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WESTCOTT PRODUCTS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 18, 2014

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

The Company has the rights to engage in oil exploration and development on approximately 300 leases in north central Kansas, with total acreage of approximately 80,000 acres (the "Property"). The Company is operating as an oil exploration and development (or production) company focused on the Property, which has oil potential at depths of less than 6,000 feet.

In partnership with Chisholm II, an exploration and production company focused on the acquisition of Kansas oil leasehold interests and exploration and development and Dala's sole shareholder prior to the Merger, the Company has an inventory of drill-ready oil prospects. Most of the prospects are supported by modern seismic data and are a combination of field extensions, step out locations and offsets to existing production. The initial eight prospects are expected to be drilled and tested over the next twelve months. Another eight plus prospects are currently being developed by the Company and Chisholm II.

Together, the companies will continue to acquire new leases and seismic data in support of their ongoing programs.

Our business strategy is to create value for our shareholders by establishing and growing reserves, production and cash flow on a cost-efficient basis. Key elements of our business strategy include:



Development and exploration of our existing oil and gas leases;



To selectively participate, on a non-operated basis, in seismically driven prospects that correspond geologically with our existing footprint within the state of Kansas;



To remain financially strong, yet flexible, through the prudent management of our current limited cash resources;



To complement our organic growth strategy, seeking to aggregate any future production in order to accelerate the Company's production and reserve profile;



Once the Company has reached net level of daily production of 100 barrels of oil per day, seeking to use a variety of derivatives to lock in current value and hedge against any potential downturn in crude pricing;



To retaining qualified personnel to carry out the Company's growth strategy.

During the three months ended June 30, 2014, the Company incurred $43,938 in oil and gas expenditures, which was one dry hole. In July 2014, the Company participated in an additional well at a cost of $44,969, which also resulted in a dry hole.

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The multiple prospects on our position, both operated and non-operated, are all independent from an exploratory point of view, meaning failure or success in one prospect has no bearing on the other prospects. The two major challenges we face when drilling are structure and porosity (stratigraphy). The first well we participated in, the Chandler #1-1 located in Graham County, Kansas, was drilled without seismic research because of the timing of the lease positions. The well was drilled 20 feet low from our original estimate thus resulting in a nonproductive well. The second well, the Chenowith Farm #30-1 located in Graham County, Kansas, drilled with the aid of three dimensional imaging was structurally on target but the porosity in the target was lower than expected resulting in a nonproductive well. We are not discouraged by the results of the first two wells as all prospects have different risk elements, especially our new prospects. We participated in the first two wells on a 25% non-operated working interest basis. These wells were located within the Central Kansas Uplift.

Our common stock currently trades on the Over-the-Counter Bulletin Board (OTCBB) under the symbol WSPD.

Results of Operations



Three Months Ended June 30, 2014

During the three months ended June 30, 2014, we had no revenues. We incurred $260,151 of general and administrative expenses, which included approximately $150,000 of legal, accounting, consulting and other professional fees; insurance expense of approximately $54,000; and compensation expense and related taxes of $40,000 (including approximately $11,000 of stock-based compensation expense).

These expenses were related to the commencement of Company operations. We also incurred an impairment expense of $43,938 relating to one dry hole drilled during the quarter. Additionally, we paid quarterly dividends on our preferred stock of $13,018. As a result, we incurred a net loss attributable to common stock of $317,107 ($0.06 per share) for the three months ended June 30, 2014.

Period from Inception (January 17, 2014) to June 30, 2014

During the period from Inception (January 17, 2014) to June 30, 2014, we had no revenues. We incurred $282,806 of general and administrative expenses, which included approximately $173,000 of legal, accounting, consulting and other professional fees; insurance expense of approximately $54,000; and compensation expense and related taxes of $40,000 (including approximately $11,000 of stock-based compensation expense). These expenses were related to the commencement of Company operations. We also incurred and an impairment expense of $43,938 relating to one dry hole drilled during the period. Additionally, we paid quarterly dividends on our preferred stock of $13,018. As a result, we incurred a net loss attributable to common stock of $339,762 ($0.12 per share) for the period from Inception to June 30, 2014.

Liquidity and Capital Requirements

We had $1,531,052 in cash on hand and working capital of $1,510,282 at June 30, 2014. We believe these funds will be sufficient to enable us to fund our principle business operations through at least the next twelve months. The Company plans to raise additional capital from the sale of common stock and achieve operating revenues with the development of its oil and gas properties.

Operating Activities utilized $250,948 in cash during the period from Inception to June 30, 2014, primarily the result of our loss for the period, offset by adjustments for the non-cash stock compensation, the impairment of oil and natural gas properties, and changes in payables and amounts due to related parties.

Investing Activities utilized $194,982 in cash during the period from Inception to June 30, 2014, which was the result of payments of liabilities acquired from Westcott in the Merger (net of cash received) and expenditures for oil and gas properties.

Financing Activities provided $1,976,982 in cash, with $1,990,000 in proceeds from the issuance of the Series A 6% Convertible Preferred Stock (net of offering costs of $35,000), reduced by $13,018 payment of quarterly dividends on the preferred stock.

Off-Balance Sheet Arrangements

None. 15



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