Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended June 30,
2010
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from __________ to __________
Commission
File Number: 0-12214
DALECO RESOURCES
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Nevada
(State
or other jurisdiction of
incorporation
or organization)
|
23-2860734
(I.R.S.
Employer
Identification
No.)
|
|
17
Wilmont Mews, 5th
Floor
West Chester, Pennsylvania
19382
(Address
of principal executive offices) (Zip
Code)
|
(610) 429-0181
(Registrant’s
telephone number
including
are code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
|
|
|
Non-accelerated
filer ¨ (Do
not check if a smaller
|
Smaller
reporting company x
|
|
reporting
company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes ¨ No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Number of
shares outstanding of the issuer's Common Stock as of June 30, 2010:
45,433,374
Number of
shares outstanding of the issuer’s Series B Preferred Stock as of June 30, 2010:
145,000
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
|
|
|
PAGE
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets
|
3
|
|
|
Consolidated
Statements of Operations
|
5
|
|
|
Consolidated
Statements of Cash Flows
|
6
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
7
|
|
|
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
14
|
|
|
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
19
|
|
|
|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
19
|
|
|
|
|
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
20
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
21
|
|
|
|
|
|
ITEM
1A.
|
RISK
FACTORS
|
21
|
|
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
|
21
|
|
|
|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
22
|
|
|
|
|
|
ITEM
4.
|
(Removed
and Reserved)
|
22
|
|
|
|
|
|
ITEM
5.
|
OTHER
INFORMATION
|
22
|
|
|
|
|
|
ITEM
6.
|
EXHIBITS
|
22
|
|
|
|
|
|
SIGNATURES
|
23
|
PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
June 30
2010
|
|
|
September 30
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
$ |
122,028 |
|
|
$ |
98,336 |
|
|
Accounts
Receivable
|
|
|
311,837 |
|
|
|
296,547 |
|
|
Other
Current Assets
|
|
|
7,424 |
|
|
|
7,424 |
|
|
Total
Current Assets
|
|
|
441,289 |
|
|
|
402,307 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
Patent
Rights
|
|
|
6,594,500 |
|
|
|
6,594,500 |
|
|
Accumulated
Amortization of Patent Rights
|
|
|
(5,632,705 |
) |
|
|
(5,199,616 |
) |
|
Net
Patent Rights
|
|
|
961,795 |
|
|
|
1,394,884 |
|
|
Patents
License Rights
|
|
|
40,907 |
|
|
|
- |
|
|
Accumulated
Amortization of Patent Rights
|
|
|
(5,679 |
) |
|
|
- |
|
|
Net
Patent Rights
|
|
|
35,228 |
|
|
|
- |
|
|
Prepaid
Mineral Royalties
|
|
|
449,717 |
|
|
|
419,879 |
|
|
Interest
Receivable
|
|
|
164,815 |
|
|
|
150,814 |
|
|
Restricted
Cash Deposits
|
|
|
109,715 |
|
|
|
109,041 |
|
|
Securities
Available for Future Sale
|
|
|
950 |
|
|
|
1,583 |
|
|
Total
Other Assets
|
|
|
1,722,220 |
|
|
|
2,076,201 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
|
|
Mineral
Properties, at cost
|
|
|
9,877,128 |
|
|
|
9,877,128 |
|
|
Accumulated
Depreciation, Depletion and Amortization
|
|
|
(95,000 |
) |
|
|
(95,000 |
) |
|
Net
Mineral Properties
|
|
|
9,782,128 |
|
|
|
9,782,128 |
|
|
Oil
and Gas Properties, at cost
|
|
|
4,424,512 |
|
|
|
4,424,512 |
|
|
Accumulated
Depreciation, Depletion and Amortization
|
|
|
(3,904,745 |
) |
|
|
(3,806,195 |
) |
|
Net
Oil and Gas Properties
|
|
|
519,767 |
|
|
|
618,317 |
|
|
Office
Equipment, Furniture and Fixtures, at cost
|
|
|
61,502 |
|
|
|
79,902 |
|
|
Accumulated
Depreciation
|
|
|
(54,832 |
) |
|
|
(67,639 |
) |
|
Net
Office Equipment, Furniture and Fixtures
|
|
|
6,670 |
|
|
|
12,263 |
|
|
Total
Net Property, Plant and Equipment
|
|
|
10,308,565 |
|
|
|
10,412,708 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
12,472,074 |
|
|
$ |
12,891,216 |
|
SEE ACCOMPANYING NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
June 30
2010
|
|
|
September 30
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
2,026,485 |
|
|
$ |
1,839,170 |
|
|
Federal
and State Income Taxes Payable
|
|
|
287,895 |
|
|
|
277,990 |
|
|
Preferred
Stock Dividends Payable
|
|
|
1,828,656 |
|
|
|
1,741,895 |
|
|
Accrued
Interest Expense
|
|
|
783,255 |
|
|
|
705,840 |
|
|
Accrued
Bonus Expense
|
|
|
1,373,831 |
|
|
|
1,373,831 |
|
|
Accrued
Salary Expense
|
|
|
953,347 |
|
|
|
944,441 |
|
|
Accrued
Expense Reimbursements
|
|
|
28,135 |
|
|
|
24,990 |
|
|
EV&T
Note Payable
|
|
|
567,213 |
|
|
|
567,213 |
|
|
CAMI
Notes Payable
|
|
|
514,881 |
|
|
|
514,881 |
|
|
Notes
Payable - Related Parties
|
|
|
105,485 |
|
|
|
45,485 |
|
|
Premium
Finance Note Payable
|
|
|
4,639 |
|
|
|
- |
|
|
Note
Payable - First Regional Bank – Current Portion
|
|
|
15,000 |
|
|
|
15,000 |
|
|
Total
Current Liabilities
|
|
|
8,488,822 |
|
|
|
8,050,736 |
|
|
Long-term
Debt:
|
|
|
|
|
|
|
|
|
|
Note
Payable – First Regional Bank – Long-term Portion
|
|
|
35,661 |
|
|
|
45,659 |
|
|
7.25%
Convertible Debentures, net of unamortized discount of $11,336 at June 30,
2010
|
|
|
18,664 |
|
|
|
- |
|
|
Total
Long-term Debt
|
|
|
54,325 |
|
|
|
45,659 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
8,543,147 |
|
|
|
8,096,395 |
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred
Stock – 20,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock (outstanding: none)
|
|
|
- |
|
|
|
- |
|
|
Series
B 8% Cumulative Convertible Preferred Stock – par value of $0.01 per share
(outstanding: 145,000 shares at June 30, 2010 and September 30,
2009)
|
|
|
1,450 |
|
|
|
1,450 |
|
|
Common
Stock – 100,000,000 shares authorized – par value
of $0.01 per share (outstanding: 45,433,374 and 45,100,811 shares at June
30, 2010 and September 30, 2009, respectively)
|
|
|
454,334 |
|
|
|
451,008 |
|
|
Additional
Paid-in Capital
|
|
|
45,549,789 |
|
|
|
45,402,515 |
|
|
Accumulated
Deficit
|
|
|
(41,495,896 |
) |
|
|
(40,480,035 |
) |
|
Subscriptions
Receivable
|
|
|
(576,000 |
) |
|
|
(576,000 |
) |
|
Accumulated
Other Comprehensive Loss
|
|
|
(4,750 |
) |
|
|
(4,117 |
) |
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
3,928,927 |
|
|
|
4,794,821 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
12,472,074 |
|
|
$ |
12,891,216 |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
|
|
|
Three Months Ended
June 30
|
|
|
Nine Months Ended
June 30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Sales
|
|
$ |
80,486 |
|
|
$ |
71,158 |
|
|
$ |
241,568 |
|
|
$ |
271,589 |
|
|
Well
Management Revenue
|
|
|
66,148 |
|
|
|
59,395 |
|
|
|
198,442 |
|
|
|
190,794 |
|
|
Royalty
Receipts
|
|
|
1,308 |
|
|
|
2,325 |
|
|
|
4,461 |
|
|
|
10,425 |
|
|
Mineral
Sales
|
|
|
- |
|
|
|
1,209 |
|
|
|
8,453 |
|
|
|
4,834 |
|
|
Total
Operating Revenues
|
|
|
147,942 |
|
|
|
134,087 |
|
|
|
452,924 |
|
|
|
477,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Operating Expenses - Oil and Gas
|
|
|
26,828 |
|
|
|
43,492 |
|
|
|
122,748 |
|
|
|
151,291 |
|
|
Operating
Expenses and Other Costs - Minerals
|
|
|
1,059 |
|
|
|
93,046 |
|
|
|
13,151 |
|
|
|
130,418 |
|
|
Production
and Severance Taxes – Oil and Gas
|
|
|
4,489 |
|
|
|
4,235 |
|
|
|
13,333 |
|
|
|
16,509 |
|
|
Depreciation,
Depletion and Amortization
|
|
|
184,533 |
|
|
|
191,055 |
|
|
|
542,911 |
|
|
|
573,165 |
|
|
General
and Administrative Expenses
|
|
|
183,181 |
|
|
|
140,891 |
|
|
|
572,468 |
|
|
|
498,269 |
|
|
Total
Expenses
|
|
|
400,090 |
|
|
|
472,719 |
|
|
|
1,264,611 |
|
|
|
1,369,652 |
|
|
Loss
From Operations
|
|
|
(252,148 |
) |
|
|
(338,632 |
) |
|
|
(811,687 |
) |
|
|
(892,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Dividend Income
|
|
|
5,384 |
|
|
|
4,689 |
|
|
|
15,406 |
|
|
|
20,390 |
|
|
Interest
Expense
|
|
|
(51,643 |
) |
|
|
(52,205 |
) |
|
|
(193,505 |
) |
|
|
(154,776 |
) |
|
Loss
on Abandonment of Mineral Property
|
|
|
- |
|
|
|
(1,976,972 |
) |
|
|
- |
|
|
|
(1,976,972 |
) |
|
Gain
on Sale of Oil and Gas Property
|
|
|
60,686 |
|
|
|
- |
|
|
|
60,686 |
|
|
|
- |
|
|
Total
Other Income (Expense),Net
|
|
|
14,427 |
|
|
|
(2,024,488 |
) |
|
|
(117,413 |
) |
|
|
(2,111,358 |
) |
|
Loss
Before Income Taxes
|
|
|
(237,721 |
) |
|
|
(2,363,120 |
) |
|
|
(929,100 |
) |
|
|
(3,003,368 |
) |
|
Taxes
Based on Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
Loss
|
|
|
(237,721 |
) |
|
|
(2,363,120 |
) |
|
|
(929,100 |
) |
|
|
(3,003,368 |
) |
|
Preferred
Stock Dividends
|
|
|
(28,920 |
) |
|
|
(28,920 |
) |
|
|
(86,761 |
) |
|
|
(87,396 |
) |
|
Net
Loss Applicable to Common Shareholders
|
|
$ |
(266,641 |
) |
|
$ |
(2,392,040 |
) |
|
$ |
(1,015,861 |
) |
|
$ |
(3,090,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Fully Diluted Net Loss per Share
|
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.07 |
) |
|
Weighted-average
Number of Shares of Common Stock Outstanding
|
|
|
45,426,910 |
|
|
|
43,257,170 |
|
|
|
45,284,118 |
|
|
|
43,139,954 |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
|
|
|
2010
|
|
|
2009
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(929,100 |
) |
|
$ |
(3,003,368 |
) |
|
Adjustments
to Reconcile Net Loss to Net Cash Provided by
(Used
in) Operating Activities:
|
|
|
|
|
|
|
|
|
|
Depreciation,
Depletion and Amortization
|
|
|
542,911 |
|
|
|
573,165 |
|
|
Stock-based
Compensation Expense
|
|
|
43,813 |
|
|
|
53,663 |
|
|
Non-cash
Charge for Issuance of Securities
|
|
|
- |
|
|
|
90,000 |
|
|
Amortization
of Discount on 7.25% Convertible Debentures
|
|
|
1,521 |
|
|
|
- |
|
|
Non-cash
Charge as Interest Expense
|
|
|
20,523 |
|
|
|
- |
|
|
Gain
on Sale of Oil and Gas Properties
|
|
|
(60,686 |
) |
|
|
- |
|
|
Loss
on Abandonment of Mineral Property
|
|
|
- |
|
|
|
1,976,972 |
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(29,291 |
) |
|
|
196,220 |
|
|
Prepaid
Mineral Royalties
|
|
|
(29,838 |
) |
|
|
(30,000 |
) |
|
Restricted
Cash Deposits
|
|
|
(674 |
) |
|
|
(133 |
) |
|
Accounts
Payable
|
|
|
187,315 |
|
|
|
(297,660 |
) |
|
Accrued
Interest Expense
|
|
|
77,415 |
|
|
|
95,281 |
|
|
Other
Accrued Expenses
|
|
|
21,956 |
|
|
|
(26,540 |
) |
|
Net
Cash Used in Operating Activities
|
|
|
(154,135 |
) |
|
|
(372,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from Sale of Oil and Gas Properties
|
|
|
60,686 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payments
on Notes and Debt
|
|
|
(29,055 |
) |
|
|
(66,733 |
) |
|
Proceeds
from Borrowings
|
|
|
146,196 |
|
|
|
21,860 |
|
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
117,141 |
|
|
|
(44,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Equivalents
|
|
|
23,692 |
|
|
|
(417,273 |
) |
|
Cash
and Equivalents at Beginning of Year
|
|
|
98,336 |
|
|
|
472,912 |
|
|
Cash
and Equivalents at End of Period
|
|
$ |
122,028 |
|
|
$ |
55,639 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
|
Income
Taxes Paid
|
|
$ |
- |
|
|
$ |
- |
|
|
Interest
Paid
|
|
$ |
57,795 |
|
|
$ |
59,495 |
|
|
Supplemental
Disclosure of Non-cash Transactions:
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends Accrued, Not Paid
|
|
$ |
86,761 |
|
|
$ |
87,396 |
|
|
Issuance
of Common Stock for Patents License Rights
|
|
$ |
40,907 |
|
|
$ |
- |
|
|
Issuance
of Securities for Services Performed
|
|
$ |
- |
|
|
$ |
90,000 |
|
|
Conversion
of 7.25% Convertible Debentures into Common Stock
|
|
$ |
32,500 |
|
|
$ |
- |
|
|
Interest
Expense Resulting from Beneficial Conversion Feature of Convertible
Debentures
|
|
$ |
20,523 |
|
|
$ |
- |
|
|
Discount
on 7.25% Convertible Debentures Resulting from Beneficial Conversion
Feature
|
|
$ |
12,857 |
|
|
$ |
- |
|
SEE
ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
1.
CONTINUED OPERATIONS AND GOING CONCERN
The unaudited consolidated financial
statements have been prepared on the basis of a going concern which contemplates
that Daleco Resources Corporation and subsidiaries (the “Company”) will be able
to realize assets and discharge liabilities in the normal course of business.
Accordingly, they do not give effect to adjustments that would be necessary
should the Company be required to liquidate its assets. The Company incurred a
net loss of $929,100 for the nine months ended June 30, 2010. The ability of the
Company to meet its total liabilities of $8,543,147 at June 30, 2010 and to
continue as a going concern is dependent upon the availability of future
funding, achieving profitability within its mineral segment and ongoing
profitability within its oil and gas operations. If the Company is unable to
continue as a going concern, there is uncertainty relative to full
recoverability of its assets. The financial statements do not reflect any
adjustments relating to these uncertainties.
The Company continues to seek out and
entertain project specific funding commitments and other capital funding
alternatives if and as they become available.
As of June 30, 2010, the Company and
certain of its subsidiaries were in default of certain debt and other
obligations. The holders of these instruments are working with the Company to
achieve the ultimate extinguishment of the obligations.
2.
BASIS OF PRESENTATION
Description
of Business
Daleco Resources Corporation 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 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 and
processes utilizing the Company’s minerals. The Company's assets
consist of two separate categories: oil and gas and non-metallic minerals. The
Company’s wholly-owned active subsidiaries include Westlands Resources
Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Clean Age
Minerals, Inc. and CA Properties, Inc.
Clean Age Minerals, Inc., through its
subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests,
leasehold interests and federal mining claims containing non-metallic minerals
(kaolin and zeolite) in the states of New Mexico, Texas and Utah. CAMI is
presently engaged in the exploration for such minerals and intends to mine the
minerals through the use of contract miners and arrangements with its joint
venture partners. 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.
The Company, through its subsidiaries,
Westland Resources Corporation, DRI Operating Company and Deven Resources, Inc.,
owns and operates oil and gas properties in Texas and West Virginia. The Company
owns (a) working interests in wells in Texas and West Virginia and (b)
overriding royalty interests in (i) seventy wells in the Deerlick Coalbed
Methane Field in Alabama and (ii) two wells and undeveloped acreage in
Pennsylvania and (iii) one well in Texas.
In February 2010, the Company entered
into a License Agreement concerning two US method patents for the treatment of
wastewaters. Such patents utilize the Company’s zeolite. The license
applies to the US and covers the use of the technology in water, wastewater and
waste treatment in animal feed operations, agriculture, and aquaculture. In
addition, the license applies to the treatment of sanitary wastewater on Federal
facilities, military bases and lands administered by the US Bureau of Indian
Affairs.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Basis
of Presentation
The
unaudited consolidated financial statements included herein have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, except as disclosed
herein, there has been no material changes in the information disclosed in the
notes to the consolidated financial statements included in the Company’s annual
report on Form 10-K for the fiscal year ended September 30, 2009. In the opinion
of management, all adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended June 30, 2010, are not necessarily indicative of the results
that may be expected for any other interim period or the entire year. For
further information, these unaudited consolidated financial statements and the
related notes should be read in conjunction with the Company’s audited
consolidated financial statements for the fiscal year ended September 30, 2009,
included in the Company’s annual report on Form 10-K (“2009 Annual
Report”).
Unless
otherwise noted, references to “year” pertain to the Company’s fiscal year,
which begins on October 1 and ends on September 30; for example, 2010 refers to
fiscal 2010, which is the period from October 1, 2009 to September 30,
2010.
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.
Significant
Accounting Policies
There
were no changes to the Company’s Significant Accounting Policies from those
disclosed in its 2009 Annual Report.
The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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) a
long-term note payable to a bank. 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 and short-term bank debt totaling $50,661
approximates fair value at June 30, 2010.
Subsequent
Events
We have
evaluated subsequent events after the balance sheet date of June 30, 2010,
through the date the financial statements were available to be filed with
the Securities and Exchange Commission (SEC). See Note 10 – Subsequent
Events.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
New
Accounting Standards
In April
2010, the FASB issued Accounting Standards Update 2010-14, Accounting for Extractive
Activities—Oil & Gas: Amendments to Paragraph 932-10-S99-1. The ASU
adds to the Codification the SEC’s Regulation S-X Rule 4-10, Financial Accounting and Reporting
for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and
the Energy Policy and Conservation Act of 1975. This rule was included in
the SEC’s Final Rule, Modernization of Oil and Gas
Reporting, which was published in December 2008 and became effective
January 1, 2010. The SEC’s Final Rule included 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.
These reporting requirements are effective for our annual report for the fiscal
year ending September 30, 2010. We are currently assessing the impact that the
adoption of the provisions of ASU 2010-14 will have on the consolidated
financial statements and disclosures.
In April
2010, the FASB issued Accounting Standards Update 2010-13, Compensation—Stock Compensation
(Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment
Award in the Currency of the Market in Which the Underlying Equity Security
Trades. ASU 2010-13 updates ASC 718 to codify the consensus
reached in EITF Issue No. 09-J, Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades. The ASU clarifies
that share-based payment awards with an exercise price denominated in the
currency of a market in which a substantial portion of the underlying equity
security trades should not be considered to meet the criteria requiring
classification as a liability. The updated guidance is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Early adoption is
permitted. The provisions of ASU 2010-13 is not expected to
have an impact on the Company’s financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-10, Consolidation (Topic 10): Amendments
for Certain Funds. ASU 2010-10 defers the effective date of
certain amendments to the consolidation requirements of ASC Topic 810, Consolidation, resulting from
the issuance of FAS 167, Amendments to FASB Interpretation
No. 46(R). Specifically, the amendments to the consolidation requirements
of Topic 810 resulting from the issuance of FAS 167 are deferred for a reporting
entity’s interest in an entity (1) that has all the attributes of an investment
company; or (2) for which it is industry practice to apply measurement
principles for financial reporting purposes that are consistent with those
followed by investment companies. The ASU does not defer
the disclosure requirements in FAS 167 amendments to Topic 810. The amendments
in this ASU are effective as of the beginning of a reporting entity's first
annual period that begins after November 15, 2009, and for interim for interim
periods within that first annual reporting period. Early application is not
permitted. The provisions of ASU 2010-10 are not expected to have an
impact on the Company’s financial statements.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06,
Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends Codification Subtopic 820-10 to add two
new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the
reasons for the transfers, and (2) a gross presentation of activity within the
Level 3 roll forward. The proposal also includes clarifications to existing
disclosure requirements on the level of disaggregation and disclosures regarding
inputs and valuation techniques. The proposed guidance would apply to all
entities required to make disclosures about recurring and nonrecurring fair
value measurements. The effective date of the ASU is the first interim or annual
reporting period beginning after December 15, 2009, except for the gross
presentation of the Level 3 roll forward information, which is required for
annual reporting periods beginning after December 15, 2010 and for interim
reporting periods within those years. Early application is
permitted. The Company is currently assessing the impact that the
adoption will have on its financial statements.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
In
January 2010, the FASB issued ASU No. 2010-03, Extractive Activities - Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and Disclosures. The FASB's
objective in issuing the ASU was to align the oil and gas reserve estimation and
disclosure requirements in ASC 932 with the requirements in the SEC final
rule, Modernization of Oil and
Gas Reporting. The amendments to the Codification in this ASU
are designed to improve the reserve estimation and disclosure requirements of
Topic 932 by: (a)
updating the reserve estimation requirements for recent changes in practice and
technology; and (b)
expanding the disclosure requirements for equity method
investments. ASU 2010-03 is effective for annual reporting periods
ending on or after December 31, 2009. Entities should apply the adoption of the
amendments as a change in accounting principle inseparable from a change in
estimate. The amendments in ASU 2010-03 specify the required disclosures for the
effect of adoption, and early adoption is not permitted. These reporting
requirements are effective for our annual report for the fiscal year ending
September 30, 2010. The Company is currently assessing the impact
that the adoption will have on its financial statements.
3.
MINERAL PROPERTIES
The
Company is an exploration stage company in respect to its mineral
holdings.
In
October 2009, the Company entered into an agreement to sell zeolite to be used
in certain agricultural applications limited to feed supplements in a ten state
area in the south-central part of the US.
In
February 2010, the Company entered into a License Agreement concerning two US
method patents for the treatment of wastewaters. Such patents utilize
the Company’s zeolite. The license applies to the US and covers the use of the
technology in water, wastewater and waste treatment in animal feed operations,
agriculture, and aquaculture. In addition, the license applies to the treatment
of sanitary wastewater on Federal facilities, military bases and lands
administered by the US Bureau of Indian Affairs. The Company issued 140,000
shares of its Common Stock in consideration for the License
Agreement. The Company recorded $40,907 as Patents License Rights
based on an average price of $0.29 per share.
In
December 2009, the proposed Sierra Kaolin Open Pit Clay Mine project cleared the
regulatory review process and the project’s definitive USDA Forest Service Plan
of Operations was approved. This will facilitate the project moving to the next
phases, including site preparation for extraction operations and the continued
evaluation of potential product specific marketing arrangements with certain
third parties.
During
the third quarter of 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
periods. The expenses applicable to the calcium carbonate minerals included in
operating expenses and other costs totaled $32,600 for the nine months ended
June 30, 2009.
4.
OIL AND GAS PROPERTIES
In June
2010, the Company sold its interests in nineteen undeveloped acres in Harrison
County, Texas for $60,686. There were no revenues and expenses applicable to
such assets included in the fiscal 2010 and 2009 periods. The assets sold had no
net book value.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
5. PREMIUM FINANCE NOTE
PAYABLE
During
November 2009, the Company entered into a Premium Finance Note Payable for
$23,696 to finance certain insurance premiums. The maturity date of
the note is October 1, 2010 and the interest rate is 11.2%. Consistent with the
provisions of the note, the Company has been making monthly payments of
principal and interest of $2,285. The balance of the Note at June 30, 2010 is
$4,639.
6.
NOTE PAYABLE TO RELATED PARTY
In January and May 2010,
the Company borrowed $40,000 and $20,000, respectively, from a Director. The
note bears interest at prime plus 2 percent and is due on demand. The Company
used the funds to satisfy certain delinquent payables.
7.
7.25% CONVERTIBLE DEBENTURES
In June
2009, the Company commenced a private placement of up to $500,000 of 7.25%
Convertible Debentures (the “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. The
Debentures are five (5) year instruments maturing on July 30, 2014, bearing
interest at 7.25 % per annum on the balance outstanding from time to
time. Interest commences to accrue immediately upon issuance of the
Debentures and will be paid quarterly on each September 30, December 31, March
31 and June 30 for which the Debentures are outstanding. Payment of
principal will commence on September 30 following the second anniversary of the
closing date of the offering. The Company has extended the offering period for
the Debentures until September 30, 2010, at the request of potential investors.
The Company is utilizing the proceeds of this private placement for general
working capital purposes.
During
the nine months ended June 30, 2010, the Company issued Debentures totaling
$62,500 of which two Directors purchased Debentures totaling $45,000.
Purchasers, including a Director, of $32,500 of the Debentures elected to
immediately convert such holdings into Common Stock and the Company issued
192,563 shares of Common Stock at an average conversion price of $0.17 per
share. The Company recognized $20,523 as interest expense resulting from the
beneficial conversion feature of the Debentures. Such interest expense was
determined based on the fair value of the Company’s Common Stock in excess of
the conversion price per share as of the commitment date to purchase the
Debentures.
Debentures
held by a Director totaling $30,000 are outstanding at June 30, 2010. The
Company recorded a discount of $12,857 on the Debentures resulting from the
beneficial conversion feature. The discount will be amortized through the
maturity date of the Debentures. Such discount was determined based on the fair
value of the Company’s Common Stock in excess of the conversion price per share
as of the commitment date to purchase the Debentures. During the three and nine
months ended June 30, 2010, the Company recognized $543 and $1,140 of
contractual coupon interest, respectively, and $693 and $1,521 of amortization
of the discount, respectively, and such amounts are included in interest
expense. The effective interest rate for the nine months ended June 30, 2010 was
18%. The if-converted value of the Debentures at June 30, 2010 exceeds the
principal amount of the Debentures by approximately $8,500.
8.
CAPITAL STOCK
Common
Stock
Shares of
Common Stock issued during the nine months ended June 30, 2010 totaled 332,563
as discussed in Notes 3 and 7.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Series
B 8% Cumulative Convertible Preferred Stock
No shares
of Series B Preferred Stock were issued or converted to Common Stock during the
nine months ended June 30, 2010.
Options
and Warrants to Purchase Common Stock
|
|
|
Number of
Options and
Warrants
|
|
|
Weighted
Average Price
per Share
|
|
|
Options
and Warrants Outstanding at September 30, 2009
|
|
|
1,609,805 |
|
|
$ |
0.51 |
|
|
Options
Granted
|
|
|
1,200,000 |
|
|
$ |
0.21 |
|
|
Options
Expired
|
|
|
(187,500 |
) |
|
$ |
0.47 |
|
|
Options
and Warrants Outstanding at June 30, 2010
|
|
|
2,622,305 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
Summarized
information relating to the stock options to purchase Common Stock outstanding
as of June 30, 2010, is as follows:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
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
|
|
|
$0.21-$0.67
|
|
|
1,800,000 |
|
|
$ |
0.30 |
|
|
|
3.42 |
|
|
|
550,000 |
|
|
$ |
0.49 |
|
Stock-based
Compensation
During
the nine months ended June 30, 2010, options to purchase 1,200,000 shares of
Common Stock were granted and options to purchase 187,500 shares of Common Stock
expired unexercised. There are options to purchase 1,800,000 shares of Common
Stock outstanding as of June 30, 2010 and all options are held by current
officers, Directors and employees of the Company (“Insiders”). The
exercise prices for the options held by Insiders range from $0.21 per share to
$0.67 per share.
In accordance with FASB ASC Topic
718, Compensation – Stock
Compensation, the Company recorded stock-based compensation expense for
the nine months ended June 30, 2010 and 2009 of $43,813 and $53,663,
respectively, relating to stock options granted to Insiders. 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 2.43% and 4.16%; expected life of three to seven years;
and expected volatility between 37% and 106%.
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 anti-dilutive.
Options
and warrants to purchase shares of Common Stock were outstanding during the
periods but have not been included in the computation of diluted earnings per
share because such shares would have an anti-dilutive effect on net loss per
share. The shares of Common Stock issuable upon the conversion of the 7.25%
Convertible Debentures (see Note 7) have not been included in the computation of
diluted earnings per share because such shares would have an anti-dilutive
effect on net loss per share. No other adjustments were made for purposes of per
share calculations.
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Payment
of Accrued Dividends
There
were no cash dividend payments in respect to either series of Preferred Stock
during the nine months ended June 30, 2010 and 2009.
Subscriptions
Receivable
The notes
receivable and accrued interest receivable pertaining to the subscriptions
receivable of $576,000 from certain former officers/directors are due in August
2010. The interest receivable related to such notes totals $164,815 at June 30,
2010. The Company is in discussions with such former officers/directors in
an effort to resolve the notes and interest receivables from them and the
accrued bonus of $1,373,831 payable to them.
9.
PENDING LITIGATION
During
October 2009, a working interest owner commenced an action against a subsidiary
of the Company in the District Court of Burleson County, Texas, for an
accounting of expense and revenues for six wells. The subsidiary,
through its Texas counsel, has filed a general denial of the
claim. In November 2009, such subsidiary provided the plaintiff with
a complete accounting for all wells in question. The Plaintiff has sought
additional discovery which request remains outstanding. The action is still
ongoing.
10.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events for recognition or disclosure in the
financial statements filed on Form 10-Q with the SEC and no event has occurred
that requires disclosure.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.
The
following discussion is intended to inform 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 the
Company’s behalf 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” 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 of wells; oil and gas
reserve estimates (including estimates of future net revenues associated with
such reserves and the present value of such future net revenues); estimates of
future production of oil, natural gas and minerals; expected results or benefits
associated with recent acquisitions; marketing of oil, gas and minerals;
expected future revenues and earnings, and results of operations; future
capital, development and exploration expenditures; expectations regarding cash
flow and future borrowings sufficient to fund ongoing operations and debt
service, capital expenditures and working capital requirements; nonpayment of
dividends; expectations regarding competition; impact of the adoption of new
accounting standards and the Company’s financial and accounting systems; and
effectiveness of the Company’s control over financial reporting.
These
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 incorrect, actual
results could vary substantially.
Various
risk 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, quantity 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 to
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
For
the three and nine months ended June 30, 2010 and 2009:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$ |
147,942 |
|
|
$ |
134,087 |
|
|
$ |
452,924 |
|
|
$ |
477,642 |
|
|
Net
Loss
|
|
$ |
(237,721 |
) |
|
$ |
(2,363,120 |
) |
|
$ |
(929,100 |
) |
|
$ |
(3,003,368 |
) |
|
Oil
and Gas Production and Cost Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(Bbl)
|
|
|
458 |
|
|
|
544 |
|
|
|
1,359 |
|
|
|
2,353 |
|
|
Gas
(Mcf)
|
|
|
7,783 |
|
|
|
9,540 |
|
|
|
23,635 |
|
|
|
27,707 |
|
|
Average
Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(per Bbl)
|
|
$ |
75.34 |
|
|
$ |
55.88 |
|
|
$ |
74.89 |
|
|
$ |
51.49 |
|
|
Gas
(per Mcf)
|
|
$ |
5.91 |
|
|
$ |
4.27 |
|
|
$ |
5.91 |
|
|
$ |
5.43 |
|
|
Mcfe
|
|
$ |
7.64 |
|
|
$ |
5.56 |
|
|
$ |
7.60 |
|
|
$ |
6.49 |
|
|
Lease
Operating Expenses and Production and Severance Taxes per
Mcfe
|
|
$ |
2.97 |
|
|
$ |
3.73 |
|
|
$ |
4.28 |
|
|
$ |
4.01 |
|
_____
Bbl =
One barrel of oil or condensate
Mcf =
One thousand cubic feet
Mcfe =
One thousand cubic feet gas equivalent
OIL
AND GAS OPERATIONS
Oil
and Gas Sales
Oil and
Gas Sales increased to $80,486 for the three months ended June 30, 2010, from
$71,158 for three months ended June 30, 2009. Oil and Gas Sales decreased to
$241,568 for the nine months ended June 30, 2010 from $271,589 for nine months
ended June 30, 2009. The decrease in oil and gas production experienced during
the nine months ended June 30, 2010 is primarily a result of wells being
“off-line” for repair and declines in the producing gas-oil ratio from certain
producing wells operated by the Company in Texas.
Well
Management Revenue
Well
Management Revenue increased to $66,148 for the three months ended June 30,
2010, from $59,395 for three months ended June 30, 2009. Well Management Revenue
increased to $198,442 for the nine months ended June 30, 2010 from $190,794 for
nine months ended June 30, 2009.
Lease
Operating Expenses and Production and Severance Taxes
Lease
Operating Expenses and Production and Severance Taxes decreased to $31,317 for
the three months ended June 30, 2010 from $47,727 for three months ended June
30, 2009. Lease Operating Expenses and Production and Severance Taxes decreased
to $136,081 for the nine months ended June 30, 2010, from $167,800 for nine
months ended June 30, 2009. The change in Lease Operating Expenses and
Production and Severance Taxes per Mcfe is primarily the result of the decrease
in production of oil and gas as discussed above.
Depreciation,
Depletion and Amortization: Oil and Gas
Depreciation,
depletion and amortization totaled $32,850 and $44,850 for the three months
ended June 30, 2010 and 2009, respectively. Depreciation, depletion and
amortization totaled $98,550 and $134,550 for the nine months ended June 30,
2010 and 2009, respectively. Such decrease is primarily the result of the
decrease in production of oil and gas.
MINERALS
OPERATIONS
The
Company is an Exploration Stage company in respect to its mineral
holdings. In December 2009, the proposed Sierra Kaolin Open Pit Clay
Mine project cleared the regulatory review process and the project’s definitive
USDA Forest Service Plan of Operations was approved. This will facilitate the
project moving to the next phases, including site preparation for extraction
operations and the continued evaluation of potential product specific marketing
arrangements with certain third parties.
Minerals
Sales
There
were no minerals sales during the three months ended June 30, 2010. Mineral
sales totaled $1,209 during the three months ended June 30, 2009, respectively.
Minerals sales totaled $8,453 and $4,834 during the nine months ended June 30,
2010 and 2009, respectively. During October 2009, the Company entered into an
agreement to sell zeolite to be used in certain agricultural applications
including but not limited to feed supplements and soil additives in a ten state
area in the south-central part of the US. The Company made initial shipments
during the nine months ended June 30, 2010.
In
February 2010, the Company entered into a License Agreement concerning two US
method patents for the treatment of wastewaters. The license applies
to the US and covers the use of the technology in water, wastewater and waste
treatment in animal feed operations, agriculture, and aquaculture. In addition,
the license applies to the treatment of sanitary wastewater on Federal
facilities, military bases and lands administered by the US Bureau of Indian
Affairs.
Minerals
Exploration Expenses
The
Company did not incur minerals exploration expenses during the nine months ended
June 30, 2010, and 2009. These expenses are primarily for costs associated with
the exploration and quantification of mineral resources and mineral reserves.
Such expenses related to the kaolin reserves were the responsibility of the
Company’s partner.
Minerals
Operating Expenses and Other Costs
Minerals
operating expenses and other costs totaled $1,059 and $93,046 for the three
months ended June 30, 2010 and 2009, respectively. Minerals operating expenses
and other costs totaled $13,151 and $130,418 for the nine months ended June 30,
2010 and 2009, respectively. The decrease is primarily attributable to the
Company incurring no expenses related to its calcium carbonate minerals in the
nine months ended June 30, 2010. During the fiscal 2009, the Company determined
that additional efforts to develop its calcium carbonate minerals in New Mexico
were no longer warranted.
Depreciation,
Depletion and Amortization: Minerals
Depreciation,
depletion and amortization totaled $150,042 and $144,563 for the three months
ended June 30, 2010 and 2009, respectively. Such amounts include amortization of
Patent Rights and Patent License Rights of $150,042 and $144,363 in the three
months ended June 30, 2010 and 2009, respectively.
Depreciation,
depletion and amortization totaled $439,435 and $433,689 for the nine months
ended June 30, 2010 and 2009, respectively. Such amounts include amortization of
Patent Rights and Patent License Rights of $438,768 and $433,089 in the nine
months ended June 30, 2010 and 2009, respectively.
DEPRECIATION
AND AMORTIZATION: OTHER
Depreciation
and amortization not identified with the minerals or oil and gas segments
totaled $1,641 and $1,642 for the three months ended June 30, 2010 and 2009,
respectively. Such depreciation and amortization totaled $4,926 and $4,926 for
the nine months ended June 30, 2010 and 2009, respectively.
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses totaled $183,181 and $140,891 for the three months
ended June 30, 2010 and 2009, respectively. The Company recorded
stock-based compensation expense of $17,197 and $8,735 for the three months
ended June 30, 2010 and 2009, respectively.
General
and administrative expenses totaled $572,468 and $498,269 for the nine months
ended June 30, 2010 and 2009, respectively. The Company recorded
stock-based compensation expense of $43,813 and $53,663 for the nine months
ended June 30, 2010 and 2009, respectively.
INTEREST
EXPENSE
Interest
expense totaled $51,643 and $52,205 for the three months ended June 30, 2010 and
2009, respectively. During the three months ended June 30, 2010, the Company
recognized $543 of contractual coupon interest and $693 of amortization of the
discount relating to the 7.25% Convertible Debentures. During the three months
ended June 30, 2010, the Company recognized $736 as interest expense resulting
from the beneficial conversion feature of the Debentures.
Interest
expense totaled $193,505 and $154,776 for the nine months ended June 30, 2010
and 2009, respectively. During the nine months ended June 30, 2010, the Company
recognized $1,140 of contractual coupon interest and $1,521 of amortization of
the discount relating to the 7.25% Convertible Debentures. During the nine
months ended June 30, 2010, the Company recognized $20,523 as interest expense
resulting from the beneficial conversion feature of the Debentures.
The 7.25%
Convertible Debentures are discussed in Note 7 of the Notes to Unaudited
Consolidated Financial Statements.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s cash flow used in operating activities was $154,135 and $372,400 for
the nine months ended June 30, 2010 and 2009, respectively. 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 June 30, 2010 was $122,028.
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 terms acceptable
to us or whether any price or other terms offered by a prospective purchaser
would be acceptable to us. We cannot predict the length of time needed to find a
willing purchaser and to close the sale of any property.
In 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.
In 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 September 30, 2010 at the request of potential
investors. Through June 30, 2010, this private placement raised $191,000 (net of
fees and expenses) for the Company. The Company is utilizing the proceeds of
this private placement for general working capital purposes.
In
January 2010, the Company borrowed $40,000 from a Director which the Company
used to satisfy certain delinquent payables.
In May
2010, the Company borrowed $20,000 from a Director which the Company used to
satisfy certain delinquent payables.
In June
2010, the Company sold its interests in nineteen undeveloped acres in Harrison
County, Texas for $60,686.
COMMERCIALIZATION
OF MINERAL 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 deposits
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 Company continues to focus on
establishing business and or financial relationships that will provide the
necessary capital to effectively exploit its kaolin and zeolite mineral resource
holdings.
Zeolite
Certain
initial small scale tests have progressed to the point where larger scalable
pilot tests of commercial applications for zeolite are in progress in respect to
soil additives and animal waste treatment.
In
October, 2009, the Company entered into an agreement to sell zeolite to be used
in certain agricultural applications limited to feed supplements in a ten state
area in the south-central part of the US. The Company made initial shipments
during the nine months ended June 30, 2010.
In
February 2010, the Company entered into a License Agreement concerning two US
method patents for the treatment of wastewaters. Such patents utilize the
Company’s zeolite. The license applies to the US and covers the use of the
technology in water, wastewater and waste treatment in animal feed operations,
agriculture, and aquaculture. In addition, the license applies to the treatment
of sanitary wastewater on Federal facilities, military bases and lands
administered by the US Bureau of Indian Affairs. The Company issued 140,000
shares of its Common Stock in consideration for the License
Agreement. The Company recorded $40,907 as Patents License Rights
based on an average price of $0.29 per share.
Kaolin
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 (a) for coatings, fillers
and pigments for use within the paint and paper manufacturing industries, and
(b) as an additive in cement formulations. The analysis results of the processed
minerals with respect to its physical properties including brightness, color,
opacity, strength, and oil absorption have indicated that commercially viable
products can be produced from the deposit’s extracted minerals.
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. In December 2009, the proposed Sierra Kaolin Open
Pit Clay Mine project cleared the regulatory review process and the project’s
definitive USDA Forest Service Plan of Operations was approved. This extraction
permit will facilitate the project moving to the next phases, including site
preparation for extraction operations and the continued evaluation of potential
product specific marketing arrangements with certain third parties.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no “off-balance sheet arrangements” and does not expect to enter
into any such arrangements in the foreseeable future.
NEW
ACCOUNTING STANDARDS
For
details of applicable new accounting standards, please, refer to Note 2 of the
Notes to Unaudited Consolidated Financial Statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
None.
Item
4. Controls and Procedures.
(a) Evaluation of Disclosure Controls
and Procedures. As of the end of the period covered by this Quarterly
Report on Form 10-Q, our Interim Chief Executive Officer/President/Chief
Financial Officer evaluated, with the participation of management, the
effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)). Based upon this evaluation, our Interim Chief
Executive Officer/President/Chief Financial Officer has concluded that our
disclosure controls and procedures were effective as of June 30, 2010 to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms.
On June 30, 2010, the Company had two
employees and engaged the Chief Accounting Officer on a consulting
basis. All day-to-day financial matters are overseen by the Interim
Chief Executive Officer/President/Chief Financial Officer with oversight by the
Board of Directors. All contracting by the Company, for other than
everyday items, is done with the approval of the entire Board of
Directors.
In light of the size of the Company,
its limited cash flow and the transparency of its actions, the Company has
instituted a limited number of formal controls and procedures in addition to
those required under the Sarbanes Oxley Act of 2002 related to the composition
of its Board of Directors and the establishment of various Board Committees.
These policies include an Employee Manual outlining procedures relating but not
limited to employee dispute resolution and issues related to “controlled
substances” and policies in handling the recordation and transfer of funds. Any
problem which cannot be resolved internally or which an employee does not desire
to discuss with a superior may be discussed with counsel or an independent
member of the Board of Directors.
The Interim Chief Executive
Officer/President/Chief Financial Officer, with the assistance of the Audit
Committee, established, consistent with the provisions of Rule 13a-15(f) and
Rule 15d-15(f) of the '34 Act, a procedure and check list for the filing of all
information and reports required by the Securities and Exchange Act of 1934, as
amended and the Sarbanes-Oxley Act ("SOX"). Since the Company employs only two
people, as of the filing date, the Company's Interim Chief Executive
Officer/President/Chief Financial Officer is responsible for reporting and
filing reports. In addition to the mandatory filing requirements established by
the Securities and Exchange Commission, OTC:BB (the exchange on which the
Registrant's stock is traded) and SOX, the Registrant has taken the position
that any transaction that could impact the value of the Company or the Company's
stock by five percent or greater requires disclosure. All press releases are
published by the Company only after submittal to the Board of Directors and
counsel for review, comment and approval.
The Company's internal controls over
financial reporting and record maintenance have been developed by the Company as
approved by the Board of Directors. These procedures are for the
detailed and accurate recordation of all transactions in which the Company is
involved and the disposition of assets. They provide reasonable assurance that
the transactions recorded permit the accurate preparation of financial
statements in accordance with generally accepted accounting principals and that
receipt and expenditures of the Company are being made only in accordance with
authorization of management. The controls provide reasonable
assurances regarding the prevention and timely detection of unauthorized use of
Company assets and acquisition or disposition of the Company's assets that could
have a material effect on the Company's financial statements.
(b) Changes in Internal Control Over
Financial Reporting. No changes were made to our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Code
of Ethics
The Board of Directors of the Company
has adopted a Code of Ethics (see Exhibit 14.1 to the Company’s Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2007) for
all of the Company's employees, officers and Directors. Each officer
and Director of the Company annually affirms that he has read the Company’s Code
of Ethics and agrees to be bound thereby.
Item
4T. Controls and Procedures.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
None
Not
required for smaller reporting companies.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
June
2009 Private Placement
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 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. The Company extended the offering period for the Debentures
until September 30, 2010 at the request of potential investors. Through June 30,
2010, this private placement raised $191,000 (net of fees and expenses) for the
Company. The Company is utilizing the proceeds of this private placement for
general working capital purposes.
Through
September 30, 2009, all of the purchasers of the Debentures elected to
immediately convert such holdings into shares of 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, this private
placement had raised $128,500 (net of fees and expenses totaling $14,225) for
the Company.
During
the nine months ended June 30, 2010, the Company issued Debentures totaling
$62,500. Purchasers of $32,500 of the Debentures elected to immediately convert
such holdings into Common Stock and the Company issued 192,563 shares of Common
Stock at an average conversion price of $0.17 per share.
February
2010 License Agreement
During
February 2010, the Company entered into a License Agreement concerning two US
method patents for the treatment of wastewaters. The Company issued
140,000 shares of its Common Stock in consideration for the License
Agreement. The Company recorded $40,907 as Patents License Rights
based on an average price of $0.29 per share.
Options
to Purchase Common Stock
In
December 2009, the Board of Directors granted options to purchase 1,200,000
shares of Common Stock to two Directors and the Interim Chief Executive
Officer/President/Chief Financial Officer/Director. The options are exercisable
through December 2014 at an exercise price of $0.21 per share. The
options vest 50% in December 2010 and 25% in each of December 2011 and
2012.
Item
3. Defaults Upon Senior Securities.
None
Item
4. (Removed and Reserved).
Item
5. Other Information.
The
Company filed its report on Form 8-K dated May 4, 2010 reporting the results of
the election of Directors and other matters voted upon at the Company’s Annual
Meeting.
The Company's Common Stock is traded on
the Over the Counter Market, Bulletin Board ("OTC:BB") symbol
“DLOV.”
|
Exhibit
|
|
|
|
Number
|
|
Description – Located at
|
|
31.1
|
|
Certification
of CEO under Section 302 of the Sarbanes-Oxley Act of 2002 - Filed
Herewith
|
|
31.2
|
|
Certification
of CFO under Section 302 of the Sarbanes-Oxley Act of 2002 - Filed
Herewith
|
|
32.1
|
|
Certification
of CEO under Section 906 of the Sarbanes-Oxley Act of 2002 - Filed
Herewith
|
|
32.2
|
|
Certification
of CFO under Section 906 of the Sarbanes-Oxley Act of 2002 - Filed
Herewith
|
The Registrant incorporates by
reference its Exhibit List as attached to its annual report on Form 10-K for the
fiscal year ended September 30, 2009.
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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DALECO
RESOURCES CORPORATION
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Dated: August
5, 2010
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/s/ Gary J. Novinskie
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Gary
J. Novinskie
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Interim
Chief Executive Officer, President, Chief
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Financial
Officer and Director (Principal Executive Officer
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and
Principal Financial Officer)
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Dated: August
5, 2010
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/s/ Richard W.
Blackstone
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Richard
W. Blackstone
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Principal
Accounting Officer
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