ITEM 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The
following discussion of our consolidated financial condition and results of operations should be read in conjunction with the
consolidated financial statements and notes thereto and the other financial information included elsewhere in this report.
Certain
statements contained in this report, including, without limitation, statements containing the words “believes,” “anticipates,”
“expects” and words of similar import, constitute “forward looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including our ability to create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes
in our business strategy or development plans; competition; business disruptions; adverse publicity; and international, national
and local general economic and market conditions.
GENERAL
Delta
International Oil & Gas Inc. (“Delta” or “the Company”) was incorporated in Delaware on November 17,
1999. Our name was changed from Delta Mutual Inc. to our present name on October 29, 2013. In 2003, we established business operations
focused on providing environmental and construction technologies and services. Our operations in the Far East (Indonesia) and
our construction operations in Puerto Rico were discontinued in 2008.
Effective
March 4, 2008, we acquired 100% of the issued and outstanding membership interests in the parent of South American Hedge Fund
LLC, a Delaware limited liability company (sometimes herein referred to as “SAHF”). For accounting purposes, the transaction
was treated as a recapitalization of the Company, as of March 4, 2008, with the parent of SAHF as the acquirer. SAHF maintains
a branch office in Argentina, where it is engaged in oil and gas exploration and development activities.
Overview
We
are an independent oil and gas company, with the SIC Code classification 1311 (oil and gas production) for SEC filing purposes,
engaged in oil and gas acquisition and exploration activities in Argentina.
As a result
of the review by our management team of oil and gas exploration and production operations in Argentina, the Company has decided
to sell its Argentine oil and gas concessions. Throughout 2016 and the first quarter of 2017, the Company has been evaluating
its entrance into different geographic regions within the energy sector, as well as the water purification and telecommunications
sectors. We have entered into an agreement as
of January 3, 2017 to dispose of our investments in two oil and gas concessions (Tartagal Oriental and Morillo) in Argentina,
as well as to transfer SAHF and the Valle de Lerma operating concession to a third party. The first payment for the sale of Tartagal
and Oriental and Morillo was received in early April.
During
the first quarter of 2017, the Company had signed two letters of intent (“LOI”) to acquire test equipment technology
companies, but after a dissatisfaction with the due diligence results, the Company decided to terminate the LOIs.
The Company is currently evaluating companies
in the tech and energy sectors as potential acquisition or merger candidates.
Investment
in MHD Technology Corporation
We
have made an investment of $125,000 in MHD Technology Corporation, a Delaware corporation (“MHD Tech”), for an equity
position of 1,343,750 shares of common stock of MHD Tech (approximately 6.25% of the outstanding shares in the company); this
investment was made through a separate limited liability company owned by Delta and set up specifically for this investment. In
connection with the investment, Santiago Peralta, our Interim Chief Executive Officer and sole director, has joined the Board
of Directors. The investment that Delta made into MHD Tech will be primarily for research and development purposes. On November
9, 2016 MHD Tech received the simulation showcasing how the pump works and has raised another $300,000 from investors (new Delta
ownership- 5.5%).
As
of March 6, 2017, MHD Technology had produced a video of its “proof-of-concept” prototype. This prototype demonstrated
water getting pushed through a small pipeline using MHD propulsion, getting desalinated, and going into a different reservoir.
The desalination was measured by a change in the pH balance of the water. The video made is not of quality production and is just
intended to serve as a demonstration of the unit working. A CGI video of the working prototype was also developed as well as an
introductory video into a unit made for the automobile industry.
The
working prototype is expected to serve various functions: gather more information regarding the technical specifications of the
unit, raising additional capital for the first full-scale prototype development, forge partnerships to help in developing the
full-scale prototype, and increase interest in product licensing.
Termination
of Proposed Acquisitions
On
April 18, 2017, we terminated two letters of intent to which we were party, a February 15, 2017 letter of intent with Bayberry
Capital for the acquisition of 100% of the outstanding shares in Naptech Test Equipment, Inc., and a March 22, 2017 letter of
intent for the acquisition of Cardinal Electronics, Inc. The Company is currently evaluating other prospects for acquisitions.
Sale
of Argentina Oil Properties
On May 12, 2016, Delta and New Times Energy
Corporation Limited reached an agreement in principle for the sale of 18% of Tartagal Oriental and Morillo, which was followed
by a definitive agreement on January 3, 2017, among High Luck Group Limited, a subsidiary of New Times Energy, and Delta and SAHF,
for a total consideration for the 18% of Tartagal Oriental and Morillo of US$4,000,000. The initial payment of US$2,000,000 has
been placed in escrow on February 10, 2017, and a deposit on the purchase price of $500,000 was received by Delta on April 3 2017.
There are various conditions for the full release of the funds including the successful transfer of the properties to High Luck
Group Ltd, a subsidiary of New Times Energy. Each condition satisfied will trigger an equal percentage of the funds being released.
On April 21, 2017, the transfer decree for Tartagal and Morillo was issued by the Province of Salta.
Additionally, Delta would receive 3% of gross
revenues of production of both oil and gas in the properties until an additional US$2 million is paid. High Luck has committed
to drill four exploratory wells in the next four months in Tartagal and Morillo concession areas; however, it is likely that the
UTE will receive an extension after drilling the first well. Although we had expected this transaction to close in the first quarter
of 2017, and are now expecting a closing in the second quarter, there is no assurance that the sale of these concessions to High
Luck Group, and the disposal of SAHF and the Valle de Lerma property to third parties will be completed, given the closing conditions
precedent and necessity of certain governmental actions in Argentina.
Our
Oil and Gas Investments
As
of March 31, 2017, the Company, through SAHF, retained 18% of the total concession in the carryover mode (“no cost obligations
to SAHF”) in the Tartagal and Morillo oil and gas concessions located in Northern Argentina. We do not operate the Tartagal
and Morillo concession, and have a minority position in the joint venture. 9% of Tartagal and Morillo had been sold to PPL in
March 2012, but due to payment defaults, the 9% were not transferred. Tartagal and Morillo have a carrying value of $0 because
50% of its interest was sold for higher than the carrying cost in 2012.
On May 5, 2017, the Company signed a
Letter of Intent for an Asset Purchase through Preferred Convertible Stock with Breitling Energy Corp. The 2014 10K of Breitling
reports reserves of around $20,000,000. Bayberry Capital will also be involved in the transaction as Breitling’s offer was
brought forth by them.
We hold a 30.6% interest in the Valle de
Lerma concession in Northern Argentina, where the joint venture partners are Grasta SA, PetroNEXUS, High Luck Group, and REMSA.
Valle de Lerma has a carrying value of $0. 29.4% of the rights were sold to PPL under the PPL Agreement and High Luck Group was
included in the UTE and the Operation Agreement as 29.4% owners and 50% liable for all expenses as requested by PPL. However, the
official government decree acknowledging High Luck Group as an owner has not yet been made. Delta has spent about $500,000 and
complied with about $800,000 of work unit commitments in relation to Valle de Lerma of which High Luck Group is liable for 50%.
Additionally, the end of the first period for Valle de Lerma was in March 2016- which the UTE is not looking to extend.
The
exploration terms are four years for the first period, three years for the second and two years for the last period. Currently
our ability to reopen the existing well site is constrained by law, since the location of the well was within the city limits
of Salta. Requests made for government approval to override the existing restrictions of the current policy have been rejected.
The Company is looking to transfer its full stake in Valle de Lerma.
Lithium
Mining Property
On
March 1, 2010, SAHF purchased control of 51% of the Guayatayoc project via a partnership agreement with Oscar Chedrese and Servicios
Mineros SA. The project holds the concession for a period of 20 years for the mineral rights to 143,000 hectares with 29 mines
located in the Northwest part of Argentina, south of the border with Bolivia, with high lithium and borates brines concentration.
We have performed sampling in the property to determine the value of the property, but the results have been inconclusive. We
are seeking a purchaser for our concession interest in this property. Delta is not expecting a sale of the lithium property within
the next year due to 1) the current price of lithium, 2) lithium’s abundance in the surrounding area, and 3) Delta’s
primary focus on other projects. The concession was completely impaired and has a carrying value of $0 as of March 31, 2017.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2017 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2016
During
the three months ended March 31, 2017, we incurred a net loss of approximately $90,000, compared to net loss of approximately
$82,000 for the three months ended March 31, 2016. The increase in the net loss for the three months ended March 31, 2017 compared
to the three months ended March 31, 2016 is primarily due to: administrative expenses in Argentina in 2017 that are usually not
incurred until the third quarter.
LIQUIDITY
AND CAPITAL REQUIREMENTS
At
March 31, 2017, we had a working capital surplus of approximately $123,000 compared with a working capital surplus of approximately
$214,000 at December 31, 2016.
At
March 31, 2017, we had total assets of approximately $286,000 compared to total assets of approximately $365,000 at December 31,
2016. Net cash used in operating activities in the three months ended March 31, 2017 was approximately $79,000, as compared with
net cash used in operating activities of $77,000 in 2016; net cash used in investing activities was $0 in the first quarter of
2017 and $125,000 in the first quarter of 2016; and net cash generated from financing activities was $-0- in the first quarters
of both years.
Effective March 30, 2012, we entered into
an Asset Purchase and Cooperation Agreement (the “Cooperation Agreement”) with Principle Petroleum Limited (“PPL”),
headquartered in the British Virgin Islands. Under the Cooperation Agreement, we agreed to sell to PPL, for a price of $7,000,000
certain exploration and exploitation rights to oil and gas deposits and certain bidding rights held by SAHF. The Company received
a total of $4,300,000 in payments, but PPL defaulted on the rest of its payments. Therefore, the agreements with PPL have been
terminated.
Estimated
2017 Capital Requirements
In
the case of the Tartagal and Morillo oil and gas properties, we have carried interests; therefore, no further capital expenditures
are required on our part.
Valle de Lerma’s target well, “La
Troja,” has been deemed inside the city limits, and, therefore, unable to be drilled. Given the concession’s limited
number of other potential “workover” drills, and the Company’s strategy to not engage in any exploratory drilling,
the cost of Valle de Lerma for 2016 is expected to be US$100,000 in canons and other obligations- which is still being determined
by the Province of Salta. The Company is currently under contract to transfer the property out along with the sale of its subsidiary,
SAHF.
SAHF also has “minimum expected income”
tax in Argentina. In the third quarter of 2016, SAHF spent about US$2,000 in minimum expected income tax in Argentina. During the
first quarter of 2017, around US$150 was paid in minimum expected income tax in Argentina. In 2018, the Company is expecting to
pay taxes of approximately $300,000 on the sale of its oil and gas concessions.
In
2016, Delta maintained its lowered operating expenses and SG&As to look for other opportunities for investment in the energy
industry. In the oil and gas sector, the focus is upstream and service-related while in the alternative energies, the focus is
in water propulsion systems and hydro-electric systems.
USE
OF ESTIMATES
The
preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of
assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to oil and gas properties, intangible assets, income taxes and contingencies
and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been
included in these financial statements. Certain amounts for prior periods have been reclassified to conform to the current presentation.
Management
believes that it is reasonably possible that the following material estimates affecting the financial statements could happen
in the coming two years:
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Reserve
reports in two of the properties;
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Cash
flow from exploratory drilling in two of the properties; and
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Future
exploration and development costs that are carried.
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NEW
FINANCIAL ACCOUNTING STANDARDS
For
a summary of new financial accounting standards applicable to the Company, please refer to the notes to the financial statements
set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 31, 2017.
Critical
Accounting Policies and Estimates
The
Securities and Exchange Commission recently issued “Financial Reporting Release No. 60 Cautionary Advice About Critical
Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosures, discussion and commentary
on their accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an
accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and
requires significant judgment and estimates on the part of management in the application of the policy.
The
Company assesses potential impairment of its long-lived assets, which include its property and equipment, investments, and its
identifiable intangibles such as deferred charges under the guidance of ASC 144 “Accounting for the Impairment or Disposal
of Long-Lived Assets.” The Company must continually determine if a permanent impairment of its long-lived assets has occurred
and write down the assets to their fair values and charge current operations for the measured impairment.
Investments
in non-consolidated affiliates – These investments consist of the Company’s ownership interests in oil and gas development
and exploration rights in Argentina, net of impairment losses if any.
We
evaluate these investments for impairment when indicators of potential impairment are present. Indicators of impairment include,
but are not limited to, levels of oil and gas reserves, availability of pipeline (or other transportation) capacity and infrastructure
and management of the operations in which the investments were made.
The
Company accounts for stock-based compensation to non-employees under ASC 718, “Compensation-Stock Compensation” (“ASC
718”). The compensation cost of the awards is based on the grant date fair-value of these awards and recognized
over the requisite service period, which is typically the vesting period. The Company uses the Black-Scholes Option
Pricing Model to determine the fair-value of stock options issued for compensation.
The
Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.” ASC
505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using
the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair
value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment
is reached or the date that performance is complete. Generally, our awards do not entail performance commitments. When
an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award
as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When
the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value
on the date the performance is complete.