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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

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, 2011

OR

 

o 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.)
     
15100 North 78th Place, Suite 200, Scottsdale, AZ   85260
(Address of principal executive offices)   (Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code: (480) 483-0420

 

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 x    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. (Check One):

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer    ¨ Smaller reporting company x
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

 

The 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 $7,308,381.

 

Number of shares of Common Stock outstanding as of April 13, 2012: 32,010,826.

 

ii
 

 

TABLE OF CONTENTS

  

PART I 1
Item 1. Business. 1
Item 1A. Risk Factors. 14
Item 1B. Unresolved Staff Comments. 18
Item 2. Properties. 18
Item 3. Legal Proceedings. 19
Item 4. Mine Safety Disclosures. 19
PART II 20
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. 20
Item 6. Selected Financial Data. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 21
Overview 22
Jollin and Tonono Oil and Gas Concessions 22
Salta Province Exploration Rights 23
Tartagal and Morillo 24
Valle de Lerma 24
Lithium Production Properties 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 27
Item 8. Financial Statements and Supplementary Data. 29
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 38
Item 9A. Controls and Procedures. 39
Item 9B. Other Information. 39
Item 10. Directors, Executive Officers, and Corporate Governance. 40
Item 11. Executive Compensation. 42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 44
Item 13. Certain Relationships and Related Transactions, and Director Independence. 44
Item 14.  Principal Accountant Fees and Services 46
Item 15. Exhibits and Financial Statement Schedules. 46

 

iii
 

 

PART I

 

NOTE REGARDING FORWARD LOOKING STATEMENTS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This Annual Report contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to be materially different from any future performance suggested herein. We wish to caution readers that in addition to the important factors described elsewhere in this Form 10-K, the following forward-looking statements, among others, sometimes have affected, and in the future could affect, our actual results and could cause our actual consolidated results during 2011, and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.

 

Item 1. Business. 

 

Unless the context otherwise requires, the terms "the Company," "we," "our" and "us" refers to Delta Mutual, Inc., and, as the context requires, its consolidated subsidiaries.

 

Background

 

We were incorporated under the name Delta Mutual, Inc. on November 17, 1999, in the State of Delaware. In 2003, we established business operations focused on providing environmental and construction technologies and services. Our operations in the Far East (Indonesia) and our construction operations in Puerto Rico were discontinued in 2008.

 

Effective March 4, 2008, we acquired 100% of the issued and outstanding membership interests in the parent of South American Hydrocarbon Fluids LLC, a Delaware limited liability company (formerly South American Hedge Fund LLC, sometimes herein referred to as “SAHF”). For accounting purposes, the transaction was treated as a recapitalization of the Company, as of March 4, 2008, with the parent of SAHF as the acquirer. SAHF maintains a branch office in Argentina, where it is engaged in oil and gas exploration and development activities.

 

Our principal offices are located at 15100 North 78th Place, Scottsdale, AZ 85260. Our telephone number is (480) 483-0420. Our common stock is quoted on the Over-the-Counter Electronic Bulletin Board under the symbol "DLTZ.OB".

  

General

 

We are a development stage independent oil and gas company engaged in oil and gas concession investments, exploitation, production and exploration activities primarily in Argentina. In addition, we have ownership interests in certain mineral rights that are located in Argentina.

 

1
 

 

Specifically, we have focused, and plan to continue to focus, on the following investments in South America.

 

Business Strategy

     

The key elements of our business strategy are to:

·Make accretive acquisitions of producing properties generally characterized by long-lived reserves with stable production and reserve development potential;

 

·Add proved reserves and maximize cash flow and production through development projects and operational efficiencies; and

 

·Engage in adjacent exploration drilling where evaluation of the property is positive.

 

Our investments have focused on concessions where there are shut-in, plugged and abandoned wells that have, in our assessment, a high probability of additional recovery of reserves through revitalization processes that are commonly used in the oil and gas industry. The revitalization processes are directed toward bringing wells back into production or to enhance production with newer technology.

 

Our Oil and Gas Investments

 

Our main source of revenue will derive from the sale of the crude oil and natural gas produced from the oil and gas concessions in which we have made investments. In August 2007, SAHF signed agreements to purchase partial ownership interests in four oil and gas concessions in Northern Argentina. The joint venture owning these concessions then started the process to obtain the necessary government and environmental operating permits for the commercial exploitation of these concessions. While we are not the operators of certain of these concessions, we generally have representation on the operating committees that are responsible for managing the business affairs of these concessions.

 

At December 2011 the SAHF participations in the Argentina concessions are as follows:

 

Block Province Status Delta [SAHF] % Partner(s)
Jollin Salta Testing 10% CO JHP (China), Maxipetrol
Tonono Salta Testing 10% CO JHP (China), Maxipetrol
Tartagal Salta 2 Work over drilled; 20 prospects 18% CO New Times Energy (HK), Maxipetrol
Morillo Salta 3D seismic interpretation; 2 exploratory wells to be drilled 18% CO New Times Energy (HK), Maxipetrol
Guemes Salta Drill Complete 20% Ketsal
Valle de Lerma Salta Workover of La Troja well 70% Remsa, PetroNexus, Grasta

 

*CO means a carryover interest in the project.

** Of these five properties, SAHF and its joint venture partner have made initial investments in Guemes.

*** In the Jollin, Tonono and Tartagal, and Morillo concessions the carry over mode relieved SAHF from the payment of canon, landlord fees of any kind or any other expense until production is realized. In the exploratory area Guemes, proportional exploratory canons were paid as explained in the financials.

 

2
 

 

Agreements with Principle Petroleum Limited

 

Effective March 30, 2012, we entered into an Asset Purchase and Cooperation Agreement (the “Cooperation Agreement”) with Principle Petroleum Limited (“PPL”), headquartered in the British Virgin Islands. Under the Cooperation Agreement, we have agreed to sell to PPL, for a price of $7,000,000 certain exploration and exploitation rights to oil and gas deposits and certain bidding rights held by Delta on the following areas: Valle de Lerma in the province of Salta; San Salvador de Jujuy; Libertador General San Martin in the province of Jujuy; and Selva Maria in the province of Formosa. Pursuant to a separate Agreement dated March 31, 2012, we have agreed with PPL to assign and transfer 50% of SAHF's current ownership of the Tartagal and Morillo (i.e., a 9% interest in the concession) to PPL for a purchase price of $500,000. PPL has also agreed in an Undertaking to provide funds to the operating entities of Valle de Lerma, Selva Maria, San Salvador and Libertador, in the aggregate amount of up to $10,000,000 (San Salvador, Libertador and Selva Maria are pending for approval from the government, which is standard procedure in Argentina). In all of the concession interests mentioned in the Cooperation Agreement and the other agreements, except for Tartagal and Morillo, SAHF will be the operator.

 

 

 

3
 

 

Jollin and Tonono Concessions

 

SAHF has a 10% ownership interest in the Jollin and Tonono oil and gas concessions located in Salta Province, Argentina. SAHF originally purchased an 20% carry-over interest in the Jollin and Tonono concessions on May 15, 2007, and subsequently increased its ownership to 47%, 20% of which was carry-over and 27% which was working. Subsequently, in 2008, SAHF sold half of its stake, giving SAHF a 10% carry-over and 13.5% working interest in the concessions. 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 December 2008, a reentry workover was made in the Jollin 2 well for 23 days until gas presence was detected in January 3, 2009 with a 170psi associated with the burning test. After several hours of test a strong presence of sand stopped the test. After 10 weeks of workover with two different rigs without a satisfactory performance of the well, a technical decision was taken to perform a 3D seismic job around the Jollin Block including the Jollin 2. After the conclusion of the 3D, estimated for second or third quarter 2012, a side track will be performed in the J2 or a bypass in the trouble stage in the vicinity of 2270 mt of the tubing. The decision will be discussed by the operating committee of the block, but will ultimately be made by the operator and majority stake-holder.

  

SAHF received its foreign registration in Argentina and was admitted as a member of the joint venture on July 2, 2010.

 

 

Tartagal and Morillo Concessions

 

Tartagal Oriental - The Tartagal Oriental (“Tartagal”) exploration license area, extended to February 2014, covers 7,065 square kilometers in Salta Province, located in the northern part of Argentina. Exploration dates back into the mid 20th century, and 22 wells, some oil producers, have been drilled in Tartagal Oriental since the 1960s. Of the 22 wells that have been drilled in Tartagal Oriental in the past decades, several were judged to be workover candidates by New Times Energy Corporation Limited, Hong Kong, the 60% owner and operator of the these  concessions. A two well workover program was designed and carried out in late 2010 and early 2011 for the CA- x1002 and CA- x1 wells. These wells are now in a trial stage of production. Commercial production will commence once the installation of relevant production facilities, including flow lines and tank batteries, are fully completed. After new 2D interpretation done in the Tartagal Block, an exploratory well was drilled and completed in September 2011. Previously drilled wells are being looked at for potential workover drills in 2012.

 

Morillo - The Morillo exploration license area covers 3,518 square kilometers in Salta Province, contiguous with and south of the Tartagal Oriental license. Granted at the same time as Tartagal Oriental, the Morillo license was also extended to February 2014. In 2011, High Luck ordered a 274 square kilometer 3D seismic to be shot in the southwestern corner of the property because of a recent discovery made by Petrobras in an adjacent block. Once the data is processed and a viable prospect is found, High Luck will drill with a San Antonio rig and team to a depth of approximately 3,000 meters. SAHF had 9% ownership of the Tartagal and Morillo oil and gas concessions located in Salta Province, Argentina, at December 31, 2010. Subsequent to year end, our ownership interest was increased to 18% in March 2011.

 

4
 

 

On May 11, 2011, SAHF received the Argentinean Salta Government’s approval for its 18% ownership share for the Tartagal and Morillo concessions.

 

Exploration Rights

  

(Guemes Block)

 

On February 6, 2008, SAHF purchased 40% of the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina for $697,000. During 2008, SAHF sold 50% of its rights in these concessions to a third party. Provided certain development activities are undertaken by owners, these exploration rights will remain in effect through the year 2011. The initial development costs and fees were paid by the majority owner and SAHF incurred no additional expenses related to this investment in 2008.

 

Exploratory drilling activities commenced in April 2010 on the Guemes Block and the first well was spud in September 2010. 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 still needs to be done.

 

Valle de Lerma Block

 

On August 10, 2011, the Company’s tender offer, made through our wholly-owned subsidiary, SAHF, for the ownership right to explore, and eventually, produce oil and natural gas in the block known as “Valle de Lerma” was declared the winning bid by the Salta provincial government. SAHF made the offer in a joint venture agreement with Remsa, PetroNexus and Grasta SA, a local mid-size gasoline refinery located in Buenos Aires, Argentina. The joint venture paid $5,000 to enter the international bid and presented a business plan, a contingency plan and economic offer to the government of Salta. In this offer, the Company committed 401 work units in the form of 2D seismic reinterpretation, 3D seismic shooting, and geochemistry for the first exploration period, which is 4 years. Each work unit has the equivalent of $5,000, so the joint venture committed $2,005,000 across a four-year span in the form of "soft" work units, or work units used to discover potential oil fields. The offer was originally approved by Resolution from the Secretary of Energy of the Salta Government, and then approved by a governor's decree in Salta published on August 11, 2011 in the daily bulletin of the province. In addition, the joint venture took out an insurance policy through Fianzas y Credito for the 10% of the committed amount for $1000/quarter, as is mandatory.

 

The Valle de Lerma block is located in the province of Salta in the northwestern region of Argentina and has an area of 5259 km2. On October 25, 2011 SAHF was awarded an Exploration and Exploitation Oil & Gas Block License by the Government of Salta, Argentina, and will file an environmental impact study and proceed to reentry and work-over of the wells. SAHF holds a majority of the license interest and is the responsible operator. The license allows SAHF 20 years to explore and produce hydrocarbons with a renewal option of ten more years.

 

5
 

 

The Valle de Lerma block has been explored in the past by YPF and several seismic 2D lines were extensively performed to research the area. Two Exploratory Wells were drilled in December 1990 and November 1994 by a private Company; both indicated hydrocarbon traces or presence. In the second well, named "La Troja" (total depth of 1433 mbbp), an oil production of 28 API density was tested at 1277 mbbp for a test time of 19 hs. For strategic reasons, the wells were capped.

 

The Company and its partner, Grasta Petroleum will develop the block exploration starting with 2D Seismic interpretation with PetroNexus SA; geological model application and a hydrocarbon micro seepage survey with Geo Microbial Technologies Argentina (Guemes Method), and La Troja well workover with a local rig company; the target will be the Cretaceous zone, both in old and new wells.  The exploration terms are four years for the first period, three years for the second and two years for the last period.

 

SAHF currently owns 70% of the rights to explore Valle de Lerma; Grasta owns 5%; PetroNexus owns 20%; and Remsa owns 5%.

 

In March, 2012, SAHF performed a mandated Environmental Impact Study report for Valle de Lerma through GeoAm. It was shortly after officially filed with the Secretary of Energy of the Province of Salta. The company is expecting its approval in April 2012. Upon the document's approval, the company will commence the La Troja well work over in Valle de Lerma.

 

In addition, in March 2012, the Company also filed a report related to the work done by OilGraphic for the recently finished reinterpretation of 2D seismic lines that were performed in Valle de Lerma in the 1990's. The net effect of this is that the work commitment will be reduced to half its total value with about three years left for the completion of the first exploration period. The Company is expecting the approval of this request by May 2012.

 

Caimancito Refinery

 

On January 13, 2012, we, through our wholly-owned subsidiary, SAHF, signed a purchase option agreement with Cruz Norte, SA to purchase 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina. In March, 2012, the purchase option agreement was finalized and signed and Cruz Norte transferred 1/3 of its stake in the refinery to SAHF. The purchase price of the refinery was US$150,000 for the 33.33% of the outstanding shares of Caimancito Refinery; the purchase price is split into two payments of $75,000: one in March 2012, and one in June 2012. So far, the Company has wired to Cruz Norte SA $55,000 in two payments in March 2012.

 

The Caimancito Refinery was built in the 1980's, in the Province of Jujuy, by Gas del Estado, a formerly State-owned natural gas company in order to produce propane, butane and natural gasoline. In 1997, management converted some of its equipment into equipment used for petroleum distillation and for solvent, gasoline, diesel oil and thinner production. During 2000, a biodiesel plant with the capacity of 10m3/day was built and operated until 2001 when the plant was revamped to 15m3/day. The Caimancito plant is the only refining plant in Jujuy. Currently, the plant is being refurbished and is expected to start refining in mid-2012.

 

6
 

 

Terms of Carryover Arrangements

 

We entered into a carryover arrangement for Jollin and Tonono on September 25, 2009. The Tartagal and Morillo interest was a carry-over interest from inception, May 15, 2007.

 

The carrying party for Jollin , Tonono , Tartagal and Morillo concessions is Oxipetrol-Petroleros de Occidente SA (Maxipetrol). Jollin and Tonono went into a carry-over mode after a buy-sell agreement with Maxipetrol on September 29, 2009.

 

Under the terms of the carry over, 50% of the production profits will be applied to the investment payment. The balance of the production profits (50%) will be distributed proportionally according to the percentage of each JV member. These terms apply for the Jollin, Tonono, Tartagal & Morillo concessions.

 

Admission of SAHF to Joint Ventures Operating Oil Concessions

 

SAHF received the approval for the Jollin Block and Tonono Block on July 2, 2010, 14 months after filing for such. The approval for the Tartagal and Morillo Blocks application was filed in August 2010 and approved May 11, 2011.

 

Prior to formal admittance into the joint ventures, SAHF’s 10% carry-over interest in the Jollin and Tonono Concessions and 9% carry-over interest in the Tartagal and Morillo Concessions were assigned to and held in Trust for SAHF by Maxipetrol for the sole use and benefit of SAHF, including any proceeds from the sale of hydrocarbons or property interests. The Assignment Agreement does not affect the rights, privileges, obligations and liabilities of the parties to the agreement related to their respective interests in any way. This is a common practice in Argentina due to the lengthy period required for obtaining government approvals.

 

The 2010 concessions payable for The Salta Province Exploration Rights Concession are past due and are being contested by the managing partner of the Joint Venture due to the changes in economic conditions since the concession interest was originally purchased by Ketsal, S.A. in 2005. The 2010 concessions total approximately $1.1 million of which SAHF’s share is $220,000. Prior to the drilling of the Guemes well, the managing partner began negotiating with the government of Argentina to have the concessions' penalties waived and it was agreedthat the Government will not draw on the Performance Bond posted by Ketsal, in exchange for opening a well on Guemes and continued development activities in the province. SAHF opened up well in Guemes known as "Dos Morros" and the overdue charges have been waived.

 

Separately, the managing partner of the Joint Venture is negotiating a carryover arrangement with YPF (which is owned by Repsol) for Cobres and La Union, while Valles Calchaquies and Rosario de la Frontera are under negotiations to be reversed to the province.. Under this agreement, the Joint Venture will sell 70% of its interest in the properties and will retain a 30% carried interest and therefore, does not have to provide the liquidity to drill and develop these blocks. Meanwhile, the joint venture will retain its current percentages in Guemes.

 

7
 

 

Because of the involvement of different pieces in the mentioned agreements and the normal turn-around time in this type of operations in Argentina, the agreements are expected to be finalized by fourth quarter of 2012. When the transactions are finalized, SAHF will register to become an official member of the new remaining joint venture. 

 

Development Schedule for Our Oil and Gas Investments

 

The focus of operations for the company's immediate development is Valle de Lerma. The "La Troja" well is expected to be worked over in the second quarter of 2012 and cleared for commercial production shortly after. Once the results from the "La Troja" well are received, the joint venture will proceed to examining potential exploratory drills in the concession.

 

In addition the operators of Tartagal and Morillo have stated that they expect to be delivering crude to the local refineries as soon as their wells are approved for commercial production and the battery and required lines and infrastructure are installed. The main costs associated with our oil and gas investments are related to oil and gas property acquisition, drilling costs, initial well revitalization, gas pipeline construction and ongoing operating expenses. The revitalization of wells allows short-term cash increases while holding the lease for additional future development.

 

Commitment to Technology  

 

In each of our core operating areas, we have accumulated detailed geologic and geophysical knowledge and have developed significant technical and operational expertise.  This data is analyzed with advanced geophysical and geological computer resources dedicated to the accurate and efficient characterization of the subsurface oil and gas reservoirs that comprise our asset base. This commitment to technology has increased the productivity and efficiency of our field operations and development activities.

 

Lithium Project

 

On March 1, 2010, we purchased control of 51% of approximately 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. This property is held under a concession for a period of 20 years that provides for the following rights: to explore, evaluate, develop, produce and arrange mineral resources on the property. Subject to the terms and conditions of this agreement, SAHF is appointed as Chief Operating Officer (COO) of the project and will be exclusively in charge and will direct all joint operations. The project involves the exploration and eventual exploitation of 29 mines in one block of a salt plateau located in Jujuy Province, Argentina. None of the 29 mines is being actively mined. We have performed sampling and geological analyses with a local geological company to determine value to the property. The condition to retain the claims is payment of the annual fee renewal and the approval of the Operation Plan and Environmental Impact Report by government authorities before any major drilling.

 

8
 

 

Each of the black dots represents a mine location.

Cachi

 

In the fourth quarter of 2010, SAHF exercised a purchase option agreement with Minera Ansotana, SA to explore and develop columbite-tantalite (coltan) from a set of mines in Cachi, Salta. Some of the key mines in Cachi are El Quemado, Penas Blancas and Tres Tetas, which were used for mining in the 1950's by German immigrants. After reviewing various reports detailing the potential of these mines, the company purchased 51% of the mine and immediately began sampling the property. In the fourth quarter of 2011, the company received very promising results from the Tres Tetas mines from samples that were taken throughout 2011 by a team of local geologists and engineers. The samples were originally analyzed in labs at a local Salta University, and then exported to Chile and Australia for further analysis. Once more samples are taken and analyzed in some of the other mines, the company will proceed to setting up the infrastructure of the area and mining the available minerals. The exploitation of resources in these mines is expected to commence in 2013.

 

9
 

 

Development Activities

 

Development projects on the concessions in which we have investments include accessing additional productive formations in existing well bores, formation stimulation, infill drilling on closer well spacing, and retrofitting or reworking existing wells.

 

Cooperation Agreement with PPL

 

In the first quarter of 2012, Delta received a deposit of $2,000,000 for a potential agreement between SAHF, LLC and PPL for the sale of some of SAHF's current properties and possible future rights in other certain properties. Currently, under the Cooperation Agreement, PPL and SAHF have agreed to a purchase price of $7,000,000 for 49-50% of SAHF's current ownership of Tartagal Oriental, Morillo, Valle de Lerma, and 50% of SAHF's rights in the bidding for San Salvador de Jujuy, Libertador General San Martin and Selva Maria.

 

Additionally, PPL has agreed to directly fund the joint ventures or potential joint ventures of Valle de Lerma, San Salvador, Libertador and Selva Maria for up to $10,000,000 (collectively) for the development of the areas. The cooperation agreement is expected to be signed in the end of March 2012, or beginning of April.

 

Reserve Reports for the Properties

 

As of March 2012, Delta Mutual, Inc. is working with some of its partners in certain joint ventures and with NSAI to develop reserve reports and prospective resources reports for Tartagal, Morillo and Valle de Lerma.

  

Customers

 

Petroleum and natural gas in the Northwest Basin of Argentina for new production blocks are traded freely and on a case by case basis. There are no long term contracts due to the supply deficit in this area. The buyers are the local refineries, and deliveries are made by pipelines or by truck in remote sites. Refineries pay for the transportation cost. At present, SAHF does not have a contract with any customer and, if current circumstances continue to prevail, SAHF will entertain the daily spot offers to maximize profit. Beginning in May 2012, the preferred destination of SAHF's oil and gas production will be the Caimancito Refinery in order to further vertically integrate the process and increase both efficiency and profitability.

 

10
 

 

Title to Properties

 

We believe we have satisfactory title in all of our producing properties; and we investigate title and title opinions from counsel only when we acquire producing properties or before commencement of drilling operations. All of our current properties have been acquired directly from the government, except in the case of the Caimancito refinery. As all of our current property titles are issued by the Argentine government (Department of Energy), we believe that we are in full compliance with the clear title requirements of each of our properties.

 

Competition

 

Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.  Also, there is substantial competition for capital available for investment in the oil and gas industry.

 

Alternative Energy Technologies

 

The Company is currently evaluating the progress of new technology for thin-film solar flat panels to store the energy from sunlight to decide if transfer to the South American Market would be appropriate for inclusion in the Company’s business plan. Other technologies, such as geothermal technology as a potential energy project, already in operation in the Argentina area, are also being evaluated

 

Governmental Regulation

 

The key points of the statutory and regulatory regime in respect of oil and gas operations in Argentina are as follows:

 

The Company’s operations in Argentina are subject to various laws, taxes and regulations governing the oil and gas industry. Information concerning SAHF is registered in the Public Registry of Commerce, and the conduct and dealing of SAHF are governed by the commercial code and supplementary laws and regulations. Taxes generally include income taxes, value added taxes, export taxes, and other production taxes such as provincial production taxes and turnover taxes. Labor laws and provincial environmental regulations are also in place.

 

According to the Argentinean Hydrocarbons Law, number 6747 and Decrees 3560/95 and 2219/96, an Oil Operator License is needed to work in exploration and Exploitation of Hydrocarbons in the country. The Company has a Federal Operator License issued by the Federal Secretary of Energy and a Salta Province Producer License issued by the Salta Secretary of Energy. The company's partner, Grasta Petroleo has the refinery license to operate the Caimancito Plant.

 

Oil Concessions

 

Our right to conduct E&P activities in Argentina is derived from participation in concessions and exploration permits granted by the Argentine federal government and provincial governments that control sub-surface minerals.  In general, provincial governments have had full jurisdiction over concession contracts since early 2007, when the Argentine federal government transferred to the provincial governments full ownership and administration rights over all hydrocarbon deposits located within the respective territories of the provinces, including all exploration permits and exploitation concessions originally granted by the federal government.

 

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A concession granted by the government gives the concession holders, or the joint venture partners, ownership of hydrocarbons at the moment they are produced through the wellhead. Under this arrangement, the concession holders have the right to freely sell produced hydrocarbons, and have authority over operations including exploration and development plans. The concessions have a term of 25 years which can be extended for 10 years with the consent of the government. Throughout the term of their concessions, the partners are subject to provincial production taxes, turnover taxes, and federal income taxes. These tax rates are fixed by law and are currently 12 to 18.5%, two percent, and 35 percent, respectively. Subsequent to the transfer of ownership and administrative rights over hydrocarbon deposits to the provinces, provincial governments have sometimes required higher provincial production tax rates in blocks awarded by the provinces or in concessions that have been granted the 10 year extension.

 

In Argentina, material mining regulations are promulgated by the Federal Congress and have been contained since 1884 by the Mining Code. On the other hand, original domain of mining natural resources belongs to the provinces. Thus, provinces (i) appoint concession authorities and (ii) provide procedural mining regulations that individuals and legal entities must follow in order to be awarded mining rights and property. Exploration concessions granted are subject to specific terms, but resulting exploitation concessions––provided that certain requirements are met–– are perpetual.

 

Mining prospecting and exploration rights are easements which title can be granted to individuals or legal entities through administrative or judicial concessions ("exploration concessions"). Any mineral discovery made either by the concessionaire or third parties, provided they take place in the area and term of the concession, grants the concessionaire the right to turn such discovery into a mine.

 

The term of exploration concessions depends on the size of the granted concession area. The basic 500 hectares concession lasts for 150 days and each surface unit added to such basic concession increases the term in 50 additional days. Therefore, the largest possible concession will last for a 1,100 days term. In addition, there is an area limit of 200,000 hectares per area and a maximum of 20 areas that can be owned by a single entity.

 

Provincial governments in Argentina recently have established production floors and conditions for producing concessions, designed to force companies to increase production or else face a revocation in their concessions. We expect that our concession terms in the future will be affected by these changes in producing concession terms.

 

SAHF received on April 29, 2011 its producing license for oil and gas. Our partners in the joint ventures that SAHF, LLC is involved in have all the other required licenses and permits to commercially produce oil and gas.

 

In the lithium (North Guayatayoc) and Coltan (Cachi) properties, licenses have not yet been pursued because SAHF is still exploring several options such as: mining and exploiting the property, and/or selling a portion of it. Once management has made a decision, the appropriate licenses will be acquired by either SAHF or its partners in the respective joint ventures.

 

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The main effects of government regulations on the Company are that it will take a longer amount of time for properties to start producing commercially and that it will cost more money. The longer time frame from acquisition of the property to their commercial production stage can be attributed to the higher amount of time and focus that has to be put on paperwork and legal work. Because all of our contracts and corporate documents are written in English in the U.S, they need to be translated and notarized with an apostille to be valid in Argentina, which can cause delays in the applications for permits and licenses in Argentina. The higher expected cost can be attributed to the legal fees incurred to comply with the government regulations, along with the royalties, canons, and landowner fees that are particular to each concession.

 

Exchange Controls

 

As a result of the devaluation of the Argentine peso at the beginning of 2002, several foreign exchange regulations were issued to limit the transfer of money abroad. On 13 October, 2011, the Argentine government launched a series of regulations in order to control the sale of foreign currency. The measures aim to slow the rise in value of the North American dollar, of which the Argentine Central Bank has had to reduce its reserves in order to avoid the continuing devaluation of the Argentine peso against the dollar. The measures, agreed on by the Banco Central de la Rep. Argentina and the Ministry of Economy are the first to be put in place since the elections in which incumbent President, Cristina Fernandez de Kirchner, was re-elected with 54% of the vote.

 

There are no restrictions for the payment abroad of interest, dividends or profits, royalties and other commercial payments duly supported by the corresponding documentation. There are presently no restrictions on foreign investment in the capital of local corporations. However, pursuant to a 2005 rule issued by the central bank, any transfer of funds into Argentina as a result of a financial debt is subject to a compulsory one-year temporary and non-interest bearing deposit equivalent to 30% of the funds transferred into Argentina. Investments in mining projects or to increase the capital requirement of a company's branch(es) in Argentina are exempt from this deposit rule.

 

Research and Development

 

We do not anticipate performing any significant product research and development under our plan of operation.

 

Employees

 

Currently, we have four management employees: Dr. Daniel R. Peralta, President and CEO, and Malcolm W. Sherman, Executive Vice President, and two SAHF employees, a field operations manager and a general manager. In our operations in Argentina, we utilize temporary employees and consultants under contract. While in operations, the number of independent contractors hired temporarily by the Company for specific projects exceeds 70.

 

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Available Information

 

We maintain a website at the address www.deltamutual.com.  We are not including the information contained on our website as part of, or incorporating it by reference into, this report.  We make available free of charge (other than an investor’s own Internet access charges) through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

 

Item 1A. Risk Factors.

  

Our oil and gas investments made by our subsidiary SAHF may not be profitable.

 

The success of our investments in Argentina will depend to a great extent on the operations, financial condition and management of the oil and gas concession and exploration rights in which we have investments. Their success may depend upon management of the operations in which the investments were made and numerous other factors beyond our control.

  

Drilling for and producing oil and natural gas are high risk activities with many uncertainties.

 

Our future success will depend on the success of our development, exploitation, production and exploration activities.  Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production.  Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations.  Our cost of drilling, completing and operating wells is often uncertain before drilling commences.  Overruns in budgeted expenditures are common risks that can make a particular project uneconomical.  Further, many factors may curtail, delay or cancel drilling, including the following:

 

     
  delays imposed by or resulting from compliance with regulatory requirements;
     
  pressure or irregularities in geological formations;
     
  shortages of or delays in obtaining qualified personnel or equipment, including drilling rigs and CO2;
     
  equipment failures or accidents; and
     
  adverse weather conditions, such as freezing temperatures, hurricanes and storms.

 

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The presence of one or a combination of these factors at our properties could adversely affect our business, financial condition or results of operations.

  

Prospects that we decide to drill may not yield oil or gas in commercially viable quantities.

 

A prospect is a property on which we have identified what our geoscientists believe, based on available seismic and geological information, to be indications of oil or gas.  Our prospects are in various stages of evaluation, ranging from a prospect which is ready to drill to a prospect that will require substantial additional seismic data processing and interpretation.  There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or gas in sufficient quantities to recover drilling or completion costs or to be economically viable.  The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or gas will be present or, if present, whether oil or gas will be present in commercial quantities.  In addition, because of the wide variance that results from different equipment used to test the wells, initial flowrates may not be indicative of sufficient oil or gas quantities in a particular field.  The analogies we draw from available data from other wells, from more fully explored prospects, or from producing fields may not be applicable to our drilling prospects.  We may terminate our drilling program for a prospect if results do not merit further investment.

  

We are subject to complex laws that can affect the cost, manner or feasibility of doing business.

 

Exploration, development, production and sale of oil and natural gas are subject to extensive federal and state regulation in Argentina.  We may be required to make large expenditures to comply with governmental regulations.  Matters subject to regulation include:  

 

  . the exploitation of our oil and gas concessions as governed by the terms of the concession agreements;
  . royalties, canons and landlord fees;
  . production permits;
  · discharge permits for drilling operations;
  · drilling bonds;
  · reports concerning operations;
  · the spacing of wells;
  · unitization and pooling of properties; and
  · taxation.

 

Under these laws, we could be liable for personal injuries, property damage and other damages.  Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.  Moreover, these laws could change in ways that could substantially increase our costs.  Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations.

 

15
 

 

Our operations may incur substantial liabilities to comply with environmental laws and regulations.

 

Our oil and gas operations are subject to stringent federal and state laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection.  These laws and regulations require an environmental impact study before drilling commences; and impose substantial liabilities for pollution resulting from our operations.  Failure to comply with these laws and regulations may result in the assessment of penalties or the incurrence of investigatory or remedial obligations.  

  

Market conditions or operational impediments may hinder our access to oil and gas markets or delay our production.

 

In connection with our continued development of oil and gas properties, we may be disproportionately exposed to the impact of delays or interruptions of production from wells in these properties, caused by transportation capacity constraints, curtailment of production or the interruption of transporting oil and gas volumes produced.  In addition, market conditions or a lack of satisfactory oil and gas transportation arrangements may hinder our access to oil and gas markets or delay our production.  The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. 

 

Crude oil and natural gas prices are volatile and a substantial reduction in these prices could adversely affect our results and the price of our common stock.

 

Our revenues, operating results and future rate of growth depend highly upon the prices we receive from crude oil and natural gas produced by the concession in which we have investments. Historically, the markets for crude oil and natural gas have been volatile and are likely to continue to be volatile in the future. The markets and prices for crude oil and natural gas depend on factors beyond our control. These factors include demand for crude oil and natural gas, which fluctuates with changes in market and economic conditions, and other factors, including:

 

worldwide and domestic supplies of crude oil and natural gas;
actions taken by foreign oil and gas producing nations;
political conditions and events (including instability or armed conflict) in crude oil or natural gas producing regions;
the level of global crude oil and natural gas inventories;
the price and level of foreign imports;
the price and availability of alternative fuels;
the availability of pipeline capacity and infrastructure;
the availability of crude oil transportation and refining capacity;
weather conditions;
domestic and foreign governmental regulations and taxes; and
the overall economic environment.

 

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Significant declines in crude oil and natural gas prices for an extended period may have the following effects on our business:

 

limiting our financial condition, liquidity, and ability to finance planned capital expenditures and results of operations;
reducing the amount of crude oil and natural gas that can be produced economically;
causing us to delay or postpone some of our capital projects;
reducing our revenues, operating income and cash flows;
reducing the carrying value of our investments in crude oil and natural gas properties; or
limiting our access to sources of capital, such as equity and long-term debt.

 

Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate.

 

Our oil and gas investments are subject to hazards and risks inherent in operating and restoring oil and gas wells, such as fires, natural disasters, explosions, casing collapses, surface cratering, pipeline ruptures or cement failures, and environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution and other environmental damages, regulatory investigations and penalties, suspension of our operations and repair and remediation costs. In addition, our liability for environmental hazards may include conditions created by the previous owners of properties in which we have investments or purchase or lease.

 

We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operations.

 

Competition in our industry is intense and many of our competitors have greater financial and technological resources.

 

We have investments in the competitive area of oil and gas exploration and production. Many competitors are large, well-established companies that have larger operating staffs and significantly greater capital resources.

 

Competition for experienced personnel may negatively impact our operations.

 

Our future profitability will depend on our ability to attract and retain qualified personnel. The loss of any key executives or other key personnel could have a material adverse effect on investments results and revenues. In particular, the loss of the services of our President, Dr. Daniel Peralta, could adversely affect our South American oil and gas investment results.

 

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International operations expose us to political, economic and currency risks.

 

With regard to our investments in oil and gas concessions located outside of the United States, we are subject to the risks of doing business abroad, including,

 

·Currency fluctuations;
·Changes in tariffs and taxes; and
·Political and economic instability.

 

Changes in currency exchange rates may affect the relative costs of operations in Argentina, and may affect the cost of certain items required in oil and gas processing, thus possibly adversely affecting our profitability.

 

There are inherent risks for the foreseeable future of conducting business internationally. Language barriers, foreign laws and tariff and taxation issues all have a potential negative effect on our ability to transact business. Changes in tariffs or taxes applicable to our investments in foreign operations may adversely affect our profitability. Political instability may increase the difficulties and costs of doing business. We may be subject to the jurisdiction of the government and/or private litigants in foreign countries where we transact business, and may be forced to expend funds to contest legal matters in those countries in disputes with those governments or with customers or suppliers.

 

We are subject to changing governmental regulations concerning our oil and gas properties and with respect to investments.

 

Provincial governments in Argentina have established production floors and conditions for producing concessions that are required to be met by the companies holding the concessions. Our operations in Argentina may in the future be adversely impacted by these measures currently being taken by provincial governments.

 

Although, there are no restrictions for the payment abroad of interest, dividends or profits, royalties and other commercial payments duly supported by the corresponding documentation, exchange control regulations could be implemented to restrict transfers of funds from SAHF to the Company, which would limit our ability to pay dividends.

 

Historically we have not paid dividends.

 

We have never paid dividends on our common stock, and management does not anticipate payment of dividends until such time as our Board of Directors determines that our profitability warrants payment of dividends.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 2. Properties.

 

As of December 31, 2011, our principal assets included Partial Rights Ownership in five oil and gas properties.

 

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Developed and Undeveloped Acreage  

The following table summarizes our estimated gross and net developed and undeveloped acreage by concession at December 31, 2010.   Net acreage represents our percentage ownership of gross acreage.  The following table does not include acreage in which our interest is limited to royalty and overriding royalty interests.

 

Block Province Status Delta % Partner(s)
Jollin Salta Testing 10% CO JHP (China), Maxipetrol
Tonono Salta testing 10% CO JHP (China), Maxipetrol
Tartagal Salta Seismic 18% CO New Times Energy (HK), Maxipetrol
Morillo Salta Seismic 18% CO New Times Energy (HK), Maxipetrol
Guemes Salta Drill Complete 20% Ketsal
Valle de Lerma Salta Workover of La Troja well 70% Remsa, PetroNexus, Grasta

 

*CO means a carryover interest in the project.

** Of these five properties, SAHF and its joint venture partner have made initial investments in Guemes.

*** In the Jollin, Tonono, Tartagal, Morillo and Coltan concession the carry over mode relieved SAHF from the payment of canon, or landlord, fees of any kind. In the exploratory areas , Guemes, Rosario, Cobres, Valles and Union, proportional exploratory canons were paid as explained in the financials. Surface canon were not paid due to the lack of surface operations in 2010 in those blocks, with the exception of Guemes where an old YPF road, built by the former National Company of Argentina and now owned by Repsol of Spain) was used to access the drilling site.

****The Company, through joint ventures, currently has partial rights to 4 bids for concessions (San Salvador de Jujuy, Libertador General San Martin (Jujuy), Selva Maria ( Formosa), and Rivadavia (Salta)) awaiting for government approval

 

Executive Offices

 

Effective April 1, 2012, we entered into a one-year lease for our executive offices, at a net monthly rental of $5,200. The lease contains renewal options for two years, with an increase in the monthly rental of $500 in each succeeding year. We anticipate that this office space will accommodate our operations for the foreseeable future.

 

Item 3. Legal Proceedings.

  

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

 

 

Our common stock has been quoted on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers, since approximately February 1, 2001.

 

Our shares are listed under the symbol “DLTZ”. The quotations in the table below reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.

  

      High   Low 
2010:  1st Quarter   0.49    0.15 
   2nd Quarter   0.49    0.23 
   3rd Quarter   0.43    0.23 
   4th Quarter   0.70    0.43 
              
2011  1st Quarter   0.58    0.49 
   2nd Quarter   0.50    0.11 
   3rd Quarter   0.44    0.23 
   4th Quarter   0.42    0.20 
2012  1st Quarter   0.51    0.38 

 

During the last two fiscal years, no cash dividends have been declared on Delta's common stock and Company management does not anticipate that dividends will be paid in the foreseeable future. The payment of dividends is within the discretion of the board of directors and will depend on the Company's earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit the Company's ability to pay dividends on its common stock other than those generally imposed by applicable state law.

 

As of February 23, 2012, there were approximately 100 record holders of our common stock.

 

Unregistered Sales of Equity Securities

 

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The following table sets forth the unreported sales of unregistered securities by the Company in the year ended December 31, 2011.

 

Date Title and Amount(1) Purchaser Principal Underwriting Total Offering Price/ Underwriting Discounts
December 20, 2011 Warrant, expiring December 19, 2018, to purchase 100,000 shares of common stock at an exercise price of $0.32 per share, issued as compensation for consulting services performed. Consultant NA $0.32 per share/NA
December 14, 2011 500,000 shares of common stock, together with warrants expiring   December 14, 2018 to purchase 200,000 shares of common stock, at an exercise price of $.35 per share. Private Investor. NA $.20 per share/NA
December 21, 2011 10,267 shares of common stock. Consultant. NA $0.30 per share/NA

 

(1) The issuances to lenders, consultants and investors are viewed by the Company as exempt from registration under the Securities Act of 1933, as amended (“Securities Act”), alternatively, as transactions either not involving any public offering, or as exempt under the provisions of Regulation D, Regulation S or Rule 701 promulgated by the SEC under the Securities Act.

 

The Company has no equity compensation plans in effect, or any securities outstanding under equity compensation plans, as of the date of this report.

 

Item 6. Selected Financial Data.

  

Not applicable.

 

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.

  

GENERAL

 

The Company was incorporated under the name Delta Mutual, Inc. in Delaware on November 17, 1999. In 2003, we established business operations focused on providing environmental and construction technologies and services. Our operations in the Far East (Indonesia) and our construction operations in Puerto Rico were discontinued in 2008.

  

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Effective March 4, 2008, we acquired 100% of the issued and outstanding membership interests in the parent of South American Hydrocarbon Fluids LLC, a Delaware limited liability company (formerly South American Hedge Fund LLC, sometimes herein referred to as “SAHF”). For accounting purposes, the transaction was treated as a recapitalization of the Company, as of March 4, 2008, with the parent of SAHF as the acquirer. SAHF maintains a branch office in Argentina, where it is engaged in oil and gas exploration and development activities.

 

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. In August 2007, SAHF signed agreements to purchase partial ownership interests in four oil and gas concessions in Northern Argentina. The joint venture owning these concessions then started the process to obtain the necessary government and environmental operating permits for the commercial exploitation of these concessions. These oil and gas investments were contributed to the Company as part of the reverse merger transaction in March 2008.

 

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.

 

Specifically, we have focused, and plan to continue to focus, on the following investments in South America.

 

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.

 

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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 year 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.

 

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 is expected to commence in the first quarter of 2012.

 

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Tartagal and Morillo

 

As of September 30, 2011, 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 from 9% 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 approximately $265,000 of costs associated with this property to proved oil and gas properties upon receipt of the reserve report from the third party working interest owner of the joint venture.

 

Valle de Lerma

 

On August 10, 2011, the Company’s tender offer, made through our wholly-owned subsidiary, SAHF, for the ownership right to explore, and eventually, produce oil and natural gas in the block known as “Valle de Lerma” was declared the winning bid by the Salta provincial government. SAHF made the offer in a joint venture agreement with Remsa, PetroNexus and Grasta SA, a local mid-size gasoline refinery located in Buenos Aires, Argentina. The Valle de Lerma block is located in the province of Salta in the northwestern region of Argentina and has an area of 5259 km2. On October 25, 2011 SAHF was awarded an Exploration and Exploitation Oil & Gas Block License by the Government of Salta, Argentina, and will file an environmental impact study and proceed to reentry and work-over of the wells. SAHF holds a majority of the license interest and is the responsible operator. The license allows SAHF 20 years to explore and produce hydrocarbons with a renewal option of ten more years.

 

The Company and its partners, Remsa, PetroNexus and Grasta Petroleum will develop the block exploration starting with 2D Seismic interpretation with PetroNexus LLC; geological model application and Hydrocarbon Micro seepage Survey with Geo Microbial Technologies Argentina (Guemes Method), and La Troja well work over with a local rig company.  The exploration terms are four years for the first period, three years for the second and two years for the last period.

 

SAHF currently owns 70% of the rights to explore Valle de Lerma; GRASTA owns 5%; NEXUS owns 20%; and REMSA owns 5%.

 

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PPL Agreement

 

Effective March 30, 2012, we entered into the Cooperation Agreement with PPL Under the Cooperation Agreement, we have agreed to sell to PPL, for a price of $7,000,000 certain exploration and exploitation rights to oil and gas deposits and certain bidding rights held by Delta on the following areas: Valle de Lerma in the province of Salta; San Salvador de Jujuy; Libertador General San Martin in the province of Jujuy; and Selva Maria in the province of Formosa. Pursuant to a separate Agreement dated March 31, 2012, we have agreed with PPL to assign and transfer 50% of SAHF's current ownership of the Tartagal and Morillo (i.e., a 9% interest in the concession) to PPL for a purchase price of $500,000. PPL has also agreed in an Undertaking to provide funds to the operating entities of Valle de Lerma, Selva Maria, San Salvador and Libertador, in the aggregate amount of up to $10,000,000 (San Salvador, Libertador and Selva Maria are pending for approval from the government, which is standard procedure in Argentina).

 

Caimancito Refinery

 

On January 13, 2012, we, through our wholly-owned subsidiary, SAHF, signed a purchase option agreement with Cruz Norte, SA to purchase 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina. In March, 2012, the purchase option agreement was finalized and signed and Cruz Norte transferred 1/3 of its stake in the refinery to SAHF. The purchase price of the refinery was $150,000 for the 33.33% of the outstanding shares of Caimancito Refinery; the purchase price is split into two payments of $75,000: one in March 2012, and one in June 2012. As of the date of this report, the Company has wired to Cruz Norte SA $55,000 in two payments in March 2012.

  

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.

 

RESULTS OF OPERATIONS

 

YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

During the year ended December 31, 2011, we incurred a net loss of $786,826 compared to a net income of $873,481 for the year ended December 31, 2010. The decrease in our net loss for the year ended December 31, 2011 over the prior year is primarily due to a $37,003 decrease in general and administrative expenses and a $14,153 increase in foreign exchange losses on the Company’s US dollar denominated advances to SAHF. These losses were partially offset by the reversal of certain contested severance and other liabilities in 2010.

 

25
 

 

LIQUIDITY

 

At December 31, 2011, we had a working capital deficit of approximately $1.3 million, compared with a working capital deficit of approximately $1.1 million at December 31, 2010.

 

At December 31, 2011, we had total assets of approximately $2,560,000 compared to total assets of approximately $2,293,000 at December 31, 2010. Net cash used in operating activities in 2011 was approximately $652,000, as compared with approximately $503,000 in 2010; net cash used in investing activities was approximately $374,000 in 2011, as compared with cash generated of approximately $579,000 in 2010. Cash used in operations and investing activities was offset by net cash provided from financing activities of approximately $972,000 in 2011 compared to approximately $1.2 million in 2010.

 

Estimated 2012 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 2012 are not met, we are not required to make any additional capital investment to protect our assets.

 

We estimate that our capital requirements in 2012 to develop the Valle de Lerma, San Salvador, Libertador and Selva Maria properties (San Salvador, Libertador and Selva Maria are pending for approval from the government) will approximate $7,000,000, funds for which investments would be provided by PPL, pursuant to its commitment to invest developmental funds of $10,000,000 for these properties.

 

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.

 

26
 

 

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.

 

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 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates.

 

27
 

 

We do not have significant short-term investments, and due to their short-term nature, we believe that there is not a material risk exposure.

 

Credit Risk - Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area.

 

Commodity Price Risk – We are exposed to market risks related to price volatility of crude oil and natural gas. The prices of crude oil and natural gas affect our revenues, since sales of crude oil and natural gas from our South American investments comprise nearly all of the components of our revenue. A decline in crude oil and natural gas prices will likely reduce our revenues, unless there are offsetting production increases. We do not use derivative commodity instruments for trading purposes.

 

The prices of the commodities that the Company produces are unsettled at this time. At times the prices seem to be drift down and then either increase or stabilize for a few days. Current price movement seems to be slightly up but with the prices of the traditionally marketed products (gasoline, diesel, and natural gas as feed stocks for various industries, power generation, and heating) are not showing material increases. Although prices are difficult to predict in the current environment, the Company maintains the expectation that demand for crude oil and natural gas will continue to increase for the foreseeable future due to the underling factors that oil and natural gas based commodities are both sources of raw energy and are fuels that are easily portable.

 

Foreign Currency Risk - Our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because our revenue is reported in U.S. dollars, fluctuating exchange rates of the local currency, when converted into U.S. dollars, may have an adverse impact on our revenue and income. We have not hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars. We do not engage in financial transactions for trading or speculative purposes.

 

 

28
 

 

Item 8. Financial Statements and Supplementary Data.

 

29
 

  

DELTA MUTUAL, INC. AND SUBSIDIARIES

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firms F-2
   
Consolidated balance sheets as of December 31, 2011 and 2010 F-3
   
Consolidated statements of operations for the years ended December 31, 2011 and 2010 and for the period from inception of development stage (January 1, 2009) to December 31, 2011 F-4
   
Consolidated statement of stockholders’ equity from inception of development stage (January 1, 2009) to December 31, 2011 F-5
   
Consolidated statements of cash flows for the years ended December 31, 2011 and 2010, and for the period from inception of development stage (January 1, 2009) to December 31, 2011 F-6
   
Notes to consolidated financial statements F-8

 

F-1
 

 

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 sheets of Delta Mutual, Inc. and Subdiaries (collectively, the “Company”) (a development stage company) as of December 31, 2011 and 2010 and the related consolidated statements of operations, equity, comprehensive income (loss) and cash flows for the years then ended and for the period January 1, 2009 (inception of the development stage) to December 31, 2011. 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 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.

 

In our opinion, the consolidated financial statements as of and for the years ended December 31, 2011 and 2010, referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for the years then ended and for the period January 1, 2009 (inception of the development stage) to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ Madsen & Associates, CPA

Madsen & Associates, CPA

 

Murray, Utah

April 16, 2012

   

F-2
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(DEVELOPMENT STAGE COMPANY)

 CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2011   2010 
ASSETS          
           
Current Assets:          
Cash  $211,303   $209,004 
Advances and other receivables   7,155    7,753 
Total current assets   218,458    216,757 
           
Investment in mineral properties   171,871    98,269 
Investments in unproved oil and gas properties   2,115,280    1,972,050 
Oil field equipment   47,151    - 
Other assets   7,060    6,368 
           
TOTAL ASSETS  $2,559,820   $2,293,444 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities:          
Accounts payable  $107,372   $109,960 
Accrued expenses   364,109    414,548 
Notes payable   1,043,365    808,365 
Total current liabilities   1,514,846    1,332,873 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at December 31, 2011 and 2010, respectively   -    - 
Common stock $0.0001 par value - authorized 250,000,000 shares; 31,507,026 and 28,647,687 shares issued and outstanding at December 31, 2011 and 2010, respectively   3,151    2,864 
Additional paid-in capital   6,550,576    5,560,099 
Deficit accumulated during the development stage   (923,458)   (136,631)
Accumulated deficit   (4,430,928)   (4,430,928)
Accumulated other comprehensive loss   (154,367)   (34,833)
Total stockholders' equity   1,044,974    960,571 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $2,559,820   $2,293,444 
           

 

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

  

F-3
 

 

  DELTA MUTUAL INC. AND SUBSIDIARIES

(DEVELOPMENT STAGE COMPANY)  

  CONSOLIDATED STATEMENT OF OPERATIONS

 

   Years ending December 31,   For the period from  January 1, 2009 (inception of the development stage) to 
   2011   2010   December 31, 2011 
             
COSTS AND EXPENSES:               
General, and administrative  $787,566   $824,570   $2,106,040 
Loss on sale of investments   -    -    157,939 
    787,566    824,570    2,263,979 
Loss from operations   (787,566)   (824,570)   (2,263,979)
                
OTHER INCOME (EXPENSE):               
Foreign exchange loss   (19,598)   (5,445)   (25,043)
Interest income   -    -    37,696 
Interest expense   (45,348)   (43,466)   (202,526)
Reversal of contested severance and other liabilities   65,786    -    65,786 
Other income (expense)   (100)   -    582,341 
Gain on deconsolidation of variable interest entity   -    -    882,268 
     Net other income (expense)   740    (48,911)   1,340,522 
Loss before income taxes   (786,826)   (873,481)   (923,457)
                
Provision for income taxes   -    -    - 
                
Net loss   (786,826)  $(873,481)  $(923,457)
                
Net loss per common share:               
    Basic and Diluted  $(0.03)  $(0.03)     
                
Weighted average common shares - basic and diluted   30,273,185    27,124,031      

 

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

 

F-4
 

 

DELTA MUTUAL INC. AND SUBSIDIARIES  

(DEVELOPMENT STAGE COMPANY)  

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  

From Inception of Development Stage (January 1, 2009) to December 31, 2011  

 

               Accumulated       Accumulated     
   Number of           Earnings (Deficit)       Other     
   Common   Common   Paid in   During the   Accumulated   Comprehensive     
   Shares   Stock   Capital   Development Stage   Deficit   Income   Total 
Balance as of inception date of development stage, January 1, 2009, as restated (See Note 2)   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 
                                    
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                            (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 
                                    
Issuance of common stock for mineral property (valued at $0.40 per share)   40,000    4    15,996                   16,000 
                                    
Issuance of common stock for unproved oil and gas properties (valued at $0.25 per share)   200,000    20    49,980                   50,000 
                                    
Issuance of common stock for services (valued at $0.30 per share)   10,267    1    3,079                   3,080 
                                    
Sales of common stock and warrants ( valued at $0.20 to $0.50 per share)   2,609,072    261    704,026                   704,287 
                                    
Allocation of proceeds from sale of common stock to warrants issued             32,700                   32,700 
                                    
Warrants issued for compensation and legal expense             184,696                   184,696 
                                    
Net loss                  (786,826)             (786,826)
                                    
Foreign currency adjustment                            (119,534)   (119,534)
                                    
Balance December 31, 2011   31,507,026   $3,151   $6,550,576   $(923,458)  $(4,430,928)  $(154,367)  $1,044,974 

 

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

 

F-5
 

 

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
 
   2011   2010   December 31, 2011 
             
Cash flows from Operating Activities:               
Net loss  $(786,826)  $(873,481)  $(923,457)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation, depletion and amortization   -    -    804 
Stock based compensation expense   184,696    -    184,696 
Issuance of common stock for services   3,080    179,004    331,584 
Loss on sale of investments   -    -    157,939 
Changes in operating assets and liabilities   (52,925)   190,978    (1,266,017)
Net cash used in operating activities   (651,975)   (503,499)   (1,514,451)
Cash flows from investing activities:               
Oil and gas properties exploration and development costs   (229,730)   (536,934)   (822,124)
Oil field equipment purchases   (51,197)   -    (51,197)
Proceeds from sales of investments   -    -    206,832 
Investment in mineral properties   (79,491)   (42,050)   (121,541)
Net cash provided by (used in) investing activities   (360,418)   (578,984)   (788,030)
                
Cash flows from financing activities:               
Proceeds from loans   235,000    -    325,657 
Proceeds from sales of common stock   736,987    1,188,667    2,130,655 
Net cash provided by financing activities   971,987    1,188,667    2,456,312 
Effect of Exchange Rates on Cash   42,705    811    43,516 
Net increase in cash   2,299    106,996    197,347 
Cash - Beginning of period   209,004    102,008    13,957 
Cash - End of period  $211,303   $209,004   $211,304 
                
Changes in operating assets and liabilities consists of:               
(Increase) decrease in advances and other receivables  $-   $129,850   $129,850 
(Increase) decrease in  other assets   (692)   33,140    (144,186)
Increase (decrease) in accounts payable and accrued expenses   (52,233)   25,228    (1,254,441)
Increase (decrease) in notes payable   -    2,760    2,760 
 Changes in assets and liabilities  $(52,925)  $190,978   $(1,266,017)
                
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  $16,000   $55,776   $71,776 
Issuance of  common stock for unproved oil and gas properties  $50,000   $-   $50,000 
Issuance of common stock for services  $3,080   $179,004   $331,584 
Issuance of common stock for debt  $-   $-   $35,000 

 

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

 

F-6
 

 

DELTA MUTUAL INC. AND SUBSIDIARIES

(DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   Years ending December 31,   For the period from  January 1, 2009 (inception of the development stage) to 
   2011   2010   December 31, 2011 
             
Net loss  $(786,826)  $(873,481)  $(923,457)
 Other comprehensive income (loss):               
 Foreign currency translation adjustment  $(119,534)   (34,833)   (154,368)
 Net change in other comprehensive loss   (119,534)   (34,833)   (154,368)
Comprehensive loss  $(906,360)  $(908,314)  $(1,077,825)

 

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

  

F-7
 

 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

ORGANIZATION

 

Delta Mutual, Inc. ("Delta" or "the Company") 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.

 

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 material intercompany transactions and balances have been eliminated.

 

ECONOMIC AND POLITICAL RISKS

 

The Company is exposed in the inherent risks for the foreseeable future of conducting business internationally. Language barriers, foreign laws and tariffs, currency fluctuation and taxation issues all have a potential effect on the Company's ability to transact business. Political instability may increase the difficulties and costs of doing business. The Company may be subject to the jurisdiction of the government and/or private litigants in foreign countries where the Company contracts business, and may be forced to expend funds to contest legal matters in those countries in disputes with those governments or with customers or suppliers. Accordingly, events resulting from changes in the economic and political climate could have a material effect on the Company.

 

USE OF ESTIMATES

 

The preparation of the consolidated financial statements in conformity with accepted accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates including, but not limited to, those related to such items as impairments of oil and gas properties, income tax exposures, accruals, depreciable/useful lives, allowance for doubtful accounts, and valuation allowances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

F-8
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

  

EVALUATION OF LONG-LIVED ASSETS

 

Oil and gas and mineral properties represent an important component of the Company’s total assets. Management reviews long-lived assets for potential impairment whenever significant events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the estimated undiscounted cash flows expected to result from the use and eventual disposition of the asset. If an impairment exists, the resulting write-down would be the difference between fair market value of the long-lived asset and the related net book value.

 

INVESTMENTS

 

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. 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.

   

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. The Company applies 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, 2011, the Company has not recorded any depletion or impairment. Although production has not yet begun at any of the properties, based upon our review of the current status of activities performed at the properties and the current prices of oil and gas, the Company does not believe any impairment exists.

  

F-9
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

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. The Company purchased oil field equipment during the fourth quarter of 2011. The equipment will be placed in service during 2012. The Company did not provide any depreciation this equipment for the year ending December 31, 2011.

 

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 which, 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, 2011 and 2010, 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, 2011 and 2010, 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).

  

F-10
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

EARNINGS (LOSS) PER SHARE

 

Basic and diluted net earnings (loss) per common share are presented in accordance with 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 2011, the functional currency for the Company’s primary 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 Loss.

 

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.

 

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, 2011 and 2010, the Company issued 10,267 and 534,555 shares and recorded compensation expense of $3,080 and $179,004, respectively. For the period from January 1, 2009 (Inception of the development stage) to December 31, 2011, the Company issued 903,394 shares and recorded compensation expense of $331,584.

 

The Company accounts for the measurement and recognition of compensation expense for share-based payment awards made to employees and directors, including employee stock options and warrants, based on estimated fair values.  Under authoritative guidance issued by the 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.  

  

F-11
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

New Financial Accounting Standards

 

Accounting Standards Update No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”)

 

ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company will implement the provisions of ASU 2011-05 by presenting the components of net income and other comprehensive income in two separate but consecutive financial statements beginning in the first quarter of 2012.

 

Accounting Standards Update No. 2011-08 – Testing Goodwill for Impairment (Topic 350): Intangibles—Goodwill and Other (“ASU No. 2011-08”)

 

ASU No. 2011-08 updates existing guidance regarding testing of goodwill for impairment. This ASU gives entities the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective during the first quarter of 2012, with early adoption permitted. The adoption of this standard during the first quarter of 2012 is not expected to have a material impact on the Company’s results of operations or financial condition.

  

2. INVESTMENT IN UNPROVED OIL AND GAS PROPERTIES

 

a) As of December 31, 2011, 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.

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 years ending December 31, 2011 and 2010, the Company paid $-0- and $139,762, respectively, in additional canons (concession maintenance payments) to maintain its ownership interest in the concession.

 

b) At December 31, 2011, the Company had a 18% ownership interest in the Tartagal and Morillo oil and gas concessions located in Salta Province, 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 $50,000, 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 concession costs associated with this property to proved oil and gas properties as appropriate when and if the reserve report is received from the third party working interest owner of the joint venture.

 

The Company’s share of the development costs for the Tartagal and Morillo concessions will be repaid from 50% of the Company's share of the future production profits from the concessions.

 

c) As of December 31, 2011, 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.

 

F-12
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

The ownership interests in The Salta Province Exploration Rights Concession ("Salta Joint Venture") are:

 

·Consortium Ketsal Kilwa – 60% (managing partner)

 

·Ambika S.A. – 20%

 

·SAHF – 20%

 

During the second quarter 2010, the Salta 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 Salta Joint Venture a management fee. Production testing to verify the commercial sustainability of the well still needs to be performed.

 

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 Salta Joint Venture. Prior to the drilling of the Guemes well, the managing partner began negotiating with the government of Argentina to have the concessions' penalties waived and it was agreed that the Government will not draw on the Performance Bond posted by Ketsal, in exchange for opening a well on Guemes and continued development activities in the province. SAHF opened up well in Guemes known as "Dos Morros" and the overdue charges have been waived.

 

d) On August 10, 2011, the Company’s tender offer, made through its wholly-owned subsidiary, SAHF, for the ownership right to explore, and eventually, produce oil and natural gas in the block known as “Valle de Lerma” was declared the winning bid by the Salta provincial government. SAHF made the offer in a joint venture agreement with Remsa, PetroNexus, Grasta SA, a local mid-size gasoline refinery located in Buenos Aires, Argentina. The Valle de Lerma block is located in the province of Salta in the northwestern region of Argentina and has an area of 5259 km2. On October 25, 2011 SAHF was awarded an Exploration and Exploitation Oil & Gas Block License by the Government of Salta, Argentina, and will file an environmental impact study and proceed to reentry and work-over of the wells. SAHF holds a majority of the license interest and is the responsible operator. The license allows SAHF 20 years to explore and produce hydrocarbons with a renewal option of ten more years in exchange for a commitment to spend $2 million on the property in exploration and development costs.

 

The Company and its partners, Resta, PetroNexus and Grasta Petroleum will develop the block exploration starting with 2D Seismic interpretation with PetroNexus LLC; geological model application and Hydrocarbon Micro seepage Survey with Geo Microbial Technologies Argentina (Guemes Method), and La Troja well work over with a local rig company.  The exploration terms are four years for the first period, three years for the second and two years for the last period. SAHF currently owns 70% of the rights to explore Valle de Lerma; GRASTA owns 5%; PetroNexus owns 20%; and Remsa owns 5%.

  

The Company evaluated these investments for impairment and concluded that, except as described above, no loss in value occurred as of December 31, 2011. The following table summarizes the Company’s investments in these unproved oil and gas properties

 

   Concession   Exploration     
   Investments   Rights   Total 
                
At December 31,2009  $773,713   $697,000   $1,470,713 
                
Additional investments in canons   139,762        139,742 
                
Drilling and development costs       397,172    397,172 
                
Translation gain (loss)   (19,995)   (15,642)   (35,597)
                
At December 31, 2010   893,520    1,078,530    1,972,050 
                
Drilling and development costs       243, 047    243,047 
                
Issuance of stock for increased ownership   50,000        50,000 
                
Translation gain (loss)   (73,148)   (76,669)   (149,817)
                
At December 31, 2011  $870,372   $1,244,908   $2,115,280 

  

F-13
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

3.  FAIR VALUE OF FINANCIAL MEASUREMENTS

 

The Company utilizes the accounting guidance for fair value measurements and discloses for all financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis during the reporting period.

 

The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability.  ASC 820, "Fair Value Measurements and Disclosures", establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as follows:  

 

Level 1 - Observable inputs such as quoted market prices in active markets.

Level 2 - Inputs other then quoted prices in active markets that are either directly or indirectly observable.

Level 3 - Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

  

As of December 31, 2011, the Company held certain financial assets that are measured at fair value on a recurring basis.  These consisted of cash and cash equivalents and unproved oil and gas properties.  The fair value of the cash and cash equivalents is determined based on quoted market prices in public markets and is categorized as Level 1.  The investment in unproved oil and gas companies is determined by the Company to develop its own assumptions and is categorized as Level 3.  The Company does not have any financial assets measured at fair value on a recurring basis as Level 2 and there were no transfers in or out of Level 2 or Level 3 during the year ended December 31, 2011.

  

The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring basis as of December 31, 2011 and 2010.

  

December 31, 2011  Total   Quoted Prices in Active Markets for Identical Assets (Level 1)   Significant Other Observable Inputs (Level 2)   Significant
Unobservable
Inputs (Level 3)
 
Cash and cash equivalents  $211,303   $211,303   $-   $- 
Unproved oil and gas properties   2,115,280              2,115,280 
Investment in mineral properties   171,871              171,871 
Total  $2,498,454   $211,303   $-   $2,287,151 

  

F-14
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

December 31, 2010  Total   Quoted Prices in Active Markets for Identical Assets (Level 1)   Significant Other Observable Inputs (Level 2)   Significant
Unobservable
Inputs (Level 3)
 
Cash and cash equivalents  $209,004   $209,004   $-   $- 
Unproved oil and gas properties   1,972,050              1,972,050 
Investment in mineral properties   98,269              98,269 
Total  $2,279,323   $209,004   $-   $2,070,319 

 

There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the year December 31, 2011 and the Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of December 31, 2011. The Company has other financial instruments, such as advances and other receivables, accounts payable and other liabilities, notes payable and other assets, which have been excluded from the tables above. Due to the short-term nature of these instruments, the carrying value of advances and other receivables, accounts payable and other liabilities, notes payable and other assets approximate their fair values.

 

 

4. NOTES PAYABLE

 

   December 31, 
   2011   2010 
Notes payable to three investors, interest at 8%, due July 2014  $150,655   $150,655 
Note payable to third party, interest at 6%, due August 10, 2011   15,000    15,000 
Note payable to third party interest at 6%, due September 20, 2007   60,000    60,000 
Notes payable to stockholders and related parties, interest at 6%, due June 20, 2012   623,970    388,970 
Notes payable to third party, interest at 6%, due August 10, 2011.  The note was settled in April 2012.   193,740    193,740 
  Total  $1,043,365   $808,365 

  

The Company included accrued interest payable on the aforesaid notes in accrued expenses as of December 31, 2011,and 2010, respectively. Interest expense for the years ended December 31, 2011 and 2010 was $45,348 and $43,466, respectively. Subsequent to December 31, 2011, the $193,740 past due note payable and related accrued interest was settled by the payment of $50,000 cash and the issuance of 475,000 shares of common stock. Also subsequent to December 31, 2011, the maturity dates of the past due notes to three investors in the amount of $150,655 were extended to July 2014.

 

5. ACCRUED EXPENSES

 

   December 31, 
   2011   2010 
Accrued compensation  $46,020   $141,806 
Accrued interest   186,555    141,207 
Accrued expenses   131,534    131,534 
           
Total  $364,109   $414,548 

  

F-15
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

6. INCOME TAXES

 

The Company has not made provision for income taxes in the years ended December 31, 2011 and 2010, respectively, since the Company has the benefit of net operating losses carried forward in these periods.

 

Due to the operating loss of the Company's Argentina subsidiary, the Company is not required to pay any income tax in Argentina. However, the Company has been subject to the personal assets tax or Minimum Presumptive Tax (MPIT) on the assets owned by SAHF that has a branch office in Argentina.

 

Personal assets tax or MPIT applies to individuals with assets owned as of December 31st each year. Taxpayers are required to pay the equivalent of 0.5% to 1.25% of the assets owned as of that date, depending on their global tax value if it exceeds a certain amount. For resident individuals, the tax applies on assets owned in Argentina and abroad. For non-resident individuals, the tax applies only on assets owned in Argentina.

 

The law presumes (without admitting evidence to rebut the presumption) that shares, quotas and other participation interests held in the capital of Argentine companies (including branches) that are held by non-resident entities are indirectly owned by foreign individuals. The tax amounts to 0.5% annually (based on the equity value according to the financial statements), which must be paid by the Argentine companies.

 

The Company has been current in paying the MPIT. This is not an income tax, which, is why it is not included in our tax provision.

 

Deferred income tax assets consist of:

 

   December 31, 
   2011   2010 
Net operating loss carry-forwards  $2,071,000   $1,772,000 
           
Less valuation allowance   (2,071,000)   (1,772,000)
           
Deferred income tax assets, net  $--   $-- 

 

Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred income tax asset. Based on management’s assessment, utilizing an effective combined tax rate for federal and state taxes of approximately 39%, the Company has determined it to be more likely than not that a deferred income tax asset of approximately $2,071,000 and $1,772,000 attributable to the future utilization of the approximately $5,310,000 and $4,544,000 in eligible net operating loss carry-forwards as of December 31, 2011 and 2010, respectively, will not be realized. The Company will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carry-forwards will begin to expire in varying amounts from year 2019 to 2029.

 

The Company is subject to taxation in the United States and certain state jurisdictions. The Company’s tax years for 2008 and forward are subject to examination by the United States and applicable state tax authorities due to the carry forward of unutilized net operating losses.

 

7. OTHER INCOME

 

During the years ended December 31, 2011 and 2010, the Company incurred foreign exchange losses of approximately $20,000 and $5,000, respectively, on its US dollar denominated payments to its SAHF subsidiaries for operating expenses. During the year ended December 31, 2011, approximately $66,000 of contested severance liabilities were resolved through legal proceedings and the Company reversed the related accrued liability.

  

F-16
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

8.   STOCKHOLDERS' EQUITY

 

Preferred Stock

 

As of December 31, 2011, the board of directors had not authorized the issuance of any series of preferred stock.

 

Common Stock

 

The Company issues shares of common stock for services and repayment of debt and interest valued at fair market value at time of issuance.

 

For the years ended December 31, 2011 and 2010, the Company sold 2,609,072 and 3,769,057 shares if its common stock and 200,000 and -0- warrants and received proceeds of $736,987 and $1,188,667, respectively. The warrants sold in 2011 are exercisable at $.35 per share and expire in 2018. The fair value of the warrants issued in connection with the sale of the Company's common stock during the year ended December 31, 2011 was $32,700. The fair value of the warrants was estimated using the Black Scholes pricing method.

 

Warrants

 

During the quarter ended December 31, 2011, the Company issued warrants to purchase 7,900,649 shares of its common stock for prices ranging from $0.20 to $0.32 per share. The warrants expire in 2018. The Company recorded compensation expense to certain officers of the Company in the amount of approximately $176,000 and legal expense of approximately $9,000 in conjunction with these issuances.

 

A summary of the warrant activity as of December 31, 2011 is presented below:

 

         Weighted Average   Weighted Average   Aggregated Intrinsic 
    Warrants    Exercise Price   Contractual Term   Value 
 Outstanding, January 1, 2011  -   $-         
                   
 Granted  7,900,649    0.21         
                   
 Expired/Cancelled  -    -         
                   
 Exercised  -    -         
                   
 Outstanding, December 31, 2011  7,900,649   $0.21   6.0 years  $1,538,130 
                   
 Exercisable, December 31, 2011  7,900,649   $0.21   6.0 years  $1,538,130 

 

9. COMMITMENTS AND CONTINGENCIES

 

ECONOMIC AND POLITICAL RISK

 

The Company is exposed in the inherent risks for the foreseeable future of conducting business internationally. Language barriers, foreign laws and tariffs and taxation issues all have a potential effect on the Company’s ability to transact business. Political instability may increase the difficulties and costs of doing business. Accordingly, events resulting from changes in the economic and political climate could have a material effect on the Company.

 

F-17
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

OPERATING LEASES

 

The Company entered into a lease agreement in February 2012 for 3,551 square feet of office space for its principal office in Arizona. The lease expires in February 2013 and the Company has an option to extend the lease for an additional two years. The Company is required to pay various executor costs in connection with the lease.

  

Future minimum lease payments for operating leases is as follows:

 

 Year Ending      
 December 31,      
 2012   $77,000 
 2013    7,000 
     $84,000 

 

The Company has sublet a portion of the premises on a month-to-month basis for $1,800 per month.

 

Rent expense was $18,497 and $18,157 for the years ended December 31, 2011 and 2010, respectively.

  

EMPLOYMENT AGREEMENTS

 

On April 26, 2010, the Company’s Board of Directors approved five-year term executive employment agreements (“Employment Agreements”) between the Company and Dr. Daniel R. Peralta, the Company’s Chairman and Chief Executive Officer, and Malcolm W. Sherman, the Company’s Executive Vice President, effective March 22, 2010 and March 23, 2010, respectively.  Dr. Peralta’s Employment Agreement provides for a fixed annual salary of $500,000; Mr. Sherman’s Employment Agreement provides for a fixed annual salary of $350,000. Under the Employment Agreements, both executives are eligible for participation in a bonus pool with other senior executives, the quarterly bonus amounts being based on financial performance comparisons with prior fiscal quarters, beginning with the quarterly reports of the Company for the year 2006 and each subsequent year during the respective terms of each of the Employment Agreements. Such bonuses will be pooled with those of other senior executives and be computed based on a total bonus pool equal to 15% of the net profits of the Company as set forth in the Company’s SEC filings.

 

The Company’s Board of Directors, with the agreement of the two executives, conditioned approval of the Employment Agreements on limitation of the salary of Dr. Peralta to $200,000, and the salary of Mr. Sherman to $150,000, until the cash flow of the Company was sufficient to pay the salaries specified in the Employment Agreements and meet other operating obligations of the Company.  Further, there would be no accruals of unpaid salaries under this agreement with the two executives.

 

F-18
 

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2011 and 2010

 

10. SUBSEQUENT EVENTS

 

Cooperation Agreement with PPL

 

Effective March 30, 2012, the Company entered into an Asset Purchase and Cooperation Agreement (the “PPL Agreement”) with Principle Petroleum Limited (“PPL”), headquartered in the British Virgin Islands. Under the PPL Agreement, PPL and SAHF have agreed to a purchase price of $7,500,000 for: 50% of SAHF's current ownership of the Tartagal and Morillo, 49% of SAHF's current ownership of Valle de Lerma; 50% of SAHF's rights in the bidding for San Salvador de Jujuy; 50% of SAHF's rights in the bidding for Libertador General San Martin; and 50% of SAHF's rights in the bidding for Selva Maria. PPL has further committed to invest developmental funds of $10,000,000 for the Valle de Lerma, San Salvador, Libertador and Selva Maria properties (proposals to develop San Salvador, Libertador and Selva Maria are pending for approval from the government, which is standard procedure in Argentina). In all of the concession interests mentioned in the Cooperation Agreement, except for Tartagal and Morillo, SAHF will be the operator.

 

Caimancito Refinery

 

On January 13, 2012, the Company, through its wholly owned subsidiary, SAHF, signed a purchase option agreement with Cruz Norte, SA to purchase 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina. In March 2012, the purchase option agreement was finalized and signed and Cruz Norte transferred 1/3 of its stake in the refinery to SAHF. The purchase price of the refinery was $150,000 for the 33.33% of the outstanding shares of Caimancito Refinery; the purchase price is split into two payments of $75,000: one in March 2012, and one in June 2012. As of the date of this report, the Company had wired to Cruz Norte SA $55,000 in two payments in March 2012.

 

F-19
 

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

  

Engagement of RBSM LLP

 

On February 16, 2011, Jewett, Schwartz, Wolfe & Associates (“JSW”) advised the Company that its audit practice was acquired by RBSM LLP, an independent registered public accounting firm. As a result, JSW resigned as the Company’s independent registered public accounting firm and the Company’s Board of Directors on February 22, 2011, approved the engagement of the acquiring entity, RBSM LLP, as the Company’s independent registered public accounting firm.

 

From the date that JSW were engaged (December 30, 2009) to the present time, or any other period of time, the reports of JSW on the Company's financial statements did not contain an adverse opinion or disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope or accounting principles, except that the report of JSW as to the Company’s financial statements for the year ended December 31, 2009, was modified for uncertainty due to the substantial doubt about the Company’s ability to continue as a going concern.

 

During the Company's two most recent fiscal years ended December 31, 2008 and 2009, and any subsequent interim period through February 16, 2011, there were no disagreements with JSW on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of JSW, would have caused it to make reference to the subject matter of the disagreement in connection with its reports. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K during the Company’s two most recent fiscal years ended December 31, 2008 and 2009, and any subsequent interim period though February 16, 2011.

 

On February 22, 2011, the Company engaged RBSM LLP as its independent registered public accounting firm. During the two most recent fiscal years and the interim periods preceding the engagement, the Company has not consulted RBSM LLP regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

 

Engagement of Madsen & Associates CPA’s, Inc.

 

On May 6, 2011, Delta Mutual, Inc. (the “Company”) terminated the engagement of RBSM LLP as its independent registered public accounting firm, and the Company’s Board of Directors on May 9, 2011, approved the engagement of Madsen & Associates CPA’s, Inc. as the Company’s independent registered public accounting firm to audit the Company’s financial statements for the year ended December 31, 2010.

 

From February 23, 2011, the date of the engagement of RBSM LLP to May 6, 2011, the date of termination of that firm’s engagement on May 6, 2011, there were no disagreements with RBSM LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RBSM LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its reports. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K during the period of the Company’s engagement of RBSM LLP as its independent registered public accounting firm.

 

29
 

 

During the two most recent fiscal years and the interim periods preceding the engagement, the Company has not consulted Madsen & Associates CPA’s, Inc. regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

  

Item 9A. Controls and Procedures.

  

As supervised by our board of directors and our chief executive and principal financial officers, management has established a system of disclosure controls and procedures and has evaluated the effectiveness of that system. The system and its evaluation are reported on in the below Management's Annual Report on Internal Control over Financial Reporting. Our chief executive and financial officer have concluded that our disclosure controls and procedures (as defined in the 1934 Securities Exchange Act Rule 13a-15(e)) as of December 31, 2011, are effective, based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the "Exchange Act"). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Management assessed the effectiveness of internal control over financial reporting as of December 31, 2011. We carried out this assessment using the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management concluded in this assessment that as of December 31, 2011, our internal control over financial reporting is effective.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm, pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

 

There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

  

None.

 

30
 

 

PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

  

DIRECTORS AND EXECUTIVE OFFICERS

 

As of the date of this report, the executive officers and directors of Delta Mutual, Inc. were as follows:

  

NAME AGE TITLE(S)
Daniel R. Peralta 57 President, CEO and Director
     
Malcolm W. Sherman 75 Executive Vice President and Director

  

Daniel R. Peralta joined the Company on January 20, 2009 as President and CEO and a director. Dr. Peralta also controls and is the President and a director of Egani, Inc., a financial and international business consulting firm, and a controlling stockholder of the Company. He has since 1998 served as President and a director of Egani S.A., Scottsdale, Arizona, an affiliated company that is engaged in the investment business. From early 2005 to late 2008, Dr. Peralta served as president of Microbial Enhancement Oil Recovery Latin, Inc., Scottsdale, Arizona, a well restoration company. Since July of 2008, Dr. Peralta has served as an advisor to the Company’s wholly owned subsidiary, South American Hedge Fund, for its oil and gas activities in Argentina. He has also served in various advisory capacities to the Argentine government and as a board member of the Central Bank of Argentina from 1994 to 1998. From 1991 to 1994, Dr. Peralta served as an advisor to the Bicameral Commission for the State Advisor of the Budget and Expenditures Commission of the Argentina National Congress. He participated in a number of Argentine government missions, including the Official Missions to Kuwait in 1991 and 1992, and to Peru and Chile in 1991 and 1992. He is the author of a number of publications on finance and economic development in South America, including “Comercio Exterior y su Balance par alas Economia Regionales” (1990), and “Comercio Exterior en la Argentina” (1988). Dr. Peralta received a doctoral degree in business administration from the University of Belgrano (Buenos Aires, Argentina) in 1988, and a bachelor’s degree in aeronautical engineering form the National Technology University, Buenos Aires, Argentina in 1982. The Company believes that Dr. Peralta’s governmental and banking sector experience and exposure to the oil industry in Argentina and oil production related technologies are of great benefit to Mr. Peralta in executing his management responsibilities for the Company, given its energy-related operations in Argentina.

 

Malcolm W. Sherman was appointed to fill a vacancy on our board of directors on July 11, 2008. He was appointed Executive Vice President on July 28, 2008. Mr. Sherman from 2005 to the present has served as President and a director of Security Systems International, Inc., a company that provides security systems for government building, industrial facilities, oil refineries and other facilities in the Middle East. From May 2000 to July 2005, Mr. Sherman served as director of marketing for Hyzoom Commercial Co. Ltdl, a division of ZAFF International, Ltd., in Riyadh, Saudi Arabia, as well as director marketing for ZAFF International, a Saudi Arabian technology company specializing in security systems for industrial facilities for industrial and oil and gas facilities, and managed four of this company’s divisional offices in the Middle East. During his career, Mr. Sherman also served as a director of two public companies. He was a member of the founding team of Taser International, Inc. in 1993, and served on its board from 1993 to 1999. He also served as executive vice president and director of Ronco, Inc. from 1982 to 1993. Mr. Sherman received a B.S. degree in business administration from the University of Miami in 1959. The Company believes that Mr. Sherman’s experience and exposure to the oil industry security and management issues in the Middle East will benefit the Company and other members of its management in the Company’s energy-related operations in Argentina.

 

31
 

 

AUDIT COMMITTEE

 

Our board of directors currently serves as our audit committee. The audit committee is responsible for recommending independent auditors and reviewing management actions in matters relating to audit functions. The committee reviews, with independent auditors, the scope and results of its audit engagement, the system of internal controls and procedures and reviews the effectiveness of procedures intended to prevent violations of laws.

 

The audit committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and the auditors prior to filing of officers’ certifications with the SEC to receive information concerning, among other things, significant deficiencies in the design or operation of internal controls.

  

CODE OF CONDUCT

 

We have a corporate code of conduct and a corporate disclosure policy in place, which provide for internal procedures concerning the reporting and disclosure of corporate matters that are material to our business and to our stockholders. Our corporate code of conduct includes a code of ethics for our officers and employees as to workplace conduct, dealings with customers, compliance with laws, improper payments, conflicts of interest, insider trading, company confidential information, and behavior with honesty and integrity. Our corporate disclosure policy includes guidelines for publicly disseminating financial and other material developments to the investing public. A copy of this code of conduct is published on our website www.deltamutual.com. We intend to disclose any future amendments to, or waivers from, certain provisions of our Code of Conduct on this website within five business days following the date of such amendment or waiver.

  

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

 

We believe that during 2011, all of our officers and directors complied with the reporting requirements of Section 16(a).

  

32
 

 

Item 11. Executive Compensation.

 

 

 

Compensation paid by the Company and its subsidiaries to the Company’s Executive Officers (the “Named Executives”)for the last three fiscal years is shown in the following table.

  

SUMMARY COMPENSATION TABLE

 

Name and Principal Position  Year   Salary ($)   Bonus ($)   Stock Awards ($)   Option Awards ($)   Non-Equity Incentive Plan Compensation ($)   Change in Pension Value and Nonquali- fied Deferred Compensation Earnings ($)   All Other Compen- sation   Total ($) 
Daniel R. Peralta, Chief Executive Officer (1)   2009   $-0-                                 $-0- 
    2010   $138,461                                 $138,461 
    2011                                         
                                              
Malcolm W. Sherman, Executive Vice President (2)   2009   $-0-                                 $-0- 
    2010   $103,845                                 $103,845 
    2011                                         

  

(1)Mr. Peralta was appointed Chief Executive Officer on January 20, 2009.

 

(2)Mr. Sherman served without compensation as an executive officer and director of the Company in 2008.

 

(3)Pursuant to the Agreement between the Company and Valucorp, Mr. Gilburd was appointed Interim Chief Financial Officer, effective November 1, 2009, in which position he served until April 30, 2010.

  

EXECUTIVE COMPENSATION NARRATIVE

 

On April 26, 2010, the Company’s Board of Directors approved five-year term executive employment agreements (“Employment Agreements”) between the Company and Dr. Daniel R. Peralta, the Company’s Chairman and Chief Executive Officer, and Malcolm W. Sherman, the Company’s Executive Vice President, effective March 22, 2010 and March 23, 2010, respectively.  Dr. Peralta’s Employment Agreement provides for a fixed annual salary of $500,000; Mr. Sherman’s Employment Agreement provides for a fixed annual salary of $350,000. Under the Employment Agreements, both executives are eligible for participation in a bonus pool with other senior executives, the quarterly bonus amounts being based on financial performance comparisons with prior fiscal quarters, beginning with the quarterly reports of the Company for the year 2006 and each subsequent year during the respective terms of each of the Employment Agreements. Such bonuses will be pooled with those of other senior executives and be computed based on a total bonus pool equal to 15% of the net profits of the Company as set forth in the Company’s SEC filings.

 

33
 

 

On December 15, 2011, the Board of Directors approved the issuance of a common stock purchase warrant to Dr. Peralta to purchase 6,367,687 shares of common stock, at an exercise price of $0.20 per share, expiring December 14, 2018, and approved a warrant to purchase 632,962 shares of common stock to Mr. Sherman, with the same exercise price and expiration date.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

  Option Awards Stock Awards
Name

Number of Securities Underlying Unexercised Options

(#)

Exercisable

Number of Securities Underlying Unexercised Options

(#)

Unexercisable

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)

Option Exercise Price

($)

Option Expiration Date

Number of Shares or Units of Stock That Have Not Vested

(#)

Market Value of Shares or Units of Stock That Have Not Vested

($)

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested

(#)

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested

($)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Daniel R.                  
Peralta 6,367,687     $0.20 12/14/2018        
                   
Malcolm                  
Sherman 632,962     $0.20 12/14/2018        

  

DIRECTORS' COMPENSATION

 

We do not compensate directors in their capacity as such nor do we compensate our directors for attendance at meetings. We do reimburse our officers and directors for reasonable expenses incurred in the performance of their duties.

 

STOCK INCENTIVE OR OPTION PLANS

 

In October 2009, we terminated our 2004 Stock Option Plan, pursuant to which 900,000 shares remained available for the grant of options.

 

34
 

 

OTHER PLANS

 

We have not adopted any other deferred compensation, pension, profit sharing, stock option plan or programs for the benefit of our officers or employees.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information, as of February 23, 2012, with respect to the beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding Common Stock and by directors and officers of the Company, both individually and as a group:

 

Name and Address of Beneficial Owner  Number of Shares Owned Beneficially   Percentage** 
Daniel R. Peralta (1)   19,367,688    51.12%
Malcolm W. Sherman (2)   1,632,962    5.08%
All Officers and Directors as a    21,000,650    54.52%
Group (2 persons)          
           
** Based on 31,517,026 shares outstanding on February 23, 2012.          

 

 

 

(1) Dr. Peralta is the beneficial owner of 13,000,001 shares owned directly by Egani, Inc., which is owned by Daniel R. Peralta and Laura Monica Gallo, husband and wife, each of whom owns 50% of the outstanding equity interests of Egani, Inc. Dr. Peralta is the President and controls the operations of Egani, Inc. The address of Egani, Inc. is 8260 East Raintree Drive, Scottsdale, AZ 85206. Dr. Peralta disclaims beneficial ownership of the shares held by his son. Dr. Peralta also holds a common stock purchase warrant to purchase 6,367,687 shares of common stock, at an exercise price of $0.20 per share, expiring December 14, 2018. Dr. Peralta’s address is c/o Delta Mutual, Inc., 14362 N. Frank Lloyd Wright Blvd., Suite 1103, Scottsdale, AZ 85260.

 

(2) Mr. Sherman owns beneficially 1,000,000 shares owned by Security Systems International, Inc. of which Mr. Sherman is the president and a director and the majority stockholder. Mr. Sherman also holds a common stock purchase warrant to purchase 632,962 shares of common stock, at an exercise price of $0.20 per share, expiring December 14, 2018. The address of Security Systems International, Inc. is 9034 East Caribbean Lane, Scottsdale, AZ 85260. Mr. Sherman’s address is c/o Delta Mutual, Inc. 14362 N. Frank Lloyd Wright Blvd., Suite 1103, Scottsdale, AZ 85260.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Effective March 4, 2008, we entered into a Membership Interest Purchase Agreement (the “Agreement”) with Egani, Inc., an Arizona corporation, (“Egani”), providing for the acquisition by the Company from Egani 100% of the shares of stock held by it in Altony SA, an Uruguay Sociedad Anonima (“Altony”), which owns 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company (“SAHF”). In connection with the Agreement, we issued 13,000,000 shares of our common stock to Egani, and also issued 1,000,000 shares to Security Systems International, Inc.(“SSI”), owned by Malcolm Sherman, our Executive Vice President and director, pursuant to a Consulting Services Agreement, dated September 10, 2007, between the Company and SSI. At the Closing of the purchase of all of the shares of stock of Altony on March 4, 2008, we issued to Egani 13,000,000 shares of our common stock, which constitutes following such issuance a majority of our outstanding shares of common stock. The stockholders of Egani are Daniel R. Peralta and Monica Laura Gallo, husband and wife, each a beneficial owner of 6,500,000 million shares of our common stock. The consideration furnished by Egani was comprised of all of the outstanding shares of stock of Altony SA and 100% of the membership interests in South American Hedge Fund LLC, valued at $2,600,000 based on the market value of 13,000,000 shares of our common stock on March 4, 2008, that we issued to acquire these assets. The sources of funds used by the beneficial owners of Egani to acquire control of the Company were personal funds.

 

 

During 2008 and 2009, Egani made loans to the Company as set forth below:

 

Date of Note  Principal Amount   Interest Rate  Maturity Date
March 6, 2008  $21,000   6%  June 20, 2012
April 28, 2008   9,550   6%  June 20, 2012
September 18, 2008   13,350   6%  June 20, 2012
October 9 , 2009   30,950   6%  June 20, 2012
Total  $74,850       

  

On October 3 and November 20, 2008, the Company issued to Santiago Peralta, the son of Daniel Peralta, demand 6% promissory notes in the respective principal amounts of $10,000 and $14,000, representing amounts loaned to the Company by Mr. Peralta on these dates. Mr. Peralta has extended the maturity date on this loan to June 20, 2012.

 

During 2008, SSI made loans to the Company as set forth in the table below:

 

Date of Note  Principal Amount   Interest Rate  Maturity Date
March 6, 2008  $100,000   6%  June 20, 2012
April 15, 2008   20,000   6%  June 20, 2012
May 14, 2008   16,900   6%  June 20, 2012
July 7, 2008   22,413   6%  June 20, 2012
September 19, 2008   16,650   6%  June 20, 2012
October 22, 2008   28,500   6%  June 20, 2012
December 15, 2008   8,190   6%  June 20, 2012
Total  $212,653       

  

35
 

 

During 2009, SSI made loans to the Company as set forth in the table below:

 

Date of Note  Principal Amount   Interest Rate  Maturity Date
January 22, 2009  $7,686   6%  June 20, 2012
    15,950   6%  June 20, 2012
    5,000   6%  June 20, 2012
    5,000   6%  June 20, 2012
    8,577   6%  June 20, 2012
    19,767   6%  June 20, 2012
    15,487   6%  June 20, 2012
Total  $77,467       

 

On November 28, 2009, Daniel Peralta, Santiago Peralta and Malcolm Sherman extended the due dates on all loans by them to the Company to June 20, 2012.

 

Item 14.  Principal Accountant Fees and Services

  

(1) Aggregate fees for the last two years:     

   2010   2011 
   $20,000   $40,000 

 

(2) Audit related fees:  2010   2011 
        $40,000 

 

(3) Tax fees:          
    2010    2011 
   $-0-   $-0- 
           
(4) All other fees: NA          

 

(5) Audit committee pre-approval processes, percentages of services approved by audit committee, percentage of hours spent on audit engagement by persons other than principal accountant's full time employees: NA

 

36
 

 

Item 15. Exhibits and Financial Statement Schedules.

 

(a)(3) Exhibits

 

 

 

Exhibit No   Description of Exhibits
     
3.1   Articles of Incorporation of the Company, as currently in effect, incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB filed with the Commission on June 15, 2000.
     
3.1a   Amendment to Certificate of Incorporation, filed September 1, 2004. Incorporated herein by reference to Exhibit 3.1a to the Company's Current Report on Form 8-K, filed with the Commission on September 3, 2004.
     
3.1b   Form of Restatement of Certificate of Incorporation of Delta Mutual, Inc., as amended. Incorporated herein by reference to Exhibit 3.1b to the Company's Quarterly Report on Form 10-QSB, filed with the Commission on November 15, 2004.
     
3.2   By-Laws of the Company. Incorporated herein by reference to Exhibit 3.2 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB filed with the Commission on June 15, 2000.
     
3.2a   Amendment to Article III, Section I of the By-Laws. Incorporated herein by reference to the Company's quarterly report on Form 10-QSB, filed with the Commission on November 21, 2000.
     
3.1c   Certificate of Amendment to Certificate of Incorporation, filed June 26,2007. Incorporated herein by reference to, Exhibit 3.1c to the Company's quarterly report on Form 10- QSB, filed with the Commission on August 10, 2007.
     
3.1d   Form of Restatement of Certificate of Incorporation of Delta Mutual, Inc., as amended. Incorporated herein by reference to Exhibit 3.1d to the Company's quarterly report on Form 10-QSB, filed with the Commission on August 10, 2007.
     
3.1e   Certificate of Amendment to Certificate of Incorporation, filed May 13, 2009. Incorporated herein by reference to Exhibit 3.1e to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 6, 2009.
     
3.1f   Form of Restatement of Certificate of Incorporation of the Company, as amended. Incorporated herein by reference to Exhibit 3.1f to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 6, 2009.
     
4.2a   Delta Mutual, Inc. 2004 Stock Option Plan. Incorporated herein by reference to Exhibit B to the Company's Definitive Proxy Statement, filed with the Commission on June 16, 2004.
     
4.6   4% Convertible Promissory Note of the Company due May 2006 issued in the principal amount of $193,740 on May 12, 2004. Incorporated herein by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-QSB, filed with the Commission on November 15, 2004.

 

37
 

 

     
4.6a   Amendment, dated as of May 2, 2006, to 4% Convertible Promissory Note in the principal amount of $193,740. Incorporated herein by reference to Exhibit 4.6a to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 2, 2007.
     
4.6b   Amendment, dated as of July 6, 2006, to 4% Convertible Promissory Note in the principal amount of $193,740. Incorporated herein by reference to Exhibit 4.6b to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 2, 2007.
     
4.6c   Amendment, dated as of September 8, 2006, to 4% Convertible Promissory Note in the principal amount of $193,740. Incorporated herein by reference to Exhibit 4.6c to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 2, 2007.
     
4.6d   Amendment, dated as of November 21, 2006, to 4% Convertible Promissory Note in the principal amount of $193,740. Incorporated herein by reference to Exhibit 4.6d to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 2, 2007.
     
4.6e   Amendment, dated April 4, 2007, to 4% Convertible Promissory Note in the Principal Amount of $193,740. Incorporated herein by reference to Exhibit 4.6e to the Company's quarterly report on Form 10-QSB, filed with the Commission on August 10, 2007.
     
4.6f   Amendment, dated September 7, 2007 to Convertible Promissory Note in the principal amount of $193,740. Incorporated herein by reference to Exhibit 4.6f to the Company's quarterly report on Form 10-QSB, filed with the Commission on November 9, 2007.
     
10.15   Strategic Alliance Agreement, dated September 10, 2003, between Delta-Envirotech, Inc. and ZAFF International Ltd. Incorporated herein by reference to Exhibit 99.2 to the Company's current report on Form 8-K, filed with the Commission on January 22, 2004.
     
10.16   Agreement, dated January 14, 2004, by and between Delta Mutual, Inc. and Hi-Tech Consulting and Construction, Inc. Incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-KSB, filed with the Commission on April 6, 2004.
     
10.26   Executive Employment Agreement, dated May 23, 2005, between Delta Mutual, Inc. and Martin G. Chilek. Incorporated herein by reference to Exhibit 10.26 to the Company's Current Report on Form 8-K, filed with the Commission on May 25, 2005.
     
10.33e   Form of Amended and Restated 8% Term Notes issued March 6, 2008 by Delta Mutual, Inc. in the aggregate principal amount of $150,655. Incorporated herein by reference to Exhibit 10.33e to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 15, 2008.
     
10.35   Membership Interest Purchase Agreement, dated March 4, 2008, between Delta Mutual, Inc. and Egani, Inc. Incorporated herein by reference to Exhibit 10.35 to the Company’s Current Report on Form 8-K, filed with the Commission on March 11, 2008.

 

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10.36   Consulting Services Agreement, dated September 10, 2007, between Delta Mutual, Inc. and Security Systems International, Inc. Incorporated herein by reference to Exhibit 10.36 to the Company’s Current Report on Form 8-K, filed with the Commission on March 11, 2008.
     
10.37   Form of 6% promissory notes issued March 6, 2008 by the Company in the aggregate principal amount of $121,000. Incorporated herein by reference to Exhibit 10.37 to the Company’s Current Report on Form 8-K, filed with the Commission on March 11, 2008.
     
10.37a   Amendment, dated September 2, 2008,to 6% Promissory Note in the principal amount of $21,000. Incorporated herein by reference to Exhibit 10.37a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.37b   Amendment, dated as of September 18, 2008, to 6% Promissory Note in the principal amount of $100,000. Incorporated herein by reference to Exhibit 10.37b to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.38   6% Promissory Note of the Company issued in the principal amount of $20,000 on April 15, 2008. Incorporated herein by reference to Exhibit 10.38 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 3, 2008.
     
10.38a   Amendment, dated as of October 8, 2008, to 6% Promissory Note in the principal amount of $20,000. Incorporated herein by reference to Exhibit 10.38a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.39   6% Promissory Note of the Company issued in the principal amount of $9,550 on April 28, 2008. Incorporated herein by reference to Exhibit 10.39 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 3, 2008.
     
10.39a   Amendment, dated as of October 10, 2008, to 6% Promissory Note in the principal amount of $9,550. Incorporated herein by reference to Exhibit 10.39a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.40   6 % Promissory Note of the Company issued in the principal amount of $16,900 on May 14, 2008. Incorporated herein by reference to Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 3, 2008.
     
10.40a   Amendment, dated as of November 4, 2008, to 6% Promissory Note in the principal amount of $16,900. Incorporated herein by reference to Exhibit 10.40a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.42   6% Promissory Note of the Company issued in the principal amount of $22,413 on July 7, 2008. Incorporated herein by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.

 

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10.43   6% Promissory Note of the Company issued in the principal amount of $13,350 on September 18,2008. Incorporated herein by reference to Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.44   6% Promissory Note of the Company issued in the principal amount of $16,650 on September 19,2008. Incorporated herein by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.45   6% Promissory Note of the Company issued in the principal amount of $10,000 on October 3, 2008. Incorporated herein by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.46   6% Promissory Note of the Company issued in the principal amount of $28,500 on October 22, 2008. Incorporated herein by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 18, 2008.
     
10.47   6% Promissory Note dated as of November 20, 2008 by Delta Mutual, Inc. to Santiago Peralta in the principal amount of $14,000. Incorporated herein by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.48   Amendment dated as of November 24, 2008 to 6% promissory notes issued to Egani, Inc. in the aggregate principal amount of $43,900. Incorporated herein by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.48a   Second Amendment, dated as of April 16, 2009, to 6% promissory notes issued to Egani, Inc. Incorporated herein by reference to Exhibit 10.48a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 20, 2009.
     
10.49   Amendment dated as of December 14, 2008 to 6% promissory notes issued to Security Systems International, Inc. in the aggregate principal amount of $136,900. Incorporated herein by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.49a   Second Amendment, dated as of April 16, 2009, to 6% promissory notes issued to Security Systems International, Inc. Incorporated herein by reference to Exhibit 10.49a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on May 20, 2009.
     
10.50   6% Promissory Note dated as of December 15, 2008 to Security Systems International, Inc. in the principal amount of $8,190. Incorporated herein by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.

 

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10.51   6% Promissory Note dated as of January 22, 2009 to Security Systems International, Inc. in the principal amount of $7,686. Incorporated herein by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.52   6% Promissory Note dated as of February 10, 2009 to Security Systems International, Inc. in the principal amount of $15,950. Incorporated herein by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.53   6% Promissory Note dated as of February 18, 2009 to Security Systems International, Inc. in the principal amount of $5,000. Incorporated herein by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.54   6% Promissory Note dated as of February 19, 2009 to Malcolm W. Sherman in the principal amount of $5,000. Incorporated herein by reference to Exhibit 10.54 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009. 10.55 6% Promissory Note dated as of March 20, 2009 to Security Systems International, Inc. in the principal amount of $19,767. Incorporated herein by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.56   6% Promissory Note dated as of March 25, 2009 to Security Systems International, LLC in the principal amount of $8,577. Incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.57   6% Promissory Note dated as of April 2, 2009 to Security Systems International, LLC in the principal amount of $14,987. Incorporated herein by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2009.
     
10.57a   Amended and Restated 6% Promissory Noted dated as of April 15, 2009 to Security Systems International LLC. Incorporated herein by reference to Exhibit 10.57a to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on August 6, 2009.
     
10.58   Agreement, dated as of November 1, 2009, between the Company and Valucorp. Incorporated herein by reference to Exhibit 10.58 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 15, 2010.
     
10.59   Note Extension Agreement, dated December 31, 2009, between the Company and Neil Berman, the Anthony Panariello Trust, the Danielle Panariello Trust and the Michaela Panariello Trust. Incorporated herein by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K, filed with the Commission on April 15, 2010.
     
10.60   Partnership Agreement on Kaia Mining Properties, dated March 12, 2010, by and among Southamerican Hedge Fund, Oscar Daniel Chedrese and Servicios Mineros SA. Incorporated herein by reference to Exhibit 10.60 to the Company’s Annual Report on Form 10-K, filed with the Commission on May 16, 2011.

 

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10.61   Form of Common Stock Purchase Warrant issued December 15, 2011. Incorporated by reference to Exhibit 10.61 to the Company’s Current Report on Form 8-K, filed with the Commission on December 28, 2011.
     
14.   Delta Mutual, Inc. Code of Conduct and Business Ethics. Incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-KSB, filed with the Commission on April 14, 2005.
     
31   Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32   Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

* Filed herewith

** Furnished herewith

 

 Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

   
SEC Ref. No. Title of Document
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document

 

The XBRL related information in Exhibits 101 to this Annual Report on Form 10-K shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

  

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  DELTA MUTUAL, INC.  
     
Dated:  April 16, 2012    
     
  By:/s/ Daniel R. Peralta  
  Daniel R. Peralta  
  President, Chief Executive Officer and Principal Financial and Accounting Officer    

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on April 16, 2012.

 

/s/ Daniel R. Peralta

 

Daniel R. Peralta, President, Chief Executive Officer and Director

 

 

/s/ Malcolm W. Sherman

 

Malcolm W. Sherman

Executive Vice President and Director

 

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