DELTRON,
INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
TABLE
OF CONTENTS
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PAGE
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PART I -
FINANCIAL INFORMATION
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Item 1.
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Unaudited
Condensed Consolidated Financial Statements
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3
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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15
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Item 4.
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Controls and
Procedures
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16
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PART II -
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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16
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Item 1A.
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Risk
Factors
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16
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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16
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Item 3.
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Defaults Upon
Senior Securities
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16
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Item 4.
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Submission of
Matters to a Vote of Security Holders
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16
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Item 5.
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Other
Information
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16
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Item 6.
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Exhibits
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17
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SIGNATURES
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18
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2
PART I – FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's September 30,
2010 Form 10-K filed with the SEC on January 13, 2010. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the periods presented have been reflected herein. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
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Deltron, Inc. and Subsidiary
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CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31,
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September 30,
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2010
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2010
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Unaudited
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Assets
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Current
Assets:
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Cash
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$ 35,861
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$ 1,852
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Accounts
receivable, net of allowance of doubtful accounts of $2,630
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and
$2,630 at December 31, 2010 and September 30, 2010, respectively
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418,320
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660,395
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Inventory,
net of allowance for obsolescence of $9,795 and $9,795 at
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December
31, 2010 and September 30, 2010, respectively
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375,900
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332,676
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Loan
receivable
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41,000
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41,000
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Prepaid
expenses and other receivables
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48,314
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19,826
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Total
Current Assets
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919,395
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1,055,749
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Property
and equipment, net
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29,389
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32,239
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Total
Assets
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$ 948,784
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$1,087,988
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Liabilities
and Stockholders' (Deficit) Equity
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Current
liabilities
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Line
of credit
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$ 100,000
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$ 125,000
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Bank
overdraft
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-
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10,506
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Accounts
payable
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289,708
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452,318
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Accrued
expenses
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52,969
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75,091
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Income
taxes payable
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800
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1,600
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Accrued
expenses - related parties
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180,000
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150,000
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Accrued
interest - related parties
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79,826
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63,541
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Convertible
notes - related parties, net of note discount of $20,304
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and
$79,333 at December 31, 2010 and September 30, 2010, respectively
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155,196
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96,167
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Convertible
notes - net of note discount of $43,695
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and
$0 at December 31, 2010 and September 30, 2010, respectively
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33,805
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-
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Derivative
liability – conversion options
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65,874
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-
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Current
portion of long term debt - related party
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374,848
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334,587
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Total
Current Liabilities
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1,333,026
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1,308,810
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Notes
payable - related party, net of current portion
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720,262
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760,523
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Total
Liabilities
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2,053,288
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2,069,333
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Stockholders'
(Deficit) Equity
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Common
stock, $0.001 par value; 10,000,000,000 shares
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authorized,
758,478,980 and 678,478,980 shares issued and outstanding
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at
December 31, 2010 and September 30, 2010, respectively
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758,479
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678,479
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Additional
paid-in capital
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1,398,767
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1,418,767
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Accumulated
deficit
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(3,261,750)
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(3,078,591)
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Total
Stockholders' (Deficit) Equity
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(1,104,504)
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(981,345)
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Total
Liabilities and Stockholders' (Deficit) Equity
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$ 948,784
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$1,087,988
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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Deltron, Inc.
and Subsidiary
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UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the three
Months ended
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December
31,
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2010
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2009
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Sales
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$ 905,401
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$ 511,556
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Cost of sales
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778,016
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435,062
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Gross profit
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127,385
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76,494
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Selling, general and
administrative expenses
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210,480
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161,231
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Operating income (loss)
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(83,095)
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(84,737)
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Other income (expenses)
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Change
in fair value of derivative liability
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(6,854)
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-
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Interest
expense, net
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(92,375)
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(14,562)
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Total other income
(expense)
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(99,229)
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(14,562)
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Loss before provision for
income taxes
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(182,324)
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(99,299)
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Provision for income
taxes
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835
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-
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Net loss
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$ (183,159)
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$
(99,299)
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Per share information
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Net loss per common
share
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Basic
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$
(0.000)
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$
(0.001)
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Fully diluted
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$
(0.000)
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$
(0.001)
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Weighted average number of
common
|
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stock outstanding -
basic
|
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718,478,980
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107,206,877
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Weighted average number of
common
|
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stock outstanding -
diluted
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718,478,980
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107,206,877
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The accompanying notes are an
integral part of these unaudited condensed consolidated financial
statements.
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|
Deltron, Inc. and Subsidiary
|
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S
(DEFICIT) EQUITY
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Additional
|
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Common Stock
|
|
paid-in
|
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Accumulated
|
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Number of shares
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Amount
|
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Capital
|
|
Deficit
|
|
Totals
|
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Balance
- December 31, 2008
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|
14,403,074
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|
$
14,403
|
|
$1,911,235
|
|
$(2,218,137)
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|
$
(292,499)
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Recapitalization
in reverse acquisition
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(624,200)
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|
|
(624,200)
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|
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|
|
|
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|
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Issuance
of stock for cash
|
|
76,031,699
|
|
76,032
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|
529,190
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|
|
|
605,222
|
|
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|
|
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|
|
|
|
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Net
loss
|
|
|
|
|
|
|
|
|
|
(400,564)
|
|
(400,564)
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|
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Balance
- September 30, 2009 (Unaudited)
|
90,434,773
|
|
90,435
|
|
1,816,225
|
|
(2,618,701)
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|
$
(712,041)
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|
|
|
|
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|
|
|
|
|
|
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|
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Issuance
of stock for cash
|
|
33,544,207
|
|
33,544
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|
31,456
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|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
loss
|
|
|
|
|
|
|
|
|
|
(99,299)
|
|
(99,299)
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|
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|
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|
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Balance
- December 31, 2009
|
|
123,978,980
|
|
123,979
|
|
1,847,681
|
|
(2,718,001)
|
|
(746,341)
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Beneficial
conversion feature
|
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|
|
|
|
|
|
|
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|
-
convertible notes payable - related parties
|
-
|
|
-
|
|
175,500
|
|
-
|
|
175,500
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|
|
|
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|
|
|
|
|
|
|
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Recapitalization
in reverse acquisition
|
554,500,000
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|
554,500
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|
(604,414)
|
|
-
|
|
(49,914)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
-
|
|
-
|
|
-
|
|
(360,590)
|
|
(360,590)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- September 30, 2010
|
|
678,478,980
|
|
$678,479
|
|
$1,418,767
|
|
$(3,078,591)
|
|
$
(981,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for service
|
80,000,000
|
|
80,000
|
|
(20,000)
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
(183,159)
|
|
(183,159)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2010 (Unaudited)
|
758,478,980
|
|
$758,479
|
|
$1,398,767
|
|
$(3,261,750)
|
|
$(1,104,504)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deltron, Inc. and Subsidiary
|
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three Months ended
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
(loss)
|
|
$
(183,159)
|
|
$
(99,299)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used
|
|
|
|
|
|
|
in
operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
2,850
|
|
2,500
|
|
|
Change
in fair value of derivative liability
|
|
6,854
|
|
-
|
|
|
amortization
of discount on note payable
|
|
74,354
|
|
-
|
|
|
(Increase)
Decrease in accounts receivable
|
|
242,075
|
|
102,779
|
|
|
(Increase)
Decrease in inventory
|
|
(43,224)
|
|
(13,999)
|
|
|
(Increase)
Decrease in prepaid expenses and other receivables
|
|
31,512
|
|
27,480
|
|
|
Increase
(decrease) in accounts payable
|
|
(162,610)
|
|
(51,990)
|
|
|
Increase
(decrease) in accrued expenses
|
|
(22,922)
|
|
(41,366)
|
|
|
Increase
(decrease) in accrued expenses - related parties
|
30,000
|
|
-
|
|
|
Increase
(decrease) in accrued interest - related parties
|
16,285
|
|
12,713
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
(7,985)
|
|
(61,182)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
-
|
|
65,000
|
|
|
Decrease
in bank overdraft
|
|
(10,506)
|
|
-
|
|
|
Borrowing
on related party notes
|
|
77,500
|
|
-
|
|
|
Payments
on line of credit
|
|
(25,000)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
41,994
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (decrease) in Cash
|
|
34,009
|
|
3,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
1,852
|
|
26,168
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
35,861
|
|
$
29,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$
2,054
|
|
$
-
|
|
|
Cash
paid for income taxes
|
|
$
800
|
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
November 2010, the Company issued 80,000,000 shares of its common stock
valued at $60,000
|
|
to
Elasco's president, $10,000 was recorded as a bonus and $50,000 is prepaid
salary to be
|
|
expensed
over six months beginning mid November 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
|
|
|
Deltron,
Inc. & Subsidiary.
Notes to
Unaudited Condensed Consolidated Financial Statements
December
31, 2010
NOTE 1- ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Business
Description
Deltron, Inc. (the “Company”) is a Nevada Corporation incorporated
on September 14, 2005. It is based in Garden Grove, California.
Through May 26, 2010 the Company was in the development stage. On May 26,
2010 the Company acquired all of the assets and liabilities of Blu Vu Deep Oil
& Gas Exploration, Inc. including its ownership of 100% of the outstanding
stock of Elasco, Inc. by issuance of 123,978,980 restricted common shares of its
stock.
Elasco
was incorporated on October 25, 1979 in the state of California. Its
principal business is manufacturing and selling of open cast molded polyurethane
elastomer products such as skateboard, roller skate, and industrial wheels.
After
the acquisition of Blu Vu’s assets, the Company is engaged in potential
manufacture and mass-market of proprietary breathing equipment developed
specifically for the oil and gas, mining and safety industries, and military and
recreational divers. The technology is still under development. Production and
manufacture of the equipment (primarily Closed-Circuit Rebreathers “CCRs” and
components used for all types of rebreathers) will be produced by the
wholly-owned subsidiary, Elasco, while the Company provides financial,
operational and technical expertise.
On
August 4, 2010, Deltron entered into an agreement with Radikal, AS (“Radikal”),
the owner of intellectual property involving rebreather technology, to purchase
its intellectual property involving said technology (the “Radikal Agreement”).
The Radikal Agreement requires the Company to pay a per unit fee of $35
for at least 500 units per year for 2 years, after which the obligation to
Radikal will be fulfilled. The Company is required to begin making payments in
January 2012.
Pursuant to the terms of the Radikal Agreement, Radikal has
transferred all U.S. and international patent rights to the Company.
However, if the per unit fee payments are not made when due, Radikal has
the right to the return of the intellectual property transferred.
The
acquisition of Blu Vu’s assets and Elasco, Inc. by the Company has been
accounted for as a reverse capitalization. The reverse recapitalization
was the acquisition of a private operating company into a non-operating shell
corporation with nominal net assets and is treated as a capital transaction,
rather than a business combination. As a result no goodwill is recorded.
In this situation Deltron is the legal acquirer because it acquired all of
the assets and liabilities of Blu Vu and 100% of the stock of Elasco and Elasco
is the legal acquiree because its equity interests were acquired. However,
Elasco is the acquirer and Deltron is the acquiree for accounting purposes.
The pre-acquisition financial statements of Elasco are treated as the
historical
financial statements of the consolidated companies except that the
equity section and earnings per share have been retroactively restated to
reflect the reverse recapitalization.
Principles of
consolidations
The
accompanying unaudited condensed consolidated financial statements are presented
in accordance with U.S generally accepted accounting principles. The unaudited
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Elasco. All significant intercompany transactions
have been eliminated in consolidation.
Interim Periods
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of the Company’s
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months ended December 31, 2010 are not necessarily
indicative of results for any future period. These statements should be
read in conjunction with the consolidated financial statements and notes for the
year ended September 30, 2010 thereto included in the Company’s Form 10-K filed
on January 13, 2010.
Use of
Estimates
The
Company’s unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the Company’s consolidated
financial statements requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the related disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Cash and Cash
Equivalents
For
purposes of reporting cash flows, the Company considers all short term debt
securities purchases with a maturity of three months or less to be cash
equivalents. The Company deposits its cash with major financial institutions and
may at times exceed the federally insured limit of $250,000. At
December 31, 2010 cash did not exceed the federally insured limit. The
Company believes that the risk of loss is minimal. To date, the Company has not
experienced any losses related to cash deposits with financial institutions. As
of December 31, 2010, the Company had a cash balance of $35,861.
Accounts Receivable
The
Company estimates the collectability of customer receivables on an ongoing basis
by reviewing past-due invoices and assessing the current creditworthiness of
each customer. Allowances are provided for specific receivables
deemed to be at risk for collection. As of December 31, 2010, accounts
receivable amounted to $418,320, net of allowance of doubtful accounts of
$2,630.
Inventory
Inventory consists of raw material, work in progress, and finished
goods. It is stated at the lower of cost or market on a first in, first
out (FIFO) basis. The Company also evaluates and reserves allowance of
obsolescence of its inventories.
Property and
Equipment and Depreciation Policy
Property and equipment are recorded at cost, less accumulated
depreciation. Cost of repairs and maintenance are expensed as they are
incurred. Major repairs that extend the useful life of equipment are capitalized
and depreciated over the remaining estimated useful life. When property and
equipment are sold or otherwise disposed, the related cost and accumulated
depreciation are removed from the respective accounts and the gains or losses
realized on the disposition are reflected in operations. The Company uses the
straight - line method in computing depreciation for financial reporting
purposes.
Income
Taxes
The
Company recognizes the tax effects of transactions in the year in which such
transactions enter into the determination of net income, regardless of when
reported for tax purposes. Deferred taxes are provided in the financial
statements under ASC 740-20 to give effect to the resulting temporary
differences which may arise from differences in the bases of fixed assets,
depreciation methods, allowances, and start-up costs based on the income taxes
expected to be payable in future years.
The
Company follows the provisions of uncertain tax positions as addressed in ASC
740-10-65-1. The Company recognized approximately no increase in the
liability for unrecognized tax benefits. The Company has no tax position
as of December 31, 2010 for which the ultimate deductibility is highly certain
but for which there is uncertainty about such timing of such deductibility.
The Company recognizes interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. No such
interest or penalties were recognized during the periods presented. The
Company had no accruals for interest and penalties at December 31, 2010.
The Company’s utilization of any net operating loss carry forward may be
unlikely as a result of its continued losses.
Fair Value of
Financial Instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires disclosure of
the fair value of financial
instruments held by the Company. The Company considers the
carrying amount of cash, prepaid expenses, accounts payable and accrued
liabilities, to approximate their fair values because of the short period of
time between the origination of such instruments and their expected realization.
The
Company has also adopted ASC 820-10 (formerly SFAS 157, “Fair Value
Measurements”) which defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as
follow:
|
|
|
|
|
|
·
|
Level
1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
|
|
·
|
Level
2 inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial
instruments.
|
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable
and significant to the fair value.
|
As of December 31,
2010, the Company used level 3 inputs for its valuation methodology for the fair
value of its notes payable and derivative liability as following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
|
As
of
|
|
December 31, 2010
|
|
|
|
December 31,
|
|
Using Fair Value Hierarchy
|
|
|
|
2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable – related party
|
|
1,095,110
|
|
|
-
|
|
|
-
|
|
|
1,219,900
|
|
Convertible notes – related parties
|
|
155,196
|
|
|
-
|
|
|
-
|
|
|
177,600
|
|
Convertible notes
|
|
|
33,805
|
|
|
|
|
|
|
|
|
81,300
|
|
Derivative liability – conversion
options
|
|
65,874
|
|
|
-
|
|
|
-
|
|
|
65,874
|
|
Total
|
|
$
|
1,349,985
|
|
$
|
-
|
|
$
|
–
|
|
$
|
1,544,674
|
As of December 31,
2010 the Company did not identify any other assets or liabilities that are
required to be presented on the balance sheet at fair value in accordance with
ASC 820-10.
Revenue
Recognition
The
Company recognizes revenues through its consolidated fully owned subsidiary.
Revenues are recognized from product sales upon delivery, at which time title
passes to the customer provided that there are no uncertainties regarding
customer acceptance, persuasive evidence of an arrangement exists, the sales
price is fixed and determinable and collectability is deemed probable.
Advertising
Costs
Advertising costs are
charged to operations when incurred.
Share-Based Compensation
The
Company has adopted ASC 718-20 (formerly SFAS No. 123R, Share-Based Payment
-revised 2004) (“ASC718-20”) and related interpretations which establish the
accounting for equity instruments exchanged for employee services. Under ASC
718-20, share-based compensation cost is measured at the grant date based on the
calculated fair value of the award. The expense is recognized over the
employees’ requisite service period, generally the vesting period of the
award.
Segment Information
Based
on the criteria established by ASC Topic 280 “Segment
report” (formerly SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”), the Company uses the management approach
for determining which, if any, of its products and services, locations,
customers or management structures constitute a reportable business segment. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of any reportable segments. As of December 31, 2010, the Company mainly
operated in two principal segments – development of the rebreather system and
sales of polyurethane elastomer products. The rebreather system is still under
development and has not generated any revenue. The following tables present
summarized information by segments:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
Rebreather
|
$
|
-
|
|
$
|
-
|
|
|
Polyurethane
|
905,401
|
|
|
511,556
|
|
|
|
$
|
905,401
|
|
$
|
511,556
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
Rebreather
|
$
|
-
|
|
$
|
-
|
|
|
Polyurethane
|
778,016
|
|
|
435,062
|
|
|
|
$
|
778,016
|
|
$
|
435,062
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
Rebreather
|
$
|
-
|
|
$
|
-
|
|
|
Polyurethane
|
127,385
|
|
|
76,494
|
|
|
|
$
|
127,385
|
|
$
|
76,494
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
Rebreather
|
$
|
104,973
|
|
$
|
71,046
|
|
|
Polyurethane
|
105,507
|
|
|
90,185
|
|
|
|
$
|
210,480
|
|
$
|
161,231
|
|
|
|
|
|
|
|
|
|
Income / (Loss) from
operations
|
|
|
|
|
|
Rebreather
|
$
|
(104,973)
|
|
$
|
(71,046)
|
|
|
Polyurethane
|
21,878
|
|
|
(13,691)
|
|
|
|
$
|
(83,095)
|
|
$
|
(84,737)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2010
|
|
|
2010
|
|
Total Assets
|
|
|
|
|
|
|
|
Rebreather
|
$
|
77,374
|
|
$
|
42,852
|
|
|
Polyurethane
|
871,410
|
|
|
1,045,136
|
|
|
|
$
|
948,784
|
|
$
|
1,087,988
|
Comprehensive Income (Loss)
ASC
220-10 (formerly, SFAS No. 130, Reporting Comprehensive Income) (“ASC 220-10”),
requires disclosure of all components of comprehensive income (loss) on an
annual and interim basis. Comprehensive income (loss) is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. The
Company’s comprehensive income (loss) is the same as its reported net income
(loss) for the three months ended December 31, 2010 and 2009.
Basic and Diluted
Per Common Share
The
Company has adopted ASC 260-10, “
Earnings per Share
,” (EPS) which
requires presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. In the
accompanying unaudited condensed consolidated financial statements, basic net
loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and dilutive common equivalent shares outstanding during the period. For
the three months ended December 31, 2010, the Company has excluded all
common equivalent shares from the calculation of diluted net loss per share as
such securities are anti-dilutive. For the three months ended December 31, 2009,
the Company did not have common equivalent shares.
Significant Recent
Accounting Pronouncements
In
October 2009, the FASB issued Accounting Standards Codification Topic No. 605,
Multiple-Deliverable Revenue Arrangements. This guidance establishes a selling
price hierarchy for determining the selling price of a deliverable and expands
the disclosures required for multiple-deliverable revenue arrangements. This
guidance is effective for revenue arrangements that are entered into or are
materially modified in fiscal years beginning on or after June 15, 2010, with
early adoption permitted. The adoption will have no material impact on the
Company’s financial statements.
In
January 2010, the FASB issued ASU No. 2010-06 regarding fair value
measurements and disclosures and improvement in the disclosure about fair value
measurements. This ASU requires additional disclosures regarding
significant transfers in and out of Levels 1 and 2 of fair value measurements,
including a description of the reasons for the transfers. Further, this
ASU requires additional disclosures for the activity in Level 3 fair value
measurements, requiring presentation of information about purchases, sales,
issuances, and settlements in the
reconciliation for fair value measurements. This ASU is
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The Company does not expect the
adoption of this ASU to have a material impact on our financial statements.
In
February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU
2010-09”) as amendments to certain recognition and disclosure requirements. The
amendments remove the requirement for an SEC filer to disclose a date in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. Those amendments remove potential
conflicts with the SEC’s literature. All of the amendments in ASU 2010-09 were
effective upon issuance for interim and annual periods. The adoption of ASU
2010-09 did not have a material impact on the Company’s consolidated
financial statements
In
March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-11,
which is included in the Codification under ASC 815, “Derivatives and Hedging”
(“ASC 815”). This update clarifies the type of embedded credit derivative
that is exempt from embedded derivative bifurcation requirements. Only an
embedded credit derivative that is related to the subordination of one financial
instrument to another qualifies for the exemption. This guidance is
effective for interim and annual reporting periods beginning January 1, 2010.
The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
NOTE 2 – GOING
CONCERN
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to a going concern, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business. As
of December 31, 2010 the company had a net deficit in retained earnings of
$(3,261,750) and a net loss of $(183,159) for the quarter then ended.
These matters create substantial doubt about the Company’s ability to
continue as a going concern. For the quarter ended December 31, 2010, the
Company is able to pay its obligations to vendors from funds raised from
issuance of convertible notes. The Company intends on financing its future
development activities from the same sources, until such time that funds
provided by operations are sufficient to fund working capital requirements.
NOTE 3 –
INVENTORY
Inventory consisted
of the following at December 31, 2010 and September 30, 2010.
|
|
|
|
|
|
|
December 31, 2010
|
|
September 30, 2010
|
|
|
|
|
|
|
Raw
material
|
$
231,879
|
|
$
232,962
|
|
Work in
process
|
40,226
|
|
41,513
|
|
Finished
goods
|
113,590
|
|
67,996
|
|
|
385,695
|
|
342,471
|
|
Less allowance
for obsolete inventory
|
(9,795)
|
|
(9,795)
|
|
|
|
|
|
NOTE 4 - PROPERTY
AND EQUIPMENT
Property and
equipment consisted of the following at December 31, 2010 and September 30,
2010.
|
|
|
|
|
|
|
December 31,
2010
|
|
September 30,
2010
|
|
Machinery &
equipment
|
$
237,377
|
|
$
237,377
|
|
Tooling
|
139,138
|
|
139,138
|
|
Computer
equipment
|
94,383
|
|
94,383
|
|
Leasehold
improvements
|
38,720
|
|
38,720
|
|
Furniture,
fixtures and office equipment
|
17,033
|
|
17,033
|
|
|
526,651
|
|
526,651
|
|
Less
accumulated depreciation
|
497,262
|
|
494,412
|
|
|
|
|
|
|
|
$
29,389
|
|
$
32,239
|
NOTE 5 – LINE OF
CREDIT
The
Company has entered into a line of credit agreement with a bank. The
maximum borrowing is $100,000. Interest is calculated at prime plus 1.5%
(with an interest rate floor of 6.5%) and is paid monthly. The agreement
expires December 5, 2011 at which time the entire principal balance is due.
The line of credit is personally guaranteed by the Trust of the former
owner of Elasco, who is the president of the Company. The outstanding
balance at December 31, 2010 and September 30, 2010 is $100,000 and $125,000,
respectively, at 6.5%.
NOTE 6 – NOTES
PAYABLE – RELATED PARTIES
Concurrent with the sale of Elasco to Blu Vu, the previous owner,
Henry Larrucea,who is the current officer and director of the Company,
agreed to exchange his outstanding demand note, with an outstanding
balance of $856,750, for a 10 year note at 5% for $600,000. The difference
of $256,750 was recorded as a gain in other income in the year ended September
30, 2009. Total interest paid or accrued for the shareholder for the three
months ending December 31, 2010 was $7,347 and the balance of the note as of
December 31, 2010 was $587,684. Payments have not been made on this note since
July 2009. There was $43,151 of accrued interest at December 31, 2010.
Mr.
Larrucea also received a promissory note for the stock of Elasco for $540,000.
The note is due in monthly payments of $10,000 and bears interest at
4.23%. The note is secured by the stock of Elasco. Total interest
paid or accrued for the three months ending December 31, 2010 was $5,367 and the
balance of the note as of December 31, 2010 was $507,425. Payments have
not been made on this note since August 2009. There was $30,528 of accrued
interest at December 31, 2010.
Both of
these notes are currently in default due to non-payment of principal and
interest. Upon default the loans become due on demand. Mr. Larrucea
has granted a waiver which waives the
default
under the terms of the notes and releases the company from liquidated damages
provision.
The
Company has two notes payable to shareholders for $20,000 and $19,500, which it
acquired under the May 26 Blu Vu asset purchase agreement. These notes are
due on May 28, 2011 and bear interest at 5.0%. Both notes are convertible
into shares of the Company’s common stock at a conversion discount of 70% of the
stocks bid price but in no event shall the conversion price be less than par
value of $0.001.
The
Company has nine notes payable to shareholders for a total of $136,000.
These notes are due ranging from September 17, 2010 to March 28, 2011 all
bearing interest at 5.0%. All nine notes are convertible into shares of
the Company’s common stock at a conversion discount of 70% of the stocks bid
price but in no event shall the conversion price be less than par value of
$0.001.
As of
December 31, 2010, the Company had authorized unissued common stock of
9,241,521,020 shares, which is sufficient to cover shares to be issued upon
conversion of all convertible notes.
Current maturities of
the notes payable for each of the five years ending September 30 are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2011
|
$
|
546,442
|
|
2012
|
|
163,779
|
|
2013
|
|
171,275
|
|
2014
|
|
118,656
|
|
2015
|
|
62,355
|
|
Thereafter
|
|
208,103
|
|
Total
|
$
|
1,270,610
|
NOTE 7 –
CONVERTIBLE NOTES PAYABLE
In
October, November and December 2010, the Company entered into securities
purchase agreements (the “Purchase Agreements”) with an investor and issued
three 10% convertible promissory notes with face amounts of $35,000, $30,000 and
$12,500 respectively (the “Convertible Notes”) and received cash proceeds
of $77,500. The Notes mature in eight months from the date of issuance,
and provide for nominal interest at the rate of ten (10%) percent per annum. The
Notes may be converted into unregistered shares of the Company’s common stock,
par value $0.001 per share (the “Common Stock”), at the Conversion Price, as
defined below, in whole, or in part, at any time beginning 180 days after the
date of the Notes, at the option of the holder. The Conversion Price shall be
equal to 50% multiplied by the Variable Conversion Rate which is equal to the
average of the three (3) lowest closing bid prices of the Common Stock during
the ten (10) trading day period prior to the date of conversion. The 50%
discounted Conversion Price establishes a conversion feature which is required
to be treated as a derivative
liability and presented at fair value. The derivative obligation
arises because, based on historical trading patterns of the Company’s stock, the
formula for determining the Conversion Rate is expected to result in a lower
Conversion Rate than the closing price of the stock on the actual date of
conversion (hereinafter referred to as the “Variable Conversion Rate
Differential”). The Company selected the historical simulation approach to value
this derivative liability believing that this method results in a valuation that
most closely relates to the economic reality of these transactions. Under this
approach, the Company computed the Variable Conversion Rate Differential for
each trading day during the twelve month period prior to the date of issuance of
each convertible promissory note and then computed the average of these daily
Variable Conversion Rate Differentials over the twelve month period. In
accordance with GAAP, the derivative liability is required to be re-evaluated at
each balance sheet date. The total unamortized discount represented by the
value of the conversion feature and the derivative liability is being accreted
over the eight month period until the conversion of the convertible promissory
notes into common stock is permitted. This results in an overall effective
interest rate of 83% on the $77,500 convertible notes. Accordingly, on issuance
date, the Company recorded derivative liability and discount on the Convertible
Notes of $59,020. For the three month period ended December 31, 2010, the amount
of interest expense resulting from accretion of the unamortized discount on the
convertible promissory notes amounted to $15,325. The remaining
unamortized balance of this discount, which amounted to $43,695, has been netted
against the face amount of the convertible promissory notes resulting in a net
carrying amount of $33,805 which is included in the accompanying balance sheet
at December 31, 2010. As of December 31, 2010, fair value of
the derivative liability was $65,874 and the change in fair value of $6,854 was
recorded against income for the quarter ended December 31, 2010.
NOTE
8 – CONCENTRATION OF CREDIT RISK
A
material part of the Company’s account receivables is outstanding with five
customers. The amount owed by these customers at December 31, 2010 was
$344,131, approximately 82% of the Company’s receivables. Sales to
the top five customers represented 79% of total sales. The amount owed by
these customers at September 30, 2010 was $518,092, approximately 78% of the
Company’s receivables. Sales to these five customers represented 76% of
total sales for the quarter ended December 31, 2009. Sales are concentrated in
the western United States.
For the
three months ended December 31, 2010 and 2009, the Company purchased
approximately $324,808 and 115,166, respectively, of raw material from five
suppliers, representing 80% and 71%, respectively, of the Company’s total
purchases. As of December 31, 2010 and September 30, 2010, amounts owed to these
five suppliers were approximately $233,284 and $186,000 representing 80% and
41%, respectively, of the total accounts payable.
NOTE 9 –
COMMITMENTS – RELATED PARTIES
The
Company leases a manufacturing and office facility from a related partnership as
an operating lease which expires in 2015. This lease currently requires
monthly payments of $5,533 plus related insurance and maintenance. Rental
expense under this lease for the three months ended December 31, 2010 was
$16,599 all of which was paid to a related party.
Future rental
payments required under this operating lease are as follows:
Year
Ended
September
30,
2011
$
49,797
2012
66,396
2013
66,396
2014
66,396
2015
66,396
The
Company has an employment agreement with Jeff Bozanic to develop its re-breather
technology. The agreement is for three years starting January 1, 2010 at a
cost of $10,000 per month. As of December 31, 2010, the Company owed Mr. Bozanic
$120,000.
Prior
to the asset purchase agreement between Blu Vu and Deltron, Blu Vu was in
negotiations with Radikal, AS (“Radikal”), the owner of intellectual property
involving rebreather technology, to purchase its intellectual property involving
said technology. At that time, Blu Vu did not own any rebreather
technology. No agreement was reached between Blu Vu and Radikal prior to
the asset purchase agreement with Deltron. On August 4, 2010, the
Company entered into an agreement with Radikal to purchase its intellectual
property involving said technology (the “Radikal Agreement”). The Radikal
Agreement requires the Company to pay a per unit fee of $35 for at least 500
units per year for 2 years, after which the obligation to Radikal will be
fulfilled.
Pursuant to the terms of the Radikal Agreement, Radikal has
transferred all U.S. and international patent rights to the Company. If the per
unit fee payments are not made when due, Radikal has the right to the return of
the intellectual property transferred. Payments for these rights are not
required to begin until January 2012.
NOTE 10 – STOCK
HOLDER EQUITY
At
December 31, 2009 the Company had 5,545,000 shares of common stock, par value
$.001, outstanding. On March 10, 2010, the Corporation’s Board of
Directors approved a one hundred-for-one (100:1) forward split of the
Corporation’s common stock, par value $0.001 per share. The forward split was
for shareholders of record as of the close of business on Friday, April 30,
2010, and the market effective date for the reverse stock split was May 3, 2010.
As a result of the forward stock split, for every one share of the Corporation’s
old common stock shareholders received ninety-nine additional shares of the
Corporation’s new common stock. Immediately following the forward split,
the number of shares of the Corporation’s outstanding issued common stock was
increased from 5,545,000 shares to approximately 554,500,000 shares, par value
$.001.
On May
26, 2010, the Company entered into an Asset Purchase Agreement (the “Agreement”)
with Blu Vu Deep Oil & Gas Exploration, Inc., a Nevada corporation.
Under the terms of the Agreement, the Company purchased substantially all
of the assets of Blue Vu, consisting of, but not limited to, all stock of Blu
Vu’s subsidiary, Elasco, Inc., certain intellectual properties, computer
programs and software, contracts, claims and accounts receivables associated
with the operation of Blu Vu’s business of developing underwater deep breathing
apparatus. In
consideration of the sale of the assets of Blu Vu, the
shareholders of Blu Vu, received restricted
common shares of the Company
totaling 123,978,980. No other consideration was exchanged in the
transaction.
In
November 2010, the Company issued 80,000,000 shares to Elasco’s president as a
bonus of $10,000 and prepaid salary of $50,000 over the next six months under an
Employee Stock Incentive Program (ESIP).
As of
December 31, 2010, the number of common shares issued and outstanding was
758,478,980.
NOTE 11 – INCOME
TAXES
The
Company recognizes deferred income tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
carrying amounts and the tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse.
The
Company incurred no income taxes for the periods ended December 31, 2010 and
December 31, 2009 except for $800 each year for state franchise taxes. For
the three months ended December 31, 2010 the Company had incurred a loss and had
a state income tax payable of $800 at December 31, 2010. No income tax
benefit was recognized as of December 31, 2010 and December 31, 2009 as a result
of the valuation allowance applied to deferred tax assets, due to the
uncertainty of recognizing any future tax benefits from the NOL.
The
Company’s net loss of approximately $(183,159) will be carried forward to offset
future taxable income. As of December 31, 2010, the Company’s federal NOL
is approximately $386,000 expiring in 2025, and its California NOL is
approximately $296,000 expiring 2015. The Company has book/tax differences of
approximately $270,000 comprised of accrued officer’s compensation of $70,000,
accrued consulting of $120,000 and accrued interest of $80,000. These
differences result in a deferred tax asset of approximately $91,000. The
federal and California NOLs result in a deferred tax asset of approximately
$124,000. Due to the uncertainty of recognizing any future benefit, the
Company has recorded a valuation allowance of $215,000 to offset the deferred
tax asset. The valuation allowance increased $69,600 from September 30,
2010, as a result of the uncertainty of utilizing the deferred tax assets.
The deferred tax
asset comprised the following at December 31, 2010:
|
|
|
|
|
|
|
Deferred tax
asset:
|
|
|
|
|
|
|
|
|
|
|
Federal benefit
of NOL carryover
|
$
96,500
|
|
|
California
benefit of NOL carryover
|
27,500
|
|
|
Accrued
officer's compensation
|
24,000
|
|
|
Accrued
consulting
|
40,000
|
|
|
Accrued
interest
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
215,000
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
(215,000)
|
|
|
|
|
|
|
|
|
Net deferred
tax asset
|
$
-
|
NOTE 12 –
SUBSEQUENT EVENTS
The Company has
evaluated subsequent event for purposes of recognition or disclosure in the
financial statements through the date of issuance of its financial
statements.
On
January 21, 2011, the Company issued a convertible note for $50,000. The
note is due on October 24, 2011 and accrues interest at 8.0%. The Note may
be converted into unregistered shares of the Company’s common stock, par value
$0.001 per share at the Conversion Price, as defined below, in whole, or
in part, at any time beginning 180 days after the date of the Notes, at the
option of the holder. The Conversion Price shall be equal to 50% multiplied by
the Variable Conversion Rate which is equal to the average of the three (3)
lowest closing bid prices of the Common Stock during the ten (10) trading day
period prior to the date of conversion.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Except for historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding our business strategy, future revenues and
anticipated costs and expenses. Such forward-looking statements include,
among others, those statements including the words “expects,” “anticipates,”
“intends,” “believes” and similar language. Our actual results may differ
significantly from those projected in the forward-looking statements.
Factors that might cause or contribute to such differences include, but
are not limited to, those discussed herein as well as in the “Description of
Business – Risk Factors” section in our Annual Report on Form 10-K for the year
ended September 30, 2010. You should carefully review the risks described
in our Annual Report and in other documents we file from time to time with the
Securities and Exchange Commission. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements.
All references in this Form 10-Q to the “Company,” “Deltron,”
“we,” “us,” or “our” are to Deltron, Inc.
Overview
As previously described, we completed an Asset Purchase under
which Deltron acquired the assets of Blu Vu Deep Oil & Gas Exploration, Inc.
The transaction was treated as a reverse recapitalization, with Blu Vu’s
wholly owned subsidiary, Elasco, Inc. (“Elasco”) becoming the accounting
acquirer. Therefore, Deltron assumed the fiscal year end of Elasco of
December 31. On August 13, 2010, following the completion of the Asset
Purchase Agreement, the Company adopted the fiscal year end of the former shell
Company of September 30 for financial reporting purposes.
The following discussion highlights the principal factors that
have affected our financial condition and results of operations as well as our
liquidity and capital resources for the periods described. The discussion
reflects the financial condition and results of operations as of and for the
three-months periods ended December 31, 2010 and 2009. This discussion
contains forward-looking statements. Please see “Forward-Looking
Statements” for a discussion of the uncertainties, risks and assumptions
associated with these forward-looking statements.
We are a manufacturing company with two distinct business segments
polyurethane and rebreather. Our primary business is Elasco which is
focused on manufacturing technology for plastic and polyurethane products.
Our secondary business segment is focused on the development of deep-sea
exploration breathing technology marketed as Blu Vu.
Polyurethane Products
Our polyurethane products are manufactured and sold by our wholly
owned subsidiary, Elasco, which makes products for the recreational roller skate
and skateboarding markets. They are of the high
21
performance type used by dedicated enthusiasts in those sports.
These products are sold to O.E.M. customers, who market and distribute
them through channels specific to their individual retail outlets, as well as by
direct marketing through their internet sales sites. Most are sold through
distribution channels of specialty stores and roller rinks. They are
differentiated from the typical product found in larger retail stores in that
they are not considered a toy category, but rather a sporting good.
Elasco also produces a variety of industrial products that are
used on assemblies and machinery where a long life cycle is needed. Some
typical products are exercise equipment rollers, bowling pin setter pads and
liners, and fire hydrant seals. Elasco’s polyurethane polymers excel in
the gap between rubber and plastics, but can mimic many rubbers and plastics
with specific formulations that optimize those characteristics. A recent
formula developed exclusively by Elasco uses a natural soy-based resin as an
ingredient to make an elastomer that performs like other hydrocarbon derived
polyurethanes. This reduces related carbon emissions from the
manufacturing process for that resin by 36%. This product is marketed as a
green alternative to oil based products, and is finding favor in the youth
market that many of Elasco’s products service.
Rebreather System
“Normal” scuba is an open circuit system. Combining a
high-pressure cylinder and a demand regulator, a diver inhales gas at ambient
pressure, uses a little of the oxygen in the gas, and then exhales. When
the diver exhales the gas, it bubbles to the surface, carrying as much as 98% of
the original oxygen it contained. The “open circuit” comes from the fact
that the exhaled gas is released on every breath.
The advantage that a rebreather has over “normal” scuba system is
that it recirculates the gas a diver is breathing, allowing the diver to breath
from the same gas over and over again, after removing the carbon dioxide
generated by human metabolism. Rebreathers provide gas to the diver in an
optimal mix for the depth at which they are diving. The system adds oxygen
and other gases to make up what is consumed. Because the gas is reused,
instead of being “thrown away” with every breath, a diver can remain underwater
far longer on much less gas. In fact, for some dives, rebreathers can be
as much as fifty times more efficient on gas consumption than standard scuba
tanks. This minimizes decompression obligations, or in some cases eliminates it
for shallower working dives. Less decompression time means more working
time, and greater cost efficiency for the project.
Business operations
As of December 31, 2010, we had an accumulated deficit of
approximately $3.26 million, and as of September 30, 2010, our accumulated
deficit was approximately $3.08 million. We incurred operating losses of
$83,095 and $84,737 for the three months ended December 31, 2010 and 2009,
respectively, and incurred net losses of $183,159 and $99,299 for those
respective periods. We expect our net losses to continue for at least the
next couple of years. We anticipate that a substantial portion of our
capital resources and efforts will be focused on the scale up due to expansion
via acquisition, product development and other general corporate purposes,
including the payment of legal fees due to our acquisitions.
As of December 31, 2010, our current liabilities of approximately
$1.33 million exceeded our current assets of $919,395 by $413,631 and our net
losses will continue for the foreseeable future. As part of the $1.33
million of current liabilities we have $155,196, net of note discount of
$20,304, of convertible notes to related parties and $33,805, net of note
discount of $43,695 of convertible notes to unrelated parties. We are
currently planning to issue additional stocks and convertible notes to support
our expansion. As a result, the additional equity funding may result in
significant dilution to existing stockholders. If adequate funds are not
available, we may be required to delay or curtail significantly our
22
development and commercialization activities. This would
have a material adverse effect on our business, financial condition and/or
results of operations and could ultimately cause us to have to cease
operations.
Financial Operations Overview
Sales
Our sales are derived from the sale of plastic and polyurethane
products. Customers are generally billed at shipping of products. We
currently have not generated any revenues from the sale of rebreather system for
the three month periods ended December 31, 2010 and 2009.
Cost
of Sales
Cost of sales for plastic and polyurethane products represents the
cost of direct labor, raw material, supplies and other miscellaneous support
expenses. No cost of sales for rebreather system is recorded because we
have not generated any revenues from the sale of rebreather system.
Selling, General and Administrative
Our selling expenses consist primarily of personnel, media,
support and travel costs to inform user organizations and consumers of our
products. Our general and administrative expenses consist primarily of
personnel, occupancy, legal, consulting and administrative and support costs for
our operations.
Critical Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and
results of operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles.
The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as revenues and
expenses during the reporting periods. We evaluate our estimates and
judgments on an ongoing basis. We base our estimates on historical
experience and on various other factors we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results could therefore differ materially from those
estimates under different assumptions or conditions. Our significant
accounting policies are described in Note 1 to our unaudited condensed
consolidated financial statements included in Item 1 of this report. We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements.
Revenue Recognition
Sales for our polyurethane products are recognized when our
plastic or polyurethane products are shipped to our customers. Currently
for rebreather system, there have not been any revenues recognized from the sale
of its products.
Results of Operations for the Three Months Ended December 31,
2010 and 2009
As
earlier described, we operate in two business segments:
Polyurethane products and Rebreather system.
Our
Elasco business focuses on the
delivery of plastic and polyurethane product to our customer. Its
23
principal business is manufacturing and selling of open cast
molded polyurethane elastomer products such as skateboard, roller skate, and
industrial wheels. Our Rebreather system, which is marketed as Blu Vu, is
engaged in the potential manufacture and mass-market of proprietary breathing
equipment developed specifically for the oil and gas, mining and safety
industries, and military and recreational divers.
The
following table presents unaudited consolidated statement of operations data for
each of the periods indicated as:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
December 31,
|
|
Percent
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
Sales
|
|
905,401
|
|
511,556
|
|
77%
|
|
Cost of
sales
|
|
778,016
|
|
435,062
|
|
79%
|
|
Gross
profit
|
|
127,385
|
|
76,494
|
|
67%
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
210,480
|
|
161,231
|
|
31%
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(83,095)
|
|
(84,737)
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
|
(99,229)
|
|
(14,562)
|
|
(581)%
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
(183,159)
|
|
(99,299)
|
|
84%
|
Sales
With respect to our polyurethane business, our sales increased by
$393,845 for the three months ended December 31, 2010, compared to the same
period in 2009, due to recovery in the economy and introduction of our new
products to our current customer base.
In respect to our rebreather product, we have not produced sales
as of December 31, 2010 and 2009.
Cost
of Sales
Cost of sales consists of payroll, raw material, supplies and
other miscellaneous costs for the Polyurethane products. For the
three-month period ended December 31, 2010, costs of sales of $778,016 consist
primarily of labor cost of $310,840, raw material cost of $400,705 and other
costs of $66,471. For the three-month period ended December 31, 2009, cost
of sales of $435,062 consisted primarily of labor costs of $232,697, raw
material cost of $163,044, and other costs of $39,321. We expect costs of
sales will increase as an absolute number as more plastic and polyurethane
products are produced. However, we expect the cost of sales to decrease as
a percentage of revenues as we improve our operating efficiency and increase the
automation of certain processes.
Selling, General
and Administration
For the three months
ended December 31, 2010 and 2009, our selling, general and administrative
expenses for each segment are as follows (unaudited):
24
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Rebreather
|
$
|
104,973
|
|
$
|
71,046
|
|
Polyurethane
|
|
105,507
|
|
|
90,185
|
|
|
$
|
210,480
|
|
$
|
161,231
|
|
|
|
|
|
|
|
Selling, general and administrative expenses associated with our
polyurethane business consist primarily of payroll costs, rental fee,
professional fee, insurance, and other expense. For the three months ended
December 31, 2010, selling, general and administrative expenses included the
following: payroll and benefits $63,651, professional fees $8,163, rent expense
$16,599, insurance expenses $2,289, and other expenses $14,805. For the
comparable period in 2009 expenses were as follows: payroll and benefits
$37,826, rent expense $16,599, consulting $13,712, professional fee $1,331,
insurance expenses $2,503 and other expenses $18,214.
Comparing the three months ended December 31, 2010, with the same
period in 2009, the increase in selling, general and administrative expenses
were primarily due to an increase in payroll expenses resulting from increase in
wages and bonus while other expenses decreased because of more outsourced
services were done in-house in 2010. Other expenses remained consistent
for the three months ended December 31, 2010 and 2009. General and
administrative expenses associated with our Blu Vu rebreather system consist
primary of consulting and professional fees.
O
ther income
(expense)
For the three months ended December 31, 2010, we incurred other
expenses of $99,229, which consisted primarily $74,354 amortization of note
discount on the $253,000 convertible notes; total interest of $18,534 paid and
accrued on the $100,000 line of credit, $1,095,110 long term promissory notes,
and $253,000 convertible notes due to certain shareholders and officer, net of
an accrued interest income of $513 on the $41,000 loan receivable; and change in
fair value of derivative liability
For the comparable period in 2009, we incurred interest expense of
$14,562
paid and accrued on the $125,000
line of credit and $1,095,110 long term promissory notes due to a shareholder
and officer.
Net
Loss
The increase in net loss of $83,860 for the three months ended
December 31, 2010, compared to the same period in 2009, was a net result of: an
increase in our polyurethane product sales, an increase in selling, general and
administration expenses due to the increase in salaries and professional fees in
2010 and the increase in interest expense resulted from amortization of
beneficial conversion option embedded in the convertible notes in 2010.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses. As
of December 31, 2010, we had an accumulated deficit of approximately $3.26
million, and as of September 30, 2010, our accumulated deficit was approximately
$3.08 million. We have not yet achieved profitability and anticipate that
we will continue to incur net losses for the foreseeable future. We expect
that our sales and general and administrative expenses will continue to grow
and, as a result, we will need to generate significant product revenues to
achieve profitability. We may never achieve profitability.
25
Due to the continued losses incurred from our operations, as of
December 31, 2010, we had $35,861 in cash and cash equivalents and a working
capital deficit of $413,631 compared to $1,852 in cash and cash equivalents and
a working capital of $253,061 at September 30, 2010.
Operating Capital and Capital Expenditure Requirements
Our continued operating losses and limited capital raise
substantial doubt about our ability to continue as a going concern, and we need
to raise substantial additional funds in the next 12 months in order to continue
to conduct our business. Until we can generate a sufficient amount of
revenues to finance our cash requirements, which we may never do, we expect to
finance future cash needs primarily through public or private equity offerings,
debt financings, borrowings or strategic collaborations.
We need additional funds to continue our operations and will need
substantial additional funds before we can generate revenue from our Blu Vu
rebreather system. We are currently exploring additional sources of
capital; however, we do not know whether additional funding will be available on
acceptable terms, or at all, especially given the economic conditions that
currently prevail. In addition, any additional equity funding may result
in significant dilution to existing stockholders, and, if we incur additional
debt financing, a substantial portion of our operating cash flow may be
dedicated to the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities.
We expect to continue to incur operating losses in the future and
to make capital expenditures to expand our polyurethane operations and to market
our Blu Vu rebreather system (including upgrading our plant equipment) and to
scale up our sales efforts. We expect that our existing cash will be used
to fund working capital and for capital expenditures and other general corporate
purposes, including the repayment of debt incurred as a result of our
acquisitions. Although since September 30, 2010, we have raised gross
proceeds of $127,500 through the sale of convertible promissory notes, we
anticipate that our cash on hand (including the proceeds from these promissory
notes) and cash generated through our operations will not be sufficient to fund
our operations for the next 12 months. In addition we will have to repay
the outstanding notes plus interest. We therefore anticipate raising additional
funds in the near future.
Sources of Liquidity
Since our inception substantially all of our operations have been
financed primarily from sales of our polyurethane products and equity and debt
financings. For the three months ended December 31, 2010, we had received
$77,500 from issuance of convertible notes.
In addition, in order to decrease the cash outflows, in November
2010, the Company issued 80 million shares of its common stock valued at $60,000
to the President of its subsidiary, Elasco, as a payment of a bonus of $10,000
and prepayment of salary of $50,000 for the following six months.
Cash
Flows
Net cash used in operating activities was $7,985 for the three
months ended December 31, 2010, compared to $61,182 for the same period ended
December 31, 2009. The decrease in cash used of $53,197 was primarily
attributable to increases in
our
polyurethane product sales.
There was no net cash used in investing activities for the three
months ended December 31, 2010 and 2009.
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Net cash proceeds from financing activities for the three months
ended December 31, 2010, were $41,994 which was primarily derived from the
issuance of convertible notes and the paydown of the line of credit.
For the three months ended December 31, 2009, proceeds from sales
of common stocks were $65,000, net of offering costs, through a Regulation S
offering.
Contractual Obligations and Commercial Commitments
As of December 31, 2010, we have a contractual obligation to pay
the line of credit of $100,000 with an interest rate of prime plus 1.5%.
There was also a total remaining balance on two promissory notes of
$1,095,110 due to a shareholder and officer in connection with our acquisitions.
The notes bear interests at a rate of 5.0% and 4.23% per annum,
respectively. Our total lease obligations are $ 315,381 for our Southern
California facility, which expires on December 31, 2015.
Income
Taxes
Since inception, we have incurred operating losses and,
accordingly, have not recorded a provision for federal income taxes for any
periods presented. As of December 31, 2010, we had net operating loss
carryforwards for federal income tax purposes of $386,000. If not
utilized, the federal net operating loss carryforwards will expire in 2025.
Utilization of net operating loss and credit carryforwards may be subject
to a substantial annual limitation due to restrictions contained in the Internal
Revenue Code that are applicable if we experience an “ownership change”.
The annual limitation may result in the expiration of our net operating
loss and tax credit carryforwards before they can be used.
Off-Balance Sheet
Arrangements
We have no
off-balance sheet arrangements or financing activities with special purpose
entities.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Our Disclosure Controls
Under the supervision and with the participation of our senior
management, including our chief executive officer and chief financial officer,
Randall Fernandez, we conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period covered by this quarterly
report (the “Evaluation Date”). Based on this evaluation, our chief executive
officer and chief financial officer concluded as of the Evaluation Date that our
disclosure controls and procedures were not effective and identified the
following material weaknesses:
1.
The Company has insufficient internal personnel resources and technical
accounting and reporting expertise within the Company’s financial closing and
reporting functions;
2.
Due to our small size, the Company did not maintain effective internal controls
to assure segregation as the same employee was responsible for initiating and
recording of transactions, thereby creating the segregation of duties weakness;
and
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3.
The Company did not have an independent board of directors for oversight of the
Company’s operations and financial reporting process.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial
reporting that occurred during the quarter ended December 31, 2010 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In the ordinary course of our business, we may from time to time
become subject to routine litigation or administrative proceedings which are
incidental to our business. We are not a party to nor are we aware of any
existing, pending or threatened lawsuits or other legal actions involving
us.
ITEM 1A.
RISK FACTORS
Not applicable.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not issue any equity securities during the quarter ended
December 31, 2010.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
[REMOVED AND RESERVED]
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS
Exhibit No.
Description
31.1 / 31.2
Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive
and Financial Officer
32.1 / 32.2
Rule 1350 Certification of Principal Executive and Financial
Officer
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SIGNATURES
Pursuant to the requirements 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.
DELTRON, INC.
Dated February 16,
2011
By:
/s/ Henry
Larrucea
Henry
Larrucea
President, Principal Executive and Financial Officer
29