Item 1. Business.
Unless the context otherwise requires, the terms the “Company", “Delta”, "we," "our" and "us" refers to Delta International Oil & Gas Inc., and, as the context requires, its consolidated subsidiaries.
Background
Delta 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.
The primary focus of the Company’s business is its South America Hedge Fund LLC (“SAHF”) subsidiary, which has investments in oil and gas concessions in Argentina and focuses on the energy sector in Latin America, and the development and supply of energy and alternative energy sources in Latin America and North America. Dr. Daniel R. Peralta, who died in November 2012, was responsible for initiating our efforts to acquire and develop oil and gas concessions in Argentina as our President and Chief Executive Officer, director, and major stockholder. 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.
Effective March 4, 2008, we acquired 100% of the issued and outstanding membership interests in 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 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258. Our telephone number is (480)483-0420. Our common stock is quoted on the Over-the-Counter Electronic Bulletin Board under the symbol "DLTZ".
General
We are an 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.
Business Strategy
We are currently evaluating the acquisition of oil and gas properties and securing additional concessions in Argentina and other locations which either are producing economical quantities of oil and gas or which demonstrate favorable characteristics for well “workovers” with a history of excellent production. It is the goal of the Company to target these concessions as compared to concessions which will be exploratory and would require drilling new wells.
We have over the past several years reviewed, and we are continuing to review, possible acquisitions of other oil and gas producing companies in Argentina. In late July, 2013 Delta began negotiations under a confidentiality agreement with the management of a private oil and gas company in Argentina that was interested in selling an entire property of 63 producing wells, which were in partnership with other companies. We proceeded with consultants to ascertain the value of this projected acquisition and retained an audit firm to do the initial due diligence as to the financial condition of the company, as well as reservoir engineers and geologists. After several months of due diligence we made an offer, subject to completion of due diligence, to acquire all of the stock of the company, which was held by five stockholders. In January 2014, an escrow agreement requiring confidentiality was signed by the parties. We provided a financing commitment for the funds necessary to purchase the properties, following which we were notified by the seller’s representative of the failure to obtain the signatures of two of the five stockholders who had previously agreed to sign and that our offer had been overbid. While we regret the failure of this negotiation to ultimately result in a property acquisition, we were gratified that the financial markets were receptive to our needs for financial support. We continue actively to review other potential acquisitions.
Specifically, we have focused, and plan to continue to focus, on the following investments in South America.
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 31, 2013 the SAHF participations in the Argentina concessions are as follows:
*
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 canons, 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.
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. The San Salvador and Lebertador concessions have since been awarded by the government to another party. Pursuant to a separate Agreement dated March 31, 2012, we 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, which was paid in 2012 and which still requires the written release by Maxipetrol trust to be documented and filed in the Minister's office by SAHF. PPL has also agreed in an Undertaking to provide funds to the operating entities of Valle de Lerma and Selva Maria, in the aggregate amount of up to $10,000,000 (Selva Maria is 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.
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.
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, who purchased 60% of the ownership in the Tartagal and Morillo oil and gas concessions, and has invested approximately $60 million to date on geological studies, 2D and 3D seismic surveys on both blocks and two work-over drills and an exploratory well drill in Tartagal. Production from the two Campo Alcoba test wells commenced in 2011 and continued into the 2012 second quarter, and then shut down due to large quantities of water in the oil. A work over of one the two previously reopened wells is planned, and currently an analytic test to drill one more exploratory well is planned by the major partner.
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, a decision will be made as to further drilling.
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, and we sold 50% of that interest to PPL in 2012.
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 2015. 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. Our partner that owned 80% of the concession sold its share to another firm, which is evaluating whether to proceed further with investments in this concession.
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 Valle de Lerma block is located in the province of Salta in the northwestern region of Argentina and has an area of 5259 km2. SAHF has done the measurement and survey study and filed an environmental impact study, which was approved. Upon completion of the study it was determined that the actual well site was within the boundaries of the City of Salta, where government restrictions do not allow oil to be produced from this site. We are currently negotiating with the government to add an additional site to the concession area from among three sites adjacent to the concession area with similar wells. When the extension of the concession area is accomplished, we will commence work on the new site, following receipt of all government approvals. 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 will commence the Valle de Lerma 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.
Development of the block by the Company and its partners would be with 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 60% of the rights to explore Valle de Lerma; Grasta owns 5%; PetroNEXUX owns 30%; and Remsa owns 5%.
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 paid in full and a current Board Resolution appointed Mr. Mac Mullen from SAHF as a new Cruz del Norte Board Member. The outstanding partial rights of SAHF are dully registered to the IGJ (Government Regulatory Entity). A contract with NOA, a service company, was entered into for NOA to advise us of the expected costs to rehabilitate the plant. Due to required rehabilitation work, currently this refinery is not being operated to produce gasoline or diesel fuel.
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.
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 did 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. In January, 2014, this trust agreement with Maxipetrol was canceled and SAHF’s ownership of that certain 9% interest was and is no longer bound by the trust agreement. SAHF has free and clear title to the property, subject to a possible sale.
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 has been appointed as Chief Operating Officer (COO) of the project. 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. We are actively seeking a partner or buyer to take over the development of this property.
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.
Because of the location and height, the window for the government’s construction of a road, further work is currently on hold until next summer, when the government is expected to complete the road.
SAHF is still exploring several options to arrange partnership interests with other firms to exploit the Cachi and lithium properties or to sell the concessions.
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.
Reserve Reports for the Properties
The Company 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 are traded freely and on a transaction by transaction 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.
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 title requirements for 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.
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 exploration and production 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 government’s 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.
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 as a part of 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 its producing license for oil and gas on April 29, 2011. Our partners in the joint ventures that SAHF 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 to arrange partnership interests with other firms to exploit the properties or to sell the concessions. Once management has made a decision, the appropriate licenses will be acquired by either SAHF or its partners in the respective joint ventures.
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 October 13, 2011, the Argentine government launched a series of regulations in order to control the sale of foreign currency. The measures were aimed at slowing 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.
In January 2014, the government devalued the Argentine peso to the greatest extent since 2002, the year the government abandoned a one-to-one peg with the U.S. dollar following a record $95 billion default. Exchange control restrictions were eased following the January 2014 devaluation.
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 three management employees: Malcolm W. Sherman, President and Chief Executive Officer, and Pablo Peralta and a SAHF employee as operations Managers. 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 can exceed 70, depending on the size of the project.
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.
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.
International operations, and in particular in Argentina, expose us to political, economic and currency risks.
With regard to our investments in oil and gas concessions located in Argentina, we are subject to the risks of doing business abroad, including,
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Currency fluctuations;
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Changes in tariffs and taxes; and
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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.
Argentina has devalued its currency, the peso, in 2002 and in 2014. We believe that the effect on oil and gas production operations will be basically to increase an operator’s costs and thereby lower its profitability.
In addition, 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 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.
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:
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delays imposed by or resulting from compliance with regulatory requirements;
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pressure or irregularities in geological formations;
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shortages of or delays in obtaining qualified personnel or equipment, including drilling rigs and CO2;
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equipment failures or accidents; and
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adverse weather conditions, such as freezing temperatures, hurricanes and storms.
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:
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the exploitation of our oil and gas concessions as governed by the terms of the concession agreements;
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royalties, canons and landlord fees;
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production permits;
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discharge permits for drilling operations;
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drilling bonds;
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reports concerning operations;
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the spacing of wells;
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unitization and pooling of properties; and
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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.
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:
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worldwide and domestic supplies of crude oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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political conditions and events (including instability or armed conflict) in crude oil or natural gas producing regions;
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the level of global crude oil and natural gas inventories;
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the price and level of foreign imports;
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the price and availability of alternative fuels;
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the availability of pipeline capacity and infrastructure;
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the availability of crude oil transportation and refining capacity;
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weather conditions;
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domestic and foreign governmental regulations and taxes; and
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the overall economic environment.
Significant declines in crude oil and natural gas prices for an extended period may have the following effects on our business:
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limiting our financial condition, liquidity, and ability to finance planned capital expenditures and results of operations;
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reducing the amount of crude oil and natural gas that can be produced economically;
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causing us to delay or postpone some of our capital projects;
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reducing our revenues, operating income and cash flows;
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reducing the carrying value of our investments in crude oil and natural gas properties; or
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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.
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.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
As of December 31, 2013, our principal assets included Partial Rights Ownership in five oil and gas properties.
*
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 canons or landlord fees of any kind. In the exploratory areas, Guemes proportional exploratory canons were paid as explained in the financials. Surface canons were not paid due to the lack of surface operations 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 in 2010 to access the drilling site.
Executive Offices
Effective March 1, 2013, we entered into a two-year lease for our new executive offices, at a net monthly rental of $2,180, located at 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258. We anticipate that this office space will accommodate our operations for the next several years.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
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.
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 March 31, 2014, there were approximately 96 record holders of our common stock.
The following table sets forth the unreported sales of unregistered securities by the Company in the year ended December 31, 2010.
(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, 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.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
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
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 is engaged 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. We are currently evaluating the acquisition of oil and gas properties and securing additional concessions in Argentina and other locations which either are producing economical quantities of oil and gas or which demonstrate favorable characteristics for well “workovers” with a history of excellent production. It is the goal of the Company 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. 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.
Our Oil and Gas Properties
Specifically, we have focused, and plan to continue to focus, on the following oil and gas investments in Argentina:
We hold a 60% interest in the Valle de Lerma concession in Northern Argentina, which we plan to operate in a joint venture agreement with Grasta SA, a local mid-size gasoline refinery located in Buenos Aires. Other partners in the block include PetroNEXUS and REMSA. We have been actively working in 2012 and 2013 to finalize all governmental approvals for an alternate drilling site, and will commence the Valle de Lerma 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.
As of December 31, 2013, 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 and a 10% concession interest in the carryover mode in the Jollin and Tonono oil and gas concessions, all of which properties are located in Northern Argentina. We do not operate either of these concessions, and have minority positions in respective the joint ventures. The joint ventures are currently developing future plans for continuing the exploration of the concessions.
As of December 31, 2013, SAHF owns 20% of 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.
Caimancito Refinery
We owned at December 31, 2013, 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.
Lithium Production 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO THE YEAR ENDED DECEMBER 31, 2012
During the year ended December 31, 2013, we had a net loss of $87,107 compared to net income of $5,043,149 for the year ended December 31, 2012. Net income for the year ended December 31, 2012 is significantly higher as compared with the current year primarily due to the gain on the sale of certain bidding rights to PPL in fiscal 2012.
During the year ended December 31, 2013 our loss from operations was approximately $816,477,­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ compared to a net loss from operations of approximately $1,361,718 in 2012, due to a higher level of general and administrative expenses in 2012.
LIQUIDITY
At December 31, 2013, we had a working capital surplus of approximately $5.0 million, compared with a working capital surplus of approximately $4.2 million at December 31, 2012.
At December 31, 2013, we had total assets of approximately $7.2 million compared to total assets of approximately $8.3 million at December 31, 2012. Net cash used in operating activities in the year ended December 31, 2013 was approximately $243,000, as compared with approximately $1.4 million in 2012; and net cash generated from investing activities was approximately $384,000 in 2013, as compared with cash generated of approximately $3.0 million in 2012. Net cash used by financing activities was approximately $563,000 in the year ended December 31, 2013, compared to $50,000 in 2012.
Effective March 30, 2012, we entered into the Cooperation Agreement with Principle Petroleum Ltd. (“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, 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, which was paid in 2012 and which still requires the written release by Maxipetrol trust to be documented and filed in the Minister's office by SAHF. PPL has also agreed in an Undertaking to provide funds to the operating entities for several properties, including Valle de Lerma and Selva Maria, which is pending for approval from the government, and which is standard procedure in Argentina.
As part of PPL’s obligations under the Cooperation Agreement, PPL made partial payments of $2,000,000 in our 2012 first fiscal quarter, $999,979 in the second quarter and $499,979 in the third quarter towards the full amount of $7,000,000 provided under the Cooperation Agreement. Both parties are working to execute the full amount of PPL’s payment obligations as agreed. A further payment of $500,000 was made by PPL in January 2013.
Estimated 2014 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. 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, although further development efforts on this concession are dependent on the decision of the current majority working interest owner.
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 and for development of an alternate property to the Selva Maria property (which we are at the government’s request reviewing and where we would be in partnership with the government) will approximate $1,350,000. The funds for Valle de Lerma would be provided by in part by PPL (and by the other partners in the UTE) pursuant to PPL’s commitment to provide up to $10,000,000 in developmental funds for specified 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.
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.
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.
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 and recognized over the requisite service period, which is typically the vesting period. The Company uses the Black-Scholes Option Pricing Model to determine the fair-value of stock options issued for compensation.
The Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.” ASC 505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached or the date that performance is complete. Generally, our awards do not entail performance commitments. When an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
DELTA INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Delta International Oil and Gas, Inc. (formerly known as Delta Mutual, Inc.) and Subsidiaries
Scottsdale, AZ
We have audited the accompanying consolidated balance sheet of Delta International Oil and Gas, Inc. (formerly known as Delta Mutual, Inc.) and subsidiaries (collectively “the Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity, other comprehensive income (loss) and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an 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 control over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta International Oil and Gas, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
April 15, 2014
DELTA INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements
DELTA INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements
DELTA INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of the consolidated financial statements
DELTA INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
From December 31, 2011 to December 31, 2013
The accompanying notes are an integral part of the consolidated financial statements
DELTA INTERNATIONAL OILA AND GAS, INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Delta Investment 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 a filing by the Company in Delaware of a Certificate of Ownership, providing for the merger of the Company’s wholly-owned subsidiary, Delta International Oil and Gas Inc., into the Company, and in the merger, changing the Company’s name to Delta International Oil& Gas Inc.
The primary focus of the Company’s business is its South America Hedge Fund LLC (“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.
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.
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.
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, 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.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
OIL AND GAS PROPERTIES
The Company accounts for our oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Under this method, subject to a limitation based on estimated value, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including internal costs directly associated with acquisition, exploration, and development activities, the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized within a cost center. Costs of production and general and administrative corporate costs unrelated to acquisition, exploration, and development activities are expensed as incurred.
Costs associated with unevaluated properties are capitalized as oil and natural gas properties but are excluded from the amortization base during the evaluation period. When we determine whether the property has proved recoverable reserves or not, or if there is an impairment, the costs are transferred into the amortization base and thereby become subject to amortization.
The Company assesses all items classified as unevaluated property on at least an annual basis for inclusion in the amortization base. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate that there would be impairment, or if proved reserves are assigned to a property, the cumulative costs incurred to date for such property are transferred to the amortizable base and are then subject to amortization.
Capitalized costs included in the amortization base are depleted using the unit of production method based on proved reserves. Depletion is calculated using the capitalized costs included in the amortization base, including estimated asset retirement costs, plus the estimated future expenditures to be incurred in developing proved reserves, net of estimated salvage values.
Beginning December 31, 2009, full cost companies use the un-weighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date. Prior to December 31, 2009, companies used the price in effect at the end of each accounting period and had the option, under certain circumstances, to elect to use subsequent commodity prices if they increased after the end of the accounting quarter.
Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change.
IMPAIRMENT
The net book value of all capitalized oil and natural gas properties within a cost center, less related deferred income taxes, is subject to a full cost ceiling limitation which is calculated quarterly. Under the ceiling limitation, costs may not exceed an aggregate of the present value of future net revenues attributable to proved oil and natural gas reserves discounted at 10 percent using current prices, plus the lower of cost or market value of unproved properties included in the amortization base, plus the cost of unevaluated properties, less any associated tax effects. Any excess of the net book value, less related deferred tax benefits, over the ceiling is written off as expense. Impairment expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
ASSET RETIREMENT OBLIGATION
The Company records the fair value of an asset retirement cost, and corresponding liability as part of the cost of the related long-lived asset and the cost is subsequently allocated to expense using a systematic and rational method. The Company records an asset retirement obligation to reflect our legal obligations related to future plugging and abandonment of our oil and natural gas wells and gas gathering systems. The Company estimates the expected cash flow associated with the obligation and discount the amount using a credit-adjusted, risk-free interest rate. At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will update our assessment accordingly. Additional retirement obligations increase the liability associated with new oil and natural gas wells and gas gathering systems as these obligations are incurred.
PROPERTY AND EQUIPMENT
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 Company did not provide any depreciation on this equipment for the years ending December 31, 2013 and 2012, as the equipment was not yet in service.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. We follow the “sales method” of accounting for oil and natural gas revenue, so we recognize revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to our ownership in the property. Actual sales of gas are based on sales, net of the associated volume charges for processing fees and for costs associated with delivery, transportation, marketing, and royalties in accordance with industry standards. Operating costs and taxes are recognized in the same period in which revenue is earned. Severance and ad valorem taxes are reflected as a component of lease operating expense.
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
The Company evaluates uncertain tax positions pursuant to ASC Topic 740-10-25 “Accounting for Uncertainty in Income Taxes,” which allows companies to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. 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.
At December 31, 2013 and 2012, the Company has approximately $75,000 and $100,000, respectively, of liabilities for uncertain tax positions. For the year ended December 31, 2012, the Company provided $100,000 for uncertain tax positions related to its investments in Argentina. Interpretation of taxation rules relating to investments in Argentina concessions may give rise to uncertain positions. In connection with the uncertain tax position, there was no interest or penalties recorded.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
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.
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).
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 year ended December 31, 2013 and 2012, there were 9,211,517 and 8,211,517, respectively of potentially dilutive common shares outstanding.
FOREIGN CURRENCY TRANSLATION
In 2013 and 2012, 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 and recognized over the requisite service period, which is typically the vesting period. For the years ended December 31, 2013 and 2012, the Company issued 0 and 28,800 shares, respectively, and recorded compensation expense in the amount of $0 and $7,280, respectively. The Company uses the Black-Scholes Option Pricing Model to determine the fair-value of stock options issued for compensation.
The Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.” ASC 505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached or the date that performance is complete. Generally, our awards do not entail performance commitments. When an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
For the years ended December 31, 2013 and 2012, the Company granted warrants to purchase 1,000,000 and 404,868, respectively of its common stock and recorded compensation expense of $60,938 and $109,561, respectively. The Company also recorded $18,999 in additions to oil and gas properties for the year ended December 31, 2012.
FAIR VALUE OF FINANCIAL MEASUREMENTS
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820 describes three levels of inputs that may be used to measure fair value:
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, 2013, there were no financial assets or liabilities that required disclosure.
NEW FINANCIAL ACCOUNTING STANDARDS
Accounting Standards Update No. 2013-02 - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU No. 2013-02”)
ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the consolidated statements of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net earnings but only if the amount reclassified is required to be reclassified to net earnings in its entirety in the same reporting period. For amounts not reclassified in their entirety to net earnings, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. ASU No. 2013-02 is effective prospectively for the Company for annual and interim periods beginning January 1, 2013. The Company does not expect that the adoption of this update will have a material effect on its consolidated financial statements.
2. 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 entities of Valle de Lerma and Selva Maria (the San Salvador and Libertador concessions were awarded to another party, whose bid exceeded that of the Company for these concessions), in the aggregate amount of up to $10,000,000 (Selva Maria is pending for approval from the government, which is standard procedure in Argentina).
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
As of December 31, 2012, the Company had received deposits in the amount of $3,499,958 from PPL on account of remainder of the proceeds has 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.
3. INVESTMENT IN UNPROVED OIL AND GAS PROPERTIES
a) As of December 31, 2013, 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 joint venture is currently developing a future plan for continuing the exploration of the concessions.
b) As of December 31, 2013, the Company retains a 9% ownership interest in the Tartagal and Morillo oil and gas concessions located in Salta Province.
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, who purchased 60% of the ownership in the Tartagal and Morillo oil and gas concessions, and has invested approximately $60 million to date on geological studies, 2D and 3D seismic surveys on both blocks and two work-over drills and an exploratory well drill in Tartagal. Production from the two Campo Alcoba test wells commenced in 2011 and continued into the 2012 second quarter, and then shut down due to large quantities of water in the oil. A work over of one the two previously reopened wells is planned, and currently an analytic test to drill one more exploratory well is planned by the major partner.
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, a decision will be made as to further drilling.
c) 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 2015. 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. Our partner that owned 80% of the concession sold its share to another firm, which is evaluating whether to proceed further with investments in this concession.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
d) 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. SAHF has done the measurement and survey study and filed an environmental impact study, which was approved. Upon completion of the study it was determined that the actual well site was within the boundaries of the City of Salta, where government restrictions do not allow oil to be produced from this site. We are currently negotiating with the government to add an additional site to the concession area from among three sites adjacent to the concession area with similar wells. When the extension of the concession area is accomplished, we will commence work on the new site, following receipt of all government approvals. 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 will commence the Valle de Lerma 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.
Development of the block by the Company and its partners would be with 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 60% of the rights to explore Valle de Lerma; Grasta owns 5%; PetroNEXUX owns 30%; and Remsa owns 5%.
The Company evaluated these investments for impairment and concluded that no loss in value occurred as of December 31, 2013. The following table summarizes the Company’s investments in these unproved oil and gas properties. One of the Company’s oil and gas producing properties began producing during the quarter ending September 30, 2012 and was subsequently capped. No depletion was recorded for the year, as the amount was not material.
4. INVESTMENT IN OIL 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, which was paid in full as of July 6, 2012. There were no operations in the refinery during the years ended December 31, 2013 and 2012. The Company accounts for the investment under the equity method.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
The oilfield equipment has not yet been placed in service.
6. RELATED PARTY TRANSACTIONS
The Company issued notes to related parties. As of December 31, 2013 and 2012, the Company owed $-0- and $623,970, respectively, to certain directors of the Company. As of December 31, 2013 and 2012, the Company owes three shareholders $150,655. Interest expense to related parties for the years ended December 31, 2013 and 2012 amounted to $28,733 and $38,685, respectively. On May 13 and 20, 2013, the Company repaid to Malcolm Sherman, Egani, Inc. and certain other shareholders all outstanding advances by such shareholders to the Company, together with accrued interest, in the aggregate amount of $754,856.
7. DEBT
Notes Payable to Related Parties
The Company included accrued interest payable on the aforesaid notes in accrued expenses as of December 31, 2013 and 2012, respectively. On March 15, 2012, the $193,740 past due note payable and related accrued interest was settled by the agreement to pay $50,000 cash and the issuance of 475,000 shares of common stock valued at $213,750. The Company recorded a loss of $9,133 on the extinguishment of debt. Also during the three months ended June 30, 2012, the maturity dates of the past due notes to three investors in the amount of $150,655 were extended to July 2014. During the three months ended September 30, 2012, the due dates of the notes payable to stockholders and related parties were extended to December 31, 2013 and have subsequently been extended to May 1, 2013.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
8. ACCRUED EXPENSES
9. INCOME TAXES
The Company had not recognized a benefit for income taxes in the year ended December 31, 2013, since the realization of the benefit of these net operating losses carried forward is not certain in the foreseeable future. Domestic NOL carry-forwards were utilized in the computation of the provision for income taxes for the year ended December 31, 2012.
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.
At December 31, 2013 and 2012, the Company has approximately $75,000 and $100,000, respectively, of liabilities for uncertain tax positions. For the year ended December 31, 2012, the Company provided $100,000 for uncertain tax positions related to its investments in Argentina. The value of that liability in US dollars has subsequently declined due to the decline in the Argentinian Peso versus the US Dollar. There were no other adjustments to this account. Interpretation of taxation rules relating to investments in Argentina concessions may give rise to uncertain tax positions.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits arising from uncertain tax positions as a component of the current provision for income taxes. During the years ended December 31, 2013 and 2012, the Company recognized approximately $-0- and $10,000, respectively, of such interest and penalties in the consolidated statements of operations.
The Company has approximately $7,500 and $10,000 accrued for interest and penalties at December 31, 2013 and 2012, respectively, which is included in liability for uncertain tax positions in the Company’s consolidated balance sheet.
The Company’s total earnings (loss) before provision (benefit) for income taxes included earnings (loss) from domestic operations of $321,411 and $5,286,391 for 2013 and 2012, respectively, and loss from foreign operations of $(408,518) and $(243,242), for 2013 and 2012, respectively.
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
The provision (benefit) for income taxes consists of the following:
A reconciliation of taxes on income computed at the federal statutory rate to amounts provided as follows:
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
10. STOCKHOLDERS' EQUITY
Preferred Stock
As of December 31, 2013, the board of directors had not authorized the issuance of any series of preferred stock.
Common Stock
The Company has in certain cases issued 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, 2013 and 2012, the Company issued 0 and 28,800 shares, respectively, with fair values of $0 and $7,260, respectively, of its common stock to a related party for services performed. For the years ended December 31, 2013 and 2012, the Company also issued 0 and 475,000 shares, respectively, with fair values of $0 and $213,750, respectively, for the settlement of a note payable and accrued interest.
During the year ended December 31, 2013, the Company issued warrants to a related party to purchase 1,000,000 shares of its common stock at a price of $0.20 per share. The company recorded compensation expense of $60,938.
During the year ended December 31, 2012, the Company issued warrants to purchase 404,868 shares of its common stock for prices ranging from $0.20 to $0.42 per share. The warrants expire in 2019. The Company recorded compensation expense in the amount of $109,561 and additions to investments to unproved oil and gas properties in the amount of $18,999.
A summary of warrant activity is detailed below:
DELTA INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
(FORMERLY DELTA MUTUAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
11. 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 $49,352 and $88,564 for the years ended December 31, 2013 and 2012, 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.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.
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 Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e)) as of December 31, 2013, were not effective, based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15, based on a material weakness as of that date in our disclosure controls and procedures discussed below in 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 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, 2013. 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, 2013, our internal control over financial reporting is not effective due to the following material weakness. Our accounting department does not have the sophistication to critically evaluate and implement accounting principles in certain cases, and at times transactions are recorded improperly, or not recorded contemporaneously and require additional procedures and adjustments to be made by our staff and our auditors. We have implemented certain procedures related to improving the ability of our staff to properly record accounting transactions to help minimize the risks associated with this significant deficiency. Given these reportable conditions and material weaknesses, management devoted additional resources to resolving questions that arose during the period covered by this report. As a result we are confident our financial statements as of December 31, 2013, and for the two years then ended, fairly present in all material respects our financial condition and results of operations.
There have been no significant changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) ) during the fourth quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
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 the Company were as follows:
On April 25, 2013, the Board of Directors of the Company appointed Dr. Phillips W. Smith as a director of the Company to fill an existing vacancy on the Board, and to the office of Chairman of the Board.
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, and was appointed President and Chief Executive Officer on November 8, 2012, following Dr. Daniel Peralta’s death on November 7, 2012. 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.
Santiago Peralta, the eldest son of Dr. Daniel Peralta, our former President and Chief Executive Officer, was appointed to our Board of Directors on November 8, 2012. Mr. Peralta is now in business school at the Thunderbird School of Global Management and has worked extensively in Argentina with our management in the negotiations for and operations in connection with the Company’s oil properties in that country.
Dr. Phillips W. Smith, age 75, has over 35 years of experience with high technology companies serving as both chief executive officer and chairman, and in corporate officer positions at three Fortune 500 companies. In 2001, Dr. Smith brought TASER International, Inc. public through an IPO and most recently served as Chairman of TASER International, Inc. (Nasdaq: TASR) until his retirement from that position in December 2004. Dr. Smith subsequently resigned his TASER board seat in October 2006. Since then, Dr. Smith has been actively involved as an investor in start-up companies. Previously, he was Chairman and CEO of CAE Systems (sold to Tektronix Inc. for $75M in 1986), CEO and Chairman of EDGE Computer and CEO and Chairman of ZYCAD, a public company on NASDAQ, and served as Chairman of Lightwave Logic, Inc. from 2010 through 2011. Dr. Smith received his B.S. degree from West Point, an M.B.A. from Michigan State University and a PhD from St. Louis University.
AUDIT COMMITTEE
Our board of directors currently serves as our audit committee.
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 2013 all of our current officers and directors complied with the reporting requirements of Section 16(a).
Item 11.
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
(1)
Dr. Peralta was appointed President and Chief Executive Officer on January 20, 2009, and was succeeded in that position by Malcolm W. Sherman on November 8, 2012 following Dr. Peralta’s death on November 7, 2012.
EXECUTIVE COMPENSATION NARRATIVE
On April 26, 2010, the Company’s Board of Directors approved a five-year term executive employment agreement (“Employment Agreement”) between the Company and Malcolm W. Sherman, then 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, Mr. Sherman 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 term of Employment Agreement. Such bonus 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.
On December 15, 2011, the Board of Directors approved the issuance of a common stock purchase warrant to Dr. Daniel Peralta, then our Chief Executive Officer, 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
DIRECTORS' COMPENSATION IN FISCAL 2013
We compensate directors as per specific agreements with each director. Malcolm W. Sherman has not been compensated in his capacity as a director. Santiago Peralta has been compensated at the rate of $5,000 per month in his capacity as a director, commencing November 2012. We do reimburse our officers and directors for reasonable expenses incurred in the performance of their duties.
DIRECTOR COMPENSATION
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.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information, as of March 31, 2014, 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:
* Unless otherwise stated in the table, the address of each of the stockholders shown in the table is c/o Delta, 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258.
** Based on 32,338,826 shares outstanding on March 31, 2014.
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(1) Egani, Inc., of which Santiago Peralta, a director of the Company, and Pablo Peralta, his brother, each owns 50% of the outstanding stock, owns 13,000,001 shares directly. The address of Egani, Inc. is c/o Delta, 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258. Santiago Peralta owns 14,500 shares directly and holds a warrant, expiring December 14, 2018 to purchase 200,000 shares of common stock at an exercise price of $0.20 per share. Pablo Peralta owns 10,000 shares of common stock directly. Santiago Peralta and Pablo Peralta also each hold a 50% interest in 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. The address of Santiago Peralta and Pablo Peralta is c/o Delta, 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258.
(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 individually 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 85260. Mr. Sherman’s address is c/o Delta, 8655 East Via de Ventura, Suite, Scottsdale, AZ 85258.
(3) Mr. Smith holds a warrant to purchase 1,000,000 shares of common stock on or before October 31, 2018, at an exercise price of $.20 per share, vesting in equal (to the extent practicable) monthly installments over a two year period commencing November 1, 2013 with the final installment vesting October 31, 2015.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
From March 6, 2008 through November 30, 2011, Security Systems International, Inc. (SSI) and the Malcolm W. Sherman Living Trust made loans to the Company in the total amount of $525,120, of which loans $415,120 was loaned by SSI. All loans bear interest at the rate of 6% per annum and all have extended maturity dates of May 1, 2013. As of December 31, 2012, the aggregate amount of principal of and accrued unpaid interest owed by the Company on these loans was $617,729.
On May 13, 2013, the Company received the payment of the proceeds of $1,000,000 from its key-man life insurance policy of the life of Daniel R. Peralta, our former CEO. On May 15, 2013, the Company repaid to Malcolm Sherman all outstanding advances by Mr. Sherman to the Company, together with accrued interest, in the amount $628,231. Additionally, the Company repaid Santiago Peralta, a director of the Company, a total of $29,683 in repayment of principal of and interest on all of his outstanding advances to the Company, and the Company repaid Egani Inc., owned by Santiago Peralta and Pablo Peralta, all of its outstanding advances to the Company and accrued interest thereon, in the amount of $83,975.
On May 10, 2013, the Board of Directors of the Company authorized the issuance to Dr. Phillips W. Smith, who was elected on April 25, 2013 as a director of the Company with a term commencing May 1, 2013, a common stock purchase warrant expiring April 30, 2018, to purchase 1,000,000 shares of common stock of the Company at an exercise price per share of $0.20. The number of shares as to which the warrant is exercisable vests in 24 monthly installments, commencing May 31, 2013, the first 23 installments being of 41,666 shares each, and the final installment is of 41, 682 shares vesting April 30, 2015, after which date the warrant will be fully vested and exercisable as to the full 1,000,000 shares.
On November 1, 2013, our Board of Directors approved the cancellation, as of the close of business October 31, 2013, of the common stock purchase warrant issued to Phillips W. Smith, a director of the Company, dated May 13, 2013, to purchase 1,000,000 shares of common stock on or before April 30, 2018, at an exercise price of $.20 per share, vesting in equal installments over the two year period through April 30, 2015. On that same date the Board approved the issuance to Mr. Smith of a replacement warrant to purchase 1,000,000 shares of common stock on or before October 31, 2018, at the same exercise price, the replacement warrant to vest in equal (to the extent practicable) monthly installments over a two year period commencing November 1, 2013 with the final installment vesting October 31, 2015. The Company evaluated the modification of the award, and the warrant was cancelled and reissued subsequent to September 30, 2013.
Item 14.
Item 14. Principal Accountant Fees and Services
(1) Aggregate fees for the last two years:
(2) Audit related fees:
(3) Tax fees:
(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
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)(3) Exhibits
* Filed herewith
** Furnished herewith
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
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 INTERNATIONAL OIL & GAS INC.
Dated: April 15, 2014
By:
/s/ Malcolm W. Sherman
Malcolm W. Sherman
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 15, 2014.
/s/ Malcolm W. Sherman
Malcolm W. Sherman,
Chief Executive Officer and Director
/s/ Santiago Peralta
Santiago Peralta
Director
/s/ Phillips W. Smith
Phillips W. Smith
Director