ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto and other financial information included elsewhere in this report.

Certain statements contained in this report, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including our ability to create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes in our business strategy or development plans; competition; business disruptions; adverse publicity; and international, national and local general economic and market conditions.

GENERAL

We were incorporated in the State of Delaware on November 17, 1999. In 2003, we established business operations focused on providing environmental and construction technologies and services in the Far East, the Middle East, and the United States. As of December 31, 2008, we discontinued our construction technology activities and our business in the Far East (Indonesia).

On March 4, 2008, we entered into a Membership Interest Purchase Agreement (the “Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the Agreement, we acquired from Egani 100% of the shares of stock held by Egani in Altony S.A., an Uruguay Sociedad Anonima, (“Altony”) which owns 100% of the issued and outstanding membership interests in South American Hedge Fund LLC, a Delaware limited liability company (sometimes herein referred to as “SAHF”). At the closing of the Agreement, we issued 130,000,000 shares of our Common stock to Egani for the purchase of Altony which constituted, following such issuance, a majority of the outstanding shares of our common stock. Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. For accounting purposes, the transaction was treated as a recapitalization of the Company with Altony as the acquirer.

The Company’s principal business at this time is conducted by our subsidiary, South American Hedge Fund, which has investments in oil and gas concessions in Argentina and intends to focus its investments in the energy sector, including development of energy producing investments and alternative energy production in Latin America and North America. Following the acquisition of SAHF, management has continued to pursue selected business opportunities in the Middle East These activities are conducted by our joint venture subsidiary, Delta-Envirotech, Inc. (“Envirotech”). We have operating control of Envirotech and hold a 45% percent ownership interest.

RESULTS OF OPERATIONS

During the three months ended March 31, 2009, we incurred a net loss of $306,624 primarily due to a loss from continuing operations of approximately $300,000. Our ability to continue as a going concern is dependent upon our ability to obtain funds to meet our obligations on a timely basis, obtain additional financing or refinancing as may be required, and ultimately to attain profitability. There are no assurances that we will be able to obtain additional financing or that such financing will be on terms favorable to us. The inability to obtain additional financing when needed would have a material adverse effect on our operating results.

THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2008

During the three months ended March 31, 2009, we incurred a net loss from continuing operations of approximately $300,000 compared to approximately $569,000 for the three months ended March 31, 2008. The decrease in our loss from continuing operations for the three months ended March 31, 2009 over the comparable period of the prior year was primarily due to a decrease in general and administrative expenses of approximately $312,000.

Our net loss for the three months ended March 31, 2009 was approximately $307,000 compared to a net loss of approximately $2,623,000 for the comparable prior year period. The net loss for the three months ended March 31, 2008 included a loss from discontinued operations of approximately $2,054,000 associated with the liquidation of the investment portfolio.

 

 

PLAN OF OPERATION

The primary focus of the Company’s business is its South American Hedge Fund subsidiary that has investments in oil and gas exploration and production in Argentina and will continue to focus on the energy sector, including the development and supply of energy and alternative energy sources in Latin America and North America. As of December 31, 2008, the securities trading activities of South American Hedge Fund were accounted for as discontinued operations.

Oil and Gas Investments

Our main source of revenue will derive from the sale of crude oil and natural gas produced form the four oil and gas concessions in which we have made investments. While we are not the operators of these concessions, we expect to have representation on the operating committees that are responsible for managing the business affairs of these concessions. Our ownership interests in these concessions range from nine to 23.5%.

Jollin and Tonono Concessions

In 2008, the majority owners of these concessions formed an Argentine-registered joint venture to operate these concessions. Since SAHF is not currently registered in Argentina, it could not become an official member of the joint venture. The other owners of the joint venture have agreed that SAHF will be admitted as a member of the joint venture, upon the registration of SAHF as a foreign company in Argentina. SAHF has applied for foreign registration and expects to become a member of the joint venture in 2009.

A well located in the Tonono Concession became operational for the commercial production of oil in the first quarter of 2009. Delivery of the commercial production is expected in the second quarter.  A well located in the Jollin Concession contains commercial quantities of natural gas. A natural gas pipeline connecting the Jollin Concession to a major distribution pipeline is in the pre-construction phase. The connecting pipeline is being constructed and will be owned by the joint venture. It is expected to be completed during the second quarter of 2009. Upon completion, it will permit the joint venture to commence deriving additional revenue from the sale of natural gas.

Tartagal and Morillo Concessions

In 2008, the majority owners of the Tartagal and Morillo Concessions agreed to form an Argentine-registered joint venture and applied for government approval of the license to operate the concessions. SAHF expects to receive its foreign corporation registration in 2009 and join the joint venture when it formed and is registered with the government.

In March 2009, a Hong Kong public company, following approval by its shareholders, agreed to acquire a 60% participation interest in these concessions for approximately $280 million. The Company expects that the funds from this acquisition will be used for development and operating expenses in 2009 and beyond. Deliveries of crude oil from these concession are expected to begin in 2009.

Exploration Rights

SAHF holds a 40% interest in the oil and gas exploration rights to five geographically defined area in the Salta Province of Northern Argentina. Provided certain development activities are under taken by the majority owner, these exploration rights will remain in effect until the year 2010.

Middle East

Envirotech is the Middle East distributor of an organic supplement designed to increase crop yield. During the second half of 2008, a Saudi Arabian farm operator purchased sample quantities of the organic supplement for crop testing. Subsequent purchases in commercial quantities will depend upon the evaluation of the crop yield that will begin in the second quarter of 2009.

 

FUNDING

Our current business plan for 2009 and beyond anticipates a substantial increase in revenue primarily from our investments in oil and gas concessions in Argentina. If we do not achieve the expected levels of revenue, we may be required to raise additional capital through equity and/or debt financing.

 

LIQUIDITY

At March 31, 2009, we had a working capital deficit of approximately $2.7 million, compared with a working capital deficit of approximately $2.4 million at December 31, 2008. The increase as of March 31, 2009 was due primarily to increases in accrued expenses of approximately $34,000 and increases in notes payable of approximately $267,000.

At March 31, 2009, we had total assets of approximately $2.0 million compared to total assets of approximately $1.8 million at December 31, 2008. The increase is primarily attributable to additional investments in the amount of approximately $193,000 made in our oil and gas concessions in Argentina.

Cash decreased approximately $9,000 for the three months ended March 31, 2009. The decrease is primarily attributable to additional investments in our oil and gas concessions of approximately $193,000 and cash used in operations activities (primarily a net loss of $306,624 offset by the non-cash option issuance of $196,745) offset by proceeds from loans of approximately $267,000.

CRITICAL ACCOUNTING ISSUES

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to intangible assets, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other Matters

Accounting Pronouncements

  

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which enhances existing guidance for measuring assets and liabilities using fair value.  This Standard provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. In February 2008, the FASB issued FASB Staff Position SFAS 157-1, “Application of SFAS No. 157 to SFAS No. 13 and its “Related Interpretive Accounting Pronouncements that Address Leasing Transactions,” (“FSP SFAS 157-1”) and FASB Staff Position SFAS 157-2, “Effective Date of SFAS No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-1 excludes SFAS No. 13 and its related interpretive accounting pronouncements that address leasing transactions from the requirements of SFAS No. 157, with the exception of fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of SFAS No. 157. FSP SFAS 157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP SFAS 157-1 and FSP SFAS 157-2 became effective for the Company upon adoption of SFAS No. 157 on January 1, 2008. See Note 4 of Notes to Consolidated Financial Statements for disclosures related to the Company’s financial assets accounted for at fair value on a recurring or nonrecurring basis. The Company completed its implementation of SFAS no. 157 effective January 1, 2009 and it did not have a material impact on its financial statements.

In December 2007, the FASB issued SFAS 141(R), which replaces SFAS 141 “Business Combinations.” This Statement is intended to improve the relevance, completeness and representational faithfulness of the information provided in financial reports about the assets acquired and the liabilities assumed in a business combination.  This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. Under SFAS 141(R), acquisition-related costs, including restructuring costs, must be recognized separately from the acquisition and will generally be expensed as incurred. That replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141(R) shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. The Company has adopted SFAS No. 141(R) effective January 1, 2009 and it did not have a material impact on its financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 62 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. The Company has adopted SFAS No. 162 effective January 1, 2009 and it did not have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements - An amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of non-controlling interests (minority interest) as equity in the consolidated financial statements and separate from parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement.  SFAS No. 160 clarifies that changes in a parent’s ownership in a subsidiary that does not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment of the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interest of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods other than fiscal years, beginning on or after December 15, 2008. The Company has adopted SFAS No. 160 effective January 1, 2009 and it did not have a material impact on its financial statements.

Critical Accounting Policies

The Securities and Exchange Commission recently issued “Financial Reporting Release No. 60 Cautionary Advice About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosures, discussion and commentary on their accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements.

Foreign currency risk - The functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange rate for the period. The functional currency in South America is the U.S. dollar. Translation adjustments are recorded in Cumulative Other Comprehensive Income.

The Company assesses potential impairment of its long-lived assets, which include its property and equipment, investments, and its identifiable intangibles such as deferred charges under the guidance of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment.

Investments in non-consolidated affiliates – These investments consist of the Company’s ownership interests in oil and gas development and exploration rights in Argentina, net of impairment losses if any.

We evaluate these investments for impairment when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, levels of oil and gas reserves, availability of pipeline (or other transportation) capacity and infrastructure and management of the operations in which the investments were made.