Item 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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. 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. We have disposed
of SAHF in June 2017 and no longer maintain a branch office in Argentina. We have made oil and gas investments in the United States,
in addition to an investment in a technology company.
Overview
As a result of the review by our management
team of oil and gas exploration and production operations in Argentina, we have sold SAHF and, separately, our Tartagal and Morillo
concessions. The first payment for the sale of Tartagal Oriental and Morillo was received in early April and the Company is working
with the buyer to close the contract. SAHF and its operations in Argentina are presented as discontinued operations in the consolidated
statement of operations.
During the second quarter of 2017, the
Company made an initial debt-based investment of $250,000 into an oil and gas work over company in California, and during the
third quarter of 2017, the Company made a $50,000 loan to a production company in Haskell County, Texas. Additionally, the Company
has signed various LOIs to purchase and make investments in other properties in Texas.
The
Company is continuing to evaluate companies primarily in the energy sector for acquisitions and mergers.
As
a secondary focus, the Company has also made investments in an early-stage water transportation company.
Investment
in MHD Technology Corporation
We
have made an investment of $125,000 in MHD Technology Corporation, a Delaware corporation (“MHD Tech”), for an equity
position of 1,343,750 shares of common stock of MHD Tech (approximately 6.25% of the outstanding shares in the company); this
investment was made through a separate limited liability company owned by Delta and set up specifically for this investment. In
connection with the investment, Santiago Peralta, our Interim Chief Executive Officer and sole director, has joined the Board
of Directors. The investment that Delta made into MHD Tech will be primarily for research and development purposes. On November
9, 2016 MHD Tech received the simulation showcasing how the pump works and has raised additional capital from investors (new Delta
ownership- 5.5%).
In
the first quarter of 2017, MHD Technology produced a video of its “proof-of-concept” prototype. This prototype demonstrated
water getting pushed through a small pipeline using MHD propulsion, getting desalinated, and going into a different reservoir.
The desalination was measured by a change in the pH balance of the water. The video made is not of quality production and is just
intended to serve as a demonstration of the unit working. A CGI video of the working prototype was also developed as well as an
introductory video into a unit made for the automobile industry.
The
working prototype is expected to serve various functions: gather more information regarding the technical specifications of the
unit, raising additional capital for the first full-scale prototype development, forge partnerships to help in developing the
full-scale prototype, and increase interest in product licensing.
In August, 2017, MHD received $150,000 of
equity-funded cash along with a commitment for an additional $350,000 from a private investor in order to finalize two other commercial-grade
prototypes in the automobile and power generation industries.
Termination
of Proposed Acquisitions
On
April 18, 2017, we terminated two letters of intent to which we were party, a February 15, 2017 letter of intent with Bayberry
Capital for the acquisition of 100% of the outstanding shares in Naptech Test Equipment, Inc., and a March 22, 2017 letter of
intent for the acquisition of Cardinal Electronics, Inc. The Company is currently evaluating other prospects for acquisitions.
On
August 11, 2017, we terminated the letter of intent to purchase the assets of Breitling Energy because of due diligence failure
deliveries from Breitling.
Sale
of Argentina Oil Properties
On
May 12, 2016, Delta and New Times Energy Corporation Limited reached an agreement in principle for the sale of 18% of Tartagal
Oriental and Morillo, which was followed by a definitive agreement on January 3, 2017, among High Luck Group Limited, a subsidiary
of New Times Energy, and Delta and SAHF (the “Assignment Agreement”), for a total consideration for the 18% of Tartagal
Oriental and Morillo of US$4,000,000. In addition to $2,000,000 to be paid at Closing, Delta would receive 3% of gross revenues
of production of both oil and gas in the properties until an additional US$2 million is paid. The initial payment of US$2,000,000
has been placed in escrow on February 10, 2017, and a deposit on the purchase price of $500,000 was received by Delta on April
4, 2017. There are various conditions for the full release of the funds including the successful transfer of the properties to
High Luck Group Ltd, a subsidiary of New Times Energy. New Times has committed to drill four exploratory wells in the next nine
months in Tartagal and Morillo concession areas. Under the Assignment Agreement, each condition satisfied is to trigger an equal
percentage of the funds being released. The Closing, with the issuance of the transfer decree for Tartagal and Morillo by the
Province of Salta, has not occurred due to delays by High Luck Group in completing work units for the property, and the parties
are in negotiation as to resolution of matters under the Assignment Agreement.
Although
we had expected this transaction to close in the second quarter of 2017, there is no assurance that the sale of these concessions
to High Luck Group will be completed given High Luck’s constant refusal to meet to transfer the properties, fulfill its
work unit and other UTE commitments, and fulfill its obligations to transfer the remainder of the payment. Our sale of SAHF, which
holds the Tartagal and Morillo concession interests and the Valle de Lerma property, to third parties was completed in June 2017.
Under the Assignment Agreement, the $2,000,000 purchase price for the sale of SAHF’s 18% interest in the Tartagal and Morillo
concession is split $500,000 to SAHF and $1,500,000 to Delta (and subsequent payments, if any, are split in the same ratio).
Note Receivable in Second Chance Oil
During
the second quarter of 2017, the Company began to execute on its oil and gas domestic acquisition strategy. The first investment
was a $250,000 loan to Second Chance Oil, LLC (“SCO”). SCO primarily focuses on work over of wells in the northern
California region that have multiple pay zones, but have historically produced from a single pay zone. Delta’s investment
is expected to cover the first two work over wells. The wells are expected to come in between 2,000 and 4,000 mcfd each.
SCO
commenced the workover of the well in late July. The company reached the target pay zones with few issues. SCO perforated the
two target formations, but neither formation could produce at a commercial quality. The top formation was too tight and the bottom
formation had too little pressure. The well was abandoned in early August and the company is looking to drill the second planned
well.
SCO
is an LLC composed of four partners (in addition to Delta) that have around 200 years of oil and gas experience. One of the partners
is a drilling company that has drilled all over the United States and will be the company drilling in the properties. The other
partners include a geologist, one of the original owners of the wells, and a consultant.
RESULTS
OF OPERATIONS
SIX
MONTHS ENDED JUNE 30, 2017 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2016
During
the six months ended June 30, 2017, we incurred a net loss of approximately $357,000 compared to a net loss of approximately $377,000
for the six months ended June 30, 2016. The net loss for the six months ended June 30, 2017 compared to the net loss for six months
ended June 30, 2016 is lower primarily due to impairment charges in 2016 and payments paid connected to the sale of Tartagal and
Morillo in 2017.
THREE
MONTHS ENDED JUNE 30, 2017 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2016
During
the three months ended June 30, 2017, we incurred a net loss of approximately $267,000, compared to net loss of approximately
$295,000 for the three months ended June 30, 2016. The net loss for the three months ended June 30, 2017 compared to the net loss
for three months ended June 30, 2016 is lower primarily due to impairment charges in 2016 and payments paid connected to the sale
of Tartagal and Morillo in 2017.
LIQUIDITY
AND CAPITAL REQUIREMENTS
At June 30, 2017, we had a working capital
deficit of approximately $388,000 compared with a working capital surplus of approximately $214,000 at June 30, 2016.
At June 30, 2017, we had total assets of approximately
$513,000 compared to total assets of approximately $365,000 at December 31, 2016. Net cash used in operating activities for the
six months ended June 30, 2017 was approximately $351,000, as compared with net cash used in operating activities of $181,000
in 2016; net cash provided by investing activities was $250,000 in 2017 as compared to net cash used in investing activities of
$125,000 in 2016; and net cash generated from financing activities was $-0- in both years.
Effective
January 3, 2017, we entered into an Asset Purchase Agreement (the “APA”) with High Luck Group Limited (“High
Luck”), headquartered in Hong Kong. Under the APA, we agreed to sell to High Luck, for a price of $2,000,000 certain exploration
and exploitation rights to oil and gas deposits held by SAHF. The Company received a total of $500,000 in payments, and is working
to close the contract to receive the rest of the payments.
Estimated
2017 Capital Requirements
Delta considerably lowered its operating expenses
and SG&A, and has disposed of its Argentina oil and gas properties to look for other opportunities for investment in the energy
industry. In the oil and gas sector, the focus is in production and exploration, while in the alternative energies, the focus
is on water propulsion systems and hydro-electric systems. Although Delta expects its strategy to improve its capital and liquidity
positions to be executed as planned, it cannot offer any assurance that it will be successful in executing the aforementioned
plans to continue as a going concern. The Company’s financial statements as of June 30, 2017 do not include any adjustments
that might result from the outcome of this uncertainty.
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.
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, 2016, filed with the SEC on March 31, 2017.
Critical
Accounting Policies and Estimates
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.
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 ASC 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.
The
Company accounts for stock-based compensation to non-employees under ASC 718, “Compensation-Stock Compensation” (“ASC
718”). The compensation cost of the awards is based on the grant date fair-value of these awards and recognized
over the requisite service period, which is typically the vesting period. The Company uses the Black-Scholes Option
Pricing Model to determine the fair-value of stock options issued for compensation.
The
Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.” ASC
505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using
the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair
value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment
is reached or the date that performance is complete. Generally, our awards do not entail performance commitments. When
an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award
as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When
the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value
on the date the performance is complete.
Discontinued Operations
We present discontinued operations in our
consolidated financial statements when we believe that the disposition of assets constitutes a strategic shift that will have a
major effect on our operations or financial results. The results of prior periods are reclassified to conform to the current year
presentation. See Note 3.
OFF BALANCE SHEET ARRANGEMENTS
The Company has performed an analysis of the related party loan
balance under ASC 810-10, and has determined that the loan represents a variable interest in SCO. SCO is a variable interest entity
(“VIE”) and depends on the Company, as well as additional parties, for continuing financial support in order to maintain
operations. However, the Company cannot make key operating decisions considered to be most significant to the VIE, and is therefore
not considered to be the primary beneficiary. Our maximum exposure to loss approximates to the carrying value of the due from related
party loan balance on the Balance Sheet at June 30, 2017.
Other than noted above, we have no off-balance sheet arrangements that have, or are reasonably likely
to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is material to our stockholders.