - basic and diluted
    27,124,031       22,779,263       20,858,566          

The accompanying notes are an integral part of the consolidated financial statements

 
17

 

DELTA MUTUAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fore the Years Ending December 31, 2010, 2009 and 2008
From Inception of Development Stage (January 1, 2009) to December 31, 2010

   
Number of
               
Earnings (Deficit)
   
Retained
   
Accumulated
   
Total
 
   
Common
   
Common
   
Paid in
   
Accumulated
   
Earnings
   
Other Comprehensive
   
Stockholders'
 
   
Shares
   
Stock
   
Capital
   
During the Development Stage
   
(Deficit)
   
Income (Loss)
   
Equity (Deficit)
 
Balance, January 1, 2008
    13,000,000     $ 1,300     $ 2,598,700     $ -     $ 1,869,468     $ -     $ 4,469,468  
                                                         
Effect of reverse acquisition
    7,888,295       789       7,099       -       (1,716,087 )     -       (1,708,199 )
                                                         
Issuance of common stock for services (valued at $0.20 - $0.50 per share)
    1,055,000       106       238,394       -       -       -       238,500  
                                                         
Issuance of common stock for debt (valued at $0.50 - $0.70 per share)
    230,057       23       143,577       -       -       -       143,600  
                                                         
Issuance of common stock for interest (valued at $0.50 - $0.70 per share)
    11,563       1       7,047       -       -       -       7,048  
                                                         
Contribution from stockholder
    -       -       1,000       -       -       -       1,000  
                                                         
Stock based compensation expense
    -       -       786,980       -       -       -       786,980  
                                                         
Net loss
    -       -       -       -       (4,584,309 )     -       (4,584,309 )
                                                         
Balance, December 31, 2008, as previously reported
    22,184,915       2,219       3,782,797       -       (4,430,928 )     -       (645,912 )
                                                         
Restatement (see Note 2)
    309,000       30       (30 )     -       -       -       -  
                                                         
Balance December 31, 2008, as restated
    22,493,955       2,249       3,782,767       -       (4,430,928 )     -       (645,912 )
                                                         
Issuance of common stock for services (valued at $0.60 per share)
    200,000       20       119,980       -       -       -       120,000  
                                                         
Issuance of common stock toward debt conversion (valued at $0.58 per share)
    60,000       6       34,994       -       -       -       35,000  
                                                         
Issuance of common stock for services (valued at $0.40 per share)
    28,572       3       9,997       -       -       -       10,000  
                                                         
Issuance of common stock for services (valued at $0.15 per share)
    130,000       13       19,487       -       -       -       19,500  
                                                         
Sales of common stock (valued at $0.06 to $0.23 per share)
    1,298,748       130       169,870       -       -       -       170,000  
                                                         
Net income
    -       -       -       736,850       -       -       736,850  
                                                         
Comprehensive income (loss)
    -       -       -       -       -       -       -  
                                                         
Balance December 31, 2009, as restated
    24,211,275       2,421       4,137,095       736,850       (4,430,928 )     -       445,438  
                                                         
Issuance of common stock for services and mineral property valued at $0.28 to $0.42 per share
    667,355       67       234,713       -       -       -       234,780  
                                                         
Sales of common stock valued at $0.15 to $0.50 per share
    3,769,057       376       1,188,291       -       -       -       1,188,667  
                                                         
Net loss
                            (873,481 )     -       -       (873,481 )
                                                         
Foreign currency adjustment - comprehensive loss
                            -       -       (34,833 )     (34,833 )
                                                         
Balance December 31, 2010
    28,647,687     $ 2,864     $ 5,560,099     $ (136,631 )   $ (4,430,928 )   $ (34,833 )   $ 960,571  

The accompanying notes are an integral part of the consolidated financial statements.

 
18

 

DELTA MUTUAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Years ending December 31,
   
For the period from
January 1, 2009
(inception of the
development stage) to
 
   
2010
   
2009
   
2008
   
December 31, 2010
 
         
(As Restated)
   
(As Restated)
       
Cash flows from Operating Activities:
                       
Net earnings (loss)
  $ (873,481 )   $ 736,850     $ (4,584,309 )   $ (136,631 )
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
                               
Depreciation, depletion and amortization
    -       804       25,641       804  
Impairment charge
    -       -       467,995       -  
Issuance of common stock for services and debt conversion
    179,004       149,500       238,500       328,504  
Loss on sale of investments
    -       157,939       860,000       157,939  
Gain on disposal of operations
    -       -       (230,057 )        
Stock based compensation expense
    -       -       786,980          
Changes in operating assets and liabilities
    190,978       (1,404,071 )     (62,560 )     (1,213,093 )
Net cash used in operating activities
    (503,499 )     (358,978 )     (2,497,810 )     (862,477 )
Cash flows from investing activities:
                               
Net cash acquired upon effect of reverse acquisition
    -       -       57,633       -  
Oil and gas properties exploration and development costs
    (536,934 )     (55,460 )     -       (592,394 )
Proceeds from sales of investments
    -       206,832       7,263,823       206,832  
Purchase of investments
    -       -       (2,618,502 )     -  
Purchase of exploration rights
    -       -       (697,000 )     -  
Purchase of concession investments
    -       -       (1,720,000 )     -  
Investment in mineral properties
    (42,050 )     -       -       (42,050 )
Net cash provided by (used in) investing activities
    (578,984 )     151,372       2,285,954       (427,612 )
                                 
Cash flows from financing activities:
                               
Proceeds from loans
    -       90,657       280,553       90,657  
Proceeds from sales of common stock
    1,188,667       205,000       -       1,393,667  
Repayment of loan
    -       -       (60,000 )     -  
Contribution from stockholder
    -       -       1,000       -  
Other proceeds
    -       -       4,260       -  
Net cash provided by financing activities
    1,188,667       295,657       225,813       1,484,324  
Effect of Exchange Rates on Cash
    811                       811  
Net increase in cash
  $ 106,996     $ 88,051     $ 13,957     $ 195,047  
Cash - Beginning of period
    102,008       13,957       -       13,957  
Cash - End of period
  $ 209,004     $ 102,008     $ 13,957     $ 209,004  

The accompanying notes are an integral part of the consolidated financial statements.

 
19

 

DELTA MUTUAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Years ending December 31,
   
For the period from 
 January 1, 2009 
(inception of the
development stage) to
 
   
2010
   
2009
   
2008
   
December 31, 2010
 
         
(As Restated)
   
(As Restated)
       
Changes in operating assets and liabilities consists of:
                       
(Increase) decrease in advances and other receivables
  $ 129,850     $ -     $ 1,914     $ 129,850  
(Increase) decrease in  other assets
    33,140       (176,634 )     -       (143,494 )
Increase (decrease) in accounts payable and accrued expenses
    25,228       (1,227,437 )     (64,474 )     (1,202,209 )
Increase (decrease) in notes payable
    2,760               -       2,760  
Changes in assets and liabilities
  $ 190,978     $ (1,404,071 )   $ (62,560 )   $ (1,213,093 )
                                 
Supplemental disclosure of cash flow information:
                               
Cash paid for interest
  $ -     $ -     $ -     $ -  
Cash paid for income taxes
  $ -     $ -     $ -     $ -  
                                 
Supplementary information:
                               
Non cash financing and investing activities:
                               
Issuance of common stock for mineral property
  $ 55,776     $ -     $ -     $ 55,776  
Issuance of common stock for services
  $ 179,004     $ 149,500     $ 7,048     $ 328,504  
Issuance of common stock for debt
  $ -     $ 35,000     $ 143,600     $ 35,000  

The accompanying notes are an integral part of the consolidated financial statements.

 
20

 

DELTA MUTUAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

   
Years Ending December 31,
   
For the period from 
January 1, 2009
(inception of the
development stage) to
 
   
2010
   
2009
   
2009
   
December 31, 2010
 
         
(As Restated)
             
Net earnings (loss)
  $ (873,481 )   $ 736,850     $ (4,597,801 )   $ (136,631 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    (34,833 )     -       -       (34,833 )
Net change in other comprehensive income (loss)
    (34,833 )     -       -       (34,833 )
Comprehensive income (loss)
  $ (908,315 )   $ 736,850     $ (4,597,801 )   $ (171,465 )

The accompanying notes are an integral part of the consolidated financial statements

 
21

 
 
DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Delta Mutual, Inc. was incorporated in Delaware on November 17, 1999. Effective March 4, 2008, Delta entered into a Membership Interest Purchase Agreement, pursuant to which Delta acquired, from Egani, Inc. shares of Altony SA, an Uruguayan Sociedad Anonima (“Altony”), which owned 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company  (“SAHF”).  At the closing of the Agreement, Delta issued 130,000,000 shares of common stock to Egani, Inc., which constituted, following such issuance, a majority of the outstanding shares of the common stock. Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. For accounting purposes, the transaction was treated as a recapitalization of the Company, as of March 4, 2008, with Altony as the acquirer.  Altony SA closed its business operations and was subsequently dissolved.

The primary focus of the Company’s business is its SAHF subsidiary, which has investments in oil and gas concessions in Argentina and focuses on the energy sector, including the development and supply of energy and alternative energy sources in Latin America and North America.

As of December 31, 2008, Delta terminated all of the construction technology activities that were carried out by Delta Technologies, Inc. (a wholly owned subsidiary).

Effective January 1, 2009, the Company had ceased all operations other than the investments of its SAHF subsidiary and became a development stage corporation, as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915 “Development Stage Entities”.  The Company has no revenue to date, continues to raise capital and there is no assurance that ultimately the Company will achieve a profitable level of operations.

Delta Mutual, Inc. and the above subsidiaries are collectively referred to as “the Company”.  All significant intercompany balances and transactions have been eliminated in consolidation.

GOING CONCERN

The consolidated financial statements for the period ended December 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 in the development stage of approximately $136,000 and working capital deficiency of approximately $1,116,000 as of December 31, 2010 and has an accumulated deficit of approximately $4.4 million.  Additionally, the Company may 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 concessions in Argentina. There is no assurance that the Company will ultimately achieve a profitable level of operations.
 
 
22

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

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 substantial intercompany transactions and balances 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.
  
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 June 30, 2008 and discontinued its construction technology activities as of 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 approximately $468,000 during the year ended December 31, 2008.

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.  These investments were reclassified to unproved oil and gas properties after the Company was officially admitted into the joint ventures for each of the properties.

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.
 
 
23

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

STOCK BASED COMPENSATION
 
The Company had a stock-based compensation plan under which stock options are granted to employees. The Company accounts for the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.  Under authoritative guidance issued by the Financial Accounting Standards Board (FASB), companies are required to estimate the fair value or calculated value of share-based payment awards on the date of grant using an option-pricing model.  The value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of income.  The Company uses the Black-Scholes Option Pricing Model to determine the fair-value of stock-based awards. The Company recognized stock based compensation expense of approximately $787,000 in 2008 (none in 2009 and 2010).
 
OIL AND GAS PROPERTIES
 
The Company follows the full cost method of accounting for oil and gas properties.  Under this method, all direct costs and certain indirect costs associated with acquisition of properties and successful, as well as, unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.  Net capitalized costs of oil and gas properties, less related deferred taxes, are limited to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on un-escalated prices discounted at 10 percent, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. Costs in excess of the present value of estimated future net revenues as discussed above are charged to proved property impairment expense.  No gain or loss is recognized upon sale or disposition of oil and gas properties, except in unusual circumstances. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented.

The Company accounts for its investments in oil and gas properties using the equity method of accounting.
 
As of December 31, 2010, the Company has not recorded any depletion or impairment, if any, of its oil and gas properties, pending a complete report on reserve studies and analysis of proved and unproved oil and gas reserves.

FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Cash, advances and other receivables, accounts payable and accrued expenses, and notes payable as reflected in the consolidated financial statements, approximates 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.
 
 
24

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 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.  As of December 31, 2010 and 2009, all of the Company’s property and equipment is fully depreciated.
 
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 FASB issued guidance codified in 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. De-recognition 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. In addition, when applicable, the Company will adjust tax expense to reflect the Company’s ongoing assessments of such matters, which require judgment and 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, 2010 2009 and 2008, respectively, and considering its loss making history since inception. The Company has not made any provision for federal and state income tax liabilities that may result from this uncertainty as of December 31, 2010, 2009 and 2008, respectively. Management believes that this will not have a material adverse impact on the Company’s consolidated financial position, its results of operations and its cash flows.

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).
 
 
25

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

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.

EARNINGS (LOSS) PER SHARE

Basic and diluted net earnings (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 earnings (loss) per share for the periods presented in the statements of operations, because all such securities were anti-dilutive. The net earnings (loss) per share is calculated by dividing the net earnings (loss) by the weighted average number of shares outstanding during the periods.  

FOREIGN CURRENCY TRANSLATION

In 2010, the functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange rate for the period. The functional currency in South America is the Argentine Peso. Translation adjustments are recorded in Accumulated Other Comprehensive Income.

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 $2,310,473 for the year ended December 31, 2008.  There were no discontinued operations in 2009 or 2010.

The summarized statement of loss for discontinued operations is as follows:

   
2008
 
       
Net sales
  $ (2,077,576 )
         
Impairment
    (467,994 )
         
Benefit (Provision) for income taxes
    230,057  
         
Loss from discontinued operations, net of taxes
  $ (2,310,473 )
 
OTHER CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission ("SEC") 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, please refer to the accompanying notes to the financial statements.
 
 
26

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation to non-employees under ASC 718, "Compensation-Stock Compensation" ("ASC 718").  The compensation cost of the awards is based on the grant date fair-value of these awards as calculated for recognition under ASC 718.

For the years ended December 31, 2010, 2009 and 2008, the Company issued 534,555, 358,572 and -0- shares and recorded compensation expense of $179,004, $149,500 and nil, respectively.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 which is intended to improve disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, the reasons for the transfers and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). The Company has applied the new disclosure requirements as of January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.
 
In February 2010, the FASB issued ASU 2010-09, which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated financial statements.
 
In April 2010, the FASB Emerging Issues Task Force (“EITF”) issued an amendment to previously issued guidance regarding the classification of a share-based payment award as either equity or a liability. The amendments clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity.  This guidance is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2010. Earlier application is permitted. This guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings and the cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which it is initially applied, as if the guidance had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. The Company is currently evaluating the impact of this guidance on its operating results, financial position and cash flows.
 
 In January 2009, the SEC issued revisions to the natural gas and oil reporting disclosures, “Modernization of Oil and Gas Reporting, Final Rule” (the “Final Rule”). In addition to changing the definition and disclosure requirements for natural gas and oil reserves, the Final Rule changed the requirements for determining quantities of natural gas and oil reserves. The Final Rule also changed certain accounting requirements under the full cost method of accounting for natural gas and oil activities. The amendments are designed to modernize the requirements for the determination of natural gas and oil reserves, aligning them with current practices and updating them for changes in technology. The Final Rule was effective for annual reports on Form10-K for fiscal years ending on or after December 31, 2009.  In addition, in January 2010, the FASB issued an accounting standards update relating to standards for extractive oil and gas activities. The accounting standards update amends existing standards to align the proved reserves calculation and disclosure requirements under US GAAP with the requirements in the SEC rules. The new standards were to be applied prospectively as a change in estimates. In April 2010, the FASB issued a further accounting standards update regarding extractive oil and gas industries to incorporate in accounting standards the revisions to Rule 4-10 of the SEC’s Regulation S-X. The amendment primarily consists of the addition and deletion of definitions of terms related to fossil fuel exploration and production arising from technology changes over the past several decades. The accounting guidance in Rule 4-10 did not change. The Company is in the process of determining the impact of this guidance on its consolidated financial position and results of operations.
 
 
27

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

2.  RESTATED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 
In the second quarter of 2010, the Company identified the number of common shares issued and outstanding was understated by approximately 375,000 shares, or 1.6% as of December 31, 2009. The Company also determined that approximately, 29,000 shares had been issued in lieu of payment for consulting services performed by third parties and approximately 37,000 shares were issued to third parties for cash that was used for travel expense by the Company. Accordingly, the Company recorded additional expense of $15,500 for the year ending December 31, 2009, which resulted in a reduction of net income from $850,091, as previously reported, to $834,591 as restated. An increase of approximately 309,000 shares outstanding is attributable to the net impact of the reverse merger in 2008 and, accordingly, $30 was reclassified from additional paid in capital to common stock as of December 31, 2008. The Company has reflected the impact of these adjustments and the increase in shares outstanding in its Consolidated Financial Statements for the years ending December 31, 2009 and 2008.

Additionally, during the year ending December 31, 2010, the Company determined that interest expense on its notes payable for prior years has been understated due to an error by $97,741, which resulted in a reduction of net earnings from $834,591 to $736,850, as restated.  The Company also determined that is was a development stage company as of January 1, 2009 and has reclassified the earnings (losses) accumulated during the period from inception to December 31, 2010 to a separate line in the equity statement.  Furthermore, the Company has reclassified $35,000 from the conversion of a note payable out of cash flow from operations in 2009 and into cash flow from financing activities.

The following represents the restated consolidated financial statements as of December 31, 2009 and adjustments related to the consolidated financial statements.
 
 
28

 
 
DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008
 
CONSOLIDATED BALANCE SHEET

   
December 31,
         
December 31,
 
   
2009
   
Adjustment
   
2009
 
   
(As Reported)
         
(As Restated)
 
                   
ASSETS
                 
                   
Current Assets:
                 
Cash
  $ 102,008     $ -     $ 102,008  
Advances and other receivables
    137,776       -       137,776  
Total current assets
    239,784       -       239,784  
                         
Investments in unproved oil and gas properties
    1,470,713       -       1,470,713  
Other assets
    39,508       -       39,508  
                         
TOTAL ASSETS
  $ 1,750,005     $ -     $ 1,750,005  
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Current Liabilities:
                       
Accounts payable
  $ 134,192     $ -     $ 134,192  
Accrued expenses
    267,029       97,741       364,770  
Notes payable
    805,605       -       805,605  
Total current liabilities
    1,206,826       97,741       1,304,567  
                         
Commitments and Contingencies
                       
                         
Stockholders' Equity:
                       
Preferred stock $0.0001 par value
    -       -       -  
Common stock $0.0001 par value
    2,384       37       2,421  
Additional paid-in capital
    4,121,632       15,463       4,137,095  
Earnings accumulated during the development stage
    -       736,850       736,850  
Accumulated Deficit
    (3,580,837 )     (850,091 )     (4,430,928 )
Accumulated other comprehensive loss
    -       -       -  
Total stockholders' equity
    543,179       (97,741 )     445,438  
                         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 1,750,005     $ -     $ 1,750,005  

 
29

 
 
DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008
     
CONSOLIDATED STATEMENT OF OPERATIONS

   
Years Ending December 31,
       
   
2009
   
Adjustments
   
2009
 
   
(As Reported)
         
(As Restated)
 
Costs and expenses:
                 
General, and administrative
  $ 478,404     $ 15,500     $ 493,904  
Loss on sale of investments
    157,939       -       157,939  
Total costs and expenses
    636,343       15,500       651,843  
Loss from operations
    (636,343 )     (15,500 )     (651,843 )
                         
Other Income (Expense):
                       
Interest income
    37,696       -       37,696  
Interest expense
    (15,971 )     (97,741 )     (113,712 )
Other income
    582,441       -       582,441  
Gain on deconsolidation of variable interest entity
    882,268       -       882,268  
Net other income (expense)
    1,486,434       (97,741 )     1,388,693  
Income (loss) before income taxes
    850,091       (113,241 )     736,850  
                         
Provision for income taxes
    -       -       -  
Net earnings (loss)
  $ 850,091     $ (113,241 )   $ 736,850  
                         
Net earnings (loss) per common share:
                       
Basic and Diluted
  $ 0.04     $ (0.01 )   $ 0.03  
Weighted average common shares - basic and diluted
    23,107,329       (328,066 )     22,779,263  

 
30

 
 
DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008
      
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Years ending December 31,
 
   
2009
   
Adjustments
   
2009
 
   
(As Reported)
   
 
   
(As Restated)
 
Cash flows from Operating Activities:
       
 
       
Net earnings (loss)
  $ 850,091     $ (113,241 )   $ 736,850  
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
                       
Depreciation, depletion and amortization
    804       -       804  
Issuance of common stock for services
    174,500       (25,000 )     149,500  
Loss on sale of investments
    157,939       -       157,939  
Changes in operating assets and liabilities
    (1,501,812 )     97,741       (1,404,071 )
Net cash used in operating activities
    (318,478 )     (40,500 )     (358,978 )
Cash flows from investing activities:
                       
Oil and gas properties exploration and development costs
    (55,460 )     -       (55,460 )
Proceeds from sales of investments
    206,832       -       206,832  
Net cash provided by (used in) investing activities
    151,372       -       151,372  
                         
Cash flows from financing activities:
                       
Proceeds from loans
    90,657       -       90,657  
Proceeds from sales of common stock
    164,500       40,500       205,000  
Net cash provided by financing activities
    255,157       40,500       295,657  
Net increase in cash
  $ 88,051             $ 88,051  
Cash - Beginning of period
    13,957               13,957  
Cash - End of period
  $ 102,008             $ 102,008  
Changes in operating assets and liabilities consists of:
                       
(Increase) decrease in  other assets
    (176,634 )     -       (176,634 )
Increase (decrease) in accounts payable and accrued expenses
    (1,325,178 )     97,741       (1,227,437 )
Changes in assets and liabilities
  $ (1,501,812 )   $ 97,741     $ (1,404,071 )
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for interest
  $ -     $ -     $ -  
Cash paid for income taxes
  $ -     $ -     $ -  
                         
Supplementary information:
                       
Non cash financing and investing activities:
                       
Issuance of common stock for mineral property
  $ 55,776     $ -     $ -  
Issuance of common stock for services
  $ -     $ 35,000     $ 35,000  

 
31

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008
 
3.  ACQUISITION

Effective March 4, 2008, the Company entered into a Membership Interest Purchase Agreement, pursuant to which the Company acquired from Egani, Inc. all the shares of stock of Altony SA, an Uruguayan Sociedad Anonima (“Altony”), which owns 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company (sometimes referred to as “SAHF”). At the closing of the Agreement, the Company issued 13,000,000 shares of its common stock to Egani, Inc., which constituted, following such issuance, a majority of the outstanding shares of its common stock. Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. For accounting purposes, the transaction was treated as a recapitalization of the Company, as of March 4, 2008, with Altony as the acquirer.

The acquired assets and liabilities assumed of Delta Mutual from the reverse acquisition were as follows:

Cash
  $ 57,623  
Prepaid expenses
    1,924  
Property and equipment
    462,842  
Accumulated depreciation
    (94,719 )
Intangible asset-net
    126,317  
Other assets
    650  
Accounts payable
    (173,370 )
Accrued expenses
    (1,225,674 )
Convertible debt
    (397,340 )
Notes payable
    (240,655 )
Minority interests
    (225,797 )
Common stock
    (7,888 )
Deficit
    1,716,087  
    $ -0-  
 
 
32

 

DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

4.  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 are removed from the consolidated financial statements and any assets and liabilities of the Company that were eliminated in consolidation are restored. The gain recognized from deconsolidating the VIE is 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. is not considered a variable interest entity (VIE) for the year ending December 31, 2009 and, accordingly, it has been deconsolidated from the accompanying consolidated financial statements effective December 31, 2009. As of December 31, 2009, majority stockholders of Envirotech are exercising significant influence over operating and financing policies of Envirotech, as well as managing its business activities and, therefore, Envirotech is no longer considered the VIE. As a result of this deconsolidation, the Company has 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 are restored at fair value.
  
Prior to December 31, 2009, the Company was deemed to be the primary beneficiary of Envirotech due to relatively significant financial support provided to this entity in terms of investment of $375,000 (which represents 45% ownership of the Company) and notes receivable of $810,867. However, due to significant losses of Envirotech and its deconsolidation as of December 31, 2009, the Company’s entire investment and notes receivable in the aggregate of approximately $1,186,000 as of December 31, 2009, were reduced to zero in order to account for restored assets at fair value. Furthermore, as of December 31, 2009, the Company was no longer liable for Envirotech’s unpaid liabilities totaling approximately $882,000, which had previously been recognized as expense by the Company and were reversed upon deconsolidation of the entity and reported as a gain upon deconsolidation of approximately $882,000, recorded as a separate line item in the accompanying consolidated financial statements. 

The Company is carrying the investment in Envirotech at cost because the Company has not been able to receive reliable information in connection with this investment.
 
5. INVESTMENT IN UNPROVED OIL AND GAS PROPERTIES
 
Prior to official admittance into the joint ventures, the Company classified its investment in unproved oil and gas properties as investments in non-consolidated affiliates.
 
 
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DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008

As of December 31, 2010, the Company has a 10% ownership interest in the Jollin and Tonono oil and gas concessions located in Salta Province, Argentina. SAHF originally purchased an 18% carry-over interest in the Jollin and Tonono concessions on May 15, 2007, and subsequently increased its ownership to 23.5%, 9% of which was carry-over and 14.5% of which was working.  SAHF in 2009 transferred 13.5% to Maxipetrol, under an arrangement where SAHF’s remaining 10% interest would be in a carry-over mode. In exchange, Maxipetrol agreed to refund the Company $500,000 of the Company’s share of costs related to the area.  The refund was used in part to repay outstanding amounts payable to Maxipetrol for prior drilling costs in the amount of $294,000, which were reversed as of December 31, 2009, and the remaining $206,000 was received in cash. The book value of Company’s share that was returned was $158,000 higher than the total consideration received and, accordingly, a loss was recognized in 2009.

SAHF received its foreign registration in Argentina and was admitted as a member of the joint venture on July 2, 2010. The Company will begin receiving revenue from the Jollin and Tonono blocks when the first well is approved for commercial production.

During the year ending December 31, 2010 the Company paid $139,762 in additional canons (concession maintenance payments) to maintain its ownership interest in the concession.

At December 31, 2010, the Company had a 9% ownership interest in the Tartagal and Morillo oil and gas concessions located in Salta Province, Argentina. Subsequent to year-end, our ownership interest was increased to 18% in March 2011.  During 2007, SAHF had originally purchased an 18% ownership of these concessions During 2008, SAHF exchanged 50% of its ownership in this investment with a third party, where the acquirer agreed to assume 50% of SAHF’s obligations with respect to future development expenses.

On March 28, 2011, the third party agreed to the transfer its 9% carried interest in the Tartagal and Morillo concession back to the Company, in exchange for 200,000 shares of the Company’s common stock, with a fair value of $90,000, and a percentage of proceeds in the event of an unexpected sale of the concession in excess of over $6 million, which brought the Company’s total interest in the Tartagal and Morillo concession to 18%.  The Company was admitted to the joint venture for these blocks on May 11, 2011.  The Company will reclassify the $225,000 concession costs associated with this property to proved oil and gas properties based upon the reserve report received from the third party working interest owner of the joint venture.

The Company’s share of the development costs will be repaid from 50% of its share of the future production profits.

As of December 31, 2010, the Company owns 20% of the oil and gas exploration rights to five blocks in the Salta Province of Northern Argentina.  The managing partner holds this interest in escrow until SAHF is officially admitted into the joint venture of the exploration rights concession.
 
The ownership interests in The Salta Province Exploration Rights Concession are:
  
 
·
Consortium Ketsal Kilwa – 60% (managing partner)
 
·
Ambika S.A. – 20%
 
·
SAHF – 20%
 
During the second quarter 2010, the Joint Venture began drilling the first well on the Guemes block of The Salta Province Exploration Rights Concession.  SAHF acted as the project manager for this drilling project, but did not charge the joint venture a management fee.  Production testing to verify the commercial sustainability of the well is estimated to commence second quarter 2011.
 
The 2010 concessions, totaling approximately $1.1 million, of which SAHF’s share is approximately $220,000, payable for The Salta Province Exploration Rights Concession are past due and are being contested with the Government by the Joint Venture.
 
The Company evaluated these investments for impairment and concluded that, except as described above, no loss in value occurred as of December 31, 2010. The following table summarizes the Company’s investments in these unproved oil and gas properties

 
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DELTA MUTUAL, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended December 31, 2010, 2009 and 2008
  
    Concession     Exploration        
   
Investments
   
Rights
   
Total