Item 1. Financial Statements

Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The results of operations for the six and three months ended June 30, 2009 and 2008 are not necessarily indicative of the results for the entire fiscal year or for any other period.

 

DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

		June 30,				December 31,
		2009				2008
ASSETS
Current Assets:
Cash		$	3,826			$	13,957
Property and equipment - net			465				804
Investments in non-consolidated affiliates			2,044,024				1,780,024
Other assets			6,368				650
TOTAL ASSETS		$	2,054,683			$	1,795,435
LIABILITIES AND DEFICIENCY
Current Liabilities:
Accounts payable		$	454,792			$	363,004
Accrued expenses			1,469,141				1,363,395
Convertible debt			253,740				253,740
Notes payable			762,569				461,208
Total Current Liabilities			2,940,242				2,441,347
Deficiency
Delta Mutual Inc. and Subsidiaries Stockholders' Deficiency:
Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			-				-
Common stock $0.0001 par value - authorized 250,000,000 shares; 22,384,916 and 22,184,916 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			2,239				2,219
Additional paid-in-capital			4,295,267				3,782,797
Deferred stock purchase			10,000				-
Deficit			(5,193,065	)			(4,430,928	)
Total Delta Mutual Inc. and Subsidiaries Stockholders' Deficiency:			(885,559	)			(645,912	)
Noncontrolling interest			-				-
Total Deficiency			(885,559	)			(645,912	)
TOTAL LIABILITIES AND DEFICIENCY		$	2,054,683			$	1,795,435

DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		Six Months Ended June 30,								Three Months Ended June 30,
		2009				2008				2009				2008
Revenue:		$	-			$	-			$	-			$	-
Costs and expenses:
General and administrative expenses			734,943				998,132				444,803				396,454
Loss on intellectual property			-				122,742				-				122,742
			734,943				1,120,874				444,803				519,196
Loss from continuing operations			(734,943	)			(1,120,874	)			(444,803	)			(519,196	)
Interest expense			(20,742	)			24,260				(10,771	)			(7,949	)
Loss from continuing operations before provision for income taxes			(755,685	)			(1,096,614	)			(455,574	)			(527,145	)
Provision for income taxes			-				-				-				-
Net loss from continuing operations			(755,685	)			(1,096,614	)			(455,574	)			(527,145	)
Discontinued operations
Gain (loss) of disposal of Far East operations and South American Hedge Fund operations, and United States construction technology activities			(6,452	)			(2,034,218	)			61				19,462
Net loss			(762,137	)			(3,130,832	)			(455,513	)			(507,683	)
Less: Net loss attributable to noncontrolling interest			-				-				-				-
Net loss attributable to Delta Mutual Inc. and Subsidiaries		$	(762,137	)		$	(3,130,832	)		$	(455,513	)		$	(507,683	)
Loss per common share - basic and diluted:
Loss from continuing operations attributable to Delta Mutual Inc. and Subsidiaries common shareholders		$	(0.03	)		$	(0.17	)		$	(0.02	)		$	(0.02	)
Discontinued operations attributable to Delta Mutual Inc. and Subsidiaries common shareholders		$	(0.03	)		$	(0.17	)		$	(0.02	)		$	(0.02	)
Weighted average common shares - basic and diluted			22,256,739				18,966,039				22,327,773				22,131,657
Amounts attributable to Delta Mutual Inc. and Subsidiaries common shareholders:
Net loss		$	(762,137	)		$	(3,130,832	)		$	(455,513	)		$	(507,683	)

DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

(Unaudited)

		Number of
		Common				Common				Paid in				Retained Earnings				Noncontrolling
		Shares				Stock				Capital				(Deficit)				Interest				Total
Balance, January 1, 2008			13,000,000			$	1,300			$	2,598,700			$	1,869,468			$	-				4,469,468
Effect of reverse acquisition			7,888,295				789				7,099				(1,716,087	)							(1,708,199	)
Issuance of common stock for services (valued at $0.20 - $0.50 per share)			1,055,000				106				238,394				-								238,500
Issuance of common stock for debt (valued at $0.50 - $0.70 per share)			230,057				23				143,577				-								143,600
Issuance of common stock for interest (valued at $0.50- $0.70 per share)			11,563				1				7,047				-								7,048
Contribution from stockholder			-				-				1,000				-								1,000
Stock based compensation expense			-				-				786,980				-								786,980
Net loss			-				-				-				(4,584,309	)			-				(4,584,309	)
Balance, December 31, 2008			22,184,916				2,219				3,782,797				(4,430,928	)			-				(645,912	)

DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

(Unaudited)

		Number of																Deferred
		Common				Common				Paid in				Retained Earnings				Stock				Noncontrolling
		Shares				Stock				Capital				(Deficit)				Purchase				Interest				Total
Balance, January 1, 2009			22,184,916				2,219				3,782,797				(4,430,928	)							-				(645,912	)
Contribution from stockholder			-				-				(1,000	)			-												(1,000	)
Issuance of common stock for services (valued at $0.60 per share)			200,000				20				119,980																120,000
Deposit on stock not yet issued																			10,000								10,000
Stock based compensation expense			-				-				394,490				-												394,490
Net loss			-				-				-				(762,137	)			-				-				(762,137	)
Balance, June 30, 2009			22,384,916			$	2,239			$	4,296,267			$	(5,193,065	)		$	10,000			$	-			$	(884,559	)

See Notes to Unaudited Consolidated Financial Statements

 

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DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Six Months Ended June 30,
		2009				2008
Cash flows from operating activities:
Net loss		$	(762,137	)		$	(3,130,832	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			339				25,112
Non-cash compensation			120,000				245,548
Loss on intellectual property							122,742
Noncontrolling interest in income (loss) of consolidated subsidiaries			-				(18,815	)
Compensatory element of option issuance			393,490				393,490
Changes in operating assets and liabilities			(72,184	)			(128,096	)
Net cash used in operating activities			(320,492	)			(2,490,851	)
Cash flows from investing activities:
Proceeds from sales of investments			-				2,871,482
Cash flows from financing activities:
Proceeds from loans			311,361				186,950
Repayment of loan			-				(640,000	)
Contribution from stockholder			(1,000	)			-
Proceeds from minority interest			-				20,006
Net cash provided by financing activities			310,361				(433,044	)
Net decrease in cash			(10,131	)			(52,413	)
Cash - Beginning of period			13,957				57,633
Cash - End of period		$	3,826			$	5,220

See Notes to Unaudited Consolidated Financial Statements

 

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DELTA MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Continued)

		Six Months Ended June 30,
		2009				2008
Supplementary information:
Changes in operating assets and liabilities consists of:
(Increase) decrease in other prepaid expenses		$	(5,718	)		$	1,914
Increase (decrease) in accounts payable and accrued expenses			(66,466	)			(130,010	)
		$	(72,184	)		$	(128,096	)
Issuance of common stock for debt		$	-			$	143,600
Issuance of common stock for in lieu of payment of accrued expenses		$	-			$	7,048
Issuance of common stock for services		$	120,000			$	238,500

See Notes to Unaudited Consolidated Financial Statements

 

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DELTA MUTUAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2009 and 2008

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated balance sheets as of June 30, 2009 and the consolidated statements of operations, stockholders’ deficiency and cash flows for the periods presented herein have been prepared by Delta Mutual, Inc. and Subsidiaries (the “Company” or “Delta”) and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, changes in stockholders’ deficiency and cash flows for all periods presented have been made. The information for the consolidated balance sheet as of December 31, 2008 was derived from audited financial statements.

Organization

Delta Mutual, Inc. and subsidiaries (“Delta” or the “Company”) was incorporated in Delaware on November 17, 1999. Since 2003, the principal business activities of the Company were focused on providing environmental and construction technologies and services to certain geographic reporting segments in the Far East, Middle East and the United States.   During the year ended December 31, 2008, all of the operations in the Far East (Indonesia) were discontinued. In addition, the construction technology activities conducted solely by its wholly-owned U.S. subsidiary, Delta Technologies, Inc., were discontinued. See Notes 1, 4, 5 and 7 for further information regarding these discontinued operations.

On March 4, 2008, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with Egani, Inc., an Arizona corporation (“Egani”). Pursuant to the Agreement, the Company acquired from Egani all of the issued and outstanding shares of stock of 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 (“SAHF”). At the closing of the Agreement, the Company issued 13,000,000 shares of its common stock to Egani for the purchase of all of the outstanding shares of stock in Altony which constituted, following such issuance, a majority of the outstanding shares of the Company’s common stock.

Immediately following the closing of the Agreement, Altony became a wholly owned subsidiary of the Company. For accounting purposes only, the transaction was treated as a recapitalization of the Company, as of March 4, 208, with Altony as the acquirer. The financial statements prior to March 4, 2008 are those of Altony and reflect the assets and liabilities of Altony at historical carrying amounts. The financial statements show a retroactive restatement of Altony’s historical stockholders’ equity to reflect the equivalent number of shares issued to Egani.

 

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The principal business activity of Altony is the ownership and management of its SAHF subsidiary. During the year ended December 31, 2008, SAHF shifted its focus from investments in securities of Latin American entities to investments in oil and gas concessions and exploration rights in Argentina and intends to continue its focus on the energy sector, including the development and supply of energy and alternate energy sources in Latin America and North America.

In 2007, SAHF acquired ownership   interests in four oil and gas concessions in Argentina. The majority owners of these concessions have established joint ventures, registered in Argentina, that are in the process of obtaining the necessary government and environmental permits to begin operations at these concessions. SAHF will become a member of the joint ventures in 2009, when it receives its foreign registration in Argentina. In the first quarter of 2008, SAHF agreed to exchange half of the ownership interests it held in the concessions to a third party, that agreed to assume 50% of the SHAF’s subsequent development costs related to these four concessions. As of December 31, 2008, the Company’s ownership interests in these concessions ranged from nine to 23.5 percent.

In 2008, SAHF acquired 40% of the rights to explore for oil and gas in five geographic areas located in Northern Argentina.

Following the acquisition of Altony, the Company continued to pursue selected business opportunities in the Middle East that are conducted by its joint venture subsidiary Delta-Envirotech, Inc. (“Envirotech”), headquartered in Virginia.

BASIS OF PRESENTATION

The consolidated financial statements for the period ended June 30, 2009 have been prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. Management recognizes that the Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and revenue to cover expenses as the Company continues to incur losses.

The Company's business is subject to the risks of its oil and gas investments in South America. The likelihood of success of the Company must be considered in light of the expenses, difficulties, delays and unanticipated challenges encountered in connection with the operations of the oil and gas concession in Argentina. There is no assurance the Company will ultimately achieve a profitable level of operations.

The Company presently does not have sufficient liquid assets to finance its anticipated funding needs and obligations. The Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and achieve a level of oil and gas revenue adequate to support its cost structure. Management is actively seeking additional capital to ensure the continuation of its current activities and complete its proposed activities. However, there is no assurance that additional capital will be obtained or that the Company’s investments will be profitable. These uncertainties raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.

 

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PRINCIPLES OF CONSOLIDATION

The Company's financial statements include the accounts of all majority-owned subsidiaries where its ownership is more than 50   percent of the common stock. The consolidated financial statements also include the accounts of any Variable Interest Entities ("VIEs") where the Company is deemed to be the primary beneficiary, regardless of its ownership percentage. All significant intercompany balances and transactions with consolidated subsidiaries are eliminated in the consolidated financial statements.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 period. Actual results could differ from those estimates.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share are computed by dividing net earnings by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of common shares and potential common shares outstanding during the period. As the Company experienced a loss during the six months ended June 30, 2009, potential common shares are excluded from the loss per share calculation because the effect would be antidilutive. Potential common shares relate to the convertible debt and stock options. As of June 30, 2009 and 2008, there were 274,992 potential common shares, respectively, related to convertible debt and 350,000 and 699,800 common shares, respectively, related to stock options.

REVENUE RECOGNITION

The Company recognized revenue from the results of its investment portfolio as the difference between proceeds from the sale of securities and their acquisition cost, less commissions paid to the firm that conducts the securities transactions. The Company was in the business of trading securities and gains and losses from the sale of securities are included in the Company’s consolidated statements of operations.

EVALUATION OF LONG-LIVED ASSETS

The Company reviews property and equipment, finite-lived intangible assets and investments in non-consolidated affiliates for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable in accordance with guidance in Statement of Financial Accounting Standards (“SFAS”) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." If the carrying value of the long-lived asset exceeds the present value of the related estimated future cash flows, the asset would be adjusted to its fair value and an impairment loss would be charged to operations in the period identified.

 

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DEPRECIATION AND AMORTIZATION

Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets.

INVESTMENTS

At acquisition, marketable debt and equity securities are designated as trading securities which are carried at estimated fair value with unrealized gains and losses reflected in results of operations.

EQUITY METHOD INVESTMENTS

The Company accounts for non-marketable investments using the equity method of accounting if the investment gives it the ability to exercise significant influence over, but not control of, an investee. Significant influence generally exists if there is an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for additional investments and their proportionate share of earnings or losses and distributions. The Company records its share of the investee’s earnings or losses in earnings (losses) from unconsolidated entities, net of income taxes, in its consolidated statement of operations. Equity investments of less than 20% are stated at cost. The cost is not adjusted for its proportionate share of earnings or losses. The Company evaluates its equity method investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, the Company compares fair value of the investment to its carrying value to determine whether impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline to be other than temporary, the excess of the carrying value over the estimated fair value is recognized as impairment in the consolidated financial statements.

STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan under which stock options are granted to employees. The Company accounts for stock-based compensation under Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment."

INCOME TAXES

The Company accounts for income taxes using an asset and liability approach under which deferred taxes are recognized by applying enacted tax rates applicable to future years to the differences between financial statement carrying amounts and the tax basis of reported assets and liabilities. The principal item giving rise to deferred taxes are future tax benefits of certain net operating loss carryforwards.

 

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FOREIGN CURRENCY TRANSLATION

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 translation gains or losses were not material for the six and three months ended June 30, 2009 and 2008, and there were no adjustments to Cumulative Other Comprehensive Income.

POLITICAL RISK

The Company is exposed in the inherent risks for the foreseeable future of conducting business internationally. Language barriers, foreign laws and tariffs and taxation issues all have a potential effect on he Company’s ability to transact business. Political instability may increase the difficulties and costs of doing business. Accordingly, events resulting from changes in the political climate could have a material effect on the Company.

DISCONTINUED OPERATIONS

During the quarter ended June 30, 2008,   all of the operations in the Far East (Indonesia) were discontinued. During the quarter ended December 31, 2008, the construction technology activities that were carried out solely by the wholly-owned subsidiary, Delta Technologies, Inc., were discontinued. Also, as of December 31, 2008, the trading of securities by its South American Hedge Fund subsidiary were accounted for as discontinued operations. These discontinued operations resulted in a gain (loss) of $(6,452) and $(2,034,218) and $61 and $19,462, respectively, for the six and three months ended June 30, 2009 and 2008, respectively.

Summarized statement of loss for discontinued operations is as follows:

		Six Months Ended June 30,								Three Months Ended June 30,
		2009				2008				2009				2008
Net sales		$	—			$	—			$	—			$	—
Impairment			—				—				—				—
Provision for income taxes			—				—				—				—
Loss from operations, net of taxes			(6,452	)			(2,034,218	)			61				19,462
Gain on disposition of minority interest			—				—				—				—
Provision for income taxes			—				—				—				—
Loss from discontinued operations, net of taxes		$	(6,452	)		$	(2,034,218	)		$	61			$	19,462

 

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FAIR VALUE OF FINANCIAL INSTRUMENTS

For financial instruments including cash, accounts payable, accrued expenses, notes payable and convertible debt, it was assumed that the carrying amount approximated fair value because of the short maturities of such instruments.

NEW FINANCIAL ACCOUNTING STANDARDS

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. The Company completed its implementation of SFAS No. 157 on 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.

 

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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.

2. ACQUISITION

Effective March 4, 2008, the Company entered into a Membership Interest Purchase Agreement, pursuant to which the Company acquired from Egani, Inc. all the shares of stock of Altony SA, an Uruguayan 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 referred to as “SAHF”). At the closing of the Agreement, the Company issued 130,000,000 shares of its common stock to Egani, Inc. which constituted, following such issuance, a majority of the outstanding shares of its 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, as of March 4, 2008, with Altony as the acquirer.

The acquired assets and liabilities assumed of Delta Mutual from the reverse acquisition are as follows:

Cash		$	57,623
Prepaid expenses			1,914
Property and equipment			462,842
Accumulated depreciation			(94,719	)
Intangible asset-net			126,317
Other assets			650
Accounts payable			(173,370	)
Accrued expenses			(1,225,674	)
Convertible debt			(397,340	)
Notes payable			(240,655	)
Minority interests			(225,797	)
Common stock			(7,888	)
Deficit			1,716,087
		$	-0-

 

 

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3. INVESTMENTS

Trading securities are comprised of public and private securities of Latin American entities. For the six and three months ended June 30, 2009 and 2008, the Company incurred realized gains (losses) of $-0- and  $(2,053,033), respectively, and $-0- and $19,503, respectively. There were no investments in trading securities as of June 30, 2009 and December 31, 2008.

4. PROPERTY AND EQUIPMENT

		June 30,				December 31,
		2009				2008
Equipment		$	6,277			$	6,277
Leasehold improvements			7,807				7,807
			14,084				14,084
Less accumulated depreciation			13,619				13,280
		$	465			$	804

During 2008, the operations in the Far East (Indonesia) and the construction technology activities conducted by Delta Technologies, Inc., a wholly-owned US subsidiary, were discontinued. During the third and fourth quarters of 2008, the Company wrote off $268,127, the value of the equipment that was used in its Indonesian operations. During the fourth quarter of 2008, Delta Technologies, Inc. wrote off $77,125, the value of the manufacturing equipment that was used to produce its insulating concrete form (ICF) building product.

Depreciation expense for the six and three months ended June 30, 2009 and 2008 amounted to $339 and $21,537, respectively, and $169 and $10,329, respectively.

 

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5. INTANGIBLE ASSETS

Intangible assets consisted of intellectual property from a patent application. The Company elected not to pursue the patent application and recorded an impairment charge of $122,742 of the unamortized amounts during the quarter ended June 30, 2008. For the six and three months ended June 30, 2009 and 2008, amortization expense was $-0- and $3,575, respectively, and $-0- and $1,787, respectively. There were no intangible assets as of June 30, 2009 and December 31, 2008.

6. INVESTMENT IN NONCONSOLIDATED AFFILIATES

The Company has a 23.5% ownership interest in the Jollin and Tonono oil and gas concessions located in Northern Argentina. During 2007, the Company purchased a 47% ownership of these concessions and paid the purchase price by issuing a non-interest bearing note in the principal amount of $1,820,000 to Oxipetrol-Petroleros de Occidente S.A. (Oxipetrol), one of the other owners, with a maturity date of July 2008. The Company’s purchase price was based upon the price tendered by the original purchasers of the concessions that was and accepted by the Argentine government, who formerly owned these properties. The   government uses a number of factors In determining the selling prices for oil and gas concession in Argentina, including the location and size of the concession and the current market prices of crude oil and natural gas. Prior to the maturity date, the Company and Oxipetrol mutually agreed to reduce the principal amount of the Company’s note primarily because of changes in oil and gas prices. Based upon the purchase price reduction, the Company repaid Oxipetrol $1,270,000 at the maturity date. Based on these circumstances, the Company recorded a one time, retroactive adjustment, reducing the value of this investment by $550,000 at December 31, 2008.

During 2008, the Company exchanged 50% of its ownership in this investment with a third party for no cash consideration, however, the acquirer contractually agreed to assume 50% of the Company’s obligations with respect to future development expenses. The Company recorded a $635,000 loss on disposition of this investment in its consolidated statement of operations.

During the year ended December 31, 2008, majority owners of the Jollin and Tonono concessions formed an Argentine-registered joint venture and   paid, in the aggregate, approximately $848,00 of development costs,   all of which were capitalized. Since the Company is not currently registered as a foreign company in Argentina, it could not become a member of the joint venture in 2008. The other owners of these concessions have agreed that, upon admission of the Company as a member of the joint venture, the Company will retain its 23.5% ownership. However, the Company’s weighted average pro-rata portion of the 2008 aggregate development cost, of approximately $223,024, all of which is included in accounts payable in the Company’s consolidated balance sheet at December 31, 2008, will be repaid to the other members from its pro-rata share of the future earnings. The Company has applied for foreign registration in Argentina and expects to be admitted as a member of the joint venture during 2009.

 

 

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Currently, there is an oil well certified for commercial operation at the Tonono Concession. Delivery of the commercial production from this well is expected by the end of the third quarter of 2009. A well on the Jollin Concession contains natural gas and can begin production upon completion of a connecting pipeline that will connect this well to a major distribution pipeline. The connecting pipeline is owned by the joint venture and is currently the pre-construction phase. If the anticipated oil and gas revenue does not offset the development costs for these concession in 2009 and beyond, or is not sufficient to repay the Company’s obligation to the other owners, the Company’s share of the development and operating expenses will be borne by the other owners subject to the repayment method described above. During the first quarter of 2009, the Company paid approximately $193,500 for development expenses at the Jollin and Tonono concessions, all of which was capitalized, and is included in the Company’s consolidated financial statements. During the second quarter of 2009, the Company’s weighted average pro-rata portion of the development expenses at the Jollin and Tonono concessions was approximately $70,500, all of which is included in accounts payable in the Company’s consolidated balance sheets, and will be repaid to the other owners as described above.

During 2008, the Company purchased 40% of the oil and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina from Kestal, SA, a company that acquired 100% of these explorations rights from the government of Argentina in 2007. Kestal retained a 60% interest.   The price Kestal paid to acquire these rights from the government was determined by the process described above. The Company paid the $697,000 purchase price in cash and incurred no additional costs or expenses related to this investment in 2008. The Company expects that in 2009 and 2010, substantially all of the exploration costs required to retain these exploration rights will be borne by the majority owner.

The Company   has 9% ownership of the Tartagal and Morillo oil and gas concessions located in Northern Argentina. During 2007, the Company purchased an 18% ownership of these concessions and paid the purchase price by issuing a non-interest bearing note in the principal amount of $480,000 to Oxipetrol, one of the other owners, with a maturity date of July 2008. The purchase price for this investment was based on the original price paid to the Argentine government to acquire these concessions, following the process described above. Prior to the maturity date, the Company and Oxipetrol mutually agreed to reduce the principal amount of the Company’s note primarily because of changes in oil and gas prices. Based upon the purchase price reduction, the Company repaid Oxipetrol $450,000 at the maturity date. Based on these circumstances, the Company recorded a one time, retroactive adjustment reducing the value of this investment by $30,000 at December 31, 2008.

During 2008, the Company exchanged 50% of its ownership in this investment with a third party for no cash consideration, however, the acquirer contractually agreed to assume 50% of the Company’s obligations with respect to future development expenses. The Company recorded a $225,000 loss on disposition of this investment in its consolidated financial statements.

In March 2009, a Hong Kong public company purchased 60% of the ownership in the Tartagal and Morillo Concessions, from the other majority owners, for total consideration of approximately $270 million. These funds will be used for development and operating expenses in 2009 and beyond.

 

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The Company evaluated these investments for impairment and concluded that, except as described above, no loss in value occurred as of June 30, 2009. The following table summarizes the Company’s investments in these nonconsolidated affiliates.

		Concession				Exploration
		Investments				Rights				Total
At December 31, 2007		$	2,300,000			$	—			$	2,300,000
Adjustment of purchase price			(580,000	)			—				(580,000	)
Disposition of investment, net			(860,000	)			—				(860,000	)
Additional investment in 2008			223,024				697,000				920,024
Equity in net earnings (loss)			—				—				—
At December 31, 2008			1,083,024				697,000				1,780,024
Additional investments in 2009			264,000				—				264,000
At June 30, 2009		$	1,347,024			$	697,000			$	2,044,024

7. NONCONTROLLING INTEREST

During 2008, the Company discontinued its operations in the Far East (Indonesia) and the operations of its Puerto Rico real estate development partnerships. For the year ended December 31, 2008, the Company wrote off all balances in connection with these joint ventures and recorded a gain on the disposal of the discontinued operations of approximately $230,057, which was included in discontinued operations on the Company’s consolidated statements of operations for the year ended December 31, 2008.

The Company continues to maintain a 45% interest in Delta-Envirotech, Inc. which meets the definition of a Variable Interest Entity as defined in Financial Accounting Standards Board Interpretation No. 46 (FIN 46),"Consolidation of Variable Interest Entities" requiring the beneficiaries of a variable interest entity to consolidate the entity. The primary beneficiary of a variable interest entity is the party that absorbs the majority of the expected losses of the entity or receives a majority of the entity's expected residual return, or both, as a result of ownership, contractual or other financial interest in the entity.

Effective January 1, 2009, the Company completed its implementation of SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements- An Amendment of ARB No. 51.”

 

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8. SHORT-TERM DEBT

		June 30,				December 31,
		2009				2008
Notes payable to three investors, interest at 8%, due November 6, 2008 (1)		$	150,655			$	150,655
Note payable to third party, interest at 6%, due April 2009 (1)			30,000				30,000
Notes payable to stockholders and related parties, interest at 6%, due on demand			381,914				280,553
Note payable to Ambika, S.A., non-interest bearing, payable on demand			200,000				—
		$	762,569			$	461,208

(1)The Company did not repay these notes at the maturity dates. The Company is currently negotiating amended terms with the noteholders. If the Company and the noteholders can not agree upon an amendment to the note, including an extension of the maturity dates, the Company may receive a notice of default. If the Company receives a notice of default and fails to repay the notes, the lenders could initiate legal proceedings and obtain a judgment against the Company.

Interest expense for the six and three months ended June 30, 2009 and 2008 amounted to $16,867 and $(30,051), respectively, and $8,833 and $5,750, respectively. Accrued interest at June 30, 2009 and December 31, 2008 amounted to $41,235 and $24,370, respectively, and is included in accrued expenses on the Company’s consolidated balance sheets.

9. CONVERTIBLE DEBT

In connection with the March 4, 2008 merger, the Company assumed convertible debt obligations of $397,340. A note in the principal amount of $193,740 was not repaid at its maturity date. The Company is currently negotiating amended terms with the noteholder. If the Company and the noteholder can not agree upon an amendment to the note, including an extension of the maturity date, the Company may receive a notice of default. If the Company receives a notice of default and fails to repay the note, the lender could initiate legal proceedings and obtain a judgment against the Company.

In April 2008, the Company issued 230,058 shares of common stock in payment of the aggregate principal amount of $143,600 of convertible notes and issued 11,564 shares of common stock in payment of the accrued interest of $7,048.

At June 30, 2009, the Company's outstanding convertible notes were convertible into 274,992 shares of common stock.

The following table shows the maturities by year of total face amount of the convertible debt obligations at June 30, 2009:

2009		$	253,740
		$	253,740

 

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For the six and three months ended June 30, 2009 and 2008, the Company recorded interest expense of $3,875 and $5,791, respectively, and $1,938 and $2,199, respectively. As of June 30, 2009 and December 31, 2008, accrued interest of $46,150 and $42,275, respectively, is included in accrued expenses on the Company's consolidated balance sheets.

10. ACCRUED EXPENSES

Accrued expenses consist of the following:

		June 30,				December 31,
		2009				2008
Professional fees		$	12,000			$	33,000
Interest expense			87,385				66,664
Payroll expense			704,508				644,508
Payroll expense-officers			78,613				50,296
Payroll tax expense			53,513				45,481
Accrued consulting fees			419,867				419,877
Other accrued expenses			113,255				103,589
		$	1,469,141			$	1,363,395

During the year ended December 31, 2008, pursuant to a written agreement with the former president of the Company, $117,436 of his accrued salary was eliminated.

Accrued consulting fees as of June 30, 2009 and December 31, 2008 include $218,667 pursuant to a consulting agreement that had been terminated for cause by the Company.

11.   STOCKHOLDERS' EQUITY

 

On April 22, 2009, the Company’s board of directors approved amendments to the Certificate of Incorporation to: (1) effect a 1 for 10 reverse split of all the outstanding common stock; and (2) authorize a new class of 10,000,000 shares of preferred stock, par value $0.0001 per share, and to authorize the board of directors to issue one or more series of the preferred stock with such designations, rights, preferences and restrictions as determined by majority vote of the directors. Thereafter on April 23, 2009, the Company received written consent from stockholders of the Company holding a majority of the outstanding shares of common stock approving the Amendments. The effective date of the Amendments is the date the reverse stock split is made effective for trading purposes by the Financial Industry Regulatory Authority (FINRA). FINRA approved the reverse split for trading purposes effective July 6, 2009. The number of shares in these financial statements reflect a reduced number of shares outstanding of the Company’s common stock from 223,849, 518 to 22,384,916 as of June 30, 2009.

 

 

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All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented. As a result, there is no overall financial effect of the reverse split, however, the number of outstanding employee stock options has been reduced from 3,500,000 to 350,000 and the exercise price for the respective options has increased by a factor of 10.

 

As of June 30, 2009, the board of directors had not authorized the issuance of any series of preferred stock.

 

The Company issues shares of common stock for services and repayment of debt and interest valued at fair market value at time of issuance.

For the six months ended June 30, 2009 and 2008, the Company issued 200,000 and 1,055,000 shares of common stock, respectively, valued at $0.60 and $0.20 - $0.70 per share, respectively, for services valued at $120,000 and $238,500, respectively.

For the three months ended June 30, 2009 and 2008, the Company issued 200,000 and 55,000 shares, respectively, valued at $0.60 and $0.70 per share, respectively, for services valued at, and $120,000 and $38,500, respectively,

For the six months ended June 30, 2009 and 2008, the Company issued –0- and 230,058 shares of common stock, respectively, for the repayment of $-0- and $143,600 principal amount of convertible notes, respectively and issued –0- and 11,564 shares, respectively, as payment of $-0- and $7,048, respectively, of accrued interest. The shares were valued at $0.50 - $0.70 per share.

For the three months ended June 30, 2009 and 2008, the Company issued –0- and 230,058 shares of common stock, respectively, for the repayment of $143,600 principal amount of convertible notes, respectively, and issued –0- and 11,564 shares, respectively, as payment of $-0- and $7,048, respectively, of accrued interest. The shares were valued at $0.50 - $0.70 per share.

During the second quarter of 2009, the Company received $10,000 pursuant to subscription agreements to purchase 33,334 shares of common stock. As of June 30, 2009, the Company had not issued these shares.

12.   BUSINESS SEGMENT INFORMATION

The Company’s reporting business segments are geographic and include   North America (United States) and South America. The primary criteria by which financial performance is evaluated and resources allocated are revenue and operating income.

 

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The following is a summary of key financial data:

		Six Months Ended								Three months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Total Revenue:
North America		$	—			$	—			$	—			$	—
South America			—				—				—				—
		$	—			$	—			$	—			$	—
Income (Loss) from Continuing Operations:
North America		$	(755,685	)		$	(1,096,614	)		$	(455,574	)		$	(527,145	)
South America			—				—				—				—
		$	(755,685	)		$	(1,096,614	)		$	(455,574	)		$	(527,145	)

13.   INCOME TAXES

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no adjustment in the net liability for unrecognized income tax benefits.

14. SHARE BASED COMPENSATION

The Company records compensation expense in its consolidated statements of operations related to employee stock-based options and awards in accordance with SFAS No. 123(R) "Share-Based Payment."

The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective contractual terms, net of estimated forfeitures. The Company has selected the modified prospective method of transition.

The Company also issues shares of its common stock to non-employees as stock-based compensation. The Company accounts for the services using the fair market value of the services rendered. For the six months ended June 30, 2009 and 2008, the Company issued and 200,000 and 1,055,000 shares, respectively, and recorded compensation expense of $120,000 and $238,500, respectively, in conjunction with the issuance of these shares. For the three months ended June 30, 2009 and 2008, the Company issued 200,000 and 55,000 shares, respectively, and recorded compensation expense of $120,000 and $38,500, respectively, in conjunction with the issuance of these shares.

Stock Option Plan

In conjunction with the March 4, 2008 merger, the Company assumed the obligation of 797,800 outstanding stock options at their fair value. As of June 30, 2009, 650,000 shares of common stock remain available for issuance under the stock option plan.

 

 

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A summary of the option activity under the Company’s stock option plan as of December 31, 2008 and changes during the six months ended June 30, 2009, is presented below.

Options		Shares				Weighted-Average Exercise Share  Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2009			350,000			$	1.10
Options granted			-			$	-
Options exercised			-			$	-
Options cancelled/expired			-			$	-
Outstanding at June 30, 2009			350,000			$	1.10				1.9			$	(245,000	)
Exercisable at June 30, 2009			350,000			$	1.10				1.9				—

Stock compensation expense applicable to stock options for the six and three months ended June 30, 2009 and 2008 was approximately $393,490 and $196,745, respectively. The aggregate intrinsic value of options outstanding as of June 30, 2009 was $(245,000).

All of the Company’s outstanding options were exercisable as of June 30, 2009.

At June 30 2009, there was $228,800 of total unrecognized compensation cost related to share-based compensation arrangements granted under the stock option plan. The cost is expected to be recognized over a weighted average period of 1.9 years.

15. COMMITMENTS AND CONTINGENCIES

Consulting Agreements

The Company had a consulting agreement that expired during the year ended December 31, 2008. As of June 30, 2009 and December 31, 2008, consulting fees of $201,200 associated with this agreement are included in accrued expenses on the Company's consolidated balance sheets.

 

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16. LEGAL PROCEEDINGS

On September 16, 2008, the Company was notified of a complaint filed with the Pennsylvania Department of Labor & Industry by its former President and CEO alleging non-payment of wages in the amount of $53,271. The Company also received notice of a similar complaint filed by a former employee alleging non-payment of wages in the amount of $17,782. In October 2008, the Company entered into repayment agreements with both of the former employees. The Company has not made any payments to these two former employees pursuant to the agreements. The Company believes the resolution of this matter will not have a material effect on the Company or its operations.

On February 5, 2009, the Company was notified that it was named as a co-defendant in a citation corporate filed in the District Court in Harris County, Texas in November 2007, by Equisource Ventures. The suit alleges breach of contract and unjust enrichment, and the plaintiff seeks actual and exemplary damages for unpaid consulting fees, attorneys’ fees, other costs and interest. The Company denies any wrongdoing and will contest vigorously the claims asserted against it. The Company also believes that the resolution of this matter will have no material effect upon the Company or its operations.

One June 3, 2009, Delta Technologies, Inc., a wholly owned subsidiary of the Company and a discontinued operation (“Delta Technologies”), was notified by a law firm engaged by Wolf Block LLP (“Wolf Block”), a law firm that had provided intellectually property legal services to Delta Technologies, that it had been retained in an attempt to collect a past due amount of approximately $41,000. If Delta Technologies does not make payment arrangements or cannot otherwise resolve this matter, Wolf Block has authorized a lawsuit to be filed against Delta Technologies and/or the Company. Delta Technologies has contacted the law firm retained by Wolf Block to dispute the amount of the past due legal services provided by Wolf Block, and is attempting to establish the correct amount past due prior to making repayment arrangements, if any. The Company believes that the resolution of this matter will have no material effect on the Company or its operations.

 

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