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EX-32.1 - DALECO RESOURCES CORPv171343_ex32-1.htm
EX-32.2 - DALECO RESOURCES CORPv171343_ex32-2.htm
EX-31.1 - DALECO RESOURCES CORPv171343_ex31-1.htm
EX-23.2 - DALECO RESOURCES CORPv171343_ex23-2.htm
EX-23.3 - DALECO RESOURCES CORPv171343_ex23-3.htm
EX-31.2 - DALECO RESOURCES CORPv171343_ex31-2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2009

o] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to

Commission File Number 0-12214

DALECO RESOURCES CORPORATION
(Name of small business issuer in its charter)
Nevada
 
23-2860734
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

17 Wilmont Mews, 5th Floor, West Chester, Pennsylvania
19382
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including are code: (610) 429-0181
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:

Common Shares, Par Value $.01
(Title of Class)

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

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

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, 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). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.
 
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 Act): Yes o No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates on March 31, 2009, was approximately $3,764,500, computed by reference to the average bid and asked price of such common equity.

Number of shares outstanding of each of the registrant’s classes of common stock as of December 15, 2009: 45,100,811

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed for its 2010 Annual Meeting of Shareholders (“2010 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K.

 
 

 

PART I

Item 1.  Business.

General

Daleco Resources Corporation (the “Company”) is a natural resources holding company whose subsidiaries are engaged in: (i) the exploration, development and production of oil and gas; (ii) the exploration for naturally occurring minerals; (iii) the marketing and sales of such minerals; and, (iv) the marketing and sales of patented products utilizing the Company’s minerals.  The Company’s wholly owned subsidiaries include Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Deerlick Royalty Partners L.P., Tri-Coastal Energy, Inc., Clean Age Minerals, Inc., CA Properties, Inc., Sustainable Forest Industries, Inc. and The Natural Resources Exchange, Inc.

The Natural Resources Exchange, Inc. and Sustainable Forest Industries, Inc. are dormant companies that have conducted no business in the past five fiscal years.

The Company's assets consist of two separate categories: oil and gas and non-metallic minerals. The Company owns a United States Patent related to its minerals.

The Company is a Nevada corporation and its Articles provide for authorized capital stock of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock.

The Company, through its wholly owned subsidiaries, Westland Resources Corporation, DRI Operating Company and Deven Resources, Inc., owns and operates oil and gas properties in the States of Texas and West Virginia. The Company owns overriding royalty interests in (i) two wells and undeveloped acreage in the Commonwealth of Pennsylvania and (ii) one well in Texas.

The Company does not refine any crude oil or market, at retail, any oil or petroleum products.  The Company does not own any drilling rigs.  All of its drilling activities are performed by independent drilling contractors on a contract basis.

Deven Resources, Inc. (“DRI”) is the managing general partner of Deerlick Royalty Partners L.P., a Delaware limited partnership, which owns overriding royalty interests in the Deerlick Coalbed Methane Field, Tuscaloosa, Alabama.  DRI is also the sole shareholder of DRI Operating Company which operates wells and has oil and gas interests in the State of West Virginia and in the Commonwealth of Pennsylvania.

As of September 30, 2009, the Company owned working interests in 28 wells in the States of Texas and West Virginia. The Company also owned overriding royalty interests in seventy wells in the Deerlick Coalbed Methane Field, Tuscaloosa, Alabama, through Deerlick Royalty Partners L.P. Throughout the twelve month period beginning October 1, 2008 and ending September 30, 2009, the Company has experienced an average decrease of 48% in the unit of production weighted average sales price it received for its oil and gas products as compared to the twelve month period beginning October 1, 2007 and ending September 30, 2008..

Clean Age Minerals, Inc., through its subsidiary, CA Properties, Inc. (collectively “CAMI”), owns fee interests, leasehold interests and federal mining claims containing non-metallic minerals in the States of Texas, New Mexico and Utah. CAMI is presently engaged in the exploration for such minerals.  CAMI intends to mine the minerals through the use of contract miners and arrangements with its joint venture partners. CAMI also owns the CA Series Patented Process which utilizes many of the minerals owned by or under lease to CAMI for the cleansing, decontamination and remediation of air, water and soils.

OIL AND GAS
 
Definitions of Terms:

As used herein, the term:

"Gross", as it applies to acreage or wells refers to the number of acres or wells in which the Company has a direct working interest.

 
-2-

 

"Horizontal Well" means a well drilled vertically from its surface to its objective depth and from that point drilled with special tools at an angle approximating 90 degrees from the bottom of the vertical hole, or drilled from such point at an angle which approximates that at which the beds of the objective formation lie, as opposed to a traditional vertical well, which is drilled vertically from the surface to its objective.

"Net", as it applies to acreage or wells, refers to the sum of the fractional working interests owned by the Company in gross acres or gross wells.

"MMBTU", "Bbls", "Mcf" and "MMcf" mean million British thermal units, barrels, a thousand cubic feet, and a million cubic feet, respectively.

"Net Revenue Interest" means the share of gross income from such lease or well received by the owner.

"Proved Developed Reserves" are proved reserves which are expected to be recovered through existing wells with existing equipment and operating methods.

"Proved Reserves" are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recovered in future years from known oil and gas reservoirs under existing economic and operating conditions.

"Proved Undeveloped Reserves" are proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where relatively major expenditures are required for drilling and completion.

“Working Interest" means the share of costs borne by an owner in the lease or well.

Crude oil and condensate volumes are expressed in barrels that are equivalent to 42 United States gallons. Gas volumes are expressed in Mcf or MMcf as determined at 60 degrees Fahrenheit and the legal pressure base that prevails in the state in which the reserves are located.

Property Acquisition and Disposition

During fiscal 2009, the Company did not acquire or dispose of any oil and gas properties or drilling prospects. Within the oil and gas sector, the Company faces competition from entities possessing substantially larger financial resources and staffs.  The demand for domestically produced oil and gas remains high and should remain at these levels in the foreseeable future especially in light of worldwide demand, the turmoil in the Middle East, decreased production form Central America and political instability in South America.  Domestic and increasing world demands, especially in the Pacific Basin, for crude oil and natural gas will continue to increase. The domestic oil industry is subject to the fluctuations inherent in the global energy industry.  Pricing for domestic natural gas is not as volatile as is the pricing for crude oil.  Natural gas and crude oil prices have fluctuated on the spot market and each is a commodity traded on the mercantile exchange. However, most of the Company’s products (natural gas and crude) are sold under contracts that provide the Company with competitive pricing within its operating areas.

During fiscal 2010, the Company intends to continue to focus on: (i) identifying niche acquisition and developmental opportunities within the oil and gas sector that can be economically exploited, and (ii) identifying third parties who will either individually or in conjunction with the Company develop the Company’s undeveloped leasehold interests or form other joint ventures.

Marketing and Production Oil and Gas, Delivery Commitment
 
The Company does not refine or engage in retail sales of any petroleum products. All of its production is sold, at the wellhead, to a variety of customers, which include pipelines, oil and gas gathering firms and other purchasers, pursuant to written agreements. Generally, sales of oil and gas are made at prevailing market prices or tied to a benchmark price under long-term contracts.  Typically, oil purchase agreements are of short duration, and provide for market sensitive pricing, while gas contracts are of a longer duration and less sensitive to rapid market fluctuations. The Company is a party to two long-term gas sales contracts, which may be terminated on short notice if a price adjustment is unacceptable to the Company. The Company is not obligated to provide a fixed and determinable quantity of oil and/or gas under existing contracts or agreements.

 
-3-

 

The availability of a market for oil and gas produced from the properties of the Company and prices received are dependent upon numerous factors, substantially all of which are beyond the control of the Company. Such factors include the level of domestic production, the availability of imported oil and gas, actions taken by foreign producing nations, the availability of distribution and transportation facilities and capacity thereon, the availability and price of fuels competitive with oil and gas, world and domestic demand for oil and gas and refined products, governmental regulation and taxation.  Such factors make it impracticable to predict with any degree of certainty future demand for or prices of the oil or gas produced by the Company.

Production of oil and gas is generally not considered to be of a seasonal nature, although severe weather conditions can temporarily curtail or preclude producing activities. Demand for natural gas is fairly constant over the entire year as a result of the increased demand for natural gas to fuel electric power generation and other commercial uses.  Since November 2007, gas production from certain wells operated by the Company in West Virginia has been curtailed occasionally by the transporting pipeline. The Company has never experienced any other difficulties in selling any of its oil or gas.

Customers
 
The following table identifies the Company’s customers who purchased in excess of five percent (5%) of the Company’s oil or gas during the fiscal year ended September 30, 2009:

Name and Location of Purchaser
 
Percentage
 
Gulfmark Energy, Inc.
Houston, Texas
    42 %
ETC Texas Pipeline, Ltd.(1)
San Antonio, Texas
    41 %
Volunteer Energy Services, Inc.
Pickerington, Ohio
    16 %

 
(1)
The Company’s production of gas from its operated wells in the Giddings Field, Texas, is sold to ETC Texas Pipeline, Ltd. pursuant to a long-term contract expiring January 31, 2010, which covers a number of the Company’s Texas leases. Subject to various conditions, ETC has agreed to buy all of the Company’s gas produced from the Giddings Field. The Company receives eighty percent (80%) of the weighted average monthly sales price for liquid products extracted from gas delivered and eighty percent (80%) of the resale prices for dry gas. Prices received by the Company are subject to deductions for taxes, compression and similar charges.

The Company does not believe that the loss of any one of these customers would have a material adverse effect upon the Company’s revenues since there are numerous purchasers of oil and gas in the areas in which the Company operates.

 
-4-

 

Production

The following table summarizes the Company’s net oil and gas production for the periods indicated, shown in barrels (“Bbls”) and, thousand cubic feet (“Mcf”):
   
Fiscal Year Ended
September 30
 
   
2009
   
2008 (1)
 
Texas:
           
Oil (Bbls)
    2,880       3,724  
Gas (Mcf)
    26,235       33,778  
Average Bbls/day
    8       10  
Average Mcf/day
    72       93  
Pennsylvania:
               
Gas (Mcf)
    -       2,682  
Average Mcf/day
    -       7  
West Virginia:
               
Gas (Mcf)
    13,690       12,326  
Average Mcf/day
    38       34  
TOTALS:
               
Oil (Bbls)
    2,880       3,724  
Gas (Mcf)
    39,925       48,786  
Average Bbls/day
    8       10  
Average Mcf/day
    109       134  
 
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the State of West Virginia and the Commonwealth of Pennsylvania.
 
The following table summarizes for the periods indicated the average price per barrel (“Bbl”) of oil, the average price per thousand cubic feet (“Mcf”) of natural gas and average sales price and production (lifting) costs per gas equivalent. In determining the prices received by the Company, the revenues are attributed to the Company’s net revenue interests. Production costs incurred by the Company include production and severance taxes and expenses of operation attributable to the Company’s working interests.  For the purpose of determining Mcf equivalents (“MCFE”), one Bbl of oil has been converted to gas equivalents at the rate of one Bbl per six Mcf.

 
 
Fiscal Year Ended
September 30
 
   
2009
   
2008 (1)
 
Texas
           
Average Sale Price Per Bbl
  $ 54.91     $ 104.87  
Average Sale Price Per Mcf
  $ 5.86     $ 11.09  
Pennsylvania
               
Average Sale Price Per Mcf
    -     $ 9.31  
West Virginia
               
Average Sale Price Per Mcf
  $ 4.82     $ 9.19  
Combined Properties
               
Average Sale Price Per Bbl
  $ 54.61     $ 104.87  
Average Sale Price Per Mcf
  $ 5.51     $ 10.51  
Average Sale Price Per MCFE
  $ 6.61     $ 12.70  
Average Production Costs per MCFE
  $ 3.71     $ 4.16  
 
 
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the State of West Virginia and the Commonwealth of Pennsylvania.

 
-5-

 

Wells and Acreage

The following tables set forth certain information as of September 30, 2009 and 2008:

Well Count
 
Gross Wells
   
Net Wells
 
Texas
    26       9.40  
West Virginia
    2       0.46  
Total
    28       9.86  
                 
Developed Acreage
 
Gross Acres
   
Net Acres
 
Texas
    3,550       1,259  
West Virginia
    662       156  
Total
    4,212       1,415  
                 
Undeveloped Acreage
 
Gross Acres
   
Net Acres
 
Texas
    1,519       554  
West Virginia
    1,115       276  
Total
    2,634       830  

Drilling Activity

The Company did not participate in the drilling of any exploratory or development wells in fiscal 2009 or 2008.  Such information should not be considered indicative of future performance of prospects of the Company. There is no necessary correlation between the number of producing wells, whether developmental or exploratory, completed during any period and the aggregate reserves or future net income generated.

Proved Reserves

The Company causes to be prepared an annual estimate of its oil and gas reserves. The Company has not filed reserves estimates with any United States authority or agency, other than estimates previously filed with the Securities and Exchange Commission. The following tables set forth the net proved developed and undeveloped reserves of the Company as of September 30, 2009 and 2008.  All of the reserves are located on-shore within the United States.

Reserve estimates for the Company’s properties as of September 30, 2009 and 2008 were taken from reserve reports dated December 31, 2009 and January 3, 2009, respectively, prepared by Hall Energy, Inc. of Magnetic Springs, Ohio, with the figures utilizing constant product prices in accordance with reporting requirements. Hall Energy, Inc. is an independent petroleum engineering concern with an emphasis in the Appalachian and Ohio Basins.
 
   
September 30
 
   
2009
   
2008 (1)
 
Net Proved Developed Reserves:
           
Oil (Bbls)
           
Texas
    12,441       27,550  
Gas (Mcf)
               
Texas
    106,526       173,067  
Pennsylvania
    -       3,072  
West Virginia
    105,609       141,739  
Total
    212,135       317,878  
Net Proved Undeveloped Reserves:
               
Oil (Bbls)
               
Texas
    64,238       65,034  
Gas (Mcf)
               
Texas
    186,416       188,591  

 
(1)
During fiscal 2008, the Company disposed of working interests in certain producing wells in the state of West Virginia and the Commonwealth of Pennsylvania.

 
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Estimated Future Net Revenues and Present Worth

Estimated future net revenues of the Company’s net oil and gas reserves at the date indicated and the present worth thereof employing a ten percent (10%) discount factor is set forth in the following tabulation:

   
September 30
 
   
2009
   
2008
 
Future Net Revenues :
           
Proved Oil and Gas Reserves
  $ 2,779,164     $ 7,958,528  
Proved Developed Oil and Gas Reserves
  $ 669,893     $ 2,977,544  
Present Worth:
               
Proved Oil and Gas Reserves
  $ 1,851,636     $ 5,444,845  
Proved Developed Oil and Gas Reserves
  $ 492,814     $ 2,088,371  

The present value of estimated future net revenues set forth above is computed using the estimated future net revenues and a discount factor of ten percent (10%) over the projected life of each property.

Petroleum engineering is not an exact science. Information relating to the Company’s oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of the future net revenues therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties compared with production from other producing properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices and future operating costs, severance and excise taxes, development costs, work-over and remedial costs, all of which may in fact vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable reserves of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary. The Company emphasizes that the actual production, revenues, severance and excise taxes, development expenditures and operating expenditures with respect to its reserves will likely vary from such estimates, and such variances may be material.  Persons should not assume that the estimates of the Company's future reserves are a guaranteed figure.

The present values shown above should not be construed as the current market value of the estimated oil and gas reserves attributable to the Company’s properties. In accordance with applicable requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from proved reserves are based, generally, on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on operating costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of the incurrence of expenses in connection with development of oil and gas properties. In addition, the ten percent (10%) discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Discounted future net revenues, no matter what discount rate is used, are materially affected by assumptions as to the timing of future production and future expenses which may and often do prove to be inaccurate.

Reserves Reported To Other Agencies

There were no estimates or reserve reports of the Company’s proved domestic net oil or gas reserves filed with any governmental authority or agency other than the Securities and Exchange Commission during the fiscal years ended September 30, 2009 and 2008.

MINERAL INTERESTS

Definitions:

“Cu Yd” and “Cu M” mean units of volume in terms of Cubic Yards and Cubic Meters, respectively.

 
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“Competent Person” is a person who is a member of a professional society for earth scientists or mineral engineers, or has other appropriate qualifications.

“Development Stage” means a party engaged in the preparation of an established commercially mineable deposit (reserves) for its extraction which is not in the production stage.

“Exploration Stage” means a party engaged in the search for mineral deposits (reserves) which is not in either the Development or Production Stage.

“Gross” means, as it applies to acreage or mining claims, the numbers of acres or mining claims in which the Company has a direct operating interest.

“Mineralized Material” is that part of a mineral deposit for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable or high level of confidence.  It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes.  The locations are spaced closely enough (i) to confirm geological continuity and/or grade continuity or (ii) for continuity to be assumed.

“Mining Claims” are regulatory and/or legal descriptions of mineral property rights as defined by State and Federal Mineral Codes.

"Net", as it applies to acreage mining claims, refers to the sum of the fractional ownership interests owned by the Company in gross acres mining claims.

“Production Stage” means a party engaged in the exploitation of a mineral deposit (reserve).

"Probable (Indicated) Reserves" are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) minerals, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) recoverable minerals, is high enough to assume continuity between points of observation.

"Proven (Measured) Reserves" are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

“Reserve" is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.

"Ton" means a unit of weight equal to 2,000 pounds (lbs.) or 906 kilograms.

General

The mining and marketing of non-metallic industrial minerals is highly competitive; however, the Company believes that the locations and quality of its mineral deposits will benefit its future development and sales efforts. By definition, the Company is an “Exploration Stage” entity in respect to its mineral holdings.  In 2005, the Company contracted Denali Enterprises to review available technical data associated with the quantification of the mineral deposits in connection with the Company’s exploration efforts. Such review reaffirmed the existence of sufficient mineral deposits to continue with such efforts.  The Company’s ability to develop these mineral deposits is dependent on its success in bringing in strategic partners with experience in or a demand for specific minerals and raising capital through third parties.  In fiscal year 2005, the Company entered into two agreements with Tecumseh Professional Associates (“TPA”) for the exploration, exploitation, development and marketing of its Sierra Kaolin and calcium carbonate. By letter dated May 4, 2006, TPA advised the Company of its intent not to continue as the operator of the Company’s Calcium Carbonate lease as of August 4, 2006. As such, the Development and Operating Agreement (Calcium Carbonate) terminated in its entirety. In June 2007, the Company and TPA entered into a Restated Development and Operating Agreement in respect to the Sierra Kaolin. Under the Restated Development and Operating Agreement the Company and TPA continued the evaluation of the Sierra Kaolin (See “Kaolin” below).  Independently, the Company has continued the evaluation of its remaining minerals, zeolite and calcium carbonate.  The Company continues to sell raw zeolite to third parties as animal feed supplement and for other uses and market its zeolite based products such as its ReNuGen™, a product utilized in wastewater treatment applications. At September 30, 2009, the Company was and continues to be involved in discussions with one or more potential joint venture partners for the development and testing of additional zeolite based products and to provide capital for market introduction. During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted.

 
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Mineral Extraction

The Company has not established large-scale production of any of its mineral deposits. The Company's mineral extraction is conducted by third party contractors engaged by CAMI or its joint venture partners.  The Company does not conduct any direct extraction activities of its own.  As such, the Company is subject to “pass through” costs for the extraction, crushing or preparation of its minerals.  Likewise, the third party operator is solely responsible for the type of equipment utilized on each mineral site, subject to the third party contractor’s compliance with all Federal, state and local laws, regulations and ordinances for the conduct of operations, environmental protection and safety of operations.

Mineralized Materials

Set forth below are the total gross acres, gross acres evaluated and estimated gross quantities of Mineralized Materials associated with the gross acres evaluated for the Company’s kaolin claims in Sierra County, New Mexico, zeolite leases and fee acreage in Presidio County, Texas, and zeolite claims in Beaver County, Utah. These Mineralized Materials were evaluated and estimated by a Competent Person.
State
 
Mineral
 
Total
Gross
Acres
   
Gross
Acres
Evaluated
   
Gross
Mineralized
Materials
(millions of
tons)
 
New Mexico
 
Kaolin
    2,720       264       55.3  
Texas
 
Zeolite
    5,200       438       75.7  
Utah
 
Zeolite
    220       -       -  
 
Zeolite

Texas - Through September 30, 2009, the Company mined approximately 1,300 tons of material for the preparation of samples and test products. Approximately 70 tons have been sold or distributed as the Company’s trademarked ReNuGen™, a zeolite based, wastewater treatment product. During fiscal 2009, approximately 20 tons were sold for use in certain agricultural oriented products.  The Company has also provided material for various environmental testing and waste purification projects and currently has approximately 1,000 tons available for product processing. During fiscal 2006, the Company initiated a confirmation geologic field mapping project and commenced a resource definition program, as well as a core hole drilling and sampling program to delineate Mineralized Materials in sufficient quantities to support large scale mining operations.   These efforts targeted 438 acres of the 5,200 acres held by the Company which are most likely to be subjected to initial development. During fiscal 2007, KT Minerals, Inc. completed the evaluation of the target area.  KT Minerals, Inc. has identified 75.7 million tons of Mineralized Materials associated with the target area. At September 30, 2008, the Company is also exploring alternatives for the development and marketing of additional zeolite based products for introduction into the industrial and environmental markets.

Utah – As of September 30, 2009, the Company is not conducting any exploration activities on Three Creek zeolite deposit.

 
Kaolin

The Company has 17 Federal Placer mining claims covering approximately 2,720 acres and 8 Lode claims covering approximately 160 acres covering a portion of its existing holdings. The Company has maintained all of its claims during fiscal year 2009.Through September 30, 2009, the Company did not produce commercial quantities of its Sierra Kaolin. Sierra Kaolin was mined in previous years for testing by prospective customers.  Under its Revised and Restated Agreement with TPA, the pre-development evaluation program of the Company’s Sierra Kaolin claims continued during fiscal year 2009. This program focused on evaluating in detail approximately 173 acres (+/-7%) of the Company’s 2,720 acre mineral claim block which is most likely to be subjected to initial development.  During fiscal 2008, KT Minerals, Inc. identified 55.3 million tons of Mineralized Materials based on a total of 53 verifiable drill holes representing 6,310 feet of subsurface material.

 
-9-

 

In 1965, 20 core holes were drilled which produced 3087 feet of core samples. In 1976, 17 core holes were drilled which produced 1784 feet of core samples. During fiscal 2005, 16 core holes were drilled on a 32 acre area from which 1,442 feet of subsurface material was recovered. During fiscal year 2006, this subsurface material was broken down into over 600 samples which were subjected to detailed testing at three different laboratories. The testing phase of the project included roughly 20,000 tests which now comprise an extensive Sierra Kaolin data base. This data base was then utilized by the consulting firm of Pincock, Allen & Holt to develop detailed geologic models of the Sierra Kaolin deposit test area. Based on this work, it was determined that this 32 acre core tested area contained approximately 1.4 million tons of Mineralized Materials.

KT Minerals, Inc. (“KT”) conducted a re-evaluation of the potential Kaolin Mineralized Materials associated with the project. The KT re-evaluation considered the geologic and compositional data available from prior studies and incorporated the results of the mineral processing study completed by Ginn Mineral Technology, Inc. (“GMT”). Based on the GMT study a greater percentage of the project’s in situ minerals could be processed into marketable material as compared to prior indications. In addition, KT evaluated and expanded the study area outside of the 32 acres encompassed by the TPA coring program to include acreage penetrated by an additional 53 historical core holes from which verifiable data could be obtained. As a result, KT evaluated approximately 264 acres of the project and identified approximately 55.3 million tons of Mineralized Materials.

These mineralized quantities were further classified by KT using the international definition of reserves classification grouping described in Section 9.3 Inventory Category (R26,R28)(E29) of the Minfile Coding Manual as follows:
Classification
 
Gross Acres
Evaluated
   
Gross Cubic
Feet
   
Gross Tons
 
Proven
    107.5       571,127,610       25,126,600  
Probable
    69.0       291,852,000       12,839,900  
Possible/Inferred
    88.0       393,294,000       17,304,000  

Section 9.3.1 of the Minfile Coding Manual:  The reserve category is used only for a mineral and/or substance inventory in an operating mine or mine near production. Sufficient information is available to form the basis of a preliminary mine production plan. Factors that affect ore reserve estimates are geological, economic, mining, metallurgical, marketing, environmental, social and governmental conditions. Ore reserves are reported as Proven, Probable and Possible/Inferred.

It should be noted that the above international mining industry quantity classifications are not recognized by the United States Security Exchange Commission (“SEC”) for reporting purposes. To categorize the mineralized material quantities indicated as reserves under the SEC guidelines, incremental economic and market supporting information is required.

As such the KT mineral quantity classifications are provided only as supplemental information and should not be utilized in association with investment decisions.

During fiscal 2009, TPA proceeded with the next phase of the project which included: (i) further work to quantify Mineralized Materials; (ii) product identification and development; (iii) detail process flow sheets; and, (iv) equipment specifications, as well as marketing and capital requirements. On December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine project has cleared the regulatory review and that the project’s definitive USDA Forest Service Plan of Operations has been approved. This will facilitate the project moving to the next phase. These activities will continue in fiscal 2010.

Marketing of Minerals and Marketing Agreements

In December 2004, the Company entered into a Memorandum of Understanding for development of Sierra Kaolin Deposit (“MOU”) with TPA for the management, development, exploration and marketing of the Company’s Sierra Kaolin claims, located in Sierra County, New Mexico (see Exhibit 10.9).

Under the Company’s March 11, 2005 and June 7, 2007 agreements with TPA (see Exhibits 10.12 and 10.17, respectively),  TPA has assumed the duties to mine, test, exploit, and market the Company’s Sierra Kaolin deposit.

 
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Management of the Company directs the activities pertaining to the Company’s zeolite minerals and participates in the decisions regarding the agreement with TPA in respect to the marketing of its Sierra Kaolin.

Government Regulations
 
Oil and Gas
 
There are statutory and/or regulatory provisions regulating the Company’s oil and gas operations. These statutes allow administrative agencies to promulgate regulations in connection with the development, production and sale of oil and gas, and to establish allowable rates of production.

The Company’s activities are subject to laws and regulations relating to environmental quality and pollution control. Although the cost of compliance with such legislation and regulations has not been material to date, such laws and regulations could substantially increase the cost of carrying on these activities and could prevent or delay the commencement or continuance of a given operation. The Company believes that existing legislation and regulations have had no material adverse effect on its present method of operations. In the future, federal, state and local environmental controls may require the Company to make significant expenditures, but neither the probability nor the magnitude of the expenditures, if any, can be predicted.

The discharge of oil, gas or the by-products of drilling, reworking and producing oil and gas into the air, soil or water may give rise to liabilities for the restoration of the environment and to third parties. A variety of federal and state laws and regulations govern the environmental aspects of the production, transportation and processing of hydrocarbons and may, in addition to other laws and regulations, impose liability in the event of a discharge or seepage (whether or not accidental). Compliance with such laws and regulations could increase the cost of the exploration, production and development of oil and gas reserves although the Company does not currently anticipate that compliance will have a material adverse effect on the ability of the Company to continue in the exploration, development or production of its existing reserves and the development and/or acquisition of new reserves.

The Company does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry.  The Company believes that it is in substantial compliance with all existing rules and regulations. No assurance can be given, however, that environmental laws will not, in the future, result in more onerous regulations causing a market increase in the cost of production, development and exploration or otherwise adversely affect the Company’s operations or financial ability to maintain its existing reserves. Although the Company maintains insurance coverage for certain liabilities, to include insurance to cover specific environmental risks, such as seepage or discharge, other environmental risks may not be fully insurable.

Mineral Interests

The Company’s activities are subject to Federal and state laws and regulations relating to environmental quality and pollution control as well as safety rules as prescribed by Occupational Safety and Health Administration.  At present, the Company does not intend to engage in mining activities on its own. The Company intends to retain, and has to date retained, the services of outside contractors to carry out such activities (see the agreements with TPA as set forth as Exhibits 10.9, 10.12 and 10.17). The Company believes that such practices will result in substantial savings in the future.  Most of the Company’s mineral interests in New Mexico (kaolin) and Utah (zeolite) are on either Federal land or lands administered by the Bureau of Indian Affairs (“BIA”).  As such, the Company must also comply with the rules and regulations imposed for the development of Federal mining leases or BIA leases.  The Marfa Properties (zeolite) in Texas are on fee and leased acreage and are subject to Federal and state laws and regulations governing open pit extraction.

Transportation
 
Oil and Gas
 
Currently the majority of the Company’s gas is sold to interstate carriers.  The Company moves its gas to the interstate carriers over a gathering system owned by the Company or joint venture partners in the Company's wells. The Company has experienced no difficulty in moving or selling its gas. The Company is not a regulated interstate/intrastate carrier of natural gas and as such it is not a regulated pipeline under the National Gas Policy Act of 1983, the National Gas Act of 1938 or as a common carrier by applicable state agencies.

 
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Mineral Interests
 
All of the Company’s mineral deposits are serviced by all weather paved or unpaved roads. The Marfa zeolite property in Texas is adjacent to a railroad line that can be utilized to transport minerals to market. The Utah zeolite and New Mexico Sierra Kaolin deposits also have access to rail lines but will require over-land transport prior to rail transport.

Partnerships
 
DRI sponsored Deerlick Royalty Partners L.P. (“Partnership”) which was formed in April 1993. As the managing general partner, DRI is subject to full liability for the obligations of the Partnership although it is entitled to indemnification to the extent of the assets of the Partnership. Since “partnership programs” constitute a “security” under the Securities Act of 1933, Deven Resources, Inc. is also subject to potential liability for failure to comply with applicable Federal and state securities laws and regulations.

The Partnership owns overriding royalty interests covering 2,043 gross acres in the Deerlick Creek coalbed methane field, Tuscaloosa County, Alabama. The Partnership is structured on a carried participation basis.

Acquisitions/Mergers
 
During the past two fiscal years, the Company has not participated in any acquisitions or mergers.

Stock Purchase Agreement

Terra Silex Agreement
 
On September 20, 2001, the Company entered into a Stock Purchase Agreement (see Exhibit 10.2) with Terra Silex Holdings, LLC (“Terra Silex”) pursuant to which the Company agreed to sell Terra Silex up to 1,800,000 shares of the Company’s Common Stock at a price of $1.25 per share. At the time of the Terra Silex Agreement, the market price of the Company’s Common Stock was $1.05.

The Terra Silex Agreement provided for the purchase of the common stock in three (3) tranches. At closing, Terra Silex acquired 400,000 shares. The second tranche was to have closed within sixty (60) days, subject to Terra Silex’s satisfactory completion of its due diligence. However, Terra Silex requested an extension.  The second tranche for 400,000 shares did close on November 20, 2001.  The third tranche was to have closed within 60 days of the closing of the second tranche.  On February 15, 2002, Terra Silex advised the Company that it would not fund the third tranche.  As such, the warrant to which Terra Silex was entitled under its stock purchase agreement was capped at 250,000 shares.  This warrant had an exercise price of $1.25 per share and was scheduled to expire on December 31, 2006.  By action of the Board of Directors on December 14, 2006, the expiration date for the Terra Silex Warrant was extended until September 16, 2007. Terra Silex did not exercise its warrant either in whole or in part. These warrants have now expired.

The Terra Silex Agreement included a provision (Section 6.3, Dilution Protection Rights) by which Terra Silex was granted the right to acquire shares of the Company’s Common Stock at the same price as offered to third parties in a “Block Sale” (as such term is defined in the Terra Silex Agreement). As a result of the Company’s private placement of 6,500,000 shares of Common Stock on September 16, 2005, Terra Silex was entitled to acquire 200,241 shares of Common Stock.  Terra Silex exercised such right in December 2006.

Patent
 
C.A. Series

CAMI is the owner of U.S. Patent No. 5,387,738, upon which an engineered product is based which utilizes all naturally occurring non-hazardous minerals for the remediation of sites contaminated with hazardous and/or toxic materials. Typically, the remediation of these sites is necessary in order to meet quality control regulation for air, land and water enforced by the Environmental Protection Agency and various other state and Federal environmental regulatory agencies. The patented engineered products are marketed by CAMI under the trademark of the CA Series. Each of these engineered environmental products is designed for specific project site requirements based on the nature of the on-site contaminant, the size of the project and specific treatment requirements.

 
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The CA Series have been proven effective, through the use of a catalytically enhanced chemical exchange process, in permanently changing many hazardous metals to a non-hazardous state and, through molecular sieve and/or absorption processes, in removing (“site remediation”) many hazardous hydrocarbon and nitrate contaminants.

The processing of contaminate materials using the patented CA Series technology is designed as an on-site operation. Internal studies have shown that because the CA Series of engineered products are designed to be used at the remediation project site, substantial cost savings can be generated as compared to other remediation methods requiring extraction, removal and incineration. The on-site use of CA engineered products can provide a complete and permanent environmental cleanup of the hazardous materials in that the “treated” materials are converted into non-hazardous permanently non-leachable substances that can remain in place. Through laboratory and field tests, the CA Series engineered products have been proved to be effective in the remediation of contamination caused by hydrocarbons and petroleum products, chemicals as well as toxic metallic compounds in rendering the toxic and hazardous materials to a permanently non-toxic and non-hazardous stage.

Trademarks

The Company has applied for Trademarks governing the CA Series of Products CA-1 through CA-6.  The Company has applied for the trademark for the Company’s “ReNuGen”, a product used to enhance the efficacy of conventional waste water treatment plants

Employees
 
At September 30, 2009, the Company had three employees. The Company employs the services of consulting scientists, geologists and engineers, as well as those of nonaffiliated operating companies that conduct the actual oil and gas field operations and mineral extraction/processing.  The Company operates its oil and gas wells in the States of Texas and West Virginia from its Pennsylvania office utilizing contract pumpers to perform actual field operations.  The Company’s non-operated wells are monitored out of the Company’s Pennsylvania office.  The Company’s mineral leases, fee interest and claims are operated by contract mining entities and are monitored by its Pennsylvania office and by TPA under its agreement covering the Company’s Sierra Kaolin.  The Company considers its relations with its consultants to be satisfactory.

Item 1A.  Risk Factors.

Not required as the registrant is a smaller reporting company.

Item 1B.  Unresolved Staff Comments.

Not required as the registrant is a smaller reporting company.

Item 2.  Properties.

OIL AND GAS INTERESTS

Texas

The Texas properties are located in the Austin Chalk Trend.   The Austin Chalk Trend consists of the Austin Chalk, Buda, Georgetown and Edwards formations, extends for approximately 300 miles in length and 50 miles across, and is encountered at depths of 5,500 to 18,000 feet.  These reservoirs are generally of low permeability. Historically, these formations were considered to be economically marginal except in areas where the reservoir rocks are highly fractured. In later years, stimulation by mechanical fracturing of the rock resulted in increasing hydrocarbon recoveries and extensive development of the Trend. Ongoing technical developments using horizontal drilling techniques allow the well bore to intersect, if present, series of vertical fracture systems instead of a single one, thus resulting in higher rates of production and recoverable reserves, at the cost of a more expensive drilling effort.  Whether an individual well will be economic, even if horizontally drilled, depends largely upon intersecting fractured portions of the formation, which cannot be predicted. Certain locales appear to contain more fracturing than others.  It is not unusual for an individual well to produce as much as forty percent (40%) of the primary recoverable reserves during the first two years of production and the remainder over a period of ten to fifteen years.  The Company is presently evaluating joint venturing with third parties to develop its Texas Properties.  The Company operates twenty-five (25) wells in Texas.

 
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West Virginia and Pennsylvania

The Company’s hydrocarbon production in the State of West Virginia is in the producing zone of the Oriskany formation of the Appalachian Basin’s Upper Devonian Section. The Company has working interests in two wells in West Virginia for which it acts as operator. The Company owns overriding royalty interests in two wells as well as certain undeveloped acreage in the Commonwealth of Pennsylvania.

Alabama

Deerlick Royalty Partners, L.P., a Delaware limited partnership for which DRI acts as the managing general partner, owns an overriding royalty interest in the Deerlick Creek Field, Tuscaloosa County, Alabama, in the Black Warrior Basin.

Operating Hazards and Uninsured Risks
 
The Company’s oil and gas operations are subject to all of the risks normally incident to the exploration for and production of oil and gas, including mechanical failures, blow-outs, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells or production facilities or damage to persons and property. While the Company maintains a $3,000,000 all risks liability policy in amounts that it believes are adequate, the insurance may not cover all potential operational risks. The occurrence of a significant event not fully insured against could have a material adverse effect on the Company’s financial position.   In the coming year, the Company plans to seek participation in certain types of exploratory or developmental drilling prospects. In these instances, the Company has historically expanded its insurance coverage to cover the specific risk associated with those types of operations.  The Company will continue to conduct its normal day-to-day activities as operator of its wells.

Title to Oil and Gas Properties
 
The Company’s interests in producing and non-producing acreage are in the form of direct or indirect interests in leases. Each of its properties is subject to customary royalty interests in amounts prevailing in the area in which the oil and gas lease was taken, overriding royalty interests, liens incident to operating agreements, liens for current taxes and other burdens and mineral encumbrances and restrictions. The Company believes that none of these burdens materially interferes with the use of such properties, in the operation of the Company’s business or the profitability of the Company’s investment therein.

As is customary in the oil and gas industry, only a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Detailed investigations are generally made, including, in most cases, receiving a title opinion of local counsel, prior to the commencement of drilling operations. A thorough examination of title was performed with respect to substantially all of the Company’s producing properties. Also, prior to the acquisition of properties, the Company has received an opinion of title, satisfactory to counsel to the Company, on a majority (in value) of the assets acquired. The Company believes that it has defensible title to substantially all of its properties.

MINERAL INTERESTS

Minerals Holdings
 
Through its wholly-owned subsidiary, CAMI, the Company owns leases for, mining claims to and a fee simple interest in non-metallic industrial minerals located in the States of Texas, New Mexico and Utah. Title and rights in the properties are held by CA Properties, Inc. (“CAPI”), a wholly-owned subsidiary of CAMI.

 
-14-

 

Texas

Marfa Zeolite

CAPI is the lessee under a 5,200 acre lease containing high grade zeolite, located approximately 40 miles south of Marfa, Presidio County, Texas. The lease terms call for royalty payments of $3.00 per ton of zeolite removed from the property with a minimum royalty of $30,000 per year. CAPI has the option to terminate the annual royalty payments by paying a lump sum of $400,000. CAPI owns, in fee, approximately 100 acres of land encompassed by and contained within the bounds of the 5,200 acre zeolite leasehold. During fiscal 2009, the Company paid the minimum royalty of $30,000.

Location

The Company's zeolite deposit is located 29 miles south of Marfa, Texas, on State Highway 67, then 2 miles west on an all weather dirt road.  A railroad is immediately adjacent to the Company's lease and fee mineral interests.  The Company's lease and fee mineral holdings are on private property. For a map of the location of the Company’s zeolite deposit, see Exhibit 99.1.

Geologic Setting

The zeolite bearing formation is an altered tuffaceous material that is exposed in several road cuts in the area.  The zeolite present is the mineral Clinoptilolite.

New Mexico

Sierra Kaolin

CAPI owns 17 placer mining claims on 2,720 acres and 8 Lode claims covering 160 acres, all located in Sierra County, New Mexico, encompassing its Sierra Kaolin deposit.  The Federal mining claims call for a royalty payment of 7% of net proceeds derived from mining operations.  There is also an overriding royalty interest of 7% out of mining operations payable to the former owner of these leases. $2,125 was paid to the Bureau of Land Management (“BLM”) in 2009 to maintain CAPI’s Federal mineral claims.  TPA paid this in accordance with the provisions of the Sierra Kaolin Operating License.
Location

The Sierra Kaolin claims are located on a paved road near Winston, NM, some 40 miles west of Truth or Consequences, NM.  The claims are located on Federal Lands administered by the Bureau of Land Management.  For a map of the location of the Company’s Kaolin claims, see Exhibit 99.1.

Geologic Setting

The Sierra Kaolin project lies near the eastern margin of the Datil-Mogollon volcanic field, a region dominated by Tertiary caldera-related volcanic rocks.

The Sierra Kaolin is considered to be a primary hydrothermal deposit that was formed in situ.  The Sierra Kaolin is part of an advanced argillic alteration assemblage that includes kaolinite (AI4(Si4O10)(OH)8); and related mineral species possible including dickite and halloysite; alunite (KAI3(OH)8(SO4)2); and chalcedonic and/or opaline quartz (hydrous amorphous silica).

Utah

Beaver Zeolite

CAPI owns 11 placer mining claims (Three Creek) covering approximately 220 acres of zeolite located in Beaver County, Utah. The zeolite in this deposit is also considered high grade.  During fiscal year 2009, the Company paid $1,375 to the Bureau of Land Management to maintain its federal mining claims.

 
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Location

The Beaver zeolite claims are located on a paved road (State Highway 153) 18 miles east of Beaver, Utah.  The claims are on Federal Lands administered by the Bureau of Land Management. For a map of the location of the Company’s Utah zeolite claims, see Exhibit 99.1.

Geologic Setting

The deposit is geologically located in an altered tuffaceous formation associated with widespread volcanic activity of the area.

Mining

The Company has periodically extracted zeolite from its deposit in Texas through the use of contract miners.  The mining of all of the Company’s mineral deposits is exclusively conducted through surface mining.  The quantities of extracted volumes were commensurate with demands for the minerals and to comply with the Company's lease obligations. The Company, under its agreements with Tecumseh Professional Associates (“TPA”) (see Exhibits 10.12 and 10.17) extracted sufficient quantities of Sierra Kaolin for qualitative and quantitative analysis of the mineral’s commercial properties. All of the extraction of the Company's current mineral holdings is expected to be done by surface mining.  At each of the locations, the areas disturbed by extractive operations have been limited to initial ten acre permit sites in New Mexico and under 100 acres in Texas in accordance with applicable state regulations.

The Company's Texas zeolite deposit will be mined on a periodic basis to meet existing obligations and to support development of new and emerging markets. Initial production of the Company’s Sierra Kaolin has been conducted by TPA for testing. Commercial development and marketing will be conducted in accordance with the Sierra Kaolin Restated Development and Operating Agreement (See Exhibit 10.17). On December 15, 2009 the Company announced that the proposed Sierra Kaolin Open Pit Clay Mine project has cleared the regulatory review and that the project’s definitive USDA Forest Service Plan of Operations has been approved. This will facilitate the project moving to the next phase.

At the present time, as a result of its limited activities on its mineral properties, the Company believes that its share of the reclamation costs currently associated with its activities is less than $50,000.

Item 3.  Legal Proceedings.

None.

Item 4.  Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2009.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
DESCRIPTION OF SECURITIES
 
Pursuant to the Company’s Articles of Incorporation, the Company is authorized to issue 100,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value of $0.01 per share.  Below is a description of the Company’s outstanding securities, including common stock, preferred stock, options, warrants and debt.

 
-16-

 

Common Stock
 
Each holder of the Company’s common stock is entitled to one vote for each share held of record.  Holders of common stock have no preemptive, subscription, conversion, or redemption rights.  Upon liquidation, dissolution or winding-up, the holders of common stock are entitled to receive the Company’s net assets pro rata.  Each holder of common stock is entitled to receive ratably any dividends declared by the board of directors out of funds legally available for the payment of dividends.  The Company has not paid any dividends on its common stock and does not contemplate doing so in the foreseeable future.  The Company anticipates that any earnings generated from operations will be used to finance its growth. As of the fiscal year ended September 30, 2009, the Company had 45,100,811 shares of common stock outstanding.

Preferred Stock
 
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2009, there were: no shares of Series A preferred stock issued and outstanding; 145,000 shares of Series B preferred stock issued and outstanding.

Series B 8% Cumulative Convertible Preferred Stock. The Series “B” Cumulative Convertible Preferred Stock has a face value of $10.00 per share with no voting power.  This preferred stock can be converted to common stock at 85% of the average of the 5 days before the date of conversion with a minimum amount of $1.25 per share.

Market Information

The Company's Common Stock trades on the NASDAQ Over the Counter Market, Bulletin Board ("OTCBB"). The symbol for the Company's shares is DLOV. The following table shows the high and low closing bid prices as quoted on the OTCBB for the fiscal quarters indicated and the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.  The Company’s fiscal year ends September 30.

2009
 
High
   
Low
 
First Quarter
  $ 0.10     $ 0.05  
Second Quarter
  $ 0.10     $ 0.06  
Third Quarter
  $ 0.14     $ 0.07  
Fourth Quarter
  $ 0.24     $ 0.10  
                 
2008
 
High
   
Low
 
First Quarter
  $ 0.25     $ 0.13  
Second Quarter
  $ 0.25     $ 0.08  
Third Quarter
  $ 0.24     $ 0.12  
Fourth Quarter
  $ 0.13     $ 0.06  

Holders

Common Equity

As of September 30, 2009, the current outstanding amount of shares of common stock was 45,100,811 with approximately 2,000 holders of record (inclusive of brokerage house "street accounts").

Preferred Equity

As of September 30, 2009, there were no Series A Preferred shares issued and outstanding and there were sixteen holders of the 145,000 shares of Series B Preferred Stock issued and outstanding.

Dividends
 
The Company has never paid a dividend on its common stock.  The Company has no plans to pay any dividends on its common stock in the near future.  The Company intends to retain all earnings, if any, for the foreseeable future for use in its business operations. Dividends have been paid on the Company's Series B Preferred Stock in shares of Common Stock at the time of conversion.

 
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Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table contains information as of September 30, 2009 regarding equity compensation plans:
   
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
   
Weighted-average
exercise price of
outstanding
options, warrants
and rights
   
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
 
Plan Category
 
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
    400,000     $ 0.38       400,000  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    400,000     $ 0.38       400,000  

Recent Sales of Unregistered Securities
 
Terra Silex Holdings Ltd, LLC Anti-dilution Shares

By agreement dated September 20, 2001, the Company entered into a Stock Purchase Agreement (“SPA”) with Terra Silex Holdings, LLC (“Terra Silex”). Section 6.3, Dilution Protection Rights, of the SPA grants Terra Silex the right to acquire shares of the Company at the same price as offered to third parties in a “Block Sale” (as such term is defined in the SPA). As a result of the Company’s private placement of 6,500,000 shares of Common Stock on September 16, 2005, Terra Silex was entitled to acquire 200,241 shares of Common Stock under the formula set forth in Section 6.3 of the SPA.  Terra Silex exercised such right in December 2006. The purchase price for the 200,241 shares acquired by Terra Silex was $50,060.

October 2006 Private Placement

In October 2006, the Company concluded a private placement of 400,000 shares of Common Stock at a price of $0.51 per share. This private placement raised $204,000 for the Company. The Company is utilizing the proceeds of this private placement for its costs associated with the exploration and quantification of mineral resources and mineral reserves on a 500 acre portion of the Marfa zeolite deposit and to complete studies to be able to commence the production and delivery of ZeoCast. See the Company’s Form D as filed with the Securities and Exchange Commission on October 18, 2006.

June 2007 Private Placement

In June 2007, the Company concluded a private placement of equity consisting of 726,670 shares of Common Stock and warrants to purchase 363,336 shares of Common Stock. This private placement raised $218,000 for the Company. The Company utilized the proceeds of this private placement for general working capital purposes.  See the Company’s Form D as filed with the Securities and Exchange Commission on July 23, 2007.

June 2009 Private Placement

In June 2009, the Company commenced a private placement of up to $500,000 of 7.25% convertible debentures.    The debentures are convertible at a conversion price equal to the greater of either $0.14 per share or an amount equal to 80% of the average of the closing bid and ask prices of the Common Stock for the 5 trading days immediately preceding the conversion date.  All of the purchasers of the debentures elected to immediately convert such holdings into Common Stock at an average conversion price of $0.14 per share and, accordingly, the Company has issued 1,019,465 shares of Common Stock as of September 30, 2009. As of September 30, 2009, this private placement raised $128,500 (net of fees and expenses totaling $14,225) for the Company. The Company is utilizing the proceeds of this private placement for general working capital purposes.

 
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Options and Warrants

Options(1) to Purchase Shares of Common Stock
 
   
Fiscal 2009
   
Fiscal 2008
   
Fiscal 2007
 
Outstanding and Exercisable at beginning of period
    2,875,000       3,750,000       4,400,000  
Granted(2) (3) (4) (5) (6) (7) (8)
    -       -       1,000,000  
Cancelled
    -       -       -  
Expired (2) (6) (9) (10) (11) (12) (13)
    (2,087,500 )     (875,000 )     (1,650,000 )
Exercised
    -       -       -  
Outstanding and Exercisable at end of period(14)
    787,500       2,875,000       3,750,000  

(1)
The Company accounts for all stock-based compensation (options) in accordance with the Financial Accounting Standard Board, or FASB, Accounting Standard Codification, or ASC, Topic 718.  Under ASC 718, the fair value of stock options and compensation costs are measured as of the grant date.
 
(2)
Richard A. Thibault was granted an option to purchase 500,000 shares of stock at an exercise price of $0.48 per share in his employment contract dated March 10, 2006, but effective as of January 15, 2006. See Exhibit 10.44, attached to the Company’s Form 8-K dated March 13, 2006.  In June 2006, Mr. Thibault voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 300,000 shares of stock (including the option discussed in footnote 5 below) expired during fiscal 2007 and options for the purchase of 250,000 shares of stock expired in fiscal 2009.
 
(3)
David L. Matz was granted an option to purchase 250,000 shares of stock at an exercise price of $0.47 per share in his employment contract dated January 23, 2006. In March 2008, Mr. Matz voluntarily resigned as an officer of the Company; accordingly, options for the purchase of 75,000 shares of stock (including the option discussed in footnote 5 below) expired during fiscal 2008 and options for the purchase of 37,500 shares of stock expired in fiscal 2009.
 
(4)
During fiscal 2006, William Pipkin was granted an option to purchase 200,000 shares of stock at an exercise price of $0.43 per share under the Company’s Non-qualified Independent Director Stock Option Plan. In September 2008, Mr. Pipkin voluntarily resigned as a Director of the Company; accordingly, the option expired during fiscal 2009.
 
 (5)
On September 19, 2006, the Board of Directors granted the following officers of the Company options to purchase shares of stock at an exercise price of $.75 per share: Stephan V. Benediktson, 200,000 shares; Nathan K. Trynin, 200,000 shares; Dov Amir, 200,000 shares; Gary J. Novinskie, 200,000 shares; David L. Matz, 50,000 shares; and Richard A. Thibault, 50,000 shares.
 
(6)
On March 7, 2007, the Board of Directors granted an option to Stephan V. Benediktson for the purchase of 600,000 shares of stock at an exercise price of $0.48 per share. This option expired during fiscal 2008.
 
(7)
Richard W. Blackstone was granted an option to purchase 200,000 shares of stock at an exercise price of $0.67 per share in his employment contact dated October 4, 2006.
 
(8)
During fiscal 2007, David A. Grady was granted an option to purchase 200,000 shares of stock at an exercise price of $0.28 per share under the Company’s Non-qualified Independent Director Stock Option Plan.
 
(9)
On September 30, 2007, an option (held by a former officer of the Company) to purchase 1,000,000 shares of stock expired.
 
(10)
In August 2007, Stephan V. Benediktson and Nathan K. Trynin voluntarily resigned their respective positions with the Company; accordingly, options to purchase 200,000 shares of stock (the unvested portions of the options discussed in footnote 5 above) expired before September 30, 2007. The balance of their options to purchase of 200,000 shares of stock expired unexercised in November 2007.
 
(11) 
During fiscal 2007, an option (held by a former director of the Company pursuant to the Company’s Non-qualified Independent Director Stock Option Plan) for the purchase of 150,000 shares of stock expired.
 
(12)
During fiscal 2004, Lord John Gilbert was granted an option to purchase 200,000 shares of stock at an exercise price of $0.85 per share under the Company’s Non-qualified Independent Director Stock Option Plan. The option expired during fiscal 2009.
 
(13)
During fiscal 2002, Dov Amir and Gary J. Novinskie were each granted an option to purchase 500,000 shares of stock at an exercise price of $0.53 per share.  Options for the purchase of 1,400,000 shares of stock (including the options discussed in footnote 5 above) expired during fiscal 2009.
 
(14)
Of the options to purchase 787,500 shares outstanding as of September 30, 2009, 600,000 shares are held by current officers, directors and employees of the Company (“Insiders”).  The exercise prices for the options held by Insiders range from $0.28 per share to $0.67 per share.

 
-19-

 

Warrants to Purchase Shares of Common Stock
 
Warrants to purchase 822,305 shares of Common Stock are outstanding at September 30, 2009 and consist of the following:

Issuance
 
Expiration Date
 
No. of
Shares
   
Exercise
 Price
Per Share
 
Financing Sources (1)
 
December 31, 2010
    822,305     $ 0.55  
Conley Warrants (2)
 
February 26, 2008
    -       -  
Anthony Warrants (2)
 
February 26, 2009
    -       -  
TPA Warrants (3)
 
November 29, 2007
    -       -  
June 2007 Private Placement Warrants (4)
 
June 21, 2009
    -       -  

(1)
Financing Sources -   On July 21, 1998, warrants to purchase 263,638 shares (expiring on November 20, 2003) were granted to four persons who lent the Company a total of $145,000.  At September 30, 2007, warrants to purchase a total of 136,364 shares are outstanding. The warrants expired unexercised on December 31, 2007.
 
On November 28, 2001, warrants to purchase a total of 435,941 shares were granted to Sonata Investment Company, Ltd. (395,273 shares) and Standard Energy (40,668 shares) as consideration for entering into the Loan Conversion Agreement dated August 1, 2001.  The Loan Conversion Agreement extended the date by which the Company had to satisfy its obligations to both Sonata Investment Company, Ltd. (“Sonata”) and Standard Energy Company (“Standard”) and granted both Sonata and Standard the right to convert the debt into common stock of the Company at such time as the Company advised Sonata and Standard of its intent to satisfy the Company’s obligations to one or both entities.  Sonata and Standard are entities affiliated with each other. The exercise price is at $1.05 per share.  The Sonata and Standard Warrants were to have expired August 1, 2002.  The Company agreed to extend the termination date of the Sonata and Standard Warrants until July 31, 2004, in exchange for Sonata’s relinquishing its twenty percent (20%) interest in the net profits of the Company’s subsidiary Sustainable Forest Industries, Inc. These extensions have resulted in a $100,000 charge to the statement of loss in fiscal 2002. The Sonata warrants were further extended until December 31, 2007, as additional consideration under the Second Amendment to the Heller Loan. The warrants expired unexercised on December 31, 2007.
 
Sonata was granted an additional warrant to purchase 250,000 shares at a price of $0.906 per share under the Second Amendment to the Heller Loan.  This warrant expired unexercised on December 31, 2007.
 
On December 21, 2007, Sonata loaned the Company $75,000 pursuant to a promissory note of same date. The Company issued warrants for the purchase of 822,305 shares of stock at an exercise price of $0.55 per share.  The warrants expire on December 31, 2010.
 
(2)
Conley & Anthony Warrants – On February 27, 2003, warrants to purchase 300,000 shares at a price of $0.13 per share were granted to each of Robert Conley and Bob Anthony in consideration of their consultation and individual expertise in regard to product development and application market identification with regard to the Company’s potential Sierra Kaolin and zeolite products respectively.  Mr. Conley’s warrant expired unexercised on February 26, 2008. On July 3, 2006, Mr. Anthony exercised a portion of his warrant (100,000 shares) and he retained warrants to purchase 200,000 shares. During fiscal 2008, the expiration date for Mr. Anthony’s warrant was extended to February 26, 2009. These warrants expired unexercised.
 
(3)
TPA Warrants – In accordance with the provisions of the First Amended Memorandum of Understanding (Sierra Kaolin Development) dated March 11, 2005, Tecumseh Professional Associates, Inc (“TPA”) was granted the right to acquire 1,500,000 shares at a price of $0.50 per share for $80,000 (“TPA Warrants”). The TPA Warrants had a term of three years with an expiration date of November 29, 2007.  These warrants expired unexercised.
 
(4)
June 2007 Private Placement Warrants – Under the terms of the June 2007 Private Placement (see Sales of Securities above), investors were issued a warrant to purchase of one share for each two shares of Common Stock purchased in the Private Placement. The warrant is exercisable during the first two years after the close of the Private Placement. These warrants expired unexercised.
 
Item 6.  Selected Financial Data.

Not required as the registrant is a smaller reporting company.

 
-20-

 
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Annual Report on Form 10-K contains forwarding-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

The following discussion is intended to inform the Company’s existing and potential security holders generally of some of the risks and uncertainties that can affect the Company and to take advantage of the “safe harbor” protection for forward-looking statements afforded under Federal securities laws.  From time to time, management or persons acting on behalf of the Company make forward-looking statements to inform existing and potential security holders about the Company.  Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “good” or other words that convey the uncertainty of future events or outcomes.  Except for statements of historical or present facts, all other statements contained in this report are forward-looking statements.  The forward-looking statements may appear in a number of places and include statements with respect to, among other things:  business objectives and strategic plans; operating strategies; acquisition strategies; drilling wells; oil and gas reserve estimates (including estimates of future net revenues associated with such reserves and the present volume of such future net revenues); estimates of future production of oil, natural gas and minerals; expected results or benefits associated with recent acquisitions; marketing of oil, gas and minerals; expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures; expectations regarding cash flow and future borrowings sufficient to fund ongoing operations and debt service, capital expenditures and working capital requirements; nonpayment of dividends; expectations regarding competition; impact of the adoption of new accounting standards and the Company’s financial and accounting systems; and effectiveness of the Company’s control over financial reporting.

These statements by their very nature are subject to certain risks, uncertainties and assumptions and will be influenced by various factors.  Should any of the assumptions underlying a forward-looking statement prove inaccurate, actual results could vary substantially.

Various factors could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following:

 
·
volatility of the market price for both crude oil and natural gas;
 
·
volatility of the market price for the Company’s minerals;
 
·
market capacity and demand for the Company’s minerals;
 
·
the timing, effects and success of the Company’s acquisitions, exploration and development activities;
 
·
the timing and marketability of production;
 
·
effectiveness of management’s strategies and decisions;
 
·
competition;
 
·
changes in the legal and/or regulatory environment and/or changes in accounting standards; policies and practices or related interpretations by auditors and/or regulatory agencies;
 
·
climatic conditions; and
 
·
unanticipated problems, issues or events.

Many, if not all, of these factors are beyond the Company’s control and are impossible to predict.  These factors are not intended to represent an exhaustive list of the general or specific facts or factors that may affect the Company.

All forward-looking statements speak only as of the date made.  All subsequent forward-looking statements are expressly qualified in their entirety by the cautionary statements above.  Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement or reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence (or non-occurrence) of anticipated (or unanticipated) events or circumstances.

 
-21-

 

Results of Operations:

Fiscal year ended September 30, 2009, compared to fiscal year ended September 30, 2008:

   
2009
   
2008
 
Revenues
  $ 656,048     $ 1,192,334  
Net Loss
  $ (3,244,941 )   $ (923,078 )
Oil and Gas Production and Cost Information:
               
Production:
               
Oil (Bbl)
    2,880       3,724  
Gas (Mcf)
    39,925       48,786  
Average price:
               
Oil (per barrel)
  $ 54.91     $ 104.87  
Gas (per Mcf)
  $ 5.51     $ 10.51  
Lease Operating Expenses and Production Tax per Mcfe
  $ 3.71     $ 4.16  


Bbl =    Barrels of oil
Mcf   = One Thousand cubic feet of gas
Mcfe = One Thousand cubic feet of gas equivalent

The decrease in oil and gas production experienced during fiscal 2009 is primarily a result of wells being “off-line” for repair, declines in the producing gas-oil ratio from certain producing wells operated by the Company in Texas and curtailments resulting from third party maintenance of natural gas pipelines and processing facilities servicing these properties Well management revenue decreased to $263,545 for fiscal 2009 from $267,767 for fiscal 2008

The decrease in Lease Operating Expenses and Production Tax per Mcfe is primarily the result of the decrease in Lease Operating Expenses in fiscal 2009.  Such expenses were greater in fiscal 2008 primarily as a result of the workover expenses incurred to maintain and enhance production of the Company’s properties in Texas.

Minerals Operations

The Company is an Exploration Stage company in respect to its mineral holdings.

Minerals Exploration Expenses

Minerals exploration expenses totaled $7,200 for fiscal 2008. These expenses are primarily for costs associated with the exploration of the mineral deposits and quantification of Mineralized Materials. The Company incurred no such expenses in fiscal 2009.

Minerals Operating Expenses and Other Costs

Minerals operating expenses and other costs increased to $123,411 for fiscal 2009 as compared to $101,567 for fiscal 2008. The amount for fiscal 2009 includes a charge for $90,000 related to the issuance of Common Stock in exchange for services. During June 2009, the Company issued 1,000,000 shares of Common Stock to William Smith, a consultant to the Company, in exchange for the marketing of and development of a market for the Company’s product, ReNuGen™, at $0.09 per share.  During fiscal 2008, the total costs incurred with the calcium carbonate annual lease rental, minimum royalty payment and claim fees amounted to $49,511. The Company did not incur such costs in fiscal 2009 as the Company ceased such payments required by the lease (see “Loss on Abandonment” below).

Loss on Abandonment

During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted. Accordingly, the Company charged-off the mineral net book value ($1,876,972) and prepaid royalties ($100,000) in respect to the property during fiscal 2009. The loss on abandonment of the calcium carbonate property totaled $1,976,972.

 
-22-

 

Depreciation, Depletion and Amortization:  Minerals

Depreciation, depletion and amortization expenses totaled $578,252 for fiscal 2009 as compared to $728,252 for fiscal 2008. Each of such amounts includes amortization of Patent Rights of $577,452.

Depreciation, Depletion and Amortization: Oil and Gas and Other

Depreciation, depletion and amortization (“DD&A”) totaled $185,968 and $182,368 for fiscal 2009 and 2008, respectively.

General and Administrative Expenses

These expenses decreased 45% to $384,390 for fiscal 2009 as compared to $702,256 for fiscal 2008. Stock-based compensation expense is included in general and administrative expenses. The Company recorded stock-based compensation expense for fiscal 2009 and fiscal 2008 of $62,399 and $188,476, respectively (see Note 8 of the Notes to Consolidated Financial Statements). General and administrative expenses also decreased as a result of the Company’s decreased staff.

Legal and Professional Fees and Expenses

These expenses decreased 26% to $189,706 for fiscal 2009 as compared to $256,657 for fiscal 2008.  The decrease is primarily attributed to the decrease in professional fees related to potential acquisitions and resource exploration.

Interest Expense

Interest expense decreased 5% to $232,257 for fiscal 2009 as compared to $244,798 for fiscal 2008.

Gain on Sale of Oil and Gas Properties

During fiscal 2008, gain on sale of oil and gas properties totaled $400,000.

In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008.  The remaining $50,000 is pending awaiting the consent of a joint interest owner in the remaining asset. Revenues and expenses applicable to such assets included in fiscal 2008 periods are not material as the wells had not produced since March 2006. The assets sold had no net book value. Accordingly, the Company recognized gain on sale of oil and gas properties of $150,000 during fiscal 2008.

In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and expenses applicable to such assets included in fiscal 2008 are not material as the two gas wells included in the sale were marginal producers. The assets sold had no net book value. Accordingly, the Company recognized gain on sale of oil and gas properties of $250,000 during fiscal 2008.

Liquidity and Capital Resources

The Company’s cash flow used for operating activities was $461,129 for fiscal 2009 and $103,961 for fiscal 2008, respectively. Accounts payable decreased $336,780 during fiscal 2009. During fiscal 2009 and 2008, the Company defaulted on certain required payments including the payment of a portion of the salaries required pursuant to certain employment agreements (see Notes 6, 7, 9, 10 and 11 of the Notes to Consolidated Financial Statements). Funds have been and are being deployed in efforts to enhance the commercial viability of the Company’s existing resource assets, to identify potential expansion opportunities and to retire obligations associated with the Company’s assets. The Company’s net cash at September 30, 2009 totaled $98,336.

Liquidity is a measure of a Company’s ability to access cash.  The Company has historically addressed its long-term liquidity requirements through the issuance of equity securities and borrowings or debt financing for certain activities.

 
-23-

 

At present, the Company does not have in place a credit facility or other line of credit upon which it may draw. As operating activities increase, the Company will evaluate the need for such a credit facility.   For desired acquisitions or project enhancements, the Company must seek project specific financing.  None of the Company’s properties are encumbered.

The prices the Company receives for its oil and gas and the level of production have a significant impact on the Company’s cash flows.  The Company is unable to predict, with any degree of certainty the prices the Company will receive for its future oil and gas production and the success of the Company’s exploration, exploitation and production activities.  Increases in the sales of the Company’s minerals, which to date have not been mined in substantial commercial quantities, will also affect cash flow.

In an effort to address the liquidity shortfall, the Company has instituted cost containment procedures including staff decreases, sold certain of its oil and gas properties, and is evaluating the sale of certain additional oil and gas properties. It may take months and possibly longer to sell these properties at a suitable price. The market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand that are beyond our control. We cannot predict whether we will be able to sell a property for the price or on the terms acceptable to us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of any property.

During December 2007, Sonata Investment Company, Ltd. loaned the Company $75,000 which the Company used to satisfy certain delinquent vendor payables (see Note 8 of the Notes to Consolidated Financial Statements). This note was repaid in May 2008 with a portion of the proceeds from the sale of the Pennsylvania properties (see below).

In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008. In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000 (see Note 3 of the Notes to Consolidated Financial Statements).

During June 2009, the Company offered a Private Placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2009 Private Placement”). Private Placement consists of up to Five Hundred Thousand Dollars ($500,000) of 7.25% Convertible Debentures (“Debentures” or “Debenture”).  The Debentures offered by the Company, are five (5) year instruments maturing on July 30, 2014, bearing interest at seven and one quarter percent (7.25 %) per annum on the balance outstanding from time to time.  Interest will commence to accrue immediately upon issuance of the Debentures and will be paid quarterly on each September 30, December 31, March 31 and June 30, which the Debentures are outstanding.  Payment of principal will commence on September 30 following the second anniversary of the Closing Date of this Offering.  The Company extended the offering period for the Debentures until at the request of potential investors. As of September 30, 2009, this private placement raised $128,500 (net of fees and expenses totaling $14,225) for the Company.  All of the purchasers of the debentures elected to immediately convert such holdings into Common Stock at an average conversion price of $0.14 per share, and accordingly the Company has issued 1,019,465 shares of Common Stock as of September 30, 2009. The Company is utilizing the proceeds of this private placement for general working capital purposes.

Commercialization of Existing Assets

During fiscal 2009, the Company determined that additional efforts to develop its calcium carbonate minerals in New Mexico were no longer warranted. The Company is continuing to pursue plans to commercialize its kaolin and zeolite projects which are critical for the Company to achieve profitability and establishing the Company as a market innovator in industrial minerals. Those plans have progressed from the data acquisition and analysis phase into ongoing mineral processing and facility design phase. The Company and its current partner and potential other partners are actively investigating various commercial applications for its mineral based products.

The efforts of the Company and Tecumseh Professional Associates LLC to evaluate the Sierra Kaolin deposit are progressing. The venture’s efforts to commercialize the Sierra Kaolin deposit have focused on an initial target area encompassing approximately 32 acres out of the project’s 2,740 acres. The test minerals extracted from the target area have been processed into product formulations determined by independent consultants to be suitable for coatings, fillers and pigments for use within the paint and paper manufacturing industries. The analysis results of the processed minerals with respect to its physical properties such as but not limited to, brightness, color, opacity, oil absorption have indicated that commercially viable products can be produced from the deposit’s extracted minerals.

 
-24-

 
 
The venture, with the assistance of its consultants, has begun technical presentations of the product formulations to entities active on both the demand and supply sides of the coatings, fillers and pigments sectors of the paint and paper industries. Preliminary feedback from these initial presentations has been encouraging and has led to follow-up discussions and submission of product samples for prospective application testing. The final results of these inquiries and testing are expected over the next several months. Tecumseh, as the project’s manager, is proceeding with its efforts to prepare the mineral deposit site for production. During November 2009, the extraction permit for the project was issued. Work continues on product identification and process flow sheet design and is expected to be completed in the next few months.

The Company continues to focus on establishing business and or financial relationships that will provide the necessary capital to effectively exploit its calcium carbonate and zeolite mineral resource holdings.  With respect to the Company’s zeolite deposit, certain initial small scale tests have progressed to the point where larger scalable pilot tests of commercial applications are to be initiated.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements and does not anticipate entering into any such arrangements in the foreseeable future.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (“SOX”) is the first major revision to the securities laws since the enactment of the Securities Act of 1933 and the Securities and Exchange Act of 1934.  The SOX, promulgated in large part in response to the Enron/Worldcom demise, covers a variety of measures all of which will not be covered here. The SOX is applicable to all publicly traded reporting companies no matter how small or large.  The SOX provides for additional controls such as the chief executive officer’s certificate regarding the accuracy of the Company’s financial statements and providing for a criminal penalty for making a false statement to the certification by an executive officer that the financial statements do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which the statements were made, not misleading with respect to the period covered by the annual report.  The certification also requires that the Chief Executive Officer of the Company certify that the financial statements and other materials presented in the annual report fairly present all material aspects of the financial condition, results of operations and cash flows of the Company as of and for the periods covered by the annual report.  This requirement exceeds the previous requirement that the financial statements merely be presented in accordance with generally accepted accounting principles.

The Company believes that it has historically provided its financial information in this fashion, having separately reported and presented each segment of the Company’s business for the past few years.

The SOX requires that a “Disclosure Committee” be established.  This committee considers the materiality of information and determines disclosure obligations on a timely basis.  This committee is the Company’s “watchman” for public disclosures.  The Company has designated the Board of Directors as the Committee.  The Company has three employees and five independent directors.  All parties are intricately involved in the decision making processes at the Company and no disclosure or decision not to disclose information is made without the input of inside management, counsel and the Board of Directors.

Because the drafting and approval of all of the Company’s reports is a collective process, the provisions of the SOX to establish an independent Disclosure Committee, a Disclosure Control Monitor, to conduct internal drafting sessions, distribution of draft reports and dealing with internal trading policies are presently either not applicable or are already implemented, have been and are part of the Company’s operating procedures. The SOX also provides for certain controls on auditors and the accounting industry.  The Company only utilizes its auditors for auditing purposes.  As such, the Company believes that it is and will continue to be in full compliance with the final regulations promulgated by the Securities and Exchange Commission (“SEC”) under the SOX.

The SEC has acknowledged that a “one-size fits all” approach to establishing effective disclosure controls and procedures is not appropriate and has now prescribed specific disclosure controls and procedures.  The SEC expects each company to develop a process that is consistent with its business and internal management and supervisory practice.  The Company believes that it has fully complied with the intent of the SOX and Regulations promulgated by the SEC.

 
-25-

 

All phases of the Company’s operations are subject to certain influences outside of the Company’s control.  Any one, or a combination, of these factors could materially affect the results of the Company’s operations.  These factors include: competitive pressures, inflation, trade restrictions, interest rate fluctuations and other capital market conditions, weather, future and options trading, and the availability of natural resources and services from other sources.  Forward-looking statements are made by or on behalf of the Company utilizing available knowledge of its business and the environment in which it operates, but because of the factors listed above, as well as other environmental factors over which the Company has no control, actual results may differ from those in the forward-looking statements.  Consequently, all of the forward-looking statements made are qualified in their entirety by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effect on the business and/or operations of the Company.

New Accounting Standards
 
For details of applicable new accounting standards, please, refer to Note 2 to the Consolidated Financial Statements.

Critical Accounting Policies

General The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of our long-lived assets and our provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to our attention that may vary our outlook for the future. Actual results may differ from these estimates under different assumptions.

We suggest that the Summary of Significant Accounting Policies, as described in Note 2 of Notes to Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.

Going Concern – The financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. For the fiscal year ended September 30, 2009, the Company incurred a net loss of $3,221,539. The ability of the Company to meet its total liabilities of $8,096,395 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment, and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets including Clean Age Minerals, Inc.’s acquisition of $20 million.

Fair Value of Financial Instruments The Company’s only financial instruments are (a) cash, securities available for future sale, and short-term trade receivables, payables, and debt, and (b) long-term debt.  The carrying amounts reported in the accompanying consolidated financial statements for cash, securities available for future sale, and short-term trade receivables, payables and debt approximate fair values because of the immediate nature of short-term maturities of these financial instruments. Based on the borrowing rates currently available to the Company for long-term bank loans with similar terms and average maturities, the carrying amount of long-term debt approximates fair value.

Receivables — In the normal course of business, we extend credit to our customers on a short-term basis. Our principal customers are major oil and natural gas exploration, development and production companies. Credit risks associated with these customers are considered minimal. Dealings with smaller, local companies, particularly with the current difficulties in equity and credit markets, pose the greatest risks. We routinely review our accounts receivable balances and make provisions for doubtful accounts as necessary. Accounts are reviewed on a case by case basis and losses are recognized in the period if we determine it is likely that receivables will not be fully collected. We may also provide a general provision for accounts receivables based on existing economic conditions.

 
-26-

 

Oil and gas properties – The Company follows the successful efforts method of accounting for the costs of exploration and development activities. Costs of successful exploration wells, development wells, and direct acquisition costs of developed and undeveloped leases containing proved reserves are capitalized and amortized on a unit-of-production method over the life of the related reserves.  Costs of exploratory wells found to be dry are expensed. Support equipment and other property and equipment recorded at cost are amortized using the straight-line method over their estimated useful lives.

Mineral properties – The Company has recorded the acquisition of Clean Age Minerals, Inc., and associated minerals rights at cost.  The Company has not produced large-scale quantities of any of its mineral deposits.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of — Long-lived assets are 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 comparison of the carrying amount of an asset to future 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 that 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. At September 30, 2009, we reviewed our long-lived assets and determined no impairment was necessary.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Not required as the registrant is a smaller reporting company.

Item 8.  Financial Statements and Supplementary Data.
 
The following financial statements and schedules are included herein:

Audited Financial Statements and Supplemental Financial Information:

*
Report of Independent Registered Public Accounting Firm

*
Consolidated Balance Sheets

*
Consolidated Statements of Operations

*
Consolidated Statements of Shareholders’ Equity

*
Consolidated Statements of Cash Flow

*
Notes to Consolidated Financial Statements

*
Report of Independent Registered Public Accounting Firm On Supplemental Financial Information

*
Schedule V – Property, Plant and Equipment

*
Schedule VI – Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment

Other Supplemental Information (Unaudited):

*
Estimated Net Quantities of Proven Oil and Gas Reserves

*
Standardized Measure of Discounted Future Net Cash Flow from Estimated Production of Proved Oil and Gas Reserves

*
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows

 
-27-

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Daleco Resources Corporation

We have audited the accompanying consolidated balance sheets of Daleco Resources Corporation and Subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Daleco Resources Corporation and Subsidiaries as of September 30, 2009 and 2008, and the results of their operations and 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 discussed in Note 1 to the financial statements, the Company has suffered significant recurring net losses and negative operating cash flow, which raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 
Vasquez & Company LLP
 
Vasquez & Company LLP

Los Angeles, California
January 13, 2010

 
-28-

 

DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008


   
2009
   
2008
 
ASSETS
           
Current Assets:
           
Cash and Equivalents    
  $ 98,336     $ 472,912  
Accounts Receivable, net of allowance for doubtful accounts of none in 2009 and $12,348 in 2008
    296,547       474,692  
Other Current Assets
    7,424       7,424  
Total Current Assets
    402,307       955,028  
Other Assets:
               
Patent Rights
    6,594,500       6,594,500  
Accumulated Amortization of Patent Rights
    (5,199,616 )     (4,622,164 )
Net Patent Rights
    1,394,884       1,972,336  
Securities Available for Future Sale
    1,583       5,510  
Restricted Cash Deposits
    109,041       105,825  
Prepaid Mineral Royalties- Long-term
    419,879       490,000  
Interest Receivable
    150,814       131,387  
Total Other Assets
    2,076,201       2,705,058  
Property, Plant and Equipment:
               
Oil and Gas Properties, at cost
    4,424,512       4,424,512  
Accumulated Depreciation, Depletion and Amortization
    (3,806,195 )     (3,626,795 )
Net Oil and Gas Properties
    618,317       797,717  
Mineral Properties, at cost
    9,877,128       12,609,100  
Accumulated Depreciation, Depletion and Amortization
    (95,000 )     (950,000 )
Net Mineral Properties
    9,782,128       11,659,100  
Office Equipment, Furniture and Fixtures, at cost
    79,902       79,902  
Accumulated Depreciation
    (67,639 )     (60,271 )
Net Equipment, Furniture and Fixtures
    12,263       19,631  
Total Net Property, Plant and Equipment
    10,412,708       12,476,448  
TOTAL ASSETS
  $ 12,891,216     $ 16,136,534  

SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
-29-

 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008


   
2009
   
2008
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
             
Current Liabilities:
           
Accounts Payable
  $ 1,839,170     $ 2,175,950  
Federal and State Income Taxes Payable
    277,990       264,795  
Note Payable - Related Party
    45,485       45,485  
Premium Finance Note Payable
    -       2,636  
EV&T Note
    567,213       567,213  
Notes Payable – First Regional Bank – Current Portion
    15,000       99,970  
CAMI Notes
    514,881       514,881  
Accrued Interest Expense
    705,840       603,499  
Accrued Preferred Stock Dividends Payable
    1,741,895       1,626,004  
Accrued Expense Reimbursements
    24,990       20,293  
Accrued Bonus Expense
    1,373,831       1,373,831  
Accrued Salary Expense
    944,441       986,698  
Total Current Liabilities
    8,050,736       8,281,255  
Notes Payable – First Regional Bank – Long-term Portion
    45,659       -  
        TOTAL LIABILITIES
    8,096,395       8,281,255  
SHAREHOLDERS’ EQUITY
               
Preferred Stock – 20,000,000 shares authorized
               
   Series A Preferred Stock (outstanding: none)
    -       -  
   Series B Convertible Preferred Stock – par value $0.01 per share (2009 and 2008 - 145,000 shares outstanding)
    1,450       1,450  
Common Stock – 100,000,000 shares authorized – par value $0.01 per share (outstanding: 2009 – 45,100,811 shares; 2008 – 43,081,346 shares)
      451,008         430,813  
Additional Paid in Capital
    45,402,515       45,118,409  
Accumulated Deficit
    (40,480,035 )     (37,119,203 )
Subscriptions Receivable
    (576,000 )     (576,000 )
Accumulated Other Comprehensive Loss
    (4,117 )     (190 )
        TOTAL SHAREHOLDERS’ EQUITY
    4,794,821       7,855,279  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 12,891,216     $ 16,136,534  

SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
-30-

 
 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 
   
2009
   
2008
 
Revenues:
           
Oil and Gas Sales
  $ 378,006     $ 903,256  
Well Management Revenue
    263,545       267,767  
Royalty Receipts
    7,948       16,731  
Mineral Sales
    6,549       4,580  
                       Total Operating Revenues
    656,048       1,192,334  
Expenses:
               
Lease Operating Expenses - Oil and Gas
    189,384       246,245  
Exploration Expenses - Minerals
    -       7,200  
Operating Expenses and Other Costs - Minerals
    123,411       101,567  
Production and Severance Taxes – Oil and Gas
    23,111       49,359  
Depreciation, Depletion and Amortization
    764,220       910,620  
General and Administrative Expenses
    384,390       702,256  
Legal and Professional Fees and  Expenses
    189,706       256,657  
Shareholder Information Expenses
    40,922       33,986  
Amortization of Equity Placement Costs
    -       11,151  
                                         Total Expenses
    1,715,144       2,319,041  
Loss From Operations
    (1,059,096 )     (1,126,707 )
Other Income (Expense):
               
Interest and Dividend Income
    23,384       48,427  
Interest Expense
    (232,257 )     (244,798 )
Gain on Sale of Oil and Gas Properties
    -       400,000  
Loss on Abandonment of Mineral Property
    (1,976,972 )     -  
                                         Total Other Income (Expense), Net
    (2,185,845 )     203,629  
Loss Before Income Taxes
    (3,244,941 )     (923,078 )
Taxes based on Income
    -       -  
Net Loss
    (3,244,941 )     (923,078 )
Preferred Stock Dividends
    (115,891 )     (23,089 )
Net Loss Applicable to Common Shareholders
  $ (3,360,832 )   $ (946,167 )
Basic and Fully Diluted Net Loss per share
  $ (0.08 )   $ (0.02 )
Weighted-average number of shares of Common Stock Outstanding
    43,486,219       43,081,346  

SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
-31-

 
 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

                                                                                                                                                                                                       
 
 
Series B
Convertible
Preferred
Stock
   
Common Stock
   
Additional
   
 
   
Subscrip-
   
Accumulated
Other
Compre-
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Paid-in
Capital
   
Accumulated
Deficit 
   
tions
Receivable
   
hensive
Loss
   
Shareholders’
Equity
 
Balance,
September 30, 2007
    145,000     $ 1,450       43,081,346     $ 430,813     $ 44,911,213     $ (36,173,036 )   $ (576,000 )   $ -     $ 8,594,440  
Issuance of Stock Purchase Warrants
                                    18,720                               18,720  
Other Comprehensive Loss
                                                            (190 )     (190 )
Stock-based Compensation Expense
                                    188,476                               188,476  
Preferred Dividends
                                            (23,089 )                     (23,089 )
Net Loss
                                            (923,078 )                     (923,078 )
Balance,
September 30, 2008
    145,000       1,450       43,081,346       430,813       45,118,409       (37,119,203 )     (576,000 )     (190 )     7,855,279  
Issuance of Common Stock Pursuant to Private Placement
                    989,286       9,893       114,382                               124,275  
Issuances of Stock For Services Performed
                    1,000,000       10,000       80,000                               90,000  
Issuance of Stock for Equity Placement Services
                    30,179       302       3923                               4,225  
Other Comprehensive Loss
                                                            (3,927 )     (3,927 )
Stock-based Compensation Expense
                                    62,399                               62,399  
Interest Expense Resulting from Beneficial Conversion Feature of Convertible Debentures
                                    23,402                               23,402  
Preferred Dividends
                                            (115,891 )                     (115,891 )
Net Loss
                                            (3,244,941 )                     (3,244,941 )
Balance,
September 30, 2009
    145,000     $ 1,450       45,100,811     $ 451,008     $ 45,402,515     $ (40,480,035 )   $ (576,000 )   $ (4,117 )   $ 4,794,821  

SEE ACCOMPANYING AUDITORS’ REPORT AND  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
-32-

 
 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


   
2009
   
2008
 
Cash Flows From Operating Activities:
           
Net Loss
  $ (3,244,941 )   $ (923,078 )
Adjustments to Reconcile Net Loss to Net Cash Used In Operations:
               
Depreciation, Depletion and Amortization
    764,220       910,620  
Amortization of Equity Placement Costs
    -       11,151  
Amortization of discount on note
    -       18,720  
Provision for Bad Debts
    -       12,348  
Non-cash Charge for Issuance of Securities
    90,000       -  
Non-cash Charge as Interest Expense
    23,402       -  
Stock Based Compensation Expense
    62,399       188,476  
Gain on Sale of Assets
    -       (400,000 )
Loss on Abandonment of Mineral Property
    1,976,972       -  
Changes in Operating Assets and Liabilities:
               
Other Current Assets
            -  
Pre-paid Mineral Royalties
    (29,879 )     (30,000 )
Restricted Cash Deposits
    (3,216 )     38,153  
Receivables
    158,718       (80,151 )
Accounts Payable
    (336,780 )     12,111  
Accrued Interest Expense
    102,341       138,953  
Other Accrued Expenses
    (24,365 )     (1,264 )
Net Cash Used in Operating Activities
    (461,129 )     (103,961 )
Cash Flows From Investing Activities:
               
Proceeds from Sale of Oil and Gas Assets
    -       350,000  
Net Cash Provided By Investing Activities
    -       350,000  
Cash Flows From Financing Activities:
               
Payments on Notes and Debt
    (63,807 )     (99,565 )
Proceeds from Borrowings
    21,860       102,171  
Proceeds of Equity Issuances
    128,500       -  
Net Cash Provided By Financing Activities
    86,553       2,606  
Net Change in Cash and Equivalents
  $ (374,576 )   $ 248,645  

SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
-33-

 
 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


   
2009
   
2008
 
Net Change in Cash and Equivalents
  $ (374,576 )   $ 248,645  
Cash and Equivalents at Beginning of Year
    472,912       224,267  
Cash and Equivalents at End of Year
  $ 98,336     $ 472,912  
                 
Supplemental Information:
               
Income Taxes Paid
  $ -     $ -  
Interest Paid
  $ 48,899     $ 48,809  
                 
Supplemental Disclosure of Non-cash Transactions:
               
Preferred Dividends Accrued, Not Paid
  $ 115,891     $ 23,089  
Issuance of Common Stock for Services Performed
  $ 94,225     $ -  
Interest Expense Resulting from Beneficial Conversion Feature of Convertible Debentures
  $ 23,402     $ -  
Receivable from Sale of Oil and Gas Properties
  $ -     $ 50,000  
Discount on Note Payable Resulting from Issuance of Stock Purchase Warrants
  $ -     $ 18,720  

SEE ACCOMPANYING AUDITORS’ REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
-34-

 

DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


1.
CONTINUED OPERATIONS

The financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. For the fiscal year ended September 30, 2009, the Company incurred a net loss of $3,244,941. The ability of the Company to meet its total liabilities of $8,096,395 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets including Clean Age Minerals, Inc.’s acquisition of $20 million. 

The Company will continue to seek out and entertain project specific funding commitments and other capital funding alternatives if and as they become available.

As of September 30, 2009, the Company and certain of its subsidiaries were in default of certain debt and other obligations (see Notes 6, 7, 9, 10 and 11 below). The holders of these instruments are working with the Company to achieve the ultimate extinguishment of the obligations.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is primarily engaged in the exploration for minerals and oil and gas activities.  We follow accounting standards set by the Financial Accounting Standard Board, commonly referred to as “FASB”. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the “Codification” or “ASC”. Prior FASB standards like FASB 13, Accounting for Leases, are no longer being issued by the FASB. Leases are addressed at FASB ASC Topic 840.

a.
Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

b.
Basis of consolidation

The consolidated financial statements of Daleco Resources Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles and include the accounts of Daleco Resources Corporation, its wholly-owned subsidiaries and their wholly-owned subsidiaries: Westlands Resources Corporation (“WRC”), Sustainable Forest Industries, Inc., Deven Resources, Inc., DRI Operating Company (“DRIOP”), Tri-Coastal Energy, Inc., Clean Age Minerals, Inc. (“CAMI”), CA Properties, Inc., and The Natural Resources Exchange, Inc. Sustainable Forest Industries, Inc. and The Natural Resources Exchange, Inc. are inactive.

The Company’s investments in oil and gas leases are accounted for using proportionate consolidation whereby the Company’s pro rata share of each of the assets, liabilities, revenues and expenses of the investments are aggregated with those of the Company in its financial statements. The Company’s investments in minerals are accounted for using purchase accounting methods.

Certain reclassifications have been made to prior period financial statements to conform to the current presentation.

-35-

 
DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


c.
Oil and gas properties and equipment

The Company follows the successful efforts method of accounting for the costs of exploration and development activities. Direct acquisition costs of developed and undeveloped leases are capitalized. Costs of undeveloped leases on which proved reserves are found are transferred to proven oil and gas properties. Each undeveloped lease with significant acquisition cost is reviewed periodically and a valuation allowance provided for any estimated decline in value. Capitalized costs of proved developed leases are charged to income on the units of production basis based upon total proved reserves.

Costs of exploratory wells found to be dry during the year before the issuance of these financial statements are charged against earnings in that year. Costs of successful exploration wells and development wells are capitalized. All costs of development wells and successful exploration wells are charged to earnings on a unit-of-production basis based upon proved developed reserves.

d.
Site Restoration, Dismantlement and Abandonment Costs

An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is required to be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related assets (mineral, oil and natural gas properties) is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.  The estimated residual salvage values are taken into account in determining amortization and depreciation rates.

The Company has not accrued any costs associated with the potential abandonment and restoration of producing wells and mining deposits as the salvage value of the Company’s producing wells or mining deposits is expected to exceed the cost of site restoration and abandonment.  To date, mining and exploration activities of the Company's mineral deposits have been conducted by contract mining companies. As mining activity increases, the Company may accrue site restoration costs as appropriate. The effect of this statement is not material to the consolidated financial statements to warrant recognition of the ARO.

e.
Office  Equipment, Furniture and Fixtures

Office Equipment, Furniture and Fixtures are recorded at cost and depreciated using the straight-line method over a period of three to seven years.

f.
Mineral Acquisition

The Company has recorded the acquisition of Clean Age Minerals, Inc. and associated minerals rights at cost (see Note 4).

g.
Cash and Cash Equivalents; Restricted Cash Deposits

Cash and cash equivalents include cash and investments with original maturities of three months or less. The Company’s net cash at September 30, 2009, totaled $98,336. Restricted Cash Deposits of $109,041 at September 30, 2009, support financial assurance requirements for the Company’s operations in certain states.

h.
Fair Value Measurements

The Company’s only financial instruments are (a) cash, securities available for future sale, and short-term trade receivables, payables and debt, and (b) long-term debt. The carrying amounts reported in the accompanying consolidated financial statements for cash, securities available for future sale, and short-term trade receivables, payables and debt approximate fair values because of the immediate nature of short-term maturities of these financial instruments. Based on the borrowing rates currently available to the Company for long-term bank loans with similar terms and average maturities, the carrying amount of long-term debt approximates fair value of $60,659 at September 30, 2009.

 
-36-

 

DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


i.
Stock-based Compensation

The Company accounts for all stock-based compensation (options) in accordance with FASB ASC 718.  Under ASC 718, the fair value of stock options and compensation costs are measured as of the grant date.   Under ASC 718, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period.   For stock-based awards granted on or after October 1, 2005, the Company amortizes stock-based compensation expense on a straight-line basis over the requisite vesting period, which generally ranges from one to five years.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  Stock-based compensation expense has been recorded net of estimated forfeitures for the years ended September 30, 2009 and 2008 such that expense was recorded only for those stock-based awards that are expected to vest. Options granted to non-employees are recognized in these financial statements as compensation expense (See Note 8) using the Black-Scholes option-pricing model.

j.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company generally assesses its oil and gas properties on a field-by-field basis utilizing its current estimate of future revenues and operating expenses. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future 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 that 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. At September 30, 2009, we reviewed our long-lived assets and determined no impairment was necessary.

k.
New Accounting Standards

In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.  ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements.  ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. We have not yet determined the impact, if any, which the provisions of ASU 2009-15 may have on the Company’s consolidated financial statements.

In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets, which formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets into the ASC. ASU 2009-16 represents a revision to the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 (1) eliminates the concept of a “qualifying special-purpose entity”, (2) changes the requirements for derecognizing financial assets, and (3) enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early application is not permitted. The provisions of ASU 2009-16 are not expected to have a material impact on the Company’s consolidated financial statements.

 
-37-

 

DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 
In October 2009, the FASB published FASB ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 includes amendments to ASC Topic 470, Debt, (Subtopic 470-20), and ASC Topic 260, Earnings per Share (Subtopic 260-10), to provide guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing.  The provisions of ASU 2009-15 are effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements.   The provisions of ASU 2009-15 are effective for arrangements entered into on (not outstanding) or after the beginning of the first reporting period that begins on or after June 15, 2009. Certain transition disclosures are also required. Early application is not permitted.  The provisions of ASU 2009-15 are not expected to have an impact on the Company’s consolidated financial statements.

In October 2009, the FASB published FASB ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements that Include Software Elements. ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance.   The provisions of ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted. The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.

In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) - Mutliple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements.   The provisions of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or the Company’s fiscal year beginning October 1, 2010. Early adoption is permitted.  The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.

In September 2009, the FASB published FASB ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). It also requires new disclosures, by major category of investments, about the attributes includes of investments within the scope of this amendment to the Codification.   The provisions of ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.  The provisions of ASU 2009-14 are not expected to have an impact on the Company’s consolidated financial statements.

In June 2009, the FASB established the FASB Codification, which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  Generally, the Codification is not expected to change US GAAP.  All other accounting literature excluded from the Codification will be considered nonauthoritative.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We adopted the new standards for our fiscal year ended September 30, 2009.  All references to authoritative accounting literature are now referenced in accordance with the Codification.

 
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DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 
In October 2008, the FASB issued guidance regarding subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.

We have evaluated subsequent events after the balance sheet date of September 30, 2009 through the date the financial statements were available to be filed with the Securities and Exchange Commission (SEC). See Note 12 – Subsequent Events.

In December 2007, the FASB issued guidance related to Business Combinations. This guidance retains the underlying concepts that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. This guidance is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this guidance would also apply the provisions of this guidance. Early adoption is not permitted. The adoption of this guidance did not have an immediate effect on our financial statements; however, this guidance will govern the accounting for any future business combinations that the Company may enter into.

In April 2008, FASB issued guidance related to the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset. The intent of this guidance is to improve the consistency between  the useful  life of  a recognizable  intangible  asset and the  period  of  expected  cash flows used to measure the fair value of the asset under U.S. generally accepted accounting principles. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not anticipate that the adoption of this guidance will have an impact on its financial position or results of operations.

In December 2007, the FASB issued guidance related to noncontrolling interests in consolidated financial statements. This guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain consolidation procedures. This guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. Based on the current consolidated financial statements, if this guidance were effective, the adoption of this guidance by the Company would not have an impact on its financial position or results of operations.

 
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DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. We adopted this guidance on October 1, 2008. In February 2008, the FASB issued additional guidance which extended the effective date for certain nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of the portions of this guidance that were not postponed did not have a material impact on our consolidated financial statements. We are currently evaluating the effect of the implementation of those parts of the guidance that were deferred.

In April 2009, the FASB issued guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. It provides guidance for estimating fair value in accordance with fair value measurements, when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our financial position or results of operations.

On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. This statement is effective for our fiscal year ending September 30, 2010. We are currently assessing the impact that the adoption will have on its consolidated financial statements and disclosures.

3.
OIL AND GAS PROPERTIES AND EQUIPMENT

At September 30:
 
2009
   
2008
 
Proven lease acreage costs
  $ 2,311,382     $ 2,311,382  
Proven undeveloped lease acreage costs
    581,810       581,810  
Well costs
    1,531,320       1,531,320  
      4,424,512       4,424,512  
Accumulated depletion, depreciation and amortization
    (3,806,195 )     (3,626,795 )
Net Oil and Gas Properties
  $ 618,317     $ 797,717  

The Company recognized gain on sale of oil and gas properties of $400,000 during fiscal 2008

In March 2008, the Company entered into an agreement to sell its interests in certain operated gas wells and related gas gathering system in West Virginia with cash consideration to the Company of $150,000 of which $100,000 was received in April 2008.  The remaining $50,000 is pending awaiting the consent of a joint interest owner in the remaining asset. Revenues and expenses applicable to such assets included in fiscal 2008 are not material as the wells have not produced since March 2006. The assets sold had no net book value.

In May 2008, the Company sold its interests in certain oil and gas properties (primarily undeveloped acreage) in Pennsylvania for $250,000. Revenues and expenses applicable to such assets included in the fiscal 2008 are not material as the two gas wells which were part of the sale were marginal producers. The assets sold had no net book value.

 
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DALECO RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008


4.
MINERAL PROPERTIES

a.
Clean Age Minerals, Inc.

CAMI, through its wholly-owned subsidiary, CA Properties, Inc., a Nevada corporation, owns or has under long-term lease: (a) approximately 5,200 acres in Marfa, Presidio County, Texas, containing high grade zeolite; (b) twenty-five mining claims located in Sierra County, New Mexico, covering approximately 2,720 acres of kaolin; and (c) eleven zeolite mining claims covering approximately 220 acres located in Beaver County, Utah. The Company is an Exploration Stage company in respect to its mineral holdings.  The Company’s ability to develop these mineral deposits is dependent on its success in bringing in strategic partners with experience in or a demand for specific minerals and raising capital through third parties.

In March 2005, the Company entered into the Sierra Kaolin Operating Agreement with TPA covering the Company’s kaolin claims in Sierra County, New Mexico. In June 2007, the Company entered into a Revised and Restated Agreement with TPA governing operations of the Sierra Kaolin claims. Under these agreements, TPA assumed the duties to mine, test and market the Company’s Sierra Kaolin.

b.
Minerals Properties and Equipment

At September 30:
 
2009
   
2008
 
Proven undeveloped lease costs
  $ 9,877,128     $ 12,609,100  
Mine development costs
    -       -  
      9,877,128       12,609,100  
Accumulated depreciation, depletion and amortization
    (95,000 )     (950,000 )