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KonaTel, Inc. - Quarter Report: 2017 June (Form 10-Q)

DALA PETROLEUM CORP.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

________________


FORM 10-Q

________________


x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2017


o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____________ to____________


Commission File No. 001-10171


DALA PETROLEUM CORP.

(Exact name of the issuer as specified in its charter)


Delaware

 

80-0000245

(State or Other Jurisdiction of incorporation or organization)

 

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


P.O Box 947

Crosslake, MN 56442

 (Address of Principal Executive Offices)


(612) 801-0789

 (Registrant Telephone Number)


Indicate by check mark whether the Registrant (1) has 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 corporate 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 (The Registrant does not maintain a website.)


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





Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company x

Emerging Growth company x


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


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


APPLICABLE ONLY TO CORPORATE ISSUERS


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:


Common Capital Voting Stock, $0.001 par value per share

 

13,692,286 shares

Class

 

Outstanding as of August 11, 2017





2





FORWARD LOOKING STATEMENTS


This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended.



DALA PETROLEUM CORP.

FORM 10-Q

JUNE 30, 2017

INDEX



 

 

 

 

 

Page No.

PART I – FINANCIAL INFORMATION

4

Item 1.      Financial Statements

4

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.      Controls and Procedures

24

PART II – OTHER INFORMATION

26

Item 1.      Legal Proceedings

26

Item 1A.   Risk Factors

26

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.      Defaults Upon Senior Securities

26

Item 4.      Mine Safety Disclosures

26

Item 5.      Other Information

26

Item 6.      Exhibits

27

 

 

SIGNATURES

29












3





PART I - FINANCIAL STATEMENTS


June 30, 2017

C O N T E N T S




 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and September 30, 2016

5

Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and 2016 (unaudited)

7

Notes to Condensed Consolidated Financial Statements

8

















4





Item 1. Financial Statements.


DALA PETROLEUM CORP.

Condensed Consolidated Balance Sheets

(unaudited)


 

June 30,

 

September 30,

 

2017

 

2016

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

44,700 

 

$

7,222 

Total current assets

 

44,700 

 

 

7,222 

 

 

 

 

 

 

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

 

 

 

 

 

Unproved

 

171,000 

 

 

171,000 

 

 

 

 

 

 

Total assets

$

215,700 

 

$

178,222 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Notes payable

$

128,056 

 

$

96,556 

Notes payable to related parties

 

106,794 

 

 

66,656 

Accounts payable and accrued expenses

 

163,971 

 

 

115,131 

 

 

 

 

 

 

Total current liabilities

 

398,821 

 

 

278,343 

Non-current liabilities

 

50,000 

 

 

Total liabilities

 

448,821 

 

 

278,343 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Series A 6% preferred convertible stock, $0.01 par value, 2,008 issued and outstanding at June 30, 2017 and September 30, 2016, respectively

 

1,302,925 

 

 

1,302,925 

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

Common stock, $0.001 par value, 50,000,000 shares authorized, 2,926,486 shares issued and outstanding at June 30, 2017 and September 30, 2016, respectively

 

2,926 

 

 

2,926 

Additional paid-in capital

 

1,513,389 

 

 

1,572,020 

Accumulated deficit

 

(3,052,361)

 

 

(2,977,992)

Total stockholders' deficit

 

(1,536,046)

 

 

(1,403,046)

 

 

 

 

 

 

Total liabilities and stockholders' deficit

$

215,700 

 

$

178,222 


See accompanying notes to unaudited condensed consolidated financial statements.




5





DALA PETROLEUM CORP.

Condensed Consolidated Statements of Operations

(unaudited)


 

For the Three Months Ended

 

For the Nine Months Ended

 

June 30,

 

June 30,

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

14,341 

 

 

16,817 

 

 

57,741 

 

 

145,640 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

14,341 

 

 

16,817 

 

 

57,741 

 

 

145,640 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Change in derivative valuation

 

 

 

 

 

 

 

54,240 

Interest expense

 

(6,202)

 

 

(4,966)

 

 

(16,629)

 

 

(14,859)

 

 

 

 

 

 

 

 

 

 

 

 

Total non-operating expenses

 

(6,202)

 

 

(4,966)

 

 

(16,629)

 

 

39,381 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(20,542)

 

 

(21,783)

 

 

(74,369)

 

 

(106,258)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on preferred stock

 

(19,544)

 

 

(30,375)

 

 

(58,632)

 

 

(91,125)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stock

$

(40,086)

 

$

(52,158)

 

$

(133,001)

 

$

(197,383)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

$

(0.01)

 

$

(0.00)

 

$

(0.05)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - basic and diluted

 

2,926,486 

 

 

9,228,978 

 

 

2,926,486 

 

 

11,429,859 


See accompanying notes to unaudited condensed consolidated financial statements.




6





DALA PETROLEUM CORP.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended June 30,

(unaudited)


 

2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(74,369)

 

$

(106,258)

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

 

 

 

 

 

(Gain) loss on changes in fair value of derivatives

 

 

 

(54,240)

Stock-based compensation

 

 

 

49,771 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

 

 

1,071 

Prepaid assets

 

 

 

33,942 

Accounts payable and accrued expenses

 

6,837 

 

 

(11,122)

Accrued interest

 

 

 

4,674 

Net cash used in operating activities

 

(67,532)

 

 

(82,162)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Deposit for stock purchase

 

50,000 

 

 

Proceeds received from notes payable (including related parties)

 

55,010 

 

 

90,010 

Net cash provided by financing activities

 

105,010 

 

 

90,010 

 

 

 

 

 

 

Net increase in cash

 

37,478 

 

 

7,848 

 

 

 

 

 

 

Cash at beginning of period

 

7,222 

 

 

2,874 

Cash at end of period

$

44,700 

 

$

10,722 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

$

 

$

Cash paid for taxes

$

 

$

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Dividends on preferred stock accrued

$

58,632 

 

$

Dividends on preferred stock forgiven

$

 

$

43,567 

Payables forgiven

$

 

$

148,010 

Notes payable and accrued interest forgiven

$

 

$

39,771 

Oil and natural gas properties disposed for treasury stock

$

 

$

(418,000)


See accompanying notes to unaudited condensed consolidated financial statements.




7





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


NOTE 1 – ORGANIZATION


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


NOTE 2 – TRANSACTIONS


June 2014 Merger


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


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


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


Dala possesses rights to engage in oil and natural gas exploration and development in north central Kansas, with total acreage of approximately 25,000 acres (the “Property”).  Since the time of the Merger, Dala is operating as an early-stage oil exploration company focused on the Property, which has oil potential at depths of less than 6,000 feet. Since May 2015, Dala had previously temporarily suspended its exploration program due to the decline in the price of oil and difficult market conditions; however the Company is presently evaluating potential options for the extension of terms of the leases comprising the Property and funding the development of the Property, either singly or as a joint venture or with a working interest, carried or fully funded.


May 2016 Transaction


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


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



8





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


July 2017 Transaction


On July 19, 2017, the Company entered into a Common Stock Purchase Agreement with M2 Equity Partners LLC, a Minnesota limited liability company (“M2”), whereby M2 has purchased 12,100,000 newly issued shares of the Company’s common stock (the “Common Stock”) for an aggregate purchase price of $347,500 (the “Purchase Price”), pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Rule 506(b) promulgated thereunder.  Prior to the closing (the “Closing”) of the Common Stock Purchase Agreement, the Company had the following outstanding securities: (i) 2,926,486 shares of Common Stock; (ii) 2,008 shares of Series A 6% Convertible Preferred Stock (the “Preferred Stock”); and (iii) 1,928,571 warrants (the “Warrants”) to acquire 1,928,571 shares of Common Stock that were issued in connection with the issuance of our Preferred Stock. In connection with this purchase of Common Stock, certain of the Company’s shareholders agreed to cancel an aggregate 1,584,200 shares of the Company’s Common Stock for an aggregate amount of $15,842; and 2,008 shares of the Company’s Preferred Stock and all outstanding Warrants for an aggregate amount of $53,841, with an additional sum of approximately $4,700 due to those shareholders who have agreed to cancel their respective shares of Preferred Stock and Warrants being reserved for the payment of miscellaneous expenses or other liabilities of the Company not provided for in the schedules and exhibits to the Common Stock Purchase Agreement, and any remainder of this sum will be paid to these shareholders, pro rata, based upon the respective percentage that the aggregate amount being paid for the cancellation of the Preferred Stock and Warrants bears, if any, to these additional funds, following payment of any such miscellaneous expenses or other liabilities of the Company.  $10,750 of the Purchase Price is being held in the Trust Account of the Company’s legal counsel to be expended on behalf of the Company or deposited into a new bank account to be opened by the Company.


As a result of the cancellation of the 1,584,200 shares of Common Stock, Preferred Stock and Warrants immediately prior to or simultaneous with the Closing, the Company had 1,342,286 shares of Common Stock issued and outstanding (the “Existing Shares”) and no shares of Preferred Stock or Warrants issued and outstanding; and taking into account the share cancellation and the 12,100,000 share Common Stock purchase and issuance, the Company presently has issued and outstanding (i) 13,442,286 shares of its Common Stock, consisting of (a) the 1,342,286 Existing Shares, and (b) the 12,100,000 shares purchased by M2; and (ii) no other securities (as defined in the Securities Act) issued or outstanding.


The Company will use the remainder of the $347,500 to, among other items set forth in the schedules and exhibits to the Common Stock Purchase Agreement, pay or compromise all outstanding indebtedness and other liabilities of the Company, amounting to approximately $262,367, which includes a payment of an aggregate of $10,000 ($5,000 to each) to our two directors and executive officers, with the understanding that our then current assets will consist of approximately $10,750, our Property, consisting of our oil and gas lease assets that we presently own, along with other intangible assets, and following the payment of the indebtedness and other liabilities and financial obligations of the Company, there will be no liabilities of the Company at Closing.


M2 has agreed to pay M2 Capital Advisors, Inc., a Minnesota corporation (“M2 Capital”), which is wholly-owned by Mark Savage, a founding member of M2, an Introduction Fee of $25,000 for introducing the Company to M2. These funds will be divided between M2 Capital and Elev8 Marketing, a firm owned by Matt Atkinson, who is also a founding member of M2 and M2’s sole Manager, and will be utilized to repay these entities for legal costs and miscellaneous expenses incurred by them in connection with the formation and funding of M2.


The Closing of the Common Stock Purchase Agreement resulted in a change in control of the Company.




9





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


NOTE 3 – BASIS OF PRESENTATION


The accompanying unaudited financial statements of Dala Petroleum, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. The results of operations for the interim period ended June 30, 2017 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending September 30, 2017. In the opinion of the Company’s management, the information contained herein reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. The unaudited interim financial statements should be read in conjunction with the audited financial statements in the Company’s Form 10-K for the year ended September 30, 2016 filed on January 13, 2017 and Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Use of Estimates


The timely preparation of financial statements 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 revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.


Accounting for Derivatives


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


Impairment of Long-Lived Assets


The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.


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


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


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




10





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


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


We currently measure and report at fair value other intangible assets (due to our impairment analysis) and derivative liabilities using ASC 820-10, Fair Value Measurement.  The fair value of intangible assets has been determined using the present value of estimated future cash flows method.  The fair value of derivative liabilities is measured using the Black-Scholes option pricing method.  The following tables summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and September 30, 2016:


 

 

Fair Value Measurements at June 30, 2017

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Total

 

 

Assets

 

Inputs

 

Inputs

 

Carrying

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

Description

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

 

$

 

$

171,000

 

$

171,000


 

 

 

 

 

Activity

 

Change in

 

 

 

 

 

 

 

 

 

 

 

During

 

Fair Value of

 

Disposal

 

 

 

 

 

September 30,

 

Fiscal

 

Intangible

 

of

 

June 30,

 

 

2016

 

Year

 

Asset

 

Property

 

2017

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

171,000

 

$

 

$

 

$

 

$

171,000


 

 

Fair Value Measurements at September 30, 2016

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Total

 

 

Assets

 

Inputs

 

Inputs

 

Carrying

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

Description

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

 

$

 

$

171,000

 

$

171,000


 

 

 

 

 

Activity

 

Change in

 

 

 

 

 

 

 

 

 

 

 

During

 

Fair Value of

 

Disposal

 

 

 

 

 

September 30,

 

Fiscal

 

Intangible

 

of

 

September 30,

 

 

2015

 

Year

 

Asset

 

Property

 

2016

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties

 

$

608,000

 

$

 

$

 

$

(437,000)

 

$

171,000


Oil and Natural Gas Properties


The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs related to the exploration and development of oil and natural gas properties are initially capitalized into a single cost center (“full cost pool”). Such costs include land acquisition costs, a portion of employee salaries related to Property development, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. Internal salaries are capitalized based on employee time allocated to the acquisition of leaseholds and development of oil and natural gas properties. The Company did not capitalize interest for the period ended June 30, 2017 as it was not required.





11





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


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


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


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


During the period ended June 30, 2017, the Company incurred total $0 in oil and natural gas expenditures.


As of September 30, 2015, the Company’s oil and natural gas properties were determined to be impaired thereby reducing the unproved oil and natural gas properties to $608,000.  No additional impairment was realized for the year ended September 30, 2016 or the period ended June 30, 2017.


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


Revenue Recognition


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


The Company uses the sales method of accounting for balancing of natural gas production and would recognize a liability if the existing proven reserves were not adequate to cover the current imbalance situation. For the nine months ended June 30, 2017, no revenue has been recognized as all wells are still unproved and non-producing.




12





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


Asset Retirement Obligation


Asset retirement obligation (“ARO”) reflects the estimated present value of the amount of dismantlement, removal, site reclamation and similar activities associated with the Company’s oil and natural gas properties. Inherent in the fair value calculation of the ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments.   As of June 30, 2017, the Company had no ARO liability as no wells have been established.


Stock-based Compensation


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


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


Income Taxes


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


Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.


The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of June 30, 2017, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.


Net Loss Per Share


The Company follows ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.  As the Company has incurred losses for the period ended June 30, 2017, the potentially dilutive shares totaling 0 are anti-dilutive and are thus not added into the loss per share calculations.  Due to the anti-dilutive impact the weighted average dilutive shares outstanding for the period ended June 30, 2017, for basic and dilutive shares, are the same.




13





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


Segment Information


In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” the Company is required to report financial and descriptive information about its reportable operating segments. The Company does not have any operating segments as of June 30, 2017, and September 30, 2016.


NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS


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


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


In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity.  This update amends existing guidance with the objective to eliminate the use of different methods in practice with respect to the consideration of redemption features in relation to other features when determining whether the nature of a host contract is more akin to debt or equity and thereby reduce existing diversity under GAAP in accounting for hybrid financial instruments issued in the form of a share.  The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share.


The amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of a host contract, but rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.  In addition, the amendments in this update clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features. The guidance applies to all entities that are issuers of, or investor in, hybrid instruments that are issued in the form of a share.   The effects of initially adopting the amendments in this update should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective.  Retrospective application is permitted to all relevant prior periods.  The updates in this pronouncement are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2016.  The Company is currently evaluating the adoption of ASU 2014-16 and the impact of the updates upon the Company.  The Company plans on adopting the pronouncement for periods beginning after December 15, 2016 and does not anticipate early adoption of this pronouncement.


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




14





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


NOTE 5 – RELATED PARTY TRANSACTIONS


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


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


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


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


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


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


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


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




15





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


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


Name of Creditor

 

Amount of

Principal Due

 

Amount of

Interest Due

 

Total

Amount Due

Alpha Capital Anstalt

 

$

37,037

 

$

7,927

 

$

44,964

Lane Ventures Inc.

 

$

2,469

 

$

603

 

$

3,072

Mill City Ventures III, Ltd

 

$

24,691

 

$

3,385

 

$

28,076


The above notes, as of June 30, 2017, are in default.


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


On October 18, 2016, the Company entered into a promissory note with Mill City for $10,000.  The promissory note bears an interest rate of 12% per annum and all principal and accrued interest of $11,200 will be due and payable by the Company to Mills City on October 17, 2017. As of June 30, 2017, the accrued interest was $930.  See Note 6.


On December 16, 2016, the Company entered into a promissory note with Mill City for $12,500. The note is payable on December 15, 2017 in the amount of $14,000. The note bears interest of 12% which is payable on December 15, 2017.  As of June 30, 2017, the accrued interest was $814.  See Note 6.


NOTE 6 – NOTES PAYABLE


Notes payable, all classified as current at June 30, 2017 and September 30, 2016, consists of the following:


 

June 30, 2017

 

September 30, 2016

 

 

 

 

Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

Lane Ventures

$

488

 

$

89

 

$

577

 

$

488

 

$

45

 

$

533

Alpha Capital

 

40,010

 

 

6,024

 

 

46,034

 

 

40,010

 

 

2,419

 

 

42,429

Alpha Capital

 

37,037

 

 

7,927

 

 

44,964

 

 

37,037

 

 

5,711

 

 

42,748

Alpha Capital

 

7,315

 

 

2,460

 

 

9,775

 

 

7,315

 

 

681

 

 

7,996

Alpha Capital

 

10,000

 

 

388

 

 

10,388

 

 

-

 

 

-

 

 

-

Alpha Capital

 

12,510

 

 

736

 

 

13,246

 

 

-

 

 

-

 

 

-

Lane Ventures

 

2,469

 

 

603

 

 

3,072

 

 

2,469

 

 

381

 

 

2,850

Total

$

109,829

 

$

18,227

 

$

128,056

 

$

87,319

 

$

9,237

 

$

96,556




16





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


Related Party

June 30, 2017

 

September 30, 2016

 

 

 

 

Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

 

Principal

 

Interest

 

Total

 

Principal

 

Interest

 

Total

Mill City Venture

$

5,195

 

$

951

 

$

6,146

 

$

5,195

 

$

484

 

$

5,679

Mill City Venture

 

30,000

 

 

6,940

 

 

36,940

 

 

30,000

 

 

5,125

 

 

35,125

Mill City Venture

 

24,691

 

 

3,385

 

 

28,076

 

 

24,691

 

 

1,161

 

 

25,852

Mill City Venture

 

10,000

 

 

931

 

 

10,931

 

 

-

 

 

-

 

 

-

Mill City Venture

 

10,000

 

 

1,387

 

 

11,387

 

 

-

 

 

-

 

 

-

Mill City Venture

 

12,500

 

 

814

 

 

13,314

 

 

-

 

 

-

 

 

-

Total

$

92,386

 

$

14,408

 

$

106,794

 

$

59,886

 

$

6,770

 

$

66,656


On June 15, 2015, the Company received funds from a demanded Promissory Note (the “Note”) that it entered into on June 8, 2015 in the amount of $99,999 in favor of Pacific Oil & Gas, LLC (the “Lender”). The Note bears an interest rate of 12% per annum and all principal and accrued interest will be due and payable by the Company to the Lender on December 31, 2015. The Note is secured by a Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement that was filed on June 25, 2015 against the Company’s Evans 9-1 lease in McPherson County, Kansas. The trustee of the Lender is the Company’s director, Clancy Cottman, and the funds delivered to the Company by the Lender were provided by a group of the Company’s Series A 6% Convertible Preferred shareholders. As of June 30, 2017, the Company received proceeds of $97,500.  On January 26, 2016, Lender extended the maturity date to March 1, 2016.  During the period ended May 26, 2016, the Company accrued $10,849 interest expense under this note.  On May 26, 2016, as part of the PCA (see Note 2), the Lender forgave the principal and interest of $110,848.  On May 10, 2016, the Company and the Lender (a company managed by Clancy Cottman, the Company’s then-director), restated the Pacific Note by assigning the amounts due to four different creditors based on their initial participation in the Pacific Note as reflected in the Restated Pacific Note (see Note 5). The restated Pacific note was accounted for by separate notes.  The balance of $39,771 (includes principal and accrued interest) that was forgiven was offset to additional paid-in capital.


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


On December 22, 2015, the Company entered into a promissory note with Mill City Ventures III, Ltd. for $5,195. The note matures on December 22, 2016 and bears interest at the rate of 12%. As of June 30, 2017, the accrued interest was $951.  This note is in default as of June 30, 2017.


On December 22, 2015, the Company entered into a promissory note with Chisholm Partners II, LLC for $7,002. The note matures on December 22, 2016 and bears interest at the rate of 12%. During the period ended May 26, 2016, the Company accrued $322 interest expense under this note.  On May 26, 2016, as part of the PCA (see Note 2), the Lender forgave the principal and interest of $7,324 as offset to additional paid-in capital.  This note is in default as of June 30, 2017.


On December 22, 2015, the Company entered into a promissory note with Lane Ventures, Inc. for $488.  The note matures on December 22, 2016 and bears interest at the rate of 12%.  During the nine months ended June 30, 2017, the Company accrued $15 interest expense under this note.  As of June 30, 2017, the accrued interest was $89.  This note is in default as of June 30, 2017.


On December 22, 2015, the Company entered into a promissory note with Alpha Capital Anstalt for $7,315.  The note matures on December 22, 2016 and bears interest at the rate of 12%.  During the nine months ended June 30, 2017, the Company accrued $221 interest expense under this note.  As of June 30, 2017, the accrued interest was $2,460.  This note is in default as of June 30, 2017.


On February 17, 2016, the Company entered into a promissory note with Mill City Ventures III, Ltd. for $30,000.  The note matures on January 28, 2017 and bears interest at the rate of 12%.  During the nine months ended June 30, 2017, the Company accrued $907 interest expense under this note.  As of June 30, 2017, the accrued interest was $6,940.  This note is in default as of June 30, 2017.  See Note 5.


On March 30, 2016, the Company entered into a promissory note with Alpha Capital Anstalt for $40,010.  The note matures on March 30, 2017 and bears interest at the rate of 12%.  During the nine months ended June 30, 2017, the Company accrued $1,210 interest expense under this note.  As of June 30, 2017, the accrued interest was $6,024.




17





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


On October 18, 2016, the Company entered into a promissory note with Mill City for $10,000.  The promissory note bears an interest rate of 12% per annum and all principal and accrued interest of $11,200 will be due and payable by the Company to Mills City on October 17, 2017. As of June 30, 2017, the accrued interest was $1,387.  See Note 5.


On December 16, 2016, the Company entered into a promissory note with Mill City for $12,500. The note is payable on December 15, 2017 in the amount of $14,000. The note bears interest of 12% which is payable on December 15, 2017.  As of June 30, 2017, the accrued interest was $814.  See Note 5.


On December 22, 2016, the promissory notes with Mill City, Ltd., Lane Ventures, Inc., and Alpha Capital Anstalt, matured, and are in default (see Note 5).


On January 4, 2017, the Company entered into a promissory note with Alpha Capital Anstalt for $12,510. The note is payable on January 3, 2018 in the amount of $14,000. The note bears interest of 12%.  As of June 30, 2017, the accrued interest was $736.  


On January 31, 2017, the Company entered into a promissory note with Mill City for $10,000.  The note is payable on January 31, 2018.  The note bears interest of 12%.  As of June 30, 2017, the accrued interest was $931.


On March 6, 2017, the Company entered into a promissory note with Alpha Capital Anstalt for $10,000.  The note is payable on March 6, 2018.  The note beards interest of 12%.  As of June 30, 2017, the accrued interest was $388.


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


Name of Creditor

 

Amount of

Principal Due

 

Amount of

Interest Due

 

Total

Amount Due

Alpha Capital Anstalt

 

$

37,037

 

$

7,927

 

$

44,964

Lane Ventures Inc.

 

$

2,469

 

$

603

 

$

3,072

Mill City Ventures III, Ltd

 

$

24,691

 

$

3,385

 

$

28,076


As of June 30, 2017, these notes are in default.


NOTE 7 – PREFERRED CONVERTIBLE STOCK AND WARRANTS


As discussed above in Note 2, in fiscal year 2014, the Company sold 2,025 units consisting of a total of 2,025 shares of Series A 6% Convertible Preferred Stock and 2,893,725 warrants at the price of $1,000 per unit.  Proceeds received totaled $2,025,000 (with a net of offering costs of $1,990,000).  The warrants were valued at $711,044 and this amount was separated from the value of the preferred stock.  Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that is convertible at any time at the option of the holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested (subject to adjustment) and (ii) 1,429 warrants (issued for each Series A 6% Convertible Preferred Stock sold in each unit) to purchase common shares of the Company at an exercise price of $1.35 for three years of the “Effective Date, “ defined as the earliest date of the following to occur: (a) the initial registration statement required by the Offering Documents has been declared effective by the United States Securities and Exchange Commission (the “SEC”), (b) all of the underlying shares have been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144 and without volume or manner-of-sale restrictions or (c) following the one year anniversary of June 3, 2014.  A total of 2,008 shares of Series A 6% Convertible Preferred Stock, exercisable into 2,868,571 shares of common stock, remain issued and outstanding as of June 30, 2017. The 6% per annum dividends are cumulative and payable quarterly in cash or, at the Company’s option, in shares of the Company’s common stock. The Company discontinued paying the quarterly dividend as of July 1, 2015 and the amount owed thereunder has been accruing since that time until May 10, 2016 at which time all accrued dividends on 675 of the 2,025 shares were waived and cancelled by those certain preferred shareholders.  The cancelled dividends were accounted for by offsetting to additional paid-in capital.


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


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




18





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


On November 17, 2014, one of the Company’s shareholders of Series A 6% Convertible Preferred Stock, Chienn Consulting Company, converted 17 shares of its Series A 6% Convertible Preferred Stock into 24,286 shares of the Company’s common stock. As of June 30, 2017, 2,008 Convertible Preferred Shares remain outstanding.


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


NOTE 8 – SHAREHOLDERS’ EQUITY


Common Stock


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


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


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


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


As of June 30, 2017, there are a total of 2,926,486 common shares outstanding.




19





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


Stock-Based Compensation


On June 2, 2014, the Company granted options to acquire common shares to its Chief Executive Officer and two directors, totaling 600,000 options.  The options have an exercise price of $0.70 per share for terms of six years.  Of the total stock options, 400,000 vest equally over the next four years and 200,000 vest equally over the next two years.  The total fair value of these options at the date of grant was estimated to be $400,087, and was determined using the Black-Scholes option pricing model with expected lives of 4.25 (four-year vesting) and 3.75 years (two-year vesting), a risk-free interest rate of 1.92%, a dividend yield of 0% and expected volatility of 195%.  The expected terms were determined using the simplified method.  For the nine months ended June 30, 2017, the Company recorded approximately $0 of stock-based compensation expense.


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


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


As of June 30, 2017, there are no outstanding stock options.


NOTE 9 – DERIVATIVES


The Series A 6% Convertible Preferred Stock issued by the Company had a full-ratchet down-round provision on the exercise price, in which the investors’ conversion price is adjusted down to the share price of future financings.  Therefore, prior to June 30, 2017, following ASC 815-40, the warrants and the conversion feature of the preferred stock are not considered indexed to our own stock, and as such, the fair value of the embedded derivative liabilities are reflected on the balance sheet prior to June 30, 2017.


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


NOTE 10 – REGISTRATION RIGHTS PENALTY


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


The Company granted the investors’ registration rights on the underlying shares related to the Series A 6% Convertible Preferred Stock and warrants.  The registration rights agreement provided for a liquidated damages provision imposed upon the Company of 1.5% of the gross proceeds per month for each month that the shares are not registered.  The liquidated damages are not to exceed 9% which was met in 2015.  The Company filed a registration statement that was effective on September 12, 2014 that did not register all of the underlying shares of the Series A 6% Convertible Preferred Stock the warrants and the dividend payments required to be registered in the Registration Rights Agreement.  As of June 30, 2017, and September 30, 2016, the Company incurred registration rights penalty of $0 and $0, respectively.




20




Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


NOTE 11 – CONCENTRATIONS


Concentration of Credit Risk


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


The Company places its temporary cash investments with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of June 30, 2017. There have been no losses in these accounts through June 30, 2017.


Concentration of Supplier


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


NOTE 12 – COMMITMENTS AND CONTINGENCIES


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


NOTE 13 – GOING CONCERN


The Company has not generated any revenues, has recurring net losses, a working capital deficiency as of June 30, 2017 of $354,121, and used cash in operations of $67,532 and $82,162 for the nine months ended June 30, 2017 and 2016, respectively. In addition, as of June 30, 2017, the Company had an accumulated deficit and stockholders’ deficiency of $3,052,361 and $1,536,046, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.


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


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


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


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




21





Dala Petroleum Corp.

Notes to Condensed Consolidated Financial Statements

June 30, 2017

(unaudited)


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


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


NOTE 14 – SUBSEQUENT EVENT


On July 19, 2017, the Company entered into a Common Stock Purchase Agreement with M2 Equity Partners LLC, a Minnesota limited liability company (“M2”), whereby M2 has purchased 12,100,000 newly issued shares of the Company’s common stock (the “Common Stock”) for an aggregate purchase price of $347,500 (the “Purchase Price”), pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Rule 506(b) promulgated thereunder.  Prior to the closing (the “Closing”) of the Common Stock Purchase Agreement, the Company had the following outstanding securities: (i) 2,926,486 shares of Common Stock; (ii) 2,008 shares of Series A 6% Convertible Preferred Stock (the “Preferred Stock”); and (iii) 1,928,571 warrants (the “Warrants”) to acquire 1,928,571 shares of Common Stock that were issued in connection with the issuance of our Preferred Stock. In connection with this purchase of Common Stock, certain of the Company’s shareholders agreed to cancel an aggregate 1,584,200 shares of the Company’s Common Stock for an aggregate amount of $15,842; and 2,008 shares of the Company’s Preferred Stock and all outstanding Warrants for an aggregate amount of $53,841, with an additional sum of approximately $4,700 due to those shareholders who have agreed to cancel their respective shares of Preferred Stock and Warrants being reserved for the payment of miscellaneous expenses or other liabilities of the Company not provided for in the schedules and exhibits to the Common Stock Purchase Agreement, and any remainder of this sum will be paid to these shareholders, pro rata, based upon the respective percentage that the aggregate amount being paid for the cancellation of the Preferred Stock and Warrants bears, if any, to these additional funds, following payment of any such miscellaneous expenses or other liabilities of the Company.  $10,750 of the Purchase Price is being held in the Trust Account of the Company’s legal counsel to be expended on behalf of the Company or deposited into a new bank account to be opened by the Company.


As a result of the cancellation of the 1,584,200 shares of Common Stock, Preferred Stock and Warrants immediately prior to or simultaneous with the Closing, the Company had 1,342,286 shares of Common Stock issued and outstanding (the “Existing Shares”) and no shares of Preferred Stock or Warrants issued and outstanding; and taking into account the share cancellation and the 12,100,000 share Common Stock purchase and issuance, the Company presently has issued and outstanding (i) 13,442,286 shares of its Common Stock, consisting of (a) the 1,342,286 Existing Shares, and (b) the 12,100,000 shares purchased by M2; and (ii) no other securities (as defined in the Securities Act) issued or outstanding.


The Company will use the remainder of the $347,500 to, among other items set forth in the schedules and exhibits to the Common Stock Purchase Agreement, pay or compromise all outstanding indebtedness and other liabilities of the Company, amounting to approximately $262,367, which includes a payment of an aggregate of $10,000 ($5,000 to each) to our two directors and executive officers, with the understanding that our then current assets will consist of approximately $10,750, our Property, consisting of our oil and gas lease assets that we presently own, along with other intangible assets, and following the payment of the indebtedness and other liabilities and financial obligations of the Company, there will be no liabilities of the Company at Closing.


M2 has agreed to pay M2 Capital Advisors, Inc., a Minnesota corporation (“M2 Capital”), which is wholly-owned by Mark Savage, a founding member of M2, an Introduction Fee of $25,000 for introducing the Company to M2. These funds will be divided between M2 Capital and Elev8 Marketing, a firm owned by Matt Atkinson, who is also a founding member of M2 and M2’s sole Manager, and will be utilized to repay these entities for legal costs and miscellaneous expenses incurred by them in connection with the formation and funding of M2.


The Closing of the Common Stock Purchase Agreement resulted in a change in control of the Company.  See Note 2 and the heading the “July 2017 Transaction.”


On July 25, 2017, we resolved to issue 250,000 shares of our common stock as compensation.  We issued 50,000 shares to Daniel Ryweck for his service on our board of directors, and 200,000 to our attorney Leonard W. Burningham for his legal services in the change of control and pursuant to an Engagement Letter.




22





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Forward-looking Statements


Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.


Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.


Accordingly, results actually achieved may differ materially from expected results in these statements.  Forward-looking statements speak only as of the date they are made.  We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.


Plan of Operations


Our revenues and future profitability are substantially dependent on our ability to raise additional funds. We have suspended drilling and other exploration and development operations until the market conditions related to the price of oil have improved; however, subsequent to June 30, 2017, however the Company is presently evaluating potential options for the extension of terms of the leases comprising the oil and gas leases it presently holds an interest in (the “Property”) and funding the development of the Property, either singly or as a joint venture or with a working interest, carried or fully funded.


We have substantially cut administrative expenses to conserve our cash resources.  The management and directors are no longer paid any salary or bonus.  We also are not immediately planning any other leasing activity in our areas of operation.  We continue to search for a financial and/or operational partner to assist in developing our oil and gas properties.  If we were to partner with another entity, we would consider all options in developing our properties.


During the nine months ended June 30, 2017, and 2016, the Company incurred $0 and $0 in oil and gas expenditures, respectively. As a result of the dry holes encountered, the Company expensed $0 of cost capitalized as impairment expense for the nine months ended June 30, 2017.


M2 is party to a binding Letter of Intent dated July 24, 2017, with KonaTel, Inc., a Nevada corporation (respectively, “KonaTel” and the “KonaTel LOI”).  Under the KonaTel LOI, M2 is to introduce KonaTel to a publicly-traded company that would be willing to acquire KonaTel, thereby making KonaTel a “successor” publicly-held company and a wholly-owned subsidiary of the publicly-held company; and M2 intends to introduce the Company to KonaTel as the publicly-traded candidate to acquire KonaTel with the Closing of the Common Stock Purchase Agreement referenced in Note 2 of our Condensed Consolidated Financial Statements in this Quarterly Report, subject to an anticipated closing at the early of September 30, 2017, or the completion of an audit of KonaTel’s financial statements for the years ended December 31, 2015, and 2016, and a review of its interim financial statements for the six months ended June 30, 2017.  No assurance can be given that the acquisition of KonaTel will be completed.


KonaTel was organized under the laws of the State of Nevada on October 14, 2014, as a full service cellular provider that delivers cellular products and services to individual and business customers in various retail and wholesale markets.  Through its network, it provides these services nationwide.  KonaTel has one retail store in Johnstown, New York, that currently has six employees; its principal executive office location is in Johnstown, Pennsylvania, where it has 14 employees, including its sole owner; and in Dallas, Texas, it has three employees that handle Virtual ETC., one of its divisions.  For additional information about this potential acquisition, see the Company’s 8-K Current Report dated July 19, 2017, filed with the SEC on July 20, 2017, in Item 8.01.


Our common stock currently trades on the OTCQB under the symbol “DALP.”




23




Results of Operations


Three Months Ended June 30, 2017 and 2016


During the three months ended June 30, 2017 and 2016, we had no revenues, respectively, and we incurred $14,341 and $16,817, respectively, of general and administrative expenses.  For the period ended June 30, 2017, those expenses included $7,000 of legal and accounting fees, consulting and other professional fees.  As a result, we incurred a net loss attributable to common stock of $(0.01) per share for the three months ended June 30, 2017.  Our net loss for the period ended June 30, 2017 was $20,542.


Nine months Ended June 30, 2017 and 2016


During the nine months ended June 30, 2017 and 2016, we had no revenues, respectively, and we incurred $57,741 and $145,640, respectively, of general and administrative expenses.  For the period ended June 30, 2017, those expenses included $38,800 of legal and accounting fees, consulting and other professional fees.  As a result, we incurred a net loss attributable to common stock of $(0.05) per share for the nine months ended June 30, 2017.  Our net loss for the period ended June 30, 2017 was $74,369.


Liquidity and Capital Requirements


We had $44,700 in cash on hand and negative working capital of $354,121 at June 30, 2017.  We believe these funds will be sufficient to enable us to fund our principal business operations through at least the next 30 days.   The Company plans to raise additional capital from the sale of its securities (including, without limitation common stock, preferred stock, promissory notes, etc.) and achieve operating revenues with the development of its oil and gas properties. In the event the Company is unable to raise funding in the near term, we will not be able to pay our liabilities. In the event we are unable to raise adequate funding in the future for our operations and to pay our outstanding debt obligations, and if our current creditors elect to foreclose on the outstanding debts then owed, we would be forced to liquidate our assets or may be forced to seek bankruptcy protection, which could result in the value of our outstanding securities declining in value or becoming worthless.


Cash flows used in operating activities was $67,532 in cash for the nine months ended June 30, 2017, primarily the result of our loss of $74,369.


Cash flows used in investing activities was $0 for the nine months ended June 30, 2017.


Cash flows provided by financing activities was $105,010 for the nine months ended June 30, 2017, related to proceeds received from notes payable.


Off-Balance Sheet Arrangements


None.


Item 3.  Quantitative and Qualitative Disclosures about Market Risk.


Not required.


Item 4.  Controls and Procedures.


Evaluation of Disclosure Controls and Procedures


The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms and that information required to be disclosed is accumulated and communicated to the chief executive and interim chief financial officer to allow timely decisions regarding disclosure.




24




As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective as of such date. The Chief Executive Officer and Chief Financial Officer have determined that the Company continues to have the following deficiencies which represent a material weakness:


·

The Company intends to appoint additional independent directors;

·

Lack of in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions.  With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;

·

Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting; and

·

Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes.


To remediate our internal control weaknesses, management intends to implement the following measures:


·

As funding permits, the Company will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.

·

The Company will hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting.

·

Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures.


The additional hiring is contingent upon The Company’s efforts to obtain additional funding through equity or debt and the results of its operations. Management hopes to secure funds in the coming fiscal year but provides no assurances that it will be able to do so.


Limitations on the Effectiveness of Controls


The Company’s sole officer does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.


Changes in Internal Control Over Financial Reporting


During the fiscal quarter covered by this Quarterly Report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



 



25




PART II - OTHER INFORMATION


Item 1. Legal Proceedings


None.


Item 1A. Risk Factors


Not required.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


None; however, see Note 14 of our Consolidated Condensed Financial Statements above regarding the change in control of our Company subsequent to June 30, 2017.


Item 3. Defaults upon Senior Securities


The Company is in default with several of its noteholders as reflected below and disclosed with this report in Note 6 of the Notes of the Financial Statements dated June 30, 2017; however, see Note 14 of our Consolidated Condensed Financial Statements above regarding the payment and/or compromise of all of these noteholders’ obligations.


 

 

 

Notes payable

Principal

Mill City Ventures III, Ltd.

$

5,195

Lane Ventures, Inc.

 

488

Alpha Capital Anstalt

 

7,315

Mill City Ventures III, Ltd.

 

30,000

Total

$

42,998


Item 4. Mine Safety Disclosure


Not applicable.


Item 5. Other Information


None.









26





Item 6. Exhibits


(a) Exhibits.


 

 

 

 

 

Exhibit

Number

 

Description of Exhibit

 

Filing

3.1

 

Articles of Incorporation

 

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

3.1(a)

 

Amended Articles of Incorporation

 

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

3.1(b)

 

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

 

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

3.1(c)

 

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

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

3.2

 

Bylaws

 

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

4.1

 

Registration Rights Agreement dated June 3, 2014

 

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

4.2

 

Form of Warrant dated June 3, 2014

 

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

4.3

 

Form of Lock-Up Agreement

 

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

4.4

 

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

 

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

4.5

 

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

 

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

4.6

 

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

 

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

10.1

 

Merger Agreement

 

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

10.2

 

Master Service Agreement

 

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

10.3

 

Option Participation Agreement

 

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

10.10

 

Partial Cancellation Agreement

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.11

 

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

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.12

 

Forms of Release

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.13

 

Lease Assignment for Clay County, Kansas

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.14

 

Lease Assignment for Dickinson County, Kansas

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.15

 

Lease Assignment for Ottawa County, Kansas

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.16

 

Lease Assignment for Saline County, Kansas

 

Filed with the Form 10-K filed on January 13, 2017 and incorporated herein by reference.

10.18

 

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

 

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

10.19

 

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

 

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

10.20

 

Common stock Purchase Agreement

 

Filed with the Form 8-K filed on July 20, 2017 and incorporated herein by reference

10.21

 

Form of Common Stock Agreement

 

Filed with the Form 8-K filed on July 20, 2017 and incorporated herein by reference





27





 

 

 

 

 

Exhibit

Number

 

Description of Exhibit

 

Filing

10.22

 

Form of Preferred Stock and Warrant Cancellation Agreement

 

Filed with the Form 8-K filed on July 20, 2017 and incorporated herein by reference

10.23

 

Form of Preferred Stock and Warrant Cancellation Agreement

 

Filed with the Form 8-K filed on July 20, 2017 and incorporated herein by reference

10.24

 

Form of Debt Cancellation Agreement / Pay-Off Letter

 

Filed with the Form 8-K filed on July 20, 2017 and incorporated herein by reference

31

 

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

 

Filed herewith.

32

 

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

 

Filed herewith.

101.INS

 

XBRL Instance Document

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

 


Exhibits incorporated by reference:


8-K Current Report dated July 19, 2017, filed with the SEC on July 20, 2017.



28





SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


DALA PETROLEUM CORP.


 

 

 

 

 

Date:

August 11, 2017

 

By:

/s/ Mark Savage

 

 

 

 

Mark Savage

 

 

 

 

Chief Executive Officer and Acting

 

 

 

 

Principal Financial Officer







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