Item 1. Business.
General
Daleco Resources Corporation (the “Company”) is a natural resources holding company whose subsidiaries are engaged in: (i) the exploration, development and production of oil and gas; (ii) the exploration for naturally occurring minerals; (iii) the marketing and sales of such minerals; and, (iv) the marketing and sales of patented products utilizing the Company’s minerals. The Company’s wholly owned subsidiaries include Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Deerlick Royalty Partners L.P., Tri-Coastal Energy, Inc., Clean Age Minerals, Inc., CA Properties, Inc., Sustainable Forest Industries, Inc. and The Natural Resources Exchange, Inc.
The Natural Resources Exchange, Inc. and Sustainable Forest Industries, Inc. are dormant companies that have conducted no business in the past five fiscal years.
The Company's assets consist of two separate categories: oil and gas and non-metallic minerals. The Company owns a United States Patent related to its minerals.
The Company is a Nevada corporation and its Articles provide for authorized capital stock of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock.
The Company, through its wholly owned subsidiaries, Westland Resources Corporation, DRI Operating Company and Deven Resources, Inc., owns and operates oil and gas properties in the States of Texas and West Virginia. The Company owns overriding royalty interests in (i) two wells and undeveloped acreage in the Commonwealth of Pennsylvania and (ii) one well in Texas.
The Company does not refine any crude oil or market, at retail, any oil or petroleum products. The Company does not own any drilling rigs. All of its drilling activities are performed by independent drilling contractors on a contract basis.
Deven Resources, Inc. (“DRI”) is the managing general partner of Deerlick Royalty Partners L.P., a Delaware limited partnership, which owns overriding royalty interests in the Deerlick Coalbed Methane Field, Tuscaloosa, Alabama. DRI is also the sole shareholder of DRI Operating Company which operates wells and has oil and gas interests in the State of West Virginia and in the Commonwealth of Pennsylvania.
As of September 30, 2009, the Company owned working interests in 28 wells in the States of Texas and West Virginia. The Company also owned overriding royalty interests in seventy wells in the Deerlick Coalbed Methane Field, Tuscaloosa, Alabama, through Deerlick Royalty Partners L.P. Throughout the twelve month period beginning October 1, 2008 and ending September 30, 2009, the Company has experienced an average decrease of 48% in the unit of production weighted average sales price it received for its oil and gas products as compared to the twelve month period beginning October 1, 2007 and ending September 30, 2008..
Clean Age Minerals, Inc., through its subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests, leasehold interests and federal mining claims containing non-metallic minerals in the States of Texas, New Mexico and Utah. CAMI is presently engaged in the exploration for such minerals. CAMI intends to mine the minerals through the use of contract miners and arrangements with its joint venture partners. CAMI also owns the CA Series Patented Process which utilizes many of the minerals owned by or under lease to CAMI for the cleansing, decontamination and remediation of air, water and soils.
OIL AND GAS
Definitions of Terms:
As used herein, the term:
"Gross", as it applies to acreage or wells refers to the number of acres or wells in which the Company has a direct working interest.
"Horizontal Well" means a well drilled vertically from its surface to its objective depth and from that point drilled with special tools at an angle approximating 90 degrees from the bottom of the vertical hole, or drilled from such point at an angle which approximates that at which the beds of the objective formation lie, as opposed to a traditional vertical well, which is drilled vertically from the surface to its objective.
"Net", as it applies to acreage or wells, refers to the sum of the fractional working interests owned by the Company in gross acres or gross wells.
"MMBTU", "Bbls", "Mcf" and "MMcf" mean million British thermal units, barrels, a thousand cubic feet, and a million cubic feet, respectively.
"Net Revenue Interest" means the share of gross income from such lease or well received by the owner.
"Proved Developed Reserves" are proved reserves which are expected to be recovered through existing wells with existing equipment and operating methods.
"Proved Reserves" are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recovered in future years from known oil and gas reservoirs under existing economic and operating conditions.
"Proved Undeveloped Reserves" are proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where relatively major expenditures are required for drilling and completion.
“Working Interest" means the share of costs borne by an owner in the lease or well.
Crude oil and condensate volumes are expressed in barrels that are equivalent to 42 United States gallons. Gas volumes are expressed in Mcf or MMcf as determined at 60 degrees Fahrenheit and the legal pressure base that prevails in the state in which the reserves are located.
Property Acquisition and Disposition
During fiscal 2009, the Company did not acquire or dispose of any oil and gas properties or drilling prospects. Within the oil and gas sector, the Company faces competition from entities possessing substantially larger financial resources and staffs. The demand for domestically produced oil and gas remains high and should remain at these levels in the foreseeable future especially in light of worldwide demand, the turmoil in the Middle East, decreased production form Central America and political instability in South America. Domestic and increasing world demands, especially in the Pacific Basin, for crude oil and natural gas will continue to increase. The domestic oil industry is subject to the fluctuations inherent in the global energy industry. Pricing for domestic natural gas is not as volatile as is the pricing for crude oil. Natural gas and crude oil prices have fluctuated on the spot market and each is a commodity traded on the mercantile exchange. However, most of the Company’s products (natural gas and crude) are sold under contracts that provide the Company with competitive pricing within its operating areas.
During fiscal 2010, the Company intends to continue to focus on: (i) identifying niche acquisition and developmental opportunities within the oil and gas sector that can be economically exploited, and (ii) identifying third parties who will either individually or in conjunction with the Company develop the Company’s undeveloped leasehold interests or form other joint ventures.
Marketing and Production Oil and Gas, Delivery Commitment
The Company does not refine or engage in retail sales of any petroleum products. All of its production is sold, at the wellhead, to a variety of customers, which include pipelines, oil and gas gathering firms and other purchasers, pursuant to written agreements. Generally, sales of oil and gas are made at prevailing market prices or tied to a benchmark price under long-term contracts. Typically, oil purchase agreements are of short duration, and provide for market sensitive pricing, while gas contracts are of a longer duration and less sensitive to rapid market fluctuations. The Company is a party to two long-term gas sales contracts, which may be terminated on short notice if a price adjustment is unacceptable to the Company. The Company is not obligated to provide a fixed and determinable quantity of oil and/or gas under existing contracts or agreements.
The availability of a market for oil and gas produced from the properties of the Company and prices received are dependent upon numerous factors, substantially all of which are beyond the control of the Company. Such factors include the level of domestic production, the availability of imported oil and gas, actions taken by foreign producing nations, the availability of distribution and transportation facilities and capacity thereon, the availability and price of fuels competitive with oil and gas, world and domestic demand for oil and gas and refined products, governmental regulation and taxation. Such factors make it impracticable to predict with any degree of certainty future demand for or prices of the oil or gas produced by the Company.
Production of oil and gas is generally not considered to be of a seasonal nature, although severe weather conditions can temporarily curtail or preclude producing activities. Demand for natural gas is fairly constant over the entire year as a result of the increased demand for natural gas to fuel electric power generation and other commercial uses. Since November 2007, gas production from certain wells operated by the Company in West Virginia has been curtailed occasionally by the transporting pipeline. The Company has never experienced any other difficulties in selling any of its oil or gas.
Customers
The following table identifies the Company’s customers who purchased in excess of five percent (5%) of the Company’s oil or gas during the fiscal year ended September 30, 2009:
(1)
The Company’s production of gas from its operated wells in the Giddings Field, Texas, is sold to ETC Texas Pipeline, Ltd. pursuant to a long-term contract expiring January 31, 2010, which covers a number of the Company’s Texas leases. Subject to various conditions, ETC has agreed to buy all of the Company’s gas produced from the Giddings Field. The Company receives eighty percent (80%) of the weighted average monthly sales price for liquid products extracted from gas delivered and eighty percent (80%) of the resale prices for dry gas. Prices received by the Company are subject to deductions for taxes, compression and similar charges.
The Company does not believe that the loss of any one of these customers would have a material adverse effect upon the Company’s revenues since there are numerous purchasers of oil and gas in the areas in which the Company operates.
Production
The following table summarizes the Company’s net oil and gas production for the periods indicated, shown in barrels (“Bbls”) and, thousand cubic feet (“Mcf”):
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the State of West Virginia and the Commonwealth of Pennsylvania.
The following table summarizes for the periods indicated the average price per barrel (“Bbl”) of oil, the average price per thousand cubic feet (“Mcf”) of natural gas and average sales price and production (lifting) costs per gas equivalent. In determining the prices received by the Company, the revenues are attributed to the Company’s net revenue interests. Production costs incurred by the Company include production and severance taxes and expenses of operation attributable to the Company’s working interests. For the purpose of determining Mcf equivalents (“MCFE”), one Bbl of oil has been converted to gas equivalents at the rate of one Bbl per six Mcf.
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the State of West Virginia and the Commonwealth of Pennsylvania.
Wells and Acreage
The following tables set forth certain information as of September 30, 2009 and 2008:
Drilling Activity
The Company did not participate in the drilling of any exploratory or development wells in fiscal 2009 or 2008. Such information should not be considered indicative of future performance of prospects of the Company. There is no necessary correlation between the number of producing wells, whether developmental or exploratory, completed during any period and the aggregate reserves or future net income generated.
Proved Reserves
The Company causes to be prepared an annual estimate of its oil and gas reserves. The Company has not filed reserves estimates with any United States authority or agency, other than estimates previously filed with the Securities and Exchange Commission. The following tables set forth the net proved developed and undeveloped reserves of the Company as of September 30, 2009 and 2008. All of the reserves are located on-shore within the United States.
Reserve estimates for the Company’s properties as of September 30, 2009 and 2008 were taken from reserve reports dated December 31, 2009 and January 3, 2009, respectively, prepared by Hall Energy, Inc. of Magnetic Springs, Ohio, with the figures utilizing constant product prices in accordance with reporting requirements. Hall Energy, Inc. is an independent petroleum engineering concern with an emphasis in the Appalachian and Ohio Basins.
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the state of West Virginia and the Commonwealth of Pennsylvania.
Estimated Future Net Revenues and Present Worth
Estimated future net revenues of the Company’s net oil and gas reserves at the date indicated and the present worth thereof employing a ten percent (10%) discount factor is set forth in the following tabulation:
The present value of estimated future net revenues set forth above is computed using the estimated future net revenues and a discount factor of ten percent (10%) over the projected life of each property.
Petroleum engineering is not an exact science. Information relating to the Company’s oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of the future net revenues therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties compared with production from other producing properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices and future operating costs, severance and excise taxes, development costs, work-over and remedial costs, all of which may in fact vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable reserves of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary. The Company emphasizes that the actual production, revenues, severance and excise taxes, development expenditures and operating expenditures with respect to its reserves will likely vary from such estimates, and such variances may be material. Persons should not assume that the estimates of the Company's future reserves are a guaranteed figure.
The present values shown above should not be construed as the current market value of the estimated oil and gas reserves attributable to the Company’s properties. In accordance with applicable requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from proved reserves are based, generally, on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on operating costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of the incurrence of expenses in connection with development of oil and gas properties. In addition, the ten percent (10%) discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Discounted future net revenues, no matter what discount rate is used, are materially affected by assumptions as to the timing of future production and future expenses which may and often do prove to be inaccurate.
Reserves Reported To Other Agencies
There were no estimates or reserve reports of the Company’s proved domestic net oil or gas reserves filed with any governmental authority or agency other than the Securities and Exchange Commission during the fiscal years ended September 30, 2009 and 2008.
MINERAL INTERESTS
Definitions:
“Cu Yd” and “Cu M” mean units of volume in terms of Cubic Yards and Cubic Meters, respectively.
“Competent Person” is a person who is a member of a professional society for earth scientists or mineral engineers, or has other appropriate qualifications.
“Development Stage” means a party engaged in the preparation of an established commercially mineable deposit (reserves) for its extraction which is not in the production stage.
“Exploration Stage” means a party engaged in the search for mineral deposits (reserves) which is not in either the Development or Production Stage.
“Gross” means, as it applies to acreage or mining claims, the numbers of acres or mining claims in which the Company has a direct operating interest.
“Mineralized Material” is that part of a mineral deposit for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable or high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are spaced closely enough (i) to confirm geological continuity and/or grade continuity or (ii) for continuity to be assumed.
“Mining Claims” are regulatory and/or legal descriptions of mineral property rights as defined by State and Federal Mineral Codes.
"Net", as it applies to acreage mining claims, refers to the sum of the fractional ownership interests owned by the Company in gross acres mining claims.
“Production Stage” means a party engaged in the exploitation of a mineral deposit (reserve).
"Probable (Indicated) Reserves" are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) minerals, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) recoverable minerals, is high enough to assume continuity between points of observation.
"Proven (Measured) Reserves" are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
“Reserve" is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
"Ton" means a unit of weight equal to 2,000 pounds (lbs.) or 906 kilograms.
General
The mining and marketing of non-metallic industrial minerals is highly competitive; however, the Company believes that the locations and quality of its mineral deposits will benefit its future development and sales efforts. By definition, the Company is an “Exploration Stage” entity in respect to its mineral holdings. In 2005, the Company contracted Denali Enterprises to review available technical data associated with the quantification of the mineral deposits in connection with the Company’s exploration efforts. Such review reaffirmed the existence of sufficient mineral deposits to continue with such efforts. The Company’s ability to develop these mineral deposits is dependent on its success in bringing in strategic partners with experience in or a demand for specific minerals and raising capital through third parties. In fiscal year 2005, the Company entered into two agreements with Tecumseh Professional Associates (“TPA”) for the exploration, exploitation, development and marketing of its Sierra Kaolin and calcium carbonate. By letter dated May 4, 2006, TPA advised the Company of its intent not to continue as the operator of the Company’s Calcium Carbonate lease as of August 4, 2006. As such, the Development and Operating Agreement (Calcium Carbonate) terminated in its entirety. In June 2007, the Company and TPA entered into a Restated Development and Operating Agreement in respect to the Sierra Kaolin. Under the Restated Development and Operating Agreement the Company and TPA continued the evaluation of the Sierra Kaolin (See “Kaolin” below). Independently, the Company has continued the evaluation of its remaining minerals, zeolite and calcium carbonate. The Company continues to sell raw zeolite to third parties as animal feed supplement and for other uses and market its zeolite based products such as its ReNuGen™, a product utilized in wastewater treatment applications. At September 30, 2009, the Company was and continues to be involved in discussions with one or more potential joint venture partners for the development and testing of additional zeolite based products and to provide capital for market introduction. During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted.
Mineral Extraction
The Company has not established large-scale production of any of its mineral deposits. The Company's mineral extraction is conducted by third party contractors engaged by CAMI or its joint venture partners. The Company does not conduct any direct extraction activities of its own. As such, the Company is subject to “pass through” costs for the extraction, crushing or preparation of its minerals. Likewise, the third party operator is solely responsible for the type of equipment utilized on each mineral site, subject to the third party contractor’s compliance with all Federal, state and local laws, regulations and ordinances for the conduct of operations, environmental protection and safety of operations.
Mineralized Materials
Set forth below are the total gross acres, gross acres evaluated and estimated gross quantities of Mineralized Materials associated with the gross acres evaluated for the Company’s kaolin claims in Sierra County, New Mexico, zeolite leases and fee acreage in Presidio County, Texas, and zeolite claims in Beaver County, Utah. These Mineralized Materials were evaluated and estimated by a Competent Person.
Zeolite
Texas - Through September 30, 2009, the Company mined approximately 1,300 tons of material for the preparation of samples and test products. Approximately 70 tons have been sold or distributed as the Company’s trademarked ReNuGen™, a zeolite based, wastewater treatment product. During fiscal 2009, approximately 20 tons were sold for use in certain agricultural oriented products. The Company has also provided material for various environmental testing and waste purification projects and currently has approximately 1,000 tons available for product processing. During fiscal 2006, the Company initiated a confirmation geologic field mapping project and commenced a resource definition program, as well as a core hole drilling and sampling program to delineate Mineralized Materials in sufficient quantities to support large scale mining operations. These efforts targeted 438 acres of the 5,200 acres held by the Company which are most likely to be subjected to initial development. During fiscal 2007, KT Minerals, Inc. completed the evaluation of the target area. KT Minerals, Inc. has identified 75.7 million tons of Mineralized Materials associated with the target area. At September 30, 2008, the Company is also exploring alternatives for the development and marketing of additional zeolite based products for introduction into the industrial and environmental markets.
Utah - As of September 30, 2009, the Company is not conducting any exploration activities on Three Creek zeolite deposit.
Kaolin
The Company has 17 Federal Placer mining claims covering approximately 2,720 acres and 8 Lode claims covering approximately 160 acres covering a portion of its existing holdings. The Company has maintained all of its claims during fiscal year 2009.Through September 30, 2009, the Company did not produce commercial quantities of its Sierra Kaolin. Sierra Kaolin was mined in previous years for testing by prospective customers. Under its Revised and Restated Agreement with TPA, the pre-development evaluation program of the Company’s Sierra Kaolin claims continued during fiscal year 2009. This program focused on evaluating in detail approximately 173 acres (+/-7%) of the Company’s 2,720 acre mineral claim block which is most likely to be subjected to initial development. During fiscal 2008, KT Minerals, Inc. identified 55.3 million tons of Mineralized Materials based on a total of 53 verifiable drill holes representing 6,310 feet of subsurface material.
In 1965, 20 core holes were drilled which produced 3087 feet of core samples. In 1976, 17 core holes were drilled which produced 1784 feet of core samples. During fiscal 2005, 16 core holes were drilled on a 32 acre area from which 1,442 feet of subsurface material was recovered. During fiscal year 2006, this subsurface material was broken down into over 600 samples which were subjected to detailed testing at three different laboratories. The testing phase of the project included roughly 20,000 tests which now comprise an extensive Sierra Kaolin data base. This data base was then utilized by the consulting firm of Pincock, Allen & Holt to develop detailed geologic models of the Sierra Kaolin deposit test area. Based on this work, it was determined that this 32 acre core tested area contained approximately 1.4 million tons of Mineralized Materials.
KT Minerals, Inc. (“KT”) conducted a re-evaluation of the potential Kaolin Mineralized Materials associated with the project. The KT re-evaluation considered the geologic and compositional data available from prior studies and incorporated the results of the mineral processing study completed by Ginn Mineral Technology, Inc. (“GMT”). Based on the GMT study a greater percentage of the project’s in situ minerals could be processed into marketable material as compared to prior indications. In addition, KT evaluated and expanded the study area outside of the 32 acres encompassed by the TPA coring program to include acreage penetrated by an additional 53 historical core holes from which verifiable data could be obtained. As a result, KT evaluated approximately 264 acres of the project and identified approximately 55.3 million tons of Mineralized Materials.
These mineralized quantities were further classified by KT using the international definition of reserves classification grouping described in Section 9.3 Inventory Category (R26,R28)(E29) of the Minfile Coding Manual as follows:
Section 9.3.1 of the Minfile Coding Manual: The reserve category is used only for a mineral and/or substance inventory in an operating mine or mine near production. Sufficient information is available to form the basis of a preliminary mine production plan. Factors that affect ore reserve estimates are geological, economic, mining, metallurgical, marketing, environmental, social and governmental conditions. Ore reserves are reported as Proven, Probable and Possible/Inferred.
It should be noted that the above international mining industry quantity classifications are not recognized by the United States Security Exchange Commission (“SEC”) for reporting purposes. To categorize the mineralized material quantities indicated as reserves under the SEC guidelines, incremental economic and market supporting information is required.
As such the KT mineral quantity classifications are provided only as supplemental information and should not be utilized in association with investment decisions.
During fiscal 2009, TPA proceeded with the next phase of the project which included: (i) further work to quantify Mineralized Materials; (ii) product identification and development; (iii) detail process flow sheets; and, (iv) equipment specifications, as well as marketing and capital requirements. On December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine project has cleared the regulatory review and that the project’s definitive USDA Forest Service Plan of Operations has been approved. This will facilitate the project moving to the next phase. These activities will continue in fiscal 2010.
Marketing of Minerals and Marketing Agreements
In December 2004, the Company entered into a Memorandum of Understanding for development of Sierra Kaolin Deposit (“MOU”) with TPA for the management, development, exploration and marketing of the Company’s Sierra Kaolin claims, located in Sierra County, New Mexico (see Exhibit 10.9).
Under the Company’s March 11, 2005 and June 7, 2007 agreements with TPA (see Exhibits 10.12 and 10.17, respectively), TPA has assumed the duties to mine, test, exploit, and market the Company’s Sierra Kaolin deposit.
Management of the Company directs the activities pertaining to the Company’s zeolite minerals and participates in the decisions regarding the agreement with TPA in respect to the marketing of its Sierra Kaolin.
Government Regulations
Oil and Gas
There are statutory and/or regulatory provisions regulating the Company’s oil and gas operations. These statutes allow administrative agencies to promulgate regulations in connection with the development, production and sale of oil and gas, and to establish allowable rates of production.
The Company’s activities are subject to laws and regulations relating to environmental quality and pollution control. Although the cost of compliance with such legislation and regulations has not been material to date, such laws and regulations could substantially increase the cost of carrying on these activities and could prevent or delay the commencement or continuance of a given operation. The Company believes that existing legislation and regulations have had no material adverse effect on its present method of operations. In the future, federal, state and local environmental controls may require the Company to make significant expenditures, but neither the probability nor the magnitude of the expenditures, if any, can be predicted.
The discharge of oil, gas or the by-products of drilling, reworking and producing oil and gas into the air, soil or water may give rise to liabilities for the restoration of the environment and to third parties. A variety of federal and state laws and regulations govern the environmental aspects of the production, transportation and processing of hydrocarbons and may, in addition to other laws and regulations, impose liability in the event of a discharge or seepage (whether or not accidental). Compliance with such laws and regulations could increase the cost of the exploration, production and development of oil and gas reserves although the Company does not currently anticipate that compliance will have a material adverse effect on the ability of the Company to continue in the exploration, development or production of its existing reserves and the development and/or acquisition of new reserves.
The Company does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry. The Company believes that it is in substantial compliance with all existing rules and regulations. No assurance can be given, however, that environmental laws will not, in the future, result in more onerous regulations causing a market increase in the cost of production, development and exploration or otherwise adversely affect the Company’s operations or financial ability to maintain its existing reserves. Although the Company maintains insurance coverage for certain liabilities, to include insurance to cover specific environmental risks, such as seepage or discharge, other environmental risks may not be fully insurable.
Mineral Interests
The Company’s activities are subject to Federal and state laws and regulations relating to environmental quality and pollution control as well as safety rules as prescribed by Occupational Safety and Health Administration. At present, the Company does not intend to engage in mining activities on its own. The Company intends to retain, and has to date retained, the services of outside contractors to carry out such activities (see the agreements with TPA as set forth as Exhibits 10.9, 10.12 and 10.17). The Company believes that such practices will result in substantial savings in the future. Most of the Company’s mineral interests in New Mexico (kaolin) and Utah (zeolite) are on either Federal land or lands administered by the Bureau of Indian Affairs (“BIA”). As such, the Company must also comply with the rules and regulations imposed for the development of Federal mining leases or BIA leases. The Marfa Properties (zeolite) in Texas are on fee and leased acreage and are subject to Federal and state laws and regulations governing open pit extraction.
Transportation
Oil and Gas
Currently the majority of the Company’s gas is sold to interstate carriers. The Company moves its gas to the interstate carriers over a gathering system owned by the Company or joint venture partners in the Company's wells. The Company has experienced no difficulty in moving or selling its gas. The Company is not a regulated interstate/intrastate carrier of natural gas and as such it is not a regulated pipeline under the National Gas Policy Act of 1983, the National Gas Act of 1938 or as a common carrier by applicable state agencies.
Mineral Interests
All of the Company’s mineral deposits are serviced by all weather paved or unpaved roads. The Marfa zeolite property in Texas is adjacent to a railroad line that can be utilized to transport minerals to market. The Utah zeolite and New Mexico Sierra Kaolin deposits also have access to rail lines but will require over-land transport prior to rail transport.
Partnerships
DRI sponsored Deerlick Royalty Partners L.P. (“Partnership”) which was formed in April 1993. As the managing general partner, DRI is subject to full liability for the obligations of the Partnership although it is entitled to indemnification to the extent of the assets of the Partnership. Since “partnership programs” constitute a “security” under the Securities Act of 1933, Deven Resources, Inc. is also subject to potential liability for failure to comply with applicable Federal and state securities laws and regulations.
The Partnership owns overriding royalty interests covering 2,043 gross acres in the Deerlick Creek coalbed methane field, Tuscaloosa County, Alabama. The Partnership is structured on a carried participation basis.
Acquisitions/Mergers
During the past two fiscal years, the Company has not participated in any acquisitions or mergers.
Stock Purchase Agreement
Terra Silex Agreement
On September 20, 2001, the Company entered into a Stock Purchase Agreement (see Exhibit 10.2) with Terra Silex Holdings, LLC (“Terra Silex”) pursuant to which the Company agreed to sell Terra Silex up to 1,800,000 shares of the Company’s Common Stock at a price of $1.25 per share. At the time of the Terra Silex Agreement, the market price of the Company’s Common Stock was $1.05.
The Terra Silex Agreement provided for the purchase of the common stock in three (3) tranches. At closing, Terra Silex acquired 400,000 shares. The second tranche was to have closed within sixty (60) days, subject to Terra Silex’s satisfactory completion of its due diligence. However, Terra Silex requested an extension. The second tranche for 400,000 shares did close on November 20, 2001. The third tranche was to have closed within 60 days of the closing of the second tranche. On February 15, 2002, Terra Silex advised the Company that it would not fund the third tranche. As such, the warrant to which Terra Silex was entitled under its stock purchase agreement was capped at 250,000 shares. This warrant had an exercise price of $1.25 per share and was scheduled to expire on December 31, 2006. By action of the Board of Directors on December 14, 2006, the expiration date for the Terra Silex Warrant was extended until September 16, 2007. Terra Silex did not exercise its warrant either in whole or in part. These warrants have now expired.
The Terra Silex Agreement included a provision (Section 6.3, Dilution Protection Rights) by which Terra Silex was granted the right to acquire shares of the Company’s Common Stock at the same price as offered to third parties in a “Block Sale” (as such term is defined in the Terra Silex Agreement). As a result of the Company’s private placement of 6,500,000 shares of Common Stock on September 16, 2005, Terra Silex was entitled to acquire 200,241 shares of Common Stock. Terra Silex exercised such right in December 2006.
Patent
C.A. Series
CAMI is the owner of U.S. Patent No. 5,387,738, upon which an engineered product is based which utilizes all naturally occurring non-hazardous minerals for the remediation of sites contaminated with hazardous and/or toxic materials. Typically, the remediation of these sites is necessary in order to meet quality control regulation for air, land and water enforced by the Environmental Protection Agency and various other state and Federal environmental regulatory agencies. The patented engineered products are marketed by CAMI under the trademark of the CA Series. Each of these engineered environmental products is designed for specific project site requirements based on the nature of the on-site contaminant, the size of the project and specific treatment requirements.
The CA Series have been proven effective, through the use of a catalytically enhanced chemical exchange process, in permanently changing many hazardous metals to a non-hazardous state and, through molecular sieve and/or absorption processes, in removing (“site remediation”) many hazardous hydrocarbon and nitrate contaminants.
The processing of contaminate materials using the patented CA Series technology is designed as an on-site operation. Internal studies have shown that because the CA Series of engineered products are designed to be used at the remediation project site, substantial cost savings can be generated as compared to other remediation methods requiring extraction, removal and incineration. The on-site use of CA engineered products can provide a complete and permanent environmental cleanup of the hazardous materials in that the “treated” materials are converted into non-hazardous permanently non-leachable substances that can remain in place. Through laboratory and field tests, the CA Series engineered products have been proved to be effective in the remediation of contamination caused by hydrocarbons and petroleum products, chemicals as well as toxic metallic compounds in rendering the toxic and hazardous materials to a permanently non-toxic and non-hazardous stage.
Trademarks
The Company has applied for Trademarks governing the CA Series of Products CA-1 through CA-6. The Company has applied for the trademark for the Company’s “ReNuGen™”, a product used to enhance the efficacy of conventional waste water treatment plants
Employees
At September 30, 2009, the Company had three employees. The Company employs the services of consulting scientists, geologists and engineers, as well as those of nonaffiliated operating companies that conduct the actual oil and gas field operations and mineral extraction/processing. The Company operates its oil and gas wells in the States of Texas and West Virginia from its Pennsylvania office utilizing contract pumpers to perform actual field operations. The Company’s non-operated wells are monitored out of the Company’s Pennsylvania office. The Company’s mineral leases, fee interest and claims are operated by contract mining entities and are monitored by its Pennsylvania office and by TPA under its agreement covering the Company’s Sierra Kaolin. The Company considers its relations with its consultants to be satisfactory.
Item 1A.
Item 1A. Risk Factors.
Not required as the registrant is a smaller reporting company.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not required as the registrant is a smaller reporting company.
Item 2.
Item 2. Properties.
OIL AND GAS INTERESTS
Texas
The Texas properties are located in the Austin Chalk Trend. The Austin Chalk Trend consists of the Austin Chalk, Buda, Georgetown and Edwards formations, extends for approximately 300 miles in length and 50 miles across, and is encountered at depths of 5,500 to 18,000 feet. These reservoirs are generally of low permeability. Historically, these formations were considered to be economically marginal except in areas where the reservoir rocks are highly fractured. In later years, stimulation by mechanical fracturing of the rock resulted in increasing hydrocarbon recoveries and extensive development of the Trend. Ongoing technical developments using horizontal drilling techniques allow the well bore to intersect, if present, series of vertical fracture systems instead of a single one, thus resulting in higher rates of production and recoverable reserves, at the cost of a more expensive drilling effort. Whether an individual well will be economic, even if horizontally drilled, depends largely upon intersecting fractured portions of the formation, which cannot be predicted. Certain locales appear to contain more fracturing than others. It is not unusual for an individual well to produce as much as forty percent (40%) of the primary recoverable reserves during the first two years of production and the remainder over a period of ten to fifteen years. The Company is presently evaluating joint venturing with third parties to develop its Texas Properties. The Company operates twenty-five (25) wells in Texas.
West Virginia and Pennsylvania
The Company’s hydrocarbon production in the State of West Virginia is in the producing zone of the Oriskany formation of the Appalachian Basin’s Upper Devonian Section. The Company has working interests in two wells in West Virginia for which it acts as operator. The Company owns overriding royalty interests in two wells as well as certain undeveloped acreage in the Commonwealth of Pennsylvania.
Alabama
Deerlick Royalty Partners, L.P., a Delaware limited partnership for which DRI acts as the managing general partner, owns an overriding royalty interest in the Deerlick Creek Field, Tuscaloosa County, Alabama, in the Black Warrior Basin.
Operating Hazards and Uninsured Risks
The Company’s oil and gas operations are subject to all of the risks normally incident to the exploration for and production of oil and gas, including mechanical failures, blow-outs, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells or production facilities or damage to persons and property. While the Company maintains a $3,000,000 all risks liability policy in amounts that it believes are adequate, the insurance may not cover all potential operational risks. The occurrence of a significant event not fully insured against could have a material adverse effect on the Company’s financial position. In the coming year, the Company plans to seek participation in certain types of exploratory or developmental drilling prospects. In these instances, the Company has historically expanded its insurance coverage to cover the specific risk associated with those types of operations. The Company will continue to conduct its normal day-to-day activities as operator of its wells.
Title to Oil and Gas Properties
The Company’s interests in producing and non-producing acreage are in the form of direct or indirect interests in leases. Each of its properties is subject to customary royalty interests in amounts prevailing in the area in which the oil and gas lease was taken, overriding royalty interests, liens incident to operating agreements, liens for current taxes and other burdens and mineral encumbrances and restrictions. The Company believes that none of these burdens materially interferes with the use of such properties, in the operation of the Company’s business or the profitability of the Company’s investment therein.
As is customary in the oil and gas industry, only a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Detailed investigations are generally made, including, in most cases, receiving a title opinion of local counsel, prior to the commencement of drilling operations. A thorough examination of title was performed with respect to substantially all of the Company’s producing properties. Also, prior to the acquisition of properties, the Company has received an opinion of title, satisfactory to counsel to the Company, on a majority (in value) of the assets acquired. The Company believes that it has defensible title to substantially all of its properties.
MINERAL INTERESTS
Minerals Holdings
Through its wholly-owned subsidiary, CAMI, the Company owns leases for, mining claims to and a fee simple interest in non-metallic industrial minerals located in the States of Texas, New Mexico and Utah. Title and rights in the properties are held by CA Properties, Inc. (“CAPI”), a wholly-owned subsidiary of CAMI.
Texas
Marfa Zeolite
CAPI is the lessee under a 5,200 acre lease containing high grade zeolite, located approximately 40 miles south of Marfa, Presidio County, Texas. The lease terms call for royalty payments of $3.00 per ton of zeolite removed from the property with a minimum royalty of $30,000 per year. CAPI has the option to terminate the annual royalty payments by paying a lump sum of $400,000. CAPI owns, in fee, approximately 100 acres of land encompassed by and contained within the bounds of the 5,200 acre zeolite leasehold. During fiscal 2009, the Company paid the minimum royalty of $30,000.
Location
The Company's zeolite deposit is located 29 miles south of Marfa, Texas, on State Highway 67, then 2 miles west on an all weather dirt road. A railroad is immediately adjacent to the Company's lease and fee mineral interests. The Company's lease and fee mineral holdings are on private property. For a map of the location of the Company’s zeolite deposit, see Exhibit 99.1.
Geologic Setting
The zeolite bearing formation is an altered tuffaceous material that is exposed in several road cuts in the area. The zeolite present is the mineral Clinoptilolite.
New Mexico
Sierra Kaolin
CAPI owns 17 placer mining claims on 2,720 acres and 8 Lode claims covering 160 acres, all located in Sierra County, New Mexico, encompassing its Sierra Kaolin deposit. The Federal mining claims call for a royalty payment of 7% of net proceeds derived from mining operations. There is also an overriding royalty interest of 7% out of mining operations payable to the former owner of these leases. $2,125 was paid to the Bureau of Land Management (“BLM”) in 2009 to maintain CAPI’s Federal mineral claims. TPA paid this in accordance with the provisions of the Sierra Kaolin Operating License.
Location
The Sierra Kaolin claims are located on a paved road near Winston, NM, some 40 miles west of Truth or Consequences, NM. The claims are located on Federal Lands administered by the Bureau of Land Management. For a map of the location of the Company’s Kaolin claims, see Exhibit 99.1.
Geologic Setting
The Sierra Kaolin project lies near the eastern margin of the Datil-Mogollon volcanic field, a region dominated by Tertiary caldera-related volcanic rocks.
The Sierra Kaolin is considered to be a primary hydrothermal deposit that was formed in situ. The Sierra Kaolin is part of an advanced argillic alteration assemblage that includes kaolinite (AI4(Si4O10)(OH)8); and related mineral species possible including dickite and halloysite; alunite (KAI3(OH)8(SO4)2); and chalcedonic and/or opaline quartz (hydrous amorphous silica).
Utah
Beaver Zeolite
CAPI owns 11 placer mining claims (Three Creek) covering approximately 220 acres of zeolite located in Beaver County, Utah. The zeolite in this deposit is also considered high grade. During fiscal year 2009, the Company paid $1,375 to the Bureau of Land Management to maintain its federal mining claims.
Location
The Beaver zeolite claims are located on a paved road (State Highway 153) 18 miles east of Beaver, Utah. The claims are on Federal Lands administered by the Bureau of Land Management. For a map of the location of the Company’s Utah zeolite claims, see Exhibit 99.1.
Geologic Setting
The deposit is geologically located in an altered tuffaceous formation associated with widespread volcanic activity of the area.
Mining
The Company has periodically extracted zeolite from its deposit in Texas through the use of contract miners. The mining of all of the Company’s mineral deposits is exclusively conducted through surface mining. The quantities of extracted volumes were commensurate with demands for the minerals and to comply with the Company's lease obligations. The Company, under its agreements with Tecumseh Professional Associates (“TPA”) (see Exhibits 10.12 and 10.17) extracted sufficient quantities of Sierra Kaolin for qualitative and quantitative analysis of the mineral’s commercial properties. All of the extraction of the Company's current mineral holdings is expected to be done by surface mining. At each of the locations, the areas disturbed by extractive operations have been limited to initial ten acre permit sites in New Mexico and under 100 acres in Texas in accordance with applicable state regulations.
The Company's Texas zeolite deposit will be mined on a periodic basis to meet existing obligations and to support development of new and emerging markets. Initial production of the Company’s Sierra Kaolin has been conducted by TPA for testing. Commercial development and marketing will be conducted in accordance with the Sierra Kaolin Restated Development and Operating Agreement (See Exhibit 10.17). On December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine project has cleared the regulatory review and that the project’s definitive USDA Forest Service Plan of Operations has been approved. This will facilitate the project moving to the next phase.
At the present time, as a result of its limited activities on its mineral properties, the Company believes that its share of the reclamation costs currently associated with its activities is less than $50,000.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2009.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
DESCRIPTION OF SECURITIES
Pursuant to the Company’s Articles of Incorporation, the Company is authorized to issue 100,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value of $0.01 per share. Below is a description of the Company’s outstanding securities, including common stock, preferred stock, options, warrants and debt.
Common Stock
Each holder of the Company’s common stock is entitled to one vote for each share held of record. Holders of common stock have no preemptive, subscription, conversion, or redemption rights. Upon liquidation, dissolution or winding-up, the holders of common stock are entitled to receive the Company’s net assets pro rata. Each holder of common stock is entitled to receive ratably any dividends declared by the board of directors out of funds legally available for the payment of dividends. The Company has not paid any dividends on its common stock and does not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance its growth. As of the fiscal year ended September 30, 2009, the Company had 45,100,811 shares of common stock outstanding.
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2009, there were: no shares of Series A preferred stock issued and outstanding; 145,000 shares of Series B preferred stock issued and outstanding.
Series B 8% Cumulative Convertible Preferred Stock. The Series “B” Cumulative Convertible Preferred Stock has a face value of $10.00 per share with no voting power. This preferred stock can be converted to common stock at 85% of the average of the 5 days before the date of conversion with a minimum amount of $1.25 per share.
Market Information
The Company's Common Stock trades on the NASDAQ Over the Counter Market, Bulletin Board ("OTCBB"). The symbol for the Company's shares is DLOV. The following table shows the high and low closing bid prices as quoted on the OTCBB for the fiscal quarters indicated and the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The Company’s fiscal year ends September 30.
Holders
Common Equity
As of September 30, 2009, the current outstanding amount of shares of common stock was 45,100,811 with approximately 2,000 holders of record (inclusive of brokerage house "street accounts").
Preferred Equity
As of September 30, 2009, there were no Series A Preferred shares issued and outstanding and there were sixteen holders of the 145,000 shares of Series B Preferred Stock issued and outstanding.
Dividends
The Company has never paid a dividend on its common stock. The Company has no plans to pay any dividends on its common stock in the near future. The Company intends to retain all earnings, if any, for the foreseeable future for use in its business operations. Dividends have been paid on the Company's Series B Preferred Stock in shares of Common Stock at the time of conversion.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information as of September 30, 2009 regarding equity compensation plans:
Recent Sales of Unregistered Securities
Terra Silex Holdings Ltd, LLC Anti-dilution Shares
By agreement dated September 20, 2001, the Company entered into a Stock Purchase Agreement (“SPA”) with Terra Silex Holdings, LLC (“Terra Silex”). Section 6.3, Dilution Protection Rights, of the SPA grants Terra Silex the right to acquire shares of the Company at the same price as offered to third parties in a “Block Sale” (as such term is defined in the SPA). As a result of the Company’s private placement of 6,500,000 shares of Common Stock on September 16, 2005, Terra Silex was entitled to acquire 200,241 shares of Common Stock under the formula set forth in Section 6.3 of the SPA. Terra Silex exercised such right in December 2006. The purchase price for the 200,241 shares acquired by Terra Silex was $50,060.
October 2006 Private Placement
In October 2006, the Company concluded a private placement of 400,000 shares of Common Stock at a price of $0.51 per share. This private placement raised $204,000 for the Company. The Company is utilizing the proceeds of this private placement for its costs associated with the exploration and quantification of mineral resources and mineral reserves on a 500 acre portion of the Marfa zeolite deposit and to complete studies to be able to commence the production and delivery of ZeoCast. See the Company’s Form D as filed with the Securities and Exchange Commission on October 18, 2006.
June 2007 Private Placement
In June 2007, the Company concluded a private placement of equity consisting of 726,670 shares of Common Stock and warrants to purchase 363,336 shares of Common Stock. This private placement raised $218,000 for the Company. The Company utilized the proceeds of this private placement for general working capital purposes. See the Company’s Form D as filed with the Securities and Exchange Commission on July 23, 2007.
June 2009 Private Placement
In June 2009, the Company commenced a private placement of up to $500,000 of 7.25% convertible debentures. The debentures are convertible at a conversion price equal to the greater of either $0.14 per share or an amount equal to 80% of the average of the closing bid and ask prices of the Common Stock for the 5 trading days immediately preceding the conversion date. All of the purchasers of the debentures elected to immediately convert such holdings into Common Stock at an average conversion price of $0.14 per share and, accordingly, the Company has issued 1,019,465 shares of Common Stock as of September 30, 2009. As of September 30, 2009, this private placement raised $128,500 (net of fees and expenses totaling $14,225) for the Company. The Company is utilizing the proceeds of this private placement for general working capital purposes.
Options and Warrants
Options(1) to Purchase Shares of Common Stock
(1)
The Company accounts for all stock-based compensation (options) in accordance with the Financial Accounting Standard Board, or FASB, Accounting Standard Codification, or ASC, Topic 718. Under ASC 718, the fair value of stock options and compensation costs are measured as of the grant date.
(2)
Richard A. Thibault was granted an option to purchase 500,000 shares of stock at an exercise price of $0.48 per share in his employment contract dated March 10, 2006, but effective as of January 15, 2006. See Exhibit 10.44, attached to the Company’s Form 8-K dated March 13, 2006. In June 2006, Mr. Thibault voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 300,000 shares of stock (including the option discussed in footnote 5 below) expired during fiscal 2007 and options for the purchase of 250,000 shares of stock expired in fiscal 2009.
(3)
David L. Matz was granted an option to purchase 250,000 shares of stock at an exercise price of $0.47 per share in his employment contract dated January 23, 2006. In March 2008, Mr. Matz voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 75,000 shares of stock (including the option discussed in footnote 5 below) expired during fiscal 2008 and options for the purchase of 37,500 shares of stock expired in fiscal 2009.
(4)
During fiscal 2006, William Pipkin was granted an option to purchase 200,000 shares of stock at an exercise price of $0.43 per share under the Company’s Non-qualified Independent Director Stock Option Plan. In September 2008, Mr. Pipkin voluntarily resigned as a Director of the Company; accordingly, the option expired during fiscal 2009.
(5)
On September 19, 2006, the Board of Directors granted the following officers of the Company options to purchase shares of stock at an exercise price of $.75 per share: Stephan V. Benediktson, 200,000 shares; Nathan K. Trynin, 200,000 shares; Dov Amir, 200,000 shares; Gary J. Novinskie, 200,000 shares; David L. Matz, 50,000 shares; and Richard A. Thibault, 50,000 shares.
(6)
On March 7, 2007, the Board of Directors granted an option to Stephan V. Benediktson for the purchase of 600,000 shares of stock at an exercise price of $0.48 per share. This option expired during fiscal 2008.
(7)
Richard W. Blackstone was granted an option to purchase 200,000 shares of stock at an exercise price of $0.67 per share in his employment contact dated October 4, 2006.
(8)
During fiscal 2007, David A. Grady was granted an option to purchase 200,000 shares of stock at an exercise price of $0.28 per share under the Company’s Non-qualified Independent Director Stock Option Plan.
(9)
On September 30, 2007, an option (held by a former officer of the Company) to purchase 1,000,000 shares of stock expired.
(10)
In August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily resigned their respective positions with the Company; accordingly, options to purchase 200,000 shares of stock (the unvested portions of the options discussed in footnote 5 above) expired before September 30, 2007. The balance of their options to purchase of 200,000 shares of stock expired unexercised in November 2007.
(11)
During fiscal 2007, an option (held by a former director of the Company pursuant to the Company’s Non-qualified Independent Director Stock Option Plan) for the purchase of 150,000 shares of stock expired.
(12)
During fiscal 2004, Lord John Gilbert was granted an option to purchase 200,000 shares of stock at an exercise price of $0.85 per share under the Company’s Non-qualified Independent Director Stock Option Plan. The option expired during fiscal 2009.
(13)
During fiscal 2002, Dov Amir and Gary J. Novinskie were each granted an option to purchase 500,000 shares of stock at an exercise price of $0.53 per share. Options for the purchase of 1,400,000 shares of stock (including the options discussed in footnote 5 above) expired during fiscal 2009.
(14)
Of the options to purchase 787,500 shares outstanding as of September 30, 2009, 600,000 shares are held by current officers, directors and employees of the Company (“Insiders”). The exercise prices for the options held by Insiders range from $0.28 per share to $0.67 per share.
Warrants to Purchase Shares of Common Stock
Warrants to purchase 822,305 shares of Common Stock are outstanding at September 30, 2009 and consist of the following:
(1)
Financing Sources - On July 21, 1998, warrants to purchase 263,638 shares (expiring on November 20, 2003) were granted to four persons who lent the Company a total of $145,000. At September 30, 2007, warrants to purchase a total of 136,364 shares are outstanding. The warrants expired unexercised on December 31, 2007.
On November 28, 2001, warrants to purchase a total of 435,941 shares were granted to Sonata Investment Company, Ltd. (395,273 shares) and Standard Energy (40,668 shares) as consideration for entering into the Loan Conversion Agreement dated August 1, 2001. The Loan Conversion Agreement extended the date by which the Company had to satisfy its obligations to both Sonata Investment Company, Ltd. (“Sonata”) and Standard Energy Company (“Standard”) and granted both Sonata and Standard the right to convert the debt into common stock of the Company at such time as the Company advised Sonata and Standard of its intent to satisfy the Company’s obligations to one or both entities. Sonata and Standard are entities affiliated with each other. The exercise price is at $1.05 per share. The Sonata and Standard Warrants were to have expired August 1, 2002. The Company agreed to extend the termination date of the Sonata and Standard Warrants until July 31, 2004, in exchange for Sonata’s relinquishing its twenty percent (20%) interest in the net profits of the Company’s subsidiary Sustainable Forest Industries, Inc. These extensions have resulted in a $100,000 charge to the statement of loss in fiscal 2002. The Sonata warrants were further extended until December 31, 2007, as additional consideration under the Second Amendment to the Heller Loan. The warrants expired unexercised on December 31, 2007.
Sonata was granted an additional warrant to purchase 250,000 shares at a price of $0.906 per share under the Second Amendment to the Heller Loan. This warrant expired unexercised on December 31, 2007.
On December 21, 2007, Sonata loaned the Company $75,000 pursuant to a promissory note of same date. The Company issued warrants for the purchase of 822,305 shares of stock at an exercise price of $0.55 per share. The warrants expire on December 31, 2010.
(2)
Conley & Anthony Warrants - On February 27, 2003, warrants to purchase 300,000 shares at a price of $0.13 per share were granted to each of Robert Conley and Bob Anthony in consideration of their consultation and individual expertise in regard to product development and application market identification with regard to the Company’s potential Sierra Kaolin and zeolite products respectively. Mr. Conley’s warrant expired unexercised on February 26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his warrant (100,000 shares) and he retained warrants to purchase 200,000 shares. During fiscal 2008, the expiration date for Mr. Anthony’s warrant was extended to February 26, 2009. These warrants expired unexercised.
(3)
TPA Warrants - In accordance with the provisions of the First Amended Memorandum of Understanding (Sierra Kaolin Development) dated March 11, 2005, Tecumseh Professional Associates, Inc (“TPA”) was granted the right to acquire 1,500,000 shares at a price of $0.50 per share for $80,000 (“TPA Warrants”). The TPA Warrants had a term of three years with an expiration date of November 29, 2007. These warrants expired unexercised.
(4)
June 2007 Private Placement Warrants - Under the terms of the June 2007 Private Placement (see Sales of Securities above), investors were issued a warrant to purchase of one share for each two shares of Common Stock purchased in the Private Placement. The warrant is exercisable during the first two years after the close of the Private Placement. These warrants expired unexercised.
Item 6.
Item 6. Selected Financial Data.
Not required as the registrant is a smaller reporting company.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This Annual Report on Form 10-K contains forwarding-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
The following discussion is intended to inform the Company’s existing and potential security holders generally of some of the risks and uncertainties that can affect the Company and to take advantage of the “safe harbor” protection for forward-looking statements afforded under Federal securities laws. From time to time, management or persons acting on behalf of the Company make forward-looking statements to inform existing and potential security holders about the Company. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “good” or other words that convey the uncertainty of future events or outcomes. Except for statements of historical or present facts, all other statements contained in this report are forward-looking statements. The forward-looking statements may appear in a number of places and include statements with respect to, among other things: business objectives and strategic plans; operating strategies; acquisition strategies; drilling wells; oil and gas reserve estimates (including estimates of future net revenues associated with such reserves and the present volume of such future net revenues); estimates of future production of oil, natural gas and minerals; expected results or benefits associated with recent acquisitions; marketing of oil, gas and minerals; expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures; expectations regarding cash flow and future borrowings sufficient to fund ongoing operations and debt service, capital expenditures and working capital requirements; nonpayment of dividends; expectations regarding competition; impact of the adoption of new accounting standards and the Company’s financial and accounting systems; and effectiveness of the Company’s control over financial reporting.
These statements by their very nature are subject to certain risks, uncertainties and assumptions and will be influenced by various factors. Should any of the assumptions underlying a forward-looking statement prove inaccurate, actual results could vary substantially.
Various factors could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following:
·
volatility of the market price for both crude oil and natural gas;
·
volatility of the market price for the Company’s minerals;
·
market capacity and demand for the Company’s minerals;
·
the timing, effects and success of the Company’s acquisitions, exploration and development activities;
·
the timing and marketability of production;
·
effectiveness of management’s strategies and decisions;
·
competition;
·
changes in the legal and/or regulatory environment and/or changes in accounting standards; policies and practices or related interpretations by auditors and/or regulatory agencies;
·
climatic conditions; and
·
unanticipated problems, issues or events.
Many, if not all, of these factors are beyond the Company’s control and are impossible to predict. These factors are not intended to represent an exhaustive list of the general or specific facts or factors that may affect the Company.
All forward-looking statements speak only as of the date made. All subsequent forward-looking statements are expressly qualified in their entirety by the cautionary statements above. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement or reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence (or non-occurrence) of anticipated (or unanticipated) events or circumstances.
Results of Operations:
Fiscal year ended September 30, 2009, compared to fiscal year ended September 30, 2008:
Bbl = Barrels of oil
Mcf = One Thousand cubic feet of gas
Mcfe = One Thousand cubic feet of gas equivalent
The decrease in oil and gas production experienced during fiscal 2009 is primarily a result of wells being “off-line” for repair, declines in the producing gas-oil ratio from certain producing wells operated by the Company in Texas and curtailments resulting from third party maintenance of natural gas pipelines and processing facilities servicing these properties Well management revenue decreased to $263,545 for fiscal 2009 from $267,767 for fiscal 2008
The decrease in Lease Operating Expenses and Production Tax per Mcfe is primarily the result of the decrease in Lease Operating Expenses in fiscal 2009. Such expenses were greater in fiscal 2008 primarily as a result of the workover expenses incurred to maintain and enhance production of the Company’s properties in Texas.
Minerals Operations
The Company is an Exploration Stage company in respect to its mineral holdings.
Minerals Exploration Expenses
Minerals exploration expenses totaled $7,200 for fiscal 2008. These expenses are primarily for costs associated with the exploration of the mineral deposits and quantification of Mineralized Materials. The Company incurred no such expenses in fiscal 2009.
Minerals Operating Expenses and Other Costs
Minerals operating expenses and other costs increased to $123,411 for fiscal 2009 as compared to $101,567 for fiscal 2008. The amount for fiscal 2009 includes a charge for $90,000 related to the issuance of Common Stock in exchange for services. During June 2009, the Company issued 1,000,000 shares of Common Stock to William Smith, a consultant to the Company, in exchange for the marketing of and development of a market for the Company’s product, ReNuGen™, at $0.09 per share. During fiscal 2008, the total costs incurred with the calcium carbonate annual lease rental, minimum royalty payment and claim fees amounted to $49,511. The Company did not incur such costs in fiscal 2009 as the Company ceased such payments required by the lease (see “Loss on Abandonment” below).
Loss on Abandonment
During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted. Accordingly, the Company charged-off the mineral net book value ($1,876,972) and prepaid royalties ($100,000) in respect to the property during fiscal 2009. The loss on abandonment of the calcium carbonate property totaled $1,976,972.
Depreciation, Depletion and Amortization: Minerals
Depreciation, depletion and amortization expenses totaled $578,252 for fiscal 2009 as compared to $728,252 for fiscal 2008. Each of such amounts includes amortization of Patent Rights of $577,452.
Depreciation, Depletion and Amortization: Oil and Gas and Other
Depreciation, depletion and amortization (“DD&A”) totaled $185,968 and $182,368 for fiscal 2009 and 2008, respectively.
General and Administrative Expenses
These expenses decreased 45% to $384,390 for fiscal 2009 as compared to $702,256 for fiscal 2008. Stock-based compensation expense is included in general and administrative expenses. The Company recorded stock-based compensation expense for fiscal 2009 and fiscal 2008 of $62,399 and $188,476, respectively (see Note 8 of the Notes to Consolidated Financial Statements). General and administrative expenses also decreased as a result of the Company’s decreased staff.
Legal and Professional Fees and Expenses
These expenses decreased 26% to $189,706 for fiscal 2009 as compared to $256,657 for fiscal 2008. The decrease is primarily attributed to the decrease in professional fees related to potential acquisitions and resource exploration.
Interest Expense
Interest expense decreased 5% to $232,257 for fiscal 2009 as compared to $244,798 for fiscal 2008.
Gain on Sale of Oil and Gas Properties
During fiscal 2008, gain on sale of oil and gas properties totaled $400,000.
In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008. The remaining $50,000 is pending awaiting the consent of a joint interest owner in the remaining asset. Revenues and expenses applicable to such assets included in fiscal 2008 periods are not material as the wells had not produced since March 2006. The assets sold had no net book value. Accordingly, the Company recognized gain on sale of oil and gas properties of $150,000 during fiscal 2008.
In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and expenses applicable to such assets included in fiscal 2008 are not material as the two gas wells included in the sale were marginal producers. The assets sold had no net book value. Accordingly, the Company recognized gain on sale of oil and gas properties of $250,000 during fiscal 2008.
Liquidity and Capital Resources
The Company’s cash flow used for operating activities was $461,129 for fiscal 2009 and $103,961 for fiscal 2008, respectively. Accounts payable decreased $336,780 during fiscal 2009. During fiscal 2009 and 2008, the Company defaulted on certain required payments including the payment of a portion of the salaries required pursuant to certain employment agreements (see Notes 6, 7, 9, 10 and 11 of the Notes to Consolidated Financial Statements). Funds have been and are being deployed in efforts to enhance the commercial viability of the Company’s existing resource assets, to identify potential expansion opportunities and to retire obligations associated with the Company’s assets. The Company’s net cash at September 30, 2009 totaled $98,336.
Liquidity is a measure of a Company’s ability to access cash. The Company has historically addressed its long-term liquidity requirements through the issuance of equity securities and borrowings or debt financing for certain activities.
At present, the Company does not have in place a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the need for such a credit facility. For desired acquisitions or project enhancements, the Company must seek project specific financing. None of the Company’s properties are encumbered.
The prices the Company receives for its oil and gas and the level of production have a significant impact on the Company’s cash flows. The Company is unable to predict, with any degree of certainty the prices the Company will receive for its future oil and gas production and the success of the Company’s exploration, exploitation and production activities. Increases in the sales of the Company’s minerals, which to date have not been mined in substantial commercial quantities, will also affect cash flow.
In an effort to address the liquidity shortfall, the Company has instituted cost containment procedures including staff decreases, sold certain of its oil and gas properties, and is evaluating the sale of certain additional oil and gas properties. It may take months and possibly longer to sell these properties at a suitable price. The market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand that are beyond our control. We cannot predict whether we will be able to sell a property for the price or on the terms acceptable to us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of any property.
During December 2007, Sonata Investment Company, Ltd. loaned the Company $75,000 which the Company used to satisfy certain delinquent vendor payables (see Note 8 of the Notes to Consolidated Financial Statements). This note was repaid in May 2008 with a portion of the proceeds from the sale of the Pennsylvania properties (see below).
In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008. In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000 (see Note 3 of the Notes to Consolidated Financial Statements).
During June 2009, the Company offered a Private Placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2009 Private Placement”). Private Placement consists of up to Five Hundred Thousand Dollars ($500,000) of 7.25% Convertible Debentures (“Debentures” or “Debenture”). The Debentures offered by the Company, are five (5) year instruments maturing on July 30, 2014, bearing interest at seven and one quarter percent (7.25 %) per annum on the balance outstanding from time to time. Interest will commence to accrue immediately upon issuance of the Debentures and will be paid quarterly on each September 30, December 31, March 31 and June 30, which the Debentures are outstanding. Payment of principal will commence on September 30 following the second anniversary of the Closing Date of this Offering. The Company extended the offering period for the Debentures until at the request of potential investors. As of September 30, 2009, this private placement raised $128,500 (net of fees and expenses totaling $14,225) for the Company. All of the purchasers of the debentures elected to immediately convert such holdings into Common Stock at an average conversion price of $0.14 per share, and accordingly the Company has issued 1,019,465 shares of Common Stock as of September 30, 2009. The Company is utilizing the proceeds of this private placement for general working capital purposes.
Commercialization of Existing Assets
During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted. The Company is continuing to pursue plans to commercialize its kaolin and zeolite projects which are critical for the Company to achieve profitability and establishing the Company as a market innovator in industrial minerals. Those plans have progressed from the data acquisition and analysis phase into ongoing mineral processing and facility design phase. The Company and its current partner and potential other partners are actively investigating various commercial applications for its mineral based products.
The efforts of the Company and Tecumseh Professional Associates LLC to evaluate the Sierra Kaolin deposit are progressing. The venture’s efforts to commercialize the Sierra Kaolin deposit have focused on an initial target area encompassing approximately 32 acres out of the project’s 2,740 acres. The test minerals extracted from the target area have been processed into product formulations determined by independent consultants to be suitable for coatings, fillers and pigments for use within the paint and paper manufacturing industries. The analysis results of the processed minerals with respect to its physical properties such as but not limited to, brightness, color, opacity, oil absorption have indicated that commercially viable products can be produced from the deposit’s extracted minerals.
The venture, with the assistance of its consultants, has begun technical presentations of the product formulations to entities active on both the demand and supply sides of the coatings, fillers and pigments sectors of the paint and paper industries. Preliminary feedback from these initial presentations has been encouraging and has led to follow-up discussions and submission of product samples for prospective application testing. The final results of these inquiries and testing are expected over the next several months. Tecumseh, as the project’s manager, is proceeding with its efforts to prepare the mineral deposit site for production. During November 2009, the extraction permit for the project was issued. Work continues on product identification and process flow sheet design and is expected to be completed in the next few months.
The Company continues to focus on establishing business and or financial relationships that will provide the necessary capital to effectively exploit its calcium carbonate and zeolite mineral resource holdings. With respect to the Company’s zeolite deposit, certain initial small scale tests have progressed to the point where larger scalable pilot tests of commercial applications are to be initiated.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements and does not anticipate entering into any such arrangements in the foreseeable future.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) is the first major revision to the securities laws since the enactment of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The SOX, promulgated in large part in response to the Enron/Worldcom demise, covers a variety of measures all of which will not be covered here. The SOX is applicable to all publicly traded reporting companies no matter how small or large. The SOX provides for additional controls such as the chief executive officer’s certificate regarding the accuracy of the Company’s financial statements and providing for a criminal penalty for making a false statement to the certification by an executive officer that the financial statements do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which the statements were made, not misleading with respect to the period covered by the annual report. The certification also requires that the Chief Executive Officer of the Company certify that the financial statements and other materials presented in the annual report fairly present all material aspects of the financial condition, results of operations and cash flows of the Company as of and for the periods covered by the annual report. This requirement exceeds the previous requirement that the financial statements merely be presented in accordance with generally accepted accounting principles.
The Company believes that it has historically provided its financial information in this fashion, having separately reported and presented each segment of the Company’s business for the past few years.
The SOX requires that a “Disclosure Committee” be established. This committee considers the materiality of information and determines disclosure obligations on a timely basis. This committee is the Company’s “watchman” for public disclosures. The Company has designated the Board of Directors as the Committee. The Company has three employees and five independent directors. All parties are intricately involved in the decision making processes at the Company and no disclosure or decision not to disclose information is made without the input of inside management, counsel and the Board of Directors.
Because the drafting and approval of all of the Company’s reports is a collective process, the provisions of the SOX to establish an independent Disclosure Committee, a Disclosure Control Monitor, to conduct internal drafting sessions, distribution of draft reports and dealing with internal trading policies are presently either not applicable or are already implemented, have been and are part of the Company’s operating procedures. The SOX also provides for certain controls on auditors and the accounting industry. The Company only utilizes its auditors for auditing purposes. As such, the Company believes that it is and will continue to be in full compliance with the final regulations promulgated by the Securities and Exchange Commission (“SEC”) under the SOX.
The SEC has acknowledged that a “one-size fits all” approach to establishing effective disclosure controls and procedures is not appropriate and has now prescribed specific disclosure controls and procedures. The SEC expects each company to develop a process that is consistent with its business and internal management and supervisory practice. The Company believes that it has fully complied with the intent of the SOX and Regulations promulgated by the SEC.
All phases of the Company’s operations are subject to certain influences outside of the Company’s control. Any one, or a combination, of these factors could materially affect the results of the Company’s operations. These factors include: competitive pressures, inflation, trade restrictions, interest rate fluctuations and other capital market conditions, weather, future and options trading, and the availability of natural resources and services from other sources. Forward-looking statements are made by or on behalf of the Company utilizing available knowledge of its business and the environment in which it operates, but because of the factors listed above, as well as other environmental factors over which the Company has no control, actual results may differ from those in the forward-looking statements. Consequently, all of the forward-looking statements made are qualified in their entirety by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effect on the business and/or operations of the Company.
New Accounting Standards
For details of applicable new accounting standards, please, refer to Note 2 to the Consolidated Financial Statements.
Critical Accounting Policies
General - The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of our long-lived assets and our provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to our attention that may vary our outlook for the future. Actual results may differ from these estimates under different assumptions.
We suggest that the Summary of Significant Accounting Policies, as described in Note 2 of Notes to Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.
Going Concern - The financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. For the fiscal year ended September 30, 2009, the Company incurred a net loss of $3,221,539. The ability of the Company to meet its total liabilities of $8,096,395 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment, and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets including Clean Age Minerals, Inc.’s acquisition of $20 million.
Fair Value of Financial Instruments - The Company’s only financial instruments are (a) cash, securities available for future sale, and short-term trade receivables, payables, and debt, and (b) long-term debt. The carrying amounts reported in the accompanying consolidated financial statements for cash, securities available for future sale, and short-term trade receivables, payables and debt approximate fair values because of the immediate nature of short-term maturities of these financial instruments. Based on the borrowing rates currently available to the Company for long-term bank loans with similar terms and average maturities, the carrying amount of long-term debt approximates fair value.
Receivables - In the normal course of business, we extend credit to our customers on a short-term basis. Our principal customers are major oil and natural gas exploration, development and production companies. Credit risks associated with these customers are considered minimal. Dealings with smaller, local companies, particularly with the current difficulties in equity and credit markets, pose the greatest risks. We routinely review our accounts receivable balances and make provisions for doubtful accounts as necessary. Accounts are reviewed on a case by case basis and losses are recognized in the period if we determine it is likely that receivables will not be fully collected. We may also provide a general provision for accounts receivables based on existing economic conditions.
Oil and gas properties - The Company follows the successful efforts method of accounting for the costs of exploration and development activities. Costs of successful exploration wells, development wells, and direct acquisition costs of developed and undeveloped leases containing proved reserves are capitalized and amortized on a unit-of-production method over the life of the related reserves. Costs of exploratory wells found to be dry are expensed. Support equipment and other property and equipment recorded at cost are amortized using the straight-line method over their estimated useful lives.
Mineral properties - The Company has recorded the acquisition of Clean Age Minerals, Inc., and associated minerals rights at cost. The Company has not produced large-scale quantities of any of its mineral deposits.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At September 30, 2009, we reviewed our long-lived assets and determined no impairment was necessary.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required as the registrant is a smaller reporting company.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The following financial statements and schedules are included herein:
Audited Financial Statements and Supplemental Financial Information:
*
Report of Independent Registered Public Accounting Firm
*
Consolidated Balance Sheets
*
Consolidated Statements of Operations
*
Consolidated Statements of Shareholders’ Equity
*
Consolidated Statements of Cash Flow
*
Notes to Consolidated Financial Statements
*
Report of Independent Registered Public Accounting Firm On Supplemental Financial Information
*
Schedule V - Property, Plant and Equipment
*
Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment
Other Supplemental Information (Unaudited):
*
Estimated Net Quantities of Proven Oil and Gas Reserves
*
Standardized Measure of Discounted Future Net Cash Flow from Estimated Production of Proved Oil and Gas Reserves
*
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Daleco Resources Corporation
We have audited the accompanying consolidated balance sheets of Daleco Resources Corporation and Subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Daleco Resources Corporation and Subsidiaries as of September 30, 2009 and 2008, and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered significant recurring net losses and negative operating cash flow, which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Vasquez & Company LLP
Vasquez & Company LLP
Los Angeles, California
January 13, 2010
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
1.
CONTINUED OPERATIONS
The financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. For the fiscal year ended September 30, 2009, the Company incurred a net loss of $3,244,941. The ability of the Company to meet its total liabilities of $8,096,395 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets including Clean Age Minerals, Inc.’s acquisition of $20 million.
The Company will continue to seek out and entertain project specific funding commitments and other capital funding alternatives if and as they become available.
As of September 30, 2009, the Company and certain of its subsidiaries were in default of certain debt and other obligations (see Notes 6, 7, 9, 10 and 11 below). The holders of these instruments are working with the Company to achieve the ultimate extinguishment of the obligations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is primarily engaged in the exploration for minerals and oil and gas activities. We follow accounting standards set by the Financial Accounting Standard Board, commonly referred to as “FASB”. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the “Codification” or “ASC”. Prior FASB standards like FASB 13, Accounting for Leases, are no longer being issued by the FASB. Leases are addressed at FASB ASC Topic 840.
a.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
b.
Basis of consolidation
The consolidated financial statements of Daleco Resources Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles and include the accounts of Daleco Resources Corporation, its wholly-owned subsidiaries and their wholly-owned subsidiaries: Westlands Resources Corporation (“WRC”), Sustainable Forest Industries, Inc., Deven Resources, Inc., DRI Operating Company (“DRIOP”), Tri-Coastal Energy, Inc., Clean Age Minerals, Inc. (“CAMI”), CA Properties, Inc., and The Natural Resources Exchange, Inc. Sustainable Forest Industries, Inc. and The Natural Resources Exchange, Inc. are inactive.
The Company’s investments in oil and gas leases are accounted for using proportionate consolidation whereby the Company’s pro rata share of each of the assets, liabilities, revenues and expenses of the investments are aggregated with those of the Company in its financial statements. The Company’s investments in minerals are accounted for using purchase accounting methods.
Certain reclassifications have been made to prior period financial statements to conform to the current presentation.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
c.
Oil and gas properties and equipment
The Company follows the successful efforts method of accounting for the costs of exploration and development activities. Direct acquisition costs of developed and undeveloped leases are capitalized. Costs of undeveloped leases on which proved reserves are found are transferred to proven oil and gas properties. Each undeveloped lease with significant acquisition cost is reviewed periodically and a valuation allowance provided for any estimated decline in value. Capitalized costs of proved developed leases are charged to income on the units of production basis based upon total proved reserves.
Costs of exploratory wells found to be dry during the year before the issuance of these financial statements are charged against earnings in that year. Costs of successful exploration wells and development wells are capitalized. All costs of development wells and successful exploration wells are charged to earnings on a unit-of-production basis based upon proved developed reserves.
d.
Site Restoration, Dismantlement and Abandonment Costs
An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is required to be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related assets (mineral, oil and natural gas properties) is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset. The estimated residual salvage values are taken into account in determining amortization and depreciation rates.
The Company has not accrued any costs associated with the potential abandonment and restoration of producing wells and mining deposits as the salvage value of the Company’s producing wells or mining deposits is expected to exceed the cost of site restoration and abandonment. To date, mining and exploration activities of the Company's mineral deposits have been conducted by contract mining companies. As mining activity increases, the Company may accrue site restoration costs as appropriate. The effect of this statement is not material to the consolidated financial statements to warrant recognition of the ARO.
e.
Office Equipment, Furniture and Fixtures
Office Equipment, Furniture and Fixtures are recorded at cost and depreciated using the straight-line method over a period of three to seven years.
f.
Mineral Acquisition
The Company has recorded the acquisition of Clean Age Minerals, Inc. and associated minerals rights at cost (see Note 4).
g.
Cash and Cash Equivalents; Restricted Cash Deposits
Cash and cash equivalents include cash and investments with original maturities of three months or less. The Company’s net cash at September 30, 2009, totaled $98,336. Restricted Cash Deposits of $109,041 at September 30, 2009, support financial assurance requirements for the Company’s operations in certain states.
h.
Fair Value Measurements
The Company’s only financial instruments are (a) cash, securities available for future sale, and short-term trade receivables, payables and debt, and (b) long-term debt. The carrying amounts reported in the accompanying consolidated financial statements for cash, securities available for future sale, and short-term trade receivables, payables and debt approximate fair values because of the immediate nature of short-term maturities of these financial instruments. Based on the borrowing rates currently available to the Company for long-term bank loans with similar terms and average maturities, the carrying amount of long-term debt approximates fair value of $60,659 at September 30, 2009.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
i.
Stock-based Compensation
The Company accounts for all stock-based compensation (options) in accordance with FASB ASC 718. Under ASC 718, the fair value of stock options and compensation costs are measured as of the grant date. Under ASC 718, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period. For stock-based awards granted on or after October 1, 2005, the Company amortizes stock-based compensation expense on a straight-line basis over the requisite vesting period, which generally ranges from one to five years.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense has been recorded net of estimated forfeitures for the years ended September 30, 2009 and 2008 such that expense was recorded only for those stock-based awards that are expected to vest. Options granted to non-employees are recognized in these financial statements as compensation expense (See Note 8) using the Black-Scholes option-pricing model.
j.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company generally assesses its oil and gas properties on a field-by-field basis utilizing its current estimate of future revenues and operating expenses. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At September 30, 2009, we reviewed our long-lived assets and determined no impairment was necessary.
k.
New Accounting Standards
In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. We have not yet determined the impact, if any, which the provisions of ASU 2009-15 may have on the Company’s consolidated financial statements.
In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets, which formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets into the ASC. ASU 2009-16 represents a revision to the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 (1) eliminates the concept of a “qualifying special-purpose entity”, (2) changes the requirements for derecognizing financial assets, and (3) enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. The provisions of ASU 2009-16 are not expected to have a material impact on the Company’s consolidated financial statements.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In October 2009, the FASB published FASB ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 includes amendments to ASC Topic 470, Debt, (Subtopic 470-20), and ASC Topic 260, Earnings per Share (Subtopic 260-10), to provide guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing. The provisions of ASU 2009-15 are effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements. The provisions of ASU 2009-15 are effective for arrangements entered into on (not outstanding) or after the beginning of the first reporting period that begins on or after June 15, 2009. Certain transition disclosures are also required. Early application is not permitted. The provisions of ASU 2009-15 are not expected to have an impact on the Company’s consolidated financial statements.
In October 2009, the FASB published FASB ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements that Include Software Elements. ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. The provisions of ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) - Mutliple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. The provisions of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In September 2009, the FASB published FASB ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). It also requires new disclosures, by major category of investments, about the attributes includes of investments within the scope of this amendment to the Codification. The provisions of ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. Early application is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In June 2009, the FASB established the FASB Codification, which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. Generally, the Codification is not expected to change US GAAP. All other accounting literature excluded from the Codification will be considered nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the new standards for our fiscal year ended September 30, 2009. All references to authoritative accounting literature are now referenced in accordance with the Codification.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In October 2008, the FASB issued guidance regarding subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.
We have evaluated subsequent events after the balance sheet date of September 30, 2009 through the date the financial statements were available to be filed with the Securities and Exchange Commission (SEC). See Note 12 - Subsequent Events.
In December 2007, the FASB issued guidance related to Business Combinations. This guidance retains the underlying concepts that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. This guidance is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this guidance would also apply the provisions of this guidance. Early adoption is not permitted. The adoption of this guidance did not have an immediate effect on our financial statements; however, this guidance will govern the accounting for any future business combinations that the Company may enter into.
In April 2008, FASB issued guidance related to the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognizable intangible asset and the period of expected cash flows used to measure the fair value of the asset under U.S. generally accepted accounting principles. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not anticipate that the adoption of this guidance will have an impact on its financial position or results of operations.
In December 2007, the FASB issued guidance related to noncontrolling interests in consolidated financial statements. This guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain consolidation procedures. This guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. Based on the current consolidated financial statements, if this guidance were effective, the adoption of this guidance by the Company would not have an impact on its financial position or results of operations.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. We adopted this guidance on October 1, 2008. In February 2008, the FASB issued additional guidance which extended the effective date for certain nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of the portions of this guidance that were not postponed did not have a material impact on our consolidated financial statements. We are currently evaluating the effect of the implementation of those parts of the guidance that were deferred.
In April 2009, the FASB issued guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. It provides guidance for estimating fair value in accordance with fair value measurements, when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our financial position or results of operations.
On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. This statement is effective for our fiscal year ending September 30, 2010. We are currently assessing the impact that the adoption will have on its consolidated financial statements and disclosures.
3.
OIL AND GAS PROPERTIES AND EQUIPMENT
The Company recognized gain on sale of oil and gas properties of $400,000 during fiscal 2008
In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008. The remaining $50,000 is pending awaiting the consent of a joint interest owner in the remaining asset. Revenues and expenses applicable to such assets included in fiscal 2008 are not material as the wells have not produced since March 2006. The assets sold had no net book value.
In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and expenses applicable to such assets included in the fiscal 2008 are not material as the two gas wells which were part of the sale were marginal producers. The assets sold had no net book value.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
4.
MINERAL PROPERTIES
a.
Clean Age Minerals, Inc.
CAMI, through its wholly-owned subsidiary, CA Properties, Inc., a Nevada corporation, owns or has under long-term lease: (a) approximately 5,200 acres in Marfa, Presidio County, Texas, containing high grade zeolite; (b) twenty-five mining claims located in Sierra County, New Mexico, covering approximately 2,720 acres of kaolin; and (c) eleven zeolite mining claims covering approximately 220 acres located in Beaver County, Utah. The Company is an Exploration Stage company in respect to its mineral holdings. The Company’s ability to develop these mineral deposits is dependent on its success in bringing in strategic partners with experience in or a demand for specific minerals and raising capital through third parties.
In March 2005, the Company entered into the Sierra Kaolin Operating Agreement with TPA covering the Company’s kaolin claims in Sierra County, New Mexico. In June 2007, the Company entered into a Revised and Restated Agreement with TPA governing operations of the Sierra Kaolin claims. Under these agreements, TPA assumed the duties to mine, test and market the Company’s Sierra Kaolin.
b.
Minerals Properties and Equipment
The Company has been amortizing its mineral properties at a nominal amortization rate as the Company has not produced commercial quantities of any of its mineral deposits. During the fiscal year ended September 30, 2008, the Company recorded a charge of $150,000. Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.
During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted. Accordingly, the Company charged-off the mineral net book value ($1,876,972) and prepaid royalties ($100,000) in respect to the property. The loss on abandonment of the calcium carbonate property totaled $1,976,972. There was no revenue applicable to the calcium carbonate minerals included in the 2009 and 2008 fiscal years. The expenses applicable to the calcium carbonate minerals included in operating expenses and other costs totaled $32,600 and $92,157 in fiscal 2009 and 2008, respectively. An amortization charge of $135,000 applicable to the calcium carbonate minerals was included in depreciation, depletion and amortization expense for fiscal 2008.
c.
Prepaid Mineral Royalties
The Company receives a credit in the nature of “prepaid mineral royalties” for advance royalties paid on the Marfa zeolite lease, Presidio County, Texas.
The Company continued extraction of minor quantities of its zeolite for use in testing and field trial applications of ReNuGen™ and for testing in air purification and soil decontamination. The Company sells one of its CA Series Products under the tradename “ReNuGen™.”
5.
PATENT AND TECHNOLOGY
a.
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.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
b.
I-Squared and I-Top Technology
Pursuant to an agreement effective December 1, 2004 (“Asset Sale Agreement”), the Company agreed to sell its I-Squared and I-Top technology to PSNet Communications. In January 2005, Ostara Corporation (“Ostara”) acquired PSNet. Ostara changed its name to (1) Rheologics Technologies, Inc. in 2005, (2) to KKS Venture Management, Inc. in July 2007, and (3) Codima, Inc. (“CDMA”) in 2008. As of September 30, 2009 and 2008, the 3,167 shares (reflective of a reverse stock split) of CDMA common stock held by the Company were carried at $1,583 and $5,510, respectively.
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, 2009, the total amount payable on these notes is $886,949 representing principal of $514,881 and accrued but unpaid interest of $372,068.
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 $178,509 through that date. Additionally, the Company owes EV&T $180,305 for current services performed and such amount is included in trade accounts payable at September 30, 2009.
c.
First Regional Bank
During November 2008, the Company made a principal payment of $25,000 on the $100,000 loan from First Regional Bank and entered into a new note for $75,000 with the bank of which the maturity date is November 18, 2013. The interest rate is 4.10% at September 30, 2009. Consistent with the provisions of the Note, the Company has been making monthly payments of principal of $1,250 and interest. The current balance of the Note is $ 60,659. The loan is secured by the personal assets of Dov Amir, a Director of the Company (“Amir Assets”).
d.
Premium Finance Agreement
In November 2008, the Company entered into a premium finance security agreement with a bank to finance $21,860 of insurance premiums. At September 30, 2009, the Company has paid all amounts due under the agreement. In November 2007, the Company entered into a premium finance security agreement with a bank to finance $27,171 of insurance premiums. At September 30, 2008, the outstanding balance was $2,636 which was paid in October 2008.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
7.
DUE TO RELATED PARTIES
a.
Amir Obligations
Dov Amir, a director of the Company, has entered into four notes with the Company as follows:
1. Note dated October 1, 1995, bearing interest at the rate of prime plus 3 percent in the principal amount of $91,062. This principal amount was satisfied as of September 30, 2005.
2. Note dated October 1, 1995, bearing interest at the rate of 7% as a result of various subsequent advances to the Company. The outstanding principal balance was $45,485 as of September 30, 2009 and 2008.
3. Note dated July 20, 1998, in the face amount of $25,000, bearing interest at the rate of 2% over the prime rate charged by the Huntington National Bank of Columbus, Ohio, through the maturity date, November 21, 1998, and 18% thereafter. The principal amount has been satisfied as of September 30, 2006.
4. Note dated June 17, 2002, bearing interest at the rate of 7% in the principal amount of $137,000. This principal amount has been satisfied as of September 30, 2005.
As of September 30, 2009, the outstanding principal and accrued but unpaid interest on the obligations listed under numbers 1 through 4 to Mr. Amir amounted to $200,748, which includes $45,485 in principal and $155,263 in accrued interest. As of September 30, 2008, the outstanding principal and accrued but unpaid interest on the obligations listed under numbers 1 through 4 to Mr. Amir amounted to $223,528, which includes $45,485 in principal and $178,045 in accrued interest.
Mr. Amir was also entitled to a cash payment of $25,000 under his Key Man Contract (see Note 10) on June 30, 2002. This bonus has not been paid.
Prior to conversion of his Series A Preferred Stock into common stock, Mr. Amir was entitled to have received dividends in the amount of $91,551 of which $59,338 remains outstanding as of September 30, 2009 and 2008.
As of September 30, 2008, the Company owed Mr. Amir no un-reimbursed business expenses and $245,836 in accrued but unpaid salary. As of September 30, 2009, the Company owed Mr. Amir un-reimbursed business expenses totaling $5,939 and $245,836 in accrued but unpaid salary.
As of September 30, 2009 and 2008, the Company was indebted to Mr. Amir in the aggregate amount of $553,702 and $530,928, respectively.
In October 2006, Mr. Amir and the Company entered into a Separation Agreement providing for Mr. Amir to receive $100,000 annually for three years (“Term”), $50,000 of which will be deemed salary with the remaining $50,000 reducing the debt owed to Mr. Amir (“Amir Debt”). Accordingly, the Company recognized $150,000 as salary expense during fiscal 2007. Should the Amir Debt not be satisfied after the expiration of the Term, the Company shall continue the $100,000 annual payment, all of which shall be allocated to the payment of the Amir Debt until the Amir Debt is fully satisfied. The Company reserves the right to prepay the outstanding Amir Debt in full at any time. Upon satisfaction of the Amir Debt in full, all payments to Amir under the Separation Agreement will cease. The Company has not made certain payments required by the Separation Agreement applicable to the Amir Debt. Also, pursuant to the Separation Agreement, the Company was to satisfy the loan from First Regional Bank to the Company (see Note 6) or provide sufficient substitute collateral for the bank so that the Amir Assets were released. The Company has not been able to accomplish either of these and the Amir Assets have not been released by the bank.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
b.
Martin Obligations
By virtue of the merger of Clean Age Minerals, Inc. (“CAMI”) with Strategic Minerals, Inc. on September 19, 2000, Strategic Minerals, Inc. assumed the obligation of CAMI to Robert E. Martin, a director of the Company, in the amount of $134,811 (“Martin Debt”). The Martin Debt was to have been satisfied on or before September 18, 2001, but was not and remains outstanding. As of September 30, 2009, the Martin Debt amounts to $134,811 in principal and accrued but unpaid interest totals $110,945. The Martin Debt is evidenced by a note providing for an annual rate of interest of 8%. These amounts are included in the amounts shown for the Company’s obligation to the former officers and directors of Clean Age Minerals, Inc. (see Note 6). As of September 30, 2009 and 2008, the Company owed Mr. Martin $245,835 in salary and $19,051 in unpaid reimbursable business expenses. As of September 30, 2009 and 2008, the Company was indebted to Mr. Martin in the aggregate amount of $510,642 and $486,331, respectively.
c.
Novinskie Obligations
Under the terms of Mr. Novinskie’s employment agreement (see Note 10), Mr. Novinskie, currently the President and a Director of the Company, was to have received a cash bonus of $25,000 as of September 30, 2002. This bonus was not paid. As of September 30, 2009, the Company owed Mr. Novinskie $245,839 in salary and $25,000 in bonuses. As of September 30, 2008, the Company owed Mr. Novinskie $287,292 in salary and $25,000 in bonuses (as discussed previously).
As of September 30, 2009 and 2008, the Company was indebted to Mr. Novinskie in the aggregate amount of $312,292 and $294,792, respectively. These amounts contain no accrued interest.
d.
Haessler Obligations
By virtue of the merger of CAMI with Strategic Minerals, Inc. on September 19, 2000, Strategic Minerals, Inc. assumed the obligations of CAMI to Carl A. Haessler, a director of the Company, in the amount of $83,478 (“Haessler Debt”). The Haessler Debt was to have been satisfied on or before September 18, 2001, but was not and remains outstanding. As of September 30, 2009, the Haessler Debt amounts to $83,478 in principal and accrued but unpaid interest totals $60,324. The Haessler Debt is evidenced by a note providing for an annual rate of interest of 8%. These amounts are included in the amounts shown for the Company’s obligation to the former officers and directors of Clean Age Minerals, Inc. (see Note 6). As of September 30, 2009 and 2008, the Company was indebted to Mr. Haessler in the aggregate amount of $143,802 and $137,123, respectively.
Also, the Company owes Series B Preferred Stock dividends (see Note 8) to Mr. Haessler of $216,723 and $192,723 at September 30, 2009 and 2008, respectively.
e.
Blackstone Obligations
As of September 30, 2009, the Company owed Mr. Blackstone $43,675 for salary and services provided to the Company. At September 30, 2008, the Company owed Mr. Blackstone (see Note 10), an officer of the Company, $1,242 in un-reimbursed expenses and $21,675 in salary. As of September 30, 2009 and 2008, the Company was indebted to Mr. Blackstone in the aggregate amount of $43,675 and $22,917, respectively. These amounts contain no accrued interest.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
8.
CAPITAL STOCK
a.
Shares Outstanding
(1)
The Articles of Incorporation of the Company provide for authorized capital stock of 100,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value $0.01 per share. No Series A Preferred shares are outstanding. The 8% Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) was issued in the acquisition of Clean Age Minerals, Inc. in September 2000. The Series B Preferred Stock can be converted to common stock at 85% of the average of the 5 days before the date of conversion with a minimum amount of $1.25 per share.
(2)
In June 2009, the Company commenced a private placement of up to $500,000 of 7.25% convertible debentures (the “June 2009 Private Placement”). The debentures are convertible at a conversion price equal to the greater of either $0.14 per share or an amount equal to 80% of the average of the closing bid and ask prices of the Common Stock for the 5 trading days immediately preceding the conversion date. All of the purchasers of the debentures elected to immediately convert such holdings into Common Stock at an average conversion price of $0.14 per share and, accordingly, the Company has issued 1,019,465 shares of Common Stock as of September 30, 2009. As of September 30, 2009, this private placement raised $128,500 (net of fees and expenses totaling $14,225) for the Company. The Company is utilizing the proceeds of this private placement for general working capital purposes. During fiscal 2009, the Company recognized $23,402 as interest expense resulting from the beneficial conversion feature of the convertible debentures. Such interest expense was determined based on the fair value of the Company’s Common Stock on the debenture purchase commitment date in excess of the conversion price per share.
(3)
During June 2009, the Company issued 1,000,000 shares of Common Stock to William Smith, a consultant to the Company, in exchange for the marketing of and development of a market for the Company’s product, ReNuGen™, at $0.09 per share.
b.
Options and Warrants Outstanding
The Company has granted the following options and warrants to purchase common stock:
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
(1)
On March 7, 2007, the Board of Directors granted an option to Stephan V. Benediktson for the purchase of 600,000 shares of stock at an exercise price of $0.48 per share. Mr. Benediktson voluntarily resigned from his office with the Company in August 2007 and the option expired unexercised in November 2007.
(2)
During fiscal 2006, William Pipkin was granted an option to purchase 200,000 shares of stock at an exercise price of $0.43 per share under the Company’s Non-qualified Independent Director Stock Option Plan. In September 2008, Mr. Pipkin voluntarily resigned as a Director of the Company; accordingly, the option expired during fiscal 2009.
(3)
During fiscal 2004, Lord John Gilbert was granted an option to purchase 200,000 shares of stock at an exercise price of $0.85 per share under the Company’s Non-qualified Independent Director Stock Option Plan. The option expired during fiscal 2009.
(4)
During fiscal 2008, David L. Matz voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 75,000 (average exercise price of $0.52 per share) and 37,500 (exercise price of $0.75 per share) shares of stock expired during fiscal 2008 and 2009, respectively.
(5)
In June 2006, Richard A. Thibault voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 250,000 shares of stock at an exercise price of $0.48 per share expired during fiscal 2009.
(6)
In August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily resigned their respective positions with the Company; accordingly, options to purchase 200,000 shares of stock expired during fiscal 2008.
(7)
June 2007 Private Placement Warrants - Under the terms of the June 2007 Private Placement, investors were issued a warrant to purchase one share for each two shares of Common Stock purchased in the Private Placement. The warrants for the purchase of 363,336 shares expired during fiscal 2009.
(8)
During fiscal 2002, Dov Amir and Gary J. Novinskie were each granted an option to purchase 500,000 shares of stock at an exercise price of $0.53 per share. During fiscal 2007, Dov Amir and Gary J. Novinskie were each granted an option to purchase 200,000 shares of stock at an exercise price of $0.75 per share. These options for the purchase of 1,400,000 shares of stock expired during fiscal 2009.
(9)
On February 27, 2003, warrants to purchase 300,000 shares of common stock at a price of $0.13 per share were granted to each of Robert Conley and Bob Anthony in consideration of their consultation and individual expertise in regard to product development and application market identification with regard to the Company’s potential Sierra Kaolin and zeolite products respectively. Mr. Conley’s warrant expired unexercised on February 26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his warrant (100,000 shares) and he retained warrants to purchase 200,000 shares. During fiscal 2008, the expiration date for Mr. Anthony’s warrants was extended to February 26, 2009. The warrants expired unexercised.
(10)
On December 21, 2007, Sonata loaned the Company $75,000 pursuant to a promissory note of same date. The Company issued warrants for the purchase of 822,305 shares of stock at an exercise price of $0.55 per share. The warrants expire on December 31, 2010. On December 31, 2007, warrants for the purchase of 822,305 shares expired. See “d. Warrants” below.
(11)
During fiscal 2008, warrants held by Tecumseh Professional Associates to purchase 1,500,000 shares of common stock expired. See “d. Warrants” below.
c.
Stock-Based Compensation
In March 2004, the shareholders of the Company approved the Non-qualified Independent Director Stock Option Plan pursuant to which 800,000 shares of Common Stock are authorized for grants for options. Each Director eligible for an award under the plan receives an option to purchase 200,000 shares of Common Stock at an exercise price equal to the average of the bid and asked closing prices for the Company’s common stock for the five trading days immediately preceding the date of the award. These option rights vest over a three-year period (but only while the recipient is a Director) - 100,000 shares in the first year and 50,000 shares in each of years two and three. The options expire five (5) years after issuance. In fiscal 2006, Charles T. Maxwell was elected to the Board of Directors and was awarded an option to purchase 200,000 shares at an exercise price of $0.48 per share. In fiscal year 2007, David A. Grady was elected to the Board of Directors and was awarded an option to purchase 200,000 shares at an exercise price of $0.28 per share. As of September 30, 2009, two options to purchase a total of 400,000 shares have been awarded to Directors and remain unexercised at that date.
No options to purchase shares of Common Stock were granted during fiscal 2009 and fiscal 2008. Options to purchase 2,087,500 and 875,000 shares of common stock expired during fiscal 2009 and 2008, respectively. Of the options for the purchase of 787,500 shares outstanding as of September 30, 2009, options to purchase 600,000 shares are held by officers, directors and employees of the Company (“Insiders”). The exercise prices for the options held by Insiders range from $0.28 per share to $0.67 per share.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
In accordance with ASC 718, the Company recorded stock-based compensation expense for fiscal 2009 and 2008 of $62,399 and $188,476, respectively, relating to stock options granted to employees. Such expense is included in General and Administrative Expenses. No tax benefit has been recognized. Compensation costs are based on the fair value at the grant date. The fair value of the options has been estimated by using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates between 3.14% and 4.72%; expected life of three to seven years; and expected volatility between 56% and 184%.
At September 30, 2008, there were 2,875,000 shares underlying options unexercised (weighted-average exercise price of $0.56 per share) of which 250,000 shares underlying options were not vested (weighted-average exercise price of $0.45 per share; weighted-average grant-date fair value of $0.48 per share). The following table summarizes information about stock options outstanding as of September 30, 2009:
No options were granted during fiscal 2009 and 2008 and no options were exercised during fiscal 2009 and 2008. At September 30, 2009, there were 50,000 shares underlying options that were not vested and the weighted-average grant-date fair value of such options was $0.28 per share.
At September 30, 2009, there was $10,099 of total unrecognized compensation cost related to non-vested share-based compensation awards. The cost is expected to be recognized over a weighted-average period of one year. The total fair value of shares vested during the years ended September 30, 2009 and 2008 was $62,399 and $188,476, respectively.
d.
Warrants
1.
Financing Sources
In July 1998, warrants to purchase 263,638 shares were granted to four persons who loaned the Company a total of $145,000. At September 30, 2007, warrants to purchase a total of 136,364 shares were outstanding and such warrants expired unexercised on December 31, 2007.
In November 2001, warrants to purchase a total of 435,941 shares were granted to Sonata Investment Company, Ltd. (395,273 shares) and Standard Energy (40,668 shares) as consideration for entering into the Loan Conversion Agreement dated August 1, 2001. The Loan Conversion Agreement extended the date by which The Company had to satisfy its obligations to both Sonata Investment Company, Ltd. (“Sonata”) and Standard Energy Company (“Standard”) and granted both Sonata and Standard the right to convert the debt into common stock of the Company at such time as the Company advised Sonata and Standard of its intent to satisfy the Company’s obligations to one or both entities. Sonata and Standard are entities affiliated with each other. The exercise price is at $1.05 per share. The Sonata and Standard Warrants were to have expired August 1, 2002. The Company agreed to extend the termination date of the Sonata and Standard Warrants until July 31, 2004, in exchange for Sonata’s relinquishing its twenty percent (20%) interest in the net profits of The Company’s subsidiary Sustainable Forest Industries, Inc. These extensions have resulted in a $100,000 charge to the statement of loss in fiscal 2002. The Sonata warrants were further extended until December 31, 2007, as additional consideration under the Second Amendment to the Heller Loan; such warrants expired unexercised.
Sonata was granted an additional warrant to purchase 250,000 shares at a price of $0.906 per share under the Second Amendment to the Heller Loan. This warrant expired unexercised on December 31, 2007.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
On December 21, 2007, Sonata loaned the Company $75,000. The maturity date of such loan is December 20, 2008, and interest, at 8%, is due quarterly. The Company used the proceeds for general working capital purposes. The Company paid the note during the third quarter of 2008. In connection with this loan, the Company issued warrants for the purchase of 822,305 shares of Common Stock at a purchase price of $0.55 per share with an expiration date of December 31, 2010. In connection with the issuance of these warrants, the Company recognized a discount on the note payable of $18,720. This amount was to be accreted over a period of one year. During fiscal 2008, the Company recorded $18,720 of this amount under interest expense as the note was paid during the third quarter of 2008.
2.
Conley & Anthony Warrants
On February 27, 2003, warrants to purchase 300,000 shares at a price of $0.13 per share were granted to each of Robert Conley and Bob Anthony in consideration of their consultation and individual expertise in regard to product development and application market identification with regard to the Company’s potential Sierra Kaolin and zeolite products respectively. Mr. Conley’s warrant expired unexercised on February 26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his warrant (100,000 shares) and he retained warrants to purchase 200,000 shares. During fiscal 2008, the expiration date for Mr. Anthony’s warrant was extended to February 26, 2009 and expired unexercised.
3.
TPA Warrants
In accordance with the provisions of the First Amended Memorandum of Understanding (Sierra Kaolin Development) dated March 11, 2005, Tecumseh Professional Associates, Inc (“TPA”) was granted the right to acquire 1,500,000 shares at a price of $0.50 per share for $80,000 (“TPA Warrants”). The TPA Warrant expired unexercised on November 29, 2007.
4.
June 2007 Private Placement Warrants
Under the terms of the June 2007 Private Placement, investors were issued a warrant to purchase one share (at a price of $1.00 per share) for each two shares of Common Stock purchased in the Private Placement. The warrants for the purchase of 363,336 shares are exercisable on or before June 21, 2009. The warrants expired unexercised.
e.
Net Income (Loss) Per Share
Net income (loss) per share is computed in accordance with FASB ASC Topic 260, "Earnings per Share". Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be antidilutive.
At September 30, 2009 and 2008, options and warrants to purchase 1,609,805 and 4,260,641 shares of common stock, respectively were outstanding. Such shares were not included in the computation of diluted earnings per share because such shares subject to options and warrants would have an antidilutive effect on net loss per share. No other adjustments were made for purposes of per share calculations.
f.
Payment of Accrued Dividends
During fiscal years 2009 and 2008, there were no cash dividend payments in respect to either series of Preferred Stock.
g.
Subscriptions Receivable
At September 30, 2009 and 2008, the notes receivable from Messrs. Benediktson and Trynin as discussed in Note 10 are classified as Subscriptions Receivable.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
9. INCOME TAXES
At September 30, 2009, the Company has current federal and state taxes payable of $192,427 and no deferred taxes payable. The Company has accrued a provision of $106,864 for penalty and interest related to the federal and state income taxes. The income tax liabilities arose primarily from alternative minimum tax for fiscal 2004.
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. ASC 740 requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards. The Company has available at September 30, 2009, operating loss carryforwards of approximately $25 million, which may be applied against future taxable income and will expire in various years through 2024. The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined at this time. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards; therefore, no net deferred tax asset has been recognized. No potential benefit of these losses has been recognized in the financial statements. The company may be subject to IRC code section 382 which could limit the amount of the net operating loss and tax credit carryovers that can be used in future years.
The Company files income tax returns in the U.S. federal jurisdiction, and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2005.
10. EMPLOYMENT CONTRACTS AND COMMITMENTS
a. On November 16, 2001, the Company entered into a Stock Purchase Agreement with SCOA (“SCOA SPA”). As a condition to the closing of the SCOA SPA, SCOA required that the Company enter into Key Man Employment Contracts (“Key Man Contracts”) with Robert E. Martin, Gary J. Novinskie and Dov Amir. The Key Man Contracts provide for acceleration of the vesting of incentive options should the Key Man be terminated prior to the expiration of the term of the Key Man Contracts. Each of Messrs. Novinskie and Amir was granted options for 500,000 shares of Company Common Stock while Mr. Martin was granted options for 1,000,000 shares of Common Stock. Mr. Martin resigned from the Company in 2005. Mr. Amir’s contract expired in accordance with its terms on September 30, 2006. Mr. Novinskie’s Employment Contract has been extended until September 30, 2011 in accordance with its terms. The options granted to Messrs. Amir and Novinskie expired unexercised during fiscal 2009.
b. In August 2005, the Company entered into employment contracts with Stephan V. Benediktson as Chief Executive Officer of the Company and Nathan Trynin as Executive Vice President. Under the terms of their employment agreements neither party is entitled to a salary unless and until the Company raises a minimum of $1,000,000, exclusive of debt. Once the $1,000,000 or more is raised, Mr. Benediktson's salary will be $10,000 per month and Mr. Trynin's salary will be $5,000 per month. Each of Mr. Benediktson and Mr. Trynin were given the right to acquire stock of the Company at the average of the bid and ask closing price for the five trading days prior to the effective dates of their contracts. Each party exercised that right. The employment contracts also contain bonus provisions tied to the performance of the Company's stock. Mr. Benediktson and Mr. Trynin entered into notes with the Company totaling $576,000 to cover their purchase of the stock offered by their Employment Agreements (see Note 8). The notes are for five years and earn interest at the prime rate of interest charged from time to time by the PNC Bank, Philadelphia, Pennsylvania. The Company holds the stock as collateral for the notes. The stock will not be released to either Mr. Benediktson or Mr. Trynin unless and until their notes are satisfied in full in accordance with their terms. Interest receivable on these notes totaled $150,814 and $131,387 at September 30, 2009 and 2008, respectively.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
In accordance with the provisions of Paragraph 12 of Mr. Benediktson’s and Mr. Trynin’s employment agreements, each was entitled to receive a bonus based on the increase, if any, of the value of the Company’s shares over the prior year. The bonus is computed using the formula set forth in Paragraph 12 (b) in their respective employment agreements. In August 2007, Messrs. Benediktson and Trynin resigned from their respective positions with the Company. On August 8, 2007 the Board of Directors approved bonuses aggregating $1,373,831.
c. In March 2006, the Company entered into an Employment Agreement with Richard A. Thibault. Mr. Thibault joined the Company as Vice President - Minerals. Under the terms of the Agreement, in addition to his base salary, Mr. Thibault was granted an option to purchase 500,000 shares of Common Stock at an exercise price ($0.48 per share) equal to the then market price of the Company’s Common Stock. In June 2007, Mr. Thibault resigned his position with the Company. Accordingly, the vested portion of the option (250,000 shares) remained exercisable until June 2009. Such option expired unexercised.
d. On January 23, 2006, the Company entered into an Employment Agreement with David L. Matz. Mr. Matz joined the Company as Vice President - Oil & Gas. Under the terms of the Agreement, in addition to his base salary, Mr. Matz was granted an option to purchase 250,000 shares of Common Stock at an exercise price ($0.47 per share) equal to the then market price of the Company’s Common Stock. In March 2008, Mr. Matz resigned his position with the Company. Accordingly, the vested portion of the option (187,500 shares) remains exercisable until March 2010.
e. In October 2006, the Company entered into an Employment Agreement with Richard W. Blackstone. Mr. Blackstone joined the Company as the Secretary and Controller. Under the terms of the Agreement, in addition to his base salary, Mr. Blackstone was granted an option to purchase 200,000 shares of Common Stock at an exercise price ($0.67 per share) equal to the then market price of the Company’s Common Stock.
f. At September 30, 2009, minimum commitments from long-term non-cancelable operating leases are as follows:
11.
LITIGATION SETTLEMENT AND PENDING LITIGATION
a.
DRIOC Litigation
During August 2007, a complaint was filed against DRIOC in the Circuit Court of Tucker County, West Virginia, seeking an accounting and other information regarding certain wells operated by DRIOC in Tucker County, West Virginia. In September 2007, DRIOC entered into an Agreed Order to provide such information.
b.
WRC Litigation
During October 2008, a complaint was filed against WRC in the District Court of Burleson County, Texas, seeking judgment in respect to $172,267 owed to a vendor of WRC. Such amount is included in Accounts Payable in the accompanying Consolidated Balance Sheet at September 30, 2008. In November 2008, the vendor agreed to dismiss its complaint against WRC after a settlement agreement was reached whereby WRC agreed to make an initial payment of $60,000 and retire the remaining obligation over a twelve month period. During fiscal 2009, WRC defaulted on its payments to the vendor. The unpaid balance totals $92,921 and such amount is included in Accounts Payable in the accompanying Consolidated Balance Sheet at September 30, 2009.
12.
SUBSEQUENT EVENTS
On October 27, 2009, a working interest owner commenced an action against WRC in the District Court of Burleson County, Texas, for an accounting of expense and revenues for six wells. WRC, through its Texas counsel, has filed a general denial of the claim. In November 2009, WRC provided the plaintiff with a complete accounting for all wells in questions. The plaintiff has not responded to the documents and information provided.
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
On December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine project has cleared the regulatory review and that the project’s definitive USDA Forest Service Plan of Operations has been approved. This will facilitate the project moving to the next phase.
From October 1, 2009 through January 13, 2010, the Company has received subscriptions totaling $55,000 for the purchase of 7.25% convertible debentures pertaining to the June 2009 Private Placement (see Note 8). The Company is utilizing the proceeds of this private placement for general working capital purposes.
Management performed an evaluation of Company activity through January 13, 2010, the date the audited consolidated financial statements were issued, and concluded that there are no significant subsequent events requiring disclosure in addition to the above listed events.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL FINANCIAL INFORMATION
To the Board of Directors and
Stockholders of Daleco Resources Corporation
Our report to the Board of Directors and Stockholders of Daleco Resources Corporation and Subsidiaries dated January 13, 2010, relating to the consolidated basic financial statements of Daleco Resources Corporation and Subsidiaries appears on page 28. Those audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The information on Schedules V and VI and the Supplemental Information (Unaudited) are presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
In our opinion, such financial statement schedules present fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered significant recurring net losses, and negative operating cash flow, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 1 to the financial statements. The financial statements and this financial information do not include any adjustments that might result from the outcome of these uncertainties.
Vasquez & Company LLP
Vasquez & Company LLP
January 13, 2010
Los Angeles, California
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
SCHEDULE V - OIL AND GAS PROPERTIES FOR THE YEARS ENDED
SEPTEMBER 30, 2009 AND
(EXPRESSED IN THOUSANDS)
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
SCHEDULE VI -ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF OIL AND GAS PROPERTIES FOR THE YEARS ENDED
SEPTEMBER 30, 2009 AND
(EXPRESSED IN THOUSANDS)
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Estimated Net Quantities of Proven Oil and Gas Reserves
Proved reserves are the estimated quantities which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operation conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. These reserve estimates were prepared by independent engineers and are based on current technology and economic conditions. The Company considers such estimates to be reasonable; however, due to inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are imprecise and subject to change over time as additional information becomes available.
The following table shows the changes in the Company's proved oil and gas reserves for the year:
Standardized Measure of Discounted Future Net Cash Flow from Estimated Production Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows from estimated production of proven oil and gas reserves after income taxes is presented in accordance with the provisions of FASB ASC Topic 932, "Extractive Industries - Oil and Gas" (“ASC 932”). In computing this data, assumptions other than those mandated by ASC 932 could produce substantially different results. The Company cautions against viewing this information as a forecast of future economic conditions or revenues.
The standardized measure of discounted future net cash flows is determined by using estimated quantities of proved reserves and taking into account the future periods in which they have been projected to be developed and produced. Estimated future production is priced at the year-end price. The resulting estimated future cash inflows are reduced by estimated future costs to develop and produce the proved reserves. The future pretax net cash flows are then reduced further by deducting future income tax expenses as applicable. The resultant net cash flows are reduced to present value amounts by applying the ASC 932 mandated 10% discount factor.
Standardized Measure of Discounted Future Net Cash Inflows as of September 30, 2009 and 2008:
*
The Company presently has approximately $25 million of loss carryforwards for Federal income tax purposes. Based on these loss carryforwards no future taxes payable have been included in the determination of future new cash inflows. Future head office general and administrative expenses have not been deducted in determining future net cash flows.
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2009. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined by Rule 13a-15(f) promulgated under the Securities and Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive review, evaluation, and assessment of the Company’s internal control over financial reporting as of September 30, 2009. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on that assessment, management concluded that, as of September 30, 2009, the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in the annual report.
There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2009 that materially affected or were likely to materially affect the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
While we believe our disclosure controls and procedures and our internal control over financial reporting are adequate, no system of controls can prevent all error and all fraud. We are monitoring the effectiveness of our disclosure controls and internal controls and we may make modifications as we deem appropriate to strengthen our control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitation in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Code of Ethics
The Board of Directors of the Company has adopted a Code of Ethics for all of the Company's employees, officers and directors, a copy of which is attached hereto as Exhibit 14.1. Each officer and Director of the Company annually affirms that he has read the Company’s Code of Ethics and agrees to be bound thereby.
New Accounting Standards
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. We have not yet determined the impact, if any, which the provisions of ASU 2009-15 may have on the Company’s consolidated financial statements.
In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets, which formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets into the FASB ASC. ASU 2009-16 represents a revision to the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 (1) eliminates the concept of a “qualifying special-purpose entity”, (2) changes the requirements for derecognizing financial assets, and (3) enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. The provisions of ASU 2009-16 are not expected to have a material impact on the Company’s consolidated financial statements.
In October 2009, the FASB published FASB ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 includes amendments to ASC Topic 470, Debt, (Subtopic 470-20), and ASC Topic 260, Earnings per Share (Subtopic 260-10), to provide guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing. The provisions of ASU 2009-15 are effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements. The provisions of ASU 2009-15 are effective for arrangements entered into on (not outstanding) or after the beginning of the first reporting period that begins on or after June 15, 2009. Certain transition disclosures are also required. Early application is not permitted. The provisions of ASU 2009-15 are not expected to have an impact on the Company’s consolidated financial statements.
In October 2009, the FASB published FASB ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements that Include Software Elements. ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. The provisions of ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) - Mutliple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. The provisions of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In September 2009, the FASB published FASB ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). It also requires new disclosures, by major category of investments, about the attributes includes of investments within the scope of this amendment to the Codification. The provisions of ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. Early application is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. Generally, the Codification is not expected to change US GAAP. All other accounting literature excluded from the Codification will be considered nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the new standards for our fiscal year ended September 30, 2009. All references to authoritative accounting literature are now referenced in accordance with the Codification.
In October 2008, the FASB issued guidance regarding subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.
We have evaluated subsequent events after the balance sheet date of September 30, 2009 through the date the financial statements were available to be filed with the Securities and Exchange Commission (SEC) on January 13, 2010. See Note 12 of the Notes to Consolidated Financial Statements.
In December 2007, the FASB issued guidance related to Business Combinations. This guidance retains the underlying concepts that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. This guidance is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this guidance would also apply the provisions of this guidance. Early adoption is not permitted. The adoption of this guidance did not have an immediate effect on our financial statements; however, this guidance will govern the accounting for any future business combinations that the Company may enter into.
In April 2008, FASB issued guidance related to the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognizable intangible asset and the period of expected cash flows used to measure the fair value of the asset under U.S. generally accepted accounting principles. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not anticipate that the adoption of this guidance will have an impact on its financial position or results of operations.
In December 2007, the FASB issued guidance related to noncontrolling interests in consolidated financial statements. This guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain consolidation procedures. This guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. Based on the current consolidated financial statements, if this guidance were effective, the adoption of this guidance by the Company would not have an impact on its financial position or results of operations.
In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. We adopted this guidance on October 1, 2008. In February 2008, the FASB issued additional guidance which extended the effective date for certain nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of the portions of this guidance that were not postponed did not have a material impact on our consolidated financial statements. We are currently evaluating the effect of the implementation of those parts of the guidance that were deferred.
In April 2009, the FASB issued guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. It provides guidance for estimating fair value in accordance with fair value measurements, when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our financial position or results of operations.
In March 2009, the FASB issued guidance for revenue arrangements with multiple deliverables by providing guidance on accounting for revenue arrangements that provide for multiple payment streams. This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after December 15, 2009. We have not yet determined the effect on our consolidated financial statements, if any, that this guidance will have.
On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. This statement is effective for our fiscal year ending September 30, 2010. We are currently assessing the impact that the adoption will have on its consolidated financial statements and disclosures.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The information is incorporated by reference to the information contained in our 2010 Proxy Statement.
Item 11.
Item 11. Executive Compensation.
The information is incorporated by reference to the information contained in our 2010 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information is incorporated by reference to the information contained in our 2010 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information is incorporated by reference to the information contained in our 2010 Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information is incorporated by reference to the information contained in our 2010 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
FINANCIAL STATEMENTS.
The following audited financial statements are included herein in Item 8 of Part II:
*
Report of Independent Registered Public Accounting Firm
*
Consolidated Balance Sheets
*
Consolidated Statements of Operations
*
Consolidated Statements of Shareholders’ Equity
*
Consolidated Statements of Cash Flow
*
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are included herein in Item 8 of Part II:
*
Report of Independent Registered Public Accounting Firm On Supplemental Financial Information
*
Estimated Net Quantities of Proven Oil and Gas Reserves
*
Standardized Measure of Discounted Future Net Cash Flow from Estimated Production of Proved Oil and Gas Reserves
*
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
EXHIBITS.
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,
Exhibit
No.
Description
Location
3.2
Audit Committee Charter effective December 9, 2005
Incorporated by reference to Exhibit 3.7 to the Company’s Annual Report on Form 10-KSB for the fiscal year ending September 30, 2005, as filed with the SEC on January 17, 2006
3.3
By-Laws of Daleco Resources Corporation of Nevada, Inc.
Incorporated by reference to Appendix D to the Company’s definitive Proxy Statement dated February 4, 2002, incorporated by reference in Part III of the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2001, as filed with the SEC on January 25, 2001
3.4
Corporate Governance Policy Adopted April 10, 2008
Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2008, as filed with the SEC on August 12, 2008
3.5
Nominating and Governance Committee Charter Adopted April 10, 2008
Incorporated by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2008, as filed with the SEC on August 12, 2008
3.6
Compensation Committee Charter
Incorporated by reference to Exhibit 3.6 to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2008, as filed with the SEC on August 12, 2008
10.1
Securities Purchase Agreement - Letter of Intent dated July 23, 2001, by and between Terra Silex Holdings, LLC and Daleco Resources Corporation
Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3, 2002
10.2
Stock Purchase Agreement dated September 20, 2001 by and between Terra Silex Holdings Ltd. Co. and Daleco Resources Corporation
Incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3, 2002
10.3
Warrant Agreement, dated September 21, 2001, between Terra Silex Holdings Ltd. Co. and Daleco Resources Corporation
Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3, 2002
10.4
Employment Agreement, dated November 30, 2001, between the Registrant and Dov Amir
Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3, 2002
10.5
Employment Agreement, dated November 30, 2001, between the Registrant and Gary Novinskie
Incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3,
Exhibit
No.
Description
Location
10.6
Stock Purchase Agreement, dated November 16, 2001, between the Company and Sumitomo Corporation of America
Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2001 filed with the SEC on January 25, 2002
10.7
Key Man Contract, dated November 30, 2001, between the Company Robert E. Martin
Incorporated by reference to Exhibit 10.34 to the Company’s Registration Statement on Form SB-2 as filed with the SEC on September 3, 2002
10.8
First Amendment to Master Distribution and Marketing Agreement dated September 14, 2004
Incorporated by reference to Exhibit 10.36 to the Company’s Form 8-K as filed with the SEC on September 16, 2004
10.9
Memorandum of Understanding for Development of Sierra Kaolin Deposit dated December 2, 2004
Incorporated by Reference to Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.10
Development and Operating Agreement (Calcium Carbonates, Cibola County, NM) dated February 14, 2005
Incorporated by Reference to Exhibit 10.38 to the Company’s Form 8-K as filed with the SEC on February 17, 2005
10.11
Market and Product Development Agreement dated February 22, 2005
Incorporated by Reference to Exhibit 10.39 to the Company’s Form 8-K as filed with the SEC on February 28, 2005
10.12
Sierra Kaolin Operating License dated March 11, 2005
Incorporated by Reference to Exhibit 10.39 (sic) to the Company’s Form 8-K as filed with the SEC on March 17, 2005
10.13
Employment Agreement, dated August 10, 2005, between the Company and Stephan V. Benediktson
Incorporated by Reference to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.14
Employment Agreement, dated August 10, 2005, between the Company and Nathan K. Trynin
Incorporated by Reference to Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.15
Third Amendment To Limestone Mining Lease and Agreement, dated August 22,
Incorporated by Reference to Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.16
Employment Agreement, dated March 10, 2006, between the Company and Richard Thibault
Incorporated by reference to Exhibit 10.44 to the Company’s Form 8-K filed with the SEC on March 13, 2006.
Exhibit
No.
Description
Location
10.17
Sierra Kaolin Restated Development and Operating Agreement Among Tecumseh Professional Associates, Inc., Tecumseh Industrial Minerals, LLC, Daleco Resources Corporation, Clean Age Minerals, Inc., and C.A. Properties, Inc. dated June 7, 2007
Incorporated by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2007, as filed with the SEC on August 14, 2007
10.18
Separation Agreement, dated October 27, 2006, between the Company and Dov Amir
Incorporated by Reference to Exhibit 10.18 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.19
Employment Agreement, dated January 23, 2006, between the Company and David L. Matz
Incorporated by Reference to Exhibit 10.19 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.20
Employment Agreement, dated October 4, 2006, between the Company and Richard W. Blackstone
Incorporated by Reference to Exhibit 10.20 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2007 as filed with the SEC on February 14, 2008
10.21
Non-qualified Independent Director Stock Option Plan Approved by the Shareholders at the Annual Meeting on March 24, 2004
Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement dated February 3, 2004, incorporated by reference in Part III of the Company’s Annual report on Form 10-KSB for the fiscal year ended September 30, 2003, as filed with the SEC on January 14, 2004
10.22
Second Amendment to Loan Agreement dated December 31, 2003
Incorporated by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2009, as filed with the SEC on May 20, 2009
14.1
Code of Ethics adopted December 9, 2005
Incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ending September 30, 2005, as filed with the SEC on January 17, 2006
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
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,
Exhibit
No.
Description
Location
23.1
Consent of Denali Enterprises dated December 21, 2005
Incorporated by reference to Exhibit 23.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2005, as filed with the SEC on January 17, 2006
23.2
Consent of Hall Energy, Inc. dated January 13, 2010
Attached to the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 2009
23.3
Consent of KT Minerals, Inc. dated January 13, 2010
Attached to the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 2009
31.1
Certification of Gary J. Novinskie, Interim Chief Executive Officer and President dated January 13, 2010
Attached to the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2009
31.2
Certification of Gary J. Novinskie, Chief Financial Officer dated January 13,
Attached to the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2009
32.1
Certification of Gary J. Novinskie, Interim Chief Executive Officer and President dated January 13, 2010
Attached to the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2009
32.2
Certification of Gary J. Novinskie, Chief Financial Officer dated January 13,
Attached to the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2009
99.1
Location Maps for Registrant’s Zeolite lease in Marfa County, Texas, Calcium Carbonate Lease, Cibola County, New Mexico, Kaolin Claims, Sierra County, New Mexico and Zeolite Claims, Beacon County, Utah.
Incorporated by reference to Exhibit 99.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2005 as filed with the SEC on January 16,
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: January 13, 2010
By:
/s/ Gary J. Novinskie
Gary J. Novinskie, Interim Chief Executive Officer, President,
Chief Financial Officer (Principal Financial Officer) and
Director
Dated: January 13, 2010
By:
/s/ Richard W. Blackstone
Richard W. Blackstone, Controller (Chief
Accounting Officer)
Dated: January 13, 2010
By:
/s/ Dov Amir
Dov Amir, Director
Dated: January 13, 2010
By:
/s/ John Gilbert
John Gilbert, Director
Dated: January 13, 2010
By:
/s/ David A. Grady
David A. Grady, Director
Dated: January 13, 2010
By:
/s/ Carl A. Haessler
Carl A. Haessler, Director
Dated: January 13, 2010
By:
/s/ Robert E. Martin
Robert E. Martin, Director
Dated: January 13, 2010
By:
/s/ Charles T. Maxwell
Charles T. Maxwell, Director