Item
1. Financial Statements
Certain
information and footnote disclosures required under accounting principles generally accepted in the United States of America have
been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all material adjustments that are necessary for a fair presentation for
the periods presented have been reflected. It is suggested that the following consolidated financial statements be read in conjunction
with the year-end consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016.
The
results of operations for the nine and three months ended September 30, 2017 and 2016 are not necessarily indicative of the results
for the entire fiscal year or for any other period.
DELTA INTERNATIONAL OIL & GAS INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
34,095
|
|
|
$
|
239,627
|
|
Total current assets
|
|
|
34,095
|
|
|
|
239,627
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, net of unamortized discount
|
|
|
257,781
|
|
|
|
-
|
|
Oil and gas properties
|
|
|
102,203
|
|
|
|
-
|
|
Investment in MHD
|
|
|
125,000
|
|
|
|
125,000
|
|
TOTAL ASSETS
|
|
$
|
519,079
|
|
|
$
|
364,627
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,200
|
|
|
$
|
4,945
|
|
Accrued expenses
|
|
|
6,140
|
|
|
|
6,140
|
|
Notes payable
|
|
|
15,000
|
|
|
|
15,000
|
|
Deposit related to discontinued operations
|
|
|
500,000
|
|
|
|
-
|
|
Total current liabilities
|
|
|
523,340
|
|
|
|
26,085
|
|
Total liabilities
|
|
|
523,340
|
|
|
|
26,085
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock $0.0001 par value - authorized 250,000,000 shares; 33,088,826 shares and 32,338,826, issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
3,308
|
|
|
|
3,233
|
|
Additional paid-in capital
|
|
|
7,238,104
|
|
|
|
7,151,482
|
|
Accumulated deficit
|
|
|
(7,245,673
|
)
|
|
|
(6,831,708
|
)
|
Accumulated other comprehensive gain
|
|
|
-
|
|
|
|
15,535
|
|
Total stockholders' equity (deficit)
|
|
|
(4,261
|
)
|
|
|
338,542
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
519,079
|
|
|
$
|
364,627
|
|
The accompanying notes are an integral part of the unaudited
consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
66,019
|
|
|
|
74,580
|
|
|
|
245,482
|
|
|
|
249,024
|
|
Loss from operations
|
|
$
|
(66,019
|
)
|
|
$
|
(74,580
|
)
|
|
$
|
(245,482
|
)
|
|
$
|
(249,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
8,972
|
|
|
|
-
|
|
|
|
9,037
|
|
|
|
80
|
|
Other Income
|
|
|
8,972
|
|
|
|
-
|
|
|
|
9,037
|
|
|
|
80
|
|
Loss before income taxes
|
|
|
(57,047
|
)
|
|
|
(74,580
|
)
|
|
|
(236,445
|
)
|
|
|
(248,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Continuing Operations
|
|
$
|
(57,047
|
)
|
|
$
|
(74,580
|
)
|
|
$
|
(236,445
|
)
|
|
$
|
(248,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Discontinued Operations, net of tax
|
|
|
(45
|
)
|
|
$
|
(9,574
|
)
|
|
$
|
(177,520
|
)
|
|
$
|
(212,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(57,092
|
)
|
|
$
|
(84,154
|
)
|
|
$
|
(413,965
|
)
|
|
$
|
(461,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Discontinued Operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Basic and Diluted Net Loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Weighted average common shares - Basic and Diluted
|
|
|
32,385,529
|
|
|
|
32,338,826
|
|
|
|
32,385,529
|
|
|
|
32,338,826
|
|
The
accompanying notes are an integral part of the unaudited consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE LOSS
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(57,092
|
)
|
|
$
|
(84,154
|
)
|
|
$
|
(413,965
|
)
|
|
$
|
(461,368
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
(2,176
|
)
|
|
|
-
|
|
|
|
(32,811
|
)
|
Net change in other comprehensive loss
|
|
|
-
|
|
|
|
(2,176
|
)
|
|
|
-
|
|
|
|
(32,811
|
)
|
Comprehensive loss
|
|
$
|
(57,092
|
)
|
|
$
|
(86,330
|
)
|
|
$
|
(413,965
|
)
|
|
$
|
(494,179
|
)
|
The
accompanying notes are an integral part of the unaudited consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(413,965
|
)
|
|
$
|
(461,368
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
-
|
|
|
|
191,236
|
|
Warrants issued for services rendered
|
|
|
34,197
|
|
|
|
-
|
|
Amortization of note receivable discount
|
|
|
(
2,484
|
)
|
|
|
-
|
|
Gain on sale of SAHF LLC
|
|
|
(15,535
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
(2,745
|
)
|
|
|
9,443
|
|
Net cash used in operating activities
|
|
|
(400,532
|
)
|
|
|
(260,689
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of furniture and equipment
|
|
|
-
|
|
|
|
(693
|
)
|
Deposit on sale of concession
|
|
|
500,000
|
|
|
|
-
|
|
Notes receivable
|
|
|
(300,000
|
)
|
|
|
-
|
|
Acquisition of oil and gas property
|
|
|
(5,000
|
)
|
|
|
-
|
|
Investment in MHD Tech
|
|
|
-
|
|
|
|
(125,000
|
)
|
Net cash provided by (used in) investing activities
|
|
|
195,000
|
|
|
|
(125,693
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
Effect of Exchange Rates on Cash
|
|
|
-
|
|
|
|
(2,167
|
)
|
Net decrease in cash
|
|
|
(205,532
|
)
|
|
|
(388,549
|
)
|
Cash - Beginning of period
|
|
|
239,627
|
|
|
|
717,085
|
|
Cash - End of period
|
|
$
|
34,095
|
|
|
$
|
328,536
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash information:
|
|
|
|
|
|
|
|
|
Stock issued for acquisition of oil and gas property
|
|
$
|
52,500
|
|
|
|
-
|
|
Discount
on note receivable
|
|
$
|
44,703
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of the unaudited consolidated financial statements.
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited interim consolidated financial statements of Delta International Oil & Gas Inc. (‘we’,
‘our’, “Delta” or the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read
in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented
have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be
expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in
the audited financial statements for the most recent fiscal year end December 31, 2016 as reported on Form 10-K, have been omitted.
Oil
and Gas Properties
The
Company accounts for our oil and natural gas producing activities using the full cost method of accounting as prescribed by the
United States Securities and Exchange Commission (SEC). Under this method, subject to a limitation based on estimated value, all
costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including internal costs
directly associated with acquisition, exploration, and development activities, the costs of abandoned properties, dry holes, geophysical
costs, and annual lease rentals are capitalized within a cost center. Costs of production and general and administrative corporate
costs unrelated to acquisition, exploration, and development activities are expensed as incurred.
Costs
associated with unevaluated properties are capitalized as oil and natural gas properties but are excluded from the amortization
base during the evaluation period. When we determine whether the property has proved recoverable reserves or not, or if there
is an impairment, the costs are transferred into the amortization base and thereby become subject to amortization.
The
Company assesses all items classified as unevaluated property on at least an annual basis for inclusion in the amortization base.
The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment
includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved
reserves are assigned. During any period in which these factors indicate that there would be impairment, or if proved reserves
are assigned to a property, the cumulative costs incurred to date for such property are transferred to the amortizable base and
are then subject to amortization.
Capitalized
costs included in the amortization base are depleted using the unit of production method based on proved reserves. Depletion is
calculated using the capitalized costs included in the amortization base, including estimated asset retirement costs, plus the
estimated future expenditures to be incurred in developing proved reserves, net of estimated salvage values.
Sales
or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or
loss recorded unless the ratio of cost to proved reserves would significantly change.
Discontinued
Operations
We
present discontinued operations in our consolidated financial statements when we believe that the disposition of assets constitutes
a strategic shift that will have a major effect on our operations or financial results. The results of prior periods are reclassified
to conform to the current year presentation. See Note 3.
Variable
Interest Entities
The
Company follows ASC 810-10-15 guidance with respect to accounting for variable interest entities (each, a “VIE”).
These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support
from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest
is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected
residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the
entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has
a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is
deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion
is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits
criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant
to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE
due to changes in facts and circumstances. The Company has entered into a transaction with a VIE during the period; however, the
Company is not considered to be the primary beneficiary in this transaction. Footnote 3 further discloses this investment.
2.
GOING CONCERN
Financial
Condition
The
Company’s financial statements for the nine months ended September 30, 2017 have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities in the normal course of business. The Company has incurred
net losses and as of September 30, 2017 has an accumulated deficit of $7,245,673 which raises substantial doubt about the Company’s
ability to continue as a going concern.
Management
Plans to Continue as a Going Concern
Delta
has signed a contract for the sale of 18% of Tartagal and Morillo properties in Argentina for a total of $2,000,000 in cash and
$2,000,000 in royalties produced from the properties, of which Delta is the beneficiary to 75% of the sales price and the new
owner of SAHF is the beneficiary to 25% of the sales price. $500,000 has already been transferred to Delta as a deposit. Management
is working diligently to close this deal.
In
the second and third quarters of 2017, Delta has loaned $300,000 in two 18-month promissory notes at 9% to 2 different oil and
gas exploration and producing companies. Along with this loan, Delta also owns 3.5% of Second Chance Oil (“SCO”),
a California company, and 3.75% carried interest in the first two re-entry wells to be drilled in a lease in West Texas by Landmaster
Partners, Inc. (“Landmaster”). Both SCO and Landmaster Partners have commenced drilling in August 2017.
Delta
anticipates that the contract with High Luck will close for the sale of Tartagal and Morillo before year-end, that the loans interest
payments will continue to be received, that early loan paybacks will commence before year-end, and that the interests held in
the Texas property will begin to payout before year-end. Management expects that all of these expected capital contribution streams
will strengthen the Company’s liquidity, financial statements, and ability to continue operating. However, the Company cannot
offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern. The Company’s
financial statements as of September 30, 2017 do not include any adjustments that might result from the outcome of this uncertainty.
2.
DISCONTINUED OPERATIONS
Disposal
of Tartagal and Morillo Concessions
On
January 3, 2017, the Company received the acceptance of its offer for the sale of SAHF’s interest in the Tartagal and Morillo
concessions from High Luck Group (“High Luck”). The consideration for 18% of Tartagal and Morillo will be $2,000,000
upon the transfer of the concessions, and 3% of gross revenues from the production of oil or gas of either concession up to an
additional $2,000,000. Once the transfer occurs, the companies will sign a mutual release. The release of funds is also contingent
on other external factors detailed on a Consulting Agreement signed between a third party (Consultant”) and High Luck. After
speaking with the Consultant to High Luck on various occasions, Delta has taken the position that most of the Consultant’s
duties have been fulfilled and the ones that have not require High Luck to present paperwork to the province and fulfill its commitments
to the Province. On February 10, 2017, High Luck Group deposited the initial $2,000,000 in an Escrow account. On April 4, 2017,
the Escrow Agent released $500,000 to Delta as a deposit towards the initial $2,000,000 payment which is reported as a “Deposit
related to discontinued operations” in the consolidated balance sheet as of September 30, 2017 pending closing of the sale.
On
April 21, 2017, the official government decree for the transfer of Tartagal and Morillo was issued, but High Luck refused to meet
with the SAHF representative to finalize the transfer despite extensive efforts from SAHF.
As
of the date of this filing, High Luck still had failed to meet with SAHF to close the contract, and we have taken the position
that High Luck is in breach of multiple clauses in the contract. The companies are attempting to solve the outstanding issues
in this transaction.
Sale
of SAHF
In
July 2017, Delta closed the agreement with Enrique Vidal for the transfer of SAHF. As the buyer, he will receive 25% of the Tartagal
and Morillo (T&M) Asset Sale in exchange for the buyer’s assumptions of all potential liabilities related to Valle de
Lerma concession.
In
connection with the deposit received from the sale of the T&M concessions and SAHF, the Company paid commissions and bonuses
totaling to $175,000 during the nine months ended September 30, 2017 which are included in “Discontinued operations, net”
in the consolidated statement of operations. Out of the remaining $1,500,000 that Delta is to be paid for the sale of T&M,
SAHF is to receive $375,000. SAHF has already received $125,000 from the initial $500,000 that was transferred to Delta.
The
following table presents the amounts of the major line items that are included in “Discontinued operations, net” in
our consolidated statements of operations.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
(45
|
)
|
|
$
|
(9,574
|
)
|
|
$
|
(193,055
|
)
|
|
$
|
(21,188
|
)
|
Impairment Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(191,236
|
)
|
Gain on sale of SAHF
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,535
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income tax
|
|
$
|
(45
|
)
|
|
$
|
(9,574
|
)
|
|
$
|
(177,520
|
)
|
|
$
|
(212,424
|
)
|
3.
NOTES RECEIVABLE
On
May 25, 2017, the Company loaned $250,000 to SCO for the development of a gas field in northern California. SCO is using the funds
provided to work over 2 wells and puncture in different pay zones, expecting close to virgin pressures.
The
note carries a 9% interest, an 18-month maturity, and has an equity kicker of 3.5% in SCO which we determined to have a value
of zero. The note will also be prepaid from 25% of the production in the new wells.
On
July 26, 2017, the Company made a $50,000 loan to Landmaster for a term of 18 months and annual interest of 9% for the
re-entry of two oil wells in Haskell County, Texas. The Company was also granted a 3.75% carried interest in the two wells
with the option to participate at the same interest in future wells on the property. The 3.75% carried interest (3% NRI) in
the two wells in the Kieke Lease with a fair value of $44,703 was recorded as an oil and gas property and a discount to the
loan made to Landmaster and amortized over the term of the note. During the nine months ended September 30, 2017,
amortization credited to interest income was $2,484.
The
Company has performed an analysis of the notes receivable balance under ASC 810-10, and has determined the note receivable in
SCO is a variable interest and that SCO is a variable interest entity (“VIE”) and depends on the Company, as well
as additional parties, for continuing financial support in order to maintain operations. However, the Company cannot make key
operating decisions considered to be most significant to the VIE, and is therefore not considered to be the primary beneficiary.
Landmaster is not considered a VIE. The Company’s maximum exposure to loss approximates to the carrying value of the notes
receivable balance at September 30, 2017.
Variable
Interest Entity
The
Company has performed an analysis of the notes receivable balance under ASC 810-10, and has determined the note receivable in
SCO is a variable interest and that SCO is a variable interest entity (“VIE”) and depends on the Company, as well
as additional parties, for continuing financial support in order to maintain operations. However, the Company cannot make key
operating decisions considered to be most significant to the VIE, and is therefore not considered to be the primary beneficiary.
The Company’s maximum exposure to loss approximates to the carrying value of the notes receivable balance at September 30,
2017. The Company has performed an analysis of the note receivable balance under ASC 810-10, and has determined that Landmaster is not a variable interest entity (“VIE”) and does not
depend on the Company for continuing financial support to maintain operations.
4.
OIL AND GAS PROPERTY
On
September 22, 2017, the Company acquired a 70% NRI of the KEC lease in Polk County, Texas from Crestmont Operating, LLC (“Crestmont”)
for a total consideration of $57,500 which consists of a cash payment of $5,000 and the issuance of 750,000 shares of the Company
with a fair value of $52,500. The shares were valued as of the date of their assignment at $.07 per share. The property has four
wells- one of the four being a salt water disposal well.
Crestmont
Operating Agreement
On
September 22, 2017, the Company signed an operating agreement with Crestmont to remain the operator of the KEC property for a
total consideration of $2,500. The operator’s role in this case includes: filing all the necessary paperwork with the Railroad
Commission, helping Delta file to become an operator, and formulating a workover plan for the wells. In connection with the operating
agreement, the Company also agreed to pay Crestmont an additional $45,000 in the form of a note that will be issued on the earlier
of (a) successful completion of the workover of one well with production of at least 13.5 barrels of oil per day for a period
of 30 days or (b) a period of three months from the effective date of the agreement in case the workover has not yet started.
The note will have a term of 1 year and annual interest of 10%.
5.
WARRANTS
During
the nine months ended September 30, 2017, in connection to the deal signed with Landmaster and Crestmont, the Company issued to
each Mr. Jay Wright and Mr. William Forkner, consultants, 158,583 5-year common stock purchase warrants with and exercise price
of $0.07 per share, and Mr. Santiago Peralta, CEO, 171,443 5-year common stock purchase warrants with an exercise price of $0.07.
The fair value of the warrants amounting to $34,197 was determined using the Black-Scholes model which included the following
assumptions: a 5-year term, risk-free rate of 2.37%, $0 dividend, and a computed volatility ranging from 324-339%.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregated
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(years)
|
|
|
Value
|
|
Outstanding, December 31, 2016
|
|
|
9,211,517
|
|
|
|
0.21
|
|
|
|
1.65
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
488,609
|
|
|
|
0.07
|
|
|
|
4.77
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
9,700,126
|
|
|
|
0.20
|
|
|
|
1.34
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, September 30, 2017
|
|
|
9,700,126
|
|
|
|
0.20
|
|
|
|
1.34
|
|
|
$
|
-
|
|
Mr.
Jay Wright and Mr. William Forkner are acting as advisers for Delta. Their roles are to bring projects to the Company, help evaluate
the projects, help negotiate the final terms of the contract, and bring funding to the Company.
6.
SUBSEQUENT EVENTS
As
of October 17, 2017, the board approved the cancellation of all management salaries to cut administrative cash disbursements.
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The
following discussion of our consolidated financial condition and results of operations should be read in conjunction with the
consolidated financial statements and notes thereto and the other financial information included elsewhere in this report.
Certain
statements contained in this report, including, without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including our ability to create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes
in our business strategy or development plans; competition; business disruptions; adverse publicity; and international, national
and local general economic and market conditions.
GENERAL
Delta
International Oil & Gas Inc. (“Delta” or “the Company”) was incorporated in Delaware on November 17,
1999. Our name was changed from Delta Mutual Inc. to our present name on October 29, 2013. 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. We have disposed
of SAHF in September 2017 and no longer maintain a branch office in Argentina. We have made oil and gas investments in the United
States, in addition to an investment in a technology company.
Overview
As
a result of the review by our management team of oil and gas exploration and production operations in Argentina, the Company decided
to sell its Argentine oil and gas concessions. We have sold SAHF and, separately, our Tartagal and Morillo concessions. The first
payment for the sale of Tartagal Oriental and Morillo was received in early April and the Company is working with the buyer to
close the contract.
During
the second and third quarters of 2017, the Company made initial investments into an oil and gas work over company in California,
and a production company in Haskell County, Texas. Additionally, the Company has purchased a 70% Net Revenue Interest in an oil
property in Polk County, Texas.
The
Company is continuing to evaluate companies primarily in the energy sector for acquisitions and mergers.
As
a secondary focus, the Company has also made investments in an early-stage water transportation company.
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 additional capital from investors (new Delta
ownership- 5.5%).
In
the first quarter of 2017, MHD Technology 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. In the third quarter of 2017, MHD Tech received an additional
$250,000 of funding from other parties with a commitment of an additional $350,000 for two other commercial-grade prototype developments
in the automobile and power generation industries.
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.
On August 11, 2017, we terminated the letter
of intent to purchase the assets of Breitling Energy because of due diligence failure concerning deliveries from Breitling.
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 (the “Assignment Agreement”), for a total consideration for the 18% of Tartagal
Oriental and Morillo of $4,000,000. In addition to $2,000,000 to be paid at Closing, 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. 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
4, 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. New Times has committed to drill four exploratory wells in the next nine
months in Tartagal and Morillo concession areas. Under the Assignment Agreement, each condition satisfied is to trigger an equal
percentage of the funds being released. The Closing, with the issuance of the transfer decree for Tartagal and Morillo by the
Province of Salta, has not occurred due to delays by High Luck Group in completing work units for the property, and the parties
are in negotiation as to resolution of matters under the Assignment Agreement.
Although
we had expected this transaction to close in the second quarter of 2017, there is no assurance that the sale of these concessions
to High Luck Group will be completed given High Luck’s constant refusal to meet to transfer the properties, fulfill its
work unit and other UTE commitments, and fulfill its obligations to transfer the remainder of the payment. Our sale of SAHF, which
holds the Tartagal and Morillo concession interests and the Valle de Lerma property, to third parties was completed in September
2017. Under the Assignment Agreement, the $2,000,000 purchase price for the sale of SAHF’s 18% interest in the Tartagal
and Morillo concession is split $500,000 to SAHF and $1,500,000 to Delta (and subsequent payments, if any, are split in the same
ratio).
Investment
in Second Chance Oil
During
the second quarter of 2017, the Company began to execute on its oil and gas domestic acquisition strategy. The first investment
was a $250,000 loan to Second Chance Oil, LLC (“SCO”). SCO primarily focuses on work over of wells in the northern
California region that have multiple pay zones, but have historically produced from a single pay zone. Delta’s investment
is expected to cover the first two work over wells. The wells are expected to come in between 2,000 and 4,000 mcfd each.
SCO commenced the workover of the well
in late July. The company reached the target pay zones with few issues. SCO perforated the two target formations, but neither formation
could produce at a commercial quality. The top formation was too tight and the bottom formation had too little pressure. The well
was abandoned in early August. The second well has commenced drilling on October 20, 2017. The target is to deepen the well by
about 30 feet and perforate it to expose more of the currently producing formation. Since the formation is currently producing,
it is viewed as a lower risk well than the first one. Results are expected later in the fourth quarter of 2017.
SCO
is an LLC composed of four partners (in addition to Delta) that have around 200 years of oil and gas experience. One of the partners
is a drilling company that has drilled all over the United States and will be the company drilling in the properties. The other
partners include a geologist, one of the original owners of the wells, and a consultant.
Investment
in Landmaster Partners, Inc.
As
part of its US acquisition strategy, the Company made an initial investment of $50,000 into Landmaster Partners, Inc. (“Landmaster”)
in the form of a note. Landmaster holds various properties in East and West Texas and produces between 50 and 70 BOPD. After Landmaster
worked over 5 wells in one of its leases, it moved to the Kieke Lease to begin production there. Delta’s investment is part
of the funds needed to drill the first two re-entry wells in the Kieke Lease.
Landmaster
commenced its first re-entry in the Kieke Lease in August 2017. The well was expected to take 5 days to drill, but it ended up
taking around 3 weeks to reach the target zone and perforate it. Once completed, the target zone started producing around 17 BOPD,
then produced between 12 and 20 BOPD for a week before being shut-off because of some location issues caused by flooding in the
area. As of the date of this filing, the well is producing between 12 and 18 BOPD.
The
next proposed re-entry will be drilled in the Kieke Lease in November 2017. This well also goes through three different formations
and is expected to have an initial production of around 40 BOPD.
Acquisition
of KEC Property
The
first asset purchase that the Company executed as part of its strategy is the acquisition of a 70% Net Revenue Interest (“NRI”)
and 100% Working Interest in the KEC property in Polk County, Texas from Crestmont. This property has 4 wells, 2 of them being
potential producers, and one of them being a salt water disposal well. One of the potential producers produced around 5.5 BOPD
in early 2017 for about three months before it was shut off because of the gearbox in the pump.
The
Company purchased this property at a low price, mostly consisting of shares with the idea that it will have to perform some work
on the wells on the property. The plan is as follows:
|
1)
|
Replace
the salt water disposal tanks.
|
|
2)
|
Do
a workover, tubing patching, and acid job on the salt water disposal well.
|
|
3)
|
Do
a workover, tubing replacement, tubing extension, and pump replacement on the A1 well.
|
This
work is expected to cost a maximum of $120,000 and is expected to give the Company access to the 23,000 barrel of oil proven reserves
that the A1 well contains at a rate of around 17 BOPD.
The
Company is looking to register a Texas oil and gas operating LLC to become the operator of the KEC Lease. Until then, Crestmont
will serve as a consultant and operator on the work to be done on the property.
Capital
Sources
On October 20, 2017, the Company signed
a non-binding term sheet with Powerup Lending for a total amount of $38,000 to begin some of the work on the KEC Property. Without
commitment, Powerup Lending is expected to offer several more similar financings within the next 6 months. This access to capital
should give the Company, if needed, sufficient funds to complete the work on the KEC property. The Company elected to not proceed
with the note from Powerup Lending, but the relationship remains open as a potential future capital source.
RESULTS
OF OPERATIONS
NINE
MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016
During
the nine months ended September 30, 2017, we incurred a net loss of approximately $416,000 compared to a net loss of approximately
$461,000 for the nine months ended September 30, 2016. The net loss for the nine months ended September 30, 2017 compared to the
net loss for nine months ended September 30, 2016 is lower primarily due to impairment charges in 2016 and payments paid connected
to the sale of Tartagal and Morillo in 2017.
THREE
MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2016
During
the three months ended September 30, 2017, we incurred a net loss of approximately $60,000, compared to net loss of approximately
$84,000 for the three months ended September 30, 2016. The net loss for the three months ended September 30, 2017 compared to
the net loss for three months ended September 30, 2016 is lower primarily due to lower general expenses in 2017 and payments paid
connected to acquisitions in 2017.
LIQUIDITY
AND CAPITAL REQUIREMENTS
At
September 30, 2017, we had a working capital deficit of approximately $489,000 compared with a working capital surplus of approximately
$305,000 at September 30, 2016.
At
September 30, 2017, we had total assets of approximately $517,000 compared to total assets of approximately $365,000 at December
31, 2016. Net cash used from operating activities in the nine months ended September 30, 2017 was approximately $401,000, as compared
with net cash used in operating activities of $261,000 in 2016; net cash gained in investing activities was $195,000 in 2017 and
net cash used was $125,000 in 2016; and net cash generated from financing activities was $-0- in both years.
Effective
January 3, 2017, we entered into an Asset Purchase Agreement (the “APA”) with High Luck Group Limited (“High
Luck”), headquartered in Hong Kong. Under the APA, we agreed to sell to High Luck, for a price of $2,000,000 certain exploration
and exploitation rights to oil and gas deposits held by SAHF. The Company received a total of $500,000 in payments, and is working
to close the contract to receive the rest of the payments.
Estimated
2017 Capital Requirements
Delta
considerably lowered its operating expenses and SG&As, and has disposed of its Argentina oil and gas properties to look for
other opportunities for investment in the energy industry. In the oil and gas sector, the focus is in production and exploration,
while in the alternative energies, the focus is on water propulsion systems and hydro-electric systems.
The
expenses associated with getting the KEC property back into production amount to $120,000. Meanwhile, the company is carried in
all other investments.
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.
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 oil and gas property, under the guidance of
ASC 360 “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.
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.
Variable Interest Entities
The Company follows ASC 810-10-15 guidance
with respect to accounting for variable interest entities (each, a “VIE”). These entities do not have sufficient equity
at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors
lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that
will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual,
ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting
entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of
variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial
interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities
of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb
losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires
an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.
The Company has entered into a transaction with a VIE during the period; however, the Company is not considered to be the primary
beneficiary in this transaction. Footnote 3 further discloses this investment.
Discontinued
Operations
We
present discontinued operations in our consolidated financial statements when we believe that the disposition of assets constitutes
a strategic shift that will have a major effect on our operations or financial results. The results of prior periods are reclassified
to conform to the current year presentation. See Note 3.
OFF
BALANCE SHEET ARRANGEMENTS
The
Company has performed an analysis of the loan balance to SCO under ASC 810-10, and has determined that the loan represents a variable
interest in SCO. SCO is a variable interest entity (“VIE”) and depends on the Company, as well as additional parties,
for continuing financial support in order to maintain operations. However, the Company cannot make key operating decisions considered
to be most significant to the VIE, and is therefore not considered to be the primary beneficiary. Our maximum exposure to loss
approximates to the carrying value of due from the SCO loan balance on the Balance Sheet at September 30, 2017.
The
Company has performed an analysis of the loan balance to Landmaster under ASC 810-10, and has determined that Landmaster is
not a variable interest entity (“VIE”) and does not depend on the Company, as well as additional parties, for
continuing financial support in order to maintain operations. Our maximum exposure to loss approximates to the carrying value
of the due from the Landmaster loan balance on the Balance Sheet at September 30, 2017.
Other
than noted above, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to our stockholders.