UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-Q


(Mark one)




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




For the quarterly period ended March 31, 2011




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




For the transition period from __________ to __________




Commission File Number: 0-12214




DALECO RESOURCES CORPORATION


(Exact name of registrant as specified in its charter)





Nevada

23-2860734(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)17 Wilmont Mews, 5thFloor

West Chester, Pennsylvania 19382

(610) 429-0181(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code)


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  ̈




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  ̈




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




Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer  ̈ (Do not check if a smaller
Smaller reporting company xreporting company)




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈    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:




Shares of Common Stock outstanding as of April 30, 2011:  48,569,622


Shares of Series B Convertible Preferred Stock outstanding of April, 30 2011:  145,000


DALECO RESOURCES CORPORATION AND SUBSIDIARIES





TABLE OF CONTENTS





PAGEPART I - FINANCIAL INFORMATIONITEM 1.
CONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheets
3Consolidated Statements of Operations
5Consolidated Statements of Cash Flows
6Notes to Unaudited Consolidated Financial Statements
7ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
15ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK
21ITEM 4.
CONTROLS AND PROCEDURES
21PART II - OTHER INFORMATIONITEM 1.
LEGAL PROCEEDINGS
22ITEM 1A.
RISK FACTORS
23ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS
23ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
24ITEM 4.
(Removed and Reserved)
24ITEM 5.
OTHER INFORMATION
24ITEM 6.
EXHIBITS
24SIGNATURES

25





-2-





PART I – FINANCIAL INFORMATION





Item 1. Consolidated Financial Statements.





DALECO RESOURCES CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS





March 31

2011


September 30

2010(Unaudited)ASSETSCurrent Assets:Cash and Equivalents

$
83,593


$
121,447Accounts Receivable


434,243



383,866Prepaid Consulting Services Agreement


366,575



-Other Current Assets


7,424



7,424Total Current Assets


891,835



512,737Other Assets:Patent Rights


6,594,500



6,594,500Accumulated Amortization of Patent Rights


(6,065,794
)


(5,777,068
)Net Patent Rights


528,706



817,432Patents License Rights


40,907



40,907Accumulated Amortization of Patents License Rights


(15,903
)


(9,087
)Net Patents License Rights


25,004



31,820Prepaid Mineral Royalties – Long-term


479,274



449,510Interest Receivable


178,868



169,533Restricted Cash Deposits


107,590



105,961Prepaid Consulting Services Agreement


334,524



-Securities Available for Future Sale


63



95Total Other Assets


1,654,029



1,574,351Property, Plant and Equipment:Mineral Properties, at cost


9,877,128



9,877,128Accumulated Depreciation, Depletion and Amortization


(95,000
)


(95,000
)Net Mineral Properties


9,782,128



9,782,128Oil and Gas Properties, at cost


4,424,512



4,424,512Accumulated Depreciation, Depletion and Amortization


(3,988,295
)


(3,937,595
)Net Oil and Gas Properties


436,217



486,917Office Equipment, Furniture and Fixtures, at cost


61,502



61,502Accumulated Depreciation


(59,042
)


(56,274
)Net Office Equipment, Furniture and Fixtures


2,460



5,228Total Net Property, Plant and Equipment


10,220,805



10,274,273TOTAL ASSETS

$
12,766,669


$
12,361,361




SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





-3-





DALECO RESOURCES CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS





March 31

2011


September 30

2010(Unaudited)LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:Accounts Payable and Revenue Payable

$
2,315,000


$
2,131,530Federal and State Income Taxes Payable


192,427



192,427Preferred Stock Dividends Payable


1,915,736



1,857,895Accrued Interest Expense


970,935



913,802Accrued Bonus Expense


1,373,831



1,373,831Accrued Salary Expense


962,252



956,315Accrued Expense Reimbursements


19,051



25,645EV&T Note Payable


567,213



567,213CAMI Notes Payable


514,881



514,881Notes Payable - Related Parties


147,360



155,485Premium Finance Note Payable


12,172



-Note Payable - Other, net of unamortized discount of $24,489 at March 31, 2011


30,744



-Note Payable - First Citizens Bank – Current Portion


15,000



15,000Total Current Liabilities


9,036,602



8,704,024Long-term Debt:Note Payable – First Citizens Bank – Long-term Portion


23,161



30,6617.25% Convertible Debentures, net of unamortized discount of $8,226 and $10,636, respectively


36,774



19,364Total Long-term Debt


59,935



50,025TOTAL LIABILITIES


9,096,537



8,754,049SHAREHOLDERS’ EQUITY:Preferred Stock – 20,000,000 shares authorizedSeries A Preferred Stock (outstanding: none)


-



-Series B 8% Cumulative Convertible Preferred Stock – par value of $0.01 per share (outstanding: 145,000 shares)


1,450



1,450Common Stock – 100,000,000 shares authorized – par value of $0.01 per share (outstanding: 48,219,622 and 45,461,945 shares, respectively)


482,196



454,619Additional Paid-in Capital


46,389,488



45,574,252Accumulated Deficit


(42,621,365
)


(41,841,404
)Subscriptions Receivable


(576,000
)


(576,000
)Accumulated Other Comprehensive Loss


(5,637
)


(5,605
)TOTAL SHAREHOLDERS’ EQUITY


3,670,132



3,607,312TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
12,766,669


$
12,361,361




SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





-4-





DALECO RESOURCES CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




Three Months ended

March 31


Six Months Ended

March 312011


2010


2011


2010Revenues:Oil and Gas Sales

$
77,083


$
81,830


$
166,108


$
161,082Well Management Revenue


71,439



66,146



142,879



132,294Royalty Receipts


1,942



1,353



3,503



3,153Mineral Sales


1,246



4,947



7,851



8,453Total Operating Revenues


151,710



154,276



320,341



304,982Expenses:Lease Operating Expenses - Oil and Gas


27,300



54,440



74,177



95,920Operating Expenses and Other Costs - Minerals


3,003



9,843



10,294



12,092Production and Severance Taxes – Oil and Gas


4,691



4,101



10,007



8,844Depreciation, Depletion and Amortization


174,582



178,856



349,010



358,378General and Administrative Expenses


260,892



206,324



470,499



389,287Total Expenses


470,468



453,564



913,987



864,521Loss From Operations


(318,758
)


(299,288
)


(593,646
)


(559,539
)Other Income (Expense):Interest and Dividend Income


5,494



4,927



11,116



10,022Interest Expense


(71,301
)


(88,038
)


(139,590
)


(141,862
)Total Other Income (Expense), Net


(65,807
)


(83,111
)


(128,474
)


(131,840
)Loss Before Income Taxes


(384,565
)


(382,399
)


(722,120
)


(691,379
)Taxes Based on Income


-



-



-



-Net Loss


(384,565
)


(382,399
)


(722,120
)


(691,379
)Preferred Stock Dividends


(28,603
)


(28,603
)


(57,841
)


(57,841
)Net Loss Applicable to Common Shareholders

$
(413,168
)

$
(411,002
)

$
(779,961
)

$
(749,220
)Basic and Fully Diluted Net Loss per Share

$
(0.01
)

$
(0.01
)

$
(0.02
)

$
(0.02
)Weighted-average Number of Shares of Common Stock Outstanding


46,726,289



45,327,120



46,134,336



45,212,722




SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





-5-




DALECO RESOURCES CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED MARCH 31, 2011 AND 2010
 (UNAUDITED)


2011


2010Cash Flows From Operating Activities:Net Loss

$
(722,120
)

$
(691,379
)Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities:Depreciation, Depletion and Amortization


349,010



358,378Amortization of Prepaid Consulting Fees


34,054



-Amortization of Discount on Note Payable - Other


8,848



-Amortization of Discount on 7.25% Convertible Debentures


1,339



828Non-cash Charge as Interest Expense


7,154



19,787Stock-based Compensation Expense


25,319



26,616Changes in Operating Assets and Liabilities:Receivables


(59,712
)


(41,114
)Prepaid Mineral Royalties


(29,764
)


(29,838
)Restricted Cash Deposits


(1,629
)


(348
)Accounts Payable


226,391



172,209Accrued Interest Expense


57,133



41,123Other Accrued Expenses


(657
)


12,543Net Cash Used in Operating Activities


(104,634
)


(131,195
)Cash Flows From Financing Activities:Payments on Notes and Debt


(29,999
)


(17,930
)Proceeds from Borrowings


96,779



123,696Net Cash Provided By Financing Activities


66,780



105,766Net Change in Cash and Equivalents


(37,854
)


(25,429
)Cash and Equivalents at Beginning of Year


121,447



98,336Cash and Equivalents at End of Period

$
83,593


$
72,907Supplemental Information:Income Taxes Paid

$
-


$
-Interest Paid

$
15,179


$
52,527Supplemental Disclosure of Non-cash Transactions:Preferred Dividends Accrued, Not Paid

$
57,841


$
57,841Issuance of Common Stock for Patents License Rights

$
-


$
40,907Issuance of Common Stock for Services Performed

$
42,921


$
-Issuance of Common Stock and Warrants for the Purchase of Common Stock Pursuant to Consulting Services Agreement

$
735,153


$
-Conversion of 7.25% Convertible Debentures into Common Stock

$
-


$
30,000Interest Expense Resulting from Issuance of Common Stock for Services Performed

$
7,154


$
19,787Discount on Note Payable Resulting from Issuance of Warrants for the Purchase of Common Stock

$
33,337


$
-Discount (Premium) on 7.25% Convertible Debentures Resulting from Beneficial Conversion Feature

$
(1,071
)

$
12,857




SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





-6-





DALECO RESOURCES CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


FOT THE THREE AND SIX MONTHS ENDED MARCH 31, 2011 AND 2010




1. CONTINUED OPERATIONS AND GOING CONCERN





The unaudited consolidated financial statements have been prepared on the basis of a going concern which contemplates that Daleco Resources Corporation and subsidiaries (the “Company”) will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. At March 31, 2011, the Company’s current assets total $891,335. The Company incurred a net loss of $722,120 for the six months ended March 31, 2011. The ability of the Company to meet its total liabilities of $9,096,537 and to continue as a going concern is dependent upon the availability of future funding, achieving profitability within its mineral segment and ongoing profitability within its oil and gas operations. If the Company is unable to continue as a going concern, there is uncertainty relative to full recoverability of its assets. The financial statements do not reflect any adjustments relating to these uncertainties.





On February 25, 2011, the Company entered into a Consulting Services Agreement with the Musser Group, LLC (“Musser Group”) to perform consulting services for the Company (also see Note 7). The Company engaged the Musser Group, an independent contractor, to provide advisory and consulting services to the Company.  The Musser Group is engaged to provide (i) managed services; (ii) strategic business planning and implementation; and (iii) assistance in directing and executing the implementation of any strategies approved by the Board of Directors of the Company. The Musser Group’s primary focus is the analysis and validation of market opportunities for the commercialization of products within the Company’s mineral segment.





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





As of March 31, 2011, the Company and certain of its subsidiaries were in default of various obligations and certain debt obligations (not including the obligations classified as Long-term Debt, Premium Finance Note Payable and Note Payable - Other in the accompanying Balance Sheet).





Such defaulted obligations at March 31, 2011 include the following:





Amounts included in accounts payable:Vendor Settlement – see Note 9

$
20,000EV&T – fees and expenses


209,196Accrued interest expense


878,475Accrued salary expense


962,252EV&T note payable


567,213CAMI notes payable


514,881Note payable – related party


45,485Total

$
3,197,502





The above amounts are primarily owed to related parties and they are working with the Company to achieve the ultimate extinguishment of the obligations as the Company attempts to achieve profitability within its mineral segment.








2. BASIS OF PRESENTATION




Description of Business





Daleco Resources Corporation is a Nevada corporation and its Articles provide for authorized capital stock of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. The Company is a natural resources holding company whose subsidiaries are engaged in (i) the exploration, development and production of oil and gas; (ii) the exploration for naturally occurring minerals; (iii) the marketing and sales of such minerals; and (iv) the marketing and sales of patented products and processes utilizing the Company’s minerals.  The Company's assets consist of two separate categories: oil and gas and non-metallic minerals. The Company’s wholly-owned active subsidiaries include Westlands Resources Corporation, Deven Resources, Inc., DRI Operating Company, Inc., Clean Age Minerals, Inc. and CA Properties, Inc.




-7-





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





The Company, through its subsidiaries, Westland Resources Corporation, DRI Operating Company and Deven Resources, Inc., owns and operates oil and gas properties in Texas and West Virginia. The Company owns (a) working interests in wells in Texas and West Virginia and (b) overriding royalty interests in (i) seventy wells in the Deerlick Coalbed Methane Field in Alabama and (ii) two wells in Pennsylvania and (iii) one well in Texas.





In February 2010, the Company entered into a License Agreement concerning two US method patents for the treatment of wastewaters. Such patents utilize the Company’s zeolite.  The license applies to the US and covers the use of the patented technology in water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian Affairs.





The Company is primarily engaged in the exploration for minerals and oil and gas activities.  We follow accounting standards set by the Financial Accounting Standard Board, commonly referred to as “FASB”. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the “Codification” or “ASC”.





Basis of Presentation





The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2010. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended September 30, 2010, included in the Company’s annual report on Form 10-K (“2010 Annual Report”).





Unless otherwise noted, references to “year” pertain to the Company’s fiscal year, which begins on October 1 and ends on September 30; for example, 2011 refers to fiscal 2011, which is the period from October 1, 2010 to September 30, 2011.





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





-8-





Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Fair Value Measurements





The Company’s only financial instruments are (a) cash, securities available for future sale, and short-term trade receivables, payables and debt, and (b) a long-term note payable to a bank. The carrying amounts reported in the accompanying consolidated financial statements for cash, securities available for future sale, and short-term trade receivables, payables and debt approximate fair values because of the immediate nature of short-term maturities of these financial instruments. Based on the borrowing rates currently available to the Company for long-term bank loans with similar terms and average maturities, the carrying amount of long-term and short-term bank debt totaling $38,161 approximates fair value at March 31, 2011.





Significant Accounting Policies





There have been no changes in significant accounting policies from those disclosed in the 2010 Annual Report on Form 10-K.





New Accounting Standards





There were no recently issued accounting pronouncements that impact our consolidated financial statements.





3. OIL AND GAS PROPERTIES SEGMENT INFORMATION





Results of Operations for Oil and Gas Producing Activities for the Three and Six Months Ended March 31, 2011 and 2010:


Three Months Ended

March 31


Six Months Ended

March 312011


2010


2011


2010Revenues:Oil and gas sales

$
77,083


$
81,830


$
166,108


$
161,082Well management revenue


71,439



66,146



142,879



132,294Royalty receipts


1,942



1,353



3,503



3,153Total revenues


150,464



149,329



312,490



296,529Lease operating expenses


27,300



54,440



74,177



95,920Production and severance taxes


4,691



4,101



10,007



8,844Depreciation depletion, amortization and valuation provisions


25,350



32,850



50,700



65,700Total expenses


57,341



91,391



134,884



170,46493,123



57,938



177,606



126,065Income tax expenses


-



-



-



-Results of operations from oil and gas producing activities (excluding corporate overhead and interest costs)

$
93,123


$
57,938


$
177,606


$
126,065





4. MINERAL PROPERTIES SEGMENT INFORMATION





The Company is an exploration stage company in respect to its mineral holdings.




-9-





During October 2009, the Company entered into an agreement to sell zeolite to be used in certain agricultural applications including but not limited to feed supplements and soil additives in a ten state area in the south-central part of the US.





In December 2009, the proposed Sierra Kaolin Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations was approved. This will facilitate the project moving to the next phases, including site preparation for extraction operations and the continued evaluation of potential product specific marketing arrangements with certain third parties.





In February 2010, the Company entered into a License Agreement concerning two US method patents for the treatment of wastewaters. Such patents utilize the Company’s zeolite.  The license applies to the US and covers the use of the patented technology in water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian Affairs.





The Company previously amortized its mineral properties at a nominal amortization rate as the Company has not produced commercial quantities of any of its mineral deposits. Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.





Results of Operations for Minerals Properties Activities for the Three and Six Months Ended March 31, 2011 and 2010:


Three Months Ended

March 31


Six Months Ended

March 312011


2010


2011


2010Mineral Sales

$
1,246


$
4,947


$
7,851


$
8,453Operating and other expenses


(3,003
)


(9,843
)


(10,294
)


(12,092
)Depreciation depletion, amortization and valuation provisions


(147,771
)


(144,363
)


(295,542
)


(289,393
)(149,528
)


(149,259
)


(297,985
)


(293,032
)Income tax expenses


-



-



-



-Results of operations from mineral properties activities (excluding corporate overhead and interest costs

$
(149,528
)

$
(149,259
)

$
(297,985
)

$
(293,032
)





5. NOTES PAYABLE





Premium Finance Note Payable





During November 2010, the Company entered into a Premium Finance Note Payable for $21,779 to finance certain insurance premiums.  The maturity date of the note is October 1, 2011 and the interest rate is 11.9%. Consistent with the provisions of the note, the Company is required to make monthly payments of principal and interest of $2,100. The balance of the Note at March 31, 2011 is $12,172.





-10-





Zia Trust Obligation





During fiscal 2010, the Company borrowed $50,000 from Zia Trust, Inc., an entity affiliated with a Director of the Company. The note bears interest at 15% per annum and is due on demand on or before July 15, 2012. The Company pledged a certificate of deposit at a bank (“CD”) as collateral for the note. The CD was released as collateral for the note in February 2011. In October 2010, the Company paid $10,000 on the note (principal of $8,125 and interest of $1,875). As of March 31, 2011, the principal balance due on the note was $41,875 (included in Notes Payable – Related Parties in the accompanying Balance Sheet) and accrued but unpaid interest on the note totals $2,933.




Note Payable - Other





On January 12, 2011, an unrelated entity loaned the Company $60,000. The note requires monthly payments of principal and interest (5.5%) totaling $2,645. The maturity date of such loan is January 12, 2012, with a scheduled final payment of $33,469. The Company used the proceeds to satisfy certain delinquent payables. In connection with this loan, the Company issued warrants for the purchase of 500,000 shares of Common Stock at a purchase price of $0.15 per share. The warrants expire on December 31, 2015. In recording the transaction, the Company allocated the value of the proceeds to the note and the warrants based on their relative fair values. The fair value of the warrants was determined using the Black-Scholes valuation model using the following assumptions: a contractual term of 5 years, risk free interest rate of 1.99%, dividend yields of 0%, and volatility of 163%. The allocated value of the warrants was $33,337 and such amount was recorded as a discount on the note. The discount is being amortized over the life of the note. The unamortized balance of the discount at March 31, 2011 was $24,489 and $8,848 is included in interest expense during the three and six months ended March 31, 2011. As of March 31, 2011, the principal balance due on the note was $55,233 and accrued interest on the note totals $155.





6. 7.25% CONVERTIBLE DEBENTURES





During the six months ended March 31, 2011, $15,000 of Debentures were purchased by a Director and no Debentures were converted.





Debentures totaling $45,000 are outstanding at March 31, 2011. During the six months ended March 31, 2010, the Company recorded a discount of $12,857 on the Debentures resulting from the beneficial conversion feature. During the six months ended March 31, 2011, the Company recorded a premium of $1,071 on the Debentures resulting from the beneficial conversion feature. The discount (net of the premium) is being amortized through the maturity date of the Debentures. Such discount or premium was determined based on the fair value of the Company’s Common Stock in comparison to the conversion price per share as of the commitment date to purchase the Debentures. During the three months ended March 31, 2011 and 2010, the Company recognized contractual coupon interest of $624 and $549, respectively, and amortization of the discount of $645 and $685, respectively. During the six months ended March 31, 2011 and 2010, the Company recognized contractual coupon interest of $1,317 and $597, respectively, and amortization of the discount of $1,339 and $828, respectively. Such amounts are included in interest expense. The effective interest rate for the six months ended March 31, 2011 and 2010 was 16% and 17%, respectively. The if-converted value of the Debentures at March 31, 2011 approximates $55,000.





7. CAPITAL STOCK





Common Stock





The Company issued a total of 2,757,677 shares of Common Stock during the six months ended March 31, 2011: 357,677 shares were issued to a vendor as discussed in Note 9 and 2,400,000 shares were issued in connection with the Consulting Services Agreement with the Musser Group (see Note 1). The shares of Common Stock issued to the Musser Group were valued at $360,000, the market price at the time of issuance. Also, the Company issued to the Musser Group warrants for the purchase of 2,500,000 shares of Common Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants are exercisable through February 24, 2016. The fair value of the warrants was determined to be $375,153 using the Black-Schiles valuation model and the following assumptions: a contractual term of 5 years, risk free interest rate of 2.16%, dividend yields of 0%, and volatility of 163%.




-11-





The Company filed a registration statement under the Securities Act of 1933 on Form S-8 for the shares of Common Stock issued to the Musser Group. The total fair value of the shares of Common Stock and the warrants issued to the Musser Group amounted to $735,153 and such amount was recorded as prepaid consulting fees. The prepaid consulting fees are being amortized over the life of the agreement. The unamortized balance at March 31, 2011 was $701,099, of which $366,575 is included in current assets. Amortization of $34,054 is included in General and Administrative Expenses during the three and six months ended March 31, 2011.





Series B 8% Cumulative Convertible Preferred Stock





No shares of Series B Preferred Stock were issued or converted to Common Stock during the six months ended March 31, 2011.





Options and Warrants to Purchase Common Stock





Number of

Options and

Warrants


Weighted

Average Price

per ShareOptions and warrants outstanding at September 30, 2010


2,622,305


$
0.38Options expired


(200,000
)

$
0.48Warrants issued in connection with Consulting Services Agreement with the Musser Group


2,500,000


$
0.15Warrants issued in connection with Note Payable


500,000


$
0.15Warrants expired


(822,305
)

$
0.55Options and warrants outstanding at March 31, 2011


4,600,000


$
0.19





Summarized information relating to the stock options to purchase Common Stock outstanding as of March 31, 2011, is as follows:





Options Outstanding


Options ExercisableExercise

Price per

Share


Number of

Shares

Underlying

Options

Unexercised


Weighted

Average

Exercise

Price

Per Share


Weighted

Average

Remaining

Life

(Years)


Number of

Shares

Underlying

Options

Exercisable


Weighted

Average

Exercise

Price Per

Share$
0.21-$0.67



1,600,000


$
0.28


2.93



1,000,000


$
0.32





Stock-based Compensation





During the six months ended March 31, 2011, no options to purchase shares of Common Stock were granted. There are options to purchase 1,600,000 shares of Common Stock outstanding as of March 31, 2011, which options are held by current officers, Directors and employees of the Company (“Insiders”).  The exercise prices for the options held by Insiders range from $0.21 per share to $0.67 per share.





In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company recorded stock-based compensation expense for the three months ended March 31, 2011 and 2010 of $8,599 and $17,197, respectively, relating to stock options granted to Insiders. The Company recorded stock-based compensation expense for the six months ended March 31, 2011 and 2010 of $25,319 and $26,616, respectively. Such expense is included in General and Administrative Expenses. No tax benefit has been recognized. Compensation costs are based on the fair value at the grant date.  The fair value of the options has been estimated by using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates between 2.43% and 4.16%; expected life of three to five years; and expected volatility between 37% and 106%.




-12-





Net Income (Loss) Per Share





Net income (loss) per share is computed in accordance with FASB ASC Topic 260, Earnings per Share. Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive.





Options and warrants to purchase shares of Common Stock were outstanding during the periods but have not been included in the computation of diluted earnings per share because such shares would have an anti-dilutive effect on net loss per share. The shares of Common Stock issuable upon the conversion of the 7.25% Convertible Debentures (see Note 6) have not been included in the computation of diluted earnings per share because such shares would have an anti-dilutive effect on net loss per share. The shares of Common Stock issuable upon the conversion of the Series B 8% Cumulative Convertible Preferred Stock have not been included in the computation of diluted earnings per share because the price at which such shares are convertible was in excess of the market price of the Common Stock at March 31, 2011. No other adjustments were made for purposes of per share calculations.





Payment of Accrued Dividends





There were no cash dividend payments in respect to either series of Preferred Stock during the six months ended March 31, 2011 and 2010. The Company has accrued but unpaid dividends of $1,915,736 at March 31, 2011 related to the Series A and Series B issues of Preferred Stock.





8. INCOME TAXES





At March 31, 2011, the Company has current federal and state taxes payable of $192,427 and no deferred tax asset or liability.  The Company has accrued $83,153 at March 31, 2011, for interest related to the federal and state income taxes.  The federal income tax liabilities arose primarily from alternative minimum tax for fiscal 2004 which the Company has contested. Interest expense related to tax liabilities is included in Interest Expense in the accompanying Consolidated Statement of Operations.





The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. ASC 740 requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards. The Company has available at September 30, 2010, operating loss carryforwards of approximately $25 million, which may be applied against future taxable income and will expire in various years through 2025. The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined at this time. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards; therefore, no net deferred tax asset has been recognized. No potential benefit of these losses has been recognized in the financial statements. The company may be subject to IRC code section 382 which could limit the amount of the net operating loss and tax credit carryovers that can be used in future years.





Below is a reconciliation of the reported amount of income tax expense attributable to continuing operations for the period to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax loss for the three and six months ended March 31, 2011 and 2010:





Income tax benefit computed at the statutory Federal income tax rate


(35
)%Change in valuation allowance


35
%Effective income tax rate


0
%





Included in the table below are the components of income tax expense for the three and six months ended March 31, 2011 and 2010:





-13-





Three Months Ended

March 31


Six Months Ended

March 312011


2010


2011


2010Current income tax expense (benefit)

$
-


$
-


$
-


$
-Deferred income tax expense (benefit)


(134,598
)


(133,840
)


(252,742
)


(241,983
)Valuation allowance


134,598



133,840



252,742



241,983Total income tax expense (benefit)

$
-


$
-


$
-


$
-





9. PENDING LITIGATION





During October 2009, a working interest owner commenced an action against a subsidiary of the Company (“WRC”) in the District Court of Burleson County, Texas, for an accounting of expense and revenues for six wells.  WRC, through its Texas counsel, has filed a general denial of the claim.  In November 2009, WRC provided the plaintiff with a complete accounting for all wells in question. The plaintiff has sought additional discovery and WRC has provided additional information. The action is ongoing.





During September 2010, a complaint was filed against WRC in the District Court of Burleson County, Texas, seeking judgment in respect to $92,921 owed to a vendor of WRC. Such amount is included in Accounts Payable in the accompanying Consolidated Balance Sheet at September 30, 2010. In November 2010, the vendor agreed to dismiss its complaint against WRC after a settlement agreement was reached whereby WRC made an initial payment of $30,000 in cash and delivered 357,677 shares of the Company’s Common Stock (consideration to the vendor of $42,921). The Company did not retire the remaining obligation by March 1, 2011, as required by the settlement agreement. The remaining obligation of $20,000 is included in Accounts Payable in the accompanying Consolidated Balance Sheet at March 31, 2011. During the six months ended March 31, 2011, the Company recognized $7,154 of interest expense relating to the fair value of the shares of its Common Stock issued to such vendor.





10. SUBSEQUENT EVENTS





On April 8, 2011, the Company entered into a Material Supply and Joint Venture Agreement between CAMI (wholly-owned subsidiary) and VitaminSpice, Inc. (“VSI”) pursuant to which CAMI agrees to supply Clinoptilolite (zeolite) to VSI in connection with the introduction by VSI of detoxification products into targeted geographic markets. VSI is obligated to utilize CAMI as its sole supplier of Clinoptilolite.  The agreement does not specify any minimum quantity supply requirements of CAMI. In addition to an initial price per ton for Clinoptilolite sold to VSI, CAMI will share in the profits from the sales of such products by VSI. Further, the Musser Group, who also provides consulting services to VSI, participates in the profits from the sales of such products by VSI. In accordance with the Company’s Audit Committee charter regarding related persons transaction policy, the agreement was ratified by the Audit Committee and the Board of Directors on April 26, 2011.





During April 2011, the Company issued Debentures totaling $49,000, of which $20,000 and $14,000 were issued to a Director and an officer, respectively. All the purchasers of such Debentures elected to immediately convert such holdings into Common Stock and the Company issued 350,000 shares of Common Stock at an average conversion price of $0.14 per share.





On April 26, 2011, the Company granted (a) options for the purchase of 950,000 shares of Common Stock to two Directors and an officer and (b) a warrant for the purchase of 100,000 shares of Common Stock to an engineering consultant to the Company. The options are exercisable through April 25, 2016, at an exercise price of $0.22 per share. The options vest 50% in April 2012 and vest 25% in each of April 2013 and 2014. The warrant is exercisable through April 25, 2016, at an exercise price of $0.22 per share.





Management performed an evaluation of Company activity through May 20, 2011, the date the unaudited consolidated financial statements were prepared for issuance, and concluded that there are no other significant subsequent events requiring disclosure.




-14-




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


OVERVIEW


This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters that we consider to be important in understanding the results of our operations for the three and six months ended March 31, 2011 and our financial condition as of March 31, 2011. Our fiscal year begins on October 1 and ends on September 30. Unless otherwise noted, references to "year" pertain to our fiscal year; for example, 2011 refers to fiscal 2011, which is the period from October 1, 2010 to September 30, 2011. In the discussion that follows, we analyze the results of our operations for the three and six months ended March 31, 2011, including the trends in our overall business, followed by a discussion of our financial condition.
  The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto, all included elsewhere in this report. The forward-looking statements in this section and other parts of this report involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Forward-Looking Statements."





RESULTS OF OPERATIONS





For the three and six months ended March 31, 2011 and 2010:





Three Months Ended

March 31


Six Months Ended

March 312011


2010


2011


2010Revenues

$
151,710


$
154,276


$
320,341


$
304,982Net Loss

$
(384,565
)

$
(382,399
)

$
(722,120
)

$
(691,379
)Oil and Gas Production and Cost Information:Production:Oil (Bbl)


355



406



840



901Gas (Mcf)


6,995



8,027



15,302



15,852Average Price:Oil (per Bbl)

$
89.05


$
76.70


$
85.80


$
74.65Gas (per Mcf)

$
6.50


$
6.31


$
6.15


$
5.92Mcfe

$
8.44


$
7.82


$
8.17


$
7.58Lease Operating Expenses and Production and Severance Taxes per Mcfe

$
3.51


$
5.60


$
4.14


$
4.93







Bbl   = One barrel of oil or condensate


Mcf   = One thousand cubic feet


Mcfe = One thousand cubic feet gas equivalent




-15-





CONSULTING SERVICES AGREEMENT





On February 25, 2011, the Company entered into a Consulting Services Agreement with the Musser Group, LLC (“Musser Group”) to perform consulting services for the Company. The Company engaged the Musser Group, an independent contractor, to provide advisory and consulting services to the Company.  The Musser Group is engaged to provide (i) managed services; (ii) strategic business planning and implementation; and (iii) assistance in directing and executing the implementation of any strategies approved by the Board of Directors of the Company. The Company issued 2,400,000 shares of Common Stock in connection with the Consulting Services Agreement with the Musser Group. Also, the Company issued to the Musser Group warrants for the purchase of 2,500,000 shares of Common Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants are exercisable through February 24, 2016. The Company filed a registration statement under the Securities Act of 1933 on Form S-8 for the shares of Common Stock issued to the Musser Group. The Company determined the fair value of the shares of Common Stock and the warrants issued to the Musser Group to be $735,153 and recorded such amount as prepaid consulting fees. The prepaid consulting fees are being amortized over the life of the agreement.





OIL AND GAS OPERATIONS





Oil and Gas Sales





Oil and Gas Sales decreased to $77,083 for the three months ended March 31, 2011 from $81,830 for three months ended March 31, 2010. Oil and Gas Sales increased to $166,108 for the six months ended March 31, 2011 from $161,082 for six months ended March 31, 2010. See the table above in respect to production, average prices and lease operating expenses and production and severance taxes per Mcfe. The level of oil and gas production experienced during the periods has been hampered as five wells are “off-line” for repair and declines in the producing gas-oil ratio from certain producing wells operated by the Company in Texas.





Well Management Revenue





Well Management Revenue increased to $71,439 for the three months ended March 31, 2011 from $66,146 for three months ended March 31, 2010. Well Management Revenue increased to $142,879 for the six months ended March 31, 2011 from $132,294 for six months ended March 31, 2010. The amounts which may be charged by the Company for well management are set for the in the joint operating agreements governing the wells operated by the Company.





Lease Operating Expenses and Production and Severance Taxes





Lease Operating Expenses and Production and Severance Taxes decreased to $31,991 for the three months ended March 31, 2011 from $58,541 for three months ended March 31, 2010. Lease Operating Expenses and Production and Severance Taxes decreased to $84,184 for the six months ended March 31, 2011 from $104,764 for six months ended March 31, 2010. The decrease in Lease Operating Expenses and Production and Severance Taxes per Mcfe is primarily the result of a reduction and deferment of well work activity.





Depreciation, Depletion and Amortization - Oil and Gas





Depreciation, depletion and amortization (“DD&A”) – Oil and Gas totaled $25,350 and $32,850 for the three months ended March 31, 2011and 2010, respectively. Depreciation, depletion and amortization (“DD&A”) – Oil and Gas totaled $50,700 and $65,700 for the six months ended March 31, 2011and 2010, respectively. Such decrease is primarily the result of the upward revision of proved developed reserves at the end of fiscal 2010 resulting primarily from the increase in oil and gas prices which the Company receives for its oil and gas production.





MINERALS OPERATIONS





The Company is an Exploration Stage company in respect to its mineral holdings.  In December 2009, the proposed Sierra Kaolin Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations was approved. This will facilitate the project moving to the next phases, including site preparation for extraction operations and the continued evaluation of potential product specific marketing arrangements with certain third parties.




-16-





Minerals Sales





Minerals sales totaled $1,246 and $4,947 during the three months ended March 31, 2011and 2010, respectively. Minerals sales totaled $7,851 and $8,453 during the six months ended March 31, 2011and 2010, respectively. During October 2009, the Company entered into an agreement to sell zeolite to be used in certain agricultural applications including but not limited to feed supplements and soil additives in a ten state area in the south-central part of the US. The Company made initial shipments during the three months ended December 31, 2009.





Minerals Exploration Expenses





The Company did not incur minerals exploration expenses during the periods ended March 31, 2011 and 2010. These expenses are primarily for costs associated with the exploration and quantification of mineral resources and mineral reserves. Such expenses related to the kaolin reserves were the responsibility of the Company’s partner.





Minerals Operating Expenses and Other Costs





Minerals operating expenses and other costs totaled $3,003 and $9,843 for the three months ended March 31, 2011and 2010, respectively. Minerals operating expenses and other costs totaled $10,294 and $12,092 for the six months ended March 31, 2011and 2010, respectively.





Depreciation, Depletion and Amortization - Minerals





DD&A - Minerals totaled $147,771 and $144,363 for the three months ended March 31, 2011and 2010, respectively. DD&A - Minerals totaled $295,542 and $289,393 for the six months ended March 31, 2011and 2010, respectively. Such amounts are amortization of Patent Rights and Patents License Rights. Once the Company produces commercial quantities of any of its mineral deposits, the Company will use the unit-of-production method in calculating cost depletion.





DEPRECIATION, DEPLETION AND AMORTIZATION - OTHER





DD&A - Other totaled $1,461 and $1,643 for the three months ended March 31, 2011and 2010, respectively.DD&A - Other totaled $2,768 and $3,285 for the six months ended March 31, 2011and 2010, respectively.





GENERAL AND ADMINISTRATIVE EXPENSES





General and administrative expenses totaled $260,892 and $206,324 for the three months ended March 31, 2011and 2010, respectively.  General and administrative expenses totaled $470,499 and $389,287 for the six months ended March 31, 2011and 2010, respectively. The Company recorded stock-based compensation expense of $25,319 and $26,616 for the six months ended March 31, 2011and 2010, respectively. The Company recorded amortization expense of $34,054 during the six months ended March 31, 2011 related to the prepaid consulting fees paid to the Musser Group. The majority of the balance of the increase is a result of an increase in consulting fees related to the Company’s efforts to commercialize its waste water treatment activities.





INTEREST EXPENSE





Interest expense totaled $71,301 and $88,038 for the three months ended March 31, 2011 and 2010, respectively. Interest expense totaled $139,590 and $141,862 for the six months ended March 31, 2011 and 2010, respectively. During the six months ended March 31, 2011, the Company recognized $7,154 as interest expense relating to the issuance of its Common Stock as discussed in Note 9 of the Notes to Unaudited Consolidated Financial Statements. During the three and six months ended March 31, 2011, the Company recognized $8,848 as interest expense regarding the amortization of discount on a note payable as discussed in Note 5 of the Notes to Unaudited Consolidated Financial Statements. During the six months ended March 31, 2010, the Company recognized $19,787 as interest expense resulting from the beneficial conversion feature of the 7.25% Convertible Debentures. The Debentures are discussed in Note 6 of the Notes to Unaudited Consolidated Financial Statements.





-17-





LIQUIDITY AND CAPITAL RESOURCES





The Company’s cash flow used in operating activities was $104,634 and $131,195 for the six months ended March 31, 2011 and 2010, respectively. Funds have been and are being deployed in efforts to enhance the commercial viability of the Company’s existing resource assets, to identify potential expansion opportunities and to retire obligations associated with the Company’s assets. The Company’s cash and equivalents at March 31, 2011 was $83,593.





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





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





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





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





In June 2010, the Company sold its interests in nineteen undeveloped acres in Harrison County, Texas for $60,686. The Company owns other undeveloped acreage in Texas which is “held by production”.





During June 2009, the Company offered a Private Placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2009 Private Placement”). Private Placement consists of up to Five Hundred Thousand Dollars ($500,000) of 7.25% Convertible Debentures (“Debentures” or “Debenture”).  The Debentures offered by the Company, are five (5) year instruments maturing on July 30, 2014, bearing interest at seven and one quarter percent (7.25 %) per annum on the balance outstanding from time to time.  Interest will commence to accrue immediately upon issuance of the Debentures and will be paid quarterly on each September 30, December 31, March 31 and June 30, which the Debentures are outstanding.  Payment of principal will commence on September 30 following the second anniversary of the Closing Date of this Offering. The debentures are convertible at a conversion price equal to the greater of either $0.14 per share or an amount equal to 80% of the average of the closing bid and ask prices of the Common Stock for the five (5) trading days immediately preceding the conversion date.  The Company has extended the offering period for the Debentures until June 30, 2011. Through March 31, 2011, this private placement raised $210,000 (net of fees and expenses) for the Company. The Company is utilizing the proceeds of this private placement for general working capital purposes.





-18-





In November 2010, the Company issued 357,677 shares of its Common Stock (consideration to the vendor of $42,921) in partial payment of a delinquent payable due a vendor of a subsidiary of the Company.





On January 12, 2011, an unrelated party loaned the Company $60,000. The note requires monthly payments of principal and interest (5.5%) totaling $2,645. The maturity date of such loan is January 12, 2012, with a scheduled final payment of $33,469.The Company used the proceeds to satisfy certain delinquent payables. In connection with this loan, the Company issued warrants for the purchase of 500,000 shares of Common Stock at a purchase price of $0.15 per share. The warrants expire on December 31, 2015.





During the six months ended March 31, 2011, $15,000 of Debentures was purchased by a Director. During April 2011, the Company issued Debentures totaling $49,000, of which $20,000 and $14,000 were issued to a Director and an officer, respectively. All the purchasers of such Debentures elected to immediately convert such holdings into Common Stock and the Company issued 350,000 shares of Common Stock at an average conversion price of $0.14 per share.





Commercialization of Existing Assets





The Company believes that its proved undeveloped reserves (“PUDs”) will be developed within the next few years as a result of renewed interest in the area of its properties. The Company is actively seeking financing of approximately $2.5 million for its share of the estimated drilling and completion costs of the PUDs. The increase in oil price and development of properties in resource plays in the immediate area are major factors contributing to such interest. To obtain the capital necessary to develop the PUDs, the Company (i) continues to seek project specific funding commitments and other capital funding alternatives and (2) is evaluating the sale of certain oil and gas producing properties.





The Company continues to pursue plans to commercialize its kaolin and zeolite projects which are critical for the Company to achieve profitability and establishing the Company as a market innovator in industrial minerals. Those plans have progressed from the data acquisition and analysis phase into ongoing mineral processing and facility design phase. The Company and its current partner and potential other partners are actively investigating various commercial applications for its mineral based products. The Company continues to focus on establishing business and or financial relationships that will provide the necessary capital to effectively exploit its kaolin and zeolite mineral resource holdings.





Zeolite





Certain initial small scale tests have progressed to the point where larger scalable pilot tests of commercial applications for zeolite are in progress in respect to soil additives and animal waste treatment.





In October, 2009, the Company entered into an agreement to sell zeolite to be used in certain agricultural applications limited to feed supplements in a ten state area in the south-central part of the US. The Company made initial shipments during fiscal 2010.





In February 2010, the Company entered into a License Agreement concerning two US method patents for the treatment of wastewaters. Such patents utilize the Company’s zeolite. The license applies to the US and covers the use of the technology in water, wastewater and waste treatment in animal feed operations, agriculture, and aquaculture. In addition, the license applies to the treatment of sanitary wastewater on Federal facilities, military bases and lands administered by the US Bureau of Indian Affairs. The Company issued 140,000 shares of its Common Stock in consideration for the License Agreement.  The Company recorded $40,907 as Patents License Rights based on an average price of $0.29 per share.





On April 8, 2011, the Company entered into a Material Supply and Joint Venture Agreement between CAMI (wholly-owned subsidiary) and VitaminSpice, Inc. (“VSI”) pursuant to which CAMI agrees to supply Clinoptilolite (zeolite) to VSI in connection with the introduction by VSI of detoxification products into targeted geographic markets. VSI is obligated to utilize CAMI as its sole supplier of Clinoptilolite.  The agreement does not specify any minimum quantity supply requirements of CAMI. In addition to an initial price per ton for Clinoptilolite sold to VSI, CAMI will share in the profits from the sales of such products by VSI.





-19-





Kaolin





The efforts of the Company and Tecumseh Professional Associates LLC to evaluate the Sierra Kaolin deposit are progressing. The venture’s efforts to commercialize the Sierra Kaolin deposit have focused on an initial target area encompassing approximately 32 acres out of the project’s 2,740 acres. The test minerals extracted from the target area have been processed into product formulations determined by independent consultants to be suitable (a) for coatings, fillers and pigments for use within the paint and paper manufacturing industries, and (b) as an additive in cement formulations. The analysis results of the processed minerals with respect to its physical properties including brightness, color, opacity, strength, and oil absorption have indicated that commercially viable products can be produced from the deposit’s extracted minerals.





The venture, with the assistance of its consultants, has begun technical presentations of the product formulations to entities active on both the demand and supply sides of the coatings, fillers and pigments sectors of the paint and paper industries. Preliminary feedback from these initial presentations has been encouraging and has led to follow-up discussions and submission of product samples for prospective application testing. The final results of these inquiries and testing are expected over the next several months. Tecumseh, as the project’s manager, is proceeding with its efforts to prepare the mineral deposit site for production. In December 2009, the proposed Sierra Kaolin Open Pit Clay Mine project cleared the regulatory review process and the project’s definitive USDA Forest Service Plan of Operations was approved. This extraction permit will facilitate the project moving to the next phases, including site preparation for extraction operations and the continued evaluation of potential product specific marketing arrangements with certain third parties.





OFF-BALANCE SHEET ARRANGEMENTS





The Company has no “off-balance sheet arrangements” and does not expect to enter into any such arrangements in the foreseeable future.





CRITICAL ACCOUNTING POLICIES





There have been no changes in significant accounting policies from those disclosed in the 2010 Annual Report on Form 10-K.





NEW ACCOUNTING STANDARDS





There were no recently issued accounting pronouncements that impact our consolidated financial statements.





FORWARD LOOKING STATEMENTS





We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "PSLRA").This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.





The following discussion is intended to inform existing and potential security holders generally of some of the risks and uncertainties that can affect the Company and to take advantage of the “safe harbor” protection for forward-looking statements afforded under Federal securities laws.  From time to time, management or persons acting on the Company’s behalf make forward-looking statements to inform existing and potential security holders about the Company.  Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan” or other words that convey the uncertainty of future events or outcomes.




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Except for statements of historical or present facts, all other statements contained in this report are forward-looking statements.  The forward-looking statements may appear in a number of places and include statements with respect to, among other things,  business objectives and strategic plans; operating strategies; acquisition strategies; drilling of wells; oil and gas reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues); estimates of future production of oil, natural gas and minerals; expected results or benefits associated with recent acquisitions; marketing of oil, gas and minerals; expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures; expectations regarding cash flow and future borrowings sufficient to fund ongoing operations and debt service, capital expenditures and working capital requirements; nonpayment of dividends; expectations regarding competition; impact of the adoption of new accounting standards and the Company’s financial and accounting systems; and effectiveness of the Company’s control over financial reporting.





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





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





·
volatility of the market price for both crude oil and natural gas;


·
volatility of the market price for the Company’s minerals;


·
market capacity and demand for the Company’s minerals;


·
the timing, effects and success of the Company’s acquisitions, exploration and development activities;


·
the timing, quantity and marketability of production;


·
effectiveness of management’s strategies and decisions;


·
competition;


·
changes in the legal and/or regulatory environment and/or changes in accounting standards;


·
policies and practices or related interpretations by auditors and/or regulatory agencies;


·
climatic conditions; and


·
unanticipated problems, issues or events.





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





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





Item 3. Quantitative and Qualitative Disclosures About Market Risk.





None.





Item 4. Controls and Procedures.





(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our Interim Chief Executive Officer/President/Chief Financial Officer evaluated, with the participation of management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Interim Chief Executive Officer/President/Chief Financial Officer has concluded that our disclosure controls and procedures were effective as of March 31, 2011 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.





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On March 31, 2011, the Company had two employees and engaged the Chief Accounting Officer on a consulting basis.  All day-to-day financial matters are overseen by the Interim Chief Executive Officer/President/Chief Financial Officer with oversight by the Board of Directors.  All contracting by the Company, for other than everyday items, is done with the approval of the entire Board of Directors.





In light of the size of the Company, its limited cash flow and the transparency of its actions, the Company has instituted a limited number of formal controls and procedures in addition to those required under the Sarbanes Oxley Act of 2002 related to the composition of its Board of Directors and the establishment of various Board Committees. These policies include an Employee Manual outlining procedures relating but not limited to employee dispute resolution and issues related to “controlled substances” and policies in handling the recordation and transfer of funds. Any problem which cannot be resolved internally or which an employee does not desire to discuss with a superior may be discussed with counsel or an independent member of the Board of Directors.





The Interim Chief Executive Officer/President/Chief Financial Officer, with the assistance of the Audit Committee, established, consistent with the provisions of Rule 13a-15(f) and Rule 15d-15(f) of the '34 Act, a procedure and check list for the filing of all information and reports required by the Securities and Exchange Act of 1934, as amended and the Sarbanes-Oxley Act ("SOX"). Since the Company employs only two people, as of the filing date, the Company's Interim Chief Executive Officer/President/Chief Financial Officer is responsible for reporting and filing reports. In addition to the mandatory filing requirements established by the Securities and Exchange Commission, OTC:BB (the exchange on which the Registrant's stock is traded) and SOX, the Registrant has taken the position that any transaction that could impact the value of the Company or the Company's stock by five percent or greater requires disclosure. All press releases are published by the Company only after submittal to the Board of Directors and counsel for review, comment and approval.





The Company's internal controls over financial reporting and record maintenance have been developed by the Company as approved by the Board of Directors.  These procedures are for the detailed and accurate recordation of all transactions in which the Company is involved and the disposition of assets. They provide reasonable assurance that the transactions recorded permit the accurate preparation of financial statements in accordance with generally accepted accounting principals and that receipt and expenditures of the Company are being made only in accordance with authorization of management.  The controls provide reasonable assurances regarding the prevention and timely detection of unauthorized use of Company assets and acquisition or disposition of the Company's assets that could have a material effect on the Company's financial statements.





(b) Changes in Internal Control Over Financial Reporting. No changes were made to our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





Code of Ethics





The Board of Directors of the Company has adopted a Code of Ethics (see Exhibit 14.1to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2007)for all of the Company's employees, officers and Directors.  Each officer and Director of the Company annually affirms that he has read the Company’s Code of Ethics and agrees to be bound thereby.





PART II. OTHER INFORMATION





Item 1. Legal Proceedings.





None




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Item 1A. Risk Factors.





Not required for smaller reporting companies.





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





June 2009 Private Placement





During June 2009, the Company offered a Private Placement under the provisions of Regulation D promulgated under the Securities Act of 1933, as amended (the “2009 Private Placement”). Private Placement consists of up to Five Hundred Thousand Dollars ($500,000) of 7.25% Convertible Debentures (“Debentures” or “Debenture”).  The Debentures offered by the Company, are five (5) year instruments maturing on July 30, 2014, bearing interest at seven and one quarter percent (7.25 %) per annum on the balance outstanding from time to time.  Interest will commence to accrue immediately upon issuance of the Debentures and will be paid quarterly on each September 30, December 31, March 31 and June 30, which the Debentures are outstanding.  Payment of principal will commence on September 30 following the second anniversary of the Closing Date of this Offering. The debentures are convertible at a conversion price equal to the greater of either $0.14 per share or an amount equal to 80% of the average of the closing bid and ask prices of the Common Stock for the 5 trading days immediately preceding the conversion date.  The Company has extended the offering period for the Debentures. Through March 31, 2011, this private placement raised $210,000 (net of fees and expenses) for the Company. The Company is utilizing the proceeds of this private placement for general working capital purposes.





Through September 30, 2009, all of the purchasers of the Debentures elected to immediately convert such holdings into shares of Common Stock at an average conversion price of $0.14 per share and, accordingly, the Company issued 1,019,465 shares of Common Stock. As of September 30, 2009, this private placement had raised $128,500 (net of fees and expenses totaling $14,225) for the Company.





During the fiscal year ended September 30, 2010, the Company issued Debentures totaling $66,500. Purchasers of $36,500 of the Debentures elected to immediately convert such holdings into Common Stock and the Company issued 221,134 shares of Common Stock at an average conversion price of $0.17 per share.





During February 2011, the Company issued Debentures totaling $15,000.





During April 2011, the Company issued Debentures totaling $49,000. The purchasers elected to immediately convert such holdings into Common Stock and the Company issued 350,000 shares of Common Stock at an average conversion price of $0.14 per share.





Options to Purchase Common Stock





In December 2009, the Company granted options to purchase 1,200,000 shares of Common Stock to two Directors and the Interim Chief Executive Officer/President/Chief Financial Officer/Director. The options are exercisable through December 2014 at an exercise price of $0.21 per share.  The options vest 50% in December 2010 and 25% in each of December 2011 and 2012.





On April 26, 2011, the Company granted options to purchase 950,000 shares of Common Stock to two Directors and an officer. The options are exercisable through April 2016 at an exercise price of $0.22 per share. The options vest 50% in April 2012 and 25% in each of April 2013 and 2014.





Warrants to Purchase Common Stock





On January 12, 2011, an unrelated party loaned the Company $60,000. In connection with this loan, the Company issued warrants for the purchase of 500,000 shares of Common Stock at a purchase price of $0.15 per share. The warrants expire on December 31, 2015.




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On February 25, 2011, in connection with the Consulting Services Agreement with The Musser Group LLC the Company issued to the Musser Group warrants for the purchase of 2,500,000 shares of Common Stock at an exercise price of $0.15 per share. The warrants may not be exercised unless and until the average bid and asking closing price of the Company’s Common Stock exceeds $1.00 per share for a period of thirty consecutive trading days. The warrants are exercisable through February 24, 2016.





On April 26, 2011, the Company granted a warrant for the purchase of 100,000 shares of Common Stock to an engineering consultant to the Company. The warrant is exercisable through April 25, 2016, at an exercise price of $0.22 per share.





Item 3. Defaults Upon Senior Securities.





a)
The Company is in default of certain obligations as discussed in Note 1 of the Notes to Unaudited Consolidated Financial Statements.





b)
The arrearage in respect to dividends on Series A and B Preferred Stock totals $1,915,736 at March 31, 2011.





Item 4. (Removed and Reserved).





Item 5. Other Information.





a)
The Company's Common Stock is traded on the OTC Markets Group Inc.’s electronic marketplace ("OTCQB") under the symbol “DLOV”.





b)
By Form 8-K filed on April 29, 2011, the Company reported the results of its Annual Meeting of Shareholders held on April 26, 2011.





c)
By Form 8-K filed on March 3, 2011, the Company reported that it had entered into a Consulting Services Agreement with The Musser Group, LLC (“Musser Group”) to perform consulting services for the Company.





Item 6. Exhibits.





Exhibit

Number

Description

Located At3.7

Certificate of Amendment to Articles of Incorporation, effective March 16, 2006

Filed Herewith10.23

Consulting Services Agreement between The Musser Group LLC and Daleco Resources Corporation dated February 25, 2011

Incorporated by reference to Exhibit 10.23 to the Form 8-K filed March 3, 201131.1

Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002

Filed Herewith31.2

Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002

Filed Herewith32.1

Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002

Filed Herewith32.2

Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002

Filed Herewith





The Registrant incorporates by reference its Exhibit List as attached to its Annual Report on Form 10-K for the fiscal year ended September 30, 2010.





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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


DALECO RESOURCES CORPORATIONDated:  May 20, 2011
/s/ Gary J. NovinskieGary J. NovinskieInterim Chief Executive Officer, President, Chief Financial Officer and Director (Principal Executive Officer and Principal Financial Officer)Dated:  May 20, 2011
/s/ Richard W. BlackstoneRichard W. BlackstonePrincipal Accounting Officer





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