UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934


For the fiscal year ended September 30, 2016


o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934


For the transition period from __________________ to __________________


Commission File No. 001-10171


DALA PETROLEUM CORP.

(Name of Small Business Issuer in its Charter)


Delaware

 

80-0000245

(State or other Jurisdiction of Incorporation or organization)

 

(I.R.S. Employer Identification No.)


328 Barry Ave S #210, Wayzata, MN 55391

(Address of Principal Executive Offices)


952-479-1923

(Registrant’s Telephone Number, including area code)


Securities Registered Pursuant to Section 12(b) of the Act: None


Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.001


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes   x No


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o Yes   x No


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   o No


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of large accelerated filer , accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer   o      Accelerated Filer   o      Non-Accelerated Filer   o      Smaller Reporting Company   x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No


On March 31, 2016, the last business day of the registrant s most recently completed second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $149,528.58, based upon the closing price on that date of the common stock of the registrant on the OTC Bulletin Board system of $0.03. For purposes of this response, the registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of its Common Stock are deemed affiliates of the registrant.


As of January 9, 2017, the registrant had 2,926,486 shares of its common stock, $0.001 par value, issued, issuable, and outstanding.






FORWARD LOOKING STATEMENTS


In this Annual Report, references to “Dala Petroleum Corp.,” “Dala,” the “Company,” “we,” “us,” “our” and words of similar import, refer to Dala Petroleum Corp., the Registrant.


This Annual Report on Form 10-K contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “anticipate,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. Investors should carefully consider all of such risks before making an investment decision with respect to the Company’s stock. The following discussion and analysis should be read in conjunction with our financial statements for Dala Petroleum Corp. Such discussion represents only the best present assessment from our Management.


TABLE OF CONTENTS

 

 

 

PART I.

 

 

Item 1.        Business

 

3

Item 1.A.    Risk Factors

 

10

Item 1.B.    Unresolved Staff Comments

 

18

Item 2.        Properties

 

18

Item 3.        Legal Proceedings

 

18

Item 4.        Mine Safety Disclosures

 

18

 

 

 

PART II.

 

 

Item 5.        Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

19

Item 6.        Selected Financial Data

 

20

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operation

 

20

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 8.        Financial Statements and Supplementary Data

 

25

Item 9.        Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

45

Item 9A.     Controls and Procedures

 

45

Item 9B.     Other Information

 

46

 

 

 

PART III.

 

 

Item 10.      Directors, Executive Officers and Corporate Governance

 

46

Item 11.      Executive Compensation

 

48

Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

50

Item 13.      Certain Relationships and Related Transactions, and Director Independence

 

51

Item 14.      Principal Accounting Fees and Services

 

51

 

 

 

PART IV.

 

 

Item 15.      Exhibits, Financial Statement Schedules

 

52

 

 

 

Signatures

 

54













2





PART I


ITEM 1.  BUSINESS


Corporate History


Dala Petroleum Corp. was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation.   All of our prior operations were conducted through Lee Building Products and T. A. Kilgore & Company, (“Kilgore”), which owned and operated a home center in League City, Texas, about 30 miles southeast of downtown Houston, Texas. During 1990, we ceased all operations, and the secured lenders took possession of all of its assets.


On March 11, 2000, our Board of Directors began the process of re-entering the development stage with the appointment of new officers and directors, and began the process of seeking the acquisition of new business opportunities. These efforts resulted in the completion of the acquisition of Dala Petroleum Corp., a Nevada Corporation (“Dala”), a transaction that is more specifically described below.


On June 2, 2014, Westcott Products Corp., a Delaware corporation (“Westcott”), its newly formed and wholly-owned subsidiary, Dala Acquisition Corp., a Nevada corporation (“Merger Subsidiary”), and Dala Petroleum Corp., a Nevada corporation (“Dala”), executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”) and all required or necessary documentation to complete the merger (collectively, the “Transaction Documents”), whereby Merger Subsidiary merged with and into Dala, and Dala was the surviving company under the merger and became a wholly-owned subsidiary of Westcott on the closing of the merger (the “Merger”).  Effective June 2, 2014, the respective Boards of Directors of Westcott and Dala, along with Westcott, as the sole stockholder of Merger Subsidiary, and Dala’s sole stockholder Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”) owning 100% of the outstanding voting securities of Dala approved the Merger by written consent, and the Articles of Merger were filed with the Secretary of State of the State of Nevada on such date, which was the effective date of the Merger.  Accordingly, Westcott issued 10,000,000 shares of its common stock in exchange for all of the outstanding shares of common stock of Dala, to Dala Petroleum’s sole shareholder. Following the receipt of the 10,000,000 shares, Chisholm II’s managing director approved the transfer of all of the shares to its members (or its members’ designees) on a pro rata basis. The transfer of shares to the members of Chisholm II occurred on June 8, 2014.


Several conditions precedent as set forth in the Merger Agreement were completed prior to the Merger. One critical condition precedent set forth in the Merger Agreement is that Westcott would raise no less than $2,000,000 (the minimum Offering) from persons who are “accredited investors” in consideration of the issuance (or the conversion) of a minimum of 2,000 shares up to a maximum of 2,500 shares of its Series A 6% Convertible Preferred Stock at the offering price of $1,000 per Unit. Upon the closing of the Offering, the Company sold 2,025 Units in the Offering, raising $2,025,000.


On August 29, 2014, the Company filed a Certificate of Amendment of Certificate of Incorporation with the State of Delaware changing the name of the Company to “Dala Petroleum Corp.,” as approved by a majority of the common shareholders and 67% of the preferred shareholders.


Dala possesses rights to engage in oil and natural gas exploration and development in north central Kansas, with total acreage of approximately 25,000 acres (the “Property”). Since the time of the Merger, Dala is operating as an early-stage oil exploration company focused on the Property, which has oil potential at depths of less than 6,000 feet. Dala was assigned the rights to explore the Property from Chisholm Partners II, LLC (“Chisholm II”), an exploration and production company focused on the acquisition of Kansas oil leasehold interests and exploration and development and Dala’s sole shareholder prior to the Merger into the Company.


Since May 2015, Dala has temporarily suspended its exploration program due to the decline in the price of oil and difficult market conditions. During the year ended September 30, 2016 the Company did not drill any wells.


Dala has established a land position over a shallow, conventional oil play in north central Kansas.  The "Play" or exploration concept is located across a four county area and is geographically defined by the boundaries of the productive North American Rift System.  The land position is concentrated over a lightly explored portion of the Rift, bordered immediately on the south by productive rift-related oil fields, and to the north by significant new discoveries in southeast Nebraska, where productive rates have recently been reported.  This Play concept was developed by a team of highly experienced international geologists, geophysicists and land experts, who applied regional geologic theory, proprietary geophysical databases and high resolution seismic.


The Company entered into a Partial Cancellation Agreement (the “PCA”) by and among its subsidiary, Dala Petroleum Corp., a Nevada corporation (“Dala NV”), Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”), and certain members of Chisholm II (the “Chisholm Members”) through which Chisholm II (after receiving shares from certain of its Chisholm Members) returned a total of 8,567,800 shares of the Company common stock to the Company’s treasury for cancellation.  In exchange for the return of these shares for cancellation, the Company assigned 55,000 acres of the Company’s property rights (approximately 68.75% of its total holdings) to Chisholm II.




3




Pursuant to terms of the PCA, on May 26, 2016, the 8,567,800 shares of common stock delivered by Chisholm II were cancelled on the books and records of the Company. Prior to that, Company delivered 55,000 acres of its leased property to Chisholm II.


On May 16, 2016, as approved by the Board of Directors of the Company as part of the settlement with the Preferred Shareholders, the Company filed an Amended and Restated Certificate of Designation of the Company’s Series A 6% Convertible Preferred Stock (the “COD”), which (i) changed the conversion price of the preferred stock from $0.70 per share to $0.05 per share, and (ii) eliminated Section 7 “Certain Adjustments” of the COD.


Pursuant to terms of the PCA, on July 28, 2016, the 1,030,000 shares of common stock delivered after the initial closing by Baldo Sanso (360,000 shares of common stock), Robert Sali (610,000 shares of common stock) and Chris Dabbs (60,000 shares of common stock), were cancelled on the books and records of the Company. The reduction was offset to additional paid-in capital. Chisholm II elected to waive receipt of any additional properties due to it under the PCA.


On May 10, 2016, the Company terminated the Master Services Agreement with Chisholm II and all amounts due thereunder were released by Chisholm II.


Our principal offices are located at 328 Barry Ave S #210, Wayzata, MN 55391.  Our telephone number is 952-479-1923.

Our fiscal year-end is September 30.


Except as otherwise indicated, as used throughout the remainder of this annual report, references to “Company,” “Westcott,” “we,” “us,” or “our” refer to “we,” “us” and “our” refer to Dala Petroleum Corp., formerly known as Westcott Products Corporation, a Delaware corporation, from and after June 2, 2014, and Dala Petroleum Corp., a Nevada corporation, prior to June 2, 2014 since its inception on January 17, 2014, now the Company’s operating subsidiary.


Business Strategy


Our business strategy is to create value for our shareholders by establishing and growing reserves, production and cash flow on a cost-efficient basis.  Due to the significant decline in the market price of oil the Company has temporarily suspended all exploration activities.  Upon reactivation, key elements of our business strategy will include:


·

Development and exploration of our existing oil and gas leases in the North American Rift System. If we begin the development of our current acreage position in the Property, we will be required to register as a licensed Oil and Gas Operator within the state of Kansas;

·

To selectively participate, on a non-operated basis, in seismically-driven prospects that correspond geologically with our existing footprint within the state of Kansas;

·

Prudent management of our current limited cash resources;

·

To complement our organic growth strategy, we will seek to aggregate any future production in order to accelerate the Company’s production and reserve profile;

·

Retaining qualified personnel to carry out the Company’s growth strategy; and

·

Evaluating potential merger or financing options.


Industry Operating Environment


The oil and natural gas industry is affected by many factors that we generally cannot control. Government regulations, particularly in the areas of taxation, energy, climate change and the environment, can have a significant impact on operations and profitability.  Significant factors that will impact oil prices in the current fiscal year and future periods include: political and social developments in the Middle East; demand in Asian and European markets; and the extent to which members of OPEC and other oil exporting nations manage oil supply through export quotas or lack thereof.  Additionally, natural gas prices continue to be under pressure due to concerns over excess supply of natural gas due to the high productivity of emerging shale developments in the United States and continued lower product demand caused by a weakened economy.  Natural gas prices are generally determined by North American supply and demand and are also affected by imports of liquefied natural gas.  Weather also has a significant impact on demand for natural gas since it is a primary heating source.


Development


Upon an acceptable recovery in the market price of oil, we will primarily engage in oil and natural gas exploration and production on the Property using a technical exploration team to further explore and develop the Property.


Dala has an inventory of drill-ready oil prospects.   Most of the prospects are supported by modern seismic data and are a combination of field extensions, step out locations and offsets to existing production. During the year ended September 30, 2016 the Company drilled zero wells.  The wells drilled had no commercial quantities of oil and were plugged and abandoned.




4




Dala established a land position over a shallow, conventional oil play in north central Kansas.  The "Play" or exploration concept is located across a four county area and is geographically defined by the boundaries of the productive North American Rift System.  The land position is concentrated over a lightly explored portion of the Rift, bordered immediately on the south by productive rift-related oil fields, and to the north by significant new discoveries in southeast Nebraska, where productive rates have recently been reported.  This Play concept was developed by a team of highly experienced international geologists, geophysicists and land experts, who applied regional geologic theory, proprietary geophysical databases and high resolution seismic.


[DALP10K093016002.GIF]


Competition


The oil and natural gas industry is intensely competitive, and we will be competing with numerous other oil and natural gas exploration and production companies.  Most of these companies have substantially greater resources than we have.  Not only do they explore for and produce oil and natural gas, but also many carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis.  The operations of other companies will be able to pay more for exploratory prospects and productive oil and natural gas properties.  They will also have substantially more resources to define, evaluate, bid for and purchase a greater number of properties and prospects than our limited financial or human resources permit.


Our larger or integrated competitors will have the resources to be better able to absorb the burden of existing, and any changes to federal, state, and local laws and regulations more easily than we can, which will adversely affect our competitive position.  Our ability to discover reserves and acquire additional properties in the future will be dependent upon our ability and resources to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.  In addition, we will be at a disadvantage in producing oil and natural gas properties and bidding for exploratory prospects, because we have substantially fewer financial and human resources than other companies in our industry.  Should a larger and better-financed company decide to directly compete with us, and be successful in its efforts, our business model and any business operations could be adversely affected.


Marketing and Customers


The market for oil and natural gas that may be produced from our properties depends on factors beyond our control, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulation. The oil and natural gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.


The price of crude oil has fallen significantly since mid-year 2014, reflecting robust non-OPEC supply growth led by expanding unconventional production in the United States, weakening growth in emerging markets, and the decision by OPEC to maintain its current production ceiling. The downturn in the price of crude oil has impacted, and, depending upon its duration, will continue to significantly impact the company's operations and ability to raise funds or attract potential partners. The company anticipates that crude oil prices will increase in the future, as continued growth in demand and a slowing in supply growth should bring global markets into balance; however, the timing of any such increases is unknown.




5




Our oil production, if any, is expected to be sold at prices tied to the spot oil markets.  Our natural gas production, if any, is expected to be sold under short-term contracts and priced based on first of the month index prices or on daily spot market prices.  We will rely on any operating partners to market and sell our production, where we contract with such operators in drilling prospects.  We currently have a suspended Management Services Agreement with Chisholm II and an Option Participation Agreement with Chisholm II.


Principal Agreements Affecting Our Ordinary Business


We do not own any physical real estate, but, instead, our acreage is comprised of leasehold interests subject to the terms and provisions of lease agreements that provide us the right to explore and develop the Property in specific geographic areas. All lease arrangements that comprise our current acreage positions are established using industry-standard terms that have been established and used in the oil and natural gas industry for many years, and our leases are with the State of Kansas. All of our current leases were assigned to us by Chisholm II, our majority shareholder that obtained the original leasehold interest prior to the assignment.


On June 3, 2014, we entered into a Master Services Agreement with Chisholm. Pursuant to the Master Service Agreement, Chisholm agreed to act as an independent contractor for the Company and provide services and personnel to develop, drill, operate, and maintain oil and gas wells and properties used to produce oil and gas within the State of Kansas for a period of twelve (12) months. As of May 10, 2016, the Company terminated the Master Services Agreement and all amounts due thereunder were released by Chisholm II. Any options to participate in future Chisholm II projects was thereby terminated as well.


In general, our current lease agreements have a term of five years from the effective date with an option to extend for an additional three years. The effective dates of the leases vary lease to lease. The oldest effective date is October 3, 2011, and the most recent effective date is March 13, 2013. Lease agreements comprising approximately 25,000 acres are currently possessed by the Company. Royalty rates will be negotiated on a case-by-case basis consistent with industry standard pricing. Once a well is drilled and production established, the leased acreage in the applicable spacing unit is customarily considered developed acreage and is held by production. Other locations within the drilling unit created for a well may also be drilled at any time with no time limit as long as the lease is held by production.


Governmental Regulation and Environmental Matters


Our operations are subject to various rules, regulations and limitations impacting the oil and natural gas exploration and production industry as a whole.


Regulation of Oil and Natural Gas Production


Oil and natural gas exploration, production and related operations, when developed, are subject to extensive rules and regulations promulgated by federal, state, tribal and local authorities and agencies.  For example, Kansas requires permits for drilling operations, drilling bonds and reports concerning operations and imposes other requirements relating to the exploration and production of oil and natural gas.  Kansas may also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging and abandonment of such wells.  Failure to comply with any such rules and regulations can result in substantial penalties.  The regulatory burden on the oil and natural gas industry will most likely increase our cost of doing business and may affect our profitability.  Although we believe we are currently in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws.  Significant expenditures may be required to comply with governmental laws and regulations and may have a material adverse effect on our financial condition and results of operations.


Environmental Matters


Our operations and properties are subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may:


·

require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities;

·

limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and

·

impose substantial liabilities for pollution resulting from such operations.


The permits required for our operations may be subject to revocation, modification and renewal by issuing authorities.  Governmental authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both.  In the opinion of management, we anticipate that we will be in substantial compliance with current applicable environmental laws and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on us, as well as the oil and natural gas industry in general.



6





The Comprehensive Environmental, Response, Compensation, and Liability Act (“CERCLA”) and comparable state statutes impose strict, joint and several liability on owners and operators of sites and on persons who have disposed of or have arranged for the disposal of “hazardous substances” found at such sites. It is not uncommon for the neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.  The Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes govern the disposal of “solid waste” and “hazardous waste” and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of “hazardous substance,” state laws affecting our operations may impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as “non-hazardous,” such exploration and production wastes could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements.


The Endangered Species Act (“ESA”) seeks to ensure that activities do not jeopardize endangered or threatened animal, fish and plant species, nor destroy or modify the critical habitat of such species.  Under ESA, exploration and production operations, as well as actions by federal agencies, may not significantly impair or jeopardize the species or its habitat.  ESA provides for criminal penalties for willful violations of ESA.  Other statutes that provide protection to animal and plant species and that may apply to our operations include, but are not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act.  Although we believe that our operations will be in substantial compliance with such statutes, any change in these statutes or any reclassification of a species as endangered could subject us (directly or indirectly through any operating partners) to significant expenses to modify our operations or could force discontinuation of certain operations altogether.


On April 17, 2012, EPA finalized rules proposed on July 28, 2011, which establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds (“VOCs”) and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The rules establish specific new requirements regarding emissions from compressors, dehydrators, storage tanks and other production equipment. In addition, the rules revise leak detection requirements for natural gas processing plants. These rules may require a number of modifications to our planned operations and those of any of our potential third-party operating partners, including the installation of new equipment to control emissions from compressors. Although we cannot predict the cost to comply with these new requirements at this point, compliance with these new rules could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business.


These new regulations and proposals and any other new regulations requiring the installation of more sophisticated pollution control equipment could have a material adverse impact on our business model and business, results of operations and financial condition.


The Federal Water Pollution Control Act of 1972, or the Clean Water Act (the “CWA”), imposes restrictions and controls on the discharge of produced waters and other pollutants into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters and to conduct construction activities in waters and wetlands. The CWA and certain state regulations prohibit the discharge of produced water, sand, drilling fluids, drill cuttings, sediment and certain other substances related to the oil and gas industry into certain coastal and offshore waters without an individual or general National Pollutant Discharge Elimination System discharge permit. In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. Costs may be associated with the treatment of wastewater and/or developing and implementing storm water pollution prevention plans. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of oil and other pollutants and impose liability on parties responsible for those discharges, for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.


The underground injection of oil and natural gas wastes are regulated by the Underground Injection Control program authorized by the Safe Drinking Water Act.  The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluids from the injection zone into underground sources of drinking water.  All of leased acreage in which we have interest may be required to be developed from unconventional sources that require hydraulic fracturing as part of the completion process.  Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate gas production.  Legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. The U.S. Congress continues to consider legislation to amend the Safe Drinking Water Act to subject hydraulic fracturing operations to regulation under the Act’s Underground Injection Control Program to require disclosure of chemicals used in the hydraulic fracturing process.


Scrutiny of hydraulic fracturing activities continues in other ways.  The federal government is currently undertaking several studies of hydraulic fracturing’s potential impact.  Several states, including Kansas, where our current leased properties are located, have also proposed or adopted legislative or regulatory restrictions on hydraulic fracturing. We cannot predict whether any other legislation will ever be enacted and if so, what its provisions would be.  If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level, it could lead to delays, increased operating costs and process prohibitions that would materially adversely affect our revenue and results of operations.



7





The National Environmental Policy Act, or NEPA, establishes a national environmental policy and goals for the protection, maintenance and enhancement of the environment and provides a process for implementing these goals within federal agencies.  A major federal agency action having the potential to significantly impact the environment requires review under NEPA.  Many of our planned activities and those of any of our potential third-party operating partners are covered under categorical exclusions which results in a shorter NEPA review process.  The Council on Environmental Quality has announced an intention to reinvigorate NEPA reviews and on March 12, 2012, issued final guidance that may result in longer review processes that could lead to delays and increased costs that could materially adversely affect our revenues and results of operations.


Climate Change


Significant studies and research have been devoted to climate change and global warming, and climate change has developed into a major political issue in the United States and globally.  Certain research suggests that greenhouse gas emissions contribute to climate change and pose a threat to the environment. Recent scientific research and political debate has focused in part on carbon dioxide and methane incidental to oil and natural gas exploration and production.


In the United States, legislative and regulatory initiatives are underway to limit greenhouse gas emissions. The U.S. Congress has considered legislation that would control GHG emissions through a “cap and trade” program and several states have already implemented programs to reduce GHG emissions.  The U.S. Supreme Court determined that GHG emissions fall within the federal Clean Air Act, or the CAA, definition of an “air pollutant,” and in response the EPA promulgated an endangerment finding paving the way for regulation of GHG emissions under the CAA. In 2010, the EPA issued a final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject to permitting requirements for greenhouse gas emissions under the Clean Air Act.


In addition, in September 2009, the EPA issued a final rule requiring the reporting of GHGs from specified large GHG emission sources in the United States beginning in 2011 for emissions in 2010.  On November 30, 2010, the EPA published a final rule expanding its existing GHG emissions reporting to include onshore and offshore oil and natural gas systems beginning in 2012. We and any of our potential third party operating partners are required to report their greenhouse gas emissions under these rules.  Because regulation of GHG emissions is relatively new, further regulatory, legislative and judicial developments are likely to occur.  Such developments may affect how these GHG initiatives will impact us.  Moreover, while the U.S. Supreme Court held in its June 2011 decision American Electric Power Co. v. Connecticut that, with respect to claims concerning GHG emissions, the federal common law of nuisance was displaced by the federal Clean Air Act, the Court left open the question of whether tort claims against sources of GHG emissions alleging property damage may proceed under state common law.  There thus remains some litigation risk for such claims.  Due to the uncertainties surrounding the regulation of and other risks associated with GHG emissions, we cannot predict the financial impact of related developments on us.


Legislation or regulations that may be adopted to address climate change could also affect the markets for our products by making our products more or less desirable than competing sources of energy.  To the extent that our products are competing with higher greenhouse gas emitting energy sources, our products would become more desirable in the market with more stringent limitations on greenhouse gas emissions.  To the extent that our products are competing with lower greenhouse gas emitting energy sources such as solar and wind, our products would become less desirable in the market with more stringent limitations on greenhouse gas emissions. We cannot predict with any certainty at this time how these possibilities may affect our operations.


The majority of scientific studies on climate change suggest that stronger storms may occur in the future in the areas where we operate, although the scientific studies are not unanimous.  Although operators may take steps to mitigate physical risks from storms, no assurance can be given that future storms will not have a material adverse effect on our business.


Existing and Probable Government Regulation to Our Current and Intended Business


Smaller Reporting Company


We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we are subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.”  That designation will relieve us of some of the informational requirements of Regulation S-K.


Sarbanes/Oxley Act


We are also subject to the Sarbanes-Oxley Act of 2002.  The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence.  It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act could substantially increase our legal and accounting costs.



8





Exchange Act Reporting Requirements


Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to our stockholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.


We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Securities Exchange Commission on a regular basis, and are required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.


Number of Total Employees and Number of Full-Time Employees


We have no full-time employees. We currently engage independent contractors in the areas of accounting, legal and auditing services, corporate finance, as well as marketing and business development. The remuneration paid to our officers and directors is more completely described elsewhere in this Annual report in the “Executive Compensation” section.


Subsidiaries


We have one wholly-owned operating subsidiary: Dala Petroleum Corp., incorporated in Nevada.


Competitive Business Conditions and Smaller Reporting Company’s Competitive Position in the Industry and Methods of Competition


The oil and natural gas industry is very competitive and the Company competes with numerous other oil and gas exploration and production companies. Numerous independent oil and gas companies, oil and gas syndicates and major oil and gas companies actively seek out and bid for oil and gas properties as well as for the services of third party providers, such as drilling companies, upon which we rely. A substantial number of our competitors have longer operating histories and substantially greater financial and personnel resources than we do, and have demonstrated the ability to operate through industry cycles.


Some of our competitors not only explore for, produce and market petroleum and natural gas, but also carry out refining operations and market the resultant products on a worldwide basis which may provide them with additional sources of capital. Larger and better capitalized competitors may be in a position to outbid us for particular prospect rights. These competitors may also be better able to withstand sustained periods of unsuccessful drilling. Larger competitors may be able to absorb the burden of any changes in laws and regulations more easily than we can, which would adversely affect our competitive position.


Patents, Trademarks, Intellectual Property


None; not applicable.


Research and Development Costs During the Last Two Fiscal Years


We are not engaged in any research or development and have not devoted any efforts to research and development since inception of the Company earlier this fiscal year.


Government Regulations


The Company is subject to federal, state and local environmental, occupational safety and health laws and regulations within the U.S. The Company strives to ensure full compliance with all regulatory requirements and is unaware of any material instances of noncompliance. In the U.S., the Company must comply with laws and regulations which include, among others:


·

the Comprehensive Environmental Response, Compensation and Liability Act;

·

the Resource Conservation and Recovery Act;

·

the Federal Water Pollution Control Act; and

·

the Toxic Substances Control Act.


Laws and regulations strictly govern the manufacture, storage, handling, transportation, use and sale of chemical products. The Company evaluates the environmental impact of its actions and attempts to quantify the cost of remediating contaminated property in order to maintain compliance with regulatory requirements and identify and avoid potential liability.


The Company may become involved in environmental litigation and claims, including remediation of properties owned or operated. No environmental litigation or claims are currently being litigated. The Company does not expect that costs related to known remediation requirements will have an adverse effect on the Company’s consolidated financial position or results of operations.



9





Additional Information


You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may also find all of the reports or registration statements that we have previously filed electronically with the SEC at its Internet site at www.sec.gov .  Please call the SEC at 1-202-551-8090 for further information on this or other Public Reference Rooms.  Our SEC reports and registration statements are also available from commercial document retrieval services, such as CCH Washington Service Bureau, whose telephone number is 1-800-955-5219.


ITEM 1A.  RISK FACTORS


RISKS RELATED TO OUR OPERATIONS


The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time.


You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.  If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.


An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled "Special Note Regarding Forward Looking Statements" above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.


Oil and gas price fluctuations in the market may adversely affect the results of our operations.


Our profitability, cash flows and the carrying value of our oil and natural gas properties are highly dependent upon the market prices of oil and natural gas. Substantially all of our sales of oil and natural gas, if any, are made in the spot market, or pursuant to contracts based on spot market prices, and not pursuant to long-term, fixed-price contracts.  Accordingly, the prices received for our oil and natural gas production are dependent upon numerous factors beyond our control. These factors include the level of consumer product demand, governmental regulations and taxes, the price and availability of alternative fuels, the level of foreign imports of oil and natural gas and the overall economic environment.


Historically, the oil and natural gas markets have proven cyclical and volatile as a result of factors that are beyond our control.  Any additional declines in oil and natural gas prices or any other unfavorable market conditions could have a material adverse effect on our financial condition.


Actual quantities of recoverable oil and gas reserves and future cash flows from those reserves most likely will vary from our estimates.


Estimating accumulations of oil and gas is complex. The process relies on interpretations of available geological, geophysical, engineering and production data. The extent, quality and reliability of this data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of:


·

the quality and quantity of available data;

·

the interpretation of that data;

·

the accuracy of various mandated economic assumptions; and

·

the judgment of the persons preparing the estimate.


Estimates of proved reserves prepared by others might differ materially from our estimates.  Actual quantities of recoverable oil and gas reserves, future production, oil and gas prices, revenues, taxes, development expenditures and operating expenses most likely will vary from our estimates.  Any significant variance could materially affect the quantities and net present value of our reserves.  In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development and prevailing oil and gas prices. Our reserves also may be susceptible to drainage by operators on adjacent properties.




10




Our operations will require significant expenditures of capital that may not be recovered.


We will require significant expenditures of capital in order to locate and develop producing properties and to drill exploratory and exploitation wells.  In conducting exploration, exploitation and development activities from a particular well, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, exploitation, development and production activities to be unsuccessful, potentially resulting in abandonment of the well.  This could result in a total loss of our investment.  In addition, the cost and timing of drilling, completing and operating wells is difficult to predict.


Compliance with, or breach of, environmental laws can be costly and could limit our operations.


Our operations will be subject to numerous and frequently changing laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection.  Any properties we might own for the exploration and production of oil and gas and the wastes disposed on these properties may be subject to the Comprehensive Environmental Response, Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and analogous state laws.  Under such laws, we could be required to remove or remediate previously released wastes or property contamination.  Laws and regulations protecting the environment have generally become more stringent and may, in some cases, impose “strict liability” for environmental damage.  Strict liability means that we may be held liable for damage without regard to whether we were negligent or otherwise at fault.  Environmental laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed.  Failure to comply with these laws and regulations may result in the imposition of administrative, civil and criminal penalties.


Although we believe that our operations are in substantial compliance with existing requirements of governmental bodies, our ability to conduct continued operations is subject to satisfying applicable regulatory and permitting controls. Our current permits and authorizations and ability to get future permits and authorizations may be susceptible on a going forward basis, to increased scrutiny, greater complexity resulting in increased costs, or delays in receiving appropriate authorizations.


We are subject to changing laws and regulations and other governmental actions that can significantly and adversely affect our business.


Federal, state, local, territorial and foreign laws and regulations relating to tax increases and retroactive tax claims, disallowance of tax credits and deductions, expropriation or nationalization of property, mandatory government participation, cancellation or amendment of contract rights, and changes in import and export regulations, limitations on access to exploration and development opportunities, as well as other political developments may affect our operations.


Because of the speculative nature of oil and gas exploration, there is risk that we will not find commercially exploitable oil and gas and that our business will fail.


The search for commercial quantities of oil and natural gas as a business is extremely risky. We cannot provide investors with any assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of oil and/or gas.  The exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas.  Problems such as unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing formations and other conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are unable to find commercially exploitable quantities of oil and gas, and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail our business plan, and as a result, any investment in us may become worthless.


We may not produce any oil or gas.


We are an exploratory company and we may not actually discover or produce any oil or gas. Additionally, our leases may expire before we are able to complete any additional exploration or discover or produce any oil or gas.


The oil and gas we produce may not be readily marketable at the time of production.


Crude oil, natural gas, condensate and other oil and gas products are generally sold to other oil and gas companies, government agencies and other industries.  The availability of ready markets for oil and gas that we might discover and the prices obtained for such oil and gas depend on many factors beyond our control, including:


·

the extent of local production and imports of oil and gas;

·

the proximity and capacity of pipelines and other transportation facilities;

·

fluctuating demand for oil and gas;

·

the marketing of competitive fuels; and

·

the effects of governmental regulation of oil and gas production and sales.


Natural gas associated with oil production is often not marketable due to demand or transportation limitations and is often flared at the producing well site.  Pipeline facilities do not exist in certain areas of exploration and, therefore, we intend on utilizing trucks to transport any oil that is discovered.




11




The price of oil and natural gas has historically been volatile.  If it were to decrease substantially, our projections, budgets and revenues would be adversely affected, potentially forcing us to make changes in our operations.


Our future financial condition, results of operations and the carrying value of any oil and natural gas interests we acquire will depend primarily upon the prices paid for oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:


·

the level of consumer demand for oil and natural gas;

·

the domestic and foreign supply of oil and natural gas;

·

the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;

·

the price of foreign oil and natural gas;

·

domestic governmental regulations and taxes;

·

the price and availability of alternative fuel sources;

·

weather conditions;

·

market uncertainty due to political conditions in oil and natural gas producing regions, including the Middle East; and

·

worldwide economic conditions.


These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices affect our revenues, and could reduce the amount of oil and natural gas that we can produce economically.  Accordingly, such declines could have a material adverse effect on our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline in value, or become worthless.


Because of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.


The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. We currently have no insurance to cover such losses and liabilities, and even if insurance is obtained, there can be no assurance that it will be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations, which could lead to any investment in us becoming worthless.


We may encounter operating hazards that may result in substantial losses.


We will be subject to operating hazards normally associated with the exploration and production of oil and gas, including hurricanes, blowouts, explosions, oil spills, cratering, pollution, earthquakes, labor disruptions and fires.  The occurrence of any such operating hazards could result in substantial losses to us due to injury or loss of life and damage to or destruction of oil and gas wells, formations, production facilities or other properties.  We maintain insurance coverage limiting financial loss resulting from certain of these operating hazards.  We do not maintain full insurance coverage for all matters that may adversely affect our operations, including war, terrorism, nuclear reactions, government fines, treatment of waste, blowout expenses, wind damage and business interruptions.  Losses and liabilities arising from uninsured or underinsured events could reduce our revenues or increase our costs. There can be no assurance that any insurance will be adequate to cover losses or liabilities associated with operational hazards.  We cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase.




12




We face strong competition from larger oil and gas companies, which could result in adverse effects on our business.


The exploration and production business is highly competitive.  Many of our competitors have substantially larger financial resources, staffs and facilities.  Our competitors in the United States include numerous major oil and gas exploration and production companies.  Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from investors.  Competitors include larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage.  Actual or potential competitors may be strengthened through the acquisition of additional assets and interests.  Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas, but are manufactured from renewable resources.


Our estimates of the volume of reserves could have flaws, or such reserves could turn out not to be commercially extractable. As a result, our future revenues and projections could be incorrect.


Estimates of reserves and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. Our actual amounts of production, revenue, taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas reserves may vary substantially from the estimates.  Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment. In addition, any estimates of our future net revenues and the present value thereof are based on assumptions derived in part from historical price and cost information, which may not reflect current and future values, and/or other assumptions made by us that only represent our best estimates. If these estimates of quantities, prices and costs prove inaccurate, we may be unsuccessful in expanding our oil and gas reserves base with our acquisitions. Additionally, if declines in and instability of oil and gas prices occur, then write downs in the capitalized costs associated with any oil and gas assets we obtain may be required. Because of the nature of the estimates of our reserves and estimates in general, we can provide no assurance that reductions to our estimated proved oil and gas reserves and estimated future net revenues will not be required in the future, and/or that our estimated reserves will be present and/or commercially extractable. If our reserve estimates are incorrect, the value of our common stock could decrease and we may be forced to write down the capitalized costs of our oil and gas properties.


Our business will suffer if we cannot obtain or maintain necessary licenses.


Our operations will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments, among other factors.  Our inability to obtain, or our loss of or denial of extension of, any of these licenses or permits could hamper our ability to produce revenues from our operations.


Our operations are subject to various litigation that could have an adverse effect on our business.


From time to time we may become a defendant in various litigation matters.  The nature of our operations exposes us to further possible litigation claims in the future.  There is risk that any matter in litigation could be adversely decided against us regardless of our belief, opinion and position, which could have a material adverse effect on our financial condition and results of operations.  Litigation is highly costly and the costs associated with defending litigation could also have a material adverse effect on our financial condition.


We may be affected by global climate change or by legal, regulatory, or market responses to such change.


The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns.  Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost to produce our products.  Additionally, the sale of our products can be impacted by weather conditions.


Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting the greenhouse gas emissions.  For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the territories we operate.  Laws enacted that directly or indirectly affect our oil and gas production could impact our business and financial results.


If oil or natural gas prices decrease or drilling efforts are unsuccessful, we may be required to record writedowns of our oil and natural gas properties.


We could be required to write down the carrying value of certain of our oil and natural gas properties.  Writedowns may occur when oil and natural gas prices are low, or if we have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration in drilling results or mechanical problems with wells where the cost to redrill or repair is not supported by the expected economics.




13




Accounting rules require that the carrying value of oil and natural gas properties be periodically reviewed for possible impairment.  Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion, net of deferred income taxes, may not exceed a ceiling amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, which is tested on a quarterly basis, an impairment is recognized.  While an impairment charge reflects our long-term ability to recover an investment, reduces our reported earnings and increases our leverage ratios, it does not impact cash or cash flow from operating activities.


Our future success depends on our ability to replace reserves that are produced.


Because the rate of production from oil and natural gas properties generally declines as reserves are depleted, our future success depends upon our ability to economically find or acquire and produce additional oil and natural gas reserves. Except to the extent that we acquire additional properties containing proved reserves, conduct successful exploration and development activities or, through engineering studies, identify additional behind-pipe zones or secondary recovery reserves, our proved reserves will decline as our reserves are produced. Future oil and natural gas production, therefore, is highly dependent upon our level of success in acquiring or finding additional reserves that are economically recoverable. We cannot assure you that we will be able to find or acquire and develop additional reserves at an acceptable cost.


We may acquire significant amounts of unproved property to further our development efforts. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We may acquire both proved and producing properties as well as undeveloped acreage that we believe will enhance growth potential and increase our earnings over time. However, we cannot assure you that all of these properties will contain economically viable reserves or that we will not abandon our initial investments.  Additionally, we cannot assure you that unproved reserves or undeveloped acreage that we acquire will be profitably developed, that new wells drilled on our properties will be productive or that we will recover all or any portion of our investments in our properties and reserves.


Our lack of industry and geographical diversification may increase the risk of an investment in our company.


We operate exclusively in the oil and gas sector and our leases in are north central Kansas. This lack of geographic diversification may make our holdings more sensitive to economic developments within a regional area, which may result in reduced rates of return or higher rates of default than might be incurred with a company that is more geographically diverse.


Our business depends on oil and natural gas transportation and processing facilities and other assets that are owned by third parties.


The marketability of our oil and natural gas depends in part on the availability, proximity and capacity of pipeline systems, processing facilities, oil trucking fleets and rail transportation assets owned by third parties.  The lack of available capacity on these systems and facilities, whether as a result of proration, physical damage, scheduled maintenance or other reasons, could result in the delay or discontinuance of development plans for our properties.  The curtailments arising from these and similar circumstances may last from a few days to several months.


Our undeveloped leasehold acreage is subject to leases that will expire over the next several years unless production is established or operations are commenced on units containing the acreage or the leases are extended.


None of our acreage is currently held by production or held by operations.  Unless production in paying quantities is established or operations are commenced on units containing these leases during their terms, the leases will expire. If our leases expire and we are unable to renew the leases, we will lose our right to develop the related properties.


The loss of our management team, upon whose knowledge, relationships with industry participants, leadership and technical expertise we rely could diminish our ability to conduct our operations, and harm our ability to execute our business plan.


Our success depends heavily upon the continued contributions of the members of our management team whose knowledge, relationships with industry participants, leadership and technical expertise would be difficult to replace.  In particular, our ability to successfully acquire additional properties, to increase our reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements depends on developing and maintaining close working relationships with industry participants.  In addition, our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment is dependent on our management team’s knowledge and expertise in the industry.  To continue to develop our business, we rely on our management team’s knowledge and expertise in the industry and will use our management team’s relationships with industry participants, specifically those of our board of directors, to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and natural gas companies.




14




Deficiencies of title to our leased interests could significantly affect our financial condition.


We typically incur the expense of a title examination prior to acquiring oil and natural gas leases or undivided interests in oil and natural gas leases or other developed rights. If an examination of the title history of a property reveals that an oil or natural gas lease or other developed rights have been purchased in error from a person who is not the owner of the mineral interest desired, our interest would substantially decline in value or be eliminated. In such cases, the amount paid for such oil or natural gas lease or leases or other developed rights may be lost.


RISKS RELATED TO OUR SECURITIES AND OUR ORGANIZATION


Our stock price may be volatile, which may result in losses to our shareholders.


The stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies listed on the over-the-counter markets quotation system in which shares of our common stock are listed, have been volatile in the past and have experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many factors, including the following, some of which are beyond our control:


·

variations in our operating results;

·

changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

·

changes in operating and stock price performance of other companies in our industry;

·

additions or departures of key personnel; and

·

future sales of our common stock.


Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.


Our common shares may become thinly traded and you may be unable to sell at or near ask prices, or at all.


We cannot predict the extent to which an active public market for trading our common stock will be sustained.


This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume.  Even if we came to the attention of such persons, those persons tend to be risk-averse and may be reluctant to follow, purchase, or recommend the purchase of shares of an unproven company such as ours until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.


The market price for our common stock is particularly volatile given our status as a relatively small company, which could lead to wide fluctuations in our share price. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.


Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.


Because the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment to decline.


Our shares are classified as penny stocks and are covered by Section 15(g) of the Exchange Act which imposes additional sales practice requirements on brokers-dealers who sell our securities. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement prior from you to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline.




15




Financial Industry Regulatory Authority (FINRA) sales practice requirements may limit your ability to buy and sell our common stock, which could depress the price of our shares.


FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our share price.


Volatility in our common share price may subject us to securities litigation.


The market for our common stock is characterized by significant price volatility as compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.


Our business is subject to changing regulations related to corporate governance, internal control, and public disclosure that have increased both our costs and the risk of noncompliance.


Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and FINRA, have issued requirements and regulations and continue to develop additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities. Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. As our internal controls are currently ineffective, our business and future prospects may suffer.


We will incur increased costs and compliance risks as a result of being a public company.


We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with adopted corporate governance requirements, including certain requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC, OTC Markets and FINRA.  We expect these rules and regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Like many smaller public companies, we face a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting and the independent auditors to attest to the effectiveness of such internal controls and the evaluation performed by management. The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements. The Public Company Accounting Oversight Board, or PCAOB, has adopted documentation and attestation standards that the independent auditors must follow in conducting its attestation under Section 404. We are currently preparing for compliance with Section 404; however, there can be no assurance that we will be able to effectively meet all of the requirements of Section 404 as currently known to us in the currently mandated timeframe. Any failure to implement effectively new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting or our independent auditors providing an adverse opinion regarding management’s assessment. Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.


We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.




16




Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our common stock.


A majority of the outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 144”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that one year following a company ceasing to be a “shell company” and filing Form 10 information with the SEC to that effect, a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of common stock. Under Rule 144, affiliates who have held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four calendar week rule does not apply to companies quoted on the OTCQB). Pursuant to Rule 144, shareholders must wait at least one year from the date of our filing of a Form 8-K with requisite Form 10 information to avail themselves of Rule 144 unless we file a registration statement for the sale of such shares prior thereto. The Company did file a registration statement on Form S-1 registering 1,973,333 shares of common stock of the Company. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares may dilute the market and have a depressive effect on the price of the shares of our common stock.


Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements. We may be unable to continue to operate without the threat of liquidation for the foreseeable future.


Our report from our independent registered public accounting firm issued in connection with the audited financial statements of our Company for the last fiscal period includes an explanatory paragraph expressing “substantial doubt about its ability to continue as a going concern,” because the Company is in the exploration stage and, accordingly, has not yet generated revenues from operations.  The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. Failure to obtain additional financing would have a material adverse effect on our business operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.


Risks of “penny stock”


Our Company’s common stock may be deemed to be “penny stock” as that term is defined in Section 240.3a51­1 of the Exchange Act. Penny stocks are stocks (i) with a price of less than five dollars per share ; (ii) that are not traded on a recognized national exchange ; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ­listed stocks must still meet requirement (i) above) ; or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000,000 for the last three years.


Section 15(g) of the Exchange Act and Rule 15g­2 of the Securities and Exchange Commission require broker­dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our Company’s common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”  Moreover, Rule 15g­9 of the Securities and Exchange Commission requires broker­dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker­dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives ; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions ; (iii) provide the investor with a written statement setting forth the basis on which the broker­dealer made the determination in (ii) above ; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our Company’s common stock to resell their shares to third parties or to otherwise dispose of them.


Our Company is listed on OTCQB under the symbol “DALP.”


Our common stock is expected to be traded over the counter, which may deprive stockholders of the full value of their shares.


Our common stock is quoted via the OTCQB under the symbol “DALP.” Accordingly, our common stock may have fewer market makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock Market. These factors may result in higher price volatility and less market liquidity for the common stock.




17




Need for any governmental approval of principal products of services.


We are subject to all governmental approval requirements for an oil and gas exploration company. The oil exploration industry is a highly-regulated industry, and the Company will need to obtain certain government approvals for its operations, including a license as an operator in the state of Kansas once the Company begins to operate the wells on the leases of the Property.


We will be required to attract and retain top quality talent to compete in the marketplace.


We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, operational, and finance personnel.  There can be no assurance of success in attracting and retaining such personnel.  Shortages in qualified personnel could limit our ability to drill for oil and continue the exploration of the Property.


We will be subject to evolving and expensive corporate governance regulations and requirements.  Our failure to adequately adhere to these requirements or the failure or circumvention of our internal controls and procedures could seriously harm our business.


As a publicly traded company, we are subject to various federal, state and other rules and regulations, including applicable requirements of the Sarbanes-Oxley Act of 2002.  Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting.  Our internal controls and procedures may not be able to prevent errors or fraud in the future.  Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system are met.  A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.


The Company is in default with several of its noteholders as reflected below and disclosed with this report in Note 6 of the Notes of the Financial Statements dated September 30, 2016.


Notes payable

Principal

Mill City Ventures III, Ltd.

$

5,195

Lane Ventures, Inc.

 

488

Alpha Capital Anstalt

 

7,315

Alpha Capital Anstalt

 

37,036

Lane Ventures, Inc.

 

2,469

Mill City Ventures III, Ltd.

 

24,691

Total

$

77,194


ITEM 1B.   UNRESOLVED STAFF COMMENTS


None.


ITEM 2:  PROPERTIES


We do not own any property but do have the rights to engage in oil exploration and development on assigned leases in north central Kansas with total acreage of approximately 25,000 acres.  The lease assets are valued at $171,000 as of September 30, 2016.


We currently do not have any monthly expenses related to our principal executive office as the management team uses their own personal offices for Company-related work.


ITEM 3:  LEGAL PROCEEDINGS


We are not a party to any pending legal proceeding. To the knowledge of our management, no federal, state or local governmental agency is presently contemplating any proceeding against us. No director, executive officer or affiliate of ours or owner of record or beneficially of more than 5% of our common stock is a party adverse to us or has a material interest adverse to us in any proceeding.


ITEM 4:  MINE SAFETY DISCLOSURES


None; not applicable.




18





PART II


ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information


Our common stock was listed on the OTC Bulletin Board of the National Association of Securities Dealers (“NASD,” now “FINRA”) on June 14, 2007, under the symbol “WSPD.” Beginning September 2014, our common stock is listed under the symbol “DALP” on the OTCQB of OTC Markets Group. No assurance can be given that any market for our common stock will develop or be maintained.


For any market that develops for our common stock, the sale of “restricted securities” (common stock) pursuant to Rule 144 of the SEC by members of management or any other person to whom any such securities may be issued in the future may have a substantial adverse impact on any such public market.  For information regarding the requirements of resales under Rule 144, see the heading “Rule 144” of this item below.


The following table sets forth, for the periods indicated over the last two years, the high and low closing bid quotations, as reported by the OTC Markets, and represents prices between dealers, does not include retail markups, markdowns or commissions, and may not represent actual transactions:


 

For the Years Ended September 30,

 

2016

 

2015

 

High

 

Low

 

High

 

Low

First Quarter

$

0.12

 

$

0.03

 

$

0.0015

 

$

0.0015

Second Quarter

$

0.10

 

$

0.03

 

$

1.34

 

$

1.15

Third Quarter

$

0.03

 

$

0.03

 

$

1.40

 

$

1.10

Fourth Quarter

$

0.03

 

$

0.02

 

$

1.40

 

$

0.11


These prices were obtained from OTC Markets Group (www.OTCMarkets.com) and do not necessarily reflect actual transactions, retail markups, mark downs or commissions.


Holders


We currently have 562 shareholders, not including an indeterminate number who may hold shares in “street name.”


Dividends


We have not declared any cash dividends with respect to our common stock, and do not intend to declare dividends in the foreseeable future. Our future dividend policy cannot be ascertained with any certainty, and if and until we complete any acquisition, reorganization or merger, no such policy will be formulated. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.


A total of 2,008 shares of Series A 6% Convertible Preferred Stock remain issued and outstanding as of September 30, 2016. The 6% per annum dividends are cumulative and payable quarterly in cash or, at the Company’s option, in shares of the Company’s common stock. The Company has accrued all outstanding dividends due under the Series A 6% Convertible Preferred Stock since June 1, 2015.


Securities Authorized for Issuance Under Equity Compensation Plans


None; not applicable.


Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities


None.


Use of Proceeds of Registered Securities


Not applicable.


Purchases of Equity Securities by Us and Affiliated Purchasers


None; not applicable.




19




ITEM 6:  SELECTED FINANCIAL DATA


Not required for smaller reporting companies.


ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


When used in this Annual Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions, and financial trends that may affect Dala’s future plans of operations, business strategy, operating results, and financial position.  Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors.  Such factors are discussed further below under “Trends and Uncertainties,” and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.


COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 2016 TO THE YEAR ENDED SEPTEMBER 30, 2015


Results of Operations


For the year ended September 30, 2016 and the year ended September 30, 2015, the Company generated no revenue from operations.  The Company currently supports operations through its financing activities through the sale of equity and issuance of debt securities.  


For the year ended September 30, 2016 and the year ended September 30, 2015, general and administrative expenses were $170,669 and $681,095, respectively, for a decrease of $510,426 or 74.9%.


For the year ended September 30, 2016 and the year ended September 30, 2015, impairment of oil and natural gas properties were $0 and $1,954,717, respectively.  


For the year ended September 30, 2016, non-operating expenses primarily were gain on derivative valuation were $54,240.  For the year ended September 30, 2015, non-operating expenses primarily were a gain on derivative valuation were $2,757,776.


For the year ended September 30, 2016 and the year ended September 30, 2015, we had a net loss from operations of $135,740 and $12,680, respectively.


Additionally, the Company recognized preferred stock dividends of $121,500 and $78,000 for the year ended September 30, 2016 and the year ended September 30, 2015, respectively.


Liquidity and Capital Resources


As of September 30, 2016, we have $7,222 in cash and cash equivalents on hand. Currently, the Company obtains cash for operating expenses through methods of financings, primarily the issuance of convertible preferred shares of stock for cash and the issuance of debt securities.


The Company anticipates future losses in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern.  The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  Management intends to finance operating costs over the next 6 months with existing cash on hand and issuance of equity securities.  There is no assurance funds will continue to be available through these methods of financing operations until the Company begin generating revenue from operations.


Cash Flow from Operations


During the year ended September 30, 2016 and the year ended September 30, 2015, cash flow used in operating activities were $85,662 and $631,611, respectively.  Cash flows used in operating activities was primarily attributable to the Company’s net loss of $135,740 and $12,680 for the year ended September 30, 2016 and the year ended September 30, 2015.


The Company recognized noncash items offsetting the net loss for the year ended September 30, 2016 primarily on changes in fair value of derivatives of $54,240 compared primarily to impairment of oil and natural gas properties of $1,954,717 offset by a gain on changes in fair value of derivatives of $2,757,776 for the year ended September 30, 2015.


Cash Flows from Investing Activities


During the period ended September 30, 2016 and the year ended September 30, 2015, cash flow used in investing activities were $0 and $587,044, respectively.  Cash flows used in investing activities for 2015 comprised primarily of $591,044 for cash paid for oil and natural cash properties.




20




Cash Flows from Financing Activities


During the period ended September 30, 2016 and the period ended September 30, 2015, cash flow provided by financing activities were $90,010 and $39,505, respectively.  The funds provided by financing were comprised primarily of proceeds received from notes payable, $90,010 for 2016 and $100,000 for 2015 offset by payments of dividends on preferred stock of $60,495.


Going Concern


As the Company did not generate any revenue during the year ended September 30, 2016, we have been dependent on debt and equity financing to support our operations.  In addition to our net losses for the period of $135,740, we have experienced negative cash flows from operations of $85,662, and have an accumulated deficit of $2,977,992. These factors raise substantial doubt about our ability to continue as a going concern.


In order to obtain capital, we may need to sell additional shares of our common stock, preferred stock, or debt securities, or borrow funds from private lenders or banking institutions. There can be no assurance that we will be successful in obtaining additional funding in the amounts or on terms acceptable to us, if at all. If we are unable to raise additional funding as necessary, we may have to suspend our operations temporarily or cease operations entirely.


Plan of Operation


Our revenues and future profitability are substantially dependent on our ability to raise additional funds. We have suspended drilling and other exploration and development operations until the market conditions related to the price of oil have improved.  We have substantially cut administrative expenses to conserve to conserve cash.  The management and directors are no longer paid any salary or bonus.  We also are not immediately planning any other leasing activity in our areas of operation.  We continue to search for a financial and/or operational partner to assist in developing our oil and gas properties.  If we were to partner with another entity, we would consider all options in developing our properties.


Off-Balance Sheet Arrangements


We had no Off-Balance Sheet arrangements during the year ended September 30, 2016.


Critical Accounting Policies and Estimates


Use of Estimates


The preparation of 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 reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the web site and property and equipment, valuation of warrant and beneficial conversion feature debt discounts, valuation of share-based payments and the valuation allowance on deferred tax assets.


Derivatives


The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.


Impairment of Long-Lived Assets


The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be 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 a comparison of the carrying amount of an asset to future undiscounted 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 by which 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.




21




Fair Value of Financial Instruments and Fair Value Measurements


The Company measures their financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses escrow liability and short-term loans the carrying amounts approximate fair value due to their short maturities.


We have adopted accounting guidance for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.


Oil and Natural Gas Properties


The Company follows the full cost method of accounting for oil and natural gas operations set by Regulation S-X, Rule 4-10, whereby all costs related to the exploration and development of oil and natural gas properties are initially capitalized into a single cost center (“full cost pool”). Such costs include land acquisition costs, a portion of employee salaries related to property development, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. Internal salaries are capitalized based on employee time allocated to the acquisition of leaseholds and development of oil and natural gas properties. The Company did not capitalize interest for the period ended September 30, 2016.


Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. There were no sales or gains or losses during the period presented.


The Company assesses all items classified as unproved property on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and amortization.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.


Capitalized costs associated with impaired properties and properties having proved reserves, estimated future development costs, and asset retirement costs under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 410-20-25 are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves. The costs of unproved properties are withheld from the depletion base until such time as they are developed, impaired, or abandoned.


Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion, net of deferred income taxes, may not exceed a ceiling amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, which is tested on a quarterly basis, an impairment is recognized. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes.


Revenue Recognition


The Company recognizes oil and natural gas revenues from our interests in producing wells when production is delivered to, and title has transferred to, the purchaser and to the extent the selling price is reasonably determinable.




22




The Company uses the sales method of accounting for balancing of natural gas production and would recognize a liability if the existing proven reserves were not adequate to cover the current imbalance situation.


Asset Retirement Obligation


Asset retirement obligation (“ARO”) reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with the Company's oil and natural gas properties. Inherent in the fair value calculation of the ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments.   As of September 30, 2015, the Company had no outstanding obligations related to ARO liability.


Stock-based Compensation


The Company records stock based compensation in accordance with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This requires that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.


The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.


Income Taxes


The Company follows ASC Topic 740 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.


Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.


The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of September 30, 2015, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.


Loss per Share


The Company follows ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.  As the Company has incurred losses for the period ended September 30, 2016, the potentially dilutive shares totaling 2,868,571 are anti-dilutive and are thus not added into the loss per share calculations.  Due to the anti-dilutive impact the weighted average dilutive shares outstanding for the period ended September 30, 2015, for basic and dilutive shares, are the same.


Recent Accounting Pronouncements


In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.




23




In June 2014, the FASB issued Accounting Standards Update No. 2014-10 (“ASU No. 2014-10”), which eliminated the definition of a Development Stage Entity and the related reporting requirements. ASU No. 2014-10 is effective for annual reporting periods beginning after December 15, 2014, with early adoption allowed.  In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows, and shareholder's equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.  The amendments in this update are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein, and early adoption is required. The Company chose to adopt ASU No. 2014-10 early, effective in its financial statements for the period ended September 30, 2015.


In August 2014, the FASB issued Accounting Standard Update No. 2014-15 (“ASU No. 2014-15”), Presentation of Financial Statements Going Concern (Subtopic 205-40) which requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, early application is permitted. We are currently evaluating the accounting implication and do not believe the adoption of ASU 2014-15 to have material impact on our consolidated financial statements, although there may be additional disclosures upon adoption.


The company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect on the company’s financial statement.


ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The price of oil and natural gas has historically been volatile. If it were to decrease substantially, our projections, budgets and revenues would be adversely affected, potentially forcing us to make changes in our operations. Our future financial condition, results of operations and the carrying value of any oil and natural gas interests we acquire will depend primarily upon the prices paid for oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:


·

The level of consumer demand for oil and natural gas;

·

The domestic and foreign supply of oil and natural gas;

·

The ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;

·

The price of foreign oil and natural gas;

·

Domestic governmental regulations and taxes;

·

The price and availability of alternative fuel sources;

·

Weather conditions;

·

Market uncertainty due to political conditions in oil and natural gas producing regions, including the Middle East; and

·

Worldwide economic conditions.

·

Worldwide economic conditions.


These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices affect our revenues, and could reduce the amount of oil and natural gas that we can produce economically. Accordingly, such declines could have a material adverse effect on our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline in value, or become worthless.



24





ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



DALA PETROLEUM CORP.

FINANCIAL STATEMENTS

September 30, 2016


TABLE OF CONTENTS



Report of Independent Registered Public Accounting Firm

26

Consolidated Balance Sheet

27

Consolidated Statement of Operations

28

Consolidated Statement of Stockholders’ Deficit

29

Consolidated Statement of Cash Flow

30

Notes to Consolidated Financial Statements

31





25





[DALP10K093016004.GIF]

Green & Company, CPAs

A PCAOB Registered Accounting Firm




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of:


Dala Petroleum Corp.


We have audited the accompanying consolidated balance sheet of Dala Petroleum Corp. as of September 30, 2016 and 2015, and the related consolidated statement of operations, stockholders’ deficiency, and cash flows for the years ended September 30, 2016 and 2015.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dala Petroleum Corp. as of September 30, 2016 and 2015, and the results of its operations and its 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 shown in the accompanying financial statements, the Company has significant net losses and cash flow deficiencies.  Those conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans regarding those matters are described in Note 4.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Green & Company CPAs


Green & Company CPAs

Tampa, Florida

January 13, 2017





 

 

 

10320 N 56 th Street, Suite 330

Temple Terrace, FL 33617

813.606.4388






26





DALA PETROLEUM CORP.

Consolidated Balance Sheets

September 30,


 

2016

 

2015

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

7,222 

 

$

2,874 

Receivables

 

 

 

1,071 

Prepaid expenses

 

 

 

34,442 

Total current assets

 

7,222 

 

 

38,387 

 

 

 

 

 

 

Oil and natural gas properties, at cost, using the full cost method of accounting

 

 

 

 

 

Unproved

 

171,000 

 

 

608,000 

Total assets

$

178,222 

 

$

646,387 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Notes payable

$

96,556 

 

$

Notes payable to related parties

 

66,656 

 

 

100,985 

Accounts payable and accrued expenses

 

115,131 

 

 

228,680 

Total current liabilities

 

278,343 

 

 

329,665 

 

 

 

 

 

 

Derivative liabilities

 

 

 

54,240 

Total liabilities

 

278,343 

 

 

383,905 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Series A 6% preferred convertible stock, $0.01 par value, 2,008 and 2,008 issued and outstanding at September 30, 2016 and 2015, respectively

 

1,302,925 

 

 

1,302,925 

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

Common stock, $0.001 par value, 50,000,000 shares authorized, 2,926,486 and 12,524,286 shares issued and outstanding at September 30, 2016 and 2015, respectively

 

2,926 

 

 

12,524 

Additional paid-in capital

 

1,572,020 

 

 

1,789,285 

Accumulated deficit

 

(2,977,992)

 

 

(2,842,252)

Total stockholders' deficit

 

(1,403,046)

 

 

(1,040,443)

Total liabilities and stockholders' deficit

$

178,222 

 

$

646,387 


See accompanying notes to consolidated financial statements.





27





DALA PETROLEUM CORP.

Consolidated Statements of Operations

For the Years Ended September 30,


 

2016

 

2015

 

 

 

 

 

 

Revenue, net

$

 

$

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

General and administrative

 

170,669 

 

 

681,095 

Impairment of oil and natural gas properties

 

 

 

1,954,717 

 

 

 

 

 

 

Total costs and expenses

 

170,669 

 

 

2,635,812 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Change in derivative valuation

 

54,240 

 

 

2,757,776 

Registration rights expense

 

 

 

(133,658)

Interest expense

 

(19,312)

 

 

(986)

 

 

 

 

 

 

Total non-operating expenses

 

34,929 

 

 

2,623,132 

 

 

 

 

 

 

Net loss

 

(135,740)

 

 

(12,680)

Dividends on preferred stock

 

(69,866)

 

 

(78,000)

Net loss attributable to common stock

$

(205,606)

 

$

(90,680)

 

 

 

 

 

 

Net loss per share - basic and diluted

$

(0.02)

 

$

(0.01)

 

 

 

 

 

 

Weighted average number of shares outstanding - basic and diluted

 

9,371,197 

 

 

12,521,092 


See accompanying notes to consolidated financial statements.









28





DALA PRETROLEUM CORP.

Consolidated Statement of Shareholders' Deficit

September 30, 2016


 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Common Stock

 

Paid In

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at inception (January 17, 2014)

 

 

$

 

$

 

$

 

$

Contributed assets in exchange for common stock

 

10,000,000 

 

 

10,000 

 

 

1,888,947 

 

 

 

 

 

1,898,947 

Recapitalization from reverse merger

 

2,500,000 

 

 

2,500 

 

 

(154,024)

 

 

 

 

 

(151,524)

Derivatives related to preferred stock and warrants

 

 

 

 

 

 

 

(106,763)

 

 

 

 

 

(106,763)

Offering costs related to issuance of preferred stock

 

 

 

 

 

 

 

(35,000)

 

 

 

 

 

(35,000)

Stock-based compensation

 

 

 

 

 

 

 

44,349 

 

 

 

 

 

44,349 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

(39,488)

 

 

(39,488)

Net loss for the period ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

(2,712,084)

 

 

(2,712,084)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

12,500,000 

 

$

12,500 

 

$

1,637,509 

 

$

(2,751,572)

 

$

(1,101,563)

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

(78,000)

 

 

(78,000)

Convertible preferred stock exercised

 

24,286 

 

 

24 

 

 

11,007 

 

 

 

 

 

11,031 

Derivatives related to preferred stock and warrants

 

 

 

 

 

 

 

7,725 

 

 

 

 

 

7,725 

Stock-based compensation

 

 

 

 

 

 

 

133,044 

 

 

 

 

 

133,044 

Net loss for the period ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

(12,680)

 

 

(12,680)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2015

 

12,524,286 

 

$

12,524 

 

$

1,789,285 

 

$

(2,842,252)

 

$

(1,040,443)

Dividends on preferred stock

 

 

 

 

 

 

 

(69,866)

 

 

 

 

 

(69,866)

Options vesting

 

 

 

 

 

 

 

49,771 

 

 

 

 

 

49,771 

Treasury stock

 

(9,597,800)

 

 

(9,598)

 

 

(427,402)

 

 

 

 

 

(437,000)

Dividends forgiven

 

 

 

 

 

 

 

43,567 

 

 

 

 

 

43,567 

Payable forgiven

 

 

 

 

 

 

 

139,701 

 

 

 

 

 

139,701 

Note payable forgiven

 

 

 

 

 

 

 

46,964 

 

 

 

 

 

46,964 

Net loss for the period ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

(135,740)

 

 

(135,740)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016

 

2,926,486 

 

$

2,926 

 

$

1,572,020 

 

$

(2,977,992)

 

$

(1,403,046)


See accompanying notes to consolidated financial statements.







29





DALA PETROLEUM CORP.

Consolidated Condensed Statements of Cash Flows

For the Years Ended September 30,


 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(135,740)

 

$

(12,680)

Adjustments to reconcile net loss to net cash used in operations:

 

 

 

 

 

Impairment of oil and natural gas properties

 

 

 

1,954,717 

(Gain) loss on changes in fair value of derivatives

 

(54,240)

 

 

(2,757,776)

Amortization of prepaid assets

 

 

 

Stock-based compensation

 

49,771 

 

 

133,044 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

1,071 

 

 

711 

Prepaid assets

 

34,442 

 

 

(338)

Accounts payable and accrued expenses

 

4,032 

 

 

79,243 

Registration rights liability

 

 

 

(18,225)

Due to related parties

 

 

 

(11,292)

Accrued interest

 

8,232 

 

 

985 

Accrued interest to related parties

 

6,770 

 

 

Net cash used in operating activities

 

(85,662)

 

 

(631,611)

 

 

 

 

 

 

Cash flows provided by (used in) investing activities

 

 

 

 

 

Proceeds from sale of acreage

 

 

 

4,000 

Cash paid for oil and natural gas properties

 

 

 

(591,044)

Net cash used in investing activities

 

 

 

(587,044)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds received from notes payable

 

30,124 

 

 

100,000 

Proceeds received from notes payable to related parties

 

59,886 

 

 

Payments of dividends on preferred stock

 

 

 

(60,495)

Net cash provided by financing activities

 

90,010 

 

 

39,505 

 

 

 

 

 

 

Net decrease in cash

 

4,348 

 

 

(1,179,150)

 

 

 

 

 

 

Cash at beginning of period

 

2,874 

 

 

1,182,024 

Cash at end of period

$

7,222 

 

$

2,874 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

$

 

$

Cash paid for taxes

$

 

$

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Fair value of common shares issued upon conversion of preferred stock

$

 

$

18,756 

Increase in unproved oil and gas properties through accounts payable

$

 

$

76,725 

Dividends on preferred stock forgiven

$

43,567 

 

$

Payables forgiven

$

139,701 

 

$

Notes payable and accrued interest forgiven

$

46,964 

 

$

Oil and natural gas properties disposed for treasury stock

$

(437,000)

 

$


 See accompanying notes to consolidated financial statements.




30





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 1 – ORGANIZATION


Dala Petroleum Corp. (the “Company,” “we,” “our,” or “Dala”), formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation.


NOTE 2 – TRANSACTIONS


June 2014 Merger


On June 2, 2014, the Company, its newly formed and wholly-owned subsidiary, Dala Acquisition Corp., a Nevada corporation (“Merger Subsidiary”), and Dala Petroleum Corp., a Nevada corporation (“Dala”), executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”), whereby Merger Subsidiary merged with and into Dala, and Dala was the surviving company under the merger and became a wholly-owned subsidiary of then-named Westcott (the “Merger”) on the closing of the Merger. As a result of the Merger, Westcott issued 10,000,000 shares of its common stock in exchange for all of the outstanding shares of common stock of Dala, which was distributed to Dala Petroleum’s sole shareholder and was then distributed on a pro rata basis to its members.


As a condition precedent to the Merger, Westcott raised $2,025,000 from persons who are “accredited investors” in consideration of the sale of 2,025 shares of its Series A 6% Convertible Preferred Stock and 2,893,725 warrants at the offering price of $1,000 per unit.  Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that is convertible at any time at the option of the Holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested and (ii) 1,429 warrants (issued for each Series A 6% Convertible Preferred Stock sold in each unit) to purchase common shares of the Company at an exercise price of $1.35 with a life of three years as of the “Effective Date” defined as the earliest date of the following to occur: (a) the initial registration statement required by the Offering Documents has been declared effective by the United States Securities and Exchange Commission (the “SEC”), (b) all of the underlying shares have been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144 and without volume or manner-of-sale restrictions or (c) following the one year anniversary of June 3, 2014.


The Merger was accounted for as a reverse-merger and recapitalization of Dala.


Dala possesses rights to engage in oil and natural gas exploration and development in north central Kansas, with total acreage of approximately 25,000 acres (the “Property”).  Since the time of the Merger, Dala is operating as an early-stage oil exploration company focused on the Property, which has oil potential at depths of less than 6,000 feet. Since May 2015, Dala has temporarily suspended its exploration program due to the decline in the price of oil and difficult market conditions.


May 2016 Transaction


The Company entered into a Partial Cancellation Agreement (the “PCA”) by and among its subsidiary, Dala Petroleum Corp., a Nevada corporation (“Dala NV”), Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”), and certain members of Chisholm II (the “Chisholm Members”) through which Chisholm II (after receiving shares from certain of its Chisholm Members) returned a total of 8,567,800 shares of the Company common stock to the Company’s treasury for cancellation.  In exchange for the return of these shares for cancellation, the Company assigned 55,000 acres of the Company’s property rights (approximately 68.75% of its total holdings) to Chisholm II.


Pursuant to terms of the PCA, on May 26, 2016, the 8,567,800 shares of common stock delivered by Chisholm II were cancelled on the books and records of the Company. Prior to that, Company delivered 55,000 acres of its leased property to Chisholm II. 


On May 16, 2016, as approved by the Board of Directors of the Company as part of the settlement with the Preferred Shareholders, the Company filed an Amended and Restated Certificate of Designation of the Company’s Series A 6% Convertible Preferred Stock (the “COD”), which (i) changed the conversion price of the preferred stock from $0.70 per share to $0.05 per share, and (ii) eliminated Section 7 “Certain Adjustments” of the COD.


Pursuant to terms of the PCA, on July 28, 2016, the 1,030,000 shares of common stock delivered after the initial closing by Baldo Sanso (360,000 shares of common stock), Robert Sali (610,000 shares of common stock) and Chris Dabbs (60,000 shares of common stock), were cancelled on the books and records of the Company. The reduction was offset to additional paid-in capital.




31





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 3 – BASIS OF PRESENTATION


Basis of Presentation


The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America.


As discussed above in Note 2, the Company merged with Dala Petroleum Corp., a Nevada corporation (“Dala”) on June 2, 2014 (the “Merger”).   Dala is focused on the acquisition and development of oil and natural gas resources in the United States.  Prior to the Merger, Westcott was considered a shell company, as defined in SEC Rule 12b-2.  For financial reporting purposes, the Merger represents a “reverse merger” rather than a business combination. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements are those of Dala immediately following the consummation of the reverse merger.


Use of Estimates


The preparation of 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 reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, allowance for accounts receivable, depreciable lives of the web site, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives, and valuation of share-based payments.


Accounting for Derivatives


The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.


Impairment of Long-Lived Assets


The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be 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 a comparison of the carrying amount of an asset to future undiscounted 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 by which 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.


The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, deposits received from customers for layaway sales and short term loans the carrying amounts approximate fair value due to their short maturities.


We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.





32




DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.


Unproved oil and natural gas properties are accounted for and measured under Regulation S-X, Rule 4-10.


We currently measure and report at fair value other intangible assets (due to our impairment analysis) and derivative liabilities using ASC 820-10, Fair Value Measurement.  The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following tables summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016:


 

 

Fair Value Measurements at September 30, 2016

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Total

 

 

Assets

 

Inputs

 

Inputs

 

Carrying

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

Description

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

-

 

$

-

 

$

171,000

 

$

171,000


 

 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

 

 

 

 

Activity

 

Fair

 

 

 

 

 

 

 

 

 

 

 

During

 

Value of

 

Disposal

 

 

 

 

 

September 30,

 

Fiscal

 

Intangible

 

of

 

September 30,

 

 

2015

 

Year

 

Asset

 

Property

 

2016

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

608,000

 

$

 

$

 

$

(437,000)

 

$

171,000


 

Fair Value Measurements at September 30, 2015

 

Fair Value Measurements at September 30, 2016

 

Quoted

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Total

 

Identical

 

Observable

 

Unobservable

 

Total

 

Assets

 

Inputs

 

Inputs

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Carrying

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

$

-

 

$

-

 

$

54,240

 

$

54,240

 

$

-

 

$

-

 

$

-

 

$

-


 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

Activity

 

Fair

 

 

 

 

 

 

 

During

 

Value of

 

 

 

 

September 30,

 

Fiscal

 

Intangible

 

September 30,

 

2015

 

Year

 

Asset

 

2016

Description

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

$

54,240

 

$

-

 

$

(54,240)

 

$

-


Oil and Natural Gas Properties


The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs related to the exploration and development of oil and natural gas properties are initially capitalized into a single cost center (“full cost pool”). Such costs include land acquisition costs, a portion of employee salaries related to property development, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. Internal salaries are capitalized based on employee time allocated to the acquisition of leaseholds and development of oil and natural gas properties. The Company did not capitalize interest for the period ended September 30, 2016 as it was not required.


Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs.




33





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


The Company assesses all items classified as unproved property on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and amortization.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.


Capitalized costs associated with impaired properties and properties having proven reserves, estimated future development costs, and asset retirement costs under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 410-20-25 are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves.  The costs of unproved properties are withheld from the depletion base until such time as they are developed, impaired, or abandoned.


Under the full cost method of accounting, capitalized oil and natural gas property costs less accumulated depletion, net of deferred income taxes, may not exceed a ceiling amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, which is tested on a quarterly basis, an impairment is recognized. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes.  If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings.  Any such write-down will reduce earnings in the period of occurrence and result in a lower depreciation, depletion and amortization rate in future periods.  A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.


In April, 2015, the Company participated in the completion of a well in which the Company owns a 10% non-operated working interest targeting the Simpson and Viola formations, Kansas. That well was determined to be dry in June 2015.


During the year ended September 30, 2016, the Company incurred total $0 in oil and natural gas expenditures.


As of September 30, 2015, the Company’s oil and natural gas properties were determined to be impaired thereby reducing the unproved oil and natural gas properties to $608,000.  No additional impairment was realized for the year ended September 30, 2016.


On May 10, 2016, the Company entered into a Partial Cancellation Agreement (the “PCA”) by and among its subsidiary, Dala Petroleum Corp., a Nevada corporation (“Dala NV”), Chisholm II, and certain members of Chisholm II (the “Chisholm Members”) through which Chisholm II (after receiving shares from certain of Chisholm Members) returned a total of 8,567,800 shares of the Company’s common stock to the Company’s treasury for cancellation.  In exchange for the return of these shares for cancellation, the Company returned 55,000 acres of the Company’s property rights, held in the form of oil and gas leases from Chisholm II (approximately 68.75% of its total holdings), to Chisholm II.


Revenue Recognition


The Company recognizes oil and natural gas revenues from our interests in producing wells when production is delivered to, and title has transferred to, the purchaser and to the extent the selling price is reasonably determinable.


The Company uses the sales method of accounting for balancing of natural gas production and would recognize a liability if the existing proven reserves were not adequate to cover the current imbalance situation. As of the year ending September 30, 2016, no revenue has been recognized as all wells are still unproved and non-producing.


Asset Retirement Obligation


Asset retirement obligation (“ARO”) reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with the Company's oil and natural gas properties. Inherent in the fair value calculation of the ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments.   As of September 30, 2016, the Company had no ARO liability as no wells have been established.




34





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


Stock-based Compensation


The Company records stock based compensation in accordance with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This requires that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.


The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.


Income Taxes


The Company follows ASC Topic 740 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.


Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.


The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of September 30, 2016, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.


Net Loss Per Share


The Company follows ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.  As the Company has incurred losses for the period ended September 30, 2016, the potentially dilutive shares totaling 2,868,571 are anti-dilutive and are thus not added into the loss per share calculations.  Due to the anti-dilutive impact the weighted average dilutive shares outstanding for the period ended September 30, 2015, for basic and dilutive shares, are the same.


Segment Information


In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”, the Company is required to report financial and descriptive information about its reportable operating segments. The Company does not have any operating segments as of September 30, 2016 and 2015.


Effect of Recent Accounting Pronouncements


In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2017.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.



35





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


In August 2014, the FASB issued ASU No. 2014-15,  Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The guidance requires management to perform an evaluation each annual and interim reporting period of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within the one-year period after the date that the financial statements are issued. If such conditions are identified, the guidance requires an entity to provide certain disclosures about the principal conditions or events that gave rise to the substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans to alleviate or mitigate substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the first annual period ending after December 15, 2016 and interim periods thereafter. The Company currently does not expect the adoption of ASU 2014-15 to have a material impact on its financial statements and does not anticipate early adoption of this pronouncement.


The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statement.


NOTE 4 – GOING CONCERN


The Company has not generated any revenues, has recurring net losses, a working capital deficiency as of September 30, 2016 of $271,121, and used cash in operations of $85,662 and $631,611 for the years ended September 30, 2016 and 2015, respectively. In addition, as of September 30, 2016, the Company had an accumulated deficit and stockholders’ deficiency of $2,977,992 and $1,403,046, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.


The accompanying consolidated unaudited financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.


There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.


The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.


The Company is attempting to commence explorations and generate revenue; however, the Company’s future cash position may not be sufficient to support its daily operations.  While the Company believes in the viability of its strategy in the exploration and development of its unproved properties and the Company’s ability to raise additional funds, until such time it is able to generate sufficient revenue to support its operations, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and in its ability to raise additional funds, until such time the Company can generate sufficient revenues to support its operations.


In the event the Company is unable to raise funding in the near term, we will not be able to pay our liabilities. In the event we are unable to raise adequate funding in the future for our operations and to pay our outstanding debt obligations, and if our current creditors elect to foreclose on the outstanding debts then owed, we would be forced to liquidate our assets or may be forced to seek bankruptcy protection, which could result in the value of our outstanding securities declining in value or becoming worthless.


The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.






36





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 5 – RELATED PARTY TRANSACTIONS


On June 2, 2014, the Company issued 10,000,000 shares of its common stock to Chisholm II in exchange for oil and gas assets.  Chisholm II was the sole stockholder of Dala Petroleum Corp. (a Nevada corporation) prior to the Merger and now is the Company’s wholly-owned operating subsidiary.


The Company had a service agreement, which has been suspended by the Company since May 2015 and has since been cancelled, with Chisholm II to use its existing technical exploration team for general and administrative-type services on behalf of the Company.   The Company was obligated to pay Chisholm II $25,000 per month plus expenses for these services under the Master Services Agreement.  For the year ended September 30, 2015, the Company paid $225,472 and had accrued $50,000 for its services prior to suspending the Master Services Agreement and cancelling all amounts due thereunder.


In June 2014, the Company entered into an Option Participation Agreement with Chisholm II, whereby Chisholm II granted the Company the option, at the Company’s own election, to participate for up to twenty-five percent (25%) of Chisholm II’s share of each drilling operation in search for oil or gas in the State of Kansas undertaken by Chisholm II.  The Company has not elected to participate in the Option Participation Agreement since April 2015.


On June 15, 2015, the Company received the funds from a Promissory Note (the “Pacific Note”) in the amount of $99,999 in favor of Pacific Oil & Gas, LLC (the “Pacific”). The Pacific Note bears an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to Pacific on December 31, 2015. The Note is secured by a Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement that was filed on June 25, 2015 against the Company’s Evans 9-1 lease in McPherson County, Kansas. The trustee of Pacific is the Company’s director, Clancy Cottman, and the funds delivered to the Company by Pacific were provided by a group of the Company’s Series A 6% Convertible Preferred shareholders.


On December 22, 2015, the Company entered into four Promissory Notes (the “Notes”) in the total amount of $20,000 in favor of Chisholm Partners II, LLC, Mill City Ventures III, LLC (“Mill City”), Lane Ventures, Inc. and Alpha Capital Anstalt (collectively, the “Lenders”). The Notes all bear an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to the Lender on December 22, 2016. The Note is unsecured. The managing partner of Chisholm Partners II, LLC is the Company’s director, Clancy Cottman.  The other three Lenders are the shareholders in the Company’s Series A 6% Convertible Preferred offering.  On July 16, 2016, a principal of Mill City, Daniel Ryweck (“Ryweck”), was appointed as a Director of the Company.


On January 26, 2016, the Company entered into a letter agreement through which Pacific Oil & Gas, LLC extended the maturity date of that certain Promissory Note dated June 8, 2015 and made pursuant to the terms and conditions of the Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated June 8, 2015. See Note 6.


On January 28, 2016, the Company entered into a Promissory Note (the “Mill City Note”) in the amount of $30,000 in favor of Mill City Ventures III, LLC (the “Lender”). The Mill City Note bears an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to the Lender on January 28, 2017. The Mill City Note is unsecured. The Lender is the shareholders in the Company’s Series A 6% Convertible Preferred offering. The funds have been used by the Company to pay liabilities and to maintain the Company’s listing on the OTCQB.


On February 17, 2016, a supermajority of more than 67% of the shareholders of the Series A 6% Convertible Preferred Stock approved certain corporate transactions in an effort to settle certain violations of the Series A 6% Convertible Preferred Stock Certificate of Designation and other documents related to the sale of Series A 6% Convertible Preferred Stock in 2014. The transactions approved by a supermajority of the Series A 6% Convertible Preferred Shareholders are to be implemented by the Board of Directors at the Board’s discretion. The approved transactions include the following: (i) the approval of a potential settlement agreement with Chisholm Partners II, LLC and certain members of Chisholm II, (ii) the approval of the amendment of the Certificate of Designation for the Series A 6% Convertible Preferred Stock modifying the Conversion Price to $0.05, (iii) the Removal of Section 7, “Certain Adjustments” in the Series A 6% Convertible Preferred Stock Certificate of Designation (iv) the modification of the permitted indebtedness allowable under the Series A 6% Convertible Preferred Stock Certificate of Designation to $200,000, (v) the approval of promissory notes with related parties in an amount up to $60,000, (vi) the waiver of the right of redemption upon Triggering Events for the Company’s violations of Section 10 of the Certificate of Designation, (vii) the waiver of the accrual of the late fee for unpaid dividends as of January 1, 2016, (viii) the waiver of the first right of refusal to purchase shares from other Series A 6% Convertible Preferred Shareholders, and (ix) waiver of the “Most Favored Nation” provision in the SPA for the Series A 6% Convertible Preferred Stock, among other things. None of the items approved by the shareholders have yet been effected by the Board.


On February 17, 2016, the Company entered into a promissory note with Mill City for $30,000.  The note matures on January 28, 2017 and bears interest at the rate of 12%.  During the year ended September 30, 2016, the Company accrued $5,125 interest expense under this note.  See Note 6.




37





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


On March 30, 2016, the Company entered into a Promissory Note (the “Alpha Note”) in the amount of $40,010 in favor of Alpha Capital Anstalt (“Alpha”). The Alpha Note bears an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to Alpha on January 28, 2017. The Alpha Note is unsecured. Alpha is a shareholder in the Company’s Series A 6% Convertible Preferred offering. The funds have been used by the Company to pay liabilities and to maintain the Company’s listing on the OTCQB.


On May 10, 2016, the Company entered into a Partial Cancellation Agreement (the “PCA”) by and among its subsidiary, Dala Petroleum Corp., a Nevada corporation (“Dala NV”), Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”)(a company that is managed by one of the Company’s then-directors), and certain members of Chisholm II (the “Chisholm Members”)(some of which are beneficially controlled by the Company’s then-officer and then-directors) through which Chisholm II (after receiving shares from certain of its Chisholm Members) is to return a total of 8,567,800 shares of the Company common stock to the Company’s treasury for cancellation.  In exchange for the return of these shares for cancellation, the Company assigned 55,000 acres of the Company’s property rights (approximately 65% of its total holdings) to Chisholm II. On May 10, 2016, the Company terminated the Master Services Agreement entered into with Chisholm II on June 3, 2014 and all amounts due thereunder were released by Chisholm II.


On May 10, 2016, the Company and one of its creditors, Pacific Oil & Gas Company, LLC (a company managed by Clancy Cottman, the Company’s then-director), restated the Pacific Note by assigning the amounts due to four different creditors based on their initial participation in the Pacific Note. The reallocation in the Restated Promissory Note (the “Restated Pacific Note”) is as follows:


Name of Creditor

 

Amount of

Principal Due

 

Amount of

Interest Due

 

Total

Amount Due

Alpha Capital Anstalt

 

$

37,036

 

$

3,970

 

$

41,006

Lane Ventures Inc.

 

$

2,469

 

$

265

 

$

2,734

Mill City Ventures III, LTD

 

$

24,691

 

$

2,646

 

$

27,337


The above notes, as of December 31, 2016, are in default.


As part of the settlement with the Preferred Shareholders, and in association with the PCA, on May 10, 2016 certain creditors of the Company agreed to release and waive all amounts owed to them by the Company. Chisholm Partners II, LLC (a company that is managed by Clancy Cottman, one of the Company’s then-directors), Clancy Cottman (then a director of the Company), Jon Wimbish (then a director of the Company), William Gumma (then a director and officer of the Company), E. Will Gray II (a former director of the Company), Pacific Oil & Gas, LLC (managed by Clancy Cottman, one of the Company’s then-directors) all released the Company from any amounts due to them. The releases were offset to additional paid-in capital.


NOTE 6- NOTES PAYABLE


Notes payable, all classified as current at September 30, 2016 and September 30, 2015, consists of the following:


Related Party

September 30, 2016

 

September 30, 2015

 

 

 

 

Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

Pacific Oil & Gas

$

-

 

$

-

 

$

-

 

$

99,999

 

$

986

 

$

100,985

Mill City Venture

 

5,195

 

 

484

 

 

5,679

 

 

-

 

 

-

 

 

-

Mill City Venture

 

30,000

 

 

5,125

 

 

35,125

 

 

-

 

 

-

 

 

-

Mill City Venture

 

24,691

 

 

1,161

 

 

25,852

 

 

-

 

 

-

 

 

-

Total

$

59,886

 

$

6,770

 

$

66,656

 

$

99,999

 

$

986

 

$

100,985


 

September 30, 2016

 

September 30, 2015

 

 

 

 

Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

Lane Ventures

$

488

 

$

45

 

$

533

 

$

-

 

$

-

 

$

-

Alpha Capital

 

40,010

 

 

2,419

 

 

42,429

 

 

-

 

 

-

 

 

-

Alpha Capital

 

37,037

 

 

5,711

 

 

42,748

 

 

-

 

 

-

 

 

-

Alpha Capital

 

7,315

 

 

681

 

 

7,996

 

 

 

 

 

 

 

 

 

Lane Ventures

 

2,469

 

 

381

 

 

2,850

 

 

-

 

 

-

 

 

-

Total

$

87,319

 

$

9,237

 

$

96,556

 

$

-

 

$

-

 

$

-





38





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


On June 15, 2015, the Company received funds from a demanded Promissory Note (the “Note”) that it entered into on June 8, 2015 in the amount of $99,999 in favor of Pacific Oil & Gas, LLC (the “Lender”). The Note bears an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to the Lender on December 31, 2015. The Note is secured by a Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement that was filed on June 25, 2015 against the Company’s Evans 9-1 lease in McPherson County, Kansas. The trustee of the Lender is the Company’s director, Clancy Cottman, and the funds delivered to the Company by the Lender were provided by a group of the Company’s Series A 6% Convertible Preferred shareholders. As of September 30, 2016, the Company received proceeds of $97,500.  On January 26, 2016, Lender extended the maturity date to March 1, 2016.  During the period ended May 26, 2016, the Company accrued $10,849 interest expense under this note.  On May 26, 2016, as part of the PCA (see Note 2), the Lender forgave the principal and interest of $110,848.  On May 10, 2016, the Company and the Lender (a company managed by Clancy Cottman, the Company’s then-director), restated the Pacific Note by assigning the amounts due to four different creditors based on their initial participation in the Pacific Note as reflected in the Restated Pacific Note (see Note 5).  The restated Pacific note was accounted for by separate notes.  The balance of $39,771 (includes principal and accrued interest) that was forgiven was offset to additional paid-in capital.


As part of the settlement with the Preferred Shareholders, and in association with the PCA, on May 10, 2016 certain creditors of the Company agreed to release and waive all amounts owed to them by the Company, including all amounts owed to Pacific Oil & Gas, LLC under the Restated Pacific Note.


On December 22, 2015, the Company entered into a promissory note with Mill City Ventures III, Ltd. for $5,195.  The note matures on December 22, 2016 and bears interest at the rate of 12%. As of December 22, 2016, the note was in default (see Note 14).  During the year ended September 30, 2016, the Company accrued $483 interest expense under this note.


On December 22, 2015, the Company entered into a promissory note with Chisholm Partners II, LLC for $7,002.  The note matures on December 22, 2016 and bears interest at the rate of 12%.  During the period ended May 26, 2016, the Company accrued $322 interest expense under this note.  On May 26, 2016, as part of the PCA (see Note 2), the Lender forgave the principal and interest of $7,324 as offset to additional paid-in capital.


On December 22, 2015, the Company entered into a promissory note with Lane Ventures, Inc. for $488.  The note matures on December 22, 2016 and bears interest at the rate of 12%.  As of December 22, 2016, the note was in default (see Note 14).  During the year ended September 30, 2016, the Company accrued $45 interest expense under this note.


On December 22, 2015, the Company entered into a promissory note with Alpha Capital Anstalt for $7,315.  The note matures on December 22, 2016 and bears interest at the rate of 12%.  As of December 22, 2016, the note was in default (see Note 14).  During the year ended September 30, 2016, the Company accrued $681 interest expense under this note.


On February 17, 2016, the Company entered into a promissory note with Mill City Ventures III, Ltd. for $30,000.  The note matures on January 28, 2017 and bears interest at the rate of 12%.  During the year ended September 30, 2016, the Company accrued $5,125 interest expense under this note.  See Note 5.


On March 30, 2016, the Company entered into a promissory note with Alpha Capital Anstalt for $40,010.  The note matures on March 30, 2017 and bears interest at the rate of 12%.  During the year ended September 30, 2016, the Company accrued $2,420 interest expense under this note.


On May 10, 2016, the Company and one of its creditors, Pacific Oil & Gas Company, LLC (a company managed by Clancy Cottman, the Company’s then-director), restated the Pacific Note by assigning the amounts due to four different creditors based on their initial participation in the Pacific Note. The reallocation in the Restated Promissory Note (the “Restated Pacific Note”) is as follows:


Name of Creditor

 

Amount of

Principal Due

 

Amount of

Interest Due

 

Total

Amount Due

Alpha Capital Anstalt

 

$

37,036

 

$

3,970

 

$

41,006

Lane Ventures Inc.

 

$

2,469

 

$

265

 

$

2,734

Mill City Ventures III, LTD

 

$

24,691

 

$

2,646

 

$

27,337


As of December 31, 2016, these notes are in default.




39





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 7 – PREFERRED CONVERTIBLE STOCK AND WARRANTS


As discussed above in Note 2, in fiscal year 2014, the Company sold 2,025 units consisting of a total of 2,025 shares of Series A 6% Convertible Preferred Stock and 2,893,725 warrants at the price of $1,000 per unit.  Proceeds received totaled $2,025,000 (with a net of offering costs of $1,990,000).  The warrants were valued at $711,044 and this amount was separated from the value of the preferred stock.  Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that is convertible at any time at the option of the holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested (subject to adjustment) and (ii) 1,429 warrants (issued for each Series A 6% Convertible Preferred Stock sold in each unit) to purchase common shares of the Company at an exercise price of $1.35 for three years of the “Effective Date, ” defined as the earliest date of the following to occur: (a) the initial registration statement required by the Offering Documents has been declared effective by the United States Securities and Exchange Commission (the “SEC”), (b) all of the underlying shares have been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144 and without volume or manner-of-sale restrictions or (c) following the one year anniversary of June 3, 2014.  A total of 2,008 shares of Series A 6% Convertible Preferred Stock, exercisable into 2,868,571 shares of common stock, remain issued and outstanding as of September 30, 2016. The 6% per annum dividends are cumulative and payable quarterly in cash or, at the Company’s option, in shares of the Company’s common stock.


The Company discontinued paying the quarterly dividend as of June 1, 2015 and the amount owed thereunder has been accruing since that time until May 10, 2016 at which time all accrued dividends on 675 of the 2,025 shares were waived and cancelled by those certain preferred shareholders.  The cancelled dividends were accounted for by offsetting to additional paid-in capital.


As the Series A 6% Convertible Preferred Stock is contingently redeemable at a fixed price and such redemption would not be solely within the control of the Company, the preferred stock is classified outside of stockholders’ equity, as “temporary equity” between liabilities and stockholders’ equity on the Company’s consolidated balance sheet.


The Series A 6% Convertible Preferred Stock has no voting rights.


On February 17, 2016, a supermajority of more than 67% of the shareholders of the Series A 6% Convertible Preferred Stock approved certain corporate transactions in an effort to settle certain violations of the Series A 6% Convertible Preferred Stock Certificate of Designation and other documents related to the sale of Series A 6% Convertible Preferred Stock in 2014. The transactions approved by a supermajority of the Series A 6% Convertible Preferred Shareholders are to be implemented by the Board of Directors at the Board’s discretion. The approved transactions include the following: (i) the approval of a potential settlement agreement with Chisholm Partners II, LLC and certain members of Chisholm II, (ii) the approval of the amendment of the Certificate of Designation for the Series A 6% Convertible Preferred Stock modifying the Conversion Price to $0.05, (iii) the Removal of Section 7, “Certain Adjustments” in the Series A 6% Convertible Preferred Stock Certificate of Designation (iv) the modification of the permitted indebtedness allowable under the Series A 6% Convertible Preferred Stock Certificate of Designation to $200,000, (v) the approval of promissory notes with related parties in an amount up to $60,000, (vi) the waiver of the right of redemption upon Triggering Events for the Company’s violations of Section 10 of the Certificate of Designation, (vii) the waiver of the accrual of the late fee for unpaid dividends as of January 1, 2016, (viii) the waiver of the first right of refusal to purchase shares from other Series A 6% Convertible Preferred Shareholders, and (ix) waiver of the “Most Favored Nation” provision in the SPA for the Series A 6% Convertible Preferred Stock, among other things. None of the items approved by the shareholders have yet been effected by the Board.


Upon the occurrence of a triggering event, each holder shall have the right to require the Company to redeem all of the Series A 6% Convertible Preferred Stock in cash at the redemption amount which is the sum of (a) the greater of (i) 130% of the stated value, and (ii) the product of (y) the VWAP on the trading day immediately preceding the date of the triggering event and (z) the stated value divided by the then conversion price, (b) all accrued but unpaid dividends thereon, if any, and (c) all liquidated damages and other costs, expenses or amounts due in respect of the Series A 6% Convertible Preferred Stock.


On November 17, 2014, one of the Company’s shareholders of Series A 6% Convertible Preferred Stock converted 17 shares of its Series A 6% Convertible Preferred Stock into 24,286 shares of the Company’s common stock. As of September 30, 2016, 2,008 Convertible Preferred Shares remain outstanding.


Effective December 31, 2015, the valuation of the derivative from the warrants using the Black Sholes model was no longer a liability given the decrease in the Company’s stock and the exercise price of the warrants.





40





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 8 – SHAREHOLDERS’ EQUITY


Common Stock


On June 2, 2014, the Company issued 10,000,000 shares of its common stock to Chisholm II in exchange for oil and natural gas assets recorded at $1,898,947.


As discussed above, the Company completed a reverse merger with Dala, with Dala being the acquirer for financial reporting purposes.  At the date of the Merger, Westcott had 2,500,000 shares of common stock outstanding, which are now outstanding for the merged Company. The total amount of shares issued and outstanding post-Merger, as of December 31, 2014 was 12,500,000 shares of common stock.


On November 17, 2014, one of the Company’s shareholders of Series A 6% Convertible Preferred Stock, Chienn Consulting Company, converted 17 shares of its Series A 6% Convertible Preferred Stock into 24,286 shares of the Company’s common stock.


As part of the Partial Cancellation Agreement executed in May 2016 (see Note 2), 9,597,800 shares of common stock were returned to the Company and recorded in treasury.


As of September 30, 2016, there are a total of 2,926,486 common shares outstanding.


Stock-Based Compensation


On June 2, 2014, the Company granted options to acquire common shares to its Chief Executive Officer and two directors, totaling 600,000 options.  The options had an exercise price of $0.70 per share for terms of six years.  Of the total stock options, 400,000 vest equally over the next four years and 200,000 vest equally over the next two years.  The total fair value of these options at the date of grant was estimated to be $400,087, and was determined using the Black-Scholes option pricing model with an expected lives of 4.25 (four-year vesting) and 3.75 years (two-year vesting), a risk-free interest rate of 1.92%, a dividend yield of 0% and expected volatility of 195%.  The expected terms were determined using the simplified method.  For the year ended September 30, 2016, the Company recorded $49,771 of stock-based compensation expense.


On December 21, 2015, ninety days after the resignation of a former officer of the Company, his 400,000 stock options expired.


On May 9, 2016, two former directors of the Company each voluntarily cancelled 100,000 stock options awarded on June 2, 2014, related to the Partial Cancellation Agreement and their subsequent resignations.


The following is a summary of the status of all of the Company’s stock options as of September 30, 2016 and changes during the period ended on that date:


 

Number

of Options

 

Weighted-

Average

Exercise Price

 

Weighted-

Average

Remaining

Contractual Life

(Years)

Outstanding at September 30, 2015

600,000 

 

$

0.70

 

5.93

Granted

 

 

-

 

-

Exercised

 

 

-

 

-

Expired

(400,000)

 

 

 

 

 

Cancelled

(200,000)

 

 

-

 

-

Outstanding at September 30, 2016

 

$

-

 

-

Exercisable at September 30, 2016

 

$

-

 

-


As of September 30, 2016, the intrinsic value of outstanding stock options was $0.





41





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 9 – DERIVATIVES


The Series A 6% Convertible Preferred Stock issued by the Company had a full-ratchet down-round provision on the exercise price, in which the investors’ conversion price is adjusted down to the share price of future financings.  Therefore, prior to September 30, 2016, following ASC 815-40, the warrants and the conversion feature of the preferred stock are not considered indexed to our own stock, and as such, the fair value of the embedded derivative liabilities are reflected on the balance sheet prior to September 30, 2016.


On February 17, 2016, a supermajority of more than 67% of the shareholders of the Series A 6% Convertible Preferred Stock approved certain corporate transactions in an effort to settle certain violations of the Series A 6% Convertible Preferred Stock Certificate of Designation and other documents related to the sale of Series A 6% Convertible Preferred Stock in 2014. The transactions approved by a supermajority of the Series A 6% Convertible Preferred Shareholders are to be implemented by the Board of Directors at the Board’s discretion. The approved transactions include the following: (i) the approval of a potential settlement agreement with Chisholm Partners II, LLC and certain members of Chisholm II, (ii) the approval of the amendment of the Certificate of Designation for the Series A 6% Convertible Preferred Stock modifying the Conversion Price to $0.05, (iii) the Removal of Section 7, “Certain Adjustments” in the Series A 6% Convertible Preferred Stock Certificate of Designation (iv) the modification of the permitted indebtedness allowable under the Series A 6% Convertible Preferred Stock Certificate of Designation to $200,000, (v) the approval of promissory notes with related parties in an amount up to $60,000, (vi) the waiver of the right of redemption upon Triggering Events for the Company’s violations of Section 10 of the Certificate of Designation, (vii) the waiver of the accrual of the late fee for unpaid dividends as of January 1, 2016, (viii) the waiver of the first right of refusal to purchase shares from other Series A 6% Convertible Preferred Shareholders, and (ix) waiver of the “Most Favored Nation” provision in the SPA for the Series A 6% Convertible Preferred Stock, among other things.  Items (i) through (iv) were approved by the Board of Directors, items (v) through (ix) listed above were not approved specifically by the Board of Directors.


Activity for derivative instruments liability during the years ended September 30, 2016 and 2015 was as follows:


 

 

 

 

 

 

 

Change

 

 

 

 

 

 

 

Change

 

 

 

 

 

 

 

Activity

 

in Fair

 

 

 

 

Activity

 

in Fair

 

 

 

 

 

 

 

During

 

Value of

 

 

 

 

During

 

Value of

 

 

 

 

 

 

 

Fiscal

 

Derivative

 

September 30,

 

Fiscal

 

Derivative

 

September 30,

 

Inception

 

Year

 

Liability

 

2015

 

Year

 

Liability

 

2016

Derivative liability

 

 

 

 

(7,723)

 

$

(2,757,776)

 

$

54,240

 

$

-

 

$

(54,240)

 

$

-


NOTE 10 – REGISTRATION RIGHTS PENALTY


In connection with the private placement and sale of 2,025 units of Series A 6% Convertible Preferred Stock and related warrants at the price of $1,000 per unit, the Company was required to register certain shares of common stock as part of a Registration Rights Agreement.


The Company granted the investors’ registration rights on the underlying shares related to the Series A 6% Convertible Preferred Stock and warrants.  The registration rights agreement provided for a liquidated damages provision imposed upon the Company of 1.5% of the gross proceeds per month for each month that the shares are not registered.  The liquidated damages are not to exceed 9% which was met in 2015.  The Company filed a registration statement that was effective on September 12, 2014 that did not register all of the underlying shares of the Series A 6% Convertible Preferred Stock the warrants and the dividend payments required to be registered in the Registration Rights Agreement.  As of September 30, 2016 and 2015, the Company incurred registration rights penalty of $0 and $133,658, respectively.


The Company has also accrued interest in the amount of $19,312 and $986 as of September 30, 2016 and 2015, respectively, at the rate of 18% per annum simple interest in accordance with the terms of the Registration Rights Agreement.


NOTE 11 – INCOME TAX


For the fiscal year 2016 and 2015, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.


As of September 30, 2016 and 2015, the Company has net operating loss carry forwards of approximately $2,900,000 and $2,800,000, respectively. The carry forwards expire through the year 2036. The Company’s net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.





42





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


The Company’s tax expense differs from the “expected” tax expense for Federal income tax purposes (computed by applying the United States Federal tax rate of 34% to loss before taxes).


The tax effects of the temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.


The tax effect of significant components of the Company’s deferred tax assets and liabilities at September 30, 2016 and 2015, respectively, are as follows:


 

September 30,

 

2016

 

2015

Deferred tax assets:

 

 

 

 

 

Net operating loss carryforward

$

1,012,517 

 

$

966,366 

Derivatives liabilities

 

(325,069)

 

 

(318,799)

Stock options

 

15,380 

 

 

15,380  

Total gross deferred tax assets

 

702,828 

 

 

662,947 

Less: Deferred tax asset valuation allowance

 

(702,828)

 

 

(662,947)

Total net deferred tax assets

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation

 

 

 

Total deferred tax liabilities

 

 

 

 

 

 

 

 

 

Total net deferred taxes

$

 

$


In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.


Because of the historical earnings history of the Company, the net deferred tax assets for 2016 were fully offset by a 100% valuation allowance. The valuation allowance for the remaining net deferred tax assets was $702,828 and $662,947 as of September 30, 2016 and 2015, respectively.


NOTE 12 – CONCENTRATIONS


Concentration of Credit Risk


Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.


The Company places its temporary cash investments with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of September 30, 2016. There have been no losses in these accounts through September 30, 2016.


Concentration of Supplier


The Company does not rely on any particular suppliers for its services.




43





DALA PETROLEUM CORP.

Notes to Consolidated Financial Statements

September 30, 2016


NOTE 13 – COMMITMENTS AND CONTINGENCIES


The Company, as a lessee of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment.  These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages.  We believe our operations are in substantial compliance with existing requirements of governmental bodies.


Legal Matters


The Company at times is subject to other legal proceedings that arise in the ordinary course of business.  In the opinion of management, as of September 30, 2016, there are no pending or threatened legal matters.


NOTE 14 – SUBSEQUENT EVENT


On October 18, 2016, the Company entered into a promissory note with Mill City for $10,000.  The promissory note bears an interest rate of 12% per annum and all principal and accrued interest of $11,200 will be due and payable by the Company to Mills City on October 17, 2017. See Note 6.


On December 16, 2016, the Company entered into a promissory note with Mill City for $12,500. The note is payable on December 15, 2017 in the amount of $14,000. The note bears interest of 12% which is payable on December 15, 2017.


On December 22, 2016, the promissory notes with Mill City, Ltd., Lane Ventures, Inc., and Alpha Capital Anstalt, matured, and are in default (see Note 6).


On January 4, 2017, the Company entered into a promissory note with Alpha Capital Anstalt for $12,500. The note is payable on January 3, 2018 in the amount of $14,000. The note bears interest of 12%.





44





ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


On September 30, 2015, we engaged Green & Company CPA’s (“Green”) of Tampa, Florida, as our new independent registered public accounting firm. During the year ended September 30, 2014, and prior to September 30, 2015 (the date of the new engagement), we did not consult with Green regarding (i) the application of accounting principles to a specified transaction, (ii) the type of audit that might be rendered on the Company’s financial statements by Green, in either case where written or oral advice provided by Green would be an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Item 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).


ITEM 9A:  CONTROLS AND PROCEDURES


Management’s Annual Report on Internal Control Over Financial Reporting


Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of the CEO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal controls over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records which in reasonable detail accurately and fairly reflect the transactions and disposition of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.


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.


A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.


In evaluating the effectiveness of the Company’s internal control over financial reporting as of September 30, 2016, management used the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the criteria established by COSO, management (with the participation of the CEO) identified the following material weaknesses in the Company’s internal control over financial reporting as of September 30, 2016, which arose from the limited number of number of staff at the Company and the inability to achieve proper segregation of duties:


·

The Company lacked effective controls for ensuring the accuracy of reporting over significant account balances, including the review, approval, and documentation of related transactions and account reconciliations and other complex accounting procedures.

·

The Company lacked effective controls because their directors are not independent.


As a result of these material weaknesses, management concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2016, based on the criteria established in Internal Control – Integrated Framework (2013) issued by COSO.


This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Security and Exchange Commission that permit us to provide only management’s report in this Annual Report.


Changes in Internal Control Over Financial Reporting


There have been no changes in internal control over financial reporting during the last fiscal quarter of our fiscal year ended September 30, 2016.





45




Limitations on the Effectiveness of Controls


The Company's management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. 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 the control system must reflect that there are resource constraints and that the benefits 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 the 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 controls. The design of any system of controls is based in part on 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.  Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.


ITEM 9B:  OTHER INFORMATION


The Company is in default with several of its noteholders as reflected below and disclosed with this report in Note 6 of the Notes of the Financial Statements dated September 30, 2016.


Notes payable

Principal

Mill City Ventures III, Ltd.

$

5,195

Lane Ventures, Inc.

 

488

Alpha Capital Anstalt

 

7,315

Alpha Capital Anstalt

 

37,036

Lane Ventures, Inc.

 

2,469

Mill City Ventures III, Ltd.

 

24,691

Total

$

77,194



PART III


ITEM 10:  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


Identification of Directors and Executive Officers


Our executive officers and directors and their respective ages, positions and biographical information are set forth below.


Name

 

Age

 

Positions Held

 

Since

Mark Perman

 

48

 

CEO, CFO, Director

 

May 2016

Daniel Ryweck

 

52

 

Director

 

July 2016


Background and Business Experience


Mark Perman is the Chief Executive Officer, Chief Financial Officer, and Director of the Company.  Mr. Perman is currently a Director of Product Development for U.S. Energy Services.  Prior to this position, he served as partner and chief financial officer of Beachfront Energy and president and co-founder of PM Rail Co.  He has also worked as a director at RBC Capital Markets and as an executive director at UBS Investment Bank.  Mr. Perman received a Bachelor’s of Science degree in Finance from Minnesota State University-Mankato in 1992.


Daniel Ryweck is a Director of the Company.  Since 2013, Mr. Ryweck has served as Chief Compliance Officer of Mill City Ventures III Ltd.  From June 2015 through September 2015, he served as interim Chief Financial Officer of Sun BioPharma, Inc., guiding that company through a reverse merger.  Since 2000, Mr. Ryweck has maintained an individual accounting practice in the Minneapolis, Minnesota area.  Mr. Ryweck graduated from the Carlson School of Management at the University of Minnesota in 1990 with a degree in accounting.


Significant Employees


We have no employees who are not executive officers, but who are expected to make a significant contribution to the Company’s business.


Family Relationships


There are no family relationships between our officers and directors.


Involvement in Other Public Companies


None of the officers and directors of the Company are affiliates of any other public companies.




46




Involvement in Certain Legal Proceedings


During the past ten (10) years, none of our present or former directors, executive officers or persons nominated to become directors or executive officers (or those in similar positions with us) has been the subject of any of the following:


(1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two (2) years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two (2) years before the time of such filing;


(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);


(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from, or otherwise limiting, the following activities:


(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;


(ii) Engaging in any type of business practice; or


(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;


(4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than sixty (60) days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;


(5) Such person was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;


(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;


(7) Such person was the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:


(i) Any federal or state securities or commodities law or regulation; or


(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or


(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or


(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.





47




Compliance with Section 16(a) of the Exchange Act


The common stock of the Company is registered under the Exchange Act, and therefore, the officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a) which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities.  Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.  Based solely upon review of the copies of such forms furnished to us during the fiscal year ended September 30, 2016, the following were filed:


Name

 

Type

 

Filed

Thomas J. Howells

 

Form 3

 

May 17, 2016

Clarence Cottman III

 

Form 4

 

May 31, 2016

Jonathan S. Wimbish

 

Form 4

 

May 31, 2016

William Gumma

 

Form 4

 

May 31, 2016

Terry L. Looper

 

Form 4

 

May 31, 2016

Mark W. Perman

 

Form 3

 

July 6, 2016

Daniel E. Ryweck

 

Form 3

 

July 18, 2016


Code of Ethics


We have adopted a Code of Ethics for our principal executive and financial officers.  See Part IV, Item 15.


Corporate Governance


Nominating Committee


We have not established a Nominating Committee because, due to our minimal operations and the fact that we presently have few directors and executive officers, we believe that we are able to effectively manage the issues normally considered by a Nominating Committee.  Following the entry into any business or the completion of any acquisition, merger or reorganization, a further review of this issue will no doubt be necessitated and undertaken by new management.


If we do establish a Nominating Committee, we will disclose this change to our procedures in recommending nominees to our Board of Directors.


Audit Committee


We have not established an Audit Committee because, due to our minimal operations and the fact that we presently have few directors and executive officers, we believe that we are able to effectively manage the issues normally considered by an Audit Committee.  Following the entry into any business or the completion of any acquisition, merger or reorganization, a further review of this issue will no doubt be necessitated and undertaken by new management.


ITEM 11:  EXECUTIVE COMPENSATION


All Compensation


Our chief executive officer will be compensated according to the terms of his Employment Agreement that is to be negotiated with the Company. There are no other employment contracts, compensatory plans or arrangements, including payments to be received from us with respect to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.




48





SUMMARY COMPENSATION TABLE


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

and

 

All Other

 

 

 

Name and

 

 

 

 

 

 

Compen-

 

 

 

 

Stock

 

Warrant

 

Compen-

 

 

 

Principal Position

 

 

 

Salary

 

sation

 

Bonus

 

Awards

 

Awards

 

sation

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Perman (1)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Executive Officer,

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel Ryweck (2)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Director

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas Howells (3)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Executive Officer,

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William Gumma (4)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Executive Officer,

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jon Wimbish (5)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

20,000

 

$

20,000

Director

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

70,000

 

$

10,000

 

$

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clancy Cottman (6)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Director

 

2015

 

$

-

 

$

-

 

$

-

 

$

-

 

$

70,000

 

$

10,000

 

$

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

E. Will Gray II (7)

 

2016

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Chief Executive Officer,

 

2015

 

$

73,077

 

$

-

 

$

-

 

$

-

 

$

280,000

 

$

-

 

$

353,077

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1) Mr. Perman was appointed as Director on May 10, 2016 and as CEO and CFO on November 1, 2016.

(2) Mr. Ryweck was appointed as Director on July 6, 2016.

(3) Mr. Howells was appointed as CEO, CFO and Director on May 10, 2016 and resigned on November 1, 2016.

(4) Mr. Gumma was appointed as CEO, CFO and Director on August 24, 2015 and resigned on June 30, 2016.

(5) Mr. Wimbish was appointed in June 2014 and resigned on May 10, 2016.

(6) Mr. Cottman was appointed in June 2014 and resigned on May 10, 2016.

(7) Mr. Gray was appointed in June 2014 and resigned on August 21, 2015.


Outstanding Equity Awards at Fiscal Year-End


None.


Compensation of Directors


Currently, our non-executive directors do not receive any compensation.




49




ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


Security Ownership of Certain Beneficial Owners


The following table sets forth the ownership by any person known to us to be the beneficial owner of more than five percent (5%) of any of our outstanding voting securities as of December 20, 2016.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  The persons named in the table below have sole voting power and investment power with respect to all shares of common stock shown as beneficially owned by them.


Beneficial Owners


Name and Address of Beneficial Owner

 

Title of Class

 

Amount and Nature

of Beneficial Ownership (1)

 

Percent of Class (2)

 

 

 

 

 

 

 

E. Will Gray

1306 W. Ohio Avenue

Midland, Texas 79701

 

Common

 

890,000

 

30.41%

 

 

 

 

 

 

 

Thomas Howells

1914 E. 9400 S. #233

Sandy, Utah 84093

 

Common

 

464,200 (3)

 

15.86%

 

 

 

 

 

 

 

Duane Jenson

4685 S. Highland Drive, Suite 202

Salt Lake City, Utah 84117

 

Common

 

247,200 (4)

 

8.45%

 

 

 

 

 

 

 

Brunson Chandler & Jones, PLLC

175 S. Main Street, Suite 1410

Salt Lake City, Utah 84111

 

Common

 

180,000

 

6.15%


Security Ownership of Officers and Directors


Name and Address of Officer or Director

 

Title of Class

 

Amount and Nature

of Beneficial Ownership (1)

 

Percent of Class (2)

 

 

 

 

 

 

 

Mark Perman (5)

328 Barry Avenue South

Suite 210

Wayzata, Minnesota 55391

 

Common

 

0

 

0%

 

 

 

 

 

 

 

Daniel Ryweck (6)

328 Barry Avenue South

Suite 210

Wayzata, Minnesota 55391

 

Common

 

0

 

0%

 

 

 

 

 

 

 

Officers and Directors as a group

 

Common

 

0

 

0%


1. The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares, which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.


2. Based on 2,926,486 issued (or issuable and fully-paid) and outstanding shares of common stock as of December 20, 2016.


3. Includes 364,200 common shares held by Clearline Ventures, LLC, of which Mr. Howells is the managing member.


4. Includes 200,000 common shares held by Jenson Services, Inc., of which Mr. Jenson is the president.


5. Mark Perman is a director and the Company’s President, CEO, and CFO.


6. Daniel Ryweck is a director of the Company.




50




SEC Rule 13d-3 generally provides that beneficial owners of securities include any person who, directly or indirectly, has or shares voting power and/or investment power with respect to such securities, and any person who has the right to acquire beneficial ownership of such security within 60 days.  Any securities not outstanding which are subject to such options, warrants or conversion privileges exercisable within 60 days are treated as outstanding for the purpose of computing the percentage of outstanding securities owned by that person.  Such securities are not treated as outstanding for the purpose of computing the percentage of the class owned by any other person.  At the present time there are no outstanding options or warrants.


Changes in Control


There are no additional present arrangements or pledges of our securities which may result in a change in control of the Company.  However, there are no provisions in our Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control.


Securities Authorized for Issuance under Equity Compensation Plans


The Company granted 600,000 incentive employee stock options to its former Chief Executive Officer and Directors pursuant to the Merger Agreement, none of which are still outstanding.


ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


Transactions with Related Persons


Dala has suspended a service agreement with Chisholm II, giving Dala the rights to use Chisholm II’s existing technical exploration team to further explore and develop the Property. This arrangement may be resumed when the market conditions related to oil prices improve.


The Company has several promissory notes with Mill City Ventures III, LLC, which Daniel Ryweck, a Director of the Company, is a member of Mill City Ventures III, LLC.


Promoters and Certain Control Persons


See the heading “Transactions with Related Persons” above.


Parents of the Smaller Reporting Company


We have no parents.


Director Independence


For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQB, on which shares of our common stock are quoted, does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means, among other considerations, a person other than an “Executive Officer” or an employee or any other individual having a relationship, which in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.


According to the NASDAQ definition, E. Will Gray II is not an independent director because he is also an executive officer of the Company and a director. Clancy Cottman and Jon Wimbish are also not independent directors because a company that they were affiliates of, Chisholm II, is compensated by the Company pursuant to a Services Agreement.


ITEM 14:  PRINCIPAL ACCOUNTING FEES AND SERVICES


The following is a summary of the fees billed to us by our principal accountants during the years ended September 30, 2016 and 2015, respectively:


Fee Category

 

2016

 

2015

Audit Fees

 

$

22,500

 

$

50,407

Audit-related Fees

 

 

-

 

 

-

Tax Fees

 

 

-

 

 

-

All Other Fees

 

 

-

 

 

-

Total Fees

 

$

22,500

 

$

50,407


Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.


Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”




51




Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.


All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit Fees,” “Audit-related Fees,” and “Tax Fees” above.


Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors


We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.


PART IV


ITEM 15:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES


(a)(1)(2)

Financial Statements.  See the audited financial statements for the period ended September 30, 2016 contained in Item 8 above which are incorporated herein by this reference.


(a)(3)

Exhibits.  The following exhibits are filed as part of this Annual Report:


Exhibit

Number

 

Description of Exhibit

 

Filing

 

 

 

 

 

3.1

 

Articles of Incorporation

 

Filed with the SEC on January 23, 1989 and incorporated herein by reference.

3.1(a)

 

Amended Articles of Incorporation

 

Filed with the SEC on January 23, 1989 and incorporated herein by reference.

3.1(b)

 

Certificate of Designation for the Series A 6% Convertible Preferred Shares filed May 30, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

3.1(c)

 

Amended and Restated Certificate of Designation of the Company’s Series A 6% Convertible Preferred Stock

 

Filed herewith

3.2

 

Bylaws

 

Filed with our initial Form 10-KSB for September 30, 2003 and incorporated herein by reference.

4.1

 

Registration Rights Agreement dated June 3, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

4.2

 

Form of Warrant dated June 3, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

4.3

 

Form of Lock-Up Agreement

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

4.4

 

Stock Option Grant Notice for E. Will Gray II dated June 3, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

4.5

 

Stock Option Grant Notice for Clarence Cottman III dated June 3, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

4.6

 

Stock Option Grant Notice for Jonathan S. Wimbish dated June 3, 2014

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

10.1

 

Merger Agreement

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

10.2

 

Master Service Agreement

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

10.3

 

Option Participation Agreement

 

Filed with the Form 8-K filed on June 3, 2014 and incorporated herein by reference.

10.10

 

Partial Cancellation Agreement

 

Filed Herewith

10.11

 

Restated Promissory Note between the Company and Pacific Oil & Gas, LLC

 

Filed Herewith

10.12

 

Forms of Release

 

Filed Herewith

10.13

 

Lease Assignment for Clay County, Kansas

 

Filed Herewith

10.14

 

Lease Assignment for Dickinson County, Kansas

 

Filed Herewith

10.15

 

Lease Assignment for Ottawa County, Kansas

 

Filed Herewith

10.16

 

Lease Assignment for Saline County, Kansas

 

Filed Herewith

 

 

 

 

 

10.18

 

Promissory Note with Mill City Ventures III Ltd dated February 17, 2016

 

Filed with the Form 10-Q filed on February 22, 2016 and incorporated herein by reference.

10.19

 

Extension Letter with Pacific Oil & Gas LLC dated January 26, 2016

 

Filed with the Form 10-Q filed on February 22, 2016 and incorporated herein by reference.




52





31

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

101.INS

 

XBRL Instance Document*

 

 

101.SCH

 

XBRL Taxonomy Extension Schema*

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase*

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase*

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase*

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase*

 

 


*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.











53





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.


DALA PETROLEUM CORP.


Date:

January 13, 2017

 

By:

/s/ Mark Perman

 

 

 

 

Mark Perman

 

 

 

 

Chief Executive Officer and Acting Principal Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Date:

January 13, 2017

 

By:

/s/ Mark Perman

 

 

 

 

Mark Perman

 

 

 

 

Director


Date:

January 13, 2017

 

By:

/s/ Daniel Ryweck

 

 

 

 

Daniel Ryweck

 

 

 

 

Director






54



Exhibit 3.1


[EXHIBIT31001.JPG]






[EXHIBIT31002.JPG]






[EXHIBIT31003.JPG]






[EXHIBIT31004.JPG]






[EXHIBIT31005.JPG]






[EXHIBIT31006.JPG]






[EXHIBIT31007.JPG]






[EXHIBIT31008.JPG]






[EXHIBIT31009.JPG]






[EXHIBIT31010.JPG]






[EXHIBIT31011.JPG]






[EXHIBIT31012.JPG]






[EXHIBIT31013.JPG]






[EXHIBIT31014.JPG]






[EXHIBIT31015.JPG]






[EXHIBIT31016.JPG]






[EXHIBIT31017.JPG]






[EXHIBIT31018.JPG]






[EXHIBIT31019.JPG]






[EXHIBIT31020.JPG]






[EXHIBIT31021.JPG]






[EXHIBIT31022.JPG]






[EXHIBIT31023.JPG]






[EXHIBIT31024.JPG]






[EXHIBIT31025.JPG]



Exhibit 10.10


PARTIAL CANCELLATION AGREEMENT


THIS PARTIAL CANCELLATION AGREEMENT (“Agreement”), dated May 10, 2016, and is to be considered effective as of even date herewith (the “Effective Date”), by and among Dala Petroleum Corp., a Delaware corporation (“Dala DE”), Dala Petroleum Corp., a Nevada corporation (“Dala NV”), Chisholm Partners II, LLC (“Chisholm II”), a Louisiana limited liability company, and certain members of Chisholm Partners II, LLC set forth on the signature pages hereto (each individually a “Chisholm Member” and collectively the “Chisholm II Members”).


WITNESSETH:


A.

On June 2, 2014, Dala DE, then-known as “Westcott Products Corp.”, its wholly-owned subsidiary, Dala Acquisition Corp., a Nevada corporation (“Merger Subsidiary”), and Dala NV executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”) and all required or necessary documentation to complete a merger (collectively, the “Transaction Documents”), whereby Merger Subsidiary merged with and into Dala NV, and Dala NV was the surviving company under the merger and became a wholly-owned subsidiary of Dala DE on the closing of the merger (the “Merger”). The respective Boards of Directors of Dala DE and Dala NV, along with Dala DE, as the sole stockholder of Merger Subsidiary, and Dala NV’s sole stockholder Chisholm II, which owned 100% of the outstanding voting securities of Dala NV, approved the Merger by written consent, and Articles of Merger were filed with the Secretary of State of the State of Nevada on June 3, 2014, effecting the Merger. Prior to the Merger, Chisholm II assigned to Dala NV the rights to engage in oil exploration and development on approximately 300 leases in north central Kansas, with total acreage of approximately 80,000 acres (the “Property”). As consideration for the Merger, Dala DE issued 10,000,000 shares of its common stock (the “Merger Shares”) to Dala NV’s sole member Chisholm II in exchange for receiving all of the outstanding shares of common stock of Dala NV. The Merger Shares were then immediately distributed by Chisholm II on a pro rata basis to its members, including the Chisholm II Members that are party to this Agreement.


B.

In conjunction with the Merger, Dala DE received $2,025,000 from investors in consideration of the issuance of 2,025 shares of its Series A 6% Convertible Preferred Stock at the offering price of $1,000 per Unit (the “Offering”). Each Unit consisted of one share of Series A 6% Convertible Preferred Stock, convertible at any time at the option of the Holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested (subject to adjustment as set forth in the Company’s Series A 6% Convertible Preferred Stock Certificate of Designation that was filed on May 30, 2014), and 1,429 warrants to purchase common shares of the Company at an exercise price of $1.35 per share within three years of the “Effective Date,” as such term was defined in the Stock Purchase Agreement for the Offering.


C.

The Merger and the Offering were governed by a series of Transaction Documents including a Stock Purchase Agreement, Registration Rights Agreement, Agreement and Plan of Merger, Private Placement Memorandum, Lock Up Agreements, Certificate of Designation (collectively referred to herein as the “Transaction Documents”).


D.

After the Merger and through May 2015 , Dala DE, through its wholly-owned subsidiary Dala NV, operated as an early-stage oil exploration company focused on the Property. For the purposes of this Agreement, the



combined operations of Dala DE and Dala NV are referred to herein as “Dala.” To date, Dala has drilled five wells that had no commercial quantities of oil, which were subsequently plugged and abandoned. Since May 2015, Dala has not had sufficient funds to continue operations or its exploration program due to the decline in the price of oil and difficult market conditions and due to the Company’s financial condition.


E.

As a result of the lack of funds to continue its operations, the Company has defaulted on some of the provisions in the Transaction Documents, including the payment in cash of the dividends under the Certificate of Designation for the Series A 6% Convertible Preferred Stock and other “Triggering Events” in Section 10 of the Certificate of Designation. The parties have evaluated and discussed the viability of Dala’s continued operations and, as a settlement for the violations of the Transaction Documents and in an effort to maintain the Company’s viability, the parties have agreed to a partial separation of Dala’s assets and a return of a portion of the Property to Chisholm II in exchange for the return of a certain amount of the Merger Shares to the Company’s treasury by the Chisholm II Members.


             NOW, THEREFORE , in consideration of the foregoing recitals and the covenants herein, the parties hereto agree as follows:


1.

Return of the Merger Shares


            Each of the Chisholm II Members shall surrender and transfer the Dala DE common stock certificate(s) representing the number of shares of Dala DE common stock listed below the signature of each Chisholm Member and further set forth on Exhibit A attached hereto, representing a total of at least 70% of the Merger Shares (the “Returned Shares”) along with medallion-guaranteed stock powers (in a form similar to the sample attached as Exhibit F) sufficient to such certificate(s), to the Board of Directors of Dala DE upon the execution of this Agreement, and each Chisholm II Member hereby agrees that the Returned Shares shall be considered no longer owned by the Chisholm II Members but shall be considered returned and transferred to Dala DE’s treasury for cancellation. Chisholm II shall coordinate with the Members of Chisholm II for the return of the Return Shares and assignment of the oil and gas leases from Dala to Chisholm II.


2.

Return of a Portion of the Property to Chisholm II


            Dala shall return a portion of the Property listed on Exhibit B attached hereto to Chisholm II, which portion of the Property shall correspond to the portion of the Merger Shares represented by the Returned Shares. Chisholm II shall bear the cost and responsibility for all assignment and recording of title to the transferred Property and any matter related thereto. Dala shall retain the leases listed on Exhibit C attached hereto.


3.

Closing .

The return of the Merger Shares as set forth in Section 1 herein and the return of a portion of the Property to Chisholm II as set forth in Section 2 herein shall take place at a closing (the “ Closing ”), to be held at such date, time and place as shall be determined by the parties at the same time as the closing of the other Company transactions described in Section 17 herein.

At the Closing:


(a)

Chisholm II, on behalf of the Chisholm II Members, shall deliver to the Dala the Returned Shares along with the medallion guarantees and other documents required for the cancellation of the Returned Shares. The closing shall not occur unless the amount of Returned Shares




consists of at least 70% of the Merger Shares that were initially issued to the Chisholm II Members as part of the Merger in June 2014. The amount of Property to be returned to Chisholm II as part of this Agreement shall be proportionally adjusted based on the amount of Returned Shares delivered by Chisholm II and the Chisholm II Members.


For example, if 100% of the originally-issued Merger Shares are returned by the Chisholm II Members as Returned Shares, Dala will receive 10,000,000 common shares for cancellation and will then return to Chisholm 75% of the acreage in the Property, or 60,000 acres (with Dala retaining 20,000 acres in the Property). If 85% of the originally-issued Merger Shares are returned by the Chisholm II Members as Returned Shares, Dala will receive 8,500,000 common shares for cancellation and will then return to Chisholm 68.75% of the acreage in the Property, or 55,000 acres (with Dala retaining 25,000 acres in the Property). If 70% of the originally-issued Merger Shares are returned by the Chisholm II Members as Returned Shares (the minimum threshold to close this Agreement), Dala will receive 7,000,000 common shares for cancellation and will then return to Chisholm 61% of the acreage in the Property, or 49,000 acres (with Dala retaining 31,000 acres in the Property).


4.

Other Dala Assets


All other assets of Dala acquired by Dala before or after the Merger, including both personal property, real property, and that portion of the Property not being transferred to Chisholm II pursuant to the terms herein, shall remain the sole and exclusive property of Dala. Chisholm II and each of the Chisholm II Members hereby waive any rights or interests they may have in all such assets.


5.

Dala Liabilities


             Dala shall remain responsible for liabilities of Dala which accrued or were incurred on behalf of Dala and are payable on the date of execution of this Agreement and are specifically set forth on Exhibit D. Chisholm II shall cancel all other liabilities owed to it by Dala as of the date of this Agreement, and shall execute a waiver and release in the form attached hereto as Exhibit E. Dala shall be responsible for any future debts of Dala including those expenses incurred effectuating the terms of this Agreement.


6.

Indemnification


(a)

Subject to the terms and conditions of this Article 6, Dala shall indemnify, defend and hold harmless William Gumma, Jonathan Wimbish, Clarence Cottman and Chisholm Partners II (collectively, the “ Indemnified Parties ”)  from and against any and all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, penalties, costs, and expenses (including reasonable attorneys’ fees and expenses), of any nature whatsoever (collectively, “ Damages”) asserted against, resulting to, imposed upon, or incurred by indemnified parties, directly or indirectly related to this transaction or any way related to Dala.

(b)

As part of the consideration for the transaction contemplated hereunder, and, in the absence of which the Indemnified Parties would not have entered into this agreement, Dala hereby expressly retains, assumes, and covenants and agrees to be fully responsible for all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, penalties, taxes, costs, expenses, duties and obligations. 

(c)

Indemnification proceedings .  In the event that any claim or demand for which Dala (the “ Indemnifying Party”) , would be liable to the Indemnified Party under this Section 6 is asserted against or sought to be




collected from the Indemnified Party by a third party, the Indemnified Party shall with reasonable promptness notify the Indemnifying Party of such claim or demand, but the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations under this article 6, except to the extent the Indemnifying Party demonstrates that the defense of such claim or demand is materially prejudiced thereby.  The Indemnifying Party shall have 30 days from receipt of the above notice from the Indemnified Party (in this section 6 , the “ Notice Period” ) to notify the Indemnified Party whether or not the Indemnifying Party desires at the Indemnifying Party’s sole cost and expense, to defend the Indemnified Party against such claim or demand; provided, that the Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and not prejudicial to the Indemnifying Party.  If the Indemnifying Party elects to assume the defense of any such claim or demand, the Indemnified Party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof.  If the Indemnifying Party elects not to assume the defense of such claim or demand (or fails to give notice to the Indemnified Party during the Notice Period), the Indemnified Party shall be entitled to assume the defense of such claim or demand with counsel of its own choice, at the expense of the Indemnifying Party.  If the claim or demand is asserted against both the Indemnifying Party and the Indemnified Party and based on the advice of counsel reasonably satisfactory to the Indemnifying Party it is determined that there is a conflict of interest which renders it inappropriate for the same counsel to represent both the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be responsible for paying separate counsel for the Indemnified Party; provided however, that the Indemnifying Party shall not be responsible for paying for more than one separate firm of attorneys to represent all of the indemnified parties, regardless of the number of indemnified parties.  If the Indemnifying Party elects to assume the defense of such claim or demand, (i) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party’s written consent (which shall not be unreasonably withheld) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (ii) the Indemnifying Party shall have no liability with respect to any compromise or settlement thereof effected without its written consent (which shall not be unreasonably withheld).

7.

Governing Law and Forum


            This Agreement shall be construed and governed by and under the laws of the State of Delaware, without regard to its choice of law principles.  Any action, suit, or other legal proceeding which is commenced to resolve any matter arising under or relating to any provision of this Agreement shall be commenced only in a court of the State of Delaware (or, if appropriate, a federal court located within the District of Delaware), and each party consents to the jurisdiction of such court and agrees that legal process may be served by United States certified mail, return receipt requested. Venue for any action shall be in Dover County, State of Delaware (or, in the case of a federal court action, in the District of Delaware).  Process in any proceeding referred to in the preceding sentence may be served on any party anywhere.


8.

Notices


Any notice of other communication required or permitted by the Agreement must be in writing and will be deemed given when (i) delivered in person; (ii) submitted by facsimile with written confirmation of transmission; (iii) delivered by overnight or two-day courier, with receipt and date of delivery stated; or (iv) when mailed by U.S. First Class Mail addressed to:





            (a)       

Dala at:


175 South Main Street

Suite 1410

Salt Lake City, Utah 84111


            (b)    

Chisholm II at:


1010 10 th Street

Golden, CO  80401


(c)

The Chisholm II Members at the addresses listed on the signature pages attached hereto.


9.

Waivers


            No failure of any party to insist on performance by another party, of any its obligation in one instance will waive such party’s right to insist on performance of that or any other obligation in the future. Any waiver by any party of any provision of this Agreement shall be made expressly in writing and not be considered to be a waiver of any subsequent breach of the same or any other provision of this Agreement.


10.

Amendments


            This Agreement may not be modified or amended except by written document signed by the parties.


11.

Parties


            This Agreement is for the benefit of, and binds, the parties, their successors and permitted assigns.


12.

Cooperation


Chisholm II and each of the Chisholm II Members shall fully and promptly cooperate with Dala with respect to the review and completion of financial statements and reports required by the Securities Exchange Act of 1934, as amended, for Dala or for any requests from any third party required to be provided, including from any federal or state regulator or auditor. Dala shall fully and promptly cooperate with Chisholm II with respect to any requests by third parties related to any issue concerning the oil and gas leases being returned to Chisholm II. At and at any time after the Closing, the parties shall duly execute, acknowledge and deliver all such further assignments, conveyances, instruments and documents, and shall take such other action consistent with the terms of this Agreement to carry out the transactions contemplated by this Agreement.


13.

Severability


            The provisions of this Agreement shall be deemed severable, and if any part of any provision is held illegal, void or invalid under applicable law, such provision shall be changed to the extent reasonably necessary to make the provision, as so changed, legal, valid and binding. If any provision of this Agreement is held to be illegal, void or invalid in its entirety, the remaining provisions of this Agreement shall not in any way be affected or impaired but shall remain binding in accordance with their terms.





14.

Counterparts

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.  This Agreement may be executed by facsimile or by email of PDF or digital image format files of the executed signature page hereto.

15.

Further Assurances


Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.


16.

Related Transactions


Each of the parties hereto specifically acknowledges and agrees that they have knowledge of certain Company-related transactions that are closing as of even date herewith including:


(a)

The appointment of new people to the Company’s Board of Directors and to serve as the Chief Executive Officer of the Company;

(b)

The cancellation of the warrants associated with the 675 Preferred Shares being sold in private sale transactions;

(c)

The forgiveness of certain debt owed by the Company to some affiliates and Preferred shareholders;

(d)

The payment by certain Preferred shareholders of certain liabilities owed by the Company through the issuance of promissory notes;

(e)

The Cancellation of the Company’s Stock Option Plan;

(f)

The amendment of the Series A 6% Convertible Preferred Stock Certificate of Designation to change the Conversion Price to $0.05 from $0.70.

(g)

The amendment of the Series A 6% Convertible Preferred Stock Certificate of Designation to remove Section 7, “Certain Adjustments,” entirely;

(h)

The amendment of the Series A 6% Convertible Preferred Stock Certificate of Designation to change the allowed “Permitted Indebtedness” amount to $200,000 from $100,000;

(i)

The waiver by the Company’s Preferred Shareholders of the Right of Redemption upon Triggering Events for the Company’s violations of Section 10 of the Certificate of Designation;

(j)

The waiver by the Company’s Preferred Shareholders of the late fee for unpaid Dividends on the Series A 6% Convertible Preferred Stock as of January 1, 2016;

(k)

The waiver by the Company’s Preferred Shareholders of the First Right of Refusal to purchase shares of the Series A 6% Convertible Preferred Stock from other Preferred Shareholders as of even date herewith;

(l)

The waiver by the Company’s Preferred Shareholders of the “Most Favored Nation” Provision in Section 4.18 of the Securities Purchase Agreement dated June 3, 2014; and

(m)

The execution of Stock Purchase Agreements between certain of the Chisholm II members that own 675 shares of Dala DE’s Series A 6% Convertible Preferred Stock and third parties through which the sellers are selling such shares of preferred stock to a third party in a separate transaction.



[Remainder of page left intentionally blank; signature page to follow.]





SIGNATURE PAGE TO PARTIAL CANCELLATION AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written above.


DALA DE:


Dala Petroleum Corp., a Delaware corporation



By: __ /s/ William Gumma _______________

Name:

William Gumma

Title:

CEO


DALA NV:


Dala Petroleum Corp., a Nevada corporation



By: __ /s/ William Gumma ________________

Name: William Gumma

Title: President


CHISHOLM II:


Chisholm Partners II, LLC.



By: _ /s/Clancy Cottman III ________________

Name:

Clancy Cottman III

Title:

Managing Member


ABLE FAMILY TRUST


By: _ /s/ Trey Able ____________________

Name:

Trey Able, Trustee

Number of Shares Being Returned: 120,000


COTTMAN FAMILY TRUST DATED 1/17/2000



By: _ /s/ Clancy Cottman __________________

Name:

Clancy Cottman III, Trustee

Number of Shares Being Returned: 1,550,000


EDWIN C. BROWN FAMILY TRUST



By: __ /s/ ______________________________

Name:

Number of Shares Being Returned: 300,000





J&M WIMBISH FAMILY TRUST



By: __ /s/Jon Wimbish ____________________

Name:

Jon Wimbish, Trustee

Number of Shares Being Returned: 800,000


KDND FAMILY TRUST



By: __ /s/ ______________________________

Name:

Number of Shares Being Returned: 240,000


OIL & GAS TECHNOLOGY CONSULTANTS INC.



By: ____ /s/ ____________________________

Name:

Number of Shares Being Returned: 960,000



ORINOCO REVOCABLE TRUST



By: _ /s/ William Gumma __________________

Name:

William Gumma, Trustee

Number of Shares Being Returned: 1,830,000


By: __ /s/Brian Bayley ____________________

Name:

Brian Bayley

Number of Shares Being Returned: 600,000


By: __ /s/ Charles Clark ___________________

Name:

Charles Clark

Number of Shares Being Returned: 60,000



By: __ /s/Erin Cottman ____________________

Name:

Erin Cottman

Number of Shares Being Returned: 50,000



By: _ /s/ Ronald J. Lincoln __________________

Name:

Ronald J. Lincoln

Number of Shares Being Returned: 120,000



By: _ /s/ Terry Looper ______________________

Name: Terry Looper

Number of Shares Being Returned: 1,410,000







By: ____ /s/ Bill Pearson ____________________

Name:

Bill Pearson

Number of Shares Being Returned: 120,000



By: _ /s/ Robert Pollack _____________________

Name:

Robert Pollock

Number of Shares Being Returned: 57,800



By: _ /s/ Robert Redfearn ____________________

Name: Robert Redfearn

Number of Shares Being Returned: 290,000




By: __ /s/ Garrett Soden _____________________

Name:

Garrett Soden

Number of Shares Being Returned: 60,000














EXHIBIT A


Shares Being Returned to the Company


As of March 3, 2016, assuming 100% participation by the Chisholm II Members.

This list will be updated at the Closing.


Shareholder Name

Stock Certificate Number

Number of Shares

J&M Wimbish Family Trust

1042

800,000

Robert L. Redfearn

1043

290,000

Terry Looper

1045

1,410,000

Able Family Trust

1046

120,000

Oil & Gas Technology Consultants Inc.

1047

960,000

Orinoco Revocable Trust

1048

1,830,000

Brian Bayley

1049

600,000

Edwin C. Brown Family Trust

1050

300,000

Bill Pearson

1051

120,000

Charles G. Clark

1052

60,000

Ronald J. Lincoln

1053

120,000

Garrett Soden

1058

60,000

KDND Family Trust

1059

240,000

Robert Pollock

1063

57,800

Erin Cottman

1065

50,000

Cottman Family Trust Dated 1/17/2000

1075

1,550,000






EXHIBIT B


Leases to Be Delivered to Chisholm II


To be added upon filing with and processing by appropriate administrative agencies.







EXHIBIT C


Leases to Be Retained by Dala


Those leases not included in Exhibit B.






EXHIBIT D


Continuing Dala Liabilities to Be Retained by Dala

 

All liabilities of Dala Petroleum Corp. and its subsidiary incurred as of the Closing Date, and all future liabilities of Dala Petroleum Corp. except those liabilities that are being forgiven in Exhibit E.





EXHIBIT E


Waiver and Release of Certain Liabilities



Creditor

Description

Amount of Debt Forgiven

Chisholm Partners II, LLC

December 2015 Promissory Note

$7,315.08

Pacific Oil & Gas Company, LLC

June 2015 Promissory Note

$39,639.31

Balance assigned

Will Gray

Accrued salary prior to resignation in August 2015

$59,178.00

Clancy Cottman

Accrued monthly fee as director since May 2015

$12,500

Bill Gumma

Accrued monthly fee as director since August 2015

$0

Jon Wimbish

Accrued monthly fee as director since May 2015

$12,500

Chisholm Partners II, LLC

Accrued monthly fee under the Master Services Agreement since May 2015

$100,000

 





EXHIBIT F

Sample Stock Power Form












Exhibit 10.11


RESTATED PROMISSORY NOTE



$110,716.70

Golden, CO

 

March 9, 2016



WHEREAS, on June 8, 2015, Pacific Oil & Gas, LLC (“Pacific”) was issued a Promissory Note by the Dala Petroleum Corp. (the “Company”), in the original principal amount of $99,999.00 (the “Note”);


WHEREAS, with the accrual of interest since June 8, 2015, the current amount owed under the Note as of the date hereof is $110,716.70;


WHEREAS, Pacific and the Company wish to restate the original Note and to readjust the recipient of the payment of that Note to accurately reflect the amounts that were delivered to Pacific by third parties to fund the Note;


WHEREAS, Pacific and the Company agree to the below readjustment of the recipients of the amount due under the Note and such creditors listed below shall have all of Pacific’s right, title, and interest in and to the amount of the Note so listed below, based on the terms and conditions set out herein.


ON DEMAND , Dala Petroleum Corp., a Delaware corporation, whose principal place of business is 175 South Main Street, Suite 1410, Salt Lake City, Utah promises to pay to the following entities the following amounts, representing the entire amount due under the Note:


Name of Creditor

Amount of Principal Due

Amount of Interest Due

Total Amount Due

Alpha Capital Anstalt

$37,036.37

$3,969.52

$41,006.19

Lane Ventures Inc.

$2,469.11

$264.63

$2,733.74