UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
| 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 number 000-30563
DELTA INTERNATIONAL OIL & GAS INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 14-1818394 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 8655 East Via de Ventura, Suite F127, Scottsdale, AZ | 85258 | |
| (Address of principal executive offices) | (Zip Code) |
(480) 483-0420
(Registrant's Telephone Number, Including Area Code)
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 o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (Check One):
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer o | Smaller reporting company x |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the issuer's common stock, $0.0001 par value per share, was 32,338,826 as of November 3, 2014.
DELTA INTERNATIONAL OIL & GAS INC.
INDEX
| Page | |
| Part I. Financial Information | 1 |
| Item 1. Financial Statements. | 1 |
| Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013 (unaudited) | 2 |
| Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited) | 3 |
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited) | 5 |
| Notes to Unaudited Consolidated Financial Statements | 6 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 9 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 13 |
| Item 4. Controls and Procedures. | 13 |
| Part II. Other Information | 14 |
| Item 6. Exhibits. | 14 |
| Signatures | 15 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The results of operations for the three and nine months ended September 30, 2014 and 2013 are not necessarily indicative of the results for the entire fiscal year or for any other period.
| 1 |
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 1,276,044 | $ | 1,833,407 | ||||
| Receivable from sale of bidding rights and oil and gas properties | 3,300,042 | 3,500,042 | ||||||
| Total current assets | 4,576,086 | 5,333,449 | ||||||
| Investment in mineral properties | 57,769 | 117,351 | ||||||
| Investments in unproved oil and gas properties | 353,169 | 1,609,889 | ||||||
| Investment in oil refinery | - | 109,452 | ||||||
| Property and equipment | - | 61,698 | ||||||
| Other assets | 7,864 | 8,234 | ||||||
| TOTAL ASSETS | $ | 4,994,888 | $ | 7,240,073 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 21,071 | $ | 1,744 | ||||
| Accrued expenses | 118,045 | 144,000 | ||||||
| Notes payable | 75,000 | 75,000 | ||||||
| Liabilities for uncertain tax positions | 60,305 | 75,228 | ||||||
| Total current liabilities | 274,421 | 295,972 | ||||||
| Long-term deferred tax liability | 633,590 | 633,590 | ||||||
| Long-term debt payable to related parties | - | 150,655 | ||||||
| Total liabilities | 908,011 | 1,080,217 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | $ | - | - | |||||
| Common stock $0.0001 par value - authorized 250,000,000 shares; 32,338,826 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | 3,233 | 3,233 | ||||||
| Additional paid-in capital | 7,094,607 | 7,021,482 | ||||||
| Accumulated deficit | (2,447,794 | ) | (398,344 | ) | ||||
| Accumulated other comprehensive loss | (563,169 | ) | (466,515 | ) | ||||
| Total stockholders' equity | 4,086,877 | 6,159,856 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 4,994,888 | $ | 7,240,073 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
| 2 |
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Costs and Expenses: | ||||||||||||||||
| General and administrative | $ | 185,008 | $ | 220,657 | $ | 625,939 | $ | 579,658 | ||||||||
| Impairment charge | 1,119,913 | - | 1,119,913 | - | ||||||||||||
| $ | 1,304,921 | $ | 220,657 | $ | 1,745,852 | $ | 579,658 | |||||||||
| Loss from operations | $ | (1,304,921 | ) | $ | (220,657 | ) | $ | (1,745,852 | ) | $ | (579,658 | ) | ||||
| Other Income (Expense): | ||||||||||||||||
| Foreign exchange gain (loss) | (37,870 | ) | (74,956 | ) | (296,410 | ) | (128,500 | ) | ||||||||
| Interest expense | (712 | ) | (3,238 | ) | (7,188 | ) | (28,433 | ) | ||||||||
| Life insurance proceeds | - | - | - | 1,000,249 | ||||||||||||
| Other Income (expense) | (38,582 | ) | (78,194 | ) | (303,598 | ) | 843,316 | |||||||||
| Income (loss) before income taxes | (1,343,503 | ) | (298,851 | ) | (2,049,450 | ) | 263,658 | |||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net Income (loss) | $ | (1,343,503 | ) | $ | (298,851 | ) | $ | (2,049,450 | ) | $ | 263,658 | |||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | 0.01 | |||||
| Diluted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | 0.01 | |||||
| Weighted average common shares - Basic | 32,338,826 | 32,097,783 | 32,338,826 | 32,086,064 | ||||||||||||
| Weighted average common shares - Diluted | 32,338,826 | 32,097,783 | 32,338,826 | 33,234,500 | ||||||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
| 3 |
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Nine Months ending September 30, | ||||||||
| 2014 | 2013 | |||||||
| Net earnings (loss) | $ | (2,049,450 | ) | $ | 263,658 | |||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation adjustment | (96,654 | ) | (165,726 | ) | ||||
| Net change in other comprehensive income (loss) | (96,654 | ) | (165,726 | ) | ||||
| Comprehensive income (loss) | $ | (2,146,104 | ) | $ | 97,932 | |||
The accompanying notes are an integral part of the unaudited consolidated financial statements
| 4 |
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months ending September 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from Operating Activities: | ||||||||
| Net income (loss) | $ | (2,049,450 | ) | $ | 263,658 | |||
| Warrants issued for services | 73,125 | 40,624 | ||||||
| Reserve for impairment | $ | 1,119,913 | ||||||
| Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | ||||||||
| Changes in operating assets and liabilities | (6,258 | ) | (202,749 | ) | ||||
| Net cash used in operating activities | (862,670 | ) | 101,533 | |||||
| Cash flows from investing activities: | ||||||||
| Oil and gas properties exploration and development costs | - | (39,054 | ) | |||||
| Proceeds from sales of oil and gas properties and bidding rights | 200,000 | 500,000 | ||||||
| Net cash provided by investing activities | 200,000 | 460,946 | ||||||
| Cash flows from financing activities: | ||||||||
| Settlement of notes payable to related parties | (150,655 | ) | (623,970 | ) | ||||
| Proceeds from sales of common stock | - | 60,480 | ||||||
| Net cash provided by financing activities | (150,655 | ) | (563,490 | ) | ||||
| Effect of Exchange Rates on Cash | 255,962 | 157,973 | ||||||
| Net increase (decrease) in cash | (557,363 | ) | 156,962 | |||||
| Cash - Beginning of period | 1,833,407 | 1,949,896 | ||||||
| Cash - End of period | $ | 1,276,044 | $ | 2,106,858 | ||||
| Changes in operating assets and liabilities consists of: | ||||||||
| (Increase) decrease in other assets | 370 | - | ||||||
| Increase (decrease) in accounts payable and accrued expenses | $ | (6,628 | ) | $ | (202,749 | ) | ||
| Changes in assets and liabilities | $ | (6,258 | ) | $ | (202,749 | ) | ||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 76,681 | $ | 130,686 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 5 |
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Delta International Oil & Gas Inc. (“Delta” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year end December 31, 2013 as reported on Form 10-K, have been omitted.
2. Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
3. EARNINGS (LOSS) PER SHARE
Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net earnings by the weighted average number of common share and potential common share outstanding during the period. Potential common shares consist of outstanding common stock purchase warrants. For the three and nine months ended September 30, 2014 and 2013, there were 0, 0, 0 and 1,148,436, respectively of potentially dilutive common shares outstanding.
4. RECEIVABLE FROM SALE OF BIDDING RIGHTS AND OIL AND GAS PROPERTIES
On March 30, 2012 the Company entered into the Cooperation Agreement with PPL. Under the Cooperation Agreement, PPL agreed to pay us $7,000,000 for 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, the Company has 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 entity of Valle de Lerma (the San Salvador, Libertador and Selva Maria concessions were awarded to other parties).
As of December 31, 2012, the Company had received deposits in the amount of $3,499,958 from PPL on account of its obligations under the Cooperation Agreement, and the remainder of the amounts owing have been recorded as a $4.0 million receivable from the sale of bidding rights and oil and gas properties. PPL is not current with the payment schedule set forth in the Cooperation Agreement, and the Company is in discussions with PPL to ensure that all payments provided for under the Cooperation Agreement are made within the time frame as required for concession financial commitments. In 2013, the Company received an additional payment of $500,000. During the third quarter of 2014, the Company received an additional payment of $200,000.
5. IMPAIRMENT CHARGES AND LOSS ON SALE OF UNPROVED OIL AND GAS PROPERTY
As of the end of October 2014, Argentina was in technical default on its external debt and, although negotiations to remedy this default are in process, in the Company’s belief, it is likely that this situation, however resolved, will lead the government to impose further restrictions on exports of capital from Argentina.
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 certain oil and gas concessions and other properties in Argentina.
| 6 |
Accordingly, during the quarter ending September 30, 2014, the Company recorded a $1.1 million impairment charge on the following of its properties and assets in Argentina.
We have incurred an impairment charge of $608,418 and written down to $-0- the carrying amount as of September 30, 2014, of SAHF’s 20% ownership interest in the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina. SAHF is designated as the operator of this concession. Exploratory drilling activities commenced in April 2010 on the Guemes Block and in July 2010, SAHF confirmed the potential existence of formations with sufficient hydrocarbons to make the well economically productive. In 2013, the initial majority working interest owner, Ketsal S.A., sold its share to another firm, which is evaluating whether to proceed further with investments in this concession. SAHF has determined to explore the possibility of selling their 20% interest in the concession to the new owners.
We have, for nominal consideration, disposed of our 10% concession interest in the carryover mode in the Jollin and Tonono oil and gas concessions in Northern Argentina, and incurred an impairment charge for this concession interest of $328,953, resulting in a carrying value of $-0-, in the three months ended September 30, 2014.
The Company no longer intends to pursue any of its own operating activities on its current oil and gas properties that are not in a carry-over mode. Accordingly, a further impairment charge of $58,498 was incurred with respect to swabbing rig equipment and other miscellaneous equipment we had purchased, and the carrying value of the equipment was written down to $-0-, as of September 30, 2014.
We owned at September 30, 2014, 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina. Due to the cost of required rehabilitation work, currently this refinery is not being operated to produce gasoline or diesel fuel, and the partners have no current plans to activate the refinery given the costs of de-mothballing the facility and required equipment and transportation improvements. We have incurred an impairment charge of $87,740 and wrote down the carrying amount for this property to $-0- as of September 30, 2014.
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. After reviewing various reports detailing the potential of these mines, the Company purchased 51% of the mine and immediately began sampling the property. We have not pursued any activities with respect to these properties, and we incurred an impairment charge of $36,304 and the carrying value of these properties was written down to $-0- as of September 30, 2014.
6. RELATED PARTY TRANSACTIONS
During the quarter ending September 30, 2014, the Company paid off notes payable owed to three shareholders in the amount of $150,655, plus accrued interest of approximately $77,000.
7. EQUITY
On May 10, 2013, the Board of Directors of the Company authorized the issuance of a common stock purchase warrant effective May 1, 2013, to purchase 1,000,000 shares of common stock, on or before April 30, 2018, at an exercise price of $0.20 per share, to Phillips W. Smith, a director of the Company. The number of shares of common stock as to which the warrant is exercisable vests in 24 monthly installments on the final day of each month during the term of the warrant, commencing May 31, 2013, and is vested in full as of April 30, 2015. If Mr. Smith ceases to be an active member of the Company’s Board of Directors at any time in the two-year period May 1, 2013 through April 30, 2015, vesting will cease as of the last full month during which he was an active member of the Board. The fair value of these warrants was $195,000 on the date of grant determined using the Black-Scholes option pricing model with the following inputs: exercise price of $0.20, expected term of 5 years, stock price of $0.20, volatility of 195%, discount rate of 5% and no expected dividends. During the nine months ended September 30, 2014 and 2013, the Company expensed $73,125 and $40,625, respectively, related to this award.
| 7 |
8. 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.
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 expired in February 2013 and the Company has moved and has a two-year lease expiring in February 2015.
Rent expense was $21,203 and $40,078 for the nine months ended September 30, 2014 and 2013, 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 former Chairman and Chief Executive Officer, and Malcolm W. Sherman, the Company’s Executive Vice President. Mr. Sherman’s Employment Agreement was effective March 23, 2010, and provides for a fixed annual salary of $300,000, which is limited by agreement of the executive and the Board to $235,000. Under the Employment Agreement, he is 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 bonus will be pooled with those of other senior executives and 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.
COUNTRY RISK
The Company has significant operations in the Argentina. The operating results of the Company may be adversely affected by changes in the political and social conditions in the Argentina and by changes in Argentinean government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in have a material adverse effect upon the Company’s business and financial condition.
EXCHANGE RISK
The Company cannot guarantee the Argentinean Peso and US dollar exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and post higher or lower profit depending on exchange rate of Peso and US dollar. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.
| 8 |
ITEM 2. 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
Delta International Oil & Gas Inc. (“Delta” or “the Company”) was incorporated in Delaware on November 17, 1999. Our name was changed from Delta Mutual Inc. to our present name on October 29, 2013, by the merger with a wholly-owned Delaware subsidiary, where the sole change resulting from the merger was the change of the Company’s name to Delta International Oil & Gas Inc. 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 Hedge Fund LLC, a Delaware limited liability company (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 has made investments in oil and gas exploration and development activities.
OVERVIEW
We are an independent oil and gas company, with the SIC Code classification 1311 (oil and gas production)for SEC filing purposes, engaged in oil and gas acquisition, exploitation, production and exploration activities primarily in Argentina. Our operating policies have been to secure oil and gas properties and concessions which either are producing economical quantities of oil and gas or which demonstrate favorable characteristics for well “workovers” with a history of excellent production. Our goal has been to target these concessions as compared to concessions which will be exploratory and would require drilling new wells.
The Company's business is subject to the risks of its oil and gas investments in South America. Our investments at this time are in the oil and gas sector in Argentina, where recently proposed legislation would change the respective roles of the federal and provincial governments in the award of and participation in oil and gas concessions. If enacted these changes could necessitate renegotiation of certain of the concessions in which we have interests, and affect the value of our investments. As of the end of October 2014, Argentina was in technical default on its external debt and, although negotiations to remedy this default are in process, it is likely that this situation, however resolved, will lead the government to impose further restrictions on exports of capital from Argentina.
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 oil and gas concessions in Argentina.
IMPAIRMENT CHARGES
Management has evaluated the carrying values of its oil and gas and mining properties as of September 30, 2014, and as a result of that evaluation, for the quarter ending September 30, 2014, the Company recorded a $1.1 million impairment charge on the following of its properties and assets in Argentina.
| 9 |
Our Oil and Gas Investments
As of September 30, 2014, 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. We do not operate the Tartagal and Morillo concession, and have a minority position in the joint venture. We have, for nominal consideration, disposed of our 10% concession interest in the carryover mode in the Jollin and Tonono oil and gas concessions in Northern Argentina, and incurred an impairment charge for this concession interest of $328,953, resulting in a carrying value of $-0-, in the three months ended September 30, 2014.
We hold a 60% interest in the Valle de Lerma concession in Northern Argentina, where the joint venture partners are Grasta SA, a local mid-size gasoline refinery located in Buenos Aires, PetroNEXUS and REMSA. We have been actively working in 2012 and 2013 to finalize all governmental approvals for an alternate drilling site. The exploration terms are four years for the first period, three years for the second and two years for the last period. Currently our ability to reopen the existing well site is constrained by law, since the location of the well was within the city limits of Salta. Requests have been made for government approval to override the existing restrictions of the current policy.
We have incurred an impairment charge of $608,418 and written down to $-0- the carrying amount as of September 30, 2014, of SAHF’s 20% ownership interest in the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina. SAHF is designated as the operator of this concession. Exploratory drilling activities commenced in April 2010 on the Guemes Block and in July 2010, SAHF confirmed the potential existence of formations with sufficient hydrocarbons to make the well economically productive. In 2013, the initial majority working interest owner, Ketsal S.A., has sold its share to another firm, which is evaluating whether to proceed further with investments in this concession. SAHF has determined to explore the possibility of selling their 20% interest in the concession to the new owners.
The Company no longer intends to pursue any of its own operating activities on its oil and gas properties that are not in a carry-over mode. Accordingly, a further impairment charge of $58,498 was incurred with respect to swabbing rig equipment and other miscellaneous equipment we had purchased, and the carrying value of the equipment was written down to $-0-, as of September 30, 2014.
We owned at September 30, 2014, 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina. Due to the cost of required rehabilitation work, currently this refinery is not being operated to produce gasoline or diesel fuel, and the partners have no current plans to activate the refinery given the costs of de-mothballing the facility and required equipment and transportation improvements. We have incurred an impairment charge of $87,740, and the carrying amount for this property was also written down to $-0- as of September 30, 2014.
Lithium and Coltan Mining Properties
On March 1, 2010, SAHF purchased control of 51% of the Guayatayoc project via a partnership agreement with Oscar Chedrese and Servicios Mineros SA. The project holds the concession for a period of 20 years for the mineral rights to 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. We have performed sampling and geological conclusions with a local geological company in order to determine value to the property. We are seeking a purchaser for our concession interest in these properties.
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. After reviewing various reports detailing the potential of these mines, the Company purchased 51% of the mine and immediately began sampling the property. We have not pursued any activities with respect to these properties, and we incurred a $36,304 impairment charge in connection with writing down the value of these properties to $-0- as of September 30, 2014.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013
During the nine months ended September 30, 2014, we incurred a net loss of approximately $2,049,000 as compared to net income of approximately $264,000 for the nine months ended September 30, 2013. The difference for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 is primarily due to a gain of approximately $1,000,000, million recognized during the second quarter of 2013, from the payment of the proceeds from the Company’s keyman life insurance policy on the life of Daniel R. Peralta, our former Chief Executive Officer described above in the nine month analysis, net of a foreign exchange loss of approximately $296,000 and an impairment loss of approximately $1,119,000 in 2014. Our loss from operations increased from approximately $580,000 in 2013 to approximately $1,746,000 in 2014, due to the impairment charge and higher general and administrative expense in 2014.
THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013
During the three months ended September 30, 2014, we incurred a net loss of approximately $1,343,000 as compared to a net loss of approximately $299,000 for the three months ended September 30, 2013. The difference for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 is primarily due to due to our having incurred an impairment loss of approximately $1,119,000 in 2014. Our loss from operations increased from approximately $221,000 in 2013 to approximately $1,305,000 in 2014 due to the impairment charge and higher general and administrative expenses in 2013.
LIQUIDITY AND CAPITAL REQUIREMENTS
At September 30, 2014, we had a working capital surplus of approximately $4.3 million compared with a working capital surplus of approximately $5.0 million at December 31, 2013.
At September 30, 2014, we had total assets of approximately $5.0 million compared to total assets of approximately $7.2 million at December 31, 2013. Net cash used in operating activities in the nine months ended September 30, 2014 was approximately $863,000, as compared with net cash provided by operating activities of approximately $461,000 in 2013; net cash generated by investing activities was approximately $200,000 in 2014, compared to approximately $461,000 in 2013; and net cash generated from financing activities was $-0- in 2014, in which period notes to related parties in were settled for approximately $151,000, as compared with cash generated of approximately $60,000 in, where notes to related parties were settled for approximately $624,000.
Estimated 2014 Capital Requirements
In the case of the 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. However, we cannot determine this exact date as it is under the control of the majority owner (80%) of the concession.
We estimate that our capital requirements in 2014 to develop the Valle de Lerma (where we have applied for extension of the concession to permit oil production from an existing site) will approximate $800,000. On March 30, 2012 the Company entered into the Cooperation Agreement with PPL. Under the Cooperation Agreement, PPL agreed to pay us $7,000,000 for certain exploration and exploitation rights to oil and gas deposits and certain bidding rights held by Delta in certain areas, including Valle de Lerma in the province of Salta. As of December 31, 2012, the Company had received deposits in the amount of $3,499,958 from PPL on account of its obligations under the Cooperation Agreement. PPL is not current with the payment schedule set forth in the Cooperation Agreement, and the Company is in discussions with PPL to ensure that all payments provided for under the Cooperation Agreement are made within the time frame as required for concession financial commitments. In 2013, the Company received an additional payment of $500,000. During the third quarter of 2014, the Company received an additional payment of $200,000.
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Further development of all of these concessions may be affected if the current proposed legislation concerning centralization of all concession awards in the federal government is enacted, since concession ownership and operating terms may be changed so as to change the investments we are required to make in these two concessions.
USE OF ESTIMATES
The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to oil and gas properties, intangible assets, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements. Certain amounts for prior periods have been reclassified to conform to the current presentation.
Management believes that it is reasonably possible that the following material estimates affecting the financial statements could happen in the coming year:
| ● |
Proved oil and gas reserves;
| |
| ● | Expected future cash flow from proved oil and gas properties; |
| ● |
Future exploration and development costs; and
| |
| ● | Future dismantlement and restoration costs. |
NEW FINANCIAL ACCOUNTING STANDARDS
For a summary of new financial accounting standards applicable to the Company, please refer to the notes to the financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on April 25, 2014.
Critical Accounting Policies and Estimates
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 preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates:
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We assess the potential impairment of long-lived assets and identifiable intangibles under the guidance of ASC topic 360; "Property, Plant and Equipment", (formerly SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"), which states that a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset exceeds its fair value. An impairment loss is recognized only if the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. 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.
At September 30, 2014, management of the Company evaluated the current oil and gas assets and determined the undiscounted cash flows expected to be generated by these assets are substantially less than the carrying amount of these items. Management reviewed accordingly the carrying amounts of the Caimancito Refinery, of the concession holding oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina, certain oil drilling equipment and the Company’s investment in the partnership for the exploration and development of columbite-tantalite (coltan) from a set of mines in Cachi, Salta. After reviewing these investments, management has determined that the carrying amounts of all of these properties and assets should be to $-0-. The Company recorded an impairment charge of $1.1 million for the nine months ended September 30, 2014 in this regard.
Investments in non-consolidated affiliates – These investments consist of the Company’s ownership interests in oil and gas development and exploration rights in Argentina, net of impairment losses if any. We evaluate these investments for impairment when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, levels of oil and gas reserves, availability of pipeline (or other transportation) capacity and infrastructure and management of the operations in which the investments were made.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive and financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost- benefit relationship of possible controls and procedures.
As of September 30, 2014, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Controls
There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives. The Company's chief executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.
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PART II—OTHER INFORMATION
ITEM 6. EXHIBITS.
| 31 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 32 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
* Filed herewith
** 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 Quarterly Report on Form 10-Q 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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DELTA INTERNATIONAL OIL & GAS INC. | ||
| BY: | /s/ Malcolm W. Sherman | |
| Malcolm W. Sherman | ||
|
President, Chief Executive Officer and Principal Financial Officer | ||
Dated: November 12, 2014
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EXHIBIT INDEX
| 31 | Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 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 |
16
EXHIBIT 31
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES OXLEY ACT OF 2002
I, Malcolm W. Sherman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Delta International Oil & Gas Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting;
| DATE: November 12, 2014 | /s/ Malcolm W. Sherman |
| Malcolm W. Sherman, | |
| Chief Executive Officer and | |
| Principal Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Delta International Oil & Gas Inc. (the "Company") on Form 10-Q for the nine months ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Malcolm W. Sherman, Chief Executive Officer and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| /s/ Malcolm W. Sherman | |
| Malcolm W. Sherman | |
| Chief Executive Officer and | |
| Principal Financial Officer | |
November 12, 2014 |
|
Earnings (Loss) Per Share
|
9 Months Ended |
|---|---|
|
Sep. 30, 2014
|
|
| Earnings (Loss) Per Share [Abstract] | |
| EARNINGS (LOSS) PER SHARE | 3. EARNINGS (LOSS) PER SHARE
Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net earnings by the weighted average number of common share and potential common share outstanding during the period. Potential common shares consist of outstanding common stock purchase warrants. For the three and nine months ended September 30, 2014 and 2013, there were 0, 0, 0 and 1,148,436, respectively of potentially dilutive common shares outstanding. |