UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2013
or
¨ 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:0-12214
DALECO RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
| Nevada | 23-2860734 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
17 Wilmont Mews, 5th Floor West Chester, Pennsylvania 19382 |
(610) 429-0181 | |
| (Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer¨ | Accelerated filer¨ | |
| Non-accelerated filer ¨ | (Do not check if a smaller reporting company) | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Shares of Common Stock outstanding as of August 14, 2013: 70,099,058
Shares of Series B 8% Cumulative Convertible Preferred Stock outstanding of August 14, 2013: 135,000
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
| PAGE | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | |
| Condensed Consolidated Balance Sheets (Unaudited) | 4 | |
| Condensed Consolidated Statements of Operations (Unaudited) | 6 | |
| Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) | 7 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) | 8 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 10 | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS | 26 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 36 |
| ITEM 4. | CONTROLS AND PROCEDURES | 36 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS | 36 |
| ITEM 1A. | RISK FACTORS | 37 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 37 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 38 |
| ITEM 4. | MINE SAFFETY DISCLOSURES | 38 |
| ITEM 5. | OTHER INFORMATION | 38 |
| ITEM 6. | EXHIBITS | 40 |
| SIGNATURES | 41 | |
| -2- |
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Some of the information, including all of the estimates and assumptions, in this report contain forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report, including, but not limited to, statements regarding our future financial position, business strategy, budgets, projected costs, savings and plans, objectives of management for future operations, legal strategies, and legal proceedings, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, or “continue” or the negative thereof or variations thereon or similar terminology. Except for statements of historical or present facts, all other statements contained in this report are forward-looking statements. The forward-looking statements may appear in a number of places and include statements with respect to, among other things: business objectives and strategic plans; operating strategies; acquisition strategies; drilling wells; oil and gas reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues); estimates of future production of oil, natural gas and minerals; expected results or benefits associated with recent acquisitions; marketing of oil, gas and minerals; expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures; expectations regarding cash flow and future borrowings sufficient to fund ongoing operations and debt service, capital expenditures and working capital requirements; nonpayment of dividends; expectations regarding competition; impact of the adoption of new accounting standards and the Company’s financial and accounting systems; and effectiveness of the Company’s control over financial reporting.
These forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Factors that may cause our actual results, performance, or achievements to be materially different from those anticipated in forward-looking statements include, among others, the following:
| • | adverse economic conditions in the United States and globally; |
| • | difficult and adverse conditions in the domestic and global capital and credit markets; |
| • | domestic and global demand for oil and natural gas and non-metallic minerals; |
| • | volatility of the market prices for crude oil and natural gas and non-metallic minerals; |
| • | the effects of government regulation, permitting, and other legal requirements; |
| • | the geologic quality of our properties with regard to, among other things, the existence of hydrocarbons in economic quantities; |
| • | uncertainties about the estimates of our oil and natural gas reserves; |
| • | our ability to increase our production and oil and natural gas income through exploration and development; |
| • | our ability to successfully apply horizontal drilling techniques and tertiary recovery methods; |
| • | the number of well locations to be drilled, the cost to drill, and the time frame within which they will be drilled; |
| • | the effects of adverse weather on operations; |
| • | drilling and operating risks; |
| • | the availability of equipment, such as drilling rigs, transportation pipelines and mining equipment; |
| • | changes in our oil and gas drilling and minerals development plans and related budgets; |
| • | the adequacy of our capital resources and liquidity including, but not limited to, access to additional borrowing capacity; and |
| • | uncertainties associated with our legal proceedings and their outcome. |
Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the respective document. Other unknown or unpredictable factors may cause actual results to differ materially from those projected by the forward-looking statements. Most of these factors are difficult to anticipate and may be beyond our control. Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.
| -3- |
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
| CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) |
| June 30, 2013 | September 30, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and equivalents | $ | 118,358 | $ | 190,738 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $25,000 at June 30, 2013, and September 30, 2012 | 342,126 | 242,182 | ||||||
| Prepaid consulting services agreement fees | 48,415 | 151,237 | ||||||
| Other current assets | 40,025 | 8,615 | ||||||
| Total Current Assets | 548,924 | 592,772 | ||||||
| Other Assets: | ||||||||
| Patents license rights | 40,907 | 40,907 | ||||||
| Accumulated amortization of patents license rights | (40,907 | ) | (36,351 | ) | ||||
| Net patents license rights | - | 4,556 | ||||||
| Prepaid mineral royalties – long-term | 539,242 | 509,254 | ||||||
| Restricted cash deposits - operations | 109,664 | 109,609 | ||||||
| Restricted cash deposits – equity issuances | 897,598 | - | ||||||
| Total Other Assets | 2,095,428 | 623,419 | ||||||
| Property, Plant and Equipment: | ||||||||
| Mineral properties, at cost | 9,877,128 | 9,877,128 | ||||||
| Accumulated depreciation, depletion and amortization | (95,000 | ) | (95,000 | ) | ||||
| Net mineral properties | 9,782,128 | 9,782,128 | ||||||
| Oil and gas properties, at cost | 4,471,590 | 4,471,590 | ||||||
| Accumulated depreciation, depletion and amortization | (4,132,939 | ) | (4,096,939 | ) | ||||
| Net oil and gas properties | 338,651 | 374,651 | ||||||
| Office equipment, furniture and fixtures, at cost | 61,502 | 61,502 | ||||||
| Accumulated depreciation | (61,502 | ) | (61,502 | ) | ||||
| Net office equipment, furniture and fixtures | - | - | ||||||
| Total Net Property, Plant and Equipment | 10,120,779 | 10,156,779 | ||||||
| TOTAL ASSETS | $ | 12,216,207 | $ | 11,372,970 | ||||
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| -4- |
| DALECO RESOURCES CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) |
| June 30, 2013 | September 30, 2012 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,253,220 | $ | 1,312,526 | ||||
| Revenue payable to oil and gas royalty and other working interest owners | 950,688 | 917,144 | ||||||
| Federal and state income taxes payable | 192,427 | 192,427 | ||||||
| Accrued interest expense | 1,111,781 | 1,099,441 | ||||||
| Accrued compensation expense | 698,729 | 690,798 | ||||||
| Accrued expense reimbursements | - | 19,051 | ||||||
| EV&T note payable | 567,213 | 567,213 | ||||||
| CAMI notes payable | 435,943 | 455,943 | ||||||
| Notes payable - related parties | 60,000 | 85,256 | ||||||
| Premium finance notes payable | 24,098 | 1,380 | ||||||
| Note payable - other | 18,511 | - | ||||||
| 7.25% convertible debentures, net of unamortized discount of $2,661 and $4,515, respectively, payable to a related party | 42,339 | 40,485 | ||||||
| Total Current Liabilities | 5,354,949 | 5,381,664 | ||||||
| Long-term Debt: | ||||||||
| Convertible note payable, net of unamortized discount of $22,908 at September 30, 2012 | - | 239,717 | ||||||
| Other long-term liabilities: | ||||||||
| Convertible accrued interest on convertible note payable | - | 5,359 | ||||||
| Accrued bonus expense | 1,373,831 | 1,373,831 | ||||||
| Series B 8% cumulative convertible preferred stock dividends accrued | 1,826,239 | 1,826,239 | ||||||
| Future abandonment costs | 10,000 | 10,000 | ||||||
| TOTAL LIABILITIES | 8,565,019 | 8,836,810 | ||||||
| Commitments and Contingencies | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Preferred Stock – 20,000,000 shares authorized | ||||||||
| Series A preferred stock - par value of $0.01 per share (issued and outstanding: none) | - | - | ||||||
| Series B 8% cumulative convertible preferred stock – par value of $0.01 per share (issued and outstanding: 135,000 shares); liquidation preference of $1,350,000, plus arrearages in cumulative dividends of $2,015,017 and $1,934,239, respectively (see Note 8) | 1,350 | 1,350 | ||||||
| Common Stock – 150,000,000 and 100,000,000 shares authorized, respectively – par value of $0.01 per share (issued and outstanding: 69,589,058 and 49,441,058 shares, respectively) (see Note 8) | 695,891 | 494,411 | ||||||
| Additional paid-in capital | 47,032,427 | 45,989,639 | ||||||
| Warrants (issued and outstanding) to purchase 22,580,000 and 3,100,000 shares of Common Stock, respectively | 1,344,934 | 429,181 | ||||||
| Accumulated deficit | (45,423,414 | ) | (44,378,421 | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 3,651,188 | 2,536,160 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 12,216,207 | $ | 11,372,970 | ||||
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| -5- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2013 AND 2012
| (UNAUDITED) |
| Three Months ended June 30 | Nine Months ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues: | ||||||||||||||||
| Oil and gas sales | $ | 113,703 | $ | 89,228 | $ | 313,000 | $ | 289,997 | ||||||||
| Well management revenue | 64,353 | 73,489 | 198,459 | 216,368 | ||||||||||||
| Royalty receipts | 1,470 | 719 | 4,280 | 2,800 | ||||||||||||
| Mineral sales | 1,279 | 2,418 | 4,113 | 4,951 | ||||||||||||
| Total Operating Revenues | 180,805 | 165,854 | 519,852 | 514,116 | ||||||||||||
| Expenses: | ||||||||||||||||
| Lease operating expenses - oil and gas | 63,897 | 70,093 | 143,316 | 150,490 | ||||||||||||
| Operating expenses and other costs - minerals | 7,721 | 3,608 | 24,017 | 9,957 | ||||||||||||
| Production and severance taxes – oil and gas | 6,114 | 3,812 | 16,827 | 16,343 | ||||||||||||
| Depreciation, depletion and amortization | 12,000 | 18,408 | 40,556 | 295,204 | ||||||||||||
| General and administrative expenses | 490,231 | 341,713 | 1,251,219 | 980,615 | ||||||||||||
| Total Expenses | 579,963 | 437,634 | 1,475,935 | 1,452,609 | ||||||||||||
| Loss From Operations | (399,158 | ) | (271,780 | ) | (956,083 | ) | (938,493 | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Gain on sale of oil and gas properties | - | - | - | 898,335 | ||||||||||||
| Interest and dividend income | 39 | 5,009 | 128 | 15,207 | ||||||||||||
| Impairment of securities available for future sale | - | - | - | (5,699 | ) | |||||||||||
| Gain on debt forgiveness | 95,802 | 43,655 | 112,330 | 43,655 | ||||||||||||
| Interest expense | (60,845 | ) | (80,368 | ) | (201,368 | ) | (243,741 | ) | ||||||||
| Total Other Income (Expense), Net | 34,996 | (31,704 | ) | (88,910 | ) | 707,757 | ||||||||||
| Loss before income taxes | (364,162 | ) | (303,484 | ) | (1,044,993 | ) | (230,736 | ) | ||||||||
| Taxes based on income | - | - | - | - | ||||||||||||
| Net Loss | (364,162 | ) | (303,484 | ) | (1,044,993 | ) | (230,736 | ) | ||||||||
| Preferred stock dividends, arrearage accumulated (see Note 8) | (27,019 | ) | (27,627 | ) | (80,778 | ) | (85,676 | ) | ||||||||
| Net loss applicable to common shareholders | $ | (391,181 | ) | $ | (331,111 | ) | $ | (1,125,771 | ) | $ | (316,412 | ) | ||||
| Basic and fully diluted net loss per common share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | ||||
| Weighted-average number of shares of common stock outstanding | 68,164,509 | 49,330,093 | 56,552,355 | 49,102,225 | ||||||||||||
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| -6- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2013
| (UNAUDITED) |
| Series A Preferred Stock | Series B Cumulative Convertible Preferred Stock | Common Stock | Additional | Warrants to Purchase | Total | |||||||||||||||||||||||||||||||
| Shares | Shares | Amount | Shares | Amount | Paid-in Capital | Common Stock | Accumulated Deficit | Shareholders’ Equity | ||||||||||||||||||||||||||||
| Balance, September 30, 2012 | - | 135,000 | $ | 1,350 | 49,441,058 | $ | 494,411 | $ | 45,989,639 | $ | 429,181 | $ | (44,378,421 | ) | $ | 2,536,160 | ||||||||||||||||||||
| 2013 Private Placement (see Notes 1and 8): Issuance of Common Stock and Warrants to purchase 1,480,000 shares of Common Stock | 3,700,000 | 37,000 | 224,085 | 108,915 | 370,000 | |||||||||||||||||||||||||||||||
| FEI/DTE Stock Purchase Agreement (see Notes 1 and 8): | ||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock and Warrants to purchase 18 million shares of Common Stock | 15,000,000 | 150,000 | 543,162 | 806,838 | 1,500,000 | |||||||||||||||||||||||||||||||
| Costs of issuance | (44,466 | ) | (44,466 | ) | ||||||||||||||||||||||||||||||||
| Issuance of Common Stock in payment of interest (see Note 1) | 50,000 | 500 | 5,000 | 5,500 | ||||||||||||||||||||||||||||||||
| Consulting Services Agreement : Issuance of Common Stock to investor relations firm (see Note 2) | 600,000 | 6,000 | 60,000 | 66,000 | ||||||||||||||||||||||||||||||||
| Issuance of Common Stock in in connection with repayment of convertible note payable (see Note 5) | 498,000 | 4,980 | 79,680 | 84,660 | ||||||||||||||||||||||||||||||||
| Issuance of Common Stock in payment of compensation (see Note 8) | 300,000 | 3,000 | 51,000 | 54,000 | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense relating to stock options granted to insiders | 124,327 | 124,327 | ||||||||||||||||||||||||||||||||||
| Net Loss | (1,044,993 | ) | (1,044,993 | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2013 | - | 135,000 | $ | 1,350 | 69,589,058 | $ | 695,891 | $ | 47,032,427 | $ | 1,344,934 | $ | (45,423,414 | ) | $ | 3,651,188 | ||||||||||||||||||||
| SEE ACCOMPANYING NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| -7- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
| (UNAUDITED) |
| 2013 | 2012 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (1,044,993 | ) | $ | (230,736 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, depletion and amortization | 40,556 | 295,204 | ||||||
| Amortization of prepaid consulting services agreement fees | 168,822 | 274,430 | ||||||
| Amortization of discount on note payable – other | - | 7,397 | ||||||
| Amortization of discount on 7.25% convertible debentures | 1,854 | 1,856 | ||||||
| Amortization of discount on convertible note payable | 4,177 | 19,969 | ||||||
| Stock-based compensation expense | 124,327 | 80,025 | ||||||
| Gain on sale of oil and gas properties | - | (898,335 | ) | |||||
| Impairment of securities available for future sale | - | 5,699 | ||||||
| Gain on debt forgiveness | (112,330 | ) | (43,655 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (99,944 | ) | 287,709 | |||||
| Prepaid mineral royalties | (29,988 | ) | (29,989 | ) | ||||
| Other current assets | (31,410 | ) | (2,364 | ) | ||||
| Restricted cash deposits | (55 | ) | (1,071 | ) | ||||
| Accounts payable | (59,306 | ) | (142,768 | ) | ||||
| Revenue payable | 33,544 | (57,211 | ) | |||||
| Accrued interest expense | 29,009 | 134,095 | ||||||
| Other accrued expenses | 42,880 | (10,334 | ) | |||||
| Net cash used in operating activities | (932,857 | ) | (310,079 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from Sale of Oil and Gas Properties | - | 898,335 | ||||||
| Cash restricted pursuant to equity issuance agreement | (897,598 | ) | - | |||||
| Net cash provided by (used in) investing activities | (897,598 | ) | 898,335 | |||||
| Cash Flows From Financing Activities: | ||||||||
| Payments on notes and debt | (120,252 | ) | (192,539 | ) | ||||
| Proceeds from borrowings | 52,793 | 19,652 | ||||||
| Proceeds from equity issuances, net of cash issuance costs and expenses of $44,466 | 1,825,534 | - | ||||||
| Net cash provided by (used in) financing activities | 1,758,075 | (172,887 | ) | |||||
| Net change in cash and equivalents | (72,830 | ) | 415,369 | |||||
| Cash and equivalents at beginning of period | 190,738 | 48,917 | ||||||
| Cash and equivalents at end of period | $ | 118,358 | $ | 464,286 | ||||
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| -8- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
| (UNAUDITED) |
| Supplemental Information: | ||||||||
| Income taxes paid | $ | - | $ | - | ||||
| Interest paid | $ | 149,086 | $ | 32,596 | ||||
| Supplemental Disclosure of Non-cash Transactions: | ||||||||
| Preferred dividends not paid, arrearage accumulated | $ | 80,778 | $ | 85,676 | ||||
| Issuance of common stock for consulting fees | $ | 66,000 | $ | - | ||||
| Grant of issued and issuable shares to a Director/Officer | $ | 114,000 | $ | - | ||||
| Issuances of warrants to purchase Common Stock | $ | 915,753 | $ | - | ||||
| Conversion of Series B 8% Cumulative Preferred Stock into Common Stock | $ | - | $ | 100,000 | ||||
| Issuance of Common Stock in Satisfaction of Series B 8% Cumulative Preferred Stock Dividend Arrearages due a Related Party | $ | - | $ | 88,319 | ||||
| Issuance of Common Stock in Payment of Principal on Convertible Note Payable | $ | 84,660 | $ | 70,000 | ||||
| Issuance of Common Stock in Payment of Principal and Interest on CAMI Notes Payable due a Related Party | $ | 5,500 | $ | 34,264 |
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| -9- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
1. CONTINUED OPERATIONS AND GOING CONCERN
The unaudited condensed consolidated financial statements have been prepared on the basis of a going concern which contemplates that Daleco Resources Corporation and subsidiaries (the “Company”) will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. At June 30, 2013, the Company’s current assets total $548,924. Net loss applicable to common shareholders amounted to $1,125,771 for the nine months ended June 30, 2013. The ability of the Company to meet its current liabilities of $5,354,949 and its total liabilities of $8,565,019 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets. The financial statements do not reflect any adjustments relating to these uncertainties.
FEI/DTEStock Purchase Agreement
On March 25, 2013, the Company finalized a Stock Purchase Agreement (“SPA”) with Far East Investments, LLC, a California limited liability company (“FEI”) and DTE Investment Ltd., a British Virgin Island company (“DTE”) (hereinafter FEI and DTE are sometimes collectively referred to as the “Investors” and individually as an “Investor”). The Investors paid the Company $1.5 million for 15 million shares of the Company’s common stock, par value $.01 (“Common Stock”) and warrants for the purchase of up to 18 million shares of Common Stock to FEI and DTE (“FEI/DTE Warrants”). The FEI/DTE Warrants have a term of five (5) years (“Term”) and may be exercised at a price of $0.20 per share (“Exercise Price”). In the third through fifth years of the Term, the Exercise Price may be satisfied by exchanging Common Stock at the current market price. The FEI/DTE Warrants may be exercised in whole or in part at any time during the Term. See Note 8.
Under the SPA for so long as the Investors retain 51% or more of the Common Stock issued under the SPA (7,650,000 shares), the Investors are entitled to request that the Company nominate for election, by the shareholders of the Company at the Company’s annual meeting of shareholders, two persons suitable to serve as directors of the Company.
A provision of the Agreement requires that the Company shall not make any public announcement or statement concerning the Agreement other than that which the Company is required to disclose on Form 8-K and other required filings with the Securities and Exchange Commission. The Company, consistent with its obligations under the securities laws, is required to seek confidential treatment of the information set forth in the Annex and Exhibits to the SPA.
In connection with the SPA, the Company entered into an Exclusive Sales Agency and Marketing Agreement with FEI (“Marketing Agreement”). The Marketing Agreement grants to FEI the right to act as the Company’s exclusive marketing and sales agent for natural resources products produced, mined and/or sold by the Company, excluding the Company’s ZeoSure products (see Note 4), in Asia excluding the nation of India.
The SPA also required Mr. Parrish’s Employment Contract to be extended through March 31, 2014.
As a condition precedent to entering into the SPA, Investors required the Company to enter into forbearance agreements with certain of its major creditors and debtors (“Certain Creditors”) (“Forbearance Agreements”), the Blackstone Agreement (as discussed below) and the Novinskie Agreement (as discussed below). The Forbearance Agreements provide for the Certain Creditors to agree to forbear from making a demand on the Company for payment of their debt for a period of two years from the date of the SPA. The Certain Creditors are entitled to receive accelerated payment of their debt should the Company receive revenues and/or capital in excess of stated amounts or if the Company permits an Event of Default (as defined in the Forbearance Agreements) to go uncured. See Notes 5, 6, and 7 for discussions regarding the Forbearance Agreements.
As part of the forbearance requirements of the SPA and a condition precedent thereto, the Company entered into the Second Amendment to Employment Agreement with Mr. Blackstone, Vice President and Chief Accounting Officer (“Blackstone Agreement”). The Blackstone Agreement provides for (1) the payments due Mr. Blackstone for services for the months of December 2012, January and February 2013; (2) a lump sum payment of $40,000 towards the outstanding balance owed Mr. Blackstone under his Employment Agreement; and (3) a provision of the pay down of the remaining balance through monthly payments over two years. Mr. Blackstone is entitled to receive accelerated payment of the Blackstone Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.See Note 7 for additional information pertaining to the Blackstone Agreement.
| -10- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
As part of the forbearance requirements of the SPA and as a condition precedent thereto, the Company entered into the First Amendment to Employment Agreement with Mr. Novinskie, President and Chief Financial Officer (“Novinskie Agreement”). The Novinskie Agreement provides for a lump sum payment of $42,500 towards the outstanding balance owed Mr. Novinskie under his Employment Agreement and Mr. Novinskie agrees to forbear from making a demand on the Company for payment of the remaining balance due him for a period of two years from the date of the SPA. Mr. Novinskie is entitled to receive accelerated payment on the remaining balance should the Company receive revenues and/or capital in excess of stated amounts or if the Company permits an Event of Default (as defined in the Novinskie Agreement) to go uncured. See Note 7 for additional information pertaining to the Novinskie Agreement.
The SPA contains provisions that restrict the use of the $1.5 million received by the Company as follows:
| Initial Restriction per the SPA | Restricted cash at June 30, 2013 | |||||||
| Forbearance Agreements, Novinskie Agreement and Blackstone Agreement | $ | 350,000 | $ | 15,000 | ||||
| Marketing Agreement payments to FEI | 120,000 | 90,000 | ||||||
| Other marketing and sales activities | 360,000 | 323,020 | ||||||
| Transaction closing costs and related | 80,000 | 13,383 | ||||||
| Oil and gas properties activities | 75,000 | 35,000 | ||||||
| Mineral properties activities | 50,000 | 50,000 | ||||||
| Future general and administrative expenses | 345,000 | 258,554 | ||||||
| Other costs and expenses | 120,000 | 112,641 | ||||||
| Total | $ | 1,500,000 | $ | 897,598 | ||||
2013 Private Placement
Commencing in January 2013, the Company offered a private placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2013 Private Placement”). The 2013 Private Placement consists of up to five hundred thousand dollars ($500,000) for the issuance of up to 5 million shares of Common Stock at $0.10 per share and warrants to purchase up to 2 million shares of Common Stock at an exercise price of $0.50 per share. The warrants expire on January 16, 2018. The Company will utilize the proceeds of this private placement for general working capital purposes. At June 30, 2013, the Company had received cash totaling $370,000 for the sale of 3.7 million shares of Common Stock and warrants to purchase 1.48 million shares of Common Stock. See Notes 8 and 11.
Debt and Other Obligations
As of June 30, 2013, the Company and certain of its subsidiaries were in default of various obligations and certain debt obligations classified as current liabilities in the accompanying balance sheet as set forth in the following table:
Such defaulted obligations at June 30, 2013 include the following:
| Amounts included in accounts payable: | ||||
| Consulting services and interest due a licensor | $ | 25,009 | ||
| EV&T – fees, expenses and accrued interest (subject to forbearance agreement) | 195,424 | |||
| CAMI notes payable and accrued interest: | ||||
| Subject to forbearance agreements | 821,694 | |||
| Not subject to forbearance agreements | 31,856 | |||
| EV&T note and interest (subject to forbearance agreement) | 1,166,958 | |||
| Note payable to related party and interest thereon (subject to forbearance agreement) | 68,793 | |||
| 7.25% Convertible Debentures due a related party (subject to forbearance agreement) | 45,867 | |||
| Note payable to former related party and interest thereon (subject to forbearance agreement) | 19,249 | |||
| Amounts included in accrued compensation expense: | ||||
| Subject to forbearance agreements | 588,468 | |||
| Not subject to forbearance agreements | 50,261 | |||
| Total | $ | 3,013,579 |
| -11- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
See Note 8 regarding the cumulative dividends in arrears of $2,015,017 at June 30, 2013, applicable to the Series B 8% Cumulative Convertible Preferred Stock, of which $1,826,239 has been accrued.
Liquidity
To obtain capital in the past, the Company’s capital obtainment methods have included selling its interest in certain oil and gas properties, and borrowing funds from and issuing Common Stock to related and unrelated parties, as well as utilizing joint venture structures. If the Company is not successful in increasing its operating cash flows and the preceding financing methods are not available, the Company may not be able to sustain its operations and may need to seek alternative actions to preserve shareholder value.
Liquidity is a measure of a Company’s ability to access cash. The Company has historically addressed its long-term liquidity requirements through the issuance of equity securities and borrowings or debt financing for certain activities. At present, the Company does not have in place a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the need for such a credit facility. For desired acquisitions or project enhancements, the Company must seek project specific financing. None of the Company’s properties are encumbered.
The prices the Company receives for its oil and gas and the level of production have a significant impact on the Company’s cash flows. The Company is unable to predict, with any degree of certainty the prices the Company will receive for its future oil and gas production and the success of the Company’s exploration, exploitation and production activities. Increases in the sales of the Company’s minerals, which to date have not been mined in substantial commercial quantities, will also affect cash flow.
In an effort to address the liquidity shortfall, the Company sold certain of its oil and gas properties in 2012, and is evaluating the sale of certain additional oil and gas properties. It may take months and possibly longer to sell these properties at a suitable price. The market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand that are beyond our control. We cannot predict whether we will be able to sell a property for the price or on terms acceptable to us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of any property.
The Company shall use the proceeds from the transaction with FEI and DTE in an effort to establish additional profitable revenue generating activities. The Company is implementing its plan and creating sales, marketing, and distribution programs. The Company has employed a Vice President of Sales and intends to use internal and external resources to focus on mineral sales. In anticipation of increased sales, the Company’s plans include handling, storage and transportation modifications for the mineral properties. Also, the Company plans to continue its workover operations and other activities in certain of its Texas and West Virginia oil and gas properties to enhance its existing revenue stream and profitability.
2. BASIS OF PRESENTATION
Description of Business
Daleco Resources Corporation (“DRC”) is a Nevada corporation and its Articles provide for authorized capital stock of 150,000,000 shares of common stock and 20,000,000 shares of preferred stock. The Company is a natural resources holding company and through its subsidiaries is primarily engaged in (i) the exploration, development and production of oil and gas; (ii) the exploration for naturally occurring minerals; (iii) the marketing and sales of such minerals; and (iv) the marketing and sales of patented products and processes utilizing the Company’s minerals. The Company's assets consist of two separate categories: oil and gas and non-metallic minerals. The Company’s wholly-owned, active subsidiaries include Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Clean Age Minerals, Inc. and CA Properties, Inc.
Clean Age Minerals, Inc., through its wholly-owned subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests, leasehold interests and federal mining claims containing non-metallic minerals (kaolin and zeolite) in the states of New Mexico, Texas and Utah. CAMI is presently engaged in the exploration for such minerals and intends to mine the minerals through the use of contract miners and arrangements with its joint venture partners.
| -12- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
The Company, through its subsidiaries, Westland Resources Corporation, DRI Operating Company and Deven Resources, Inc., owns and operates oil and gas properties in Texas and West Virginia. The Company owns (a) working interests in wells in Texas and West Virginia and (b) overriding royalty interests in (i) seventy-one wells in the Deerlick Coalbed Methane Field in Alabama, (ii) two wells in Pennsylvania, and (iii) one well in Texas.
The Company is primarily engaged in the exploration for minerals and oil and gas activities.
The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as “FASB”. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial position, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the “Codification” or “ASC”. From time to time, the FASB issues an Accounting Standards Update (“ASU”) which may impact the financial statements and disclosures therein (see “Recent Accounting Pronouncements”).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as amended (“2012 Annual Report”). In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 3-month and 9-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjunction with the Company’s audited consolidated financial statements included in the 2012 Annual Report.
Unless otherwise noted, references to “year” pertain to the Company’s fiscal year, which begins on October 1 and ends on September 30; for example, 2013 refers to fiscal 2013, which is the period from October 1, 2012 to September 30, 2013.
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Fair Value Measurements
At June 30, 2013, the Company’s only financial instruments are (a) cash and equivalents, short-term trade receivables, restrictive cash deposits, payables, accrued expenses, debt and future abandonment costs. The carrying amounts reported in the accompanying condensed consolidated financial statements for such items approximate fair values because of the immediate nature of short-term maturities of these financial instruments.
Subscriptions Receivable and Interest Receivable
Management of the Company believes that the collection of the principal balance of and interest due pursuant to certain notes receivable is in doubt (see Note 11 of the Notes to Consolidated Financial Statements included in the 2012 Annual Report on Form 10-K). As of September 30, 2012, the Company changed to the recovery method in accounting for the notes receivable and interest thereon. The principal and interest will be recorded when, and if, collected. This change to the recovery method resulted in the recognition of $207,025 as an impairment of the interest receivable at September 30, 2012. The principal balance of the notes receivable ($576,000) was previously reflected as subscriptions receivable. Accordingly, the Company recorded no interest income relating to such notes during the nine months ended June 30, 2013.
| -13- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Investor Relations Firm Consulting Agreement
In March 2013, the Company engaged an investor relations firm (“IR Firm”) to assist management in such activities for one year. The Company issued 600,000 shares (valued at $0.11 per share) of Common Stock to the IR Firm and such contract requires monthly payments of cash of $5,000 during the term of the agreement. The Company is amortizing the prepaid consulting fees of $66,000 over the term of the contract with the IR Firm and unamortized consulting fees total $48,415 at June 30, 2013.
Significant Accounting Policies
There have been no changes in significant accounting policies from those disclosed in the 2012 Annual Report.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, U.S. GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. To address these differences between IFRS and U.S. GAAP, in January 2011 the FASB and the IASB (the Boards) issued an exposure draft that proposed new criteria for netting that were narrower than the current conditions currently in U.S. GAAP. Nevertheless, in response to feedback from their respective stakeholders, the Boards decided to retain their existing offsetting models. Instead, the Boards have issued common disclosure requirements related to offsetting arrangements to allow investors to better compare financial statements prepared in accordance with IFRS or U.S. GAAP. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently assessing the impact that the adoption may have on its financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Intangible—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more likely than not threshold is defined as having a likelihood of more than 50 percent. Under ASU No. 2012-02, an entity is not required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines it is more likely than not that its fair value is less than its carrying value. ASU No. 2012-02 is effective for annual periods beginning after September 15, 2012. The adoption of ASU No. 2012-02 did not have an impact on the Company’s condensed consolidated financial position or results of operations.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities guidance clarifying the scope of disclosures about offsetting assets and liabilities. The guidance limits the scope of balance sheet offsetting disclosures to derivative instruments, including bifurcated embedded derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement of similar agreement. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities are required to provide the new disclosures retrospectively for all comparative periods. The Company is currently assessing the impact that the adoption may have on its financial statements.
3. OIL AND GAS PROPERTIES SEGMENT INFORMATION
During the nine months ended June 30, 2013, there was no major discovery or other event that caused a significant change from the reserve quantity and related information presented in the 2012 Annual Report. During the nine months ended June 30, 2013, the price the Company receives for its natural gas production decreased 12% to $4.54 per Mcf from $5.16 per Mcf for the comparable period of 2012; however, from a revenue perspective, the Company's oil and gas properties are primarily oil producers and the average price per Mcfe increased 2% to $8.36 from $8.22 for 2013 and 2012, respectively.
| -14- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Results of Operations for Oil and Gas Producing Activities for the three and nine months ended June 30, 2013 and 2012:
| Three Months Ended June 30 | Nine Months Ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues: | ||||||||||||||||
| Oil and gas sales | $ | 113,703 | $ | 89,228 | $ | 313,000 | $ | 289,997 | ||||||||
| Well management revenue | 64,353 | 73,489 | 198,459 | 216,368 | ||||||||||||
| Royalty receipts | 1,470 | 719 | 4,280 | 2,800 | ||||||||||||
| Total revenues | 179,526 | 163,436 | 515,739 | 509,165 | ||||||||||||
| Expenses: | ||||||||||||||||
| Lease operating expenses | 63,897 | 70,093 | 143,316 | 150,490 | ||||||||||||
| Production and severance taxes | 6,114 | 3,812 | 16,827 | 16,343 | ||||||||||||
| Depreciation, depletion and amortization | 12,000 | 15,000 | 36,000 | 45,000 | ||||||||||||
| Total expenses | 82,011 | 88,905 | 196,143 | 211,833 | ||||||||||||
| Revenues in excess of expenses | 97,515 | 74,531 | 319,596 | 297,332 | ||||||||||||
| Gain on sale of oil and gas properties | - | - | - | 898,335 | ||||||||||||
| Income tax expenses | - | - | - | - | ||||||||||||
| Results of operations from oil and gas producing activities (excluding corporate overhead and interest costs) | $ | 97,515 | $ | 74,531 | $ | 319,596 | $ | 1,195,667 | ||||||||
Sale of Oil and Gas Property Leasehold Deep Rights
On January 20, 2012, the Company entered into a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing to the Company. The Company used the proceeds for general working capital purposes.
4. MINERAL PROPERTIES SEGMENT INFORMATION
The Company is an exploration stage company in respect to its mineral holdings.
The Company previously amortized its mineral properties at a nominal amortization rate as the Company has not produced commercial quantities of any of its mineral deposits. Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.
During fiscal 2010, the Company entered into an agreement to sell zeolite to be used in certain agricultural applications including but not limited to feed supplements and soil additives in a ten state area in the south-central part of the US. On August 10, 2012, the Company gave notice to the purchaser to terminate the agreement in October 2012 pursuant to the notice provision provided in the agreement. The Company intends to seek alternatives for the sale of its zeolite to be used in agricultural applications.
In December 2009, the proposed Sierra Kaolin Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations was approved. This will facilitate the project moving to the next phases, including site preparation for extraction operations and the continued evaluation of potential product specific marketing arrangements with certain third parties.
On July 3, 2012, CAMI entered into an operating agreement for ZeoSure LLC (“ZLLC”) as one of ZLLC’s two managing members. ZLLC was formed for the purpose of developing human consumption products including but not limited to detoxification and digestive supplements and human consumable products utilizing CAPI’S Clinoptilolite zeolite mineral focusing on markets throughout the world with a primary emphasis on markets in the United States and Asia. CAMI and SafeHatch LLC, an entity controlled by an individual previously affiliated with the Musser Group, are the managing members and each owns 47.5% of ZLLC. The remaining 5% of ZLLC is owned by the Musser Group. The members of ZLLC intend to seek initial capital of $1 million from third parties and enter into product marketing and distribution agreements with participants active within the dietary supplements market in the next few months. The operating agreement has not been ratified by the Audit Committee of the Board of Directors of the Company. Other than seeking initial capital, ZLLC had no activity through June 30, 2013.
| -15- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Patent Rights - CAMI was the owner of U.S. Patent No. 5,387,738 upon which an engineered product was based which utilized all naturally occurring non-hazardous minerals for the remediation of sites contaminated with hazardous and/or toxic materials. Such patent expired on February 7, 2012. During February 2013, CAMI applied for new provisional patents for its enhancement processes upon which an engineered product is based which utilized all naturally occurring non-hazardous minerals for the remediation of sites contaminated with hazardous and/or toxic materials. As of June 30, 2013, the US Patent Office had not ruled on CAMI’s application.
Patent License Rights - In February 2010, the Company entered into a License Agreement concerning two US method patents for the treatment of sanitary wastewaters. Such patents utilize the Company’s zeolite. The license applies to the US and covers the use of the patented technology in water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian Affairs. At June 30, 2013, the Company owes the licensor for consulting fees pursuant to the License Agreement and interest totaling $25,009. Such amount is included in Accounts Payable in the accompanying balance sheet. On May13, 2013, the Company entered into an additional 3-year extension of the License Agreement which had expired in February 2013.
Trademark - The Company has a trademark for the Company’s ReNuGen™, a product used to enhance the efficacy of conventional waste water treatment plants.
Results of Operations for Minerals Properties Activities for the three and nine months ended June 30, 2013 and 2012:
| Three Months Ended June 30 | Nine Months Ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Mineral Sales | $ | 1,279 | $ | 2,418 | $ | 4,113 | $ | 4,951 | ||||||||
| Operating and other expenses | (7,721 | ) | (3,608 | ) | (24,017 | ) | (9,957 | ) | ||||||||
| Depreciation, depletion and amortization: | ||||||||||||||||
| Amortization of Patent and Patent License Rights | - | (3,408 | ) | (4,556 | ) | (250,204 | ) | |||||||||
| Expenses in excess of revenues | (6,442 | ) | (4,598 | ) | (24,460 | ) | (255,210 | ) | ||||||||
| Income tax expenses | - | - | - | - | ||||||||||||
| Results of operations from mineral properties activities (excluding corporate overhead and interest costs) | $ | (6,442 | ) | $ | (4,598 | ) | $ | (24,460 | ) | $ | (255,210 | ) | ||||
5.NOTES PAYABLE
Premium Finance Agreements
During November 2012, the Company entered into a Premium Finance Note Payable for $17,808 to finance a portion of certain insurance premiums. The note was fully paid prior to June 30, 2013. The note had a maturity date of August 1, 2013, and the interest rate was 8.75%. The Company was required to make monthly payments of principal and interest of $2,052.
During April 2013, The Company entered into a Premium Finance Note Payable for $34,985 to finance a portion of certain Directors’ and Officers’ insurance premiums. The note has a maturity date of December 21, 2013, an interest rate of 7.4% and requires monthly payments of principal and interest of $3,887. As of June 30, 2013 the balance on the note was $24,098.
| -16- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
EV&T Note Payable and Fees and Expenses
Effective March 25, 2013, the Company and EV&T entered into a forbearance agreement in respect to amounts owed to EV&T for services performed and interest thereon. The Company paid $114,000 to EV&T as required by the forbearance agreement and $34,783 in fees for the period October 1, 2012 through February 28, 2013. As of June 30, 2013 there remained $195,424 due and owning EV&T for services not connected with its September 2006 Note (“Note”) and $1,166,958 due and owing on the Note including accrued but unpaid interest. The Note will earn no interest in the first year and 3.5% interest in the second year under the forbearance agreement. EV&T is entitled to receive accelerated payment of the outstanding balance due and owing it should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. Should the outstanding balances due and owing EV&T under both the Note and non-Note not be paid in full within the two year term of the forbearance agreement, the original terms of the EVT Note calling for payment of interest of 12% per annum on the outstanding debt will govern the Company’s obligations to EV&T.
CAMI Notes Payable
During April 2012, the Company paid $50,000 in cash and issued 158,290 shares of Common Stock in full satisfaction of a note due the Estate of Eric Haessler, an affiliate of Carl A. Haessler, a Director at that time. The note had a principal balance of $58,938 and accrued and unpaid interest related to such note totaled $60,044 at the time of repayment. The Company valued the stock at $25,327 based on the closing price of $0.16 per share. The total consideration payment (cash and common stock) of $75,327 was $43,655 less than the $118,982 of principal and interest owed by the Company. Accordingly, the Company recognized a gain on debt forgiveness of $43,655.
As of September 30, 2012, there was a total of $455,943 in principal and $438,904 in interest (total of $894,847) due and owing to CAMI note holders under that certain Stock Purchase Agreement dated August 2000.
Carl Haessler. As of September 30, 2012, the amounts owed to Mr. Haessler, a Director at that date, consisted of principal of $83,478 and accrued but unpaid interest of $80,359 for a total of $163,837 (“Haessler Debt”). The Haessler Debt is evidenced by a note providing for an annual rate of interest of 8% and repayment of such notes and interest thereon is guaranteed by DRC. As a condition of the $1,500,000 capital stock purchase by FEI and DTE in March 2013 pursuant to that certain Stock Purchase Agreement dated March 25, 2013 (“SPA”), Mr. Haessler entered into a Forbearance Agreement providing for no payment to him on the Haessler Debt and his agreement to forbear from making a demand on the Company for payment of the remaining Haessler Debt for a period of two (2) years from the date of the SPA. The remaining Haessler Debt will earn no interest in the first year and 3.5% interest in the second. Mr. Haessler is entitled to receive accelerated payment of the Haessler Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. At June 30, 2013, the Haessler Debt totals $177,287. At the Company’s Annual Meeting of Shareholders in June 2013, Mr. Haessler was not re-elected to serve as a Director.
Alice Haessler. As of September 30, 2012 the debt owed to Alice Haessler amounted to $20,000 in principal and accrued but unpaid interest of $19,253 for a total of $39,253. Under the terms of the agreement dated March 25, 2013, with Alice Haessler, Mrs. Haessler received $20,000 in cash and 50,000 shares of Common Stock in full settlement of the obligation owed to Alice Haessler. The Company recognized $16,528 as gain on debt forgiveness as a result of such settlement. Carl Haessler is the conservator for Alice Haessler.At the Company’s Annual Meeting of Shareholders in June 2013, Mr. Haessler was not re-elected to serve as a Director.
Herbert L. Lucas. As of September 30, 2012, the amounts owed to Mr. Lucas consisted of $153,530 in principal and accrued but unpaid interest totaled $147,793 for a total of $301,323 (“Lucas Debt”). The Lucas Debt is evidenced by a note providing for an annual rate of interest of 8% and repayment of such notes and interest thereon is guaranteed by DRC. As a condition of the $1,500,000 capital stock purchase by FEI and DTE in March 2013 pursuant to the SPA, Mr. Lucas entered into a Forbearance Agreement providing for payment to Mr. Lucas of $30,100 of the Lucas Debt and his agreement to forbear from making a demand on the Company for payment of the remaining Lucas Debt for a period of two (2) years from the date of the SPA. The remaining Lucas Debt will earn no interest in the first year and 3.5% interest in the second. Mr. Lucas is entitled to receive accelerated payment of the Lucas Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.At June 30, 2013, the Lucas Debt totals $294,456.
| -17- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Robert Martin. As of September 30, 2012, the amounts owed to Mr. Martin, a Director and President of CAMI, consisted of principal of $134,811 and accrued but unpaid interest of $129,773. The Martin Debt is evidenced by a note providing for an annual rate of interest of 8% and repayment of such notes and interest thereon is guaranteed by DRC. As of September 30, 2012, the Company owed Mr. Martin $245,835 in salary and $19,051 in unpaid reimbursable business expenses. These amounts contain no accrued interest. As of September 30, 2012, the Company was indebted to Mr. Martin in the aggregate amount of $529,470 (“Martin Debt”). As a condition of the $1,500,000 capital stock purchase by FEI and DTE in March 2013 pursuant to the SPA, Mr. Martin entered into a Forbearance Agreement providing for payment to Mr. Martin of $53,500 of the Martin Debt and his agreement to forbear from making a demand on the Company for payment of the remaining Martin Debt for a period of two (2) years from the date of the SPA. The remaining Martin Debt will earn no interest in the first year and 3.5% interest in the second. Mr. Martin is entitled to receive accelerated payment of the Martin Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. At June 30, 2013, the Martin Debt totals $495,970.
Robert A. Nolind.As of September 30, 2012, the amounts owed to Mr. Nolind consisted of principal of $49,124 and accrued and unpaid interest of $47,288 for a total of $96,412 (“Nolind Debt”). The Nolind Debt is evidenced by a note providing for an annual rate of interest of 8% and repayment of such notes and interest thereon is guaranteed by DRC. As a condition of the $1,500,000 capital stock purchase by FEI and DTE in March 2013 pursuant to the SPA, Mr. Nolind entered into a Forbearance Agreement providing for payment to Mr. Nolind of $9,600 of the Nolind Debt and his agreement to forbear from making a demand on the Company for payment of the remaining Nolan Debt for a period of two (2) years from the date of the SPA. The remaining Nolind Debt will earn no interest in the first year and 3.5% interest in the second. Mr. Nolind is entitled to receive accelerated payment of the Nolind Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. At June 30, 2013, the Nolind Debt totals $94,248.
As of June 30, 2013, the Company was in default in the payment of principal and interest thereon of $31,856 in respect to the balance of the CAMI notes payable which are not subject to forbearance agreements.
At June 30, 2013, the outstanding balance of the CAMI Notes Payable aggregated $435,943 and accrued but unpaid interest totaled $417,607.
Convertible Note Payable and Amir Settlement Agreement
On July 12, 2011, the Company entered into a Settlement Agreement with Dov Amir (“Amir”), a former director/officer of the Company, as discussed in Note 6 of the Notes to Consolidated Financial Statements included in the 2011 Annual Report. Among other provisions, certain assets of Amir shall remain pledged as collateral for the Company’s note payable to First Citizens Bank and Amir was granted the right to convert any and all amounts due him under the note into shares of Common Stock at a conversion price of $0.25 per share. As a result of granting the conversion rights relating to the note, the Company recognized $46,938 as a discount on the note at July 12, 2011, resulting from the beneficial conversion feature. The discount was determined based on the fair value of the Company’s Common Stock in comparison to the conversion price on the date of the note.
On May 3, 2013, the Company paid cash of $70,000 and issued 498,000 shares of Common Stock in full satisfaction of all amounts due Amir pursuant to the note. The Company estimates the value of the cash and shares of Common Stock (at $0.17 per share) at approximately $155,000. The if-converted value of the Convertible Note Payable on such date approximated $183,000. Accordingly, the Company recognized $95,802 as gain on debt forgiveness as a result of such full satisfaction of the note.
The discount was being amortized over the life of the note. Amortization of the discount of $665 and $14,709 is included in interest expense during the three months ended June 30, 2013 and 2012, respectively. Amortization of the discount of $4,177 and $19,969 is included in interest expense during the nine months ended June 30, 2013 and 2012, respectively. During the three months ended June 30, 2013 and 2012, the Company recognized contractual coupon interest of $879 and $2,665, respectively. During the nine months ended June 30, 2013 and 2012, the Company recognized contractual coupon interest of $6,208 and $10,646, respectively. The effective interest rate through May 3, 2013 was approximately 7%.
6. 7.25% CONVERTIBLE DEBENTURES
During the nine months ended June 30, 2013, no Debentures were converted to Common Stock. Debentures held by a Director (Maxwell) totaling $45,000 are outstanding at June 30, 2013. During the three months ended June 30, 2013 and 2012, the Company recognized contractual coupon interest of $813 for each period and amortization of the discount of $617 and $619, respectively.During the nine months ended June 30, 2013 and 2012, the Company recognized contractual coupon interest of $2,440 and $2,449, respectively, and amortization of the discount of $1,854 and $1,856, respectively. The effective interest rate approximates 16%. The if-converted value of the Debentures at June 30, 2013, approximates $64,000. Accrued and unpaid interest due on the Debentures totals $867 at June 30, 2013.
| -18- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
As a condition of the $1,500,000 capital stock purchase by FEI and DTE in March 2013 pursuant to the SPA, Mr. Maxwell entered into a Forbearance Agreement in respect to all principal and interest owed and owing to the Director in respect to the Debentures. The Company paid interest due on the Debentures of $9,487 to the Director as required by the forbearance agreement. Such Director has agreed to forbear from making a demand on the Company for payment of the Debentures for a period of two (2) years from the date of the SPA. The Debentures will earn no interest in the first year and 3.5% interest in the second. Mr. Maxwell is entitled to receive accelerated payment of the Debentures should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.
7. RELATED PARTIES
See Note 6 in respect to the 7.25% Convertible Debentures owned by a Director (Maxwell).
See Note 8 in respect to the purchase by a Director (Maxwell) of shares of Common Stock and a warrant to purchase shares of Common Stock.
Notes Payable - Related Parties
Maxwell -As a condition of the $1,500,000 capital stock purchase by Far East Investments, LLC and DTE Investment, Ltd. in March 2013 pursuant to that certain Stock Purchase Agreement dated March 25, 2013 (“SPA”), Mr. Maxwell entered into a Forbearance Agreement in respect to all principal and interest owed and owing to the Director in respect to the $60,000 note payable to such Director (“Maxwell Note”) and the Company paid interest of $1,813 on the Maxwell Note to the Director as required by the forbearance agreement. Such Director has agreed to forbear from making a demand on the Company for payments of the Maxwell Note for a period of two (2) years from the date of the SPA. The debt due such Director will earn no interest in the first year and 3.5% interest in the second. Mr. Maxwell is entitled to receive accelerated payment of the Maxwell Note should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. At June 30, 2013, the Company owes Mr. Maxwell $69,587 for principal and interest thereon.
Grady -As a condition of the SPA, Real Asset Management, LLC (“RAM”) entered into a Forbearance Agreement in respect to all principal and interest owed and owing to RAM in respect to the $50,000 note payable to RAM (“RAM Note”). The Company paid principal of $6,745 and interest of $7,255 on the RAM Note as required by the forbearance agreement. RAM has agreed to forbear from making a demand on the Company for payments of the note principal and interest for a period of two (2) years from the date of the SPA. The debt due RAM will earn no interest in the first year and 3.5% interest in the second. RAM is entitled to receive accelerated payment of the RAM Note should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured. At June 30, 2013, the Company owes RAM $19,249 for principal and interest and interest thereon. David A. Grady, a former Director is affiliated with RAM.
Certain Personal Loans
During March 2012, the Audit, Compensation and Nominating and Governance Committees of the Board of Directors (“Board”) (collectively, “AC&N Committees”) became aware of personal loans entered into in September 2005 totaling in excess of $400,000 from Amir, a former director/officer of the Company, to four individuals. It is the understanding of the AC&N Committees (based on oral representations of Mr. Amir) that (i) the proceeds of such loans were used to fund the exercise in September 2005 of options (granted to such individuals in September 2000) to purchase shares of Common Stock (at $0.25 per share); (ii) two of such individuals are current employees of the Company, including the President/CFO and a current Director; (iii) one of such individuals is a former employee of the Company; (iv) one of such individuals has served and is serving as general counsel (EV&T) to the Company; (v) the sole collateral for each of the loans is the Common Stock acquired by each individual upon the exercise of each option; and (vi) there is no agreement between Amir and such individuals regarding their voting rights related to the Common Stock owned by such individuals and Amir.
CAMI Notes Payable
See Note 6 in respect to Messrs. Haessler and Martin.
| -19- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Marketing Agreement
In connection with the SPA, the Company entered into an Exclusive Sales Agency and Marketing Agreement with FEI (“Marketing Agreement”). The Marketing Agreement grants to FEI the right to act as the Company’s exclusive marketing and sales agent for natural resources products produced, mined and/or sold by the Company, excluding the Company’s ZeoSure products (see Note 4), in Asia excluding the nation of India. From April 2013 to June 2013, in connection with the Marketing Agreement, the Company paid $30,000 to Far East Investments (USA) LLC, an affiliate of FEI. Through June 30, 2013, no sales transactions relating to the Marketing Agreement had occurred.
Employment Agreements
Blackstone – See Note 1 in respect to the Second Amendment of the Employment Agreement. As of June 30, 2013, the Company owed Mr. Blackstone $139,563 for salary and reimbursable expenses related to his employment agreement with the Company.
Martin – See Note 5 regarding amounts due Mr. Martin, a Director and President of CAMI, in connection with his previous employment agreement with the Company. As of June 30, 2013, the Company owed Mr. Martin $245,835 for salary related to such employment agreement. As of June 30, 2013, the Company has paid the reimbursable expenses of $19,051.
Novinskie – See Note 1 in respect to the First Amendment of the Employment Agreement with the Company. As of June 30, 2013, the Company owed Mr. Novinskie $342,633 for salary related to his employment agreement with the Company.
Parrish - In November 2012, the Employment Contract with Michael D. Parrish was renewed. Such contract was orally amended in December 2012 to reflect a change in base salary. Effective March 25, 2013, the Company granted (i) 600,000 shares of common stock issuable at the rate of 100,000 shares at the end of each of six months commencing April 30, 2013 (see Note 11) and (ii) and an option for the purchase of 1.2 million shares of common stock to Mr. Parrish (see Note 8). Pursuant to a section contained in the 2013 SPA, Mr. Parrish’s Employment Contract has been extended through March 31, 2014.
Sverapa - On April 22, 2013, the Company entered into an employment agreement with Joseph Sverapa (“Sverapa”) as the Company’s Vice President of Sales. The agreement provides for (1) a base salary; (2) a cash incentive of 25% of gross profits on sales due to Sverapa’s activities; (3) an equity incentive arrangement; and (4) an initial grant of an option to purchase 50,000 shares of Common Stock. The equity incentive arrangement provides that Sverapa shall receive options to purchase 50,000 shares of Common Stock for each $1 million of gross profits from sales resulting from Sverapa’s activities. Sverapa shall receive options for the purchase of not more than 200,000 shares of Common Stock in respect to this equity incentive arrangement. Any such option will be exercisable for five years after the date of its grant and will vest 50% on the first anniversary of the date of such grant and 25% each on the second and third anniversary of the date of such grant. In connection with the employment agreement, the Company granted to Sverapa an option for the purchase of 50,000 shares of Common Stock at $0.20 per share. This option is exercisable through April 2018 and vests 50% on the first anniversary of the agreement and 25% each on the second and third anniversary date of the agreement.
Directors
On May 1, 2013, the Board appointed Li Chi Kong, owner/officer of DTE, and Grant Lin, owner/officer of FEI, to the Board of Directors to fill vacancies in the Board.
At the Company’s Annual Meeting of Shareholders in June 2013 (the “2013 Annual Meeting”), Messrs. Kong, Lin, Martin, Maxwell, Novinskie and Parrish were elected to serve as Directorsuntil the Company’s 2014 Annual Meeting of Shareholders. At the 2013 Annual Meeting, Messrs. Grady and Haessler were not re-elected to serve as Directors.
8. CAPITAL STOCK
At the Company’s Annual Meeting of Shareholders in June 2013, the shareholders approved, among other things, the following:
| · | An increase in the authorized shares of Common Stock from 100 million shares to 150 million shares, and |
| · | An increase in the number of shares of Common Stock reserved for issuance pursuant to the Independent Directors Non-qualified Stock Option Plan of the Company form 800,000 shares to 1.6 million shares and to extend the period during which grants may be made. |
| -20- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Common Stock
The Company issued shares of Common Stock during the nine months ended June 30, 2013 as follows:
| 2013 Private Placement (see Note 1) | 3,700,000 | |||
| FEI/DTE Stock Purchase Agreement (see Note 1) | 15,000,000 | |||
| Alice Haessler (see Note 1) | 50,000 | |||
| Consultant agreement with an investor relations firm (see Note 2) | 600,000 | |||
| Employment agreement with Chief Executive Officer (see Note 7) | 300,000 | |||
| Amended and restated agreement of settlement in respect to convertible note payable to Amir(see Note 6) | 498,000 | |||
| Total | 20,148,000 |
Series A Preferred Stock
No shares of Series A Preferred Stock were issued during the nine months ended June 30, 2013. No shares were outstanding at June 30, 2013 and September 30, 2012.
Series B 8% Cumulative Convertible Preferred Stock
No shares of Series B Preferred Stock, par value of $0.01 per share, were issuedduring the nine months ended June 30, 2013.
Shares of Series B Preferred Stock outstanding at June 30, 2013, and September 30, 2012, totaled 135,000 shares. Such shares are convertible into shares of Common Stock on the basis of their $10.00 per share stated value, at the exchange rate per common share of 85% of the average of the closing price of the Common Stock for the five trading days immediately preceding the date when shares of Series B Preferred Stock are delivered to the Company for conversion, but in no event shall the conversion price be less than $1.25 per share. Thus, at June 30, 2013, the 135,000 shares of Series B Preferred Stock were convertible into 1,080,000 shares of Common Stock.
Further, the shares of Series B Preferred Stock (i) earn dividends at the rate of 8% per annum computed on the basis of a 365 day year, and (ii) have priority in liquidation to the extent of the stated value of $10.00 per share plus any unpaid dividends over any other preferred stock, common stock or any other stock issued after September 19, 2000. At June 30, 2013, the liquidation preference totals $3,365,017 (stated value of $1,350,000 plus arrearages in cumulative dividends of $2,015,017).
Dividends
There were no cash dividend payments in respect to Common Stock or either series of Preferred Stock during the nine months ended June 30, 2013 and 2012.
At June 30, 2013, the cumulative dividends in arrears applicable to the Series B Preferred Stock totals $2,015,017, of which $1,826,239 has been accrued.
Options and Warrants to Purchase Common Stock:
| Number of Options and Warrants | Weighted Average Price per Share | |||||||
| Options and warrants outstanding at September 30, 2012 | 5,250,000 | $ | 0.18 | |||||
| Warrants issued pursuant to 2013 Private Placement (see Note 1) | 1,480,000 | $ | 0.50 | |||||
| Warrants issued pursuant to FEI/DTE Stock Purchase Agreement (see Note 1) | 18,000,000 | $ | 0.20 | |||||
| Option granted to a Director(1) | 200,000 | $ | 0.06 | |||||
| Option granted to a Director/Officer(2) | 1,200,000 | $ | 0.14 | |||||
| Option granted to an Officer(3) | 50,000 | $ | 0.18 | |||||
| Option expired(1) | (200,000 | ) | $ | 0.06 | ||||
| Options and warrants outstanding at June 30, 2013 | 25,980,000 | $ | 0.21 | |||||
| -21- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
| (1) | On December 27, 2012, David A Grady, a Director of the Company, was granted an option to purchase 200,000 shares of stock at an exercise price of $0.06 per share under the Company’s Non-qualified Independent Director Stock Option Plan (“Plan”). The option is exercisable through December 2017. The option vests 50% in December 2013 and 25% in each of December 2014 and 2015. The fair value of the option was determined to be $11,656 using the Black-Scholes valuation model.At the Company’s Annual Meeting of Shareholders in June 2013, Mr. Grady was not re-elected to serve as a Director; accordingly, the option expired unexercised in accordance with the terms of the Plan. |
| (2) | Effective March 25, 2013, the Company granted 600,000 shares of Common Stock to Mr. Parrish. During the three and nine months ended June 30, 2013, the Company recognized compensation expense of $48,000 and $114,000, respectively, related to such grant. The 600,000 shares are issuable at the rate of 100,000 shares at the end of each of six months commencing April 30, 2013 (see Note 11). The Company may recognize additional compensation expense should the price at such issuance dates exceed $0.20 (the closing price per share of the Common Stock on June 30, 2013). Also, effective March 25, 2013, the Company granted an option for the purchase of 1.2 million shares of common stock to Mr. Parrish at an exercise price of $0.14 per share. The option is exercisable through May 21, 2014 and vests 50% on each of May 21, 2013 and 2014. The fair value of the option was determined to be $119,737 using the Black-Scholes valuation model. |
| (3) | Effective May 8, 2013, the Company granted an option for the purchase of 50,000 shares of common stock to Joseph Sverapa, Vice President of Sales, at an exercise price of $0.18 per share. The option is exercisable through May 2018. The option vests 50% in May 2014 and 25% in each of May 2015 and 2016. The fair value of the option was determined to be $8,878 using the Black-Scholes valuation model. |
Warrants to Purchase Shares of Common Stock
At September 30, 2012, warrants to purchase 3,100,000 shares of Common Stock were outstanding. During the nine months ended June 30, 2013, the Company issued warrants to purchases 19,480,000 shares of Common Stock. At September 30, 2012, warrants to purchase 22,580,000 shares of Common Stock were outstanding. The Company has valued the outstanding warrants as $1,344,934 and $429,181 at June 30, 2013, and September 30, 2012, respectively.
On January 12, 2011, Sonata Investment Company, Ltd. loaned $60,000 to the Company pursuant to a promissory note of the same date. The Company issued warrants for the purchase of 500,000 shares of stock at an exercise price of $0.12 per share. The warrants expire on December 31, 2015. The fair value of the warrants was determined to be $33,337 using the Black-Scholes valuation model.
On February 25, 2011, the Company entered into a Consulting Services Agreement with the Musser Group. In addition to certain registered securities, the Company issued to individuals associated with the Musser Group warrants for the purchase of 2,500,000 shares of Common Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants are exercisable through February 24, 2016.The fair value of the warrants was determined to be $375,153 using the Black-Scholes valuation model.
On April 26, 2011, the Company granted a warrant for the purchase of 100,000 shares of Common Stock to an engineering consultant to the Company. The warrant is exercisable through April 25, 2016, at an exercise price of $0.22 per share.The fair value of the warrants was determined to be $20,691 using the Black-Scholes valuation model.
On March 25, 2013, the Company finalized the SPA FEI and DTE (see Note 1). The Investors paid the Company $1.5 million for 15 million shares of the Company’s Common Stock and warrants for the purchase of up to 18 million shares of Common Stock. The FEI/DTE Warrants have a term of five (5) years and may be exercised at a price of $0.20 per share. In the third through fifth years of such term, the exercise price may be satisfied by exchanging Common Stock at the current market price. The FEI/DTE Warrants may be exercised in whole or in part at any time during such term.The fair value of the warrants was determined to be $806,838 using the Black-Scholes valuation model.
Commencing in January 2013, the Company offered a private placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (see Note 1). The 2013 Private Placement consists of up to five hundred thousand dollars ($500,000) for the issuance of up to 5 million shares of Common Stock at $0.10 per share and warrants to purchase up to 2 million shares of Common Stock at an exercise price of $0.50 per share. The warrants expire on January 16, 2018. At June 30, 2013, the Company had received cash totaling $370,000 for the sale of 3.7 million shares of Common Stock and warrants to purchase 1.48 million shares of Common Stock. The fair value of the warrants was determined to be $108,915 using the Black-Scholes valuation model. See Note 11.
| -22- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
Stock Options
Summarized information relating to the stock options to purchase Common Stock outstanding as of June 30, 2013, is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
Exercise Price per | Number of Shares Underlying Options Unexercised | Weighted Average Exercise Price Per Share | Weighted Average Remaining Life (Years) | Number of Shares Underlying Options Exercisable | Weighted Average Exercise Price Per Share | |||||||||||||||
| $0.14-$0.22 | 3,400,000 | $ | 0.19 | 2.05 | 2,512,500 | $ | 0.20 | |||||||||||||
Stock-based Compensation
During the nine months ended June 30, 2013, the Company granted options for the purchase of 1,450,000 shares of Common Stock. On December 27, 2012, David A Grady, a Director of the Company, was granted an option to purchase 200,000 shares of stock at an exercise price of $0.06 per share under the Company’s Non-qualified Independent Director Stock Option Plan (“Plan”). At the Company’s Annual Meeting of Shareholders in June 2013, Mr. Grady was not re-elected to serve as a Director; accordingly,the option expired unexercised in accordance with the terms of the Plan.There are options to purchase 2.9 million shares of Common Stock outstanding as of June 30, 2013, which options are held by current officers, Directors and employees of the Company (“Insiders”). The exercise prices for the options held by Insiders as of June 30, 2013, range from $0.14 per share to $0.22 per share.
Stock-based compensation expense relating to stock options granted to Insiders is recorded in accordance with FASB ASC Topic 718,Compensation – Stock Compensation(Stock-based Compensation Expense). The Company recorded Stock-based Compensation Expense for the three months ended June 30, 2013 and 2012 of $83,239 and $20,851, respectively. The Company recorded Stock-based Compensation Expense for the nine months ended June 30, 2013 and 2012 of $124,327 and $80,025, respectively. Such expense is included in General and Administrative Expenses. No tax benefit has been recognized. Compensation costs are based on the fair value at the grant date. The fair value of the options has been estimated by using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates between 0.24% and 2.43%; expected life of two to five years; and expected volatility between 37% and 236%.
At June 30, 2013, there was $101,917 of total unrecognized compensation cost related to non-vested share-based compensation awards applicable tostock options granted to Insiders . Such cost is expected to be recognized over a weighted-average period of 1.1 years.
Net Income (Loss) Per Share
Net income (loss) per share is computed in accordance with FASB ASC Topic 260,Earnings per Share. Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive.
Options and warrants to purchase shares of Common Stock were outstanding during the periods but have not been included in the computation of diluted earnings per share because such shares would have an anti-dilutive effect on net loss per share during the periods presented. No other adjustments were made for purposes of per share calculations.
9. INCOME TAXES
At June 30, 2013, and September 30, 2012, the Company has current federal and state taxes payable of $192,427 and no deferred tax asset or liability. At June 30, 2013, and September 30, 2012, accrued interest related to the federal and state income taxes totaled $84,031 and $92,531, respectively. Interest expense related to tax liabilities is included in Interest Expense in the accompanying Consolidated Statement of Operations. The federal income tax liabilities arose primarily from alternative minimum tax for fiscal 2004.
| -23- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
During February 2012, the Company entered into an installment agreement with the Department of Treasury – Internal Revenue Service (“IRS”) in respect to income taxes and interest thereon relating to alternative minimum tax for fiscal 2004. The agreement requires monthly payments of not less than $2,150 commencing in February 2012 and continuing for 72 months or until the balance ($153,514 as of February 1, 2012) has been paid in full. The IRS has filed a notice of Federal tax lien. The Company has requested audit reconsideration and has submitted information to the IRS which supports the Company’s position that it was not subject to alternative minimum tax related to fiscal 2004.
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. ASC 740 requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards. The Company has available at September 30, 2012, operating loss carryforwards of approximately $25 million, which may be applied against future taxable income and will expire in various years through 2027. The amount of an ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined at this time. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards; therefore, no net deferred tax asset has been recognized. No potential benefit of these losses has been recognized in the financial statements. As a result of the March 25, 2013 SPA (see Note 1), the Company is subject to IRC code section 382 which limits the amount of the net operating loss and tax credit carryovers that can be used in future years.
| Below is a reconciliation of the reported amount of income tax expense attributable to continuing operations for the period to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax loss for the three and nine months ended June 30, 2013 and 2012: |
| Three Months Ended June 30 | Nine months Ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Income tax expense (benefit) computed at the statutory Federal income tax rate | (35 | )% | (35 | )% | (35 | )% | (35 | )% | ||||||||
| Valuation allowance | 35 | % | 35 | % | 35 | % | 35 | % | ||||||||
| Effective income tax rate | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Included in the table below are the components of income tax expense for the three and nine months ended June 30, 2013 and 2012:
| Three Months Ended June 30 | Nine months Ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Current income tax expense (benefit) | $ | - | $ | - | $ | - | $ | - | ||||||||
| Deferred income tax expense (benefit) | (127,457 | ) | (106,219 | ) | (365,748 | ) | (80,758 | ) | ||||||||
| Valuation allowance | 127,457 | 106,219 | 365,748 | 80,758 | ||||||||||||
| Total income tax expense (benefit) | $ | - | $ | - | $ | - | $ | - | ||||||||
10. PENDING LITIGATION
Two law suits have been filed in Burleson County, Texas, against the Company, one in July 2012 and the other in October, 2012, by certain owners of royalty interests in oil and gas wells operated by WRC for, among other things, an accounting of expense and revenues for certain wells and/or production units in which their leases are included. The plaintiffs also alleged that WRC has failed to fully develop their leases. The applicable leases are held by production by inclusion in a production unit or units and are fully developed. WRC, through its Texas counsel, has filed a general denial of the claim. A preliminary hearing is scheduled for October 11, 2013.
In August 2012, a surface owner in certain property on which a natural gas gathering system right-of-way is owned by a subsidiary of the Company (“DRIOP”) commenced an action against DRIOP in the Circuit Court of Randolph County, West Virginia, alleging interference with access by such surface owner to and from certain property. DRIOP, through its West Virginia counsel, has filed a general denial of the claim. Management of the Company contemplates a settlement of the litigation within the next 60 days.
| -24- |
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
11. SUBSEQUENT EVENTS
2013 Private Placement (see Notes 1 and 8)
From July 1 through August 13, 2013, the Company had received cash totaling $41,000 for the sale of 410,000 shares of Common Stock and warrants to purchase 164,000 shares of Common Stock. The fair value of the warrants was determined to be $12,069 using the Black-Scholes valuation model.
Issuance of Shares of Common Stock to an Officer/Director in payment of Compensation (see Note 8)
On July 31, 2013, the Company issued 100,000 shares of Common Stock to an Officer/Director (Parrish) pursuant to the grant of 600,000 shares effective March 25, 2013.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters that we consider being important in understanding the results of our operations for the three and nine months ended June 30, 2013 and our financial condition as of June 30, 2013. Our fiscal year begins on October 1 and ends on September 30. Unless otherwise noted, references to "year" pertain to our fiscal year; for example, 2013 refers to fiscal 2013, which is the period from October 1, 2012 to September 30, 2013. Unless otherwise noted, references to "quarter" pertain to a quarter of our fiscal year; for example, the third quarter of 2013 refers to the three months in the period from April 1, 2013 to June 30, 2013 (the “current quarter”). In the discussion that follows, we analyze the results of our operations for the three and nine months ended June 30, 2013, including the trends in our overall business, followed by a discussion of our financial condition.
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto, all included elsewhere in this report. The forward-looking statements in this section and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Forward-Looking Statements."The “2012 Annual Report” refers to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and the amendment thereto.
Results of Operations
For the three and nine months ended June 30, 2013 and 2012:
| Three Months Ended June 30 | Nine months Ended June 30 | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Oil and gas sales | $ | 113,703 | $ | 89,228 | $ | 313,000 | $ | 289,997 | ||||||||
| Well management revenue | $ | 64,353 | $ | 73,489 | $ | 198,459 | $ | 216,368 | ||||||||
| Total operating revenues | $ | 180,805 | $ | 165,854 | $ | 519,852 | $ | 514,116 | ||||||||
| Gain on sale of oil and gas properties | $ | - | $ | - | $ | - | $ | 898,335 | ||||||||
| Net Income (Loss) | $ | (364,162 | ) | $ | (303,484 | ) | $ | (1,044,993 | ) | $ | (230,736 | ) | ||||
| Oil and Gas Production and Cost Information: | ||||||||||||||||
| Production: | ||||||||||||||||
| Oil (Bbl) | 777 | 537 | 2,107 | 1,640 | ||||||||||||
| Gas (Mcf) | 8,517 | 7,066 | 24,769 | 25,424 | ||||||||||||
| Mcfe | 11,718 | 10,288 | 37,411 | 35,264 | ||||||||||||
| Average Price: | ||||||||||||||||
| Oil (per Bbl) | $ | 94.48 | $ | 95.58 | $ | 95.17 | $ | 96.84 | ||||||||
| Gas (per Mcf) | $ | 4.73 | $ | 5.36 | $ | 4.54 | $ | 5.16 | ||||||||
| Mcfe | $ | 9.70 | $ | 8.67 | $ | 8.36 | $ | 8.22 | ||||||||
| Lease Operating Expenses and Production and Severance Taxes per Mcfe | $ | 5.31 | $ | 7.18 | $ | 4.28 | $ | 4.73 | ||||||||
_____
Bbl = One barrel of oil or condensate
Mcf = One thousand cubic feet
Mcfe = One thousand cubic feet gas equivalent
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OIL AND NATURAL GAS OPERATIONS
See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements.
Oil and Gas Sales
Oil and gas sales increased 27% to $113,703 for the current quarter from $89,228 for the third quarter of 2012. Oil and gas sales increased 8% to $313,000 for the three quarters of 2013 from $289,997 for the three quarters of 2012. See the table above in respect to production, average prices and lease operating expenses and production and severance taxes per Mcfe. The level of oil production experienced during the current three quarters of 2013 increased (28%) primarily as a result of four wells being brought back “on-line” (certain wells had been “off-line” during a portion of 2012 for repair) which offset the anticipated decline in production from the wells and the purchase of certain working interests in certain wells operated by the Company in Texas during the fourth quarter of 2012. At June 30, 2013, the Company is continuing to workover additional wells in Texas that are off-line awaiting repairs to certain mechanical items such as tubing, rods, down-hole pumps and/or pumping units. Generally, a well is off-line for less than two months; however, rig availability from third party contractors impacts the timing of the well work. The Company intends to bring such wells back “on-line” during the fourth quarter of 2013.
Gain on Sale of Oil and Gas Properties
On January 20, 2012, the Company entered into a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing to the Company.
Well Management Revenue
Well management revenue decreased 12% to $64,353 for the current quarter from $73,489 for the third quarter of 2012. Well management revenue decreased 8% to $198,459 for the three quarters of 2013 from $216,368 for the three quarters of 2012. Such decreases are primarily the result of the Company purchasing working interests in certain wells during the fourth quarter of 2012. The amounts which may be charged by the Company for well management are set forth in the joint operating agreements governing the wells operated by the Company.
Lease Operating Expenses and Production and Severance Taxes
Lease operating expenses and production and severance taxes decreased 5% to $70,011 for the current quarter from $73,905 for the third quarter of 2012. Lease operating expenses and production and severance taxes decreased 4% to $160,143 for the three quarters of 2013 from $166,833 for the three quarters of 2012. The lease operating expenses and production and severance taxes per Mcfe decreased to $5.31for the current quarter of 2013 from $7.18 for the third quarter of 2012 primarily as a result of four wells being brought back “on-line” (increased workover costs) during the third quarter of 2012.
Depreciation, Depletion and Amortization (“DD&A”) - Oil and Gas
DD&A – Oil and gas totaled $12,000 and $15,000 for the current quarter and for the third quarter of 2012, respectively. DD&A – Oil and gas totaled $36,000 for the three quarters of 2013 and $45,000 for the three quarters of 2012, respectively. Such decrease is primarily the result of the upward revision of proved developed reserves at the end of 2012 resulting primarily from the increase in oil and gas prices which the Company receives for its oil and gas production.
Minerals Operations
See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements.
The Company is an Exploration Stage company in respect to its mineral holdings.
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Minerals Sales
Minerals sales totaled $1,279 and $2,418 for the current quarter and for the third quarter of 2012, respectively. Minerals sales totaled $4,113 for the three quarters of 2013 and $4,951 for the three quarters of 2012, respectively.
Minerals Exploration Expenses
The Company did not incur minerals exploration expenses during the nine months ended June 30, 2013 and 2012. These expenses are primarily for costs associated with the exploration and quantification of mineral resources and mineral reserves. Such expenses related to the kaolin reserves were the responsibility of the Company’s partner in such project.
Minerals Operating Expenses and Other Costs
Minerals operating expenses and other costs totaled $7,721 and $3,608 for the current quarter and for the third quarter of 2012, respectively. Minerals operating expenses totaled $24,017 for the three quarters of 2013 and $9,957 for the three quarters of 2012, respectively.The increases in expenses are directly related to the costs associated with the preparation of mineral product samples for distribution to potential customers.
DD&A - Minerals
DD&A - Minerals totaled $4,556 for the three quarters of 2013 and $250,204 for the three quarters of 2012, respectively. Such amounts are amortization of Patent Rights and Patents License Rights. The Company’s patent expired in February 2012. Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.
DD&A - Other
The related assets were fully depreciated prior to the beginning of fiscal 2012.
General and Administrative Expenses
General and administrative expenses totaled $490,231 and $341,713 for the current quarter and for the third quarter of 2012, respectively. The Company recorded stock-based compensation expense of $83,239 and $20,851 for the current quarter and for the third quarter of 2012, respectively. During the current quarter, the Company recognized compensation expense of $54,000 related to a grant of 600,000 shares of Common Stock to the CEO. See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements. The Company may recognize additional compensation expense should the price at such issuance date exceed $0.20 (the closing price per share of the Common Stock on June 30, 2013). The Company recorded amortization expense of$16,500 and $91,143 for the current quarter and for the third quarter of 2012, respectively,related to the prepaid consulting fees paid to the Musser Group (see “Consulting Services Agreement” discussed below) and the prepaid consulting fees paid to an investor relations firm in March 2013.
General and administrative expenses totaled $1,251,219 for the three quarters of 2013 and $980,615 for the three quarters of 2012. The Company recorded stock-based compensation expense of $124,327 for the three quarters of 2013 and $80,025 for the three quarters of 2012. The Company recorded amortization expense of$168,822 for the three quarters of 2013 and $274,430 for the three quarters of 2012related to the prepaid consulting fees paid to the Musser Group and the prepaid consulting fees paid to an investor relations firm in March 2013. During the three quarters of 2013, the Company recognized compensation expense of $114,000 related to a grant of 600,000 shares of Common Stock to the CEO as discussed above.
During the first three quarters of 2013, the Company incurred increased salary expense of $82,926 in connection with the employment arrangement with Mr. Parrish, the Company’s Chief Executive Officer since May 2012. During the first three quarters of 2013, the Company incurred increased compensation expense of $13,416 in connection with the employment arrangement with Mr. Sverapa, the Company’s Vice President of Sales since April 2013.
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SUBSCRIPTIONS RECEIVABLE AND INTEREST RECEIVABLE
Management of the Company believes that the collection of the principal balance of and interest due pursuant to certain notes receivable is in doubt (see Note 11 of the Notes to Consolidated Financial Statements included in the 2012 Annual Report). As of September 30, 2012, the Company changed to the recovery method in accounting for the notes receivable and interest thereon. The principal and interest will be recorded when, and if, collected. This change to the recovery method resulted in the recognition of $207,025 as an impairment of the interest receivable at September 30, 2012. The principal balance of the notes receivable ($576,000) was previously reflected as subscriptions receivable. Accordingly, the Company recorded no interest income relating to such notes during the first and second quarter of 2013.
GAIN ON DEBT FORGIVENESS
During March 2013, The Company recognized $16,528 as gain on debt forgiveness as a result of the settlement with Alice Haessler as discussed in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.
During May 2013, The Company recognized $95,802 as gain on debt forgiveness as a result of the settlement with Dov Amir as discussed in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.
During April 2012, the Company paid $50,000 in cash and issued 158,290 shares of Common Stock in full satisfaction of a note due the Estate of Eric Haessler, an affiliate of Carl A. Haessler, a Director at that time. The note had a principal balance of $58,938 and accrued and unpaid interest related to such note totaled $60,044 at the time of repayment. The Company valued the stock at $25,327 based on the closing price of $0.16 per share. The total consideration payment (cash and common stock) of $75,327 was $43,655 less than the $118,982 of principal and interest owed by the Company. Accordingly, the Company recognized a gain on debt forgiveness of $43,655.
Interest Expense
Interest expense totaled $60,845 and $80,368 for the current quarter and for the third quarter of 2012, respectively.
Interest expense totaled $201,368 for the three quarters of 2013 and $243,741 for the three quarters of 2012, respectively. During the three quarters of 2013 and 2012, the Company recognized $6,031 and $29,222, respectively, as interest expense regarding the amortization of discounts on debt issuances.
CONSULTING SERVICES AGREEMENTS
On February 25, 2011, the Company entered into a Consulting Services Agreement with the Musser Group, LLC (“Musser Group”) to perform consulting services for the Company through February 2013. During February 2013, the agreement was extended through February 2014 at no cost to the Company. The Company has engaged the Musser Group, an independent contractor, to provide advisory and consulting services to the Company. The Musser Group is engaged to provide (i) managed services; (ii) strategic business planning and implementation; and (iii) assistance in directing and executing the implementation of any strategies approved by the Board of Directors of the Company. The Musser Group’s primary focus is the analysis and validation of market opportunities for the commercialization of products within the Company’s mineral segment. See “COMMERCIALIZATION OF EXISTING ASSETS” below.
The Company issued 2,400,000 shares of Common Stock to individuals associated with the Musser Group in connection with the Consulting Services Agreement with the Musser Group. Also, the Company issued to individuals associated with the Musser Group warrants for the purchase of 2,500,000 shares of Common Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants are exercisable through February 24, 2016. The Company filed a registration statement under the Securities Act of 1933 on Form S-8 for the shares of Common Stock issued to individuals associated with the Musser Group. The Company determined the fair value of the shares of Common Stock and the warrants issued to individuals associated with the Musser Group to be $735,153 and recorded such amount as prepaid consulting fees. The prepaid consulting fees are amortized over the life of the respective agreements.
In March 2013, the Company engaged an investor relations firm (“IR Firm”) to assist management in such activities for one year. The Company issued 600,000 shares (valued at $0.11 per share) of Common Stock to the IR Firm and such contract requires monthly payments of cash of $5,000 during the term of the agreement. The Company is amortizing the prepaid consulting fees of $66,000 over the term of the contract with the IR Firm and unamortized consulting fees total $48,415 at June 30, 2013.
| -29- |
Liquidity and Capital Resources
Liquidity and Capital Resources
The Company’s cash flow used in operating activities was $932,857 for the nine months ended June 30, 2013. Such use of cash flow reflects the use of $335,000 in payments required by the Forbearance Agreements, Novinskie Agreement and Blackstone Agreement as discussed below in the FEI/DTE Stock Purchase Agreement section.
The Company’s net cash (unrestricted) at June 30, 2013 totaled $118,358. Restricted cash deposits – equity issuances is discussed below in the FEI/DTE Stock Purchase Agreement section below.
To obtain capital in the past, the Company’s methods of raising capital have included selling its interest in certain oil and gas properties, and borrowing funds from and issuing Common Stock to related and unrelated parties, as well as utilizing joint venture structures. If the Company is not successful in increasing its operating cash flows and the preceding financing methods are not available, the Company may not be able to sustain its operations and may need to seek alternative actions to preserve shareholder value.
Liquidity is a measure of a Company’s ability to access cash. The Company has historically addressed its long-term liquidity requirements through the issuance of equity securities and borrowings or debt financing for certain activities. At present, the Company does not have in place a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the need for such a credit facility. For desired acquisitions or project enhancements, the Company must seek project specific financing. None of the Company’s properties are encumbered.
At present, the Company does not have in place a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the need for such a credit facility. For desired acquisitions or project enhancements, the Company must seek project specific financing. None of the Company’s properties are encumbered.See Note 4 of the Notes to Consolidated Financial Statements included in the 2012 Annual Report regarding ZeoSure LLC.
The prices the Company receives for its oil and gas and the level of production have a significant impact on the Company’s cash flows. The Company is unable to predict, with any degree of certainty the prices the Company will receive for its future oil and gas production and the success of the Company’s exploration, exploitation and production activities. Increases in the sales of the Company’s minerals, which to date have not been mined in substantial commercial quantities, will also affect cash flow.
In an effort to address the liquidity shortfall, the Company sold certain of its oil and gas properties in 2012, and is evaluating the sale of certain additional oil and gas properties. It may take months and possibly longer to sell these properties at a suitable price. The market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand that are beyond our control. We cannot predict whether we will be able to sell a property for the price or on terms acceptable to us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of any property.
In addition to its work on its existing wells and producing formations, the Company has initiated an investigation of its leasehold rights associated with the geologically deeper Eagle Ford Shale in South Texas. Once the Company has confirmed its deep rights underlying its existing producing properties it intends to explore alternatives (included joint venture and or/ sales opportunities) to exploit those leasehold rights.
On January 20, 2012, the Company entered into a purchase and sale agreement (the “PSA”) pursuant to which the Company agreed to sell certain oil and natural gas leasehold deep rights for cash of $898,335, subject to adjustment as to any title defect that is not cured within the timeframe permitted by the PSA. The sale closed on March 28, 2012. The Company received $898,335 at the closing and recognized gain in the amount of proceeds received. The oil and natural gas leasehold deep rights that were sold were undeveloped, and as such not income-producing to the Company. See Note 3 of the Notes to Condensed Consolidated Financial Statements. The Company used the proceeds for general working capital purposes.
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During April 2012, the Company paid $50,000 in cash and issued of 158,290 shares of Common Stock in full satisfaction of a note due an affiliate of Carl A. Haessler, a Director at that time, as discussed in Note 6 of the Notes to Consolidated Financial Statements included in the 2012 Annual Report.
During May 2012, Carl Haessler, a Director at that time, elected to convert 10,000 shares of Series B 8% Cumulative Convertible Preferred Stock into 80,000 shares of Common Stock at the conversion rate of $1.25 per share of Common Stock. Also, Mr. Haessler accepted 73,854 shares of Common Stock as satisfaction for any and all dividends due him ($92,318 of which $88,319 were accrued) in respect to his direct holdings of 30,000 shares of Series B 8% Cumulative Convertible Preferred Stock through the date of the conversion of 10,000 of such shares. See Note 7 of the Notes to Consolidated Financial Statementsincluded in the 2012 Annual Report.
On August 23, 2012, the Company, entered into an agreement with Michael D. Parrish to become the Chief Executive Officer and a director of the Board of Directors of the Company. The initial term of Mr. Parrish’s employment was effective as of May 18, 2012. In November 2012, the employment contract with Mr. Parrish was renewed. Such contract was orally amended in December 2012 to reflect a change in base salary. Effective March 25, 2013, the Company granted (i) 600,000 shares of common stock and (ii) and an option for the purchase of 1.2 million shares of common stock to Mr. Parrish (see Note 8). Pursuant to a section contained in the 2013 SPA, Mr. Parrish’s Employment Contract has been extended through March 31, 2014.
The Company shall use the proceeds from the transaction with FEI and DTE (discussed below) in an effort to establish additional profitable revenue generating activities. The Company is implementing its plan and creating sales, marketing, and distribution programs. The Company has employed a Vice President of Sales and intends to use internal and external resources to focus on mineral sales. In anticipation of increased sales, the Company’s plans include handling, storage and transportation modifications for the mineral properties. Also, the Company plans to continue its workover operations and other activities in certain of its Texas and West Virginia oil and gas properties to enhance its existing revenue stream and profitability.
FEI/DTEStock Purchase Agreement
On March 25, 2013, the Company finalized a Stock Purchase Agreement (“SPA”) with Far East Investments, LLC, a California limited liability company (“FEI”) and DTE Investment Ltd., a British Virgin Island company (“DTE”) (hereinafter FEI and DTE are sometimes collectively referred to as the “Investors” and individually as an “Investor”). The Investors paid the Company $1.5 million for 15 million shares of the Company’s common stock, par value $.01 (“Common Stock”) and the Company issued warrants for the purchase of up to 18 million shares of Common Stock to FEI and DTE (“FEI/DTE Warrants”). The FEI/DTE Warrants have a term of five (5) years (“Term”) and may be exercised at a price of $0.20 per share (“Exercise Price”). In the third through fifth years of the Term, the Exercise Price may be satisfied by exchanging Common Stock at the current market price. The FEI/DTE Warrants may be exercised in whole or in part at any time during the Term.
Under the SPA for so long as the Investors retain 51% or more of the Common Stock issued under the SPA (7,650,000 shares), the Investors are entitled to request that the Registrant nominate for election, by the shareholders of the Registrant at the Registrant’s annual meeting of shareholders, two persons suitable to serve as directors of the Registrant.
A provision of the Agreement requires that the Company shall not make any public announcement or statement concerning the Agreement other than that which the Company is required to disclose on Form 8-K and other required filings with the Securities and Exchange Commission. Consistent with its obligations under the securities laws, the Company is required to seek confidential treatment of the information set forth in the Annex and Exhibits to the SPA.
In connection with the SPA the Company entered into an Exclusive Sales Agency and Marketing Agreement with FEI (“Marketing Agreement”). The Marketing Agreement grants to FEI the right to act as the Company’s exclusive marketing and sales agent for natural resources products produced, mined and/or sold by the Company, excluding the Company’s ZeoSure products (see Note 4), in Asia excluding the nation of India.As of June 30, 2013, the Company and FEI are actively seeking to aggregate certain petroleum products and coal supplies owned by others for export to identified buyers in Asia. The completion of these identified transactions is contingent on the finalization of financial and supply arrangements.
| -31- |
As condition precedent to entering into the SPA, Investors required the Company to enter into forbearance agreements with certain of its major creditors and debtors (“Certain Creditors”) (“Forbearance Agreements”), the Blackstone Agreement (as discussed below) and the Novinskie Agreement (as discussed below). The Forbearance Agreements provide for the Certain Creditors to agree to forbear from making a demand on the Company for payment of their debt for a period of two years from the date of the SPA. The Certain Creditors are entitled to receive accelerated payment of their debt should the Company receive revenues and/or capital in excess of stated amounts or if the Company permits an Event of Default (as defined in the Forbearance Agreements) to go uncured. See Notes 5, 6, and 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for discussions regarding the Forbearance Agreements.
As part of the forbearance requirements of the SPA and as a condition precedent thereto, the Company entered into the Second Amendment to Employment Agreement with Mr. Blackstone, Vice President & Chief Accounting Officer (“Blackstone Agreement”). The Blackstone Agreement provides for (1) the payments due Mr. Blackstone for services for the months of December 2012, January and February 2013; (2) a lump sum payment towards the outstanding balance owed Mr. Blackstone under his Employment Agreement; and (3) a provision of the pay down of the remaining balance through monthly payments over two years. Mr. Blackstone is entitled to receive accelerated payment of the Blackstone Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.See Note7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information pertaining to the Blackstone Agreement.
As part of the forbearance requirements of the SPA and as a condition precedent thereto, the Company entered into the First Amendment to Employment Agreement with Mr. Novinskie, President and CFO (“Novinskie Agreement”). The Novinskie Agreement provides for a lump sum payment towards the outstanding balance owed Mr. Novinskie under his Employment Agreement and Mr. Novinskie agrees to forbear from making a demand on the Company for payment of the remaining balance due him for a period of two years from the date of the SPA. Mr. Novinskie is entitled to receive accelerated payment on the remaining balance should the Company receive revenues and/or capital in excess of stated amounts or if the Company permits an Event of Default (as defined in the Novinskie Agreement) to go uncured. See Note7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information pertaining to the Novinskie Agreement.
The SPA contains provisions that restrict the use of the $1.5 million received by the Company as follows:
| Initial Restriction per the SPA | Restricted cash at June 30, 2013 | |||||||
| Forbearance Agreements, Novinskie Agreement and Blackstone Agreement | $ | 350,000 | $ | 15,000 | ||||
| Marketing Agreement payments to FEI | 120,000 | 90,000 | ||||||
| Other marketing and sales activities | 360,000 | 323,020 | ||||||
| Transaction closing costs and related | 80,000 | 13,383 | ||||||
| Oil and gas properties activities | 75,000 | 35,000 | ||||||
| Mineral properties activities | 50,000 | 50,000 | ||||||
| Future general and administrative expenses | 345,000 | 258,554 | ||||||
| Other costs and expenses | 120,000 | 112,641 | ||||||
| Total | $ | 1,500,000 | $ | 897,598 | ||||
2013 Private Placement
Commencing in January 2013, the Company offered a private placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2013 Private Placement”). The 2013 Private Placement consists of up to five hundred thousand dollars ($500,000) for the issuance of up to 5 million shares of Common Stock at $0.10 per share and warrants to purchase up to 2 million shares of Common Stock at an exercise price of $0.50 per share. The warrants expire on January 16, 2018. The Company will utilize the proceeds of this private placement for general working capital purposes. At June 30, 2013, the Company had received cash totaling $370,000 for the sale of 3.7 million shares of Common Stock and warrants to purchase 1.48 million shares of Common Stock.
Convertible Note Payable to Dov Amir
On May 3, 2013, the Company paid cash of $70,000 and issued 498,000 shares of Common Stock in full satisfaction of all amounts due Amir pursuant to the note. The Company determined the value of the cash and shares of Common Stock (at $0.17 per share) to be $154,660. The if-converted value of the Convertible Note Payable on such date was $183,051. Accordingly, the Company recognized $95,802 as gain on debt forgiveness as a result of such full satisfaction of the note.
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Certain Debt and Other Obligations
As of June 30, 2013, the Company and certain of its subsidiaries were in default of various obligations and certain debt obligations classified as current liabilities in the accompanying balance sheet as set forth in the following table:
Such defaulted obligations at June 30, 2013 include the following:
| Amounts included in accounts payable: | ||||
| Consulting services and interest due a licensor | $ | 25,009 | ||
| EV&T – fees, expenses and accrued interest (subject to forbearance agreement) | 195,424 | |||
| CAMI notes payable and accrued interest: | ||||
| Subject to forbearance agreements | 821,694 | |||
| Not subject to forbearance agreements | 31,856 | |||
| EV&T note and interest (subject to forbearance agreement) | 1,166,958 | |||
| Note payable to related party and interest thereon (subject to forbearance agreement) | 68,793 | |||
| 7.25% Convertible Debentures due a related party (subject to forbearance agreement) | 45,867 | |||
| Note payable to former related party and interest thereon (subject to forbearance agreement) | 19,249 | |||
| Amounts included in accrued compensation expense: | ||||
| Subject to forbearance agreements | 588,468 | |||
| Not subject to forbearance agreements | 50,261 | |||
| Total | $ | 3,013,579 |
See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements regarding the cumulative dividends in arrears of $2,015,017 at June 30, 2013, applicable to the Series B 8% Cumulative Convertible Preferred Stock.
Commercialization of Existing Assets
The Company has identified fifteen (15) potential development and redevelopment opportunities associated with its existing leasehold acreage in Texas. The Company believes that the potential for the development of such locations will occur within the next few years as a result of renewed interest in the area of its properties. The prevailing oil price and the development of properties in “resource plays” in the area of the Company’s acreage are major factors contributing to such interest. At September 30, 2011 and 2012, the Company had assigned probable and possible reserves to the fifteen (15) potential developmental locations. The Company is actively seeking financing of approximately $2.5 million for its share of the estimated drilling and completion costs of such development opportunities. To obtain the capital necessary to develop these, the Company (1) continues to seek project specific funding commitments and other capital funding alternatives and (2) is evaluating the sale of certain oil and gas producing properties.
The Company continues to pursue plans to commercialize its kaolin and zeolite projects which are critical for the Company to achieve profitability and establish the Company as a market innovator in industrial minerals. Those plans have progressed from the data acquisition and analysis phase into ongoing mineral processing and facility design phase. The Company and its current partner and potential other partners are actively investigating various commercial applications for its mineral based products. The Company continues to focus on establishing business and or financial relationships that will provide the necessary capital to effectively exploit its kaolin and zeolite mineral resource holdings.
In connection with the March 2013 SPA the Company entered into an Exclusive Sales Agency and Marketing Agreement with FEI (“Marketing Agreement”). The Marketing Agreement grants to FEI the right to act as the Company’s exclusive marketing and sales agent for natural resources products produced, mined and/or sold by the Company, excluding the Company’s ZeoSure products (see Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements), in Asia excluding the nation of India.
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Zeolite
In respect to sanitary wastewater treatment applications, the Company continues to supply material for use in a sequential batch reactor facility located in Pennsylvania and the Company has provided material for a confirmation test of the use of its ReNuGen(TM) product in an alternate design treatment plant. Certain small scale tests have progressed to the point where larger scalable pilot tests of commercial applications for zeolite are in progress in respect to soil additives, animal waste treatment and treatment of industrial wastewaters.
In October, 2009, the Company entered into an agreement to sell zeolite to be used in certain agricultural applications limited to feed supplements in a ten state area in the south-central part of the US. The Company has made limited shipments since fiscal 2010. The Company made no shipments during fiscal 2012. The development of this market has been hampered as a result of economic and environmental factors affecting the purchaser. During August 2012, the Company gave notice to the purchaser to terminate the agreement in October 2012 pursuant to the notice provision provided in the agreement. The Company intends to seek alternatives for the sale of its zeolite to be used in agricultural applications.
In February 2010, the Company entered into a License Agreement concerning two US method patents for the treatment of wastewaters. Such patents utilize the Company’s zeolite. The license applies to the US and covers the use of the technology in water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian Affairs. The Company issued 140,000 shares of its Common Stock in consideration for the License Agreement. The Company recorded $40,907 as Patents License Rights based on an average price of $0.29 per share.
Since hiring its Vice President of Sales, the Company has increased its efforts to develop and expand viable markets for zeolite based products. In general these potential markets are based on the results of prior testing efforts. As such, the Company has begun to introduce an absorbent product, Cite-Clean for use in minimizing unintended industrial discharges and a natural product additive for municipal compost producer to control odors and enhance the eventual nutrient uptake by plants in agricultural and horticultural applications.
On April 8, 2011, in connection with the efforts of the Musser Group, the Company entered into a Material Supply and Joint Venture Agreement between CAMI (wholly-owned subsidiary) and VitaminSpice, Inc. (“VSI”) pursuant to which CAMI agrees to supply Clinoptilolite (zeolite) to VSI in connection with the introduction by VSI of detoxification products into targeted geographic markets. VSI is obligated to utilize CAMI as its sole supplier of Clinoptilolite. The agreement does not specify any minimum quantity supply requirements of CAMI. In addition to an initial price per ton for Clinoptilolite to be sold to VSI, CAMI will share in the profits from the sales of such products by VSI. CAMI has provided material to VSI for use in product and market strategy development, as well as potential clinical studies. The Company made no shipments of product to VSI and the Company has not received any orders from VSI. VSI has not met certain performance standards as set forth in the agreement. On April 13, 2012, the Company gave notice to VSI and terminated the agreement pursuant to the provision in respect to termination for cause.
On July 3, 2012, CAMI entered into an operating agreement for ZeoSure LLC (“ZLLC”) as one of ZLLC’s two managing members. ZLLC was formed for the purpose of developing human consumption products including but not limited to detoxification and digestive supplements and human consumable products utilizing CAPI’S Clinoptilolite zeolite mineral focusing on markets throughout the world with a primary emphasis on markets in the United States and Asia. CAMI and SafeHatch LLC, an entity controlled by an individual previously affiliated with the Musser Group, are the managing members and each owns 47.5% of ZLLC. The remaining 5% of ZLLC is owned by the Musser Group. The members of ZLLC intend to seek initial capital of $1 million from third parties and enter into product marketing and distribution agreements with participants active within the dietary supplements market in the next few months. The operating agreement has not been ratified by the Audit Committee of the Board of Directors of the Company. Other than seeking initial capitaland attempting to identify viable product marketing and distribution partners, ZLLC had no activity through June 30, 2013.
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Kaolin
The efforts of the Company and Tecumseh Professional Associates, Inc. (“TPA”) to evaluate the Sierra Kaolin deposit are ongoing. The venture’s efforts to commercialize the Sierra Kaolin deposit have focused on an initial target area encompassing approximately 32 acres out of the project’s 2,740 acres. The test minerals extracted from the target area have been processed into product formulations determined by independent consultants to be suitable (a) for coatings, fillers and pigments for use within the paint and paper manufacturing industries, and (b) as an additive in cement formulations. The analysis results of the processed minerals with respect to its physical properties including brightness, color, opacity, strength, and oil absorption have indicated that commercially viable products can be produced from the deposit’s extracted minerals.
In December 2009, the Sierra Kaolin Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations was approved. Mine site plans have been prepared to facilitate planned extraction operations. Since receiving project approval, the venture, with the assistance of its consultants, has made technical presentations of the product formulations to entities active (a) in the specialty cement applications and (b) on both the demand and supply sides of the coatings, fillers and pigments sectors of the paint and paper industries. While the feedback from these presentations has been encouraging, market conditions within the paper and housing industries have not been favorable; however, interest in the Sierra Kaolin deposit’s minerals for use in meta-kaolin applications has remained favorable. As such the project manager is focusing its commercialization efforts in this area.
During fiscal 2012, in addition to the meta-kaolin applications, because of its natural brightness, interest has been expressed relative to the use of the Sierra Kaolin material as a possible economic substitute and/or extender for titanium oxide within the filter and coating industries. TPA has also been in discussions with entities within the mining sector relative to other joint venture opportunities involving the mineral claims controlled by the Sierra Kaolin project. To date, the discussions have been exploratory in nature.
During the quarter ended June 30, 2013, third party interest in the Sierra Kaolin Project has increased. Management of the Company believes the market for fillers and coatings (the historical primary uses for Kaolin products) have begun to recover, while the interest in Meta-Kaolin products in the Southwestern United States has continued to increase. This later market is of particular interest to the Company because test data indicates that its Sierra Kaolin mineral has specific physical and chemical properties that support its use in the application. TPA as the project’s manager is aggressively pursuing these commercialization opportunities.
Off-balance Sheet Arrangements,CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “Variable Interest Entities,” that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures. However, the request for project financing for ZeoSure LLC is being presented to potential third parties and management of the Company will evaluate alternative financing structures as part of any negotiations with those potential sources of capital. Also, the company intends to request project financing for the (15) potential development and redevelopment opportunities associated with its existing leasehold acreage in Texas and management of the Company will evaluate alternative financing structures as part of any negotiations with those potential sources of capital.
We have various contractual obligations that are appropriately recorded as liabilities in our consolidated financial statements. Certain other items are not recognized as liabilities in our consolidated financial statements. Examples of items not recognized as liabilities in our consolidated financial statements are commitments to purchase goods and services that have not yet been received or rendered, respectively, as of June 30, 2013, and future minimum lease payments for the use of property and equipment under operating lease agreements.
Certain contractual obligations classified as noncurrent liabilities in the consolidated balance sheet as of June 30, 2013 include accrued bonus expense ($1,373,831) and Series B 8% Cumulative Convertible Preferred Stock Dividends accrued ($1,826,239). See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements regarding the cumulative dividends in arrears of $2,015,017 at June 30, 2013, applicable to the Series B 8% Cumulative Convertible Preferred Stock.
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CRITICAL ACCOUNTING POLICIES
There have been no changes in significant accounting policies from those disclosed in the 2012 Annual Report on Form 10-K.
RECENT Accounting PRONOUNCEMENTS
See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
The forward-looking statements in this section and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of various factors. See the “CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS” contained on page 3 of this Quarterly Report on Form 10-Q.
All forward-looking statements speak only as of the date made. All subsequent forward-looking statements are expressly qualified in their entirety by the cautionary statements above. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement or reflect events or circumstances after the date on which the forward-looking statement is made, or to reflect the occurrence (or non-occurrence) of anticipated (or unanticipated) events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
None.
Item 4. Controls and Procedures.
Based on management’s evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Code of Ethics
The Board of Directors of the Company has adopted a Code of Ethics (see Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2007) for all of the Company's employees, officers and Directors. Each officer and Director of the Company annually affirms that he has read the Company’s Code of Ethics and agrees to be bound thereby.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Two law suits have been filed in Burleson County, Texas, against the Company, one in July 2012 and the other in October, 2012, by certain owners of royalty interests in oil and gas wells operated by WRC for, among other things, an accounting of expense and revenues for certain wells and/or production units in which their leases are included. The plaintiffs also alleged that WRC has failed to fully develop their leases. The applicable leases are held by production by inclusion in a production unit or units and are fully developed. WRC, through its Texas counsel, has filed a general denial of the claim. A preliminary hearing is scheduled for October 11, 2013.
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In August 2012, a surface owner in certain property on which a natural gas gathering system right-of-way is owned by a subsidiary of the Company (“DRIOP”) commenced an action against DRIOP in the Circuit Court of Randolph County, West Virginia, alleging interference with access by such surface owner to and from certain property. DRIOP, through its West Virginia counsel, has filed a general denial of the claim. Management of the Company contemplates a settlement of the litigation within the next 60 days.
Item 1A. Risk Factors.
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
Independent Directors Stock Option Plan
On December 27, 2012, David A Grady, a Director of the Company at that date, was granted an option to purchase 200,000 shares of stock at an exercise price of $0.06 per share under the Company’s Non-qualified Independent Director Stock Option Plan (“Plan”). The option is exercisable through December 2017. The option vests 50% in December 2013 and 25% in each of December 2014 and 2015.At the Company’s Annual Meeting of Shareholders in June 2013, Mr. Grady was not re-elected to serve as a Director; accordingly, the option expired unexercised in accordance with the terms of the Plan.
CAMI Debt
Under the terms of the agreement dated March 25, 2013, with Alice Haessler, Mrs. Haessler received $20,000 in cash and 50,000 shares of Common Stock in full settlement of the obligation owed to Alice Haessler.
2013 Private Placement
As of June 30, 2013, the Company has received cash totaling $370,000 for the sale of 3.7 million shares of Common Stock and warrants to purchase 1.48 million shares of Common Stock. See Part II, Item 5.
FEI/DTEStock Purchase Agreement
On March 25, 2013, the Company sold 15,000,000 shares of Common Stock and issued warrants to purchase up to 18,000,000 shares of Common Stock to FEI and DTE (“FEI/DTE Warrants”) for $1,500,000. The FEI/DTE Warrants have a term of five (5) years (“Term”) and may be exercised at a price of $0.20 per share (“Exercise Price”). In the third through fifth years of the Term, the Exercise Price may be satisfied by exchanging Common Stock at the current market price. The FEI/DTE Warrants may be exercised in whole or in part at any time during the Term.
Option and Grant to Chief Executive Officer (“CEO”)
Effective March 25, 2013, the Company granted (i) 600,000 shares of common stock and (ii) and an option for the purchase of 1.2 million shares of common stock to Michael Parrish, CEO of the Company. The 600,000 shares are issuable at the rate of 100,000 shares at the end of each of the nine months commencing April 30, 2013. Also, effective March 25, 2013, the Company granted an option for the purchase of 1.2 million shares of Common Stock to Mr. Parrish at an exercise price of $0.14 per share. The option is exercisable through May 21, 2014 and vests 50% on each of May 21, 2013 and 2014.
Convertible Note Payable to Dov Amir
On May 3, 2013, the Company paid cash of $70,000 and issued 498,000 shares of Common Stock in full satisfaction of all amounts due Amir pursuant to the note. The Company determined the value of the cash and shares of Common Stock (at $0.17 per share) to be $154,660.
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Option and Grant to Vice President of Sales
Effective May 8, 2013, the Company granted an option for the purchase of 50,000 shares of common stock to Joseph Sverapa, Vice President of Sales, at an exercise price of $0.18 per share. The option is exercisable through May 2018. The option vests 50% in May 2014 and 25% in each of May 2015 and 2016. The fair value of the option was determined to be $8,878 using the Black-Scholes valuation model.
Issuer Purchases of Equity Securities
The Company does not have a stock purchase program for its equity securities.
| Item 3. Defaults Upon Senior Securities. |
| a) | The Company is in default of certain obligations as discussed in Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements. |
| b) | The arrearage in respect to dividends on Series B Preferred Stock totals $2,015,017 at June 30, 2013. |
Item 4. Mine Safety Disclosures.
| None. |
Item 5. Other Information.
Current Reports on Form 8-K (filed during the current quarter)
The Registrant hereby incorporates by reference the Registrant’s Current Report on Form 8-K dated May 1, 2013, filed on May 8, 2013.
The Registrant hereby incorporates by reference the Registrant’s two Current Reports on Forms 8-K dated May 6, 2013, filed on May 8, 2013.
The Registrant hereby incorporates by reference the Registrant’s Current Report on Form 8-K dated June 3, 2013, filed on June 7, 2013.
The Registrant hereby incorporates by reference the Registrant’s Current Report on Forms 8-K dated June 20, 2013, filed on June 25, 2013.
2013 Private Placement
Commencing in January 2013, the Company offered a private placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2013 Private Placement”). The 2013 Private Placement consists of up to five hundred thousand dollars ($500,000) for the issuance of up to 5 million shares of Common Stock at $0.10 per share and warrants to purchase up to 2 million shares of Common Stock at an exercise price of $0.50 per share. The warrants expire on January 16, 2018. The Company will utilize the proceeds of this private placement for general working capital purposes. As of June 30, 2013, the Company has received cash totaling $370,000 for the sale of 3.7 million shares of Common Stock and warrants to purchase 1.48 million shares of Common Stock.
Employment Agreements
Blackstone – As part of the forbearance requirements of the SPA (see Item 2 of Part II) and as a condition precedent thereto, the Company entered into the Second Amendment to Employment Agreement with Mr. Blackstone, Vice President and Chief Accounting Officer (“Blackstone Agreement”). The Blackstone Agreement provides for (1) the payments due Mr. Blackstone for services for the months of December 2012, January and February 2013; (2) a lump sum payment towards the outstanding balance owed Mr. Blackstone under his Employment Agreement; and (3) a provision of the pay down of the remaining balance through monthly payments over two years. Mr. Blackstone is entitled to receive accelerated payment of the Blackstone Debt should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.See Note7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information pertaining to the Blackstone Agreement.
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Martin –The Company owes Mr. Martin $245,835 in salary. As part of the forbearance requirements of the SPA, Mr. Martin entered into a Forbearance Agreement providing for his agreement to forbear from making a demand on the Company for payment of, among other obligations due him, the salary due him in connection with his previous employment agreement with the Company for a period of two (2) years from the date of the SPA. The salary due Mr. Martin will earn no interest in the first year and 3.5% interest in the second. Mr. Martin is entitled to receive accelerated payment of the salary due him should the Company receive revenues and/or investments in excess of stated amounts or if the company permits an Event of Default to go uncured.
Novinskie – As part of the forbearance requirements of the SPA and as a condition precedent thereto, the Company entered into the First Amendment to Employment Agreement with Mr. Novinskie, President and CFO (“Novinskie Agreement”). The Novinskie Agreement provides for a lump sum payment towards the outstanding balance owed Mr. Novinskie under his Employment Agreement and Mr. Novinskie agrees to forbear from making a demand on the Company for payment of the remaining balance due him for a period of two years from the date of the SPA. Mr. Novinskie is entitled to receive accelerated payment on the remaining balance should the Company receive revenues and/or capital in excess of stated amounts or if the Company permits an Event of Default (as defined in the Novinskie Agreement) to go uncured. See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information pertaining to the Novinskie Agreement.
Parrish - In November 2012, the Employment Contract with Michael D. Parrish was renewed. Such contract was orally amended in December 2012 to reflect a change in base salary. Effective March 25, 2013, the Company granted (i) 600,000 shares of common stock and (ii) and an option for the purchase of 1.2 million shares of common stock to Mr. Parrish. Pursuant to a section contained in the 2013 SPA, Mr. Parrish’s Employment Contract has been extended through March 31, 2014. Also see Item 2 of Part II.
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Item 6. Exhibits.
Exhibit Number | Description | Located At | ||
| 3.8 | Certificate of Amendment to Articles of Incorporation effective June 20, 2013 (increases authorized common shares to 150 million) | Filed Herewith | ||
| 10.27 | Stock Purchase Agreement with Far East Investments, LLC and DTE Investment Ltd. and DTE dated March 25, 2013 | Incorporated by reference to Exhibit 10.27 to Registrant’s Current Report on Form 8-K dated March 25, 2013, filed on March 27, 2013 | ||
| 10.28 | First Amendment to Employment Agreement by and between Gary J. Novinskie and Daleco Resources Corporation dated March 15, 2013 | Incorporated by reference to Exhibit 10.28 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on May 20, 2013 | ||
| 10.29 | Second Amendment to Employment Agreement by and between Richard W. Blackstone and Daleco Resources Corporation dated March 15, 2013 | Incorporated by reference to Exhibit 10.29 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on May 20, 2013 | ||
| 10.30 | Amended and Restated Agreement of Settlement dated June 25, 2013, between the Company and Dov Amir | Filed Herewith | ||
| 10.31 | Amended and Restated Non-qualified Independent Director Stock Option Plan Approved by the Shareholders at the Annual Meeting on June 20, 2013 (supersedes and replaces Exhibit 10.21 in its entirety) | Filed Herewith | ||
| 31.1 | Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed Herewith | ||
| 31.2 | Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed Herewith | ||
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |
The Registrant incorporates by reference its Exhibit List as attached to its Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DALECO RESOURCES CORPORATION | ||
| (Registrant) | ||
| Dated: August 19, 2013 | /s/ MICHAEL D. PARRISH | |
| Michael D. Parrish | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| Dated: August 19, 2013 | /s/ GARY J. NOVINSKIE | |
| Gary J. Novinskie | ||
| President, Chief Financial Officer and Director | ||
| (Principal Financial Officer) |
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