Item
1. Financial Statements
Certain
information and footnote disclosures required under accounting principles generally accepted in the United States of America have
been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the
year-end consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2013.
The
results of operations for the three and six months ended June 30, 2014 and 2013 are not necessarily indicative of the results
for the entire fiscal year or for any other period.
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,486,052
|
|
|
$
|
1,833,407
|
|
Receivable from sale of bidding rights and oil and gas properties
|
|
|
3,500,042
|
|
|
|
3,500,042
|
|
Total current assets
|
|
|
4,986,094
|
|
|
|
5,333,449
|
|
|
|
|
|
|
|
|
|
|
Investment in mineral properties
|
|
|
94,062
|
|
|
|
117,351
|
|
Investments in unproved oil and gas properties
|
|
|
1,290,398
|
|
|
|
1,609,889
|
|
Investment in oil refinery
|
|
|
87,731
|
|
|
|
109,452
|
|
Property and equipment
|
|
|
58,492
|
|
|
|
61,698
|
|
Other assets
|
|
|
7,864
|
|
|
|
8,234
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,524,641
|
|
|
$
|
7,240,073
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
17,040
|
|
|
$
|
1,744
|
|
Accrued expenses
|
|
|
182,043
|
|
|
|
144,000
|
|
Notes payable
|
|
|
75,000
|
|
|
|
75,000
|
|
Liabilities for uncertain tax positions
|
|
|
60,298
|
|
|
|
75,228
|
|
Total current liabilities
|
|
|
334,381
|
|
|
|
295,972
|
|
Long-term deferred tax liability
|
|
|
633,590
|
|
|
|
633,590
|
|
Long-term debt payable to related parties
|
|
|
150,655
|
|
|
|
150,655
|
|
Total liabilities
|
|
|
1,118,626
|
|
|
|
1,080,217
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock $0.0001 par value-authorized 10,000,000 shares; no shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock $0.0001 par value - authorized 250,000,000 shares; 32,338,826 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
|
|
|
3,233
|
|
|
|
3,233
|
|
Additional paid-in capital
|
|
|
7,070,232
|
|
|
|
7,021,482
|
|
Accumulated deficit
|
|
|
(1,104,291
|
)
|
|
|
(398,344
|
)
|
Accumulated other comprehensive loss
|
|
|
(563,159
|
)
|
|
|
(466,515
|
)
|
Total stockholders' equity
|
|
|
5,406,015
|
|
|
|
6,159,856
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
6,524,641
|
|
|
$
|
7,240,073
|
|
The
accompanying notes are an integral part of the consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
199,096
|
|
|
$
|
177,671
|
|
|
$
|
440,931
|
|
|
$
|
359,001
|
|
|
|
|
199,096
|
|
|
|
177,671
|
|
|
|
440,931
|
|
|
|
359,001
|
|
Loss from operations
|
|
|
(199,096
|
)
|
|
|
(177,671
|
)
|
|
|
(440,931
|
)
|
|
|
(359,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
(29,451
|
)
|
|
|
73,386
|
|
|
|
(258,540
|
)
|
|
|
(53,544
|
)
|
Interest expense
|
|
|
(3,238
|
)
|
|
|
(12,597
|
)
|
|
|
(6,476
|
)
|
|
|
(25,195
|
)
|
Life insurance proceeds
|
|
|
-
|
|
|
|
1,000,249
|
|
|
|
-
|
|
|
|
1,000,249
|
|
Other Income (expense)
|
|
|
(32,689
|
)
|
|
|
1,061,038
|
|
|
|
(265,016
|
)
|
|
|
921,510
|
|
Income (loss) before income taxes
|
|
|
(231,785
|
)
|
|
|
883,367
|
|
|
|
(705,947
|
)
|
|
|
562,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(231,785
|
)
|
|
$
|
883,367
|
|
|
$
|
(705,947
|
)
|
|
$
|
562,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - Basic
|
|
|
32,338,826
|
|
|
|
32,086,826
|
|
|
|
32,338,826
|
|
|
|
32,080,528
|
|
Weighted average common shares - Diluted
|
|
|
32,338,826
|
|
|
|
32,428,557
|
|
|
|
32,338,826
|
|
|
|
32,389,517
|
|
The
accompanying notes are an integral part of the consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three Months ending
June 30,
|
|
|
Six Months ending
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(231,785
|
)
|
|
$
|
883,367
|
|
|
$
|
(705,947
|
)
|
|
$
|
562,509
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(4,337
|
)
|
|
|
(196,670
|
)
|
|
|
(96,644
|
)
|
|
|
(154,246
|
)
|
Net change in other comprehensive income (loss)
|
|
|
(4,337
|
)
|
|
|
(154,246
|
)
|
|
|
(96,644
|
)
|
|
|
(154,246
|
)
|
Comprehensive income (loss)
|
|
$
|
(236,122
|
)
|
|
$
|
408,263
|
|
|
$
|
(802,591
|
)
|
|
$
|
408,263
|
|
The
accompanying notes are an integral part of the unaudited consolidated financial statements
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months ending
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Cash flows from Operating Activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(705,947
|
)
|
|
$
|
562,509
|
|
Warrants issued for services
|
|
$
|
48,750
|
|
|
$
|
16,250
|
|
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
53,339
|
|
|
|
(213,279
|
)
|
Net cash provided (used) in operating activities
|
|
|
(603,858
|
)
|
|
|
365,480
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Oil and gas properties exploration and development costs
|
|
|
-
|
|
|
|
(28,389
|
)
|
Proceeds from sales of oil and gas properties and bidding rights
|
|
|
-
|
|
|
|
500,000
|
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
471,611
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Settlement of notes payable to related parties
|
|
|
-
|
|
|
|
(623,970
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
(623,970
|
)
|
Effect of Exchange Rates on Cash
|
|
|
256,503
|
|
|
|
38,342
|
|
Net increase in cash
|
|
|
(347,355
|
)
|
|
|
251,463
|
|
Cash - Beginning of period
|
|
|
1,833,407
|
|
|
|
1,949,896
|
|
Cash - End of period
|
|
$
|
1,486,052
|
|
|
$
|
2,201,359
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities consists of:
|
|
|
|
|
|
|
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
$
|
53,339
|
|
|
$
|
(213,279
|
)
|
Changes in assets and liabilities
|
|
$
|
53,339
|
|
|
$
|
(213,279
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
130,686
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplementary information:
|
|
|
|
|
|
|
|
|
Non cash financing and investing activities:
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of the unaudited consolidated financial statements.
DELTA
INTERNATIONAL OIL & GAS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated
financial statements of Delta International Oil & Gas Inc. (“Delta” or the “Company”) have been prepared
in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and
Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate
the disclosure contained in the audited financial statements for the most recent fiscal year end December 31, 2013 as reported
on Form 10-K, have been omitted.
2. Reclassifications
Certain prior year amounts in the consolidated
financial statements have been reclassified to conform to the current year presentation.
3. EARNINGS (LOSS) PER SHARE
Basic earnings per share are computed by dividing net earnings by
the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed
by dividing net earnings by the weighted average number of common share and potential common share outstanding during the period. Potential
common shares consist of outstanding common stock purchase warrants. For the three and six months ended June 30, 2014
and 2013, there were 0, 0, 0 and 308,989, respectively of potentially dilutive common shares outstanding.
4. RECEIVABLE FROM SALE OF BIDDING RIGHTS AND
OIL AND GAS PROPERTIES
On March 30, 2012 the Company entered into
the Cooperation Agreement with PPL. Under the Cooperation Agreement, PPL agreed to pay us $7,000,000 for certain exploration and
exploitation rights to oil and gas deposits and certain bidding rights held by Delta on the following areas: Valle de Lerma in
the province of Salta; San Salvador de Jujuy; Libertador General San Martin in the province of Jujuy; and Selva Maria in the province
of Formosa. Pursuant to a separate Agreement dated March 31, 2012, the Company has agreed with PPL to assign and transfer
50% of SAHF's current ownership of the Tartagal and Morillo (i.e., a 9% interest in the concession) to PPL for a purchase price
of $500,000. PPL has also agreed in an Undertaking to provide funds to the operating entities of Valle de Lerma and Selva Maria
(the San Salvador and Libertador concessions were awarded to another party, whose bid exceeded that of the Company for these concessions),
in the aggregate amount of up to $10,000,000 (Selva Maria is pending for approval from the government, which is standard procedure
in Argentina).
As of December 31, 2012, the Company had received
deposits in the amount of $3,499,958 from PPL on account of remainder of the proceeds has been recorded as a $4.0 million receivable
from the sale of bidding rights and oil and gas properties. PPL is not current with the payment schedule set forth in the
Cooperation Agreement, and the Company is in discussions with PPL to ensure that all payments provided for under the Cooperation
Agreement are made within the time frame as required for concession financial commitments. In 2013, the Company received an additional
payment of $500,000
.
During the third
quarter of 2014, the Company received an additional payment of $200,000.
5. RELATED PARTY TRANSACTIONS
As of June 30, 2014 and December 31, 2013,
the Company owes three shareholders $150,655.
6. EQUITY
On May 10, 2013, the Board of Directors
of the Company authorized the issuance of a common stock purchase warrant effective May 1, 2013, to purchase 1,000,000 shares of
common stock, on or before April 30, 2018, at an exercise price of $0.20 per share, to Phillips W. Smith, a director of the Company. The
number of shares of common stock as to which the warrant is exercisable vests in 24 monthly installments on the final day of each
month during the term of the warrant, commencing May 31, 2013, and is vested in full as of April 30, 2015. If Mr. Smith
ceases to be an active member of the Company’s Board of Directors at any time in the two-year period May 1, 2013 through
April 30, 2015, vesting will cease as of the last full month during which he was an active member of the Board. The
fair value of these warrants was $195,000 on the date of grant determined using the Black-Scholes option pricing model with the
following inputs: Exercise price of $0.20, expected term of 5 years, stock price of $0.20, volatility of 195%, discount
rate of 5% and no expected dividends. During the six months ended June 30, 2014 and 2013, the Company expensed $48,750
and $16,250, respectively, related to this award.
7. COMMITMENTS AND CONTINGENCIES
ECONOMIC AND POLITICAL RISK
The Company is exposed in the inherent risks for the foreseeable
future of conducting business internationally. Language barriers, foreign laws and tariffs and taxation issues all have a potential
effect on the Company’s ability to transact business. Political instability may increase the difficulties and costs of doing
business. Accordingly, events resulting from changes in the economic and political climate could have a material effect on the
Company.
OPERATING LEASES
The Company entered into a lease agreement in February 2012 for
3,551 square feet of office space for its principal office in Arizona. The lease expired in February 2013 and the Company
has moved and has a two-year lease expiring in February 2015.
Rent expense was $17,157 and $38,781 for the six months ended June
30, 2014 and 2013, respectively.
EMPLOYMENT AGREEMENTS
On April 26, 2010, the Company’s Board of Directors approved
five-year term executive employment agreements (“Employment Agreements”) between the Company and Dr. Daniel R. Peralta,
the Company’s former Chairman and Chief Executive Officer, and Malcolm W. Sherman, the Company’s Executive Vice President. Mr.
Sherman’s Employment Agreement was effective March 23, 2010, and provides for a fixed annual salary of $300,000, which is
limited by agreement of the executive and the Board to $235,000. Under the Employment Agreement, he is eligible for participation
in a bonus pool with other senior executives, the quarterly bonus amounts being based on financial performance comparisons with
prior fiscal quarters, beginning with the quarterly reports of the Company for the year 2006 and each subsequent year during the
respective terms of each of the Employment Agreements. Such bonus will be pooled with those of other senior executives and computed
based on a total bonus pool equal to 15% of the net profits of the Company as set forth in the Company’s SEC filings.
COUNTRY RISK
The Company has significant operations in the Argentina. The operating
results of the Company may be adversely affected by changes in the political and social conditions in the Argentina and by changes
in Argentinean government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political
and other conditions will not result in have a material adverse effect upon the Company’s business and financial condition.
EXCHANGE RISK
The Company cannot guarantee the Argentinean Peso and US dollar
exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and post higher or
lower profit depending on exchange rate of Peso and US dollar. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of our consolidated
financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes
thereto and the other financial information included elsewhere in this report.
Certain statements contained in this report,
including, without limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import, constitute "forward looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including our ability to
create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes in our business strategy
or development plans; competition; business disruptions; adverse publicity; and international, national and local general economic
and market conditions.
GENERAL
Delta International Oil & Gas Inc. (“Delta”
or “the Company”) was incorporated in Delaware on November 17, 1999. Our name was changed from Delta Mutual
Inc. to our present name on October 29, 2013, by the merger with a wholly-owned Delaware subsidiary, where the sole change resulting
from the merger was the change of the Company’s name to Delta International Oil & Gas Inc. In 2003, we established
business operations focused on providing environmental and construction technologies and services. Our operations in
the Far East (Indonesia) and our construction operations in Puerto Rico were discontinued in 2008.
Effective March 4, 2008, we acquired 100% of
the issued and outstanding membership interests in the parent of South American Hedge Fund LLC, a Delaware limited liability company
(sometimes herein referred to as “SAHF”). For accounting purposes, the transaction was treated as a recapitalization
of the Company, as of March 4, 2008, with the parent of SAHF as the acquirer. SAHF maintains a branch office in Argentina, where
it has made investments in oil and gas exploration and development activities.
Overview
We are an independent oil and gas company,
with the SIC Code classification 1311 (oil and gas production)for SEC filing purposes, engaged in oil and gas acquisition, exploitation,
production and exploration activities primarily in Argentina. Our operating policies have been to secure oil and gas properties
and concessions which either are producing economical quantities of oil and gas or which demonstrate favorable characteristics
for well “workovers” with a history of excellent production. Our goal has been to target these concessions
as compared to concessions which will be exploratory and would require drilling new wells.
The Company's business is subject to the risks
of its oil and gas investments in South America. Our investments at this time are in the oil and gas sector in Argentina, where
recently proposed legislation would change the respective roles of the federal and provincial governments in the award of and participation
in oil and gas concessions. If enacted these changes could necessitate renegotiation of certain of the concessions in which we
have interests, and affect the value of our investments. As of the end of July 2014, Argentina was in technical default on its
external debt and, although negotiations to remedy this default are in process, it is likely that this situation, however resolved,
will lead the government to impose further restrictions on exports of capital from Argentina.
The likelihood of success of the Company must
be considered in light of the expenses, difficulties, delays and unanticipated challenges encountered in connection with the operations
of oil and gas concessions in Argentina.
Our Oil and Gas Investments
We hold a 60% interest in the Valle de Lerma
concession in Northern Argentina, where the joint venture partners are Grasta SA, a local mid-size gasoline refinery located in
Buenos Aires, PetroNEXUS and REMSA. We have been actively working in 2012 and 2013 to finalize all governmental approvals for an
alternate drilling site. The exploration terms are four years for the first period, three years for the second and two years for
the last period. Currently our ability to reopen the existing well site is constrained by law, since the location of the well was
within the city limits of Salta. Requests have been made for government approval to override the existing restrictions of the current
policy.
As of June 30, 2014, the Company, through SAHF,
retained 9% of the total concession in the carryover mode ("no cost obligations to SAHF") in the Tartagal and Morillo
oil and gas concessions located in Northern Argentina and a 10% concession interest in the carryover mode in the Jollin and Tonono
oil and gas concessions, all of which properties are located in Northern Argentina. We do not operate either of these
concessions, and have minority positions in respective the joint ventures. The joint ventures are currently developing future plans
for continuing the exploration of the concessions.
As of June 30, 2014, SAHF owns 20% of the oil
and gas exploration rights to five geographically defined areas in the Salta Province of Northern Argentina. SAHF is
designated as the operator of this concession. Exploratory drilling activities commenced in April 2010 on the Guemes Block and
in July 2010, SAHF confirmed the potential existence of formations with sufficient hydrocarbons to make the well economically productive.
In 2013, the initial majority working interest owner, Ketsal S.A., has sold its share to another firm, which is evaluating whether
to proceed further with investments in this concession. SAHF will explore the possibility of selling their 20% interest in the
concession to the new owners who control the concession if we determine that there is no reasonable program offered to the government
by the controlling partners for opening the well or expanding the field.
We owned at June 30, 2014, 33.33% of the Caimancito
Refinery, located in the Jujuy Province, Argentina. Due to the cost of required rehabilitation work, currently this refinery is
not being operated to produce gasoline or diesel fuel, and the partners have no current plans to activate the refinery.
Lithium Production Properties
On March 1, 2010, SAHF purchased control of
51% of the Guayatayoc project via a partnership agreement with Oscar Chedrese and Servicios Mineros SA. The project holds the concession
for a period of 20 years for the mineral rights to 143,000 hectares with 29 mines located in the Northwest part of Argentina, south
of the border with Bolivia, with high lithium and borates brines concentration. We have performed sampling and geological conclusions
with a local geological company in order to determine value to the property. We are seeking a purchaser for our concession interest
in these properties.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 2013
During the six months ended June 30, 2014,
we incurred a net loss of approximately $706,000 as compared to net income of approximately $562,000 for the six months ended June
30, 2013. The difference for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 is primarily due
to a gain recognized during the second quarter of 2013 of $1,000,249, from the payment of the proceeds from the Company’s
keyman life insurance policy on the life of Daniel R. Peralta, our former Chief Executive Officer. Our loss from operations increased
from approximately $359,000 in 2013 to approximately $441,000 in 2014 due to higher general and administrative expenses.
THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2013
During the three months ended June 30, 2014,
we incurred a net loss of approximately $232,000 as compared to net income of approximately $883,000 for the three months ended
June 30, 2013. The difference for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 is primarily
due to a gain of approximately $1,000,000, described above in the six month analysis. Our loss from operations remained approximately
constant from 2013 to 2014.
LIQUIDITY AND CAPITAL REQUIREMENTS
At June 30, 2014, we had a working capital
surplus of approximately $4.7 million compared with a working capital surplus of approximately $5.0 million at December 31, 2013.
At June 30, 2014, we had total assets of approximately
$6.5 million compared to total assets of approximately $7.2 million at December 31, 2013. Net cash used in operating activities
in the six months ended June 30, 2014 was $604,000, as compared with net cash provided by operating activities of approximately
$365,000 in 2013; and net cash generated from investing activities was $-0- in 2014, as compared with cash generated of $472,000
in 2013. Net cash generated by financing activities was $-0- in the six months ended June 30, 2014, as compared with
cash used of $624,000 in 2013.
Estimated 2014 Capital Requirements
In the case of the Jollin and Tonono and Tartagal
and Morillo oil and gas properties, we have carried interests; therefore, no further capital expenditures are required on our part. For
the exploration rights in Salta Province, we have completed the drilling and development of one well in Guemes that is expected
to begin production testing in 2014. However, we cannot determine this exact date as it is under the control of the
majority owner (80%) of the concession. We are in discussions with the majority owner seeking a resolution of future actions with
respect to this property.
We estimate that our capital requirements in
2014 to develop the Valle de Lerma (where we have applied for extension of the concession to permit oil production from an existing
site) and Selva Maria properties (the award of the Selva Maria concession is pending approval from the government) will approximate
$1,350,000 for Selva Maria and $800,000 for Valle de Lerma. Further development of these concessions may be affected if the current
proposed legislation concerning centralization of all concession awards in the federal government is enacted, since concession
ownership and operating terms may be changed so as to change the investments we are required to make in these two concession.
USE OF ESTIMATES
The preparation of the financial statements
requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including
those related to oil and gas properties, intangible assets, income taxes and contingencies and litigation. The Company bases its
estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. In the opinion of management,
all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements.
Certain amounts for prior periods have been reclassified to conform to the current presentation.
Management believes that it is reasonably possible
that the following material estimates affecting the financial statements could happen in the coming year:
|
●
|
Proved oil and gas reserves;
|
|
●
|
Expected future cash flow from proved oil and gas properties;
|
|
●
|
Future exploration and development costs; and
|
|
●
|
Future dismantlement and restoration costs.
|
NEW FINANCIAL ACCOUNTING STANDARDS
For a summary of new financial accounting standards
applicable to the Company, please refer to the notes to the financial statements set forth in our Annual Report on Form 10-K for
the year ended December 31, 2013, filed with the SEC on April 25, 2014.
Critical Accounting Policies
The Securities and Exchange Commission recently
issued “Financial Reporting Release No. 60 Cautionary Advice About Critical Accounting Policies” (“FRR 60”),
suggesting companies provide additional disclosures, discussion and commentary on their accounting policies considered most critical
to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to
the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part
of management in the application of the policy. For a summary of the Company’s significant accounting policies, including
the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements. Foreign currency
risk - The functional currency for some foreign operations is the local currency. Assets and liabilities of foreign operations
are translated at balance sheet date rates of exchange and income, expense and cash flow items are translated at the average exchange
rate for the period. The functional currency in South America is the U.S. dollar. Translation adjustments are recorded in Cumulative
Other Comprehensive Income.
The Company assesses potential impairment
of its long-lived assets, which include its property and equipment, investments, and its identifiable intangibles such as deferred
charges under the guidance of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company
must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their
fair values and charge current operations for the measured impairment.
Investments in non-consolidated affiliates – These
investments consist of the Company’s ownership interests in oil and gas development and exploration rights in Argentina,
net of impairment losses if any.
We evaluate these investments for impairment
when indicators of potential impairment are present. Indicators of impairment include, but are not limited to, levels of oil and
gas reserves, availability of pipeline (or other transportation) capacity and infrastructure and management of the operations in
which the investments were made.