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, 2010
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
(Exact
name of registrant as specified 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 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 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, 2010, was approximately $8,818,780, 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 31, 2010: 45,819,622
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement to be filed for its 2011 Annual
Meeting of Shareholders (“2011 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 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, 2010, 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, 2009 and
ending September 30, 2010, the Company has experienced an average increase of
14% 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,
2008 and ending September 30, 2009.
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.
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.
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 2010, the Company did not acquire any oil and gas properties or drilling
prospects. In June 2010, the Company sold its interests in nineteen
undeveloped acres in Harrison County, Texas. 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 2011, 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 regulations, environmental restrictions, drilling moratoriums 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. 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,
2010:
Name and Location of
Purchaser
|
|
Percentage
|
|
ETC
Texas Pipeline, Ltd.(1)
|
San
Antonio, Texas
|
|
|
37 |
% |
Gulfmark
Energy, Inc.
|
Houston,
Texas
|
|
|
33 |
% |
Volunteer
Energy Services, Inc.
|
Pickerington,
Ohio
|
|
|
14 |
% |
Sheridan
Production Company LLC
|
Houston,
TX
|
|
|
12 |
% |
|
(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, 2012, 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
|
|
|
|
2010
|
|
|
2009
|
|
Texas:
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
1,791 |
|
|
|
2,880 |
|
Gas
(Mcf)
|
|
|
20,523 |
|
|
|
26,235 |
|
Average
Bbls/day
|
|
|
5 |
|
|
|
8 |
|
Average
Mcf/day
|
|
|
56 |
|
|
|
72 |
|
Pennsylvania:
|
|
|
|
|
|
|
|
|
Gas
(Mcf)
|
|
|
85 |
|
|
|
- |
|
Average
Mcf/day
|
|
|
- |
|
|
|
- |
|
West
Virginia:
|
|
|
|
|
|
|
|
|
Gas
(Mcf)
|
|
|
12,572 |
|
|
|
13,690 |
|
Average
Mcf/day
|
|
|
34 |
|
|
|
38 |
|
TOTALS:
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
1,791 |
|
|
|
2,880 |
|
Gas
(Mcf)
|
|
|
33,180 |
|
|
|
39,925 |
|
Average
Bbls/day
|
|
|
5 |
|
|
|
8 |
|
Average
Mcf/day
|
|
|
91 |
|
|
|
109 |
|
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
|
|
|
|
2010
|
|
|
2009
|
|
Texas
|
|
|
|
|
|
|
Average
Sale Price Per Bbl
|
|
$ |
74.63 |
|
|
$ |
54.91 |
|
Average
Sale Price Per Mcf
|
|
$ |
6.59 |
|
|
$ |
5.86 |
|
Pennsylvania
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Mcf
|
|
$ |
4.56 |
|
|
|
- |
|
West
Virginia
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Mcf
|
|
$ |
4.80 |
|
|
$ |
4.82 |
|
Combined
Properties
|
|
|
|
|
|
|
|
|
Average
Sale Price Per Bbl
|
|
$ |
74.63 |
|
|
$ |
54.61 |
|
Average
Sale Price Per Mcf
|
|
$ |
5.91 |
|
|
$ |
5.51 |
|
Average
Sale Price Per MCFE
|
|
$ |
7.51 |
|
|
$ |
6.61 |
|
Average
Production Costs per MCFE
|
|
$ |
4.18 |
|
|
$ |
3.71 |
|
Wells and Acreage
The
following tables set forth certain information as of September 30, 2010 and
2009:
|
|
2010
|
|
|
2009
|
|
Well Count
|
|
Gross Wells
|
|
|
Net Wells
|
|
|
Gross Wells
|
|
|
Net Wells
|
|
Texas
|
|
|
26 |
|
|
|
9.40 |
|
|
|
26 |
|
|
|
9.40 |
|
West
Virginia
|
|
|
2 |
|
|
|
0.46 |
|
|
|
2 |
|
|
|
0.46 |
|
Total
|
|
|
28 |
|
|
|
9.86 |
|
|
|
28 |
|
|
|
9.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed Acreage
|
|
Gross
Acres
|
|
|
Net
Acres
|
|
|
Gross Acres
|
|
|
Net Acres
|
|
Texas
|
|
|
3,550 |
|
|
|
1,259 |
|
|
|
3,550 |
|
|
|
1,259 |
|
West
Virginia
|
|
|
662 |
|
|
|
156 |
|
|
|
662 |
|
|
|
156 |
|
Total
|
|
|
4,212 |
|
|
|
1,415 |
|
|
|
4,212 |
|
|
|
1,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeveloped Acreage
|
|
Gross
Acres
|
|
|
Net
Acres
|
|
|
Gross Acres
|
|
|
Net Acres
|
|
Texas
|
|
|
1,519 |
|
|
|
554 |
|
|
|
1,538 |
|
|
|
573 |
|
West
Virginia
|
|
|
1,115 |
|
|
|
276 |
|
|
|
1,115 |
|
|
|
276 |
|
Total
|
|
|
2,634 |
|
|
|
830 |
|
|
|
2,653 |
|
|
|
849 |
|
Drilling Activity
The
Company did not participate in the drilling of any exploratory or development
wells in fiscal 2010 or 2009. 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, 2010 and 2009. All of
the reserves are located on-shore within the United States.
The
Company believes that the proved undeveloped reserves will be developed within
the next few years as a result of renewed interest in the area of its
properties. The increase in oil price and development of properties
in resource plays in the immediate area are major factors contributing to such
renewed interest.
Reserve estimates for the Company’s
properties as of September 30, 2010 and 2009 were taken from reserve reports
dated December 30, 2010 and December 31, 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
|
|
|
|
2010
|
|
|
2009
|
|
Net
Proved Developed Reserves:
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
|
|
|
|
Texas
|
|
|
19,396 |
|
|
|
12,441 |
|
Gas
(Mcf)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
147,989 |
|
|
|
106,526 |
|
Pennsylvania
|
|
|
- |
|
|
|
- |
|
West
Virginia
|
|
|
184,904 |
|
|
|
105,609 |
|
Total
|
|
|
332,893 |
|
|
|
212,135 |
|
Net
Proved Undeveloped Reserves:
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
65,086 |
|
|
|
64,238 |
|
Gas
(Mcf)
|
|
|
|
|
|
|
|
|
Texas
|
|
|
188,852 |
|
|
|
186,416 |
|
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
|
|
|
|
2010
|
|
|
2009
|
|
Future
Net Revenues :
|
|
|
|
|
|
|
Proved
Oil and Gas Reserves
|
|
$ |
4,486,639 |
|
|
$ |
2,779,164 |
|
Proved
Developed Oil and Gas Reserves
|
|
$ |
1,686,066 |
|
|
$ |
669,893 |
|
Present
Worth:
|
|
|
|
|
|
|
|
|
Proved
Oil and Gas Reserves
|
|
$ |
2,866,464 |
|
|
$ |
1,851,636 |
|
Proved
Developed Oil and Gas Reserves
|
|
$ |
1,099,727 |
|
|
$ |
492,814 |
|
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. Estimated future
production is priced at the average price received for fiscal 2010 for the
amounts at September 30, 2010 and the year-end prices for amounts at September
30, 2009. The change
in method of calculating the estimated product prices in 2010 from 2009 is due to the Company
adopting the reserve estimation and disclosure requirements of ASC Topic 932,
Extractive Industries – Oil and Gas, prospectively, on September 30,
2010.
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, 2010 and
2009.
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 zeolite
properties. 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, 2010, 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, 2010, the Company mined approximately 1,310 tons of
material for the preparation of samples and test products. Approximately 75 tons
have been sold or distributed as the Company’s trademarked ReNuGen™, a zeolite
based, wastewater treatment product. During fiscal 2010 and 2009, approximately
120 and 20 tons, respectively, 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, Krumrey Industrial Minerals, LLC,
formerly known as KT Minerals, Inc. (“KIM”), completed the evaluation of the
target area. KIMKT Minerals, Inc. has identified 75.7 million tons of
Mineralized Materials associated with the target area. At September 30, 2010,
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, 2010, 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 2010.Through September 30, 2010, 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 2010. 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.
KIM
conducted a re-evaluation of the potential Kaolin Mineralized Materials
associated with the project. The KIM 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, KIM 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, KIM evaluated approximately 264 acres of the project and
identified approximately 55.3 million tons of Mineralized
Materials.
These mineralized quantities were
further classified by KIM 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 KIM mineral quantity classifications are provided only as supplemental
information and should not be utilized in association with investment
decisions.
During
fiscal 2009 and 2010, 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 2011.
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.
Patent
and License Agreement
C.A. Series Patent
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.
License Agreement
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 patented technology in water,
wastewater and waste treatment in animal feed operations, agriculture, and
aquaculture. In addition, the license applies to the treatment of sanitary
wastewater on Federal facilities, military bases and lands administered by the
US Bureau of Indian Affairs.
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, 2010, the Company had
two employees. The Company employs the services of consulting accountants,
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 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 $3,000,000 of all risks liability policies 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 2010, 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 2010 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 2010, 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. (Removed and
Reserved).
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
convertible 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, 2010, the Company had 45,461,945 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, 2010, 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.
2010
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
0.26 |
|
|
$ |
0.14 |
|
Second
Quarter
|
|
$ |
0.28 |
|
|
$ |
0.17 |
|
Third
Quarter
|
|
$ |
0.24 |
|
|
$ |
0.13 |
|
Fourth
Quarter
|
|
$ |
0.20 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
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 |
|
Holders
Common Equity
As of
September 30, 2010, the current outstanding amount of shares of common stock was
45,461,945 with approximately 2,000 holders of record (inclusive of brokerage
house "street accounts").
Preferred
Equity
As of September 30, 2010, 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, 2010 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
|
|
|
600,000 |
|
|
$ |
0.33 |
|
|
|
200,000 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
600,000 |
|
|
$ |
0.33 |
|
|
|
200,000 |
|
Recent
Sales of Unregistered Securities
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 December 31, 2010 at the request of potential
investors. Through September 30, 2010, this private placement raised $195,000
(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 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 fiscal year ended September 30, 2010, the Company issued Debentures totaling
$66,500. Purchasers of $36,500 of the Debentures elected to immediately convert
such holdings into Common Stock and the Company issued 221,134 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 of $40,907 ($0.29 per share) for the
License Agreement.
Options
and Warrants
Options
(1)
to Purchase Shares of Common Stock
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
Outstanding
and Exercisable at beginning of period
|
|
|
787,500 |
|
|
|
2,875,000 |
|
|
|
3,750,000 |
|
Granted(2)
|
|
|
1,200,000 |
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expired
(3)
(4) (5) (6) (7) (8)
|
|
|
(187,500 |
) |
|
|
(2,087,500 |
) |
|
|
(875,000 |
) |
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
and Exercisable at end of period(9)
|
|
|
1,800,000 |
|
|
|
787,500 |
|
|
|
2,875,000 |
|
|
(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)
|
In
December 2009, the Board of Directors granted (a) an option to purchase
200,000 shares of stock to a Director under the Company’s Non-qualified
Independent Director Stock Option Plan, (b) an option to purchase 500,000
shares of Common Stock to a Director and (c) an option to purchase 500,000
shares of Common Stock to the President/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.
|
|
(3)
|
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
expired in fiscal 2009.
|
|
(4)
|
In
March 2008, David L. Matz voluntarily resigned as an officer of the
Company; accordingly, options for the purchase of 187,500, 37,500 and
75,000 shares of stock expired during fiscal 2010, 2009 and 2008,
respectively.
|
|
(5)
|
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.
|
|
(6)
|
In
August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily
resigned their respective positions with the Company. Options to purchase
of 800,000 shares of stock expired unexercised during fiscal
2008.
|
|
(7)
|
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.
|
|
(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 2006, 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. Options for the purchase of 1,400,000 shares of stock expired
during fiscal 2009.
|
|
(9)
|
Options
to purchase 1,800.000 shares are outstanding as of September 30, 2010 and
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 (average exercise price of $0.30
per share).
|
Warrants
to Purchase Shares of Common Stock
On December 21, 2007, Sonata Investment
Company, Ltd. loaned $75,000 to the Company pursuant to a promissory note of
same date. The Company issued warrants for the purchase of 522,305 shares of
stock at an exercise price of $0.55 per share. The warrants expired on December
31, 2010.
On
January 12, 2011, Sonata Investment Company, Ltd. loaned $60,000 to the Company
pursuant to a promissory note of same date. The Company issued warrants for the
purchase of 500,000 shares of stock at an exercise price of $0.12 per share. The
warrants expire on December 31, 2015.
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 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 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, 2010, compared to fiscal year ended September 30,
2009:
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
$ |
659,065 |
|
|
$ |
656,048 |
|
Net
Loss
|
|
$ |
(1,245,369 |
) |
|
$ |
(3,244,941 |
) |
Oil
and Gas Production and Cost Information:
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
Oil
(Bbl)
|
|
|
1,791 |
|
|
|
2,880 |
|
Gas
(Mcf)
|
|
|
33,180 |
|
|
|
39,925 |
|
Average
price:
|
|
|
|
|
|
|
|
|
Oil
(per barrel)
|
|
$ |
74.63 |
|
|
$ |
54.91 |
|
Gas
(per Mcf)
|
|
$ |
5.91 |
|
|
$ |
5.51 |
|
Lease
Operating Expenses and Production and Severance Taxes per
Mcfe
|
|
$ |
4.18 |
|
|
$ |
3.71 |
|
Bbl =
Barrels of oil
Mcf =
One Thousand cubic feet of gas
Mcfe =
One Thousand cubic feet of gas equivalent
Oil
and Gas Operations
Oil
and Gas Sales
Oil and
Gas Sales decreased to $329,724 for fiscal 2010 from $378,006 for fiscal 2009.
The decrease in oil and gas production experienced during fiscal 2010 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
Well
Management Revenue increased to $309,855 for fiscal 2010 from $263,545 for
fiscal 2009. The increase is primarily a result of the increase in rate of
overhead charges per well.
Lease
Operating Expenses and Production and Severance Taxes
The
increase in Lease Operating Expenses and Production and Severance Taxes Tax per
Mcfe is primarily the result of the decrease in oil and gas production. Lease
Operating Expenses and Production Tax totaled $183,777 for fiscal 2010 and
$212,495 for fiscal 2009.
Depreciation,
Depletion and Amortization - Oil and Gas
Depreciation,
depletion and amortization (“DD&A”) – Oil and Gas totaled $131,400 and
$179,400 for fiscal 2010 and 2009, respectively. The 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.
Minerals
Exploration Expenses
The
Company did not incur Minerals Exploration Expenses during fiscal 2010 and 2009.
Minerals Exploration Expenses are primarily for costs associated with the
exploration of the mineral deposits and quantification of Mineralized
Materials.
Minerals
Operating Expenses and Other Costs
Minerals operating expenses and other
costs decreased to $22,497 for fiscal 2010 as compared to $123,411 for
fiscal 2009. The amount for fiscal 2009 includes a charge for $90,000 related to
the issuance of Common Stock in exchange for services. In 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.
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
DD&A
- Minerals totaled $587,206 for fiscal 2010 as compared to $578,252 for fiscal
2009. Such amounts include amortization of Patent Rights and Patent License
Rights of $586,539 and $577,452, respectively.
Depreciation,
Depletion and Amortization - Other
DD&A
- Other totaled $6,367 and $6,568 for fiscal 2010 and 2009,
respectively.
General
and Administrative Expenses
These
expenses increased 30% to $796,575 for fiscal 2010 as compared to $615,018 for
fiscal 2009. Such increase is primarily due to an increase in engineering,
financial and accounting fees which included business development activities
related to the license agreement concerning two US method patents for the
treatment of wastewaters. Stock-based compensation expense is included in
general and administrative expenses. The Company recorded stock-based
compensation expense for fiscal 2010 and fiscal 2009 of $62,848 and $62,399,
respectively (see Note 9(c) of the Notes to Consolidated Financial
Statements).
Interest
Expense
Interest
expense increased 11% to $258,553 for fiscal 2010 as compared to $232,257 for
fiscal 2009. During fiscal 2010, the Company recognized $1,689 of contractual
coupon interest and $2,220 of amortization of the discount relating to the 7.25%
Convertible Debentures. During fiscal 2010, the Company recognized $22,238 as
interest expense resulting from the beneficial conversion feature of the
Debentures. During fiscal 2009, no 7.25% Convertible Debentures were
outstanding. During fiscal 2009, the Company recognized $23,402 as interest
expense resulting from the beneficial conversion feature of the Debentures. The
7.25% Convertible Debentures are discussed in Note 8 of the Notes to
Consolidated Financial Statements.
Gain
on Sale of Oil and Gas Properties
In June
2010, the Company sold its interests in nineteen undeveloped acres (unproved) in
Harrison County, Texas for $60,686.
Liquidity
and Capital Resources
The
Company’s cash flow used for operating activities was $199,077 for fiscal 2010
and $461,129 for fiscal 2009, respectively. Accounts payable increased $284,910
during fiscal 2010. During fiscal 2010 and 2009, 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, 2010 totaled $121,447.
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
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 December 31, 2010 at the request of potential
investors. Through September 30, 2010, this private placement raised $195,000
(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 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 fiscal year ended September 30, 2010, the Company issued Debentures totaling
$66,500. Purchasers of $36,500 of the Debentures elected to immediately convert
such holdings into Common Stock and the Company issued 221,134 shares of Common
Stock at an average conversion price of $0.17 per share.
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 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 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 fiscal 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 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 of Notes
to 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, 2010, the Company
incurred a net loss of $1,245,369. The ability of the Company to meet its total
liabilities of $8,754,049 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.
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) 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
$45,661 approximates fair value at September 30, 2010.
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, 2010, 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 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
|
Other
Supplemental Information (Unaudited):
*
|
Estimated
Net Quantities of Proved 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 Shareholders
of Daleco
Resources Corporation
We have
audited the accompanying consolidated balance sheets of Daleco Resources
Corporation and Subsidiaries as of September 30, 2010 and 2009, 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, 2010 and 2009, 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
12, 2011
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, 2010 AND
2009
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
$ |
121,447 |
|
|
$ |
98,336 |
|
Accounts
Receivable
|
|
|
383,866 |
|
|
|
296,547 |
|
Other
Current Assets
|
|
|
7,424 |
|
|
|
7,424 |
|
Total
Current Assets
|
|
|
512,737 |
|
|
|
402,307 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Patent
Rights
|
|
|
6,594,500 |
|
|
|
6,594,500 |
|
Accumulated
Amortization of Patent Rights
|
|
|
(5,777,068 |
) |
|
|
(5,199,616 |
) |
Net
Patent Rights
|
|
|
817,432 |
|
|
|
1,394,884 |
|
Patents
License Rights
|
|
|
40,907 |
|
|
|
- |
|
Accumulated
Amortization of Patents License Rights
|
|
|
(9,087 |
) |
|
|
- |
|
Net
Patents License Rights
|
|
|
31,820 |
|
|
|
- |
|
Prepaid
Mineral Royalties- Long-term
|
|
|
449,510 |
|
|
|
419,879 |
|
Interest
Receivable
|
|
|
169,533 |
|
|
|
150,814 |
|
Restricted
Cash Deposits
|
|
|
105,961 |
|
|
|
109,041 |
|
Securities
Available for Future Sale
|
|
|
95 |
|
|
|
1,583 |
|
Total
Other Assets
|
|
|
1,574,351 |
|
|
|
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
|
|
|
(3,937,595 |
) |
|
|
(3,806,195 |
) |
Net
Oil and Gas Properties
|
|
|
486,917 |
|
|
|
618,317 |
|
Office
Equipment, Furniture and Fixtures, at cost
|
|
|
61,502 |
|
|
|
79,902 |
|
Accumulated
Depreciation
|
|
|
(56,274 |
) |
|
|
(67,639 |
) |
Net
Office Equipment, Furniture and Fixtures
|
|
|
5,228 |
|
|
|
12,263 |
|
Total
Net Property, Plant and Equipment
|
|
|
10,274,273 |
|
|
|
10,412,708 |
|
TOTAL
ASSETS
|
|
$ |
12,361,361 |
|
|
$ |
12,891,216 |
|
SEE
ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DALECO
RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, 2010 AND
2009
|
|
|
2010
|
|
|
2009
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
2,131,530 |
|
|
$ |
1,846,620 |
|
Federal
and State Income Taxes Payable
|
|
|
192,427 |
|
|
|
192,427 |
|
Preferred
Stock Dividends Payable
|
|
|
1,857,895 |
|
|
|
1,741,895 |
|
Accrued
Interest Expense
|
|
|
913,802 |
|
|
|
783,953 |
|
Accrued
Bonus Expense
|
|
|
1,373,831 |
|
|
|
1,373,831 |
|
Accrued
Salary Expense
|
|
|
956,315 |
|
|
|
944,441 |
|
Accrued
Expense Reimbursements
|
|
|
25,645 |
|
|
|
24,990 |
|
EV&T
Note Payable
|
|
|
567,213 |
|
|
|
567,213 |
|
CAMI
Notes Payable
|
|
|
514,881 |
|
|
|
514,881 |
|
Notes
Payable - Related Parties
|
|
|
155,485 |
|
|
|
45,485 |
|
Note
Payable – First Citizens Bank – Current Portion
|
|
|
15,000 |
|
|
|
15,000 |
|
Total
Current Liabilities
|
|
|
8,704,024 |
|
|
|
8,050,736 |
|
Long-term
Debt:
|
|
|
|
|
|
|
|
|
Note
Payable – First Citizens Bank – Long-term Portion
|
|
|
30,661 |
|
|
|
45,659 |
|
7.25%
Convertible Debentures, net of unamortized discount of $10,636 at
September 30, 2010
|
|
|
19,364 |
|
|
|
- |
|
Total
Long-term Debt
|
|
|
50,025 |
|
|
|
45,659 |
|
TOTAL
LIABILITIES
|
|
|
8,754,049 |
|
|
|
8,096,395 |
|
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 (2010 and 2009 -
145,000 shares outstanding)
|
|
|
1,450 |
|
|
|
1,450 |
|
Common
Stock – 100,000,000 shares authorized – par value $0.01 per share
(outstanding: 2010 – 45,461,945; 2009 – 45,100,811 shares)
|
|
|
454,619 |
|
|
|
451,008 |
|
Additional
Paid-in Capital
|
|
|
45,574,252 |
|
|
|
45,402,515 |
|
Accumulated
Deficit
|
|
|
(41,841,404 |
) |
|
|
(40,480,035 |
) |
Subscriptions
Receivable
|
|
|
(576,000 |
) |
|
|
(576,000 |
) |
Accumulated
Other Comprehensive Loss
|
|
|
(5,605 |
) |
|
|
(4,117 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
3,607,312 |
|
|
|
4,794,821 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
12,361,361 |
|
|
$ |
12,891,216 |
|
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, 2010 AND
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
Oil
and Gas Sales
|
|
$ |
329,724 |
|
|
$ |
378,006 |
|
Well
Management Revenue
|
|
|
309,855 |
|
|
|
263,545 |
|
Royalty
Receipts
|
|
|
6,283 |
|
|
|
7,948 |
|
Mineral
Sales
|
|
|
13,203 |
|
|
|
6,549 |
|
Total
Operating Revenues
|
|
|
659,065 |
|
|
|
656,048 |
|
Expenses:
|
|
|
|
|
|
|
|
|
Lease
Operating Expenses - Oil and Gas
|
|
|
163,612 |
|
|
|
189,384 |
|
Operating
Expenses and Other Costs - Minerals
|
|
|
22,497 |
|
|
|
123,411 |
|
Production
and Severance Taxes – Oil and Gas
|
|
|
20,165 |
|
|
|
23,111 |
|
Depreciation,
Depletion and Amortization
|
|
|
724,973 |
|
|
|
764,220 |
|
General
and Administrative Expenses
|
|
|
796,575 |
|
|
|
615,018 |
|
Total
Expenses
|
|
|
1,727,822 |
|
|
|
1,715,144 |
|
Loss
From Operations
|
|
|
(1,068,757 |
) |
|
|
(1,059,096 |
) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
and Dividend Income
|
|
|
21,255 |
|
|
|
23,384 |
|
Interest
Expense
|
|
|
(258,553 |
) |
|
|
(232,257 |
) |
Gain
on Sale of Oil and Gas Properties
|
|
|
60,686 |
|
|
|
- |
|
Loss
on Abandonment of Mineral Property
|
|
|
- |
|
|
|
(1,976,972 |
) |
Total
Other Income (Expense), Net
|
|
|
(176,612 |
) |
|
|
(2,185,845 |
) |
Loss
Before Income Taxes
|
|
|
(1,245,369 |
) |
|
|
(3,244,941 |
) |
Taxes
based on Income
|
|
|
- |
|
|
|
- |
|
Net
Loss
|
|
|
(1,245,369 |
) |
|
|
(3,244,941 |
) |
Preferred
Stock Dividends
|
|
|
(116,000 |
) |
|
|
(115,891 |
) |
Net
Loss Applicable to Common Shareholders
|
|
$ |
(1,361,369 |
) |
|
$ |
(3,360,832 |
) |
Basic
and Fully Diluted Net Loss per share
|
|
$ |
(0.03 |
) |
|
$ |
(0.08 |
) |
Weighted-average
number of shares of Common Stock Outstanding
|
|
|
45,327,531 |
|
|
|
43,486,219 |
|
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, 2010 AND
2009
|
|
|
Series
B
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated |
|
|
Subscrip-tions |
|
|
Accumulated
Other
Compre-hensive
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Receivable
|
|
|
Loss
|
|
|
Equity
|
|
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 |
|
Conversion
of 7.25% Convertible Debentures into Common Stock
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Conversion
of 7.25% Convertible Debentures into Common Stock
|
|
|
|
|
|
|
|
|
|
|
221,134 |
|
|
|
2,211 |
|
|
|
34,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,500 |
|
Issuance
of Stock For Patent License Rights
|
|
|
|
|
|
|
|
|
|
|
140,000 |
|
|
|
1,400 |
|
|
|
39,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,907 |
|
Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,488 |
) |
|
|
(1,488 |
) |
Stock-based
Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,848 |
|
Interest
Expense and Discount Resulting from Beneficial Conversion Feature of
Convertible Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,093 |
|
Preferred
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,000 |
) |
|
|
|
|
|
|
|
|
|
|
(116,000 |
) |
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,245,369 |
) |
|
|
|
|
|
|
|
|
|
|
(1,245,369 |
) |
Balance,
September 30, 2010
|
|
|
145,000 |
|
|
$ |
1,450 |
|
|
|
45,461,945 |
|
|
$ |
454,619 |
|
|
$ |
45,574,252 |
|
|
$ |
41,841,404 |
|
|
$ |
(576,000 |
) |
|
$ |
(5,605 |
) |
|
$ |
3,607,312 |
|
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, 2010 AND
2009
|
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,245,369 |
) |
|
$ |
(3,244,941 |
) |
Adjustments
to Reconcile Net Loss to Net Cash Used In Operations:
|
|
|
|
|
|
|
|
|
Depreciation,
Depletion and Amortization
|
|
|
724,973 |
|
|
|
764,220 |
|
Amortization
of Discount on Convertible Debenture
|
|
|
2,220 |
|
|
|
- |
|
Non-cash
Charge for Issuance of Securities
|
|
|
- |
|
|
|
90,000 |
|
Non-cash
Charge as Interest Expense
|
|
|
22,238 |
|
|
|
23,402 |
|
Stock
Based Compensation Expense
|
|
|
62,848 |
|
|
|
62,399 |
|
Gain
on Sale of Assets
|
|
|
(60,686 |
) |
|
|
- |
|
Loss
on Abandonment of Mineral Property
|
|
|
- |
|
|
|
1,976,972 |
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Restricted
Cash Deposits
|
|
|
3,080 |
|
|
|
(3,216 |
) |
Receivables
|
|
|
(106,038 |
) |
|
|
158,718 |
|
Pre-paid
Mineral Royalties
|
|
|
(29,631 |
) |
|
|
(29,879 |
) |
Accounts
Payable
|
|
|
284,910 |
|
|
|
(336,780 |
) |
Accrued
Interest Expense
|
|
|
129,849 |
|
|
|
115,536 |
|
Other
Accrued Expenses
|
|
|
12,529 |
|
|
|
(37,560 |
) |
Net
Cash Used in Operating Activities
|
|
|
(199,077 |
) |
|
|
(461,129 |
) |
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Sale of Oil and Gas Assets
|
|
|
60,686 |
|
|
|
- |
|
Net
Cash Provided By Investing Activities
|
|
|
60,686 |
|
|
|
- |
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Payments
on Notes and Debt
|
|
|
(38,694 |
) |
|
|
(63,807 |
) |
Proceeds
from Borrowings
|
|
|
200,196 |
|
|
|
150,360 |
|
Net
Cash Provided By Financing Activities
|
|
|
161,502 |
|
|
|
86,553 |
|
Net
Change in Cash and Equivalents
|
|
$ |
23,111 |
|
|
$ |
(374,576 |
) |
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, 2010 AND
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Change in Cash and Equivalents
|
|
$ |
23,111 |
|
|
$ |
(374,576 |
) |
Cash
and Equivalents at Beginning of Year
|
|
|
98,336 |
|
|
|
472,912 |
|
Cash
and Equivalents at End of Year
|
|
$ |
121,447 |
|
|
$ |
98,336 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Income
Taxes Paid
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Paid
|
|
$ |
63,951 |
|
|
$ |
48,899 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-cash Transactions:
|
|
|
|
|
|
|
|
|
Preferred
Dividends Accrued, Not Paid
|
|
$ |
116,000 |
|
|
$ |
115,891 |
|
Issuance
of Common Stock for Patents License Rights
|
|
$ |
40,907 |
|
|
$ |
- |
|
Issuance
of Common Stock for Services Performed
|
|
$ |
- |
|
|
$ |
94,225 |
|
Conversion
of 7.25% Convertible Debentures into Common Stock
|
|
$ |
36,500 |
|
|
$ |
138,500 |
|
Interest
Expense Resulting from Beneficial Conversion Feature of Convertible
Debentures
|
|
$ |
22,238 |
|
|
$ |
23,402 |
|
Discount
on 7.25 Convertible Debentures resulting from Beneficial Conversion
Feature
|
|
$ |
12,857 |
|
|
$ |
- |
|
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, 2010 AND
2009
|
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, 2010, the Company incurred a net loss of $1,245,369.
The ability of the Company to meet its total liabilities of $8,754,049 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 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, 2010, 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.
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 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 patented technology in water,
wastewater and waste treatment in animal feed operations, agriculture, and
aquaculture. In addition, the license applies to the treatment of sanitary
wastewater on Federal facilities, military bases and lands administered by the
US Bureau of Indian Affairs.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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”.
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
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.
Tri-Coastal Energy, 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.
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 proved 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.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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, 2010, totaled $121,447.
Restricted Cash Deposits of $105,961 at September 30, 2010, 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) 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
$45,661 approximates fair value at September 30, 2010.
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.
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, 2010 and 2009 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 9) 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, 2010, we reviewed our
long-lived assets and determined no impairment was
necessary.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
k.
Income Taxes
We
provide for income taxes using the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We evaluate our tax
positions in a two-step process. The first step is to determine whether it is
more likely than not that a tax position will be sustained upon examination. The
second step is a measurement process whereby a tax position that meets the
more-likely-than-not threshold is calculated to determine the amount of benefit
to recognize in the financial statements. See Note 10.
l.
Revenue
Recognition
Oil and
natural gas revenue is recognized when the oil or natural gas is delivered to or
collected by the respective purchaser, a sales agreement exists, collection for
amounts billed is reasonably assured and the sales price is fixed or
determinable. Title to the produced quantities transfers to the purchaser at the
time the purchaser collects or receives the products. In the case of oil sales,
title is transferred to the purchaser when the oil leaves the stock tanks and
enters the purchaser’s trucks. In the case of gas production, title is
transferred when the gas passes through the meter of the purchaser. It is the
measurement of the purchaser that determines the amount of oil or gas purchased
(although there are provisions for challenging these measurements if the Company
believes the measurements are incorrect). Prices for such production are defined
in sales contracts and may be based on certain publicly available indices. The
purchasers of such production have historically made payment for oil and natural
gas purchases within 30-60 days of the end of each production month. The Company
periodically reviews the difference between the dates of production and the
dates the Company collects payment for such production to ensure that
receivables from those purchasers are collectible. The point of sale for the oil
and natural gas production is at its applicable measurement facility; generally,
the Company does not incur transportation costs related to our sales of oil and
natural gas production. The Company does not currently participate in any
gas-balancing arrangements. The Company does not recognize revenue for oil
production held in stock tanks before delivery to the purchaser.
To the
extent actual quantities and values of oil and natural gas are unavailable for a
given reporting period because of timing or information not received from third
parties, the expected sales volumes and price for those properties are estimated
and recorded as Accounts Receivable in the accompanying financial
statements.
m.
New Accounting
Standards
In
December 2010, the FASB issued Accounting Standards Update 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business
Combinations. The amendments in this Update clarify the acquisition date
that should be used for reporting the pro forma financial information
disclosures in Topic 805 when comparative financial statements are presented.
The amendments also improve the usefulness of the pro forma revenue and earnings
disclosures by requiring a description of the nature and amount of material,
nonrecurring pro forma adjustments that are directly attributable to the
business combination(s). The amendments in this Update are effective
prospectively for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption 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 CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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 are 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 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.
3.
OIL AND GAS
PROPERTIES
Oil
and Gas Properties at September 30:
|
|
|
|
2010
|
|
|
2009
|
|
Proved
lease acreage costs
|
|
$ |
2,311,382 |
|
|
$ |
2,311,382 |
|
Proved
undeveloped lease acreage costs
|
|
|
581,810 |
|
|
|
581,810 |
|
Wells
and related equipment and facilities
|
|
|
1,531,320 |
|
|
|
1,531,320 |
|
Support
equipment and facilities
|
|
|
- |
|
|
|
- |
|
Uncompleted
wells, equipment and facilities
|
|
|
- |
|
|
|
- |
|
|
|
|
4,424,512 |
|
|
|
4,424,512 |
|
Accumulated
depletion, depreciation and amortization
|
|
|
(3,937,595 |
) |
|
|
(3,806,195 |
) |
Net
Oil and Gas Properties
|
|
$ |
486,917 |
|
|
$ |
618,317 |
|
During
fiscal 2010 and 2009 the Company did not incur any property acquisition,
exploration or development costs. The Company did not have any capitalized
exploratory well costs at the beginning of fiscal 2009. All of the Company’s oil
and gas activities are on-shore in the United States.
In June
2010, the Company sold its interests in nineteen undeveloped acres (unproved) 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 book value.
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.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
Results
of Operations for Oil and Gas Producing Activities for Fiscal 2010 and
2009:
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$ |
329,724 |
|
|
$ |
378,006 |
|
Well
management revenue
|
|
|
309,855 |
|
|
|
263,545 |
|
Royalty
receipts
|
|
|
6,283 |
|
|
|
7,948 |
|
Total
revenues
|
|
|
645,862 |
|
|
|
649,499 |
|
Lease
operating expenses
|
|
|
(163,612 |
) |
|
|
(189,384 |
) |
Production
and severance taxes
|
|
|
(20,165 |
) |
|
|
(23,111 |
) |
Depreciation
depletion, amortization and valuation provisions
|
|
|
(131,400 |
) |
|
|
(179,400 |
) |
Gain
on sale of unproved properties
|
|
|
60,686 |
|
|
|
- |
|
|
|
|
391,371 |
|
|
|
257,604 |
|
Income
tax expenses
|
|
|
- |
|
|
|
- |
|
Results
of operations from oil and gas producing activities (excluding corporate
overhead and interest costs
|
|
$ |
391,371 |
|
|
$ |
257,604 |
|
4.
MINERAL PROPERTIES AND
RESULTS OF OPERATIONS
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 fiscal 2005, the Company entered
into the Sierra Kaolin Operating Agreement with TPA covering the Company’s
kaolin claims in Sierra County, New Mexico. In fiscal 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. During Fiscal 2010, 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.
b.
|
Minerals
Properties and Equipment
|
At
September 30:
|
|
2010
|
|
|
2009
|
|
Undeveloped
lease costs
|
|
$ |
9,877,128 |
|
|
$ |
9,877,128 |
|
Mine
development costs
|
|
|
- |
|
|
|
- |
|
|
|
|
9,877,128 |
|
|
|
9,877,128 |
|
Accumulated
depreciation, depletion and amortization
|
|
|
(95,000 |
) |
|
|
(95,000 |
) |
Net
Mineral Properties
|
|
$ |
9,782,128 |
|
|
$ |
9,782,128 |
|
The
Company previously amortized its mineral properties at a nominal amortization
rate as the Company has not produced commercial quantities of any of its mineral
deposits. Once the Company produces commercial quantities of any of its mineral
deposits, the Company will use the unit-of-production method in calculating cost
depletion.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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 fiscal 2009. The expenses
applicable to the calcium carbonate minerals included in operating expenses and
other costs totaled $32,600 in fiscal 2009.
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™.” 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.
d.
Results of Operations for
Minerals Properties Activities for Fiscal 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
Mineral
Sales
|
|
$ |
13,203 |
|
|
$ |
6,549 |
|
Operating
and other expenses
|
|
|
(22,497 |
) |
|
|
(123,411 |
) |
Depreciation
depletion, amortization and valuation provisions
|
|
|
(587,206 |
) |
|
|
(578,252 |
) |
Loss
on abandonment of mineral property
|
|
|
- |
|
|
|
- |
|
|
|
|
(596,500 |
) |
|
|
(695,114 |
) |
Income
tax expenses
|
|
|
- |
|
|
|
- |
|
Results
of operations from mineral properties activities (excluding corporate
overhead and interest costs
|
|
$ |
(596,500 |
) |
|
$ |
(695,114 |
) |
5.
PATENT AND
TECHNOLOGY
a. Patent
Rights - CA Series Patent
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.
b.
Patents License Rights – Wastewater
Treatment Method Patents
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.
c.
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, 2010 and 2009, the 3,167 shares (reflective of a reverse stock
split) of CDMA common stock held by the Company were carried at $95 and $1,583,
respectively.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
6.
NOTES
PAYABLE
a.
CAMI Notes
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, 2010, the total amount
payable on these notes is $928,140 representing principal of $514,881 and
accrued but unpaid interest of $413,259.
b.
EV&T
Note
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 $273,102 through that date. Additionally, the
Company owes EV&T $169,583 for current services performed and such amount is
included in trade accounts payable at September 30, 2010.
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 3.75%
at September 30, 2010. 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 $45,661. The loan is secured by certain personal
assets of Dov Amir, a Director of the Company (“Amir Assets”).
d.
Premium Finance
Agreement
In November 2009, the Company entered
into a premium finance security agreement with a bank to finance $23,696 of
insurance premiums. At September 30, 2010, the Company has paid all amounts due
under the 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.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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, 2010 and 2009.
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, 2010, the outstanding principal and accrued but unpaid interest on
the obligations listed under numbers 1 through 4 to Mr. Amir amounted to
$173,415, which includes $45,485 in principal and $127,930 in accrued interest.
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.
Mr. Amir
was also entitled to a cash payment of $25,000 under his Key Man Contract (see
Note 11) 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, 2010 and 2009.
As of
September 30, 2010, 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, 2010 and 2009, the Company was indebted to Mr. Amir in the
aggregate amount of $503,589 and $536,861, 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”). 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 Citizens 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, 2010 AND
2009
|
In
connection with the acquisition of CAMI, CAMI owes Robert E. Martin, a director
of the Company, 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, 2010, the Martin Debt amounts to $134,811 in
principal and accrued but unpaid interest totals $108,203. 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, 2010 and 2009, the Company owed Mr. Martin $245,835 in salary and
$19,051 in unpaid reimbursable business expenses. As of September 30, 2010 and
2009, the Company was indebted to Mr. Martin in the aggregate amount of $507,900
and $497,115, respectively.
Under the
terms of Mr. Novinskie’s employment agreement (see Note 11), 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, 2010, the Company owed Mr. Novinskie $312,292 in salary and
$25,000 in bonuses. As of September 30, 2009, the Company owed Mr. Novinskie
$287,292 in salary and $25,000 in bonuses (as discussed previously). As of
September 30, 2010, the Company owed Mr. Novinskie $6,594 in unpaid reimbursable
business expenses.
As of
September 30, 2010 and 2009, the Company was indebted to Mr. Novinskie in the
aggregate amount of $343,886 and $312,292, respectively. These amounts contain
no accrued interest.
In
connection with the acquisition of CAMI, CAMI owes $83,478 to Carl A. Haessler,
a director of the Company and $58,938 to the estate of Eric R. Haessler, Carl A.
Haessler, executor (“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 $142,416 in principal and
accrued but unpaid interest totals $114,307. The Haessler Debt is evidenced by
notes 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 CAMI (see Note 6). As of September 30, 2010 and 2009, the Haessler
Debt and accrued but unpaid interest totals $256,723 and $245,330,
respectively.
Also, the
Company owes Series B Preferred Stock dividends (see Note 9) to Carl A. Haessler
of $240,723 and $216,723 at September 30, 2010 and 2009,
respectively.
e.
|
Blackstone
Obligations
|
At
September 30, 2010, the Company owed Mr. Blackstone (see Note 11), an officer of
the Company, $110,875 for salary and services provided to the Company. As of
September 30, 2009, the Company owed Mr. Blackstone $43,675 for salary and
services provided to the Company. These amounts contain no accrued
interest.
During
fiscal 2010, the Company borrowed $60,000 from Charles T. Maxwell, a Director of
the Company. The note bears interest at prime plus 2 percent and is due on
demand on or before January 31, 2012. The Company used the funds to satisfy
certain delinquent payables. As of September 30, 2010, accrued but unpaid
interest on the note totals $1,942. See Note 8 regarding the 7.25% Convertible
Debenture held by this Director.
During
fiscal 2010, the Company borrowed $50,000 from Zia Trust, Inc., an entity
affiliated with David A. Grady, a Director of the Company. The note bears
interest at 15% per annum and is due on demand on or before July 15, 2012. The
Company pledged a certificate of deposit at a bank (“CD”) as collateral for the
note. The CD has a balance of $54,590 which is included in cash and equivalents
at September 30, 2010. The Company used the funds to satisfy certain delinquent
payables. As of September 30, 2010, accrued but unpaid interest on the note
totals $1,563.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
8.
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
December 31, 2010, at the request of potential investors. 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 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. 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.
During
fiscal 2010, the Company issued Debentures totaling $66,500 of which two
Directors purchased Debentures totaling $45,000. Purchasers, including a
Director, of $36,500 of the Debentures elected to immediately convert such
holdings into Common Stock and the Company issued 221,134 shares of Common Stock
at an average conversion price of $0.17 per share. The Company recognized
$22,238 as interest expense resulting from the beneficial conversion feature of
the Debentures during fiscal 2010. 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 September 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 fiscal 2010, the
Company recognized $1,689 of contractual coupon interest and $2,220 of
amortization of the discount and such amounts are included in interest expense.
The effective interest rate for fiscal 2010 was 25%. The if-converted value of
the Debentures at June 30, 2010 exceeds the principal amount of the Debentures
by approximately $2,100.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
9.
CAPITAL
STOCK
a.
Shares
Outstanding
|
|
Number of
Common
Shares (1)
|
|
|
Number of
Series B
Preferred
Shares (1)
|
|
Outstanding
at September 30, 2008
|
|
|
43,081,346 |
|
|
|
145,000 |
|
Conversion
of 7.25% Convertible Debentures into Common Stock (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 |
|
Conversion
of 7.25% Convertible Debentures into Common Stock (2)
|
|
|
221,134 |
|
|
|
- |
|
Issuance
of Stock For Patent License Rights (4)
|
|
|
140,000 |
|
|
|
- |
|
Outstanding
at September 30, 20010
|
|
|
45,461,945 |
|
|
|
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. At
September 30, 2010, dividends payable on Series A and Series B Preferred
shares totaled $59,338 and $1,798,557, respectively. At September 30,
2009, dividends payable on Series A and Series B Preferred shares totaled
$59,338 and $1,682,557,
respectively.
|
|
(2)
|
See
Note 8 of the Notes to Consolidated Financial
Statements.
|
|
(3)
|
In
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.
|
|
(4)
|
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.
|
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, 2008
|
|
|
4,260,641 |
|
|
$ |
0.57 |
|
Employee
and Director Stock Options:
|
|
|
|
|
|
|
|
|
Forfeited
or Expired (2)
(3) (4) (5) (7)
|
|
|
(2,087,500 |
) |
|
$ |
0.59 |
|
Stockholder
Warrants:
|
|
|
|
|
|
|
|
|
Expired
(6)
(8)
|
|
|
(563,336 |
) |
|
$ |
0.69 |
|
Outstanding
at September 30, 2009
|
|
|
1,609,805 |
|
|
$ |
0.51 |
|
Employee
and Director Stock Options:
|
|
|
|
|
|
|
|
|
Granted
(1)
|
|
|
1,200,000 |
|
|
$ |
0.21 |
|
Expired
(4)
|
|
|
(187,500 |
) |
|
$ |
0.47 |
|
Outstanding
at September 30, 2010
|
|
|
2,622,305 |
|
|
$ |
0.38 |
|
|
(1)
|
In
December 2009, the Board of Directors granted (a) an option to purchase
200,000 shares of stock to a Director under the Company’s Non-qualified
Independent Director Stock Option Plan, (b) an option to purchase 500,000
shares of Common Stock to a Director and (c) an option to purchase 500,000
shares of Common Stock to the President/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.
|
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
|
(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 37,500 (exercise price
of $0.75 per share) and 187,500 (average exercise price of $0.47 per
share) shares of stock expired during fiscal 2009 and 2010,
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)
|
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.
|
|
(7)
|
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.
|
|
(8)
|
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.
|
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. In fiscal 2010, Lord John Gilbert was awarded
an option to purchase 200,000 shares at an exercise price of $0.21 per share. As
of September 30, 2010, three options to purchase a total of 600,000 shares have
been awarded to Directors and remain unexercised at that date.
Options
to purchase 1,200,000 shares of Common Stock were granted during fiscal 2010. No
options were granted during fiscal 2009. Options to purchase 187,500 and
2,087,500 shares of common stock expired during fiscal 2010 and 2009,
respectively. The options for the purchase of 1,800,000 shares outstanding as of
September 30, 2010, 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.
In
accordance with ASC 718, the Company recorded stock-based compensation expense
for fiscal 2010 and 2009 of $62,848 and $62,399, 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 2.43% and 4.16%;
expected life of three to seven years; and expected volatility between 37% and
106%.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
At
September 30, 2009, there were 787,500 shares underlying options unexercised
(weighted-average exercise price of $0.48 per share) of which 50,000 shares
underlying options were not vested (weighted-average exercise price of $0.28 per
share; weighted-average grant-date fair value of $0.28 per share). The following
table summarizes information about stock options outstanding as of September 30,
2010:
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 |
|
|
|
3.17 |
|
|
|
600,000 |
|
|
$ |
0.48 |
|
Options to purchase 1,200,000 were
granted during fiscal 2010 (weighted-average exercise price of $0.21 per share;
weighted-average grant-date fair value of $0.26 per share per share) and no
options were granted during fiscal 2009. No options were exercised during fiscal
2010 and 2009. At September 30, 2010, there were 1,200,000 shares underlying
options that were not vested and the weighted-average grant-date fair value of
such options was $0.26 per share.
At
September 30, 2010, there was $84,075 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, 2010 and 2009 was $62,848
and $62,399, respectively.
d.
Warrants
1.
Financing
Sources
On
December 21, 2007, Sonata Investment Company, Ltd. 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. The warrants expired on
December 31. 2010. See Note 13(b).
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.
3.
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.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
At
September 30, 2010 and 2009, options and warrants to purchase 2,622,305 and
1,609,805 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 Preferred
Stock Dividends
During
fiscal years 2010 and 2009, there were no cash dividend payments in respect to
either series of Preferred Stock.
g.
Subscriptions
Receivable
At
September 30, 2010 and 2009, the notes receivable from Messrs. Benediktson and
Trynin as discussed in Note 11 are classified as Subscriptions
Receivable.
10.
INCOME TAXES
At September 30, 2010, the Company has
current federal and state taxes payable of $192,427 and no deferred tax asset or
liability. The Company has accrued $101,768 and $85,563 at September 30, 2010
and 2009, respectively, for interest related to the federal and state income
taxes. The income tax liabilities arose primarily from alternative minimum tax
for fiscal 2004. Interest expense related to tax liabilities of $16,205 and
$13,195 for fiscal 2010 and 2009, respectively, is included in Interest Expense
in the accompanying Consolidated Statement of Operations.
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, 2010, operating loss carryforwards of approximately $25 million,
which may be applied against future taxable income and will expire in various
years through 2025. 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.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
The
income tax effects of timing differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at September 30, 2010 and
2009 are as follows:
|
|
2010
|
|
|
2009
|
|
Net
operating loss carryforwards
|
|
$ |
8,486,728 |
|
|
$ |
8,626,496 |
|
Basis
differences in patent rights
|
|
|
(276,975 |
) |
|
|
(472,630 |
) |
Basis
differences in property and equipment
|
|
|
(2,772,635 |
) |
|
|
(2,772,635 |
) |
State
income taxes
|
|
|
36,170 |
|
|
|
36,170 |
|
Bonus
expense
|
|
|
467,103 |
|
|
|
467,103 |
|
Salary
expense
|
|
|
325,147 |
|
|
|
321,110 |
|
|
|
|
6,265,538 |
|
|
|
6,205,614 |
|
Less
valuation allowance
|
|
|
(6,265,538 |
) |
|
|
(6,205,614 |
) |
Net
Oil and Gas Properties
|
|
$ |
- |
|
|
$ |
- |
|
Below is
a reconciliation of the reported amount of income tax expense attributable to
continuing operations for the year to the amount of income tax expense that
would result from applying domestic federal statutory tax rates to pretax loss
for fiscal 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
Income
tax benefit computed at the statutory Federal income tax
rate
|
|
|
(35 |
)% |
|
|
(35 |
)% |
Change
in valuation allowance
|
|
|
35 |
% |
|
|
35 |
% |
Effective
income tax rate
|
|
|
0 |
% |
|
|
0 |
% |
Included
in the table below are the components of income tax expense for fiscal 2010 and
2009:
|
|
2010
|
|
|
2009
|
|
Current
income tax expense (benefit)
|
|
$ |
- |
|
|
$ |
- |
|
Deferred
income tax expense (benefit)
|
|
|
(435,879 |
) |
|
|
(1,135,729 |
) |
Valuation
allowance
|
|
|
435,879 |
|
|
|
1,135,729 |
|
Total
income tax expense (benefit)
|
|
$ |
- |
|
|
$ |
- |
|
11. 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.
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 9.g.). The notes earn interest
at the prime rate of interest charged from time to time by the PNC Bank,
Philadelphia, Pennsylvania. The notes, as amended in fiscal 2010, mature in
August 2015. 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 $169,533 and $150,814 at September 30, 2010
and 2009, respectively.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
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. Such option expired
unexercised.
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,
2010, minimum commitments from long-term non-cancelable operating leases are as
follows:
Fiscal Year
|
|
Amount
|
|
2010
|
|
$ |
67,034 |
|
2011
|
|
|
16,714 |
|
Total
|
|
$ |
83,748 |
|
During
September 2010, a complaint was filed against WRC in the District Court of
Burleson County, Texas, seeking judgment in respect to $92,921 owed to a vendor
of WRC. Such amount is included in Accounts Payable in the accompanying
Consolidated Balance Sheet at September 30, 2010 and 2009. See Note
13(a).
During
October 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 sought
additional discovery and the Company has provided additional information. The
action is still ongoing.
13. SUBSEQUENT
EVENTS
a.
WRC
Litigation
See Note
12(b). In November 2010, the vendor agreed to dismiss its complaint against WRC
after a settlement agreement was reached whereby WRC made an initial payment of
$30,000 in cash and delivery of 357,677 shares of Common Stock (consideration of
$42,921). The Company must retire the remaining obligation ($20,000) by March 1,
2011.
DALECO RESOURCES CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
b.
Note Payable
On
January 12, 2011, Sonata Investment Company, Ltd. loaned the Company $60,000.
The maturity date of such loan is January 12, 2012. Principal of $2,500 and
interest, at prime plus 2%, is due monthly. The Company used the proceeds to
satisfy certain delinquent payables. In connection with this loan, the Company
issued warrants for the purchase of 500,000 shares of Common Stock at a purchase
price of $0.12 per share. The warrants expire on December 31, 2015.
Management
performed an evaluation of Company activity through January 12, 2011, 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 Shareholders
of Daleco
Resources Corporation
Our
report to the Board of Directors and Stockholders of Daleco Resources
Corporation and Subsidiaries dated January 12, 2011, 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
Supplemental Information (Unaudited) is 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
12, 2011
Los
Angeles, California
SUPPLEMENTAL
INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Estimated
Net Quantities of Proved 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
Company believes that the proved undeveloped reserves will be developed within
the next few years as a result of renewed interest in the area of its
properties. The increase in oil price and development of properties
in resource plays in the immediate area are major factors contributing to such
renewed interest.
The
following table shows the changes in the Company's proved oil and gas reserves
for the year:
|
|
2010
|
|
|
2009
|
|
|
|
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
|
|
|
76,679 |
|
|
|
399 |
|
|
|
92,584 |
|
|
|
506 |
|
Acquisition
of Reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disposition
of Reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Revision
of Previous Estimates
|
|
|
9,594 |
|
|
|
156 |
|
|
|
(13,025 |
) |
|
|
(67 |
) |
Production
for Year
|
|
|
(1,791 |
) |
|
|
(33 |
) |
|
|
(2,880 |
) |
|
|
(40 |
) |
Balance
- End of Year
|
|
|
84,482 |
|
|
|
522 |
|
|
|
76,679 |
|
|
|
399 |
|
Proved
Developed Reserves as at September 30
|
|
|
19,396 |
|
|
|
333 |
|
|
|
12,441 |
|
|
|
212 |
|
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 proved 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 average price received for fiscal
2010 for the amounts at September 30, 2010 and the year-end prices for amounts
at September 30, 2009. The change in method of
calculating the estimated product prices in 2010 from 2009 is due to the Company
adopting the reserve estimation and disclosure requirements of ASC Topic 932,
Extractive Industries – Oil and Gas, prospectively, on September 30, 2010.
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, 2010 and
2009:
|
|
2010
|
|
|
2009
|
|
Future
cash inflows
|
|
$ |
9,286,864 |
|
|
$ |
7,064,998 |
|
Future
production costs
|
|
|
(2,343,605 |
) |
|
|
(1,957,191 |
) |
Future
development costs
|
|
|
(2,456,620 |
) |
|
|
(2,328,643 |
) |
Future
income tax expense*
|
|
|
- |
|
|
|
- |
|
Subtotal
|
|
|
4,486,639 |
|
|
|
2,779,164 |
|
Discount
factor at 10%
|
|
|
(1,620,175 |
) |
|
|
(927,528 |
) |
Standardized
Measure of Future Net Cash Flows
|
|
$ |
2,866,464 |
|
|
$ |
1,851,636 |
|
|
*
|
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 corporate 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
|
|
2010
|
|
|
2009
|
|
Balance
- Beginning of Year
|
|
$ |
1,851,636 |
|
|
$ |
5,444,845 |
|
Increase
(decrease) in future net cash flows:
|
|
|
|
|
|
|
|
|
Sales
for the year net of related production costs
|
|
|
(145,947 |
) |
|
|
(165,511 |
) |
Acquisition
of reserves in place
|
|
|
- |
|
|
|
- |
|
Changes
in estimated future development costs
|
|
|
(18,034 |
) |
|
|
59,029 |
|
Changes
in sales and transfer prices net of production costs related to future
production
|
|
|
299,689 |
|
|
|
(2,846,282 |
) |
Change
due to revision in quantity estimates and other
|
|
|
693,956 |
|
|
|
(1,184,930 |
) |
Disposition
of reserves in place
|
|
|
- |
|
|
|
- |
|
Extensions
and discoveries net of related costs
|
|
|
- |
|
|
|
- |
|
Accretion
of discount
|
|
|
185,164 |
|
|
|
544,485 |
|
Balance
- End of Year
|
|
$ |
2,866,464 |
|
|
$ |
1,851,636 |
|
Item 9. Changes In and
Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. 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, 2010. 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, 2010. 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, 2010, 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, 2010 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 2010, the FASB issued Accounting Standards Update 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business
Combinations. The amendments in this Update clarify the acquisition date
that should be used for reporting the pro forma financial information
disclosures in Topic 805 when comparative financial statements are presented.
The amendments also improve the usefulness of the pro forma revenue and earnings
disclosures by requiring a description of the nature and amount of material,
nonrecurring pro forma adjustments that are directly attributable to the
business combination(s). The amendments in this Update are effective
prospectively for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption is permitted. The Company is currently
assessing the impact that the adoption will have on its financial
statements.
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 are 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 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.
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
2011 Proxy Statement.
Item 11. Executive
Compensation.
The
information is incorporated by reference to the information contained in our
2011 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
2011 Proxy Statement.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence.
The
information is incorporated by reference to the information contained in our
2011 Proxy Statement.
Item 14. Principal
Accounting Fees and Services.
The
information is incorporated by reference to the information contained in our
2011 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
|
SUPPLEMENTAL
INFORMATION.
The
following supplemental information is included herein in Item 8 of Part
II:
*
|
Estimated
Net Quantities of Proved 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
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
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
|
|
|
|
|
|
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
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
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 May 15, 2008, 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 May 15, 2008, 2008
|
|
|
|
|
|
3.6
|
|
Compensation
Committee Charter Adopted April 10, 2008
|
|
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 May 15, 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
|
|
|
|
|
|
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
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
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.
|
|
|
|
|
|
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
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
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
|
|
|
|
|
|
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 December 30, 2010
|
|
Attached
to the Company's Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
|
|
|
|
|
23.3
|
|
Consent
of Krumrey Industrial Minerals, LLC dated December 29,
2010
|
|
Attached
to the Company's Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
|
|
|
|
|
31.1
|
|
Certification
of Gary J. Novinskie, Interim Chief Executive Officer and President dated
January 13, 2011
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
|
|
|
|
|
31.2
|
|
Certification
of Gary J. Novinskie, Chief Financial Officer dated January 13,
2011
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
Exhibit
No.
|
|
Description
|
|
Location
|
|
|
|
|
|
32.1
|
|
Certification
of Gary J. Novinskie, Interim Chief Executive Officer and President dated
January 13, 2011
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
|
|
|
|
|
32.2
|
|
Certification
of Gary J. Novinskie, Chief Financial Officer dated January 13,
2011
|
|
Attached
to the Company’s Annual Report on Form 10-K for the fiscal year ending
September 30, 2010
|
|
|
|
|
|
99.1
|
|
Location
Maps for Registrant’s Zeolite lease in Marfa County, Texas, Kaolin Claims
in Sierra County, New Mexico, and Zeolite Claims in 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, 2011
|
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, 2011
|
By:
|
/s/ Gary J. Novinskie
|
|
|
Gary
J. Novinskie, Interim Chief Executive Officer,
President,
|
|
|
Chief
Financial Officer (Principal Financial Officer) and
|
|
|
Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ Richard W.
Blackstone
|
|
|
Richard
W. Blackstone, Controller (Chief
|
|
|
Accounting
Officer)
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ Dov Amir
|
|
|
Dov
Amir, Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ John Gilbert
|
|
|
John
Gilbert, Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ David A. Grady
|
|
|
David
A. Grady, Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ Carl A. Haessler
|
|
|
Carl
A. Haessler, Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ Robert E. Martin
|
|
|
Robert
E. Martin, Director
|
|
|
|
Dated:
January 13, 2011
|
By:
|
/s/ Charles T. Maxwell
|
|
|
Charles
T. Maxwell, Director
|