SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission file number 000-30563
DELTA MUTUAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 14-1818394 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 16427 North Scottsdale Road, Suite 410, Scottsdale, AZ | 85254 | |
| (Address of principal executive offices) | (Zip Code) |
(480) 483-0420
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (Check One):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the issuer's common stock, $0.0001 par value per share, was 32,086,826 as of May 14, 2013.
DELTA MUTUAL, INC.
INDEX
| Page | |
| Part I. Financial Information | 1 |
| Item 1. Financial Statements. | 1 |
| Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012 (unaudited) | 2 |
| Consolidated Statements of Operations for the three and six months Ended June 30, 2013 and 2012 (unaudited) | 3 |
| Consolidated Statements of Cash Flows for the six months Ended June 30, 2013 and 2012 (unaudited) | 5 |
| Notes to Unaudited Consolidated Financial Statements | 6 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 9 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 14 |
| Item 4.Controls and Procedures. | 14 |
| Part II. Other Information | 14 |
| Item 6. Exhibits. | 15 |
| Signatures | 16 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
The results of operations for the three and six months ended June 30, 2013 and 2012 are not necessarily indicative of the results for the entire fiscal year or for any other period.
1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 2,201,359 | $ | 1,949,896 | ||||
| Receivable from sale of bidding rights and oil and gas properties | 3,500,042 | 4,000,042 | ||||||
| Total current assets | 5,701,401 | 5,949,938 | ||||||
| Investment in mineral properties | 160,792 | 160,144 | ||||||
| Investments in unproved oil and gas properties | 1,854,327 | 1,995,024 | ||||||
| Investment in oil refinery | 132,771 | 145,494 | ||||||
| Property and equipment | 71,540 | 76,293 | ||||||
| Other assets | 8,632 | 8,849 | ||||||
| TOTAL ASSETS | $ | 7,929,463 | $ | 8,335,743 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 22,106 | $ | 141,582 | ||||
| Accrued expenses | 128,007 | 221,809 | ||||||
| Notes payable | 75,000 | 75,000 | ||||||
| Notes payable to related parties | - | 623,970 | ||||||
| Liabilities for uncertain tax positions | 91,255 | 100,000 | ||||||
| Income taxes payable | 633,590 | 633,590 | ||||||
| Total current liabilities | 949,958 | 1,795,951 | ||||||
| Long-term debt payable to related parties | 150,655 | 150,655 | ||||||
| Total liabilities | 1,100,613 | 1,946,606 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively | - | - | ||||||
| Common stock $0.0001 par value - authorized 250,000,000 shares; 32,086,826 and 32,010,826 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively | 3,208 | 3,201 | ||||||
| Additional paid-in capital | 6,931,539 | 6,900,096 | ||||||
| Retained earnings (accumulated deficit) | 251,272 | (311,237 | ) | |||||
| Accumulated other comprehensive loss | (357,169 | ) | (202,923 | ) | ||||
| Total stockholders' equity | 6,828,850 | 6,389,137 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 7,929,463 | $ | 8,335,743 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
2
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months ending June 30, | Six Months ending June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Sales | $ | - | $ | - | $ | - | $ | 1,789 | ||||||||
| Costs and Expenses: | ||||||||||||||||
| General and administrative | 177,671 | 309,502 | 359,001 | 793,260 | ||||||||||||
| 177,671 | 309,502 | 359,001 | 793,260 | |||||||||||||
| Loss from operations | (177,671 | ) | (309,502 | ) | (359,001 | ) | (791,471 | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Foreign exchange gain (loss) | 73,386 | 205,687 | (53,544 | ) | 221,593 | |||||||||||
| Interest expense | (12,597 | ) | (12,597 | ) | (25,195 | ) | (24,915 | ) | ||||||||
| Life insurance proceeds | 1,000,249 | 1,000,249 | - | |||||||||||||
| Gain on sale of bidding right and unvevaluated oil and gas property | - | - | - | 7,244,716 | ||||||||||||
| Net other income (expense) | 1,061,038 | 193,090 | 921,510 | 7,441,394 | ||||||||||||
| Income (loss) before income taxes | 883,367 | (116,412 | ) | 562,509 | 6,649,923 | |||||||||||
| Provision for (benefit from ) income taxes | - | (13,484 | ) | - | 770,106 | |||||||||||
| Net earnings (loss) | $ | 883,367 | $ | (102,928 | ) | $ | 562,509 | $ | 5,879,817 | |||||||
| Net earnings (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.03 | $ | (0.00 | ) | $ | 0.02 | $ | 0.18 | |||||||
| Diluted | $ | 0.03 | $ | (0.00 | ) | $ | 0.02 | $ | 0.17 | |||||||
| Weighted average common shares - Basic | 32,086,826 | 32,008,967 | 32,080,528 | 31,807,145 | ||||||||||||
| Weighted average common shares - Diluted | 32,428,557 | 32,008,967 | 32,389,517 | 35,465,834 | ||||||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
3
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three Months ending June 30, | Six Months ending June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Net earnings | $ | 883,367 | $ | (102,928 | ) | $ | 562,509 | $ | 5,879,817 | |||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustment | (196,670 | ) | (256,811 | ) | (154,246 | ) | (303,607 | ) | ||||||||
| Net change in other comprehensive income (loss) | (196,670 | ) | (256,811 | ) | (154,246 | ) | (303,607 | ) | ||||||||
| Comprehensive income (loss) | $ | 686,697 | $ | (359,738 | ) | $ | 408,263 | $ | 5,576,210 | |||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
4
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months ending June 30, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from Operating Activities: | ||||||||
| Net earnings | $ | 562,509 | $ | 5,879,817 | ||||
| Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||
| Gain on sale of bidding rights and unevaluated oil and gas properties | - | (7,244,716 | ) | |||||
| Loss on settlement of note payable | - | 9,133 | ||||||
| Issuance of warrants for services | 16,250 | - | ||||||
| Issuance of common stock for services | - | 3,500 | ||||||
| Changes in operating assets and liabilities | (213,279 | ) | 747,093 | |||||
| Net cash provided by (used in) operating activities | 365,480 | (605,173 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Oil and gas properties exploration and development costs | (28,389 | ) | (313,938 | ) | ||||
| Investment in oil refinery | - | (125,460 | ) | |||||
| Purchases of furniture and equipment | - | (30,253 | ) | |||||
| Proceeds from sales of oil and gas properties and bidding rights | 500,000 | 2,999,979 | ||||||
| Investment in mineral properties | - | (6,820 | ) | |||||
| Net cash provided by investing activities | 471,611 | 2,523,508 | ||||||
| Cash flows from financing activities: | ||||||||
| Settlement of notes payable to related parties | (623,970 | ) | - | |||||
| Net cash used in financing activities | (623,970 | ) | - | |||||
| Effect of Exchange Rates on Cash | 38,342 | 38,437 | ||||||
| Net increase in cash | 251,463 | 1,956,772 | ||||||
| Cash - Beginning of period | 1,949,896 | 211,303 | ||||||
| Cash - End of period | $ | 2,201,359 | $ | 2,168,075 | ||||
| Changes in operating assets and liabilities consists of: | ||||||||
| (Increase) decrease in advances and other receivables | $ | - | $ | (1,789 | ) | |||
| (Increase) decrease in other assets | - | - | ||||||
| Increase (decrease) in accounts payable and accrued expenses | (213,279 | ) | (21,659 | ) | ||||
| Increase (decrease) in income taxes payable | - | 770,541 | ||||||
| Changes in assets and liabilities | $ | (213,279 | ) | $ | 747,093 | |||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 130,686 | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplementary information: | ||||||||
| Issuance of common stock for services | $ | - | $ | 3,500 | ||||
| Issuance of common stock for investment in mineral properties | $ | 15,200 | $ | - | ||||
| Issuance of common stock for debt | $ | - | $ | 213,750 | ||||
| Issuance of warrants for unproved oil and gas properties | $ | - | $ | 9,995 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
5
DELTA MUTUAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year end December 31, 2012 as reported on Form 10-K, have been omitted.
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. During the six months ended June 30, 2013, the Company received $500,000 under this agreement.
3. RELATED PARTY TRANSACTIONS
The Company has issued notes to related parties. As of June 30, 2013 and December 31, 2012, the Company owed $-0- and $623,970, respectively, to certain directors of the Company. As of June 30, 2013 and December 31, 2012, the Company owes three shareholders $150,655. Interest expense to related parties for the six months ended June 30, 2013 and 2012 amounted to $12,597 and $25,195, 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.
4. RECLASSIFICATION
In accordance with the SEC’s Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company recorded a reclassification adjustments for the three and six months ended June 30, 2012 of $(23,793) and $242,331 which served to increase the gain on sale of bidding rights and unevaluated oil and gas property, Provision for income taxes and General and Administrative expenses. This non-cash adjustment resulted from incorrectly recognizing revenue on the sale of bidding rights from a third party and from capitalizing certain general and administrative expenses as investments in unproved oil and gas properties. As a result of the Company’s evaluation of this error under SAB 108, the Company determined that this error was not material in relation to the current year, but was material to the three and six months ended June 30, 2012. Consequently, the June 30, 2012 statement of operations was adjusted to reflect the correction of this error. In evaluating materiality and determining the appropriateness of applying SAB 108 to this error, the Company considered materiality both qualitatively and quantitatively as prescribed by the SEC’s Staff Accounting Bulletin No. 99. The table noted below reflects the impact of the above error to the consolidated statements of operations for the six months ended June 30, 2012.
| As Reported | Adjustments | As Restated | ||||||||||
| Sales | $ | 1,789 | $ | $ | 1,789 | |||||||
| Costs and Expenses: | ||||||||||||
| General and Administrative | 712,108 | 81,152 | (1) | 793,260 | ||||||||
| Loss from Operations | (710,319 | ) | (791,471 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Foreign exchange gain (loss) | 221,593 | 221,593 | ||||||||||
| Interest expense | (24,915 | ) | (24,915 | ) | ||||||||
Gain on sale of bidding rights and unevaluated oil and gas property | 6,500,000 | 744,716 | (1) | 7,244,716 | ||||||||
| 6,696,678 | 7,441,394 | |||||||||||
| Income (loss) before income taxes | 5,986,358 | 6,649,923 | ||||||||||
| Provision for income taxes | 349,308 | 421,233 | (1) | 770,541 | ||||||||
| Net earnings (loss) | $ | 5,637,050 | $ | 5,879,381 | ||||||||
| Net earnings (loss) per common shares | ||||||||||||
| Basic | $ | 0.18 | $ | 0.18 | ||||||||
| Diluted | 0.16 | 0.17 | ||||||||||
| Weighted Average Common Shares - Basic | 31,807,145 | 31,807,145 | ||||||||||
| Weighted Average Common Shares - Diluted | 35,465,834 | 35,465,834 | ||||||||||
(1) Adjustment on gain on sale of bidding rights and to reverse capitalized costs on unproved oil and gas properties.
6
The table noted below reflects the impact of the above error to the consolidated statements of operations for the three months ended June 30, 2012.
| As Reported | Adjustments | As Restated | ||||||||||
| Sales | $ | -- | $ | $ | -- | |||||||
| Costs and Expenses: | ||||||||||||
| General and Administrative | 277,893 | 31,609 | (1) | 309,502 | ||||||||
| Loss from Operations | (277,893 | ) | (309,502 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Foreign exchange gain (loss) | 205,687 | 205,687 | ||||||||||
| Interest expense | (12,597 | ) | (12,597 | ) | ||||||||
| 193,090 | 193,090 | |||||||||||
| Income (loss) before income taxes | (84,803) | (116,412) | ||||||||||
| Provision for income taxes | (5,673) | (7,816)( | 1) | (13,489) | ||||||||
| Net earnings (loss) | $ | (79,130) | $ | (102,923) | ||||||||
| Net earnings (loss) per common shares | ||||||||||||
| Basic | $ | 0.00 | $ | 0.00 | ||||||||
| Diluted | 0.00 | 0.00 | ||||||||||
| Weighted Average Common Shares - Basic | 32,008,967 | 32,008,967 | ||||||||||
| Weighted Average Common Shares - Diluted | 32,008,967 | 32,008,967 | ||||||||||
(1) To reverse capitalized costs on unproved oil & gas properties.
7
DELTA MUTUAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. SIGNIFICANT EVENTS
On May 10, 2013, the Board of Directors of the Company authorized the issuance of a common stock purchase warrant effective May 1, 2013, to purchase 1,000,000 shares of common stock, on or before April 30, 2018, at an exercise price of $0.20 per share, to Phillips W. Smith, a director of the Company. The number of shares of common stock as to which the warrant is exercisable vests in 24 monthly installments on the final day of each month during the term of the warrant, commencing May 31, 2013, and is vested in full as of April 30, 2015. If Mr. Smith ceases to be an active member of the Company’s Board of Directors at any time in the two-year period May 1, 2013 through April 30, 2015, vesting will cease as of the last full month during which he was an active member of the Board. The fair value of these warrants was $195,000 on the date of grant determined using the Black-Scholes option pricing model with the following inputs: Exercise price of $0.20, expected term of 5 years, stock price of $0.20, volatility of 195%, discount rate of 5% and no expected dividends. During the six months ended June 30, 2013, the Company expensed $16,250 related to this award.
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.
8
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
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 Mutual, Inc. (the “Company”) was incorporated in Delaware on November 17, 1999. In 2003, we established business operations focused on providing environmental and construction technologies and services. Our operations in the Far East (Indonesia) and our construction operations in Puerto Rico were discontinued in 2008.
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. In addition, we have ownership interests in certain mineral rights that are located in Argentina. In August 2007, SAHF signed agreements to purchase partial ownership interests in four oil and gas concessions in Northern Argentina. The joint venture owning these concessions then started the process to obtain the necessary government and environmental operating permits for the commercial exploitation of these concessions. These oil and gas investments were contributed to the Company as part of the reverse merger transaction in March 2008.
Our goal is to generate meaningful growth in shareholder value through the discovery and development of proved oil and gas reserves or other minerals, and we have focused on concessions where there are shut-in, plugged or abandoned wells that have, in our assessment, a high probability of additional recovery of reserves through the revitalization of the wells using standard oil and gas industry practices to bring back wells into production or to enhance production. In addition, our growth plan is centered upon the pursuit of energy related development projects that we believe will generate attractive rates of return while maintaining a balanced portfolio of lower risk, long-lived oil and gas properties that provide stable cash flows.
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.
9
Recent Developments
Dr. Daniel R. Peralta, our President and Chief Executive Officer, director, and major stockholder, and his wife died in their home November 7, 2012. Our board appointed Malcolm Sherman, who was our Executive Vice President, as President and Chief Executive Officer and elected Santiago Peralta, the son of Dr. Peralta, as a member of our Board of Directors. On April 25, 2013 Phillips W. Smith was elected to our Board to fill an existing vacancy.
Principle Petroleum Ltd. Agreement
Effective March 30, 2012, we entered into the Cooperation Agreement with Principle Petroleum Ltd. (“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 June 30, 2012, we agreed with PPL to assign and transfer 50% of SAHF's 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. PPL has also agreed in an Undertaking to provide funds to the operating entities of Valle de Lerma, Selva Maria, San Salvador and Libertador, in the aggregate amount of up to $10,000,000 (Selva Maria is pending for approval from the government, which is standard procedure in Argentina). The San Salvador and Libertador concessions were, upon the receipt by the government of a higher bid, awarded to another company.
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 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.
Development of Our Oil and Gas Properties
Specifically, we have focused, and plan to continue to focus, on the following investments in South America.
Valle de Lerma
On August 10, 2011, the Company’s tender offer, made through our wholly-owned subsidiary, SAHF, for the ownership right to explore, and eventually, produce oil and natural gas in the block known as “Valle de Lerma” was declared the winning bid by the Salta provincial government. SAHF made the offer in a joint venture agreement with Grasta SA, a local mid-size gasoline refinery located in Buenos Aires, Argentina. Other partners in the block include PetroNEXUS and REMSA. On October 25, 2011 SAHF was awarded an Exploration and Exploitation Oil & Gas Block License by the Government of Salta, 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.
10
SAHF currently owns 60% of the rights to explore Valle de Lerma; GRASTA owns 5%; PetroNEXUS owns 30%; and REMSA owns 5%.
The total investment commitment originally approved is of 401 work units within a three year term. Each work unit has a value of $5,000 totaling a $2,005,000 of committed investment for the first quarter. In the second quarter of 2011, the Company executed 175 work units and the conclusions were submitted to the proper regulatory government agency, which approved the work performed with the Resolution 021/2012 dated May 11, 2012. Our insurance policy for the remnant amount of $1,155,000 was issued in the second quarter of 2012.
Tartagal and Morillo
As of December 31, 2012, 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. In March 2009, a Hong Kong public company 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. The exploration period of the licenses for the Tartagal and Morillo blocks has been extended until February 2014. Production from the two Campo Alcoba test wells commenced in 2011 and has continued into the 2012 second quarter. A work over of one the two previously reopened wells is planned, and currently an analytic test to drill one more exploratory well is under way. On May 11, 2011, SAHF received the Salta Government’s approval for its 18% ownership share for the Tartagal and Morillo concessions. Effective March 30, 2012, we agreed to sell 50% of our interest in these concessions to PPL.
Jollin and Tonono Oil and Gas Concessions
As of December 31, 2012, the Company, through SAHF, has a 10% interest concession in the carryover mode ("no cost obligations to SAHF") in the Jollin and Tonono oil and gas concessions located in Northern Argentina.
SAHF received its foreign registration in Argentina and was admitted as a member of the joint venture on July 2, 2010. Accordingly, the Company has reclassified its concession costs in the amount of $688,475 associated with this property to proved oil and gas properties as of December 31, 2010 based upon the reserve report received from the third party working interest owner of the joint venture. The Company will begin receiving revenue from the Jollin and Tonono blocks when the first well is approved for commercial production. The joint venture is currently developing a future plan for continuing the exploration of the concessions.
Salta Province Exploration Rights
During 2008, SAHF purchased 40% of the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina from Ketsal, SA (“Ketsal”) for $697,000 cash. In 2009, SAHF assigned 50% of its rights to a third party. As of December 31, 2012, SAHF owns 20% of the rights to this oil and gas concession. SAHF is responsible for managing the drilling activities in the Salta Province and bears its pro-rata share of the costs. Exploratory drilling activities commenced in April 2010 on the Guemes Block and the first well was spud in September 2010. 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.
The UTE for this concession is in litigation with the drilling company that drilled the test well and has sued for an alleged $3,000,000 of additional expenses over and above the contract amount under the fixed price drilling contract, where the contract amount was set at $1,000,000, and overage amounts were to be set prior to execution. The operator of the concession, Ketsal, is in the process of settlement negotiations. SAHF has no obligation or liability for any amounts paid in settlement of, or as a result of an adverse judgment in, this litigation. However, the resolution of this lawsuit may affect the schedule for the future development of this property.
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Production testing to verify the commercial sustainability of the well is expected to commence in the third quarter of 2013, subject to favorable settlement of the litigation.
Caimancito Refinery
We, through our wholly-owned subsidiary, SAHF, have purchased 33.33% of the Caimancito Refinery, located in the Jujuy Province, Argentina, pursuant to a March, 2012 purchase option agreement. The purchase price for the 33.33% of the outstanding shares of Caimancito Refinery was $150,000, which has been paid in full. 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.
Lithium Production Properties
On March 1, 2010, we signed a purchase option agreement with Minera Jujuy from the Jujuy Province, Argentina related to the acquisition of approximate 143,000 hectares with 29 mines located in the Northwest part of Argentina, south of the border with Bolivia, with high lithium and borates brines concentration. Currently, we are performing sampling and geological conclusions with a local geological company in order to determine value to the property. 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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2013 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
During the three and six months ended June 30, 2013, we had $-0- in revenues and incurred net earnings of $883,367 and $562,509, respectively, compared to net loss of $102,928 for the three months ended June 30, 2012 and net earnings for the six months ended June 30, 2012 of $5,879,817. The difference for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, is primarily due to a gain recognized during the second quarter of 2013 of $1,000,249 from the payment of the proceeds from the Company’s key-man life insurance policy on the life of Daniel R. Peralta, our former CEO. The difference for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 is primarily due to a $7.2 million gain on sale of bidding rights on unevaluated oil and gas properties in the prior year, less the impact of the life insurance proceeds in the first six months of 2013. Our loss from operations decreased from $305,742 in three months ended June 30, 2012 to $177,670 in the three months ended June 30, 2013, due primarily to lower general and administrative expenses of $177,670 in 2013, as compared with $305,742 in 2012. Our loss from operations decreased from $791,471 in six months ended June 30, 2012 to $359,001 in the three months ended June 30, 2013, due primarily to lower general and administrative expenses of $359,001 in 2013, as compared with $793,260 in 2012.
At June 30, 2013, we had a working capital surplus of approximately $4.75 million compared with a working capital surplus of approximately $4.15 million at December 31, 2012.
At June 30, 2013, we had total assets of approximately $7.9 million compared to total assets of approximately $8.3 million at December 31, 2012. Net cash provided by operating activities in the six months ended June 30, 2013 was approximately $365,000, as compared with net cash used in operations of approximately $605,000 in 2012; and net cash generated from investing activities was approximately $472,000 2013, as compared with cash generated of approximately $2.5 million in 2012. Net cash used in financing activities was approximately $624,000 in the six months ended June 30, 2013, and $-0- in the comparable period in 2012.
Estimated 2013 Capital Requirements
In the case of the Jollin and Tonono and Tartagal and Morillo oil and gas properties, we have carried interests; therefore, no further capital expenditures are required on our part. For the exploration rights in Salta Province, we have completed the drilling and development of one well in Guemes that is expected to begin production testing in 2013. 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 successful settlement of litigation with regards to amounts owed under the drilling contract. In the event our revenue expectations for 2012 are not met, we are not required to make any additional capital investment to protect our assets.
We estimate that our capital requirements in 2013 to develop the Valle de Lerma (where we have applied for extension of the concession to permit oil production from an existing site) and Selva Maria properties (the award of the Selva Maria concession is pending approval from the government) will approximate $1,350,000 for Selva Maria and $800,000 for Valle de Lerma. The funds for which investments would be provided by in part by PPL (and by the other partners in the respective UTE’s) pursuant to PPL’s commitment to provide up to $10,000,000 in developmental funds for these properties.
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USE OF ESTIMATES
The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to oil and gas properties, intangible assets, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements. Certain amounts for prior periods have been reclassified to conform to the current presentation.
Management believes that it is reasonably possible that the following material estimates affecting the financial statements could happen in the coming year:
| ● | Proved oil and gas reserves; | |
| ● | Expected future cash flow from proved oil and gas properties; |
| ● | Future exploration and development costs; and | |
| ● | Future dismantlement and restoration costs. |
NEW FINANCIAL ACCOUNTING STANDARDS
For a summary of new financial accounting standards applicable to the Company, please refer to the notes to the financial statements set forth in our Annual Report on Form 10-K for the year ended December 31,2012, filed with the SEC on April 25, 2013.
Critical Accounting Policies
The Securities and Exchange Commission recently issued “Financial Reporting Release No. 60 Cautionary Advice About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosures, discussion and commentary on their accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements. Foreign currency risk - The functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange rate for the period. The functional currency in South America is the U.S. dollar. Translation adjustments are recorded in Cumulative Other Comprehensive Income.
The Company assesses potential impairment of its long-lived assets, which include its property and equipment, investments, and its identifiable intangibles such as deferred charges under the guidance of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment.
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Investments in non-consolidated affiliates – These investments consist of the Company’s ownership interests in oil and gas development and exploration rights in Argentina, net of impairment losses if any.
We evaluate these investments for impairment when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, levels of oil and gas reserves, availability of pipeline (or other transportation) capacity and infrastructure and management of the operations in which the investments were made.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of Six and Nine months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates.
We do not have significant short-term investments, and due to their short-term nature, we believe that there is not a material risk exposure.
Credit Risk - Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area.
Commodity Price Risk – We are exposed to market risks related to price volatility of crude oil and natural gas. The prices of crude oil and natural gas affect our revenues, since sales of crude oil and natural gas from our South American investments comprise nearly all of the components of our revenue. A decline in crude oil and natural gas prices will likely reduce our revenues, unless there are offsetting production increases. We do not use derivative commodity instruments for trading purposes.
The prices of the commodities that the Company produces are unsettled at this time. At times the prices seem to be drift down and then either increase or stabilize for a few days. Current price movement seems to be slightly up but with the prices of the traditionally marketed products (gasoline, diesel, and natural gas as feed stocks for various industries, power generation, and heating) are not showing material increases. Although prices are difficult to predict in the current environment, the Company maintains the expectation that demand for crude oil and natural gas will continue to increase for the foreseeable future due to the underling factors that oil and natural gas based commodities are both sources of raw energy and are fuels that are easily portable.
Foreign Currency Risk - Our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because our revenue is reported in U.S. dollars, fluctuating exchange rates of the local currency, when converted into U.S. dollars, may have an adverse impact on our revenue and income. We have not hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars. We do not engage in financial transactions for trading or speculative purposes.
Item 4. – CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive and financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost- benefit relationship of possible controls and procedures.
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As of June 30, 2013, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Controls
There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives. The Company's chief executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.
PART II—OTHER INFORMATION
ITEM 6. EXHIBITS.
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
| 32 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
| SEC Ref. No. | Title of Document | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DELTA MUTUAL, INC. | |||
| BY: | /s/ Malcolm W. Sherman | ||
| Malcolm W. Sherman | |||
President, Chief Executive Officer and Principal Financial Officer | |||
Dated: August 15, 2013
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EXHIBIT INDEX
| 31 | Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| SEC Ref. No. | Title of Document | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
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