Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT UNDER
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2009
o] TRANSITION REPORT
UNDER 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
(Name
of small business issuer in its charter)
Nevada
|
|
23-2860734
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
17
Wilmont Mews, 5th
Floor, West Chester, Pennsylvania
|
19382
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s telephone number,
including are code: (610) 429-0181
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act:
Common
Shares, Par Value $.01
(Title
of Class)
Indicate
by check mark if the registrant is a well seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d)
of the Act. Yes o No x
Indicate by check
mark whether the issuer (1) 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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
|
Large
accelerated filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act): Yes o No x
Aggregate
market value of the voting and non-voting common equity held by non-affiliates
on March 31, 2009, was approximately $3,764,500, computed by reference to the
average bid and asked price of such common equity.
Number of
shares outstanding of each of the registrant’s classes of common stock as of
December 15, 2009: 45,100,811
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement to be filed for its 2010 Annual
Meeting of Shareholders (“2010 Proxy Statement”) are incorporated by reference
into Part III of this Annual Report on Form 10-K.
PART
I
Item 1.
Business.
General
Daleco Resources Corporation (the
“Company”) is a natural resources holding company whose subsidiaries are 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 utilizing
the Company’s minerals. The Company’s wholly owned subsidiaries include
Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company,
Inc., Deerlick Royalty Partners L.P., Tri-Coastal Energy, Inc., Clean Age
Minerals, Inc., CA Properties, Inc., Sustainable Forest Industries, Inc. and The
Natural Resources Exchange, Inc.
The
Natural Resources Exchange, Inc. and Sustainable Forest Industries, Inc. are
dormant companies that have conducted no business in the past five fiscal
years.
The
Company's assets consist of two separate categories: oil and gas and
non-metallic minerals. The Company owns a United States Patent related to its
minerals.
The Company is a Nevada corporation and
its Articles provide for authorized capital stock of 100,000,000 shares of
common stock and 20,000,000 shares of preferred stock.
The Company, through its wholly owned
subsidiaries, Westland Resources Corporation, DRI Operating Company and Deven
Resources, Inc., owns and operates oil and gas properties in the States of Texas
and West Virginia. The Company owns overriding royalty interests in (i) two
wells and undeveloped acreage in the Commonwealth of Pennsylvania and (ii) one
well in Texas.
The
Company does not refine any crude oil or market, at retail, any oil or petroleum
products. The Company does not own any drilling rigs. All of its
drilling activities are performed by independent drilling contractors on a
contract basis.
Deven Resources, Inc. (“DRI”) is the
managing general partner of Deerlick Royalty Partners L.P., a Delaware limited
partnership, which owns overriding royalty interests in the Deerlick Coalbed
Methane Field, Tuscaloosa, Alabama. DRI is also the sole shareholder of
DRI Operating Company which operates wells and has oil and gas interests in the
State of West Virginia and in the Commonwealth of Pennsylvania.
As of September 30, 2009, the Company
owned working interests in 28 wells in the States of Texas and West Virginia.
The Company also owned overriding royalty interests in seventy wells in the
Deerlick Coalbed Methane Field, Tuscaloosa, Alabama, through Deerlick Royalty
Partners L.P. Throughout the twelve month period beginning October 1, 2008 and
ending September 30, 2009, the Company has experienced an average decrease of
48% in the unit of production weighted average sales price it received for its
oil and gas products as compared to the twelve month period beginning October 1,
2007 and ending September 30, 2008..
Clean Age Minerals, Inc., through its
subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests,
leasehold interests and federal mining claims containing non-metallic minerals
in the States of Texas, New Mexico and Utah. CAMI is presently engaged in the
exploration for such minerals. CAMI intends to mine the minerals through
the use of contract miners and arrangements with its joint venture partners.
CAMI also owns the CA Series Patented Process which utilizes many of the
minerals owned by or under lease to CAMI for the cleansing, decontamination and
remediation of air, water and soils.
OIL
AND GAS
Definitions of
Terms:
As used
herein, the term:
"Gross",
as it applies to acreage or wells refers to the number of acres or wells in
which the Company has a direct working interest.
"Horizontal
Well" means a well drilled vertically from its surface to its objective depth
and from that point drilled with special tools at an angle approximating 90
degrees from the bottom of the vertical hole, or drilled from such point at an
angle which approximates that at which the beds of the objective formation lie,
as opposed to a traditional vertical well, which is drilled vertically from the
surface to its objective.
"Net", as
it applies to acreage or wells, refers to the sum of the fractional working
interests owned by the Company in gross acres or gross wells.
"MMBTU",
"Bbls", "Mcf" and "MMcf" mean million British thermal units, barrels, a thousand
cubic feet, and a million cubic feet, respectively.
"Net
Revenue Interest" means the share of gross income from such lease or well
received by the owner.
"Proved
Developed Reserves" are proved reserves which are expected to be recovered
through existing wells with existing equipment and operating
methods.
"Proved
Reserves" are the estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recovered in future years from known oil and gas reservoirs
under existing economic and operating conditions.
"Proved
Undeveloped Reserves" are proved reserves which are expected to be recovered
from new wells on undrilled acreage or from existing wells where relatively
major expenditures are required for drilling and completion.
“Working
Interest" means the share of costs borne by an owner in the lease or
well.
Crude oil
and condensate volumes are expressed in barrels that are equivalent to 42 United
States gallons. Gas volumes are expressed in Mcf or MMcf as determined at 60
degrees Fahrenheit and the legal pressure base that prevails in the state in
which the reserves are located.
Property Acquisition and
Disposition
During
fiscal 2009, the Company did not acquire or dispose of any oil and gas
properties or drilling prospects. Within the oil and gas sector, the Company
faces competition from entities possessing substantially larger financial
resources and staffs. The demand for domestically produced oil and gas
remains high and should remain at these levels in the foreseeable future
especially in light of worldwide demand, the turmoil in the Middle East,
decreased production form Central America and political instability in South
America. Domestic and increasing world demands, especially in the Pacific
Basin, for crude oil and natural gas will continue to increase. The domestic oil
industry is subject to the fluctuations inherent in the global energy
industry. Pricing for domestic natural gas is not as volatile as is the
pricing for crude oil. Natural gas and crude oil prices have fluctuated on
the spot market and each is a commodity traded on the mercantile exchange.
However, most of the Company’s products (natural gas and crude) are sold under
contracts that provide the Company with competitive pricing within its operating
areas.
During fiscal 2010, the Company intends
to continue to focus on: (i) identifying niche acquisition and developmental
opportunities within the oil and gas sector that can be economically exploited,
and (ii) identifying third parties who will either individually or in
conjunction with the Company develop the Company’s undeveloped leasehold
interests or form other joint ventures.
Marketing and Production Oil and Gas,
Delivery Commitment
The Company does not refine or engage
in retail sales of any petroleum products. All of its production is sold, at the
wellhead, to a variety of customers, which include pipelines, oil and gas
gathering firms and other purchasers, pursuant to written agreements. Generally,
sales of oil and gas are made at prevailing market prices or tied to a benchmark
price under long-term contracts. Typically, oil purchase agreements are of
short duration, and provide for market sensitive pricing, while gas contracts
are of a longer duration and less sensitive to rapid market fluctuations. The
Company is a party to two long-term gas sales contracts, which may be terminated
on short notice if a price adjustment is unacceptable to the Company. The
Company is not obligated to provide a fixed and determinable quantity of oil
and/or gas under existing contracts or agreements.
The availability of a market for oil
and gas produced from the properties of the Company and prices received are
dependent upon numerous factors, substantially all of which are beyond the
control of the Company. Such factors include the level of domestic production,
the availability of imported oil and gas, actions taken by foreign producing
nations, the availability of distribution and transportation facilities and
capacity thereon, the availability and price of fuels competitive with oil and
gas, world and domestic demand for oil and gas and refined products,
governmental regulation and taxation. Such factors make it impracticable
to predict with any degree of certainty future demand for or prices of the oil
or gas produced by the Company.
Production of oil and gas is generally
not considered to be of a seasonal nature, although severe weather conditions
can temporarily curtail or preclude producing activities. Demand for natural gas
is fairly constant over the entire year as a result of the increased demand for
natural gas to fuel electric power generation and other commercial uses.
Since November 2007, gas production from certain wells operated by the Company
in West Virginia has been curtailed occasionally by the transporting pipeline.
The Company has never experienced any other difficulties in selling any of its
oil or gas.
Customers
The following table identifies the
Company’s customers who purchased in excess of five percent (5%) of the
Company’s oil or gas during the fiscal year ended September 30,
2009:
Name and Location of Purchaser
|
|
Percentage
|
|
Gulfmark
Energy, Inc.
|
Houston,
Texas
|
|
|
42 |
% |
ETC
Texas Pipeline, Ltd.(1)
|
San
Antonio, Texas
|
|
|
41 |
% |
Volunteer
Energy Services, Inc.
|
Pickerington,
Ohio
|
|
|
16 |
% |
|
(1)
|
The
Company’s production of gas from its operated wells in the Giddings Field,
Texas, is sold to ETC Texas Pipeline, Ltd. pursuant to a long-term
contract expiring January 31, 2010, which covers a number of the Company’s
Texas leases. Subject to various conditions, ETC has agreed to buy all of
the Company’s gas produced from the Giddings Field. The Company receives
eighty percent (80%) of the weighted average monthly sales price for
liquid products extracted from gas delivered and eighty percent (80%) of
the resale prices for dry gas. Prices received by the Company are subject
to deductions for taxes, compression and similar
charges.
|
The
Company does not believe that the loss of any one of these customers would have
a material adverse effect upon the Company’s revenues since there are numerous
purchasers of oil and gas in the areas in which the Company
operates.
Production
The
following table summarizes the Company’s net oil and gas production for the
periods indicated, shown in barrels (“Bbls”) and, thousand cubic feet
(“Mcf”):
|
|
Fiscal Year Ended
September 30
|
|
|
|
2009
|
|
|
2008 (1)
|
|
Texas:
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
2,880 |
|
|
|
3,724 |
|
Gas
(Mcf)
|
|
|
26,235 |
|
|
|
33,778 |
|
Average
Bbls/day
|
|
|
8 |
|
|
|
10 |
|
Average
Mcf/day
|
|
|
72 |
|
|
|
93 |
|
Pennsylvania:
|
|
|
|
|
|
|
|
|
Gas
(Mcf)
|
|
|
- |
|
|
|
2,682 |
|
Average
Mcf/day
|
|
|
- |
|
|
|
7 |
|
West
Virginia:
|
|
|
|
|
|
|
|
|
Gas
(Mcf)
|
|
|
13,690 |
|
|
|
12,326 |
|
Average
Mcf/day
|
|
|
38 |
|
|
|
34 |
|
TOTALS:
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
2,880 |
|
|
|
3,724 |
|
Gas
(Mcf)
|
|
|
39,925 |
|
|
|
48,786 |
|
Average
Bbls/day
|
|
|
8 |
|
|
|
10 |
|
Average
Mcf/day
|
|
|
109 |
|
|
|
134 |
|
|
(1)
|
During
fiscal 2008, the Company disposed of working interests in certain
producing wells in the State of West Virginia and the Commonwealth of
Pennsylvania.
|
The following table summarizes for the
periods indicated the average price per barrel (“Bbl”) of oil, the average price
per thousand cubic feet (“Mcf”) of natural gas and average sales price and
production (lifting) costs per gas equivalent. In determining the prices
received by the Company, the revenues are attributed to the Company’s net
revenue interests. Production costs incurred by the Company include production
and severance taxes and expenses of operation attributable to the Company’s
working interests. For the purpose of determining Mcf equivalents
(“MCFE”), one Bbl of oil has been converted to gas equivalents at the rate of
one Bbl per six Mcf.
|
|
Fiscal Year Ended
September 30
|
|
|
|
2009
|
|
|
2008 (1)
|
|
Texas
|
|
|
|
|
|
|
Average
Sale Price Per Bbl
|
|
$ |
54.91 |
|
|
$ |
104.87 |
|
Average
Sale Price Per Mcf
|
|
$ |
5.86 |
|
|
$ |
11.09 |
|
Pennsylvania
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Mcf
|
|
|
- |
|
|
$ |
9.31 |
|
West
Virginia
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Mcf
|
|
$ |
4.82 |
|
|
$ |
9.19 |
|
Combined
Properties
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Bbl
|
|
$ |
54.61 |
|
|
$ |
104.87 |
|
Average
Sale Price Per Mcf
|
|
$ |
5.51 |
|
|
$ |
10.51 |
|
Average
Sale Price Per MCFE
|
|
$ |
6.61 |
|
|
$ |
12.70 |
|
Average
Production Costs per MCFE
|
|
$ |
3.71 |
|
|
$ |
4.16 |
|
|
(1)
|
During
fiscal 2008, the Company disposed of working interests in certain
producing wells in the State of West Virginia and the Commonwealth of
Pennsylvania.
|
Wells and Acreage
The
following tables set forth certain information as of September 30, 2009 and
2008:
Well Count
|
|
Gross Wells
|
|
|
Net Wells
|
|
Texas
|
|
|
26 |
|
|
|
9.40 |
|
West
Virginia
|
|
|
2 |
|
|
|
0.46 |
|
Total
|
|
|
28 |
|
|
|
9.86 |
|
|
|
|
|
|
|
|
|
|
Developed Acreage
|
|
Gross Acres
|
|
|
Net Acres
|
|
Texas
|
|
|
3,550 |
|
|
|
1,259 |
|
West
Virginia
|
|
|
662 |
|
|
|
156 |
|
Total
|
|
|
4,212 |
|
|
|
1,415 |
|
|
|
|
|
|
|
|
|
|
Undeveloped Acreage
|
|
Gross Acres
|
|
|
Net Acres
|
|
Texas
|
|
|
1,519 |
|
|
|
554 |
|
West
Virginia
|
|
|
1,115 |
|
|
|
276 |
|
Total
|
|
|
2,634 |
|
|
|
830 |
|
Drilling Activity
The
Company did not participate in the drilling of any exploratory or development
wells in fiscal 2009 or 2008. Such information should not be considered
indicative of future performance of prospects of the Company. There is no
necessary correlation between the number of producing wells, whether
developmental or exploratory, completed during any period and the aggregate
reserves or future net income generated.
Proved Reserves
The
Company causes to be prepared an annual estimate of its oil and gas reserves.
The Company has not filed reserves estimates with any United States authority or
agency, other than estimates previously filed with the Securities and Exchange
Commission. The following tables set forth the net proved developed and
undeveloped reserves of the Company as of September 30, 2009 and 2008. All
of the reserves are located on-shore within the United States.
Reserve estimates for the Company’s
properties as of September 30, 2009 and 2008 were taken from reserve reports
dated December 31, 2009 and January 3, 2009, respectively, prepared by Hall
Energy, Inc. of Magnetic Springs, Ohio, with the figures utilizing constant
product prices in accordance with reporting requirements. Hall Energy, Inc. is
an independent petroleum engineering concern with an emphasis in the Appalachian
and Ohio Basins.
|
|
September 30
|
|
|
|
2009
|
|
|
2008 (1)
|
|
Net
Proved Developed Reserves:
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
|
|
|
|
Texas
|
|
|
12,441 |
|
|
|
27,550 |
|
Gas
(Mcf)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
106,526 |
|
|
|
173,067 |
|
Pennsylvania
|
|
|
- |
|
|
|
3,072 |
|
West
Virginia
|
|
|
105,609 |
|
|
|
141,739 |
|
Total
|
|
|
212,135 |
|
|
|
317,878 |
|
Net
Proved Undeveloped Reserves:
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
64,238 |
|
|
|
65,034 |
|
Gas
(Mcf)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
186,416 |
|
|
|
188,591 |
|
|
(1)
|
During
fiscal 2008, the Company disposed of working interests in certain
producing wells in the state of West Virginia and the Commonwealth of
Pennsylvania.
|
Estimated Future Net Revenues and
Present Worth
Estimated future net revenues of the
Company’s net oil and gas reserves at the date indicated and the present worth
thereof employing a ten percent (10%) discount factor is set forth in the
following tabulation:
|
|
September 30
|
|
|
|
2009
|
|
|
2008
|
|
Future
Net Revenues :
|
|
|
|
|
|
|
Proved
Oil and Gas Reserves
|
|
$ |
2,779,164 |
|
|
$ |
7,958,528 |
|
Proved
Developed Oil and Gas Reserves
|
|
$ |
669,893 |
|
|
$ |
2,977,544 |
|
Present
Worth:
|
|
|
|
|
|
|
|
|
Proved
Oil and Gas Reserves
|
|
$ |
1,851,636 |
|
|
$ |
5,444,845 |
|
Proved
Developed Oil and Gas Reserves
|
|
$ |
492,814 |
|
|
$ |
2,088,371 |
|
The present value of estimated future
net revenues set forth above is computed using the estimated future net revenues
and a discount factor of ten percent (10%) over the projected life of each
property.
Petroleum engineering is not an exact
science. Information relating to the Company’s oil and gas reserves is based
upon engineering estimates. Estimates of economically recoverable oil and gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties compared with production from other producing properties, the assumed
effects of regulation by governmental agencies and assumptions concerning future
oil and gas prices and future operating costs, severance and excise taxes,
development costs, work-over and remedial costs, all of which may in fact vary
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable reserves of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary. The Company
emphasizes that the actual production, revenues, severance and excise taxes,
development expenditures and operating expenditures with respect to its reserves
will likely vary from such estimates, and such variances may be material.
Persons should not assume that the estimates of the Company's future reserves
are a guaranteed figure.
The present values shown above should
not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company’s properties. In accordance with applicable
requirements of the Securities and Exchange Commission, the estimated discounted
future net revenues from proved reserves are based, generally, on prices and
costs as of the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net revenues also will be affected
by factors such as actual production, supply and demand for oil and gas,
curtailments or increases in consumption by gas purchasers, changes in
governmental regulations or taxation, the impact of inflation on operating
costs, general and administrative costs and interest expense. The timing of
actual future net revenues from proved reserves, and thus their actual present
value, will be affected by the timing of the incurrence of expenses in
connection with development of oil and gas properties. In addition, the ten
percent (10%) discount factor, which is required by the Commission to be used to
calculate discounted future net revenues for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the oil and gas industry.
Discounted future net revenues, no matter what discount rate is used, are
materially affected by assumptions as to the timing of future production and
future expenses which may and often do prove to be inaccurate.
Reserves Reported To Other
Agencies
There were no estimates or reserve
reports of the Company’s proved domestic net oil or gas reserves filed with any
governmental authority or agency other than the Securities and Exchange
Commission during the fiscal years ended September 30, 2009 and
2008.
MINERAL
INTERESTS
Definitions:
“Cu Yd”
and “Cu M” mean units of volume in terms of Cubic Yards and Cubic Meters,
respectively.
“Competent
Person” is a person who is a member of a professional society for earth
scientists or mineral engineers, or has other appropriate
qualifications.
“Development
Stage” means a party engaged in the preparation of an established commercially
mineable deposit (reserves) for its extraction which is not in the production
stage.
“Exploration
Stage” means a party engaged in the search for mineral deposits (reserves) which
is not in either the Development or Production Stage.
“Gross”
means, as it applies to acreage or mining claims, the numbers of acres or mining
claims in which the Company has a direct operating interest.
“Mineralized
Material” is that part of a mineral deposit for which tonnage, densities, shape,
physical characteristics, grade and mineral content can be estimated with a
reasonable or high level of confidence. It is based on detailed and
reliable exploration, sampling and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits,
workings, and drill holes. The locations are spaced closely enough (i) to
confirm geological continuity and/or grade continuity or (ii) for continuity to
be assumed.
“Mining
Claims” are regulatory and/or legal descriptions of mineral property rights as
defined by State and Federal Mineral Codes.
"Net", as
it applies to acreage mining claims, refers to the sum of the fractional
ownership interests owned by the Company in gross acres mining
claims.
“Production
Stage” means a party engaged in the exploitation of a mineral deposit
(reserve).
"Probable
(Indicated) Reserves" are reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven (measured)
minerals, but the sites for inspection, sampling and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) recoverable minerals, is high enough to
assume continuity between points of observation.
"Proven
(Measured) Reserves" are reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.
“Reserve"
is that part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.
"Ton"
means a unit of weight equal to 2,000 pounds (lbs.) or 906
kilograms.
General
The mining and marketing of
non-metallic industrial minerals is highly competitive; however, the Company
believes that the locations and quality of its mineral deposits will benefit its
future development and sales efforts. By definition, the Company is an
“Exploration Stage” entity in respect to its mineral holdings. In 2005,
the Company contracted Denali Enterprises to review available technical data
associated with the quantification of the mineral deposits in connection with
the Company’s exploration efforts. Such review reaffirmed the existence of
sufficient mineral deposits to continue with such efforts. The Company’s
ability to develop these mineral deposits is dependent on its success in
bringing in strategic partners with experience in or a demand for specific
minerals and raising capital through third parties. In fiscal year 2005,
the Company entered into two agreements with Tecumseh Professional Associates
(“TPA”) for the exploration, exploitation, development and marketing of its
Sierra Kaolin and calcium carbonate. By letter dated May 4, 2006, TPA advised
the Company of its intent not to continue as the operator of the Company’s
Calcium Carbonate lease as of August 4, 2006. As such, the Development and
Operating Agreement (Calcium Carbonate) terminated in its entirety. In June
2007, the Company and TPA entered into a Restated Development and Operating
Agreement in respect to the Sierra Kaolin. Under the Restated Development and
Operating Agreement the Company and TPA continued the evaluation of the Sierra
Kaolin (See “Kaolin” below). Independently, the Company has continued the
evaluation of its remaining minerals, zeolite and calcium carbonate. The
Company continues to sell raw zeolite to third parties as animal feed supplement
and for other uses and market its zeolite based products such as its ReNuGen™, a
product utilized in wastewater treatment applications. At September 30, 2009,
the Company was and continues to be involved in discussions with one or more
potential joint venture partners for the development and testing of additional
zeolite based products and to provide capital for market introduction. During
fiscal 2009, the Company determined that additional efforts to develop its
calcium carbonate minerals in New Mexico were no longer warranted.
Mineral Extraction
The Company has not established
large-scale production of any of its mineral deposits. The Company's mineral
extraction is conducted by third party contractors engaged by CAMI or its joint
venture partners. The Company does not conduct any direct extraction
activities of its own. As such, the Company is subject to “pass through”
costs for the extraction, crushing or preparation of its minerals.
Likewise, the third party operator is solely responsible for the type of
equipment utilized on each mineral site, subject to the third party contractor’s
compliance with all Federal, state and local laws, regulations and ordinances
for the conduct of operations, environmental protection and safety of
operations.
Mineralized
Materials
Set forth
below are the total gross acres, gross acres evaluated and estimated gross
quantities of Mineralized Materials associated with the gross acres evaluated
for the Company’s kaolin claims in Sierra County, New Mexico, zeolite leases and
fee acreage in Presidio County, Texas, and zeolite claims in Beaver County,
Utah. These Mineralized Materials were evaluated and estimated by a Competent
Person.
State
|
|
Mineral
|
|
Total
Gross
Acres
|
|
|
Gross
Acres
Evaluated
|
|
|
Gross
Mineralized
Materials
(millions of
tons)
|
|
New
Mexico
|
|
Kaolin
|
|
|
2,720 |
|
|
|
264 |
|
|
|
55.3 |
|
Texas
|
|
Zeolite
|
|
|
5,200 |
|
|
|
438 |
|
|
|
75.7 |
|
Utah
|
|
Zeolite
|
|
|
220 |
|
|
|
- |
|
|
|
- |
|
Zeolite
Texas -
Through September 30, 2009, the Company mined approximately 1,300 tons of
material for the preparation of samples and test products. Approximately 70 tons
have been sold or distributed as the Company’s trademarked ReNuGen™, a zeolite
based, wastewater treatment product. During fiscal 2009, approximately 20 tons
were sold for use in certain agricultural oriented products. The Company
has also provided material for various environmental testing and waste
purification projects and currently has approximately 1,000 tons available for
product processing. During fiscal 2006, the Company initiated a confirmation
geologic field mapping project and commenced a resource definition program, as
well as a core hole drilling and sampling program to delineate Mineralized
Materials in sufficient quantities to support large scale mining
operations. These efforts targeted 438 acres of the 5,200 acres held
by the Company which are most likely to be subjected to initial development.
During fiscal 2007, KT Minerals, Inc. completed the evaluation of the target
area. KT Minerals, Inc. has identified 75.7 million tons of Mineralized
Materials associated with the target area. At September 30, 2008, the Company is
also exploring alternatives for the development and marketing of additional
zeolite based products for introduction into the industrial and environmental
markets.
Utah – As
of September 30, 2009, the Company is not conducting any exploration activities
on Three Creek zeolite deposit.
The
Company has 17 Federal Placer mining claims covering approximately 2,720 acres
and 8 Lode claims covering approximately 160 acres covering a portion of its
existing holdings. The Company has maintained all of its claims during fiscal
year 2009.Through September 30, 2009, the Company did not produce commercial
quantities of its Sierra Kaolin. Sierra Kaolin was mined in previous years for
testing by prospective customers. Under its Revised and Restated Agreement
with TPA, the pre-development evaluation program of the Company’s Sierra Kaolin
claims continued during fiscal year 2009. This program focused on evaluating in
detail approximately 173 acres (+/-7%) of the Company’s 2,720 acre mineral claim
block which is most likely to be subjected to initial development. During
fiscal 2008, KT Minerals, Inc. identified 55.3 million tons of Mineralized
Materials based on a total of 53 verifiable drill holes representing 6,310 feet
of subsurface material.
In 1965,
20 core holes were drilled which produced 3087 feet of core samples. In 1976, 17
core holes were drilled which produced 1784 feet of core samples. During fiscal
2005, 16 core holes were drilled on a 32 acre area from which 1,442 feet of
subsurface material was recovered. During fiscal year 2006, this subsurface
material was broken down into over 600 samples which were subjected to detailed
testing at three different laboratories. The testing phase of the project
included roughly 20,000 tests which now comprise an extensive Sierra Kaolin data
base. This data base was then utilized by the consulting firm of Pincock, Allen
& Holt to develop detailed geologic models of the Sierra Kaolin deposit test
area. Based on this work, it was determined that this 32 acre core tested area
contained approximately 1.4 million tons of Mineralized Materials.
KT
Minerals, Inc. (“KT”) conducted a re-evaluation of the potential Kaolin
Mineralized Materials associated with the project. The KT re-evaluation
considered the geologic and compositional data available from prior studies and
incorporated the results of the mineral processing study completed by Ginn
Mineral Technology, Inc. (“GMT”). Based on the GMT study a greater percentage of
the project’s in situ minerals could be processed into marketable material as
compared to prior indications. In addition, KT evaluated and expanded the study
area outside of the 32 acres encompassed by the TPA coring program to include
acreage penetrated by an additional 53 historical core holes from which
verifiable data could be obtained. As a result, KT evaluated approximately 264
acres of the project and identified approximately 55.3 million tons of
Mineralized Materials.
These mineralized quantities were
further classified by KT using the international definition of reserves
classification grouping described in Section 9.3 Inventory Category
(R26,R28)(E29) of the Minfile Coding Manual as follows:
Classification
|
|
Gross Acres
Evaluated
|
|
|
Gross Cubic
Feet
|
|
|
Gross Tons
|
|
Proven
|
|
|
107.5 |
|
|
|
571,127,610 |
|
|
|
25,126,600 |
|
Probable
|
|
|
69.0 |
|
|
|
291,852,000 |
|
|
|
12,839,900 |
|
Possible/Inferred
|
|
|
88.0 |
|
|
|
393,294,000 |
|
|
|
17,304,000 |
|
Section 9.3.1 of the Minfile Coding
Manual: The reserve category is used only for a mineral and/or substance
inventory in an operating mine or mine near production. Sufficient information
is available to form the basis of a preliminary mine production plan. Factors
that affect ore reserve estimates are geological, economic, mining,
metallurgical, marketing, environmental, social and governmental conditions. Ore
reserves are reported as Proven, Probable and Possible/Inferred.
It should be noted that the above
international mining industry quantity classifications are not recognized by the
United States Security Exchange Commission (“SEC”) for reporting purposes. To
categorize the mineralized material quantities indicated as reserves under the
SEC guidelines, incremental economic and market supporting information is
required.
As such
the KT mineral quantity classifications are provided only as supplemental
information and should not be utilized in association with investment
decisions.
During
fiscal 2009, TPA proceeded with the next phase of the project which included:
(i) further work to quantify Mineralized Materials; (ii) product identification
and development; (iii) detail process flow sheets; and, (iv) equipment
specifications, as well as marketing and capital requirements. On December 15,
2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine
project has cleared the regulatory review and that the project’s definitive USDA
Forest Service Plan of Operations has been approved. This will facilitate the
project moving to the next phase. These activities will continue in fiscal
2010.
Marketing
of Minerals and Marketing Agreements
In
December 2004, the Company entered into a Memorandum of Understanding for
development of Sierra Kaolin Deposit (“MOU”) with TPA for the management,
development, exploration and marketing of the Company’s Sierra Kaolin claims,
located in Sierra County, New Mexico (see Exhibit 10.9).
Under the
Company’s March 11, 2005 and June 7, 2007 agreements with TPA (see Exhibits
10.12 and 10.17, respectively), TPA has assumed the duties to mine, test,
exploit, and market the Company’s Sierra Kaolin deposit.
Management of the Company directs the
activities pertaining to the Company’s zeolite minerals and participates in the
decisions regarding the agreement with TPA in respect to the marketing of its
Sierra Kaolin.
Government
Regulations
Oil
and Gas
There are statutory and/or regulatory
provisions regulating the Company’s oil and gas operations. These statutes allow
administrative agencies to promulgate regulations in connection with the
development, production and sale of oil and gas, and to establish allowable
rates of production.
The Company’s activities are subject to
laws and regulations relating to environmental quality and pollution control.
Although the cost of compliance with such legislation and regulations has not
been material to date, such laws and regulations could substantially increase
the cost of carrying on these activities and could prevent or delay the
commencement or continuance of a given operation. The Company believes that
existing legislation and regulations have had no material adverse effect on its
present method of operations. In the future, federal, state and local
environmental controls may require the Company to make significant expenditures,
but neither the probability nor the magnitude of the expenditures, if any, can
be predicted.
The discharge of oil, gas or the
by-products of drilling, reworking and producing oil and gas into the air, soil
or water may give rise to liabilities for the restoration of the environment and
to third parties. A variety of federal and state laws and regulations govern the
environmental aspects of the production, transportation and processing of
hydrocarbons and may, in addition to other laws and regulations, impose
liability in the event of a discharge or seepage (whether or not accidental).
Compliance with such laws and regulations could increase the cost of the
exploration, production and development of oil and gas reserves although the
Company does not currently anticipate that compliance will have a material
adverse effect on the ability of the Company to continue in the exploration,
development or production of its existing reserves and the development and/or
acquisition of new reserves.
The Company does not believe that its
environmental risks are materially different from those of comparable companies
in the oil and gas industry. The Company believes that it is in
substantial compliance with all existing rules and regulations. No assurance can
be given, however, that environmental laws will not, in the future, result in
more onerous regulations causing a market increase in the cost of production,
development and exploration or otherwise adversely affect the Company’s
operations or financial ability to maintain its existing reserves. Although the
Company maintains insurance coverage for certain liabilities, to include
insurance to cover specific environmental risks, such as seepage or discharge,
other environmental risks may not be fully insurable.
Mineral
Interests
The Company’s activities are subject to
Federal and state laws and regulations relating to environmental quality and
pollution control as well as safety rules as prescribed by Occupational Safety
and Health Administration. At present, the Company does not intend to
engage in mining activities on its own. The Company intends to retain, and has
to date retained, the services of outside contractors to carry out such
activities (see the agreements with TPA as set forth as Exhibits 10.9, 10.12 and
10.17). The Company believes that such practices will result in substantial
savings in the future. Most of the Company’s mineral interests in New
Mexico (kaolin) and Utah (zeolite) are on either Federal land or lands
administered by the Bureau of Indian Affairs (“BIA”). As such, the Company
must also comply with the rules and regulations imposed for the development of
Federal mining leases or BIA leases. The Marfa Properties (zeolite) in
Texas are on fee and leased acreage and are subject to Federal and state laws
and regulations governing open pit extraction.
Transportation
Oil
and Gas
Currently the majority of the Company’s
gas is sold to interstate carriers. The Company moves its gas to the
interstate carriers over a gathering system owned by the Company or joint
venture partners in the Company's wells. The Company has experienced no
difficulty in moving or selling its gas. The Company is not a regulated
interstate/intrastate carrier of natural gas and as such it is not a regulated
pipeline under the National Gas Policy Act of 1983, the National Gas Act of 1938
or as a common carrier by applicable state agencies.
Mineral
Interests
All of the Company’s mineral deposits
are serviced by all weather paved or unpaved roads. The Marfa zeolite property
in Texas is adjacent to a railroad line that can be utilized to transport
minerals to market. The Utah zeolite and New Mexico Sierra Kaolin deposits also
have access to rail lines but will require over-land transport prior to rail
transport.
Partnerships
DRI sponsored Deerlick Royalty Partners
L.P. (“Partnership”) which was formed in April 1993. As the managing general
partner, DRI is subject to full liability for the obligations of the Partnership
although it is entitled to indemnification to the extent of the assets of the
Partnership. Since “partnership programs” constitute a “security” under the
Securities Act of 1933, Deven Resources, Inc. is also subject to potential
liability for failure to comply with applicable Federal and state securities
laws and regulations.
The Partnership owns overriding royalty
interests covering 2,043 gross acres in the Deerlick Creek coalbed methane
field, Tuscaloosa County, Alabama. The Partnership is structured on a carried
participation basis.
Acquisitions/Mergers
During
the past two fiscal years, the Company has not participated in any acquisitions
or mergers.
Stock
Purchase Agreement
Terra
Silex Agreement
On September 20, 2001, the Company
entered into a Stock Purchase Agreement (see Exhibit 10.2) with Terra Silex
Holdings, LLC (“Terra Silex”) pursuant to which the Company agreed to sell Terra
Silex up to 1,800,000 shares of the Company’s Common Stock at a price of $1.25
per share. At the time of the Terra Silex Agreement, the market price of the
Company’s Common Stock was $1.05.
The Terra Silex Agreement provided for
the purchase of the common stock in three (3) tranches. At closing, Terra Silex
acquired 400,000 shares. The second tranche was to have closed within sixty (60)
days, subject to Terra Silex’s satisfactory completion of its due diligence.
However, Terra Silex requested an extension. The second tranche for
400,000 shares did close on November 20, 2001. The third tranche was to
have closed within 60 days of the closing of the second tranche. On
February 15, 2002, Terra Silex advised the Company that it would not fund
the third tranche. As such, the warrant to which Terra Silex was entitled
under its stock purchase agreement was capped at 250,000 shares. This
warrant had an exercise price of $1.25 per share and was scheduled to expire on
December 31, 2006. By action of the Board of Directors on December 14,
2006, the expiration date for the Terra Silex Warrant was extended until
September 16, 2007. Terra Silex did not exercise its warrant either in whole or
in part. These warrants have now expired.
The Terra
Silex Agreement included a provision (Section 6.3, Dilution Protection Rights)
by which Terra Silex was granted the right to acquire shares of the Company’s
Common Stock at the same price as offered to third parties in a “Block Sale” (as
such term is defined in the Terra Silex Agreement). As a result of the Company’s
private placement of 6,500,000 shares of Common Stock on September 16, 2005,
Terra Silex was entitled to acquire 200,241 shares of Common Stock. Terra
Silex exercised such right in December 2006.
Patent
C.A. Series
CAMI is the owner of U.S. Patent No.
5,387,738, upon which an engineered product is based which utilizes all
naturally occurring non-hazardous minerals for the remediation of sites
contaminated with hazardous and/or toxic materials. Typically, the remediation
of these sites is necessary in order to meet quality control regulation for air,
land and water enforced by the Environmental Protection Agency and various other
state and Federal environmental regulatory agencies. The patented engineered
products are marketed by CAMI under the trademark of the CA Series. Each of
these engineered environmental products is designed for specific project site
requirements based on the nature of the on-site contaminant, the size of the
project and specific treatment requirements.
The CA Series have been proven
effective, through the use of a catalytically enhanced chemical exchange
process, in permanently changing many hazardous metals to a non-hazardous state
and, through molecular sieve and/or absorption processes, in removing (“site
remediation”) many hazardous hydrocarbon and nitrate contaminants.
The processing of contaminate materials
using the patented CA Series technology is designed as an on-site operation.
Internal studies have shown that because the CA Series of engineered products
are designed to be used at the remediation project site, substantial cost
savings can be generated as compared to other remediation methods requiring
extraction, removal and incineration. The on-site use of CA engineered products
can provide a complete and permanent environmental cleanup of the hazardous
materials in that the “treated” materials are converted into non-hazardous
permanently non-leachable substances that can remain in place. Through
laboratory and field tests, the CA Series engineered products have been proved
to be effective in the remediation of contamination caused by hydrocarbons and
petroleum products, chemicals as well as toxic metallic compounds in rendering
the toxic and hazardous materials to a permanently non-toxic and non-hazardous
stage.
Trademarks
The Company has applied for Trademarks
governing the CA Series of Products CA-1 through CA-6. The Company has
applied for the trademark for the Company’s “ReNuGen™”, a product used to enhance
the efficacy of conventional waste water treatment plants
Employees
At September 30, 2009, the Company had
three employees. The Company employs the services of consulting scientists,
geologists and engineers, as well as those of nonaffiliated operating companies
that conduct the actual oil and gas field operations and mineral
extraction/processing. The Company operates its oil and gas wells in the
States of Texas and West Virginia from its Pennsylvania office utilizing
contract pumpers to perform actual field operations. The Company’s
non-operated wells are monitored out of the Company’s Pennsylvania office.
The Company’s mineral leases, fee interest and claims are operated by contract
mining entities and are monitored by its Pennsylvania office and by TPA under
its agreement covering the Company’s Sierra Kaolin. The Company considers
its relations with its consultants to be satisfactory.
Item 1A. Risk
Factors.
Not
required as the registrant is a smaller reporting company.
Item 1B.
Unresolved
Staff Comments.
Not
required as the registrant is a smaller reporting company.
Item 2.
Properties.
OIL
AND GAS INTERESTS
Texas
The Texas properties are located in the
Austin Chalk Trend. The Austin Chalk Trend consists of the Austin
Chalk, Buda, Georgetown and Edwards formations, extends for approximately 300
miles in length and 50 miles across, and is encountered at depths of 5,500 to
18,000 feet. These reservoirs are generally of low permeability.
Historically, these formations were considered to be economically marginal
except in areas where the reservoir rocks are highly fractured. In later years,
stimulation by mechanical fracturing of the rock resulted in increasing
hydrocarbon recoveries and extensive development of the Trend. Ongoing technical
developments using horizontal drilling techniques allow the well bore to
intersect, if present, series of vertical fracture systems instead of a single
one, thus resulting in higher rates of production and recoverable reserves, at
the cost of a more expensive drilling effort. Whether an individual well
will be economic, even if horizontally drilled, depends largely upon
intersecting fractured portions of the formation, which cannot be predicted.
Certain locales appear to contain more fracturing than others. It is not
unusual for an individual well to produce as much as forty percent (40%) of the
primary recoverable reserves during the first two years of production and the
remainder over a period of ten to fifteen years. The Company is presently
evaluating joint venturing with third parties to develop its Texas
Properties. The Company operates twenty-five (25) wells in
Texas.
West Virginia and
Pennsylvania
The Company’s hydrocarbon production in
the State of West Virginia is in the producing zone of the Oriskany formation of
the Appalachian Basin’s Upper Devonian Section. The Company has working
interests in two wells in West Virginia for which it acts as operator. The
Company owns overriding royalty interests in two wells as well as certain
undeveloped acreage in the Commonwealth of Pennsylvania.
Alabama
Deerlick Royalty Partners, L.P., a
Delaware limited partnership for which DRI acts as the managing general partner,
owns an overriding royalty interest in the Deerlick Creek Field, Tuscaloosa
County, Alabama, in the Black Warrior Basin.
Operating
Hazards and Uninsured Risks
The Company’s oil and gas operations
are subject to all of the risks normally incident to the exploration for and
production of oil and gas, including mechanical failures, blow-outs, cratering,
pollution and fires, each of which could result in damage to or destruction of
oil and gas wells or production facilities or damage to persons and property.
While the Company maintains a $3,000,000 all risks liability policy in amounts
that it believes are adequate, the insurance may not cover all potential
operational risks. The occurrence of a significant event not fully insured
against could have a material adverse effect on the Company’s financial
position. In the coming year, the Company plans to seek
participation in certain types of exploratory or developmental drilling
prospects. In these instances, the Company has historically expanded its
insurance coverage to cover the specific risk associated with those types of
operations. The Company will continue to conduct its normal day-to-day
activities as operator of its wells.
Title
to Oil and Gas Properties
The Company’s interests in producing
and non-producing acreage are in the form of direct or indirect interests in
leases. Each of its properties is subject to customary royalty interests in
amounts prevailing in the area in which the oil and gas lease was taken,
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and mineral encumbrances and restrictions. The
Company believes that none of these burdens materially interferes with the use
of such properties, in the operation of the Company’s business or the
profitability of the Company’s investment therein.
As is customary in the oil and gas
industry, only a preliminary investigation of title is made at the time of
acquisition of undeveloped properties. Detailed investigations are generally
made, including, in most cases, receiving a title opinion of local counsel,
prior to the commencement of drilling operations. A thorough examination of
title was performed with respect to substantially all of the Company’s producing
properties. Also, prior to the acquisition of properties, the Company has
received an opinion of title, satisfactory to counsel to the Company, on a
majority (in value) of the assets acquired. The Company believes that it has
defensible title to substantially all of its properties.
MINERAL
INTERESTS
Minerals
Holdings
Through its wholly-owned subsidiary,
CAMI, the Company owns leases for, mining claims to and a fee simple interest in
non-metallic industrial minerals located in the States of Texas, New Mexico and
Utah. Title and rights in the properties are held by CA Properties, Inc.
(“CAPI”), a wholly-owned subsidiary of CAMI.
Texas
Marfa
Zeolite
CAPI is the lessee under a 5,200 acre
lease containing high grade zeolite, located approximately 40 miles south of
Marfa, Presidio County, Texas. The lease terms call for royalty payments of
$3.00 per ton of zeolite removed from the property with a minimum royalty of
$30,000 per year. CAPI has the option to terminate the annual royalty payments
by paying a lump sum of $400,000. CAPI owns, in fee, approximately 100 acres of
land encompassed by and contained within the bounds of the 5,200 acre zeolite
leasehold. During fiscal 2009, the Company paid the minimum royalty of
$30,000.
Location
The Company's zeolite deposit is
located 29 miles south of Marfa, Texas, on State Highway 67, then 2 miles west
on an all weather dirt road. A railroad is immediately adjacent to the
Company's lease and fee mineral interests. The Company's lease and fee
mineral holdings are on private property. For a map of the location of the
Company’s zeolite deposit, see Exhibit 99.1.
Geologic
Setting
The zeolite bearing formation is an
altered tuffaceous material that is exposed in several road cuts in the
area. The zeolite present is the mineral Clinoptilolite.
New
Mexico
Sierra
Kaolin
CAPI owns 17 placer mining claims on
2,720 acres and 8 Lode claims covering 160 acres, all located in Sierra County,
New Mexico, encompassing its Sierra Kaolin deposit. The Federal mining
claims call for a royalty payment of 7% of net proceeds derived from mining
operations. There is also an overriding royalty interest of 7% out of
mining operations payable to the former owner of these leases. $2,125 was paid
to the Bureau of Land Management (“BLM”) in 2009 to maintain CAPI’s Federal
mineral claims. TPA paid this in accordance with the provisions of the
Sierra Kaolin Operating License.
Location
The Sierra Kaolin claims are located on
a paved road near Winston, NM, some 40 miles west of Truth or Consequences,
NM. The claims are located on Federal Lands administered by the Bureau of
Land Management. For a map of the location of the Company’s Kaolin claims,
see Exhibit 99.1.
Geologic
Setting
The
Sierra Kaolin project lies near the eastern margin of the Datil-Mogollon
volcanic field, a region dominated by Tertiary caldera-related volcanic
rocks.
The
Sierra Kaolin is considered to be a primary hydrothermal deposit that was formed
in situ. The Sierra Kaolin is part of an advanced argillic alteration
assemblage that includes kaolinite (AI4(Si4O10)(OH)8); and
related mineral species possible including dickite and halloysite; alunite
(KAI3(OH)8(SO4)2); and
chalcedonic and/or opaline quartz (hydrous amorphous silica).
Utah
Beaver
Zeolite
CAPI owns 11 placer mining claims
(Three Creek) covering approximately 220 acres of zeolite located in Beaver
County, Utah. The zeolite in this deposit is also considered high grade.
During fiscal year 2009, the Company paid $1,375 to the Bureau of Land
Management to maintain its federal mining claims.
Location
The Beaver zeolite claims are located
on a paved road (State Highway 153) 18 miles east of Beaver, Utah. The
claims are on Federal Lands administered by the Bureau of Land Management. For a
map of the location of the Company’s Utah zeolite claims, see Exhibit
99.1.
Geologic
Setting
The deposit is geologically located in
an altered tuffaceous formation associated with widespread volcanic activity of
the area.
Mining
The Company has periodically extracted
zeolite from its deposit in Texas through the use of contract miners. The
mining of all of the Company’s mineral deposits is exclusively conducted through
surface mining. The quantities of extracted volumes were commensurate with
demands for the minerals and to comply with the Company's lease obligations. The
Company, under its agreements with Tecumseh Professional Associates (“TPA”) (see
Exhibits 10.12 and 10.17) extracted sufficient quantities of Sierra Kaolin for
qualitative and quantitative analysis of the mineral’s commercial properties.
All of the extraction of the Company's current mineral holdings is expected to
be done by surface mining. At each of the locations, the areas disturbed
by extractive operations have been limited to initial ten acre permit sites in
New Mexico and under 100 acres in Texas in accordance with applicable state
regulations.
The Company's Texas zeolite deposit
will be mined on a periodic basis to meet existing obligations and to support
development of new and emerging markets. Initial production of the Company’s
Sierra Kaolin has been conducted by TPA for testing. Commercial development and
marketing will be conducted in accordance with the Sierra Kaolin Restated
Development and Operating Agreement (See Exhibit 10.17). On December 15,
2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine
project has cleared the regulatory review and that the project’s definitive USDA
Forest Service Plan of Operations has been approved. This will facilitate the
project moving to the next phase.
At the present time, as a result of its
limited activities on its mineral properties, the Company believes that its
share of the reclamation costs currently associated with its activities is less
than $50,000.
Item 3. Legal
Proceedings.
None.
Item 4. Submission of
Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2009.
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
DESCRIPTION
OF SECURITIES
Pursuant to the Company’s Articles of
Incorporation, the Company is authorized to issue 100,000,000 shares of common
stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par
value of $0.01 per share. Below is a description of the Company’s
outstanding securities, including common stock, preferred stock, options,
warrants and debt.
Common
Stock
Each holder of the Company’s common
stock is entitled to one vote for each share held of record. Holders of
common stock have no preemptive, subscription, conversion, or redemption
rights. Upon liquidation, dissolution or winding-up, the holders of common
stock are entitled to receive the Company’s net assets pro rata. Each
holder of common stock is entitled to receive ratably any dividends declared by
the board of directors out of funds legally available for the payment of
dividends. The Company has not paid any dividends on its common stock and
does not contemplate doing so in the foreseeable future. The Company
anticipates that any earnings generated from operations will be used to finance
its growth. As of the fiscal year ended September 30, 2009, the Company had
45,100,811 shares of common stock outstanding.
Preferred
Stock
The Company is authorized to issue
20,000,000 shares of preferred stock, par value $0.01 per share. As of
September 30, 2009, there were: no shares of Series A preferred stock
issued and outstanding; 145,000 shares of Series B preferred stock issued and
outstanding.
Series B 8%
Cumulative Convertible Preferred Stock. The Series “B”
Cumulative Convertible Preferred Stock has a face value of $10.00 per share with
no voting power. This preferred stock can be converted to common stock at
85% of the average of the 5 days before the date of conversion with a minimum
amount of $1.25 per share.
Market
Information
The
Company's Common Stock trades on the NASDAQ Over the Counter Market, Bulletin
Board ("OTCBB"). The symbol for the Company's shares is DLOV. The following
table shows the high and low closing bid prices as quoted on the OTCBB for the
fiscal quarters indicated and the quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. The Company’s fiscal year ends September 30.
2009
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
0.10 |
|
|
$ |
0.05 |
|
Second
Quarter
|
|
$ |
0.10 |
|
|
$ |
0.06 |
|
Third
Quarter
|
|
$ |
0.14 |
|
|
$ |
0.07 |
|
Fourth
Quarter
|
|
$ |
0.24 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
0.25 |
|
|
$ |
0.13 |
|
Second
Quarter
|
|
$ |
0.25 |
|
|
$ |
0.08 |
|
Third
Quarter
|
|
$ |
0.24 |
|
|
$ |
0.12 |
|
Fourth
Quarter
|
|
$ |
0.13 |
|
|
$ |
0.06 |
|
Holders
Common Equity
As of
September 30, 2009, the current outstanding amount of shares of common stock was
45,100,811 with approximately 2,000 holders of record (inclusive of brokerage
house "street accounts").
Preferred
Equity
As of September 30, 2009, there were no
Series A Preferred shares issued and outstanding and there were sixteen holders
of the 145,000 shares of Series B Preferred Stock issued and
outstanding.
Dividends
The Company has never paid a dividend
on its common stock. The Company has no plans to pay any dividends on its
common stock in the near future. The Company intends to retain all
earnings, if any, for the foreseeable future for use in its business operations.
Dividends have been paid on the Company's Series B Preferred Stock in shares of
Common Stock at the time of conversion.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table contains information as of September 30, 2009 regarding
equity compensation plans:
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
400,000 |
|
|
$ |
0.38 |
|
|
|
400,000 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
400,000 |
|
|
$ |
0.38 |
|
|
|
400,000 |
|
Recent
Sales of Unregistered Securities
Terra
Silex Holdings Ltd, LLC Anti-dilution Shares
By
agreement dated September 20, 2001, the Company entered into a Stock Purchase
Agreement (“SPA”) with Terra Silex Holdings, LLC (“Terra Silex”). Section
6.3, Dilution Protection Rights, of the SPA grants Terra Silex the right to
acquire shares of the Company at the same price as offered to third parties in a
“Block Sale” (as such term is defined in the SPA). As a result of the Company’s
private placement of 6,500,000 shares of Common Stock on September 16, 2005,
Terra Silex was entitled to acquire 200,241 shares of Common Stock under the
formula set forth in Section 6.3 of the SPA. Terra Silex exercised such
right in December 2006. The purchase price for the 200,241 shares acquired by
Terra Silex was $50,060.
October
2006 Private Placement
In
October 2006, the Company concluded a private placement of 400,000 shares of
Common Stock at a price of $0.51 per share. This private placement raised
$204,000 for the Company. The Company is utilizing the proceeds of this private
placement for its costs associated with the exploration and quantification of
mineral resources and mineral reserves on a 500 acre portion of the Marfa
zeolite deposit and to complete studies to be able to commence the production
and delivery of ZeoCast. See the Company’s Form D as filed with the Securities
and Exchange Commission on October 18, 2006.
June
2007 Private Placement
In June
2007, the Company concluded a private placement of equity consisting of 726,670
shares of Common Stock and warrants to purchase 363,336 shares of Common Stock.
This private placement raised $218,000 for the Company. The Company utilized the
proceeds of this private placement for general working capital purposes.
See the Company’s Form D as filed with the Securities and Exchange Commission on
July 23, 2007.
June
2009 Private Placement
In June
2009, the Company commenced a private placement of up to $500,000 of 7.25%
convertible debentures. The debentures are convertible at a
conversion price equal to the greater of either $0.14 per share or an amount
equal to 80% of the average of the closing bid and ask prices of the Common
Stock for the 5 trading days immediately preceding the conversion date.
All of the purchasers of the debentures elected to immediately convert such
holdings into Common Stock at an average conversion price of $0.14 per share
and, accordingly, the Company has issued 1,019,465 shares of Common Stock as of
September 30, 2009. As of September 30, 2009, this private placement raised
$128,500 (net of fees and expenses totaling $14,225) for the Company. The
Company is utilizing the proceeds of this private placement for general working
capital purposes.
Options
and Warrants
Options(1) to
Purchase Shares of Common Stock
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
Outstanding and Exercisable at beginning of period
|
|
|
2,875,000 |
|
|
|
3,750,000 |
|
|
|
4,400,000 |
|
Granted(2)
(3) (4) (5) (6) (7) (8)
|
|
|
- |
|
|
|
- |
|
|
|
1,000,000 |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expired
(2)
(6) (9) (10) (11) (12) (13)
|
|
|
(2,087,500 |
) |
|
|
(875,000 |
) |
|
|
(1,650,000 |
) |
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
and Exercisable at end of period(14)
|
|
|
787,500 |
|
|
|
2,875,000 |
|
|
|
3,750,000 |
|
|
(1)
|
The
Company accounts for all stock-based compensation (options) in accordance
with the Financial Accounting Standard Board, or FASB, Accounting Standard
Codification, or ASC, Topic 718. Under ASC 718, the fair value of
stock options and compensation costs are measured as of the grant
date.
|
|
(2)
|
Richard
A. Thibault was granted an option to purchase 500,000 shares of stock at
an exercise price of $0.48 per share in his employment contract dated
March 10, 2006, but effective as of January 15, 2006. See Exhibit 10.44,
attached to the Company’s Form 8-K dated March 13, 2006. In June
2006, Mr. Thibault voluntarily resigned as an officer of the Company;
accordingly, options for the purchase of 300,000 shares of stock
(including the option discussed in footnote 5 below) expired during fiscal
2007 and options for the purchase of 250,000 shares of stock expired in
fiscal 2009.
|
|
(3)
|
David
L. Matz was granted an option to purchase 250,000 shares of stock at an
exercise price of $0.47 per share in his employment contract dated January
23, 2006. In March 2008, Mr. Matz voluntarily resigned as an officer of
the Company; accordingly, options for the purchase of 75,000 shares of
stock (including the option discussed in footnote 5 below) expired during
fiscal 2008 and options for the purchase of 37,500 shares of stock expired
in fiscal 2009.
|
|
(4)
|
During
fiscal 2006, William Pipkin was granted an option to purchase 200,000
shares of stock at an exercise price of $0.43 per share under the
Company’s Non-qualified Independent Director Stock Option Plan. In
September 2008, Mr. Pipkin voluntarily resigned as a Director of the
Company; accordingly, the option expired during fiscal
2009.
|
|
(5)
|
On
September 19, 2006, the Board of Directors granted the following officers
of the Company options to purchase shares of stock at an exercise price of
$.75 per share: Stephan V. Benediktson, 200,000 shares; Nathan K. Trynin,
200,000 shares; Dov Amir, 200,000 shares; Gary J. Novinskie, 200,000
shares; David L. Matz, 50,000 shares; and Richard A. Thibault, 50,000
shares.
|
|
(6)
|
On
March 7, 2007, the Board of Directors granted an option to Stephan V.
Benediktson for the purchase of 600,000 shares of stock at an exercise
price of $0.48 per share. This option expired during fiscal
2008.
|
|
(7)
|
Richard
W. Blackstone was granted an option to purchase 200,000 shares of stock at
an exercise price of $0.67 per share in his employment contact dated
October 4, 2006.
|
|
(8)
|
During
fiscal 2007, David A. Grady was granted an option to purchase 200,000
shares of stock at an exercise price of $0.28 per share under the
Company’s Non-qualified Independent Director Stock Option Plan.
|
|
(9)
|
On
September 30, 2007, an option (held by a former officer of the Company) to
purchase 1,000,000 shares of stock
expired.
|
|
(10)
|
In
August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily
resigned their respective positions with the Company; accordingly, options
to purchase 200,000 shares of stock (the unvested portions of the options
discussed in footnote 5 above) expired before September 30, 2007. The
balance of their options to purchase of 200,000 shares of stock expired
unexercised in November 2007.
|
|
(11)
|
During
fiscal 2007, an option (held by a former director of the Company pursuant
to the Company’s Non-qualified Independent Director Stock Option Plan) for
the purchase of 150,000 shares of stock
expired.
|
|
(12)
|
During
fiscal 2004, Lord John Gilbert was granted an option to purchase 200,000
shares of stock at an exercise price of $0.85 per share under the
Company’s Non-qualified Independent Director Stock Option Plan. The option
expired during fiscal 2009.
|
|
(13)
|
During
fiscal 2002, Dov Amir and Gary J. Novinskie were each granted an option to
purchase 500,000 shares of stock at an exercise price of $0.53 per
share. Options for the purchase of 1,400,000 shares of stock
(including the options discussed in footnote 5 above) expired during
fiscal 2009.
|
|
(14)
|
Of
the options to purchase 787,500 shares outstanding as of September 30,
2009, 600,000 shares are held by current officers, directors and employees
of the Company (“Insiders”). The exercise prices for the options
held by Insiders range from $0.28 per share to $0.67 per
share.
|
Warrants
to Purchase Shares of Common Stock
Warrants
to purchase 822,305 shares of Common Stock are outstanding at September 30, 2009
and consist of the following:
Issuance
|
|
Expiration Date
|
|
No. of
Shares
|
|
|
Exercise
Price
Per Share
|
|
Financing
Sources (1)
|
|
December
31, 2010
|
|
|
822,305 |
|
|
$ |
0.55 |
|
Conley
Warrants (2)
|
|
February
26, 2008
|
|
|
- |
|
|
|
- |
|
Anthony
Warrants (2)
|
|
February
26, 2009
|
|
|
- |
|
|
|
- |
|
TPA
Warrants (3)
|
|
November
29, 2007
|
|
|
- |
|
|
|
- |
|
June
2007 Private Placement Warrants (4)
|
|
June
21, 2009
|
|
|
- |
|
|
|
- |
|
|
(1)
|
Financing Sources -
On July 21, 1998, warrants to purchase 263,638 shares
(expiring on November 20, 2003) were granted to four persons who lent the
Company a total of $145,000. At September 30, 2007, warrants to
purchase a total of 136,364 shares are outstanding. The warrants expired
unexercised on December 31, 2007.
|
On
November 28, 2001, warrants to purchase a total of 435,941 shares were granted
to Sonata Investment Company, Ltd. (395,273 shares) and Standard Energy (40,668
shares) as consideration for entering into the Loan Conversion Agreement dated
August 1, 2001. The Loan Conversion Agreement extended the date by which
the Company had to satisfy its obligations to both Sonata Investment Company,
Ltd. (“Sonata”) and Standard Energy Company (“Standard”) and granted both Sonata
and Standard the right to convert the debt into common stock of the Company at
such time as the Company advised Sonata and Standard of its intent to satisfy
the Company’s obligations to one or both entities. Sonata and Standard are
entities affiliated with each other. The exercise price is at $1.05 per
share. The Sonata and Standard Warrants were to have expired August 1,
2002. The Company agreed to extend the termination date of the Sonata and
Standard Warrants until July 31, 2004, in exchange for Sonata’s relinquishing
its twenty percent (20%) interest in the net profits of the Company’s subsidiary
Sustainable Forest Industries, Inc. These extensions have resulted in a $100,000
charge to the statement of loss in fiscal 2002. The Sonata warrants were further
extended until December 31, 2007, as additional consideration under the Second
Amendment to the Heller Loan. The warrants expired unexercised on December 31,
2007.
Sonata
was granted an additional warrant to purchase 250,000 shares at a price of
$0.906 per share under the Second Amendment to the Heller Loan. This
warrant expired unexercised on December 31, 2007.
On
December 21, 2007, Sonata loaned the Company $75,000 pursuant to a promissory
note of same date. The Company issued warrants for the purchase of 822,305
shares of stock at an exercise price of $0.55 per share. The warrants
expire on December 31, 2010.
|
(2)
|
Conley & Anthony Warrants
– On February 27, 2003, warrants to purchase 300,000 shares at a
price of $0.13 per share were granted to each of Robert Conley and Bob
Anthony in consideration of their consultation and individual expertise in
regard to product development and application market identification with
regard to the Company’s potential Sierra Kaolin and zeolite products
respectively. Mr. Conley’s warrant expired unexercised on February
26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his warrant
(100,000 shares) and he retained warrants to purchase 200,000 shares.
During fiscal 2008, the expiration date for Mr. Anthony’s warrant was
extended to February 26, 2009. These warrants expired
unexercised.
|
|
(3)
|
TPA Warrants – In
accordance with the provisions of the First Amended Memorandum of
Understanding (Sierra Kaolin Development) dated March 11, 2005, Tecumseh
Professional Associates, Inc (“TPA”) was granted the right to acquire
1,500,000 shares at a price of $0.50 per share for $80,000 (“TPA
Warrants”). The TPA Warrants had a term of three years with an expiration
date of November 29, 2007. These warrants expired
unexercised.
|
|
(4)
|
June 2007 Private Placement
Warrants – Under the terms of the June 2007 Private Placement (see
Sales of Securities above), investors were issued a warrant to purchase of
one share for each two shares of Common Stock purchased in the Private
Placement. The warrant is exercisable during the first two years after the
close of the Private Placement. These warrants expired
unexercised.
|
Item 6. Selected
Financial Data.
Not
required as the registrant is a smaller reporting company.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward
Looking Statements
This
Annual Report on Form 10-K contains forwarding-looking statements, within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act.
The
following discussion is intended to inform the Company’s existing and potential
security holders generally of some of the risks and uncertainties that can
affect the Company and to take advantage of the “safe harbor” protection for
forward-looking statements afforded under Federal securities laws. From
time to time, management or persons acting on behalf of the Company make
forward-looking statements to inform existing and potential security holders
about the Company. Forward-looking statements are generally accompanied by
words such as “estimate,” “project,” “predict,” “believe,” “expect,”
“anticipate,” “plan,” “good” or other words that convey the uncertainty of
future events or outcomes. 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 volume 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
statements by their very nature are subject to certain risks, uncertainties and
assumptions and will be influenced by various factors. Should any of the
assumptions underlying a forward-looking statement prove inaccurate, actual
results could vary substantially.
Various
factors could cause actual results to differ materially from those expressed in
forward-looking statements, including, without limitation, the
following:
|
·
|
volatility
of the market price for both crude oil and natural
gas;
|
|
·
|
volatility
of the market price for the Company’s
minerals;
|
|
·
|
market
capacity and demand for the Company’s
minerals;
|
|
·
|
the
timing, effects and success of the Company’s acquisitions, exploration and
development activities;
|
|
·
|
the
timing and marketability of
production;
|
|
·
|
effectiveness
of management’s strategies and
decisions;
|
|
·
|
changes
in the legal and/or regulatory environment and/or changes in accounting
standards; policies and practices or related interpretations by auditors
and/or regulatory agencies;
|
|
·
|
climatic
conditions; and
|
|
·
|
unanticipated
problems, issues or events.
|
Many, if
not all, of these factors are beyond the Company’s control and are impossible to
predict. These factors are not intended to represent an exhaustive list of
the general or specific facts or factors that may affect the
Company.
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.
Results of
Operations:
Fiscal
year ended September 30, 2009, compared to fiscal year ended September 30,
2008:
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
656,048 |
|
|
$ |
1,192,334 |
|
Net
Loss
|
|
$ |
(3,244,941 |
) |
|
$ |
(923,078 |
) |
Oil
and Gas Production and Cost Information:
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
Oil
(Bbl)
|
|
|
2,880 |
|
|
|
3,724 |
|
Gas
(Mcf)
|
|
|
39,925 |
|
|
|
48,786 |
|
Average
price:
|
|
|
|
|
|
|
|
|
Oil
(per barrel)
|
|
$ |
54.91 |
|
|
$ |
104.87 |
|
Gas
(per Mcf)
|
|
$ |
5.51 |
|
|
$ |
10.51 |
|
Lease
Operating Expenses and Production Tax per Mcfe
|
|
$ |
3.71 |
|
|
$ |
4.16 |
|
Bbl =
Barrels of oil
Mcf
= One Thousand cubic feet of gas
Mcfe =
One Thousand cubic feet of gas equivalent
The
decrease in oil and gas production experienced during fiscal 2009 is primarily a
result of wells being “off-line” for repair, declines in the producing gas-oil
ratio from certain producing wells operated by the Company in Texas and
curtailments resulting from third party maintenance of natural gas pipelines and
processing facilities servicing these properties Well management revenue
decreased to $263,545 for fiscal 2009 from $267,767 for fiscal 2008
The
decrease in Lease Operating Expenses and Production Tax per Mcfe is primarily
the result of the decrease in Lease Operating Expenses in fiscal 2009.
Such expenses were greater in fiscal 2008 primarily as a result of the workover
expenses incurred to maintain and enhance production of the Company’s properties
in Texas.
Minerals
Operations
The
Company is an Exploration Stage company in respect to its mineral
holdings.
Minerals
Exploration Expenses
Minerals
exploration expenses totaled $7,200 for fiscal 2008. These expenses are
primarily for costs associated with the exploration of the mineral deposits and
quantification of Mineralized Materials. The Company incurred no such expenses
in fiscal 2009.
Minerals
Operating Expenses and Other Costs
Minerals operating expenses and other
costs increased to $123,411 for fiscal 2009 as compared to $101,567 for fiscal
2008. The amount for fiscal 2009 includes a charge for $90,000 related to the
issuance of Common Stock in exchange for services. During June 2009, the Company
issued 1,000,000 shares of Common Stock to William Smith, a consultant to the
Company, in exchange for the marketing of and development of a market for the
Company’s product, ReNuGen™, at $0.09 per share. During fiscal 2008, the
total costs incurred with the calcium carbonate annual lease rental, minimum
royalty payment and claim fees amounted to $49,511. The Company did not incur
such costs in fiscal 2009 as the Company ceased such payments required by the
lease (see “Loss on Abandonment” below).
Loss
on Abandonment
During
fiscal 2009, the Company determined that additional efforts to develop its
calcium carbonate minerals in New Mexico were no longer warranted. Accordingly,
the Company charged-off the mineral net book value ($1,876,972) and prepaid
royalties ($100,000) in respect to the property during fiscal 2009. The loss on
abandonment of the calcium carbonate property totaled $1,976,972.
Depreciation,
Depletion and Amortization: Minerals
Depreciation,
depletion and amortization expenses totaled $578,252 for fiscal 2009 as compared
to $728,252 for fiscal 2008. Each of such amounts includes amortization of
Patent Rights of $577,452.
Depreciation,
Depletion and Amortization: Oil and Gas and Other
Depreciation,
depletion and amortization (“DD&A”) totaled $185,968 and $182,368 for fiscal
2009 and 2008, respectively.
General
and Administrative Expenses
These
expenses decreased 45% to $384,390 for fiscal 2009 as compared to $702,256 for
fiscal 2008. Stock-based compensation expense is included in general and
administrative expenses. The Company recorded stock-based compensation expense
for fiscal 2009 and fiscal 2008 of $62,399 and $188,476, respectively (see Note
8 of the Notes to Consolidated Financial Statements). General and administrative
expenses also decreased as a result of the Company’s decreased
staff.
Legal
and Professional Fees and Expenses
These
expenses decreased 26% to $189,706 for fiscal 2009 as compared to $256,657 for
fiscal 2008. The decrease is primarily attributed to the decrease in
professional fees related to potential acquisitions and resource
exploration.
Interest
Expense
Interest
expense decreased 5% to $232,257 for fiscal 2009 as compared to $244,798 for
fiscal 2008.
Gain
on Sale of Oil and Gas Properties
During
fiscal 2008, gain on sale of oil and gas properties totaled
$400,000.
In March
2008, the Company entered into an agreement to sell its interests in certain
operated gas wells and related gas gathering system in West Virginia with cash
consideration to the Company of $150,000 of which $100,000 was received in April
2008. The remaining $50,000 is pending awaiting the consent of a joint
interest owner in the remaining asset. Revenues and expenses applicable to such
assets included in fiscal 2008 periods are not material as the wells had not
produced since March 2006. The assets sold had no net book value. Accordingly,
the Company recognized gain on sale of oil and gas properties of $150,000 during
fiscal 2008.
In May
2008, the Company sold its interests in certain oil and gas properties
(primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and
expenses applicable to such assets included in fiscal 2008 are not material as
the two gas wells included in the sale were marginal producers. The assets sold
had no net book value. Accordingly, the Company recognized gain on sale of oil
and gas properties of $250,000 during fiscal 2008.
Liquidity
and Capital Resources
The
Company’s cash flow used for operating activities was $461,129 for fiscal 2009
and $103,961 for fiscal 2008, respectively. Accounts payable decreased $336,780
during fiscal 2009. During fiscal 2009 and 2008, the Company defaulted on
certain required payments including the payment of a portion of the salaries
required pursuant to certain employment agreements (see Notes 6, 7, 9, 10 and 11
of the Notes to Consolidated Financial Statements). Funds have been and are
being deployed in efforts to enhance the commercial viability of the Company’s
existing resource assets, to identify potential expansion opportunities and to
retire obligations associated with the Company’s assets. The Company’s net cash
at September 30, 2009 totaled $98,336.
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 has instituted cost
containment procedures including staff decreases, sold certain of its oil and
gas properties, 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 the 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.
During
December 2007, Sonata Investment Company, Ltd. loaned the Company $75,000 which
the Company used to satisfy certain delinquent vendor payables (see Note 8 of
the Notes to Consolidated Financial Statements). This note was repaid in May
2008 with a portion of the proceeds from the sale of the Pennsylvania properties
(see below).
In March
2008, the Company entered into an agreement to sell its interests in certain
operated gas wells and related gas gathering system in West Virginia with cash
consideration to the Company of $150,000 of which $100,000 was received in April
2008. In May 2008, the Company sold its interests in certain oil and gas
properties (primarily undeveloped acreage) in Pennsylvania for $250,000 (see
Note 3 of the Notes to Consolidated Financial Statements).
During
June 2009, the Company offered a Private Placement under the provisions of
Regulation D promulgated under the Securities Act of 1933, as amended (the “2009
Private Placement”). Private Placement consists of up to Five Hundred Thousand
Dollars ($500,000) of 7.25% Convertible Debentures (“Debentures” or
“Debenture”). The Debentures offered by the Company, are five (5) year
instruments maturing on July 30, 2014, bearing interest at seven and one quarter
percent (7.25 %) per annum on the balance outstanding from time to time.
Interest will commence to accrue immediately upon issuance of the Debentures and
will be paid quarterly on each September 30, December 31, March 31 and June 30,
which the Debentures are outstanding. Payment of principal will commence
on September 30 following the second anniversary of the Closing Date of this
Offering. The Company extended the offering period for the Debentures
until at the request of potential investors. As of September 30, 2009, this
private placement raised $128,500 (net of fees and expenses totaling $14,225)
for the Company. All of the purchasers of the debentures elected to
immediately convert such holdings into Common Stock at an average conversion
price of $0.14 per share, and accordingly the Company has issued 1,019,465
shares of Common Stock as of September 30, 2009. The Company is utilizing the
proceeds of this private placement for general working capital
purposes.
Commercialization
of Existing Assets
During
fiscal 2009, the Company determined that additional efforts to develop its
calcium carbonate minerals in New Mexico were no longer warranted. The Company
is continuing to pursue plans to commercialize its kaolin and zeolite projects
which are critical for the Company to achieve profitability and establishing 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
efforts of the Company and Tecumseh Professional Associates LLC to evaluate the
Sierra Kaolin deposit are progressing. 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 for coatings, fillers and
pigments for use within the paint and paper manufacturing industries. The
analysis results of the processed minerals with respect to its physical
properties such as but not limited to, brightness, color, opacity, oil
absorption have indicated that commercially viable products can be produced from
the deposit’s extracted minerals.
The
venture, with the assistance of its consultants, has begun technical
presentations of the product formulations to entities active on both the demand
and supply sides of the coatings, fillers and pigments sectors of the paint and
paper industries. Preliminary feedback from these initial presentations has been
encouraging and has led to follow-up discussions and submission of product
samples for prospective application testing. The final results of these
inquiries and testing are expected over the next several months. Tecumseh, as
the project’s manager, is proceeding with its efforts to prepare the mineral
deposit site for production. During November 2009, the extraction permit for the
project was issued. Work continues on product identification and process flow
sheet design and is expected to be completed in the next few
months.
The
Company continues to focus on establishing business and or financial
relationships that will provide the necessary capital to effectively exploit its
calcium carbonate and zeolite mineral resource holdings. With respect
to the Company’s zeolite deposit, certain initial small scale tests have
progressed to the point where larger scalable pilot tests of commercial
applications are to be initiated.
Off-balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements and does not anticipate entering
into any such arrangements in the foreseeable future.
Sarbanes-Oxley
Act
The
Sarbanes-Oxley Act of 2002 (“SOX”) is the first major revision to the securities
laws since the enactment of the Securities Act of 1933 and the Securities and
Exchange Act of 1934. The SOX, promulgated in large part in response
to the Enron/Worldcom demise, covers a variety of measures all of which will not
be covered here. The SOX is applicable to all publicly traded reporting
companies no matter how small or large. The SOX provides for
additional controls such as the chief executive officer’s certificate regarding
the accuracy of the Company’s financial statements and providing for a criminal
penalty for making a false statement to the certification by an executive
officer that the financial statements do not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements,
in light of the circumstances under which the statements were made, not
misleading with respect to the period covered by the annual
report. The certification also requires that the Chief Executive
Officer of the Company certify that the financial statements and other materials
presented in the annual report fairly present all material aspects of the
financial condition, results of operations and cash flows of the Company as of
and for the periods covered by the annual report. This requirement
exceeds the previous requirement that the financial statements merely be
presented in accordance with generally accepted accounting
principles.
The
Company believes that it has historically provided its financial information in
this fashion, having separately reported and presented each segment of the
Company’s business for the past few years.
The SOX
requires that a “Disclosure Committee” be established. This committee
considers the materiality of information and determines disclosure obligations
on a timely basis. This committee is the Company’s “watchman” for
public disclosures. The Company has designated the Board of Directors
as the Committee. The Company has three employees and five
independent directors. All parties are intricately involved in the
decision making processes at the Company and no disclosure or decision not to
disclose information is made without the input of inside management, counsel and
the Board of Directors.
Because
the drafting and approval of all of the Company’s reports is a collective
process, the provisions of the SOX to establish an independent Disclosure
Committee, a Disclosure Control Monitor, to conduct internal drafting sessions,
distribution of draft reports and dealing with internal trading policies are
presently either not applicable or are already implemented, have been and are
part of the Company’s operating procedures. The SOX also provides for certain
controls on auditors and the accounting industry. The Company only
utilizes its auditors for auditing purposes. As such, the Company
believes that it is and will continue to be in full compliance with the final
regulations promulgated by the Securities and Exchange Commission (“SEC”) under
the SOX.
The SEC
has acknowledged that a “one-size fits all” approach to establishing effective
disclosure controls and procedures is not appropriate and has now prescribed
specific disclosure controls and procedures. The SEC expects each
company to develop a process that is consistent with its business and internal
management and supervisory practice. The Company believes that it has
fully complied with the intent of the SOX and Regulations promulgated by the
SEC.
All
phases of the Company’s operations are subject to certain influences outside of
the Company’s control. Any one, or a combination, of these factors
could materially affect the results of the Company’s
operations. These factors include: competitive pressures, inflation,
trade restrictions, interest rate fluctuations and other capital market
conditions, weather, future and options trading, and the availability of natural
resources and services from other sources. Forward-looking statements
are made by or on behalf of the Company utilizing available knowledge of its
business and the environment in which it operates, but because of the factors
listed above, as well as other environmental factors over which the Company has
no control, actual results may differ from those in the forward-looking
statements. Consequently, all of the forward-looking statements made
are qualified in their entirety by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected effect on the business and/or operations of the Company.
New
Accounting Standards
For
details of applicable new accounting standards, please, refer to Note 2 to the
Consolidated Financial Statements.
Critical
Accounting Policies
General
– The
preparation of financial statements in accordance with accounting standards
generally accepted in the United States requires management to make estimates
and assumptions that affect both the recorded values of assets and liabilities
at the date of the financial statements and the revenues recognized and expenses
incurred during the reporting period. Our estimates and assumptions affect our
recognition of deferred expenses, bad debts, income taxes, the carrying value of
our long-lived assets and our provision for certain contingencies. We evaluate
the reasonableness of these estimates and assumptions continually based on a
combination of historical information and other information that comes to our
attention that may vary our outlook for the future. Actual results may differ
from these estimates under different assumptions.
We
suggest that the Summary of Significant Accounting Policies, as described in
Note 2 of Notes to Consolidated Financial Statements, be read in conjunction
with this Management’s Discussion and Analysis of Financial Condition and
Results of Operations. We believe the critical accounting policies that most
impact our consolidated financial statements are described below.
Going
Concern – The financial
statements have been prepared on the basis of a going concern, which
contemplates that 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. For the fiscal year ended September 30, 2009, the Company
incurred a net loss of $3,221,539. The ability of the Company to meet its total
liabilities of $8,096,395 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 including Clean Age Minerals, Inc.’s
acquisition of $20 million.
Fair
Value of Financial Instruments – The Company’s
only financial instruments are (a) cash, securities available for future sale,
and short-term trade receivables, payables, and debt, and (b) long-term
debt. The
carrying amounts reported in the accompanying consolidated financial statements
for cash, securities available for future sale, and short-term trade
receivables, payables and debt approximate fair values
because of the immediate nature of short-term maturities of these financial
instruments. Based on the borrowing rates currently available to the
Company for long-term bank loans with similar terms and average maturities, the
carrying amount of long-term debt approximates fair value.
Receivables — In the normal
course of business, we extend credit to our customers on a short-term basis. Our
principal customers are major oil and natural gas exploration, development and
production companies. Credit risks associated with these customers are
considered minimal. Dealings with smaller, local companies, particularly with
the current difficulties in equity and credit markets, pose the greatest risks.
We routinely review our accounts receivable balances and make provisions for
doubtful accounts as necessary. Accounts are reviewed on a case by case basis
and losses are recognized in the period if we determine it is likely that
receivables will not be fully collected. We may also provide a general provision
for accounts receivables based on existing economic conditions.
Oil and gas properties – The
Company follows the successful efforts method of accounting for the costs of
exploration and development activities. Costs of successful exploration wells,
development wells, and direct acquisition costs of developed and undeveloped
leases containing proved reserves are capitalized and amortized on a
unit-of-production method over the life of the related
reserves. Costs of exploratory wells found to be dry are expensed.
Support equipment and other property and equipment recorded at cost are
amortized using the straight-line method over their estimated useful
lives.
Mineral properties – The
Company has recorded the acquisition of Clean Age Minerals, Inc., and associated
minerals rights at cost. The Company has not produced large-scale
quantities of any of its mineral deposits.
Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of — Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount that the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. At September 30, 2009, we reviewed our
long-lived assets and determined no impairment was
necessary.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Not
required as the registrant is a smaller reporting company.
Item 8. Financial
Statements and Supplementary Data.
The
following financial statements and schedules are included herein:
Audited
Financial Statements and Supplemental Financial Information:
*
|
Report
of Independent Registered Public Accounting
Firm
|
*
|
Consolidated
Balance Sheets
|
*
|
Consolidated
Statements of Operations
|
*
|
Consolidated
Statements of Shareholders’ Equity
|
*
|
Consolidated
Statements of Cash Flow
|
*
|
Notes
to Consolidated Financial
Statements
|
*
|
Report
of Independent Registered Public Accounting Firm On Supplemental Financial
Information
|
*
|
Schedule
V – Property, Plant and Equipment
|
*
|
Schedule
VI – Accumulated Depreciation, Depletion and Amortization of Property,
Plant and Equipment
|
Other
Supplemental Information (Unaudited):
*
|
Estimated
Net Quantities of Proven Oil and Gas
Reserves
|
*
|
Standardized
Measure of Discounted Future Net Cash Flow from Estimated Production of
Proved Oil and Gas Reserves
|
*
|
Summary
of Changes in Standardized Measure of Discounted Future Net Cash
Flows
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of Daleco
Resources Corporation
We have
audited the accompanying consolidated balance sheets of Daleco Resources
Corporation and Subsidiaries as of September 30, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Daleco Resources Corporation
and Subsidiaries as of September 30, 2009 and 2008, and the results of their
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered significant recurring net losses and
negative operating cash flow, which raise substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those
matters are also described in Note 1 to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
|
Vasquez & Company
LLP
|
|
Vasquez
& Company LLP
|
Los
Angeles, California
January
13, 2010
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
$ |
98,336 |
|
|
$ |
472,912 |
|
Accounts
Receivable, net of allowance for doubtful accounts of none in
2009 and $12,348 in 2008
|
|
|
296,547 |
|
|
|
474,692 |
|
Other
Current Assets
|
|
|
7,424 |
|
|
|
7,424 |
|
Total
Current Assets
|
|
|
402,307 |
|
|
|
955,028 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Patent
Rights
|
|
|
6,594,500 |
|
|
|
6,594,500 |
|
Accumulated
Amortization of Patent Rights
|
|
|
(5,199,616 |
) |
|
|
(4,622,164 |
) |
Net
Patent Rights
|
|
|
1,394,884 |
|
|
|
1,972,336 |
|
Securities
Available for Future Sale
|
|
|
1,583 |
|
|
|
5,510 |
|
Restricted
Cash Deposits
|
|
|
109,041 |
|
|
|
105,825 |
|
Prepaid
Mineral Royalties- Long-term
|
|
|
419,879 |
|
|
|
490,000 |
|
Interest
Receivable
|
|
|
150,814 |
|
|
|
131,387 |
|
Total
Other Assets
|
|
|
2,076,201 |
|
|
|
2,705,058 |
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
|
Oil
and Gas Properties, at cost
|
|
|
4,424,512 |
|
|
|
4,424,512 |
|
Accumulated
Depreciation, Depletion and Amortization
|
|
|
(3,806,195 |
) |
|
|
(3,626,795 |
) |
Net
Oil and Gas Properties
|
|
|
618,317 |
|
|
|
797,717 |
|
Mineral
Properties, at cost
|
|
|
9,877,128 |
|
|
|
12,609,100 |
|
Accumulated
Depreciation, Depletion and Amortization
|
|
|
(95,000 |
) |
|
|
(950,000 |
) |
Net
Mineral Properties
|
|
|
9,782,128 |
|
|
|
11,659,100 |
|
Office
Equipment, Furniture and Fixtures, at cost
|
|
|
79,902 |
|
|
|
79,902 |
|
Accumulated
Depreciation
|
|
|
(67,639 |
) |
|
|
(60,271 |
) |
Net
Equipment, Furniture and Fixtures
|
|
|
12,263 |
|
|
|
19,631 |
|
Total
Net Property, Plant and Equipment
|
|
|
10,412,708 |
|
|
|
12,476,448 |
|
TOTAL
ASSETS
|
|
$ |
12,891,216 |
|
|
$ |
16,136,534 |
|
SEE ACCOMPANYING AUDITORS’ REPORT AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
1,839,170 |
|
|
$ |
2,175,950 |
|
Federal
and State Income Taxes Payable
|
|
|
277,990 |
|
|
|
264,795 |
|
Note
Payable - Related Party
|
|
|
45,485 |
|
|
|
45,485 |
|
Premium
Finance Note Payable
|
|
|
- |
|
|
|
2,636 |
|
EV&T
Note
|
|
|
567,213 |
|
|
|
567,213 |
|
Notes
Payable – First Regional Bank – Current Portion
|
|
|
15,000 |
|
|
|
99,970 |
|
CAMI
Notes
|
|
|
514,881 |
|
|
|
514,881 |
|
Accrued
Interest Expense
|
|
|
705,840 |
|
|
|
603,499 |
|
Accrued
Preferred Stock Dividends Payable
|
|
|
1,741,895 |
|
|
|
1,626,004 |
|
Accrued
Expense Reimbursements
|
|
|
24,990 |
|
|
|
20,293 |
|
Accrued
Bonus Expense
|
|
|
1,373,831 |
|
|
|
1,373,831 |
|
Accrued
Salary Expense
|
|
|
944,441 |
|
|
|
986,698 |
|
Total
Current Liabilities
|
|
|
8,050,736 |
|
|
|
8,281,255 |
|
Notes
Payable – First Regional Bank – Long-term Portion
|
|
|
45,659 |
|
|
|
- |
|
TOTAL
LIABILITIES
|
|
|
8,096,395 |
|
|
|
8,281,255 |
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
Stock – 20,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock (outstanding: none)
|
|
|
- |
|
|
|
- |
|
Series
B Convertible Preferred Stock – par value $0.01 per share (2009 and 2008 -
145,000 shares outstanding)
|
|
|
1,450 |
|
|
|
1,450 |
|
Common
Stock – 100,000,000 shares authorized – par value $0.01 per share
(outstanding: 2009 – 45,100,811 shares; 2008 – 43,081,346
shares)
|
|
|
451,008 |
|
|
|
430,813 |
|
Additional
Paid in Capital
|
|
|
45,402,515 |
|
|
|
45,118,409 |
|
Accumulated
Deficit
|
|
|
(40,480,035 |
) |
|
|
(37,119,203 |
) |
Subscriptions
Receivable
|
|
|
(576,000 |
) |
|
|
(576,000 |
) |
Accumulated
Other Comprehensive Loss
|
|
|
(4,117 |
) |
|
|
(190 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
4,794,821 |
|
|
|
7,855,279 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
12,891,216 |
|
|
$ |
16,136,534 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
Oil
and Gas Sales
|
|
$ |
378,006 |
|
|
$ |
903,256 |
|
Well
Management Revenue
|
|
|
263,545 |
|
|
|
267,767 |
|
Royalty
Receipts
|
|
|
7,948 |
|
|
|
16,731 |
|
Mineral
Sales
|
|
|
6,549 |
|
|
|
4,580 |
|
Total
Operating Revenues
|
|
|
656,048 |
|
|
|
1,192,334 |
|
Expenses:
|
|
|
|
|
|
|
|
|
Lease
Operating Expenses - Oil and Gas
|
|
|
189,384 |
|
|
|
246,245 |
|
Exploration
Expenses - Minerals
|
|
|
- |
|
|
|
7,200 |
|
Operating
Expenses and Other Costs - Minerals
|
|
|
123,411 |
|
|
|
101,567 |
|
Production
and Severance Taxes – Oil and Gas
|
|
|
23,111 |
|
|
|
49,359 |
|
Depreciation,
Depletion and Amortization
|
|
|
764,220 |
|
|
|
910,620 |
|
General
and Administrative Expenses
|
|
|
384,390 |
|
|
|
702,256 |
|
Legal
and Professional Fees and Expenses
|
|
|
189,706 |
|
|
|
256,657 |
|
Shareholder
Information Expenses
|
|
|
40,922 |
|
|
|
33,986 |
|
Amortization
of Equity Placement Costs
|
|
|
- |
|
|
|
11,151 |
|
Total
Expenses
|
|
|
1,715,144 |
|
|
|
2,319,041 |
|
Loss
From Operations
|
|
|
(1,059,096 |
) |
|
|
(1,126,707 |
) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
and Dividend Income
|
|
|
23,384 |
|
|
|
48,427 |
|
Interest
Expense
|
|
|
(232,257 |
) |
|
|
(244,798 |
) |
Gain
on Sale of Oil and Gas Properties
|
|
|
- |
|
|
|
400,000 |
|
Loss
on Abandonment of Mineral Property
|
|
|
(1,976,972 |
) |
|
|
- |
|
Total
Other Income (Expense), Net
|
|
|
(2,185,845 |
) |
|
|
203,629 |
|
Loss
Before Income Taxes
|
|
|
(3,244,941 |
) |
|
|
(923,078 |
) |
Taxes
based on Income
|
|
|
- |
|
|
|
- |
|
Net
Loss
|
|
|
(3,244,941 |
) |
|
|
(923,078 |
) |
Preferred
Stock Dividends
|
|
|
(115,891 |
) |
|
|
(23,089 |
) |
Net
Loss Applicable to Common Shareholders
|
|
$ |
(3,360,832 |
) |
|
$ |
(946,167 |
) |
Basic
and Fully Diluted Net Loss per share
|
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
Weighted-average
number of shares of Common Stock Outstanding
|
|
|
43,486,219 |
|
|
|
43,081,346 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED
SEPTEMBER 30, 2009 AND 2008
|
|
Series
B
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Subscrip-
|
|
|
Accumulated
Other
Compre-
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
|
|
|
tions
Receivable
|
|
|
hensive
Loss
|
|
|
Shareholders’
Equity
|
|
Balance,
September
30, 2007
|
|
|
145,000 |
|
|
$ |
1,450 |
|
|
|
43,081,346 |
|
|
$ |
430,813 |
|
|
$ |
44,911,213 |
|
|
$ |
(36,173,036 |
) |
|
$ |
(576,000 |
) |
|
$ |
- |
|
|
$ |
8,594,440 |
|
Issuance
of Stock Purchase Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,720 |
|
Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190 |
) |
|
|
(190 |
) |
Stock-based
Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,476 |
|
Preferred
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,089 |
) |
|
|
|
|
|
|
|
|
|
|
(23,089 |
) |
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(923,078 |
) |
|
|
|
|
|
|
|
|
|
|
(923,078 |
) |
Balance,
September
30, 2008
|
|
|
145,000 |
|
|
|
1,450 |
|
|
|
43,081,346 |
|
|
|
430,813 |
|
|
|
45,118,409 |
|
|
|
(37,119,203 |
) |
|
|
(576,000 |
) |
|
|
(190 |
) |
|
|
7,855,279 |
|
Issuance
of Common Stock Pursuant to Private Placement
|
|
|
|
|
|
|
|
|
|
|
989,286 |
|
|
|
9,893 |
|
|
|
114,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,275 |
|
Issuances
of Stock For Services Performed
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
10,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,000 |
|
Issuance
of Stock for Equity Placement Services
|
|
|
|
|
|
|
|
|
|
|
30,179 |
|
|
|
302 |
|
|
|
3923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,225 |
|
Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,927 |
) |
|
|
(3,927 |
) |
Stock-based
Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,399 |
|
Interest
Expense Resulting from Beneficial Conversion Feature of Convertible
Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,402 |
|
Preferred
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,891 |
) |
|
|
|
|
|
|
|
|
|
|
(115,891 |
) |
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,244,941 |
) |
|
|
|
|
|
|
|
|
|
|
(3,244,941 |
) |
Balance,
September
30, 2009
|
|
|
145,000 |
|
|
$ |
1,450 |
|
|
|
45,100,811 |
|
|
$ |
451,008 |
|
|
$ |
45,402,515 |
|
|
$ |
(40,480,035 |
) |
|
$ |
(576,000 |
) |
|
$ |
(4,117 |
) |
|
$ |
4,794,821 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(3,244,941 |
) |
|
$ |
(923,078 |
) |
Adjustments
to Reconcile Net Loss to Net Cash Used In Operations:
|
|
|
|
|
|
|
|
|
Depreciation,
Depletion and Amortization
|
|
|
764,220 |
|
|
|
910,620 |
|
Amortization
of Equity Placement Costs
|
|
|
- |
|
|
|
11,151 |
|
Amortization
of discount on note
|
|
|
- |
|
|
|
18,720 |
|
Provision
for Bad Debts
|
|
|
- |
|
|
|
12,348 |
|
Non-cash
Charge for Issuance of Securities
|
|
|
90,000 |
|
|
|
- |
|
Non-cash
Charge as Interest Expense
|
|
|
23,402 |
|
|
|
- |
|
Stock
Based Compensation Expense
|
|
|
62,399 |
|
|
|
188,476 |
|
Gain
on Sale of Assets
|
|
|
- |
|
|
|
(400,000 |
) |
Loss
on Abandonment of Mineral Property
|
|
|
1,976,972 |
|
|
|
- |
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Other
Current Assets
|
|
|
|
|
|
|
- |
|
Pre-paid
Mineral Royalties
|
|
|
(29,879 |
) |
|
|
(30,000 |
) |
Restricted
Cash Deposits
|
|
|
(3,216 |
) |
|
|
38,153 |
|
Receivables
|
|
|
158,718 |
|
|
|
(80,151 |
) |
Accounts
Payable
|
|
|
(336,780 |
) |
|
|
12,111 |
|
Accrued
Interest Expense
|
|
|
102,341 |
|
|
|
138,953 |
|
Other
Accrued Expenses
|
|
|
(24,365 |
) |
|
|
(1,264 |
) |
Net
Cash Used in Operating Activities
|
|
|
(461,129 |
) |
|
|
(103,961 |
) |
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Sale of Oil and Gas Assets
|
|
|
- |
|
|
|
350,000 |
|
Net
Cash Provided By Investing Activities
|
|
|
- |
|
|
|
350,000 |
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Payments
on Notes and Debt
|
|
|
(63,807 |
) |
|
|
(99,565 |
) |
Proceeds
from Borrowings
|
|
|
21,860 |
|
|
|
102,171 |
|
Proceeds
of Equity Issuances
|
|
|
128,500 |
|
|
|
- |
|
Net
Cash Provided By Financing Activities
|
|
|
86,553 |
|
|
|
2,606 |
|
Net
Change in Cash and Equivalents
|
|
$ |
(374,576 |
) |
|
$ |
248,645 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
Net
Change in Cash and Equivalents
|
|
$ |
(374,576 |
) |
|
$ |
248,645 |
|
Cash
and Equivalents at Beginning of Year
|
|
|
472,912 |
|
|
|
224,267 |
|
Cash
and Equivalents at End of Year
|
|
$ |
98,336 |
|
|
$ |
472,912 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Income
Taxes Paid
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Paid
|
|
$ |
48,899 |
|
|
$ |
48,809 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-cash Transactions:
|
|
|
|
|
|
|
|
|
Preferred
Dividends Accrued, Not Paid
|
|
$ |
115,891 |
|
|
$ |
23,089 |
|
Issuance
of Common Stock for Services Performed
|
|
$ |
94,225 |
|
|
$ |
- |
|
Interest
Expense Resulting from Beneficial Conversion Feature of Convertible
Debentures
|
|
$ |
23,402 |
|
|
$ |
- |
|
Receivable
from Sale of Oil and Gas Properties
|
|
$ |
- |
|
|
$ |
50,000 |
|
Discount
on Note Payable Resulting from Issuance of Stock Purchase
Warrants
|
|
$ |
- |
|
|
$ |
18,720 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
The financial statements have been
prepared on the basis of a going concern, which contemplates that 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. For the fiscal
year ended September 30, 2009, the Company incurred a net loss of $3,244,941.
The ability of the Company to meet its total liabilities of $8,096,395 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 including Clean Age Minerals, Inc.’s acquisition of
$20 million.
The Company will continue to seek out
and entertain project specific funding commitments and other capital funding
alternatives if and as they become available.
As of September 30, 2009, the Company
and certain of its subsidiaries were in default of certain debt and other
obligations (see Notes 6, 7, 9, 10 and 11 below). The holders of these
instruments are working with the Company to achieve the ultimate extinguishment
of the obligations.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The Company is primarily engaged in the
exploration for minerals and oil and gas activities. We follow
accounting standards set by the Financial Accounting Standard Board, commonly
referred to as “FASB”. The FASB sets generally accepted accounting principles
(“GAAP”) that we follow to ensure we consistently report our financial
condition, 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”. Prior FASB standards like
FASB 13, Accounting for Leases, are no longer being issued by the FASB. Leases
are addressed at FASB ASC Topic 840.
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 at 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.
b.
|
Basis
of consolidation
|
The consolidated financial statements
of Daleco Resources Corporation (the “Company”) have been prepared in accordance
with generally accepted accounting principles and include the accounts of Daleco
Resources Corporation, its wholly-owned subsidiaries and their wholly-owned
subsidiaries: Westlands Resources Corporation (“WRC”), Sustainable Forest
Industries, Inc., Deven Resources, Inc., DRI Operating Company (“DRIOP”),
Tri-Coastal Energy, Inc., Clean Age Minerals, Inc. (“CAMI”), CA Properties,
Inc., and The Natural Resources Exchange, Inc. Sustainable Forest Industries,
Inc. and The Natural Resources Exchange, Inc. are inactive.
The
Company’s investments in oil and gas leases are accounted for using
proportionate consolidation whereby the Company’s pro rata share of each of the
assets, liabilities, revenues and expenses of the investments are aggregated
with those of the Company in its financial statements. The Company’s investments
in minerals are accounted for using purchase accounting methods.
Certain
reclassifications have been made to prior period financial statements to conform
to the current presentation.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
c.
|
Oil
and gas properties and equipment
|
The Company follows the successful
efforts method of accounting for the costs of exploration and development
activities. Direct acquisition costs of developed and undeveloped leases are
capitalized. Costs of undeveloped leases on which proved reserves are found are
transferred to proven oil and gas properties. Each undeveloped lease with
significant acquisition cost is reviewed periodically and a valuation allowance
provided for any estimated decline in value. Capitalized costs of proved
developed leases are charged to income on the units of production basis based
upon total proved reserves.
Costs of
exploratory wells found to be dry during the year before the issuance of these
financial statements are charged against earnings in that year. Costs of
successful exploration wells and development wells are capitalized. All costs of
development wells and successful exploration wells are charged to earnings on a
unit-of-production basis based upon proved developed reserves.
d.
|
Site
Restoration, Dismantlement and Abandonment
Costs
|
An asset
retirement obligation (“ARO”) associated with the retirement of a tangible
long-lived asset is required to be recognized as a liability in the period in
which it is incurred and becomes determinable. Under this method, when
liabilities for dismantlement and abandonment costs, excluding salvage values,
are initially recorded, the carrying amount of the related assets (mineral,
oil and natural gas properties) is increased. The fair value of the ARO asset
and liability is measured using expected future cash outflows discounted
at the credit-adjusted risk-free interest rate. Accretion of the liability
is recognized each period using the interest method of allocation, and the
capitalized cost is depleted over the useful life of the related asset.
The estimated residual salvage values are taken into account in
determining amortization and depreciation rates.
The Company has not
accrued any costs associated with the potential abandonment and restoration of
producing wells and mining deposits as the salvage
value of the Company’s producing wells or mining deposits is expected to exceed
the cost of site restoration and abandonment. To date, mining and
exploration
activities of
the Company's mineral deposits have been conducted by contract
mining companies. As mining activity increases, the Company may accrue
site restoration costs as appropriate. The effect of this statement is not
material to the consolidated financial statements to warrant recognition of the
ARO.
e.
|
Office Equipment,
Furniture and Fixtures
|
Office Equipment, Furniture and
Fixtures are recorded at cost and depreciated using the straight-line method
over a period of three to seven years.
The Company has recorded the
acquisition of Clean Age Minerals, Inc. and associated minerals rights at cost
(see Note 4).
g.
|
Cash
and Cash Equivalents; Restricted Cash
Deposits
|
Cash and
cash equivalents include cash and investments with original maturities of three
months or less. The Company’s net cash at September 30, 2009, totaled $98,336.
Restricted Cash Deposits of $109,041 at September 30, 2009, support financial
assurance requirements for the Company’s operations in certain
states.
h.
|
Fair
Value Measurements
|
The
Company’s only financial instruments are (a) cash, securities available for
future sale, and short-term trade receivables, payables and debt, and (b)
long-term debt. The carrying amounts
reported in the accompanying consolidated financial statements for cash,
securities available for future sale, and short-term trade receivables, payables
and debt approximate
fair values because of the immediate nature of short-term maturities of these
financial instruments. Based on the borrowing rates currently available
to the Company for long-term bank loans with similar terms and average
maturities, the carrying amount of long-term debt approximates fair value of
$60,659 at September 30, 2009.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
i.
|
Stock-based
Compensation
|
The Company accounts for all
stock-based compensation (options) in accordance with FASB ASC
718. Under ASC 718, the fair value of stock options and compensation
costs are measured as of the grant date. Under ASC 718,
stock-based awards granted prior to its adoption will be expensed over the
remaining portion of their vesting period. For stock-based awards granted
on or after October 1, 2005, the Company amortizes stock-based compensation
expense on a straight-line basis over the requisite vesting period, which
generally ranges from one to five years.
ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from initial estimates.
Stock-based compensation expense has been recorded net of estimated
forfeitures for the years ended September 30, 2009 and 2008 such that expense
was recorded only for those stock-based awards that are expected to vest.
Options granted to non-employees are recognized in these financial statements as
compensation expense (See Note 8) using the Black-Scholes option-pricing
model.
j.
|
Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed
Of
|
Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The
Company generally assesses its oil and gas properties on a field-by-field basis
utilizing its current estimate of future revenues and operating expenses.
Recoverability of assets
to be held and used is measured by comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount that the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. At September 30, 2009, we reviewed our
long-lived assets and determined no impairment was
necessary.
k.
|
New
Accounting Standards
|
In
December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17,
Consolidations (Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which codifies FASB Statement No. 167, Amendments to
FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the
other entity’s economic performance. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity’s
financial statements. ASU 2009-17 is effective at the start of a
reporting entity’s first fiscal year beginning after November 15, 2009, or the
Company’s fiscal year beginning October 1, 2010. Early application is not
permitted. We have
not yet determined the impact, if any, which the provisions of ASU
2009-15 may have on the Company’s consolidated financial
statements.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets, which formally codifies
FASB Statement No. 166, Accounting for Transfers of
Financial Assets into the ASC. ASU 2009-16 represents a revision to the
provisions of former FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. Among other things, ASU 2009-16
(1) eliminates the concept of a “qualifying special-purpose entity”, (2) changes
the requirements for derecognizing financial assets, and (3) enhances
information reported to users of financial statements by providing greater
transparency about transfers of financial assets and an entity’s continuing
involvement in transferred financial assets. ASU 2009-16 is effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009, or the Company’s fiscal year beginning October 1, 2010. Early application
is not permitted. The provisions of ASU 2009-16 are not expected to have a
material impact on the Company’s consolidated financial
statements.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In
October 2009, the FASB published FASB ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 includes amendments to ASC Topic 470, Debt,
(Subtopic 470-20), and ASC Topic 260, Earnings per Share (Subtopic 260-10), to
provide guidance on share-lending arrangements entered into on an entity's own
shares in contemplation of a convertible debt offering or other
financing. The provisions of ASU 2009-15 are effective for fiscal
years beginning on or after December 15, 2009, and interim periods within those
fiscal years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such
arrangements. The provisions of ASU 2009-15 are effective for
arrangements entered into on (not outstanding) or after the beginning of the
first reporting period that begins on or after June 15, 2009. Certain transition
disclosures are also required. Early application is not
permitted. The provisions of ASU 2009-15 are not expected to have an
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB published FASB ASU 2009-14, Software (Topic 985) - Certain
Revenue Arrangements that Include Software Elements. ASU 2009-14 changes
the accounting model for revenue arrangements that include both tangible
products and software elements. Under this guidance, tangible products
containing software components and non-software components that function
together to deliver the tangible product's essential functionality are excluded
from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition.
In addition, hardware components of a tangible product containing software
components are always excluded from the software revenue
guidance. The provisions of ASU 2009-14 are effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, or the Company’s fiscal year
beginning October 1, 2010. Early adoption is permitted. The provisions of ASU
2009-14 are not expected to have an impact on the Company’s consolidated
financial statements.
In
October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) -
Mutliple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25,
Revenue
Recognition-Multiple-Element Arrangements, for separating consideration
in multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor's multiple-deliverable revenue arrangements. The
provisions of ASU 2009-13 are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010 or the Company’s fiscal year beginning October 1, 2010. Early adoption
is permitted. The provisions of ASU 2009-14 are not expected to have
an impact on the Company’s consolidated financial statements.
In
September 2009, the FASB published FASB ASU No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). ASU 2009-12 amends ASC
Subtopic 820-10, Fair Value
Measurements and Disclosures—Overall, to permit a reporting entity to
measure the fair value of certain investments on the basis of the net asset
value per share of the investment (or its equivalent). It also requires new
disclosures, by major category of investments, about the attributes includes of
investments within the scope of this amendment to the
Codification. The provisions of ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted. The provisions of ASU 2009-14 are not expected to have an
impact on the Company’s consolidated financial statements.
In June
2009, the FASB established the FASB Codification, which officially commenced
July 1, 2009, to become the source of authoritative US GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative US GAAP for SEC registrants. Generally,
the Codification is not expected to change US GAAP. All other
accounting literature excluded from the Codification will be considered
nonauthoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. We adopted the new standards for our fiscal year ended
September 30, 2009. All references to authoritative accounting
literature are now referenced in accordance with the
Codification.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In
October 2008, the FASB issued guidance regarding subsequent events. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. In particular, this guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009, and the adoption did not have a material impact on the Company’s financial
position or results of operations.
We have
evaluated subsequent events after the balance sheet date of September 30, 2009
through the date the financial statements were available to be filed with
the Securities and Exchange Commission (SEC). See Note 12 – Subsequent
Events.
In
December 2007, the FASB issued guidance related to Business Combinations. This
guidance retains the underlying concepts that all business combinations are
still required to be accounted for at fair value under the acquisition method of
accounting, but changed the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an intangible asset at the acquisition date; restructuring costs
associated with a business combination will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. This guidance is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of
the accounting for valuation allowances on deferred taxes and acquired tax
contingencies. Adjustments made to valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions that closed prior to the
effective date of this guidance would also apply the provisions of this
guidance. Early adoption is not permitted. The adoption of this guidance did not
have an immediate effect on our financial statements; however, this guidance
will govern the accounting for any future business combinations that the Company
may enter into.
In April
2008, FASB issued guidance related to the determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognizable intangible asset. The intent of this guidance is to improve the
consistency between the useful life of a recognizable
intangible asset and the period of expected cash
flows used to measure the fair value of the asset under U.S. generally accepted
accounting principles. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is prohibited. The Company
does not anticipate that the adoption of this guidance will have an impact on
its financial position or results of operations.
In
December 2007, the FASB issued guidance related to noncontrolling interests in
consolidated financial statements. This guidance requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. It also amends
certain consolidation procedures. This guidance also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008, with earlier adoption prohibited. Based on the current
consolidated financial statements, if this guidance were effective, the adoption
of this guidance by the Company would not have an impact on its financial
position or results of operations.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In
September 2006, the FASB issued guidance on fair value measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. We adopted this guidance on October 1, 2008. In February
2008, the FASB issued additional guidance which extended the effective date for
certain nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008. The adoption of the portions of this guidance
that were not postponed did not have a material impact on our consolidated
financial statements. We are currently evaluating the effect of the
implementation of those parts of the guidance that were deferred.
In April
2009, the FASB issued guidance related to determining fair value when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. It provides guidance for
estimating fair value in accordance with fair value measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. It also includes guidance on identifying circumstances that indicate
a transaction is not orderly. This guidance emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions.
This guidance is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
On
December 31, 2008, the SEC published final rules and interpretations updating
its oil and gas reporting requirements. Many of the revisions are updates to
definitions in the existing oil and gas rules to make them consistent with the
Petroleum Resource Management System, which is a widely accepted standard for
the management of petroleum resources that was developed by several industry
organizations. Key revisions include the ability to include nontraditional
resources in reserves, the use of new technology for determining reserves,
permitting disclosure of probable and possible reserves, and changes to the
pricing used to determine reserves based on a 12-month average price rather than
a period end spot price. The average is to be calculated using the
first-day-of-the-month price for each of the 12 months that make up the
reporting period. The new rules are effective for annual reports for fiscal
years ending on or after December 31, 2009. Early adoption is not permitted.
This statement is effective for our fiscal year ending September 30, 2010. We
are currently assessing the impact that the adoption will have on its
consolidated financial statements and disclosures.
3.
|
OIL
AND GAS PROPERTIES AND EQUIPMENT
|
At
September 30:
|
|
2009
|
|
|
2008
|
|
Proven
lease acreage costs
|
|
$ |
2,311,382 |
|
|
$ |
2,311,382 |
|
Proven
undeveloped lease acreage costs
|
|
|
581,810 |
|
|
|
581,810 |
|
Well
costs
|
|
|
1,531,320 |
|
|
|
1,531,320 |
|
|
|
|
4,424,512 |
|
|
|
4,424,512 |
|
Accumulated
depletion, depreciation and amortization
|
|
|
(3,806,195 |
) |
|
|
(3,626,795 |
) |
Net
Oil and Gas Properties
|
|
$ |
618,317 |
|
|
$ |
797,717 |
|
The
Company recognized gain on sale of oil and gas properties of $400,000 during
fiscal 2008
In March
2008, the Company entered into an agreement to sell its interests in certain
operated gas wells and related gas gathering system in West Virginia with cash
consideration to the Company of $150,000 of which $100,000 was received in April
2008. The remaining $50,000 is pending awaiting the consent of a
joint interest owner in the remaining asset. Revenues and expenses applicable to
such assets included in fiscal 2008 are not material as the wells have not
produced since March 2006. The assets sold had no net book value.
In May
2008, the Company sold its interests in certain oil and gas properties
(primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and
expenses applicable to such assets included in the fiscal 2008 are not material
as the two gas wells which were part of the sale were marginal producers. The
assets sold had no net book value.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
a.
|
Clean Age Minerals,
Inc.
|
CAMI,
through its wholly-owned subsidiary, CA Properties, Inc., a Nevada corporation,
owns or has under long-term lease: (a) approximately 5,200 acres in Marfa,
Presidio County, Texas, containing high grade zeolite; (b) twenty-five mining
claims located in Sierra County, New Mexico, covering approximately 2,720 acres
of kaolin; and (c) eleven zeolite mining claims covering approximately 220 acres
located in Beaver County, Utah. The Company is an Exploration Stage company in
respect to its mineral holdings. The Company’s ability to develop
these mineral deposits is dependent on its success in bringing in strategic
partners with experience in or a demand for specific minerals and raising
capital through third parties.
In March 2005, the Company entered into
the Sierra Kaolin Operating Agreement with TPA covering the Company’s kaolin
claims in Sierra County, New Mexico. In June 2007, the Company entered into
a Revised and Restated Agreement with TPA governing operations of the
Sierra Kaolin claims. Under these agreements, TPA assumed the duties to mine,
test and market the Company’s Sierra Kaolin.
b.
|
Minerals
Properties and Equipment
|
At
September 30:
|
|
2009
|
|
|
2008
|
|
Proven
undeveloped lease costs
|
|
$ |
9,877,128 |
|
|
$ |
12,609,100 |
|
Mine
development costs
|
|
|
- |
|
|
|
- |
|
|
|
|
9,877,128 |
|
|
|
12,609,100 |
|
Accumulated
depreciation, depletion and amortization
|
|
|
(95,000 |
) |
|
|
(950,000 |
) |
Net
Mineral Properties
|
|
$ |
9,782,128 |
|
|
$ |
11,659,100 |
|
The
Company has been amortizing its mineral properties at a nominal amortization
rate as the Company has not produced commercial quantities of any of its mineral
deposits. During the fiscal year ended September 30, 2008, the Company recorded
a charge of $150,000. 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 2009, the Company determined that additional efforts to develop its
calcium carbonate minerals in New Mexico were no longer warranted. Accordingly,
the Company charged-off the mineral net book value ($1,876,972) and prepaid
royalties ($100,000) in respect to the property. The loss on abandonment of the
calcium carbonate property totaled $1,976,972. There was no revenue applicable
to the calcium carbonate minerals included in the 2009 and 2008 fiscal years.
The expenses applicable to the calcium carbonate minerals included in operating
expenses and other costs totaled $32,600 and $92,157 in fiscal 2009 and 2008,
respectively. An amortization charge of $135,000 applicable to the calcium
carbonate minerals was included in depreciation, depletion and amortization
expense for fiscal 2008.
c.
|
Prepaid
Mineral Royalties
|
The Company receives a credit in the
nature of “prepaid mineral royalties” for advance royalties paid on the Marfa
zeolite lease, Presidio County, Texas.
The
Company continued extraction of minor quantities of its zeolite for use in
testing and field trial applications of ReNuGen™ and for testing in air
purification and soil decontamination. The Company sells one of its CA Series
Products under the tradename “ReNuGen™.”
As part
of the acquisition of Clean Age Minerals, Inc., the Company also acquired U.S.
Patent No: 5387738. This patent, owned by Clean Age Minerals, Inc. (previously
owned by Matrix-Loc, Inc., which was acquired by Clean Age Minerals, Inc., as a
result of Matrix-Loc’s merger with Clean Age Minerals, Inc., as of March 18,
2002), deals with a reagent and process for the remediation of water and
contaminated soils. The Company has obtained a Trademark “ReNuGen™”
for its CA-1 Series for use in waste treatment plants.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
b.
|
I-Squared and I-Top
Technology
|
Pursuant
to an agreement effective December 1, 2004 (“Asset Sale Agreement”), the Company
agreed to sell its I-Squared and I-Top technology to PSNet Communications. In
January 2005, Ostara Corporation (“Ostara”) acquired PSNet. Ostara changed its
name to (1) Rheologics Technologies, Inc. in 2005, (2) to KKS Venture
Management, Inc. in July 2007, and (3) Codima, Inc. (“CDMA”) in 2008. As of
September 30, 2009 and 2008, the 3,167 shares (reflective of a reverse stock
split) of CDMA common stock held by the Company were carried at $1,583 and
$5,510, respectively.
Pursuant
to Paragraph 5.1 of the Agreement and Plan of Merger between Clean Age Minerals,
Inc. (“CAMI”), and Strategic Minerals, Inc. (“SMI”), and the Company dated
September 19, 2000, obligations of CAMI to certain officers, directors and third
parties were to have been satisfied by SMI or the Company within one (1) year of
the merger. The indebtedness totaled (including the Martin Debt and
the Haessler Debt as defined in Note 7 below) $514,881 and was evidenced by
notes dated September 19, 2000 (“CAMI Notes”). The CAMI Notes were
due and payable on or before September 18, 2001, and provide for interest at the
rate of 8% per annum. The CAMI Notes remain
outstanding. As of September 30, 2009, the total amount payable on
these notes is $886,949 representing principal of $514,881 and accrued but
unpaid interest of $372,068.
On September 30, 2005, but effective as
of September 1, 2005, the Company entered into a Settlement Agreement with
and issued a note (‘EV&T Note”) to its counsel, Ehmann, Van Denbergh &
Trainor, P.C. (“EV&T”) to resolve and deal with the Company’s outstanding
legal fees. As of September 1, 2005, the Company owed EV&T $825,355 for
services performed, costs and expenses (“Debt”). Under the Settlement Agreement,
the Company paid EV&T $25,355 and entered into a three (3) year note for the
remainder of the Debt. The EV&T Note and Settlement Agreement provide for
the note to earn interest at the rate of five percent (5%) per annum on the
outstanding balance from time to time. The EV&T Note is to be repaid in 35
monthly installments of $13,000, commencing on October 1, 2005, with the
remainder due and payable on August 1, 2008, pursuant to the terms of the
Settlement. In April 2007, the Company defaulted in respect to payments required
by the Settlement Agreement. As a result of the default and
EV&T’s demand for full payment, the interest rate increased from 5% to 12%
and the full amount of the EV&T Note and unpaid interest became due and
payable. As of September 30, 2009, the outstanding balance of the EV&T Note
was $567,213 and accrued but unpaid interest totaled $178,509 through that date.
Additionally, the Company owes EV&T $180,305 for current services performed
and such amount is included in trade accounts payable at September 30,
2009.
During
November 2008, the Company made a principal payment of $25,000 on the $100,000
loan from First Regional Bank and entered into a new note for $75,000 with the
bank of which the maturity date is November 18, 2013. The interest rate is 4.10%
at September 30, 2009. Consistent with the provisions of the Note, the Company
has been making monthly payments of principal of $1,250 and interest. The
current balance of the Note is $ 60,659. The loan is secured by the personal
assets of Dov Amir, a Director of the Company (“Amir Assets”).
d.
|
Premium
Finance Agreement
|
In November 2008, the Company entered
into a premium finance security agreement with a bank to finance $21,860 of
insurance premiums. At September 30, 2009, the Company has paid all amounts due
under the agreement. In November 2007, the Company entered into a premium
finance security agreement with a bank to finance $27,171 of insurance premiums.
At September 30, 2008, the outstanding balance was $2,636 which was paid in
October 2008.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
7.
|
DUE
TO RELATED PARTIES
|
Dov Amir,
a director of the Company, has entered into four notes with the Company as
follows:
1. Note
dated October 1, 1995, bearing interest at the rate of prime plus 3 percent in
the principal amount of $91,062. This principal amount was satisfied
as of September 30, 2005.
2. Note
dated October 1, 1995, bearing interest at the rate of 7% as a result of various
subsequent advances to the Company. The outstanding principal balance was
$45,485 as of September 30, 2009 and 2008.
3. Note
dated July 20, 1998, in the face amount of $25,000, bearing interest at the rate
of 2% over the prime rate charged by the Huntington National Bank of Columbus,
Ohio, through the maturity date, November 21, 1998, and 18% thereafter. The
principal amount has been satisfied as of September 30, 2006.
4. Note
dated June 17, 2002, bearing interest at the rate of 7% in the principal amount
of $137,000. This principal amount has been satisfied as of September 30,
2005.
As of
September 30, 2009, the outstanding principal and accrued but unpaid interest on
the obligations listed under numbers 1 through 4 to Mr. Amir amounted to
$200,748, which includes $45,485 in principal and $155,263 in accrued interest.
As of September 30, 2008, the outstanding principal and accrued but unpaid
interest on the obligations listed under numbers 1 through 4 to Mr. Amir
amounted to $223,528, which includes $45,485 in principal and $178,045 in
accrued interest.
Mr. Amir
was also entitled to a cash payment of $25,000 under his Key Man Contract (see
Note 10) on June 30, 2002. This bonus has not been paid.
Prior to
conversion of his Series A Preferred Stock into common stock, Mr. Amir was
entitled to have received dividends in the amount of $91,551 of which $59,338
remains outstanding as of September 30, 2009 and 2008.
As of
September 30, 2008, the Company owed Mr. Amir no un-reimbursed business
expenses and $245,836 in accrued but unpaid salary. As of September 30, 2009,
the Company owed Mr. Amir un-reimbursed business expenses totaling $5,939 and
$245,836 in accrued but unpaid salary.
As of
September 30, 2009 and 2008, the Company was indebted to Mr. Amir in the
aggregate amount of $553,702 and $530,928, respectively.
In
October 2006, Mr. Amir and the Company entered into a Separation Agreement
providing for Mr. Amir to receive $100,000 annually for three years (“Term”),
$50,000 of which will be deemed salary with the remaining $50,000 reducing the
debt owed to Mr. Amir (“Amir Debt”). Accordingly, the Company recognized
$150,000 as salary expense during fiscal 2007. Should the Amir Debt not be
satisfied after the expiration of the Term, the Company shall continue the
$100,000 annual payment, all of which shall be allocated to the payment of the
Amir Debt until the Amir Debt is fully satisfied. The Company
reserves the right to prepay the outstanding Amir Debt in full at any time. Upon
satisfaction of the Amir Debt in full, all payments to Amir under the Separation
Agreement will cease. The Company has not made certain payments required by the
Separation Agreement applicable to the Amir Debt. Also, pursuant to the
Separation Agreement, the Company was to satisfy the loan from First Regional
Bank to the Company (see Note 6) or provide sufficient substitute collateral for
the bank so that the Amir Assets were released. The Company has not been able to
accomplish either of these and the Amir Assets have not been released by the
bank.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
By virtue
of the merger of Clean Age Minerals, Inc. (“CAMI”) with Strategic Minerals, Inc.
on September 19, 2000, Strategic Minerals, Inc. assumed the obligation of CAMI
to Robert E. Martin, a director of the Company, in the amount of $134,811
(“Martin Debt”). The Martin Debt was to have been satisfied on or
before September 18, 2001, but was not and remains outstanding. As of
September 30, 2009, the Martin Debt amounts to $134,811 in principal and accrued
but unpaid interest totals $110,945. The Martin Debt is evidenced by a note
providing for an annual rate of interest of 8%. These amounts are
included in the amounts shown for the Company’s obligation to the former
officers and directors of Clean Age Minerals, Inc. (see Note 6). As
of September 30, 2009 and 2008, the Company owed Mr. Martin $245,835 in salary
and $19,051 in unpaid reimbursable business expenses. As of September 30, 2009
and 2008, the Company was indebted to Mr. Martin in the aggregate amount of
$510,642 and $486,331, respectively.
Under the
terms of Mr. Novinskie’s employment agreement (see Note 10), Mr. Novinskie,
currently the President and a Director of the Company, was to have received a
cash bonus of $25,000 as of September 30, 2002. This bonus was not
paid. As of September 30, 2009, the Company owed Mr. Novinskie $245,839 in
salary and $25,000 in bonuses. As of September 30, 2008, the Company owed Mr.
Novinskie $287,292 in salary and $25,000 in bonuses (as discussed
previously).
As of
September 30, 2009 and 2008, the Company was indebted to Mr. Novinskie in the
aggregate amount of $312,292 and $294,792, respectively. These amounts contain
no accrued interest.
By virtue
of the merger of CAMI with Strategic Minerals, Inc. on September 19, 2000,
Strategic Minerals, Inc. assumed the obligations of CAMI to Carl A. Haessler, a
director of the Company, in the amount of $83,478 (“Haessler
Debt”). The Haessler Debt was to have been satisfied on or before
September 18, 2001, but was not and remains outstanding. As of
September 30, 2009, the Haessler Debt amounts to $83,478 in principal and
accrued but unpaid interest totals $60,324. The Haessler Debt is evidenced by a
note providing for an annual rate of interest of 8%. These amounts
are included in the amounts shown for the Company’s obligation to the former
officers and directors of Clean Age Minerals, Inc. (see Note 6). As of September
30, 2009 and 2008, the Company was indebted to Mr. Haessler in the aggregate
amount of $143,802 and $137,123, respectively.
Also, the
Company owes Series B Preferred Stock dividends (see Note 8) to Mr. Haessler of
$216,723 and $192,723 at September 30, 2009 and 2008, respectively.
e.
|
Blackstone
Obligations
|
As of
September 30, 2009, the Company owed Mr. Blackstone $43,675 for salary and
services provided to the Company. At September 30, 2008, the Company owed Mr.
Blackstone (see Note 10), an officer of the Company, $1,242 in un-reimbursed
expenses and $21,675 in salary. As of September 30, 2009 and 2008, the Company
was indebted to Mr. Blackstone in the aggregate amount of $43,675 and $22,917,
respectively. These amounts contain no accrued interest.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
|
Number of Common
Shares, Par
Value $0.01 per
Share (1)
|
|
|
Number of Series
B Preferred
Shares, Par Value
$0.01 per Share (1)
|
|
Outstanding
at September 30, 2007 and 2008
|
|
|
43,081,346 |
|
|
|
145,000 |
|
Issued
pursuant to Private Placement (2)
|
|
|
989,286 |
|
|
|
- |
|
Issued
for services performed pursuant to Private Placement (2)
|
|
|
30,179 |
|
|
|
- |
|
Issued
for services performed (3)
|
|
|
1,000,000 |
|
|
|
- |
|
Outstanding
at September 30, 2009
|
|
|
45,100,811 |
|
|
|
145,000 |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Articles of Incorporation of the Company provide for authorized capital
stock of 100,000,000 shares of common stock, par value $0.01 per share,
and 20,000,000 shares of preferred stock, par value $0.01 per share. No
Series A Preferred shares are outstanding. The 8% Cumulative Convertible
Preferred Stock (“Series B Preferred Stock”) was issued in the acquisition
of Clean Age Minerals, Inc. in September 2000. The Series B Preferred
Stock can be converted to common stock at 85% of the average of the 5 days
before the date of conversion with a minimum amount of $1.25 per
share.
|
|
(2)
|
In
June 2009, the Company commenced a private placement of up to $500,000 of
7.25% convertible debentures (the “June 2009 Private Placement”). The
debentures are convertible at a conversion price equal to the greater of
either $0.14 per share or an amount equal to 80% of the average of the
closing bid and ask prices of the Common Stock for the 5 trading days
immediately preceding the conversion date. All of the purchasers of the
debentures elected to immediately convert such holdings into Common Stock
at an average conversion price of $0.14 per share and, accordingly, the
Company has issued 1,019,465 shares of Common Stock as of September 30,
2009. As of September 30, 2009, this private placement raised $128,500
(net of fees and expenses totaling $14,225) for the Company. The Company
is utilizing the proceeds of this private placement for general working
capital purposes. During fiscal 2009, the Company recognized $23,402 as
interest expense resulting from the beneficial conversion feature of the
convertible debentures. Such interest expense was determined based on the
fair value of the Company’s Common Stock on the debenture purchase
commitment date in excess of the conversion price per
share.
|
|
(3)
|
During
June 2009, the Company issued 1,000,000 shares of Common Stock to William
Smith, a consultant to the Company, in exchange for the marketing of and
development of a market for the Company’s product, ReNuGen™, at $0.09 per
share.
|
b.
|
Options
and Warrants Outstanding
|
The
Company has granted the following options and warrants to purchase common
stock:
|
|
Number
of
Options
and
Warrants
|
|
|
Weighted
Average
Price
per
Share
|
|
Outstanding
at September 30, 2007
|
|
|
6,935,641 |
|
|
$ |
0.58 |
|
Employee
and Director Stock Options:
|
|
|
|
|
|
|
|
|
Forfeited
or Expired (1)
(4) (6)
|
|
|
(875,000 |
) |
|
$ |
0.54 |
|
Stockholder
Warrants:
|
|
|
|
|
|
|
|
|
Granted
(12)
|
|
|
822,305 |
|
|
$ |
0.55 |
|
Expired
(9)
(10) (11)
|
|
|
(2,622,305 |
) |
|
$ |
0.59 |
|
Outstanding
at September 30, 2008
|
|
|
4,260,641 |
|
|
$ |
0.57 |
|
Employee
and Director Stock Options:
|
|
|
|
|
|
|
|
|
Forfeited
or Expired (1)
(3) (4) (5) (8)
|
|
|
(2,087,500 |
) |
|
$ |
0.59 |
|
Stockholder
Warrants:
|
|
|
|
|
|
|
|
|
Expired
(7)
(11)
|
|
|
(563,336 |
) |
|
$ |
0.69 |
|
Outstanding
at September 30, 2009
|
|
|
1,609,805 |
|
|
$ |
0.51 |
|
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
(1)
|
On
March 7, 2007, the Board of Directors granted an option to Stephan V.
Benediktson for the purchase of 600,000 shares of stock at an exercise
price of $0.48 per share. Mr. Benediktson voluntarily resigned from his
office with the Company in August 2007 and the option expired unexercised
in November 2007.
|
|
(2)
|
During
fiscal 2006, William Pipkin was granted an option to purchase 200,000
shares of stock at an exercise price of $0.43 per share under the
Company’s Non-qualified Independent Director Stock Option Plan. In
September 2008, Mr. Pipkin voluntarily resigned as a Director of the
Company; accordingly, the option expired during fiscal
2009.
|
|
(3)
|
During
fiscal 2004, Lord John Gilbert was granted an option to purchase 200,000
shares of stock at an exercise price of $0.85 per share under the
Company’s Non-qualified Independent Director Stock Option Plan. The option
expired during fiscal 2009.
|
|
(4)
|
During
fiscal 2008, David L. Matz voluntarily resigned as an officer of the
Company; accordingly, options for the purchase of 75,000 (average exercise
price of $0.52 per share) and 37,500 (exercise price of $0.75 per share)
shares of stock expired during fiscal 2008 and 2009,
respectively.
|
|
(5)
|
In
June 2006, Richard A. Thibault voluntarily resigned as an officer of the
Company; accordingly, options for the purchase of 250,000 shares of stock
at an exercise price of $0.48 per share expired during fiscal
2009.
|
|
(6)
|
In
August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily
resigned their respective positions with the Company; accordingly, options
to purchase 200,000 shares of stock expired during fiscal
2008.
|
|
(7)
|
June
2007 Private Placement Warrants – Under the terms of
the June 2007 Private Placement, investors were issued a warrant to
purchase one share for each two shares of Common Stock purchased in the
Private Placement. The warrants for the purchase of 363,336 shares expired
during fiscal 2009.
|
|
(8)
|
During
fiscal 2002, Dov Amir and Gary J. Novinskie were each granted an option to
purchase 500,000 shares of stock at an exercise price of $0.53 per
share. During fiscal 2007, Dov Amir and Gary J. Novinskie were
each granted an option to purchase 200,000 shares of stock at an exercise
price of $0.75 per share. These options for the purchase of 1,400,000
shares of stock expired during fiscal
2009.
|
|
(9)
|
On
February 27, 2003, warrants to purchase 300,000 shares of common stock at
a price of $0.13 per share were granted to each of Robert Conley and Bob
Anthony in consideration of their consultation and individual expertise in
regard to product development and application market identification with
regard to the Company’s potential Sierra Kaolin and zeolite products
respectively. Mr. Conley’s warrant expired unexercised on
February 26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his
warrant (100,000 shares) and he retained warrants to purchase 200,000
shares. During fiscal 2008, the expiration date for Mr. Anthony’s warrants
was extended to February 26, 2009. The warrants expired
unexercised.
|
|
(10)
|
On
December 21, 2007, Sonata loaned the Company $75,000 pursuant to a
promissory note of same date. The Company issued warrants for the purchase
of 822,305 shares of stock at an exercise price of $0.55 per
share. The warrants expire on December 31, 2010. On December
31, 2007, warrants for the purchase of 822,305 shares expired. See “d.
Warrants” below.
|
|
(11)
|
During
fiscal 2008, warrants held by Tecumseh Professional Associates to purchase
1,500,000 shares of common stock expired. See “d. Warrants”
below.
|
c.
|
Stock-Based
Compensation
|
In March
2004, the shareholders of the Company approved the Non-qualified Independent
Director Stock Option Plan pursuant to which 800,000 shares of Common Stock are
authorized for grants for options. Each Director eligible for an award under the
plan receives an option to purchase 200,000 shares of Common Stock at an
exercise price equal to the average of the bid and asked closing prices for the
Company’s common stock for the five trading days immediately preceding the date
of the award. These option rights vest over a three-year period (but
only while the recipient is a Director) - 100,000 shares in the first year and
50,000 shares in each of years two and three. The options expire five
(5) years after issuance. In fiscal 2006, Charles T. Maxwell was
elected to the Board of Directors and was awarded an option to purchase 200,000
shares at an exercise price of $0.48 per share. In fiscal year 2007, David A.
Grady was elected to the Board of Directors and was awarded an option to
purchase 200,000 shares at an exercise price of $0.28 per share. As
of September 30, 2009, two options to purchase a total of 400,000 shares have
been awarded to Directors and remain unexercised at that date.
No
options to purchase shares of Common Stock were granted during fiscal 2009 and
fiscal 2008. Options to purchase 2,087,500 and 875,000 shares of common stock
expired during fiscal 2009 and 2008, respectively. Of the options for
the purchase of 787,500 shares outstanding as of September 30, 2009, options to
purchase 600,000 shares are held by officers, directors and employees of the
Company (“Insiders”). The exercise prices for the options held by
Insiders range from $0.28 per share to $0.67 per share.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In
accordance with ASC 718, the Company recorded stock-based compensation expense
for fiscal 2009 and 2008 of $62,399 and $188,476, respectively, relating to
stock options granted to employees. 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 3.14% and 4.72%;
expected life of three to seven years; and expected volatility between 56% and
184%.
At
September 30, 2008, there were 2,875,000 shares underlying options unexercised
(weighted-average exercise price of $0.56 per share) of which 250,000 shares
underlying options were not vested (weighted-average exercise price of $0.45 per
share; weighted-average grant-date fair value of $0.48 per share). The following
table summarizes information about stock options outstanding as of September 30,
2009:
Exercise
Price per
Share
|
|
|
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
|
|
|
$0.28-$0.67
|
|
|
|
787,500 |
|
|
$ |
0.48 |
|
|
|
1.69 |
|
|
|
737,500 |
|
|
$ |
0.49 |
|
No options were granted during fiscal
2009 and 2008 and no options were exercised during fiscal 2009 and 2008. At
September 30, 2009, there were 50,000 shares underlying options that were not
vested and the weighted-average grant-date fair value of such options was $0.28
per share.
At
September 30, 2009, there was $10,099 of total unrecognized compensation cost
related to non-vested share-based compensation awards. The cost is
expected to be recognized over a weighted-average period of one year. The total
fair value of shares vested during the years ended September 30, 2009 and 2008
was $62,399 and $188,476, respectively.
In July
1998, warrants to purchase 263,638 shares were granted to four persons who
loaned the Company a total of $145,000. At September 30, 2007,
warrants to purchase a total of 136,364 shares were outstanding and such
warrants expired unexercised on December 31, 2007.
In
November 2001, warrants to purchase a total of 435,941 shares were granted to
Sonata Investment Company, Ltd. (395,273 shares) and Standard Energy (40,668
shares) as consideration for entering into the Loan Conversion Agreement dated
August 1, 2001. The Loan Conversion Agreement extended the date by
which The Company had to satisfy its obligations to both Sonata Investment
Company, Ltd. (“Sonata”) and Standard Energy Company (“Standard”) and granted
both Sonata and Standard the right to convert the debt into common stock of the
Company at such time as the Company advised Sonata and Standard of its intent to
satisfy the Company’s obligations to one or both entities. Sonata and
Standard are entities affiliated with each other. The exercise price is at $1.05
per share. The Sonata and Standard Warrants were to have expired
August 1, 2002. The Company agreed to extend the termination date of
the Sonata and Standard Warrants until July 31, 2004, in exchange for Sonata’s
relinquishing its twenty percent (20%) interest in the net profits of The
Company’s subsidiary Sustainable Forest Industries, Inc. These extensions have
resulted in a $100,000 charge to the statement of loss in fiscal 2002. The
Sonata warrants were further extended until December 31, 2007, as additional
consideration under the Second Amendment to the Heller Loan; such warrants
expired unexercised.
Sonata
was granted an additional warrant to purchase 250,000 shares at a price of
$0.906 per share under the Second Amendment to the Heller Loan. This
warrant expired unexercised on December 31, 2007.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
On
December 21, 2007, Sonata loaned the Company $75,000. The maturity
date of such loan is December 20, 2008, and interest, at 8%, is due
quarterly. The Company used the proceeds for general working capital
purposes. The Company paid the note during the third quarter of
2008. In connection with this loan, the Company issued warrants for
the purchase of 822,305 shares of Common Stock at a purchase price of $0.55 per
share with an expiration date of December 31, 2010. In connection with the
issuance of these warrants, the Company recognized a discount on the note
payable of $18,720. This amount was to be accreted over a period of one year.
During fiscal 2008, the Company recorded $18,720 of this amount under interest
expense as the note was paid during the third quarter of 2008.
|
2.
|
Conley
& Anthony Warrants
|
On
February 27, 2003, warrants to purchase 300,000 shares at a price of $0.13 per
share were granted to each of Robert Conley and Bob Anthony in consideration of
their consultation and individual expertise in regard to product development and
application market identification with regard to the Company’s potential Sierra
Kaolin and zeolite products respectively. Mr. Conley’s warrant expired
unexercised on February 26, 2008. On July 3, 2006, Mr. Anthony exercised a
portion of his warrant (100,000 shares) and he retained warrants to purchase
200,000 shares. During fiscal 2008, the expiration date for Mr. Anthony’s
warrant was extended to February 26, 2009 and expired unexercised.
In
accordance with the provisions of the First Amended Memorandum of Understanding
(Sierra Kaolin Development) dated March 11, 2005, Tecumseh Professional
Associates, Inc (“TPA”) was granted the right to acquire 1,500,000 shares at a
price of $0.50 per share for $80,000 (“TPA Warrants”). The TPA Warrant expired
unexercised on November 29, 2007.
|
4.
|
June
2007 Private Placement Warrants
|
Under the
terms of the June 2007 Private Placement, investors were issued a warrant to
purchase one share (at a price of $1.00 per share) for each two shares of Common
Stock purchased in the Private Placement. The warrants for the purchase of
363,336 shares are exercisable on or before June 21, 2009. The warrants expired
unexercised.
e.
|
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 year. 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 antidilutive.
At
September 30, 2009 and 2008, options and warrants to purchase 1,609,805 and
4,260,641 shares of common stock, respectively were outstanding. Such
shares were not included in the computation of diluted earnings per share
because such shares subject to options and warrants would have an antidilutive
effect on net loss per share. No other adjustments were made for purposes of per
share calculations.
f.
|
Payment
of Accrued Dividends
|
During
fiscal years 2009 and 2008, there were no cash dividend payments in respect to
either series of Preferred Stock.
g.
|
Subscriptions
Receivable
|
At
September 30, 2009 and 2008, the notes receivable from Messrs. Benediktson and
Trynin as discussed in Note 10 are classified as Subscriptions
Receivable.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
9. INCOME
TAXES
At September 30, 2009, the Company has
current federal and state taxes payable of $192,427 and no deferred taxes
payable. The Company has accrued a provision of $106,864 for penalty
and interest related to the federal and state income taxes. The
income tax liabilities arose primarily from alternative minimum tax for 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, 2009, operating loss carryforwards of approximately $25 million,
which may be applied against future taxable income and will expire in various
years through 2024. The amount of and 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. The company may be subject to IRC code section 382 which could limit
the amount of the net operating loss and tax credit carryovers that can be used
in future years.
The
Company files income tax returns in the U.S. federal jurisdiction, and various
states. With few exceptions, the Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for years before
2005.
10. EMPLOYMENT
CONTRACTS AND COMMITMENTS
a. On
November 16, 2001, the Company entered into a Stock Purchase Agreement with SCOA
(“SCOA SPA”). As a condition to the closing of the SCOA SPA, SCOA required that
the Company enter into Key Man Employment Contracts (“Key Man Contracts”) with
Robert E. Martin, Gary J. Novinskie and Dov Amir. The Key Man Contracts provide
for acceleration of the vesting of incentive options should the Key Man be
terminated prior to the expiration of the term of the Key Man Contracts. Each of
Messrs. Novinskie and Amir was granted options for 500,000 shares of Company
Common Stock while Mr. Martin was granted options for 1,000,000 shares of Common
Stock. Mr. Martin resigned from the Company in 2005. Mr. Amir’s
contract expired in accordance with its terms on September 30, 2006. Mr.
Novinskie’s Employment Contract has been extended until September 30, 2011 in
accordance with its terms. The options granted to Messrs. Amir and Novinskie
expired unexercised during fiscal 2009.
b. In
August 2005, the Company entered into employment contracts with Stephan V.
Benediktson as Chief Executive Officer of the Company and Nathan Trynin as
Executive Vice President. Under the terms of their employment agreements neither
party is entitled to a salary unless and until the Company raises a minimum of
$1,000,000, exclusive of debt. Once the $1,000,000 or more is raised,
Mr. Benediktson's salary will be $10,000 per month and Mr. Trynin's salary will
be $5,000 per month. Each of Mr. Benediktson and Mr. Trynin were
given the right to acquire stock of the Company at the average of the bid and
ask closing price for the five trading days prior to the effective dates of
their contracts. Each party exercised that right. The employment contracts also
contain bonus provisions tied to the performance of the Company's
stock. Mr. Benediktson and Mr. Trynin entered into notes with the
Company totaling $576,000 to cover their purchase of the stock offered by their
Employment Agreements (see Note 8). The notes are for five years and
earn interest at the prime rate of interest charged from time to time by the PNC
Bank, Philadelphia, Pennsylvania. The Company holds the stock as
collateral for the notes. The stock will not be released to either Mr.
Benediktson or Mr. Trynin unless and until their notes are satisfied in full in
accordance with their terms. Interest receivable on these notes
totaled $150,814 and $131,387 at September 30, 2009 and 2008,
respectively.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
In
accordance with the provisions of Paragraph 12 of Mr. Benediktson’s and Mr.
Trynin’s employment agreements, each was entitled to receive a bonus based on
the increase, if any, of the value of the Company’s shares over the prior year.
The bonus is computed using the formula set forth in Paragraph 12 (b) in their
respective employment agreements. In August 2007, Messrs. Benediktson and Trynin
resigned from their respective positions with the Company. On August
8, 2007 the Board of Directors approved bonuses aggregating
$1,373,831.
c. In
March 2006, the Company entered into an Employment Agreement with Richard A.
Thibault. Mr. Thibault joined the Company as Vice President – Minerals. Under
the terms of the Agreement, in addition to his base salary, Mr. Thibault was
granted an option to purchase 500,000 shares of Common Stock at an exercise
price ($0.48 per share) equal to the then market price of the Company’s Common
Stock. In June 2007, Mr. Thibault resigned his position with the Company.
Accordingly, the vested portion of the option (250,000 shares) remained
exercisable until June 2009. Such option expired unexercised.
d. On
January 23, 2006, the Company entered into an Employment Agreement with David L.
Matz. Mr. Matz joined the Company as Vice President – Oil & Gas. Under the
terms of the Agreement, in addition to his base salary, Mr. Matz was granted an
option to purchase 250,000 shares of Common Stock at an exercise price ($0.47
per share) equal to the then market price of the Company’s Common Stock. In
March 2008, Mr. Matz resigned his position with the Company. Accordingly, the
vested portion of the option (187,500 shares) remains exercisable until March
2010.
e. In
October 2006, the Company entered into an Employment Agreement with Richard W.
Blackstone. Mr. Blackstone joined the Company as the Secretary and Controller.
Under the terms of the Agreement, in addition to his base salary, Mr. Blackstone
was granted an option to purchase 200,000 shares of Common Stock at an exercise
price ($0.67 per share) equal to the then market price of the Company’s Common
Stock.
f. At
September 30, 2009, minimum commitments from long-term non-cancelable operating
leases are as follows:
Fiscal
Year
|
|
Amount
|
|
2010
|
|
$ |
67,099 |
|
2011
|
|
|
67,034 |
|
2012
|
|
|
16,714 |
|
Total
|
|
$ |
150,847 |
|
11.
|
LITIGATION
SETTLEMENT AND PENDING
LITIGATION
|
During
August 2007, a complaint was filed against DRIOC in the Circuit Court of Tucker
County, West Virginia, seeking an accounting and other information regarding
certain wells operated by DRIOC in Tucker County, West Virginia. In
September 2007, DRIOC entered into an Agreed Order to provide such
information.
During
October 2008, a complaint was filed against WRC in the District Court of
Burleson County, Texas, seeking judgment in respect to $172,267 owed to a vendor
of WRC. Such amount is included in Accounts Payable in the accompanying
Consolidated Balance Sheet at September 30, 2008. In November 2008, the vendor
agreed to dismiss its complaint against WRC after a settlement agreement was
reached whereby WRC agreed to make an initial payment of $60,000 and retire the
remaining obligation over a twelve month period. During fiscal 2009, WRC
defaulted on its payments to the vendor. The unpaid balance totals
$92,921 and such amount is included in Accounts Payable in the accompanying
Consolidated Balance Sheet at September 30, 2009.
On
October 27, 2009, a working interest owner commenced an action against WRC in
the District Court of Burleson County, Texas, for an accounting of expense and
revenues for six wells. WRC, through its Texas counsel, has filed a
general denial of the claim. In November 2009, WRC provided the
plaintiff with a complete accounting for all wells in questions. The plaintiff
has not responded to the documents and information provided.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
On
December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit
Clay Mine project has cleared the regulatory review and that the project’s
definitive USDA Forest Service Plan of Operations has been approved. This will
facilitate the project moving to the next phase.
From
October 1, 2009 through January 13, 2010, the Company has received subscriptions
totaling $55,000 for the purchase of 7.25% convertible debentures pertaining to
the June 2009 Private Placement (see Note 8). The Company is utilizing the
proceeds of this private placement for general working capital
purposes.
Management
performed an evaluation of Company activity through January 13, 2010, the date
the audited consolidated financial statements were issued, and concluded that
there are no significant subsequent events requiring disclosure in addition to
the above listed events.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL FINANCIAL
INFORMATION
To the
Board of Directors and
Stockholders
of Daleco Resources Corporation
Our
report to the Board of Directors and Stockholders of Daleco Resources
Corporation and Subsidiaries dated January 13, 2010, relating to the
consolidated basic financial statements of Daleco Resources Corporation and
Subsidiaries appears on page 28. Those audits were conducted for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
information on Schedules V and VI and the Supplemental Information (Unaudited)
are presented for the purpose of additional analysis and is not a required part
of the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
In our
opinion, such financial statement schedules present fairly, in all material
respects, the information set forth therein.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered significant recurring net losses, and
negative operating cash flow, which raises substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 1 to the financial statements. The financial statements
and this financial information do not include any adjustments that might result
from the outcome of these uncertainties.
Vasquez & Company
LLP
|
Vasquez
& Company LLP
|
January
13, 2010
Los
Angeles, California
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
SCHEDULE
V – OIL AND GAS PROPERTIES FOR THE YEARS ENDED
SEPTEMBER 30, 2009 AND
2008
(EXPRESSED IN
THOUSANDS)
|
|
YEAR ENDED SEPTEMBER 30
|
|
|
|
2009
($000)
|
|
|
2008
($000)
|
|
COST:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
Lease Acreage:
|
|
|
|
|
|
|
Balance
- Beginning of year
|
|
$ |
2,311 |
|
|
$ |
2,311 |
|
Additions
|
|
|
- |
|
|
|
- |
|
Disposal
|
|
|
- |
|
|
|
- |
|
Balance
- End Of Year
|
|
|
2,311 |
|
|
|
2,311 |
|
|
|
|
|
|
|
|
|
|
Proven
Undeveloped Lease Acreage:
|
|
|
|
|
|
|
|
|
Balance
- Beginning of Year
|
|
|
582 |
|
|
|
582 |
|
Additions
|
|
|
- |
|
|
|
- |
|
Disposal
|
|
|
- |
|
|
|
- |
|
Balance
- End of Year
|
|
|
582 |
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
Well
Costs:
|
|
|
|
|
|
|
|
|
Balance
Beginning of Year
|
|
|
1,532 |
|
|
|
2,384 |
|
Additions
|
|
|
- |
|
|
|
- |
|
Disposal
|
|
|
- |
|
|
|
(852 |
) |
Balance
- End of Year
|
|
|
1,532 |
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
TOTAL
COST
|
|
$ |
4,425 |
|
|
$ |
4,425 |
|
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
SCHEDULE
VI –ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF OIL AND GAS PROPERTIES FOR THE
YEARS ENDED
SEPTEMBER 30, 2009 AND
2008
(EXPRESSED IN
THOUSANDS)
|
|
YEAR ENDED SEPTEMBER 30
|
|
|
|
2009
($000)
|
|
|
2008
($000)
|
|
ACCUMULATED
DEPRECIATION, DEPLETION AND AMORTIZATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
Lease Acreage:
|
|
|
|
|
|
|
Balance
- Beginning of Year
|
|
$ |
2,138 |
|
|
$ |
2,099 |
|
Charge
for the Year
|
|
|
38 |
|
|
|
39 |
|
Disposal
|
|
|
- |
|
|
|
- |
|
Balance
- End of Year
|
|
|
2,176 |
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
Proven
Undeveloped Lease Acreage:
|
|
|
|
|
|
|
|
|
Balance
Beginning of Year
|
|
|
485 |
|
|
|
463 |
|
Charge
for Year
|
|
|
21 |
|
|
|
22 |
|
Disposal
|
|
|
- |
|
|
|
- |
|
Balance
- End of Year
|
|
|
506 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
Well
Costs:
|
|
|
|
|
|
|
|
|
Balance
- Beginning of Year
|
|
|
1,004 |
|
|
|
1,741 |
|
Charge
for Year
|
|
|
120 |
|
|
|
115 |
|
Disposal
|
|
|
- |
|
|
|
(852 |
) |
Balance
- End of Year
|
|
|
1,124 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
|
|
$ |
3,806 |
|
|
$ |
3,627 |
|
SUPPLEMENTAL
INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Estimated
Net Quantities of Proven Oil and Gas Reserves
Proved
reserves are the estimated quantities which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operation conditions. Proved
developed reserves are the quantities expected to be recovered through existing
wells with existing equipment and operating methods. These reserve
estimates were prepared by independent engineers and are based on current
technology and economic conditions. The Company considers such
estimates to be reasonable; however, due to inherent uncertainties and the
limited nature of reservoir data, estimates of underground reserves are
imprecise and subject to change over time as additional information becomes
available.
The
following table shows the changes in the Company's proved oil and gas reserves
for the year:
|
|
2009
|
|
|
2008
|
|
|
|
CRUDE OIL
AND
CONDENSATE
(BARRELS)
|
|
|
NATURAL
GAS
(MMCF)
|
|
|
CRUDE OIL
AND
CONDENSATE
(BARRELS)
|
|
|
NATURAL
GAS
(MMCF)
|
|
Proved
Developed and Undeveloped Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of Year
|
|
|
92,584 |
|
|
|
506 |
|
|
|
84,881 |
|
|
|
669 |
|
Acquisition
of Reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disposition
of Reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26 |
) |
Revision
of Previous Estimates
|
|
|
(13,025 |
) |
|
|
(67 |
) |
|
|
11,427 |
|
|
|
(88 |
) |
Production
for Year
|
|
|
(2,880 |
) |
|
|
(40 |
) |
|
|
(3,724 |
) |
|
|
(49 |
) |
Balance
- End of Year
|
|
|
76,679 |
|
|
|
399 |
|
|
|
92,584 |
|
|
|
506 |
|
Proved
Developed Reserves as at September 30
|
|
|
12,441 |
|
|
|
212 |
|
|
|
23,600 |
|
|
|
318 |
|
Standardized
Measure of Discounted Future Net Cash Flow from Estimated Production Proved Oil
and Gas Reserves
The
standardized measure of discounted future net cash flows from estimated
production of proven oil and gas reserves after income taxes is presented in
accordance with the provisions of FASB ASC Topic 932, "Extractive Industries –
Oil and Gas" (“ASC 932”). In computing this data, assumptions other
than those mandated by ASC 932 could produce substantially different
results. The Company cautions against viewing this information as a
forecast of future economic conditions or revenues.
The
standardized measure of discounted future net cash flows is determined by using
estimated quantities of proved reserves and taking into account the future
periods in which they have been projected to be developed and
produced. Estimated future production is priced at the year-end
price. The resulting estimated future cash inflows are reduced by
estimated future costs to develop and produce the proved
reserves. The future pretax net cash flows are then reduced further
by deducting future income tax expenses as applicable. The resultant
net cash flows are reduced to present value amounts by applying the ASC 932
mandated 10% discount factor.
Standardized
Measure of Discounted Future Net Cash Inflows as of September 30, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
Future
cash inflows
|
|
$ |
7,064,998 |
|
|
$ |
14,400,236 |
|
Future
production costs
|
|
|
(1,957,191 |
) |
|
|
(4,087,696 |
) |
Future
development costs
|
|
|
(2,328,643 |
) |
|
|
(2,354,012 |
) |
Future
income tax expense*
|
|
|
- |
|
|
|
- |
|
Subtotal
|
|
|
2,779,164 |
|
|
|
7,958,528 |
|
Discount
factor at 10%
|
|
|
(927,528 |
) |
|
|
(2,513,683 |
) |
Standardized
Measure of Future Net Cash Flows
|
|
$ |
1,851,636 |
|
|
$ |
5,444,845 |
|
|
*
|
The
Company presently has approximately $25 million of loss carryforwards for
Federal income tax purposes. Based on these loss carryforwards
no future taxes payable have been included in the determination of future
new cash inflows. Future head office general and administrative
expenses have not been deducted in determining future net cash
flows.
|
Summary
of Changes in Standardized Measure of Discounted Future Net Cash
Flows
|
|
2009
|
|
|
2008
|
|
Balance
- Beginning of Year
|
|
$ |
5,444,845 |
|
|
$ |
3,831,334 |
|
Increase
(decrease) in future net cash flows:
|
|
|
|
|
|
|
|
|
Sales
for the year net of related production costs
|
|
|
(165,511 |
) |
|
|
(607,652 |
) |
Acquisition
of reserves in place
|
|
|
- |
|
|
|
- |
|
Changes
in estimated future development costs
|
|
|
59,029 |
|
|
|
(298,603 |
) |
Changes
in sales and transfer prices net of production costs related to future
production
|
|
|
(2,846,282 |
) |
|
|
2,682,045 |
|
Change
due to revision in quantity estimates and other
|
|
|
(1,184,930 |
) |
|
|
(195,412 |
) |
Disposition
of reserves in place
|
|
|
- |
|
|
|
(350,000 |
) |
Extensions
and discoveries net of related costs
|
|
|
- |
|
|
|
- |
|
Accretion
of discount
|
|
|
544,485 |
|
|
|
383,133 |
|
Balance
- End of Year
|
|
$ |
1,851,636 |
|
|
$ |
5,444,845 |
|
Item 9. Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item
9A(T). Controls and Procedures.
Disclosure
Controls and Procedures
An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of
1934, as amended) as of September 30, 2009. Based on that evaluation, the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined by Rule 13a-15(f) promulgated under
the Securities and Exchange Act of 1934, as amended). The Company’s
internal control over financial reporting is a process designed under the
supervision of the Company’s Chief Executive Officer and Chief Financial Officer
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has made a comprehensive review, evaluation, and assessment of the Company’s
internal control over financial reporting as of September 30, 2009. In
making its assessment of the effectiveness of the Company’s internal control
over financial reporting, management used the framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on that assessment, management concluded that, as
of September 30, 2009, the Company’s internal control over financial reporting
was effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report in the
annual report.
There
were no changes in the Company’s internal controls over financial reporting
during the quarter ended September 30, 2009 that materially affected or were
likely to materially affect the Company’s internal control over financial
reporting.
Limitations on the Effectiveness of
Controls
While we
believe our disclosure controls and procedures and our internal control over
financial reporting are adequate, no system of controls can prevent all error
and all fraud. We are monitoring the effectiveness of our disclosure controls
and internal controls and we may make modifications as we deem appropriate to
strengthen our control system. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within our Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with its policies or procedures. Because of the inherent
limitation in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Code
of Ethics
The Board of Directors of the Company
has adopted a Code of Ethics for all of the Company's employees, officers and
directors, a copy of which is attached hereto as Exhibit 14.1. 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.
New
Accounting Standards
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, which codifies FASB Statement No. 167, Amendments to
FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the
other entity’s economic performance. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity’s
financial statements. ASU 2009-17 is effective at the start of a
reporting entity’s first fiscal year beginning after November 15, 2009, or the
Company’s fiscal year beginning October 1, 2010. Early application is not
permitted. We have
not yet determined the impact, if any, which the provisions of ASU
2009-15 may have on the Company’s consolidated financial
statements.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets, which formally codifies
FASB Statement No. 166, Accounting for Transfers of
Financial Assets into the FASB ASC. ASU 2009-16 represents a revision to
the provisions of former FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. Among other things, ASU 2009-16
(1) eliminates the concept of a “qualifying special-purpose entity”, (2) changes
the requirements for derecognizing financial assets, and (3) enhances
information reported to users of financial statements by providing greater
transparency about transfers of financial assets and an entity’s continuing
involvement in transferred financial assets. ASU 2009-16 is effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009, or the Company’s fiscal year beginning October 1, 2010. Early application
is not permitted. The provisions of ASU 2009-16 are not expected to have a
material impact on the Company’s consolidated financial statements.
In
October 2009, the FASB published FASB ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 includes amendments to ASC Topic 470, Debt,
(Subtopic 470-20), and ASC Topic 260, Earnings per Share (Subtopic 260-10), to
provide guidance on share-lending arrangements entered into on an entity's own
shares in contemplation of a convertible debt offering or other
financing. The provisions of ASU 2009-15 are effective for fiscal
years beginning on or after December 15, 2009, and interim periods within those
fiscal years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such
arrangements. The provisions of ASU 2009-15 are effective for
arrangements entered into on (not outstanding) or after the beginning of the
first reporting period that begins on or after June 15, 2009. Certain transition
disclosures are also required. Early application is not
permitted. The provisions of ASU 2009-15 are not expected to have an
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB published FASB ASU 2009-14, Software (Topic 985) - Certain
Revenue Arrangements that Include Software Elements. ASU 2009-14 changes
the accounting model for revenue arrangements that include both tangible
products and software elements. Under this guidance, tangible products
containing software components and non-software components that function
together to deliver the tangible product's essential functionality are excluded
from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition.
In addition, hardware components of a tangible product containing software
components are always excluded from the software revenue
guidance. The provisions of ASU 2009-14 are effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, or the Company’s fiscal year
beginning October 1, 2010. Early adoption is permitted. The provisions of ASU
2009-14 are not expected to have an impact on the Company’s consolidated
financial statements.
In
October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) -
Mutliple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25,
Revenue
Recognition-Multiple-Element Arrangements, for separating consideration
in multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor's multiple-deliverable revenue arrangements. The
provisions of ASU 2009-13 are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010 or the Company’s fiscal year beginning October 1, 2010. Early adoption
is permitted. The provisions of ASU 2009-14 are not expected to have
an impact on the Company’s consolidated financial statements.
In
September 2009, the FASB published FASB ASU No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). ASU 2009-12 amends ASC
Subtopic 820-10, Fair Value
Measurements and Disclosures—Overall, to permit a reporting entity to
measure the fair value of certain investments on the basis of the net asset
value per share of the investment (or its equivalent). It also requires new
disclosures, by major category of investments, about the attributes includes of
investments within the scope of this amendment to the
Codification. The provisions of ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted. The provisions of ASU 2009-14 are not expected to have an
impact on the Company’s consolidated financial statements.
In June
2009, the Financial Accounting Standards Board (FASB) established the FASB
Accounting Standards Codification (Codification), which officially commenced
July 1, 2009, to become the source of authoritative US GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative US GAAP for SEC registrants. Generally,
the Codification is not expected to change US GAAP. All other
accounting literature excluded from the Codification will be considered
nonauthoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. We adopted the new standards for our fiscal year ended
September 30, 2009. All references to authoritative accounting
literature are now referenced in accordance with the Codification.
In
October 2008, the FASB issued guidance regarding subsequent events. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. In particular, this guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009, and the adoption did not have a material impact on the Company’s financial
position or results of operations.
We have
evaluated subsequent events after the balance sheet date of September 30, 2009
through the date the financial statements were available to be filed with
the Securities and Exchange Commission (SEC) on January 13, 2010. See Note 12 of
the Notes to Consolidated Financial Statements.
In
December 2007, the FASB issued guidance related to Business Combinations. This
guidance retains the underlying concepts that all business combinations are
still required to be accounted for at fair value under the acquisition method of
accounting, but changed the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an intangible asset at the acquisition date; restructuring costs
associated with a business combination will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. This guidance is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of
the accounting for valuation allowances on deferred taxes and acquired tax
contingencies. Adjustments made to valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions that closed prior to the
effective date of this guidance would also apply the provisions of this
guidance. Early adoption is not permitted. The adoption of this guidance did not
have an immediate effect on our financial statements; however, this guidance
will govern the accounting for any future business combinations that the Company
may enter into.
In April
2008, FASB issued guidance related to the determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognizable intangible asset. The intent of this guidance is to improve the
consistency between the useful life of a recognizable
intangible asset and the period of expected cash
flows used to measure the fair value of the asset under U.S. generally accepted
accounting principles. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is prohibited. The Company
does not anticipate that the adoption of this guidance will have an impact on
its financial position or results of operations.
In
December 2007, the FASB issued guidance related to noncontrolling interests in
consolidated financial statements. This guidance requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. It also amends
certain consolidation procedures. This guidance also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008, with earlier adoption prohibited. Based on the current
consolidated financial statements, if this guidance were effective, the adoption
of this guidance by the Company would not have an impact on its financial
position or results of operations.
In
September 2006, the FASB issued guidance on fair value measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. We adopted this guidance on October 1, 2008. In February
2008, the FASB issued additional guidance which extended the effective date for
certain nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008. The adoption of the portions of this guidance
that were not postponed did not have a material impact on our consolidated
financial statements. We are currently evaluating the effect of the
implementation of those parts of the guidance that were deferred.
In April
2009, the FASB issued guidance related to determining fair value when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. It provides guidance for
estimating fair value in accordance with fair value measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. It also includes guidance on identifying circumstances that indicate
a transaction is not orderly. This guidance emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions.
This guidance is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
In March
2009, the FASB issued guidance for revenue arrangements with multiple
deliverables by providing guidance on accounting for revenue arrangements that
provide for multiple payment streams. This guidance is effective for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after December 15, 2009. We have not yet determined the effect on our
consolidated financial statements, if any, that this guidance will
have.
On
December 31, 2008, the SEC published final rules and interpretations updating
its oil and gas reporting requirements. Many of the revisions are updates to
definitions in the existing oil and gas rules to make them consistent with the
Petroleum Resource Management System, which is a widely accepted standard for
the management of petroleum resources that was developed by several industry
organizations. Key revisions include the ability to include nontraditional
resources in reserves, the use of new technology for determining reserves,
permitting disclosure of probable and possible reserves, and changes to the
pricing used to determine reserves based on a 12-month average price rather than
a period end spot price. The average is to be calculated using the
first-day-of-the-month price for each of the 12 months that make up the
reporting period. The new rules are effective for annual reports for fiscal
years ending on or after December 31, 2009. Early adoption is not permitted.
This statement is effective for our fiscal year ending September 30, 2010. We
are currently assessing the impact that the adoption will have on its
consolidated financial statements and disclosures.
Item 9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
The
information is incorporated by reference to the information contained in our
2010 Proxy Statement.
Item
11. Executive Compensation.
The
information is incorporated by reference to the information contained in our
2010 Proxy Statement.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
information is incorporated by reference to the information contained in our
2010 Proxy Statement.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence.
The
information is incorporated by reference to the information contained in our
2010 Proxy Statement.
Item
14. Principal Accounting Fees and Services.
The
information is incorporated by reference to the information contained in our
2010 Proxy Statement.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
The
following audited financial statements are included herein in Item 8 of Part
II:
*
|
Report
of Independent Registered Public Accounting
Firm
|
*
|
Consolidated
Balance Sheets
|
*
|
Consolidated
Statements of Operations
|
*
|
Consolidated
Statements of Shareholders’ Equity
|
*
|
Consolidated
Statements of Cash Flow
|
*
|
Notes
to Consolidated Financial
Statements
|
FINANCIAL STATEMENT
SCHEDULES.
The
following financial statement schedules are included herein in Item 8 of Part
II:
*
|
Report
of Independent Registered Public Accounting Firm On Supplemental Financial
Information
|
*
|
Estimated
Net Quantities of Proven Oil and Gas
Reserves
|
*
|
Standardized
Measure of Discounted Future Net Cash Flow from Estimated Production of
Proved Oil and Gas Reserves
|
*
|
Summary
of Changes in Standardized Measure of Discounted Future Net Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of July 7, 2001, by and among Daleco Resources
Corporation, DROC Acquisition, Inc., 16/6, Inc. and Thomas
Smith
|
|
Incorporated
by reference to Exhibit 2.1 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger dated as of April 1, 2002 by and between Daleco
Resources Corporation, a Delaware Corporation, and Daleco Resources
Corporation of Nevada, a Nevada Corporation
|
|
Incorporated
by reference to Appendix C to the Company’s definitive Proxy Statement
dated February 4, 2002, incorporated by reference in Part III of the
Company’s Annual Report on Form 10-KSB for the fiscal year ended September
30, 2001, as filed with the SEC on January 25, 2002
|
|
|
|
|
|
2.3
|
|
Agreement
and Plan of Reorganization by and among Daleco Resources Corporation,
Strategic Minerals, Inc. and Clean Age Minerals, Incorporated dated
September 19, 2000
|
|
Incorporated
by reference to Exhibit 2.2 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation of Daleco Resources Corporation of Nevada,
Inc.
|
|
Incorporated
by reference to Appendix B to the Company’s definitive Proxy Statement
dated February 4, 2002, incorporated by reference in Part III of the
Company’s Annual report Form 10-KSB for the fiscal year ended September
30, 2001, as filed with the SEC on January 25,
2001
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
3.2
|
|
Audit
Committee Charter effective December 9, 2005
|
|
Incorporated
by reference to Exhibit 3.7 to the Company’s Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2005, as filed with the SEC on
January 17, 2006
|
|
|
|
|
|
3.3
|
|
By-Laws
of Daleco Resources Corporation of Nevada, Inc.
|
|
Incorporated
by reference to Appendix D to the Company’s definitive Proxy Statement
dated February 4, 2002, incorporated by reference in Part III of the
Company’s Annual Report on Form 10-KSB for the fiscal year ended September
30, 2001, as filed with the SEC on January 25, 2001
|
|
|
|
|
|
3.4
|
|
Corporate
Governance Policy Adopted April 10, 2008
|
|
Incorporated
by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2008, as filed with the
SEC on August 12, 2008
|
|
|
|
|
|
3.5
|
|
Nominating
and Governance Committee Charter Adopted April 10, 2008
|
|
Incorporated
by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2008, as filed with the
SEC on August 12, 2008
|
|
|
|
|
|
3.6
|
|
Compensation
Committee Charter
|
|
Incorporated
by reference to Exhibit 3.6 to the Company’s Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2008, as filed with the
SEC on August 12, 2008
|
|
|
|
|
|
10.1
|
|
Securities
Purchase Agreement - Letter of Intent dated July 23, 2001, by and between
Terra Silex Holdings, LLC and Daleco Resources Corporation
|
|
Incorporated
by reference to Exhibit 10.12 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
10.2
|
|
Stock
Purchase Agreement dated September 20, 2001 by and between Terra Silex
Holdings Ltd. Co. and Daleco Resources Corporation
|
|
Incorporated
by reference to Exhibit 10.13 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
10.3
|
|
Warrant
Agreement, dated September 21, 2001, between Terra Silex Holdings Ltd. Co.
and Daleco Resources Corporation
|
|
Incorporated
by reference to Exhibit 10.14 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
10.4
|
|
Employment
Agreement, dated November 30, 2001, between the Registrant and Dov
Amir
|
|
Incorporated
by reference to Exhibit 10.21 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
10.5
|
|
Employment
Agreement, dated November 30, 2001, between the Registrant and Gary
Novinskie
|
|
Incorporated
by reference to Exhibit 10.22 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3,
2002
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
10.6
|
|
Stock
Purchase Agreement, dated November 16, 2001, between the Company and
Sumitomo Corporation of America
|
|
Incorporated
by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB
for the fiscal year ended September 30, 2001 filed with the SEC on
January 25, 2002
|
|
|
|
|
|
10.7
|
|
Key
Man Contract, dated November 30, 2001, between the Company Robert E.
Martin
|
|
Incorporated
by reference to Exhibit 10.34 to the Company’s Registration Statement on
Form SB-2 as filed with the SEC on September 3, 2002
|
|
|
|
|
|
10.8
|
|
First
Amendment to Master Distribution and Marketing Agreement dated September
14, 2004
|
|
Incorporated
by reference to Exhibit 10.36 to the Company’s Form 8-K as filed with the
SEC on September 16, 2004
|
|
|
|
|
|
10.9
|
|
Memorandum
of Understanding for Development of Sierra Kaolin Deposit dated December
2, 2004
|
|
Incorporated
by Reference to Exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2007 as filed with the SEC on
February 14, 2008
|
|
|
|
|
|
10.10
|
|
Development
and Operating Agreement (Calcium Carbonates, Cibola County, NM) dated
February 14, 2005
|
|
Incorporated
by Reference to Exhibit 10.38 to the Company’s Form 8-K as filed with the
SEC on February 17, 2005
|
|
|
|
|
|
10.11
|
|
Market
and Product Development Agreement dated February 22, 2005
|
|
Incorporated
by Reference to Exhibit 10.39 to the Company’s Form 8-K as filed with the
SEC on February 28, 2005
|
|
|
|
|
|
10.12
|
|
Sierra
Kaolin Operating License dated March 11, 2005
|
|
Incorporated
by Reference to Exhibit 10.39 (sic) to the Company’s Form 8-K as filed
with the SEC on March 17, 2005
|
|
|
|
|
|
10.13
|
|
Employment
Agreement, dated August 10, 2005, between the Company and Stephan V.
Benediktson
|
|
Incorporated
by Reference to Exhibit 10.13 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.14
|
|
Employment
Agreement, dated August 10, 2005, between the Company and Nathan K.
Trynin
|
|
Incorporated
by Reference to Exhibit 10.14 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.15
|
|
Third
Amendment To Limestone Mining Lease and Agreement, dated August 22,
2007
|
|
Incorporated
by Reference to Exhibit 10.15 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.16
|
|
Employment
Agreement, dated March 10, 2006, between the Company and Richard
Thibault
|
|
Incorporated
by reference to Exhibit 10.44 to the Company’s Form 8-K filed with the SEC
on March 13,
2006.
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
10.17
|
|
Sierra
Kaolin Restated Development and Operating Agreement Among Tecumseh
Professional Associates, Inc., Tecumseh Industrial Minerals, LLC, Daleco
Resources Corporation, Clean Age Minerals, Inc., and C.A. Properties, Inc.
dated June 7, 2007
|
|
Incorporated
by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2007, as filed with the SEC
on August 14, 2007
|
|
|
|
|
|
10.18
|
|
Separation
Agreement, dated October 27, 2006, between the Company and Dov
Amir
|
|
Incorporated
by Reference to Exhibit 10.18 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.19
|
|
Employment
Agreement, dated January 23, 2006, between the Company and David L.
Matz
|
|
Incorporated
by Reference to Exhibit 10.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.20
|
|
Employment
Agreement, dated October 4, 2006, between the Company and Richard W.
Blackstone
|
|
Incorporated
by Reference to Exhibit 10.20 to the Company's Annual Report on Form
10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC
on February 14, 2008
|
|
|
|
|
|
10.21
|
|
Non-qualified
Independent Director Stock Option Plan Approved by the Shareholders at the
Annual Meeting on March 24, 2004
|
|
Incorporated
by reference to Appendix A to the Company’s definitive Proxy Statement
dated February 3, 2004, incorporated by reference in Part III of the
Company’s Annual report on Form 10-KSB for the fiscal year ended September
30, 2003, as filed with the SEC on January 14, 2004
|
|
|
|
|
|
10.22
|
|
Second
Amendment to Loan Agreement dated December 31, 2003
|
|
Incorporated
by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form
10-Q for the quarter ending March 31, 2009, as filed with the SEC on May
20, 2009
|
|
|
|
|
|
14.1
|
|
Code
of Ethics adopted December 9, 2005
|
|
Incorporated
by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2005, as filed with the SEC on
January 17, 2006
|
|
|
|
|
|
21
|
|
Subsidiaries
of the Company
|
|
Incorporated
by Reference to Exhibit 21 to the Company's Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2007 as filed with the SEC on
February 14, 2008
|
|
|
|
|
|
22
|
|
Published
report regarding matters submitted to vote of security
holders
|
|
Incorporated
by reference to Item 4 of Registrant's Quarterly Report on Form 10-QSB for
the period ending March 31, 2007, as filed with the SEC on May 15,
2007
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
23.1
|
|
Consent
of Denali Enterprises dated December 21, 2005
|
|
Incorporated
by reference to Exhibit 23.1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2005, as filed with the SEC on
January 17, 2006
|
|
|
|
|
|
23.2
|
|
Consent
of Hall Energy, Inc. dated January 13, 2010
|
|
Attached
to the Company's Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
23.3
|
|
Consent
of KT Minerals, Inc. dated January 13, 2010
|
|
Attached
to the Company's Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
31.1
|
|
Certification
of Gary J. Novinskie, Interim Chief Executive Officer and President dated
January 13, 2010
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
31.2
|
|
Certification
of Gary J. Novinskie, Chief Financial Officer dated January 13,
2010
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
32.1
|
|
Certification
of Gary J. Novinskie, Interim Chief Executive Officer and President dated
January 13, 2010
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
32.2
|
|
Certification
of Gary J. Novinskie, Chief Financial Officer dated January 13,
2010
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2009
|
|
|
|
|
|
99.1
|
|
Location
Maps for Registrant’s Zeolite lease in Marfa County, Texas, Calcium
Carbonate Lease, Cibola County, New Mexico, Kaolin Claims, Sierra County,
New Mexico and Zeolite Claims, Beacon County, Utah.
|
|
Incorporated
by reference to Exhibit 99.1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ending September 30, 2005 as filed with the SEC on
January 16,
2007
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) 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
|
|
|
|
Dated: January
13, 2010
|
By:
|
/s/
Gary J. Novinskie
|
|
|
Gary
J. Novinskie, Interim Chief Executive Officer,
President
|
|
|
and
Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Dated:
January 13, 2010
|
By:
|
/s/ Gary J. Novinskie
|
|
|
Gary
J. Novinskie, Interim Chief Executive Officer,
President,
|
|
|
Chief
Financial Officer (Principal Financial Officer) and
|
|
|
Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ Richard W.
Blackstone
|
|
|
Richard
W. Blackstone, Controller (Chief
|
|
|
Accounting
Officer)
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ Dov Amir
|
|
|
Dov
Amir, Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ John Gilbert
|
|
|
John
Gilbert, Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ David A. Grady
|
|
|
David
A. Grady, Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ Carl A. Haessler
|
|
|
Carl
A. Haessler, Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ Robert E. Martin
|
|
|
Robert
E. Martin, Director
|
|
|
|
Dated:
January 13, 2010
|
By:
|
/s/ Charles T. Maxwell
|
|
|
Charles
T. Maxwell, Director
|