DELTA MUTUAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2008 and 2007
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Delta Mutual, Inc. and subsidiaries (“Delta” or the “Company”) was incorporated in Delaware on November 17, 1999. Since 2003, its principal business activities have focused on providing environmental and construction technologies and services to certain geographic reporting segments in the Far East, Middle East and the United States.
On March 4, 2008, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the Agreement, the Company acquired from Egani all of the issued and outstanding shares of stock of Altony S.A., an Uruguayan Sociedad Anonima (“Altony”), which owns 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company (“SAHF”). At the closing of the Agreement, the Company issued 130,000,000 shares of its common stock to Egani for the purchase, from Egani, of all of the outstanding shares of stock in Altony which constituted, following such issuance, a majority of the outstanding shares of the Company’s common stock.
Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. As originally filed, the shell public company was consolidated with the acquirer as of January 1, 2007. For accounting purposes only, the transaction was treated as a recapitalization of the Company as of March 4, 2008, with Altony as the acquirer, when the consolidation of the two entities became effective. The financial statements prior to March 4, 2008 are those of Altony and reflect the assets and liabilities of Altony at historical carrying amounts. The financial statements show a retroactive restatement of Altony’s historical stockholders’ equity to reflect the equivalent number of shares issued to the owner of the subsidiary.
The principal business activity of Altony is the ownership and management of its SAHF subsidiary. SAHF has initially focused on oil and gas investments in Argentina and intends to continue its focus on the energy sector, including the development and supply of energy and alternate energy sources in Latin America and the United States.
In August 2007, SAHF signed a purchase option for a partial interest in three oil and gas concessions in Argentina. SAHF is in the process of obtaining the necessary government and environmental permits to operate these concessions. In the third quarter of 2008, SAHF agreed to exchange certain development rights it held in these concessions for ownership interests in the oil and gas production from these concessions ranging from nine to 23.5 percent.
The Company intends to continue its environmental and construction technology and service activities. Its environmental activities are conducted by its joint venture subsidiary Delta-Envirotech, Inc. (“Envirotech”), headquartered in Virginia. The construction technology activities are conducted by the Company’s wholly owned subsidiary Delta Technologies, Inc. (“Technologies”) that holds intellectual property rights and has filed a patent for a new insulating concrete wall forming (ICF) system now known as Delta Wall.
BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 2008, and the consolidated statements of operations and cash flows for the periods presented herein have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly, the financial position, results of operations and cash flows for all periods presented have been made. The information for the consolidated balance sheet as of December 31, 2007 was derived from the audited financial statements of Altony S.A. and its wholly-owned subsidiary.
The consolidated financial statements for the period ended March 31, 2008 have been prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. Management recognizes that the Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and revenue to cover expenses as the Company continues to incur losses.
The Company's business is subject to most of the risks inherent in the establishment of a new business enterprise. 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 formation of a new business, raising operating and development capital, and the marketing of a new product. There is no assurance the Company will ultimately achieve a profitable level of operations.
The Company presently does not have sufficient liquid assets to finance its anticipated funding needs and obligations. The Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and achieve a level of sales adequate to support its cost structure. Management is actively seeking additional capital to ensure the continuation of its current activities and complete its proposed activities. However, there is no assurance that additional capital will be obtained or that the Company’s subsidiaries will be profitable. These uncertainties raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.
SIGNIFICANT ACCOUNTING POLICIES
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 common stock. The consolidated financial statements also include the accounts of any Variable Interest Entities ("VIEs") where the Company is deemed to be the primary beneficiary, regardless of its ownership percentage. All significant intercompany balances and transactions with consolidated subsidiaries are eliminated in the consolidated financial statements. Where the Company's ownership interest is less than 100 percent, the minority ownership interests are reported in the consolidated balance sheet as a liability. The minority ownership interest of the Company's earnings or loss, net of tax, is classified as "Minority interest share of income (loss) of consolidated subsidiaries" in the consolidated statements of operations.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
LOSS PER SHARE
Basic and diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. Potential common shares are excluded from the loss per share calculation because the effect would be antidilutive. Potential common shares relate to the convertible debt, stock options and common stock purchase warrants. As of March 31, 2008 there were 4,421,920 potential common shares related to convertible debt and 6,998,000 potential common shares related to stock options.
REVENUE RECOGNITION
The Company recognizes revenue from the results of its investment portfolio as the difference between proceeds from the sale of securities and their acquisition cost, less commissions paid to the firm that conducts the securities transactions.
EVALUATION OF LONG-LIVED ASSETS
The Company reviews property and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable in accordance with guidance in Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." If the carrying value of the long-lived asset exceeds the present value of the related estimated future cash flows, the asset would be adjusted to its fair value and an impairment loss would be charged to operations in the period identified.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets.
STOCK-BASED COMPENSATION
The Company has a stock-based compensation plan under which stock options are granted to employees. Effective January 1, 2006, the Company accounts for stock based compensation under Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment." The Company adopted SFAS 123(R) using the modified prospective method. Under modified prospective application, this SFAS applies to new awards and to awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for the portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS 123. Changes to the grant-date fair value of equity awards granted before the required effective date of this Statement are precluded. The compensation cost for those earlier awards shall be attributed to periods beginning on or after the required effective date of this SFAS using the attribution method that was used under SFAS 123, except that the method of recognizing forfeitures only as they occur shall not be continued.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach under which deferred taxes are recognized by applying enacted tax rates applicable to future years to the differences between financial statement carrying amounts and the tax basis of reported assets and liabilities. The principal item giving rise to deferred taxes are future tax benefits of certain net operating loss carryforwards.
FOREIGN CURRENCY TRANSLATION
The functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange rate for the period. Translation adjustments in future periods will be recorded in Cumulative Other Comprehensive Income. The translation gains or losses were not material for the three months ended March 31, 2008 and 2007.
INTANGIBLES
SFAS No. 142, "Goodwill and Other Intangible Assets" specifies the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets deemed to have indefinite useful lives are not amortized but are subject to, at a minimum, an annual impairment test. If the carrying value of goodwill or intangible assets exceeds its fair market value, an impairment loss would be recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash, investments, accounts payable, accrued expenses, notes payable and convertible debt, it was assumed that the carrying amount approximated fair value because of the short maturities of such instruments.
NEW FINANCIAL ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS No. 159 ("SFAS 159") "The Fair Value Option for Financial Assets and Financial Liabilities," providing companies with an option to report selected financial assets and liabilities at fair value. The Standard's objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. The adoption of SFAS 159 on January 1, 2008 did not impact the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141(R)”) “Business Combinations,” which replaces SFAS 141 “Business Combinations.” This Statement improves the relevance, completeness and representational faithfulness of the information provided in financial reports about the assets acquired and liabilities assumed in a business combination. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. Under SFAS 141 (R), the acquisition-related costs, including restructuring costs, must be recognized separately from the acquisition and will generally be expensed as incurred. That replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141(R) shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. The Company will implement this Statement in 2009.
In December 2007, the FASB issued SFAS No.160 “Non-Controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 151” (“SFAS 160”). SFAS 160 established new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this Statement requires the recognition of non-controlling interests (minority interests) as equity in the consolidated financial statements and separate from parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership in a subsidiary that does not result in deconsolidation, are equity transactions if the parent retains its controlling financial interest. In addition, this Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment as of the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interest of the parent and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods other than fiscal years, beginning on or after December 2008. The Company is currently evaluating the impact of the adoption of this Statement on its financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” an amendment of FASB Statement No. 133 (“SFAS No. 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not believe that SFAS No. 161 will have a material impact on its financial statements.
2. INVESTMENTS
The Company has investments in public and private securities of the United States and Latin American countries as well as long-term investments in oil and gas concessions. The fair market value of these investments at March 31, 2008 and December 31, 2007 is indicated below.
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Public securities | | $ | — | | | $ | 322,300 | |
| Private securities | | | 2,409,596 | | | | 5,556,720 | |
| Current investments | | | 2,409,596 | | | | 5,879,020 | |
| | | | | | | | | |
| Oil and gas concessions | | | 2,300,000 | | | | 1,130,000 | |
| | | | | | | | | |
| | | $ | 4,709,596 | | | $ | 7,009,020 | |
3. PROPERTY AND EQUIPMENT
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Equipment | | $ | 455,035 | | | $ | — | |
| Deposits on land | | | — | | | | — | |
| Leasehold improvements | | | 7,807 | | | | — | |
| | | | 462,842 | | | | — | |
Less accumulated depreciation | | | 105,927 | | | | — | |
| | | | | | | | | |
| | | $ | 356,915 | | | $ | — | |
Depreciation expense for the three months ended March 31, 2008 amounted to $11,208.
4. INTANGIBLE ASSETS
Intangible assets are intellectual property included in a patent application. If the patent is not issued, the Company will write-off the unamortized amounts immediately. Amortization expense was $1,788 for the three months ended March 31, 2008. Other intangible assets consist of the following:
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Gross Carrying Amount | | $ | 143,000 | | | $ | — | |
| | | | | | | | | |
| Accumulated Amortization | | | 18,471 | | | | — | |
| Intellectual property costs | | $ | 124,529 | | | $ | — | |
Estimated amortization expense for intangible assets for the next five years is as follows:
| Estimated | | | |
| Year Ending | | Amortization | |
| December 31, | | Expense | |
| 2008 | | | 5,364 | |
| 2009 | | | 7,150 | |
| 2010 | | | 7,150 | |
| 2011 | | | 7,150 | |
| 2012 | | | 7,150 | |
2008 represents amortization from April 1, through December 31, 2008.
5. INVESTMENT IN JOINT VENTURES
| a. | In December 2003, the Company formed a joint venture to develop Section 124, low income housing in the Commonwealth of Puerto Rico. The Company became the general partner and 75% majority owner of a limited partnership, Delta Development Partners, LP that owned the 85% majority share of Delta Developers Corp., a Puerto Rico corporation, formed to manage the construction and related activities required to build approximately 270 homes under Section 124. During the year ended December 31, 2006, the activities associated with this joint venture were discontinued. |
In October 2004, the Company formed a second joint venture to develop Section 124 low income housing in Puerto Rico. The Company became the general partner and majority owner of a limited partnership, Delta Development Partners II, LP that owned the 85% majority share of Delta Developers Guayanilla Corp., a Puerto Rico corporation formed to manage the construction and related activities required to build approximately 300 homes under Section 124. During the first quarter of 2007, the activities associated with this joint venture were discontinued and the land deposit was returned to the joint venture.
In November 2006, the Company entered into a new joint venture to develop Section 124 housing in Puerto Rico. The Company became the general partner and 35% minority owner of limited partnership, Delta TA, LP formed to manage the construction and related activities to build approximately 338 residential units under the Section 124 program. As of the quarter ended September 30, 2007, the Puerto Rico housing development activities associated with this partnership were discontinued.
| b. | On January 14, 2004, the Company entered into a joint venture agreement with Hi-Tech Consulting and Construction, Inc. (“Hi- Tech”) forming Delta-Envirotech, Inc. for the purpose of providing environmental technologies and services to markets in the Middle East. The joint venture company is based in Virginia and focuses on participating in foreign government sponsored pollution remediation and other projects. |
In July 2004, the Company and Hi-Tech, pursuant to an agreement to purchase stock dated January 14, 2004, each sold 75 shares of the joint venture to a third party, representing a ten percent (10%) interest for $2. The Company and Hi-Tech each own forty-five percent (45%) of the joint venture.
Delta-Envirotech, Inc. meets the definition of a Variable Interest Entity as defined in Financial Accounting Standards Board Interpretation No. 46 (FIN 46),"Consolidation of Variable Interest Entities" requiring the primary beneficiaries of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs the majority of the expected losses of the entity or receives a majority of the entity's expected residual return, or both, as a result of ownership, contractual or other financial interest in the entity.
| c. | Minority interests primarily consist of outside investors ownership interest in Delta Development Partners, L.P.; Delta Development Partners II, L.P.; Delta TA, LP; Delta Developers Corp.; Delta Developers Guayanilla Corp.; Delta-Envirotech, Inc. and PT Triyudha– Envirotech. |
The income and losses from operations of these entities and their respective minority interests have been reflected in the Company's statement of operations for the three months ended March 31, 2008. There are excess losses not absorbed by the minority interests due to limitations of their capital contributions. In future periods, the profits first attributable to the minority interests will be first absorbed against any unused losses until the losses are fully absorbed. The amount on the Company's consolidated balance sheet represents the minority interests as of March 31, 2008.
The following represents a schedule of minority interests as of:
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| Delta Development Partners L.P. | | $ | 81,966 | | | $ | — | |
| Delta Development Partners II, L.P. | | | 36,739 | | | | — | |
| Delta TA L.P. | | | 106,871 | | | | — | |
| Delta Developers Corp. | | | — | | | | — | |
| Delta Developers Guayanilla Corp. | | | — | | | | — | |
| Delta-Envirotech, Inc. | | | — | | | | — | |
| PT Triyudha - Envirotech | | | — | | | | — | |
| | | | | | | | | |
| | | $ | 225,576 | | | $ | — | |
6. NOTES PAYABLE
In April 2005, the Company issued three 8% term notes to private investors in the amount of $210,655, with the principal and interest due at maturity on October 2, 2005. Pursuant to note modification agreements, the maturity dates of these notes were extended and in June 2006 these notes became payable on written demand by the lenders. In March 2008, the Company paid $60,000 of the principal amount of the original notes and each of the three notes was amended and restated. By amendment, the noteholders waived all of the accrued and unpaid interest on the original notes and the aggregate principal amount was reduced to $150,655. The amended and restated notes bear interest of 8% and mature in November 2008. Interest expense for the three months ended March 31, 2008 amounted to $(36,856). As of March 31, 2008, accrued interest of $1,004 is included in accrued expenses on the Company's consolidated balance sheet.
In May 2006, the Company borrowed $30,000 from an investor (formerly a related party) at interest of 6% per annum with the principal and interest due on May 17, 2008. In May 2008, the note was amended extending the maturity date to August 2008. Interest expense for the three months ended March 31, 2008 amounted to $450. As of March 31, 2008 accrued interest of $3,372 is included in accrued expenses on the Company's consolidated balance sheet.
In August 2007, the SAHF borrowed $2,300,000 from Oxipetrol-Petroleros de Ocidente, S.A. in conjunction with its investment in oil and gas concessions. This is a non interest-bearing loan that matures on July 15, 2008. The principal amount of $2,300,000 is included in Notes payable on the Company’s consolidate balance sheet at March 31, 2008 and December 31, 2007.
7. CONVERTIBLE DEBT
During the year ended December 31, 2004, the Company issued convertible notes in the principal amounts of $961,400. The convertible notes had interest rates from 4% to 6% and matured at various dates between May 12, 2006 and January 16, 2007. These notes are convertible into common stock at a conversion price of $0.05 to $0.125 per share. One note, in the original principal amount of $129,160 that originally matured in May 2006 was amended during 2006 and 2007 extending the maturity date until June 2008. After partial conversion of the principal amount of this note in July 2006, and the payment of accrued interest in March 2007, the remaining principal amount and all accrued interest was converted into 1,491,886 shares of common stock in April 2008. Another note, in the principal amount of $193,740 that originally matured in May 2006 was amended during 2006 and 2007 extending the maturity date to December 1, 2007. The Company did not repay the note on the maturity date but the holder of this note has verbally agreed not to make written demand for payment. The Company is currently negotiating amended terms with the noteholder. If the Company and the noteholder can not agree upon an amendment to the note, including an extension of the maturity date, the Company may receive a notice of default. One note issued by the Company in the principal amount of $60,000, became payable upon written demand by the lender in September 2006. The balance of the convertible notes issued in 2004 was converted into 12,923,280 shares of common stock through March 31, 2008.
In connection with the issuance of the convertible notes, the Company issued 8,880,000 common stock purchase warrants at an exercise price of $0.10 per share. The warrants expired March 31, 2006.
The Company accounted for the warrants and the convertible debt with detachable warrants in accordance with Emerging Issues Task Force 00-27 and 00-19 and SFAS No. 33. The Company performed calculations allocating the proceeds of convertible debt with detachable warrants to each respective security at their fair values. The Company used the conversion value of the convertible debt and calculated fair value of the warrants using the Black-Scholes valuation model for its estimate of fair value. The Company compared the allocated proceeds of the convertible debt to the difference between its conversion value and face amount. The calculated fair value of the convertible debt of $722,855 was recorded as the value of the Beneficial Conversion Feature and accordingly credited to Additional Paid-in Capital. The value of the warrants of $235,545 was recorded as a reduction of the convertible debt. The convertible debt was recorded at zero. The convertible debt was accreted to its face value after 2004, 2005 and 2006 conversions, under the interest method per APB 21, until it either converted or matured.
In May 2006, the Company issued a convertible note to a related party in the principal amount of $16,000, bearing interest at 6% per annum. The note was convertible into common stock at a conversion price of $0.06 per share, the fair value at the date of issuance. The note matured on November 3, 2007 and upon maturity the Company issued 266,667 shares of common stock in payment of the principal amount and 24,000 shares of common stock in payment of $1,440 of accrued interest.
During the first quarter of 2007, the Company issued a convertible note to a related party in the principal amount of $17,000, and a convertible note to an investor in the principal amount of $266,000. Both notes bear interest of 6% per annum and are convertible into common stock at a conversion price of $0.05 per share, the fair value at the date of issuance. Both notes matured in April 2008. In conjunction with the issuance of these two notes, the Company reclassified $266,000 recorded as deferred stock purchase, on its consolidated balance sheet as of December 31, 2006, to convertible notes at March 31, 2007. On October 30, 2007, the holder of the $266,000 note converted the principal amount of the note into 5,320,000 shares of common stock and waived all accrued interest. In April 2008, the Company issued 340,000 shares of common stock in payment of the principal amount of the $17,000 note and issued 20,400 shares of common stock in payment of the accrued interest of $1,020.
In April 2007, the Company issued a convertible note to a related party in the principal amount of $26,600 bearing interest of 6% per annum and convertible into common stock at the conversion price of $0.05 per share, the fair value at the date of issuance, with a maturity date of April 9, 2008. On the maturity date, the Company issued 532,000 shares of common stock in payment of the principal amount and 31,920 shares of common stock in payment of the accrued interest of $1,596.
During the second and third quarters of 2007, the Company borrowed $550,000 from an investor pursuant to the terms of a convertible promissory note with a maturity date of May 2008; interest of 10% per annum; and convertible into common stock at the conversion price of $0.05 per share, the fair value at the date of issuance. In September 2007, the investor converted the principal amount of the note into 11,000,000 shares of common stock and waived all accrued interest.
At March 31, 2008, the Company's outstanding convertible notes were convertible into 4,421,920 shares of common stock.
The following table shows the maturities by year of total face amount of the convertible debt obligations at March 31, 2008:
For the three months ended March 31, 2008, the Company recorded interest expense of $3,591. As of March 31, 2008, accrued interest of $43,249 is included in accrued expenses on the Company's consolidated balance sheet.
8. ACCRUED EXPENSES
Accrued expenses consists of the following:
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| Professional fees | | $ | 49,257 | | | $ | — | |
| Interest expense | | | 48,230 | | | | — | |
| Payroll expense | | | 494,661 | | | | — | |
| Payroll expense-officers | | | 126,061 | | | | — | |
| Payroll tax expense | | | 38,614 | | | | — | |
| Accrued consulting fees | | | 144,000 | | | | — | |
| Other accrued expenses | | | 382,859 | | | | — | |
| | | $ | 1,283,682 | | | $ | — | |
9. LOANS FROM RELATED PARTIES
In March 2008, the Company borrowed $121,000, in the aggregate, from two stockholders of the Company, with interest of 6% per annum and the principal and interest due on September 6, 2008. The balance due to the stockholders is included in Notes Payable on the Company’s consolidated balance sheet at March 31, 2008. Accrued interest of $605 is included in accrued expenses on the Company’s consolidated balance sheet at March 31, 2008.
10. OTHER RELATED PARTY TRANSACTION
The Company's subsidiary, Delta-Envirotech, Inc. ("Envirotech") pays monthly office rent to David Razmara, the president of Envirotech and a stockholder of the Company, in the current amount of $2,000. The rent expense for the three months ended March 31, 2008 amounted to $6,000.
11. STOCKHOLDERS' EQUITY
The Company issues shares of common stock for services and repayment of debt and interest valued at fair market value at time of issuance.
a. For the three months ended March 31, 2008, the Company issued 10,000,000 shares of common stock for services valued at $200,000, valued at $0.02 per share.
b. For the three months ended March 31, 2008, the Company did not issue any shares of common stock for payment of debt or accrued interest.
12. DISCONTINUED OPERATIONS
As of September 30, 2007, the Company adopted a formal plan to discontinue all its operations in Puerto Rico. As a result of the Company’s decision, the operations of Delta Development Partners, LP; Delta Developers Corp.; Delta Development Partners II, LP; Delta Developers Guayanilla Corp., and Delta TA, LP have been classified as discontinued operations. The assets and liabilities, results of operations, and cash flows of these discontinued operations have been included with the operations of the Company in its consolidated financial statements due to the immaterial nature of the transactions.
13. BUSINESS SEGMENT INFORMATION
The Company’s reporting business segments are geographic and include the Far East (Indonesia), the Middle East, North America (United States) and South America. The Company formerly operated in a fifth reporting segment, Puerto Rico. The primary criteria by which financial performance is evaluated and resources allocated are revenue and operating income.
The following is a summary of key financial data:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Total Revenue: | | | | | | |
| | | | | | | |
| North America | | $ | — | | | $ | — | |
| Indonesia | | | — | | | | — | |
| Middle East | | | — | | | | — | |
| Puerto Rico | | | — | | | | — | |
| South America | | | (2,060,953 | ) | | | (483,523 | ) |
| | | $ | (2,060,953 | ) | | $ | (483,523 | ) |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| North America | | $ | (554,371 | ) | | $ | — | |
| Indonesia | | | (8,988 | ) | | | — | |
| Middle East | | | (38,006 | ) | | | — | |
| Puerto Rico | | | (313 | ) | | | — | |
| South America | | | (2,060,975 | ) | | | (481,911 | ) |
| | | $ | (2,662,653 | ) | | $ | (481,894 | ) |
14. INCOME TAXES
The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainties in Income Taxes,” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no adjustment in the net liability for unrecognized income tax benefits.
15. SHARE BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123(R) "Share-Based Payment," requiring the recognition of compensation expense in the Consolidated Statements of Operations related to the fair value of its employee share-based options and awards. SFAS No. 123(R) revises SFAS No. 123 "Accounting for Stock-Based Compensation" and supercedes APB Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123(R) is supplemented by SEC Staff Accounting Bulletin ("SAB") No.107 "Share-Based Payment." SAB No.107 expresses the SEC staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations including the valuation of share-based payment arrangements.
The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective contractual terms, net of estimated forfeitures. The Company has selected the modified prospective method of transition; accordingly, prior periods have not been restated. Prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25, and related interpretation in accounting for its stock-based compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants.
At March 31, 2008, the Company had one share-based compensation plan, which is described below. During the three months ended March 31, 2008, the adoption of SFAS No.123(R) resulted in an aggregate pretax compensation expense recognized in net loss for stock based compensation of $196,745. For the three months ended March 31, 2008, the aggregate pretax compensation expense caused basic and diluted earnings per common share to decrease by $-0- per share.
The Company also issues shares of its common stock to non-employees as stock-based compensation. The Company accounts for the services using the fair market value of the services rendered. For the three months ended March 31, 2008, the Company issued 10,000,000 shares and recorded compensation expense of $200,000 in conjunction with the issuance of these shares.
Stock Option Plan
In December 2001, the Company's stockholders approved the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant to which 2,000,000 shares of common stock were reserved for issuance. In August 2004, the Company's stockholders approved the 2004 Stock Option Plan (the "2004 Plan"), pursuant to which 10,000,000 shares of common stock were reserved for issuance. As of March 31, 2008, there were 3,002,000 shares of common stock available for issuance under the 2004 Plan.
The Company was also authorized to issue shares of stock to its employees from its 2001 Plan. The Company expensed the issuance of stock awards in accordance with SFAS No. 123. Shares issued from the 2001 Plan were expensed at the time of issuance, as the stock issued had no restrictions to the employees.
The Company did not issue any stock options to its employees during the three months ended March 31, 2008.
A summary of the option activity under the 2004 Plan as of December 31, 2007 and changes during the three months ended March 31, 2008, is presented below.
| Options | | Shares | | | Weighted-Average Exercise Share Price | | | Weighted- Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | |
| Outstanding at January 1, 2008 | | | 7,978,000 | | | $ | 0.11 | | | | | | | |
| Options granted | | | - | | | $ | - | | | | | | | |
| Options exercised | | | - | | | $ | - | | | | | | | |
| Options cancelled/expired | | | (980,000 | ) | | $ | 0.11 | | | | | | | |
| | | | | | | | | | | | | | | |
| Outstanding at March 31, 2008 | | | 6,998,000 | | | $ | 0.11 | | | | 3.2 | | | $ | (419,880 | ) |
| | | | | | | | | | | | | | | | | |
| Exercisable at March 31, 2008 | | | 6,998,000 | | | $ | 0.11 | | | | 3.2 | | | | — | |
Stock compensation expense applicable to stock options for the three months ended March 31, 2008 was approximately $196,745. The aggregate intrinsic value of options outstanding as of March 31, 2008 and December 31, 2007 was $(419,880) and $(718,020), respectively.
At March 31, 2008, there was $1,212,525 of total unrecognized compensation cost related to share-based compensation arrangements granted under the 2004 Plan. The cost is expected to be recognized over a weighted average period of 3.2 years.
16. COMMITMENTS AND CONTINGENCIES
Consulting Agreements
In August 2005, Delta Technologies, Inc. entered into a consulting agreement with Richard F. Straub, Jr. ("Straub") for a period of three years, to provide ongoing technical assistance and support in the production of Technologies' insulating concrete wall forming products.
For the three months ended March 31, 2008, consulting fees of $13,200 have been expensed and $79,167 of the stock value associated with the issuance of shares to Straub is included in accrued expenses on the Company's consolidated balance sheet.
17. SUBSEQUENT EVENTS
| a. | In April 2008, the Company issued 924,320 shares of common stock as payment of $43,600 principal amount and accrued interest, pursuant to two convertible notes issued by the Company in April 2007. Also in April 2008, the Company issued 1,491,885 shares of common stock as payment of $100,000 principal amount and accrued interest pursuant to a convertible note issued by the Company in May 2004. |
| b. | In April 2008, the Company issued 550,000 shares of common stock to a consultant for services valued at $38,500, at a price per share of $0.07. |
| c. | During the second quarter of 2008, the Company borrowed $46,450, in the aggregate, from two stockholders of the Company pursuant to 6% promissory notes maturing in October and November 2008. |
18. RESTATEMENT
The balance sheet as of December 31, 2007 has been restated to reflect the reverse merger as of March 4, 2008. The following table reflects the historical balance sheet of the acquired company in the reverse acquisition.
| Balance Sheet | | | | | | | | Adjusted | |
| As filed | | | | | | | | Balance Sheet | |
| December 31, 2007 | | | | | Adjustments (1) | | | December 31, 2007 | |
| | | | | | | | | | |
| ASSETS | | | | | | | | | |
| Current Assets: | | | | | | | | | |
| Cash | | $ | 57,633 | | | | (57,633 | ) | | $ | - | |
| Investments | | | 4,709,020 | | | | 1,170,000 | | | | 5,879,020 | |
| Prepaid expenses | | | 1,914 | | | | (1,914 | ) | | | - | |
| | | | | | | | | | | | | |
| Total Current Assets | | | 4,768,567 | | | | | | | | 5,879,020 | |
| | | | | | | | | | | | | |
| Property and equipment -net | | | 368,123 | | | | (368,123 | ) | | | | |
| Intangible asset | | | 126,317 | | | | (126,317 | ) | | | | |
| Investments in oil and gas concessions | | | 2,300,000 | | | | (1,170,000 | ) | | | 1,130,000 | |
| Other assets | | | 650 | | | | (650 | ) | | | - | |
| | | | | | | | | | | | | |
| TOTAL ASSETS | | $ | 7,563,657 | | | | | | | $ | 7,009,020 | |
| | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | |
| Accounts payable | | $ | 412,922 | | | | (173,370 | ) | | $ | 239,552 | |
| Accrued expenses | | | 1,225,674 | | | | (1,225,674 | ) | | | - | |
| Convertible debt | | | 397,340 | | | | (397,340 | ) | | | - | |
| Notes payable | | | 2,540,655 | | | | (240,655 | ) | | | 2,300,000 | |
| | | | | | | | | | | | | |
| Total Current Liabilities | | | 4,576,591 | | | | | | | | 2,539,552 | |
| | | | | | | | | | | | | |
| Minority interests in consolidated subsidiaries | | | 225,797 | | | | (225,797 | ) | | | - | |
| | | | | | | | | | | | | |
| Stockholders' Equity: | | | | | | | | | | | | |
| Common stock $0.0001 par value - authorized 250,000,000 shares; 218,882,953 and 208,882,953 outstanding, respectively | | | 20,888 | | | | (7,888 | ) | | | 13,000 | |
| Additional paid-in capital | | | 11,953,766 | | | | (9,366,766 | ) | | | 2,587,000 | |
| Accumulated deficit | | | (9,213,385 | ) | | | 11,082,853 | | | | 1,869,468 | |
| | | | | | | | | | | | | |
| Total Stockholders' Equity | | | 2,761,269 | | | | | | | | 4,469,468 | |
| | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 7,563,657 | | | | | | | $ | 7,009,020 | |
| (1) | To reflect the elimination of the parent company at December 31, 2007 as the merger was not consumated until March 4, 2008. |
