Blu Vu Deep Oil & Gas Exploration, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2010
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Business Description
Blu Vu Deep Oil & Gas Exploration, Inc. was incorporated in 2008 under the law of Nevada. Blu Vu is a technology company engaged in potential manufacture and mass-marketing proprietary breathing equipment developed specifically for the oil and gas, mining and safety industries, military and recreational divers. The technology is still under development. Production and manufacturing of the equipment (primarily Closed-Circuit Rebreathers “CCRs” and components used for all types of rebreathers) will be produced by Blu Vu’s fully-owned subsidiaries, while Blu Vu provides financial, operational and technical expertise.
On March 24, 2009, the Company acquired all of the outstanding stock of a privately held corporation, Elasco, Inc. for a promissory note payable of $540,000. Elasco was incorporated on October 25, 1979 in the state of California. Its principal business is manufacturing and sales of open cast molded polyurethane elastomer products such as skateboard, roller skate, and industrial wheels.
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 Deltron to pay a per unit fee 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 will transfer all U.S. and international patent rights to Deltron. Deltron expects that the transfer of those rights will be completed in the next 90 days. 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 Elasco by Blu Vu has been accounted for as a reverse recapitalization. The reverse recapitalization is 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 Blu Vu is the legal acquirer because it acquired all of the equity interest of Elasco and Elasco is the legal acquiree because its equity interests were acquired. However, Elasco is the acquirer and Blu Vu is the acquiree for accounting purposes. The pre-acquisition financial statements of Elasco are treated as the historical financial statements of the consolidated companies.
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 subsidiaries after elimination of all significant intercompany transactions and balances.
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 March 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 December 31, 2009 thereto included in the Company’s Form 8-K filed on May 28, 2010.
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.
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.
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 March 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 March 31, 2010. The Company’s utilization of any net operating loss carry forward may be unlikely as a result of its continued losses.
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.
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.
Advertising Costs
Advertising costs are expensed when incurred.
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.
|
During the quarter ended March 31, 2010, the Company issued convertible notes totaling $39,500. As of March 31, 2010, the carrying value of these convertible notes was $39,500. The Company used level 3 inputs for its valuation methodology and the fair value was determined to
be approximately $39,100 using cash flows discounted at relevant market interest rates in effect at the period close since there is no observable market price.
As of March 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.
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 March 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 March 31, 2009, the Company did not have common equivalent shares.
Significant Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification Topic No. 855, Subsequent Events. This guidance establishes general standards of accounting for and, disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance is effective for interim or annual financial periods ending after June 15, 2009 and was adopted with no material effect on the Company's statement of financial condition or results of operations.
In June 2009, the FASB issued Accounting Standards Codification Topic No. 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("ASC 105-10"). This guidance establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the basis for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification. ASC 105-10
is effective for the financial statements issued for interim and annual periods ending after September 15, 2009. The adoption will have no material impact on the Company’s financial statements but will require that interim and annual filings include references to the Codification.
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 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 unaudited 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 March 31, 2010, the Company had a net deficit in retained earnings of $2,877,645 and a net loss of $159,644 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 March 31, 2010, the Company was able to pay its obligations to vendors from funds raised from shareholders. 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 March 31, 2010 and December 31, 2009.
2010
2009
Raw material
$209,929
$219,372
Work in process
24,935
101,996
Finished goods
65,849
8,418
300,713
329,786
Less allowance for obsolete inventory
(9,000
)
(9,000
)
$291,713
$320,786
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2010 and December 31, 2009.
2010
2009
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
479,310
476,810
$ 47,341
$ 49,841
NOTE 5 – LINE OF CREDIT
The Company has entered into a line of credit agreement with a bank. The maximum borrowing is $125,000. Interest is calculated at prime plus 1.5% (with an interest rate floor of 6.5%) and is paid monthly. The agreement expires June 1, 2010 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 was the President of the Company at March 31, 2010. The outstanding balance at March 31, 2010 and December 31, 2009 is $125,000 at 6.5%.
NOTE 6 – NOTES PAYABLE – RELATED PARTY
Concurrent with the sale of Elasco the previous owner 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. Total interest paid or accrued for the shareholder for the three months ending March 31, 2010 was $7,347 and the balance of the note as of March 31, 2010 was $587,684. Payments have not been made on this note since July 2009. There is approximately $22,000 of accrued interest at March 31, 2010.
The same party 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 shareholder for the three months ending March 31, 2010 was $5,367 and the balance of the note as of March 31, 2010 was $507,425. Payments have not been made on this note since August 2009. There is approximately $14,000 of accrued interest at March 31, 2010.
The Company has two notes payable to shareholders for $20,000 and $19,500. These notes are due July 12, 2010 and August 17, 2010, respectively and bear interest at 5.0%. Both notes have been assumed by Deltron, Inc. under the May 26, 2010 asset purchase agreement and are convertible into shares of Deltron’s common stock at a conversion discount of 70% of the stocks bid price. The effect of the beneficial conversion feature has been recorded as interest expense of $39,500 in the quarter ended March 31, 2010.
Current maturities of the notes payable for each of the five years ending December 31 are as follows: 2010 $255,989; 2011 $ 158,375; 2012 $165,620; 2013 $173,201; 2014 $89,924, thereafter $291,499. .
NOTE 7 – 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 March 31, 2010, was $292,459, approximately 89% of the
Company’s receivables. Sales to the top five customers represented 83% of total sales for the period ended March 31, 2010. The amount owed by these customers at December 31, 2009, was $172,433, approximately 69% of the Company’s receivables. Sales to these five customers represented 74% of total sales for the year ended December 31, 2009.
NOTE 8 – 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 March 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
December 31,
2010
$ 66,396
2011
66,396
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.
NOTE 9 – STOCK HOLDER EQUITY
In October 2008, the Company initially authorized 100,000,000 shares at a $0.0001 par value. By December 31, 2009 the Company issued 49,845,698 common shares. The Company raised capital through a Regulation S offering. During the first quarter of 2010 no additional shares were issued.
NOTE 10 – 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 period ended December 31, 2009 except for $800 for state franchise taxes. At December 31, 2009 the Company had a federal and California NOL carryforward of approximately $425,000 available to offset income in future years. For the three months ended March 31, 2010 the Company had incurred a loss and had no tax liability at March 31, 2010. No income tax benefit was recognized as of December 31, 2009 and March 31, 2010 as a result of the valuation allowance applied to deferred tax assets based on uncertainty the Company would realize the income tax benefit.
NOTE 11 – SUBSEQUENT EVENT
On May 26, 2010, Blu Vu sold all of its assets and liabilities to Deltron, Inc. including the stock of its wholly-owned subsidiary Elasco, Inc. for 123,978,980 shares of Deltron’s common stock. The transaction is being accounted for as a reverse recapitalization. Deltron, Inc. had been considered a shell company in the development stage up until the closing of the reverse recapitalization.
Prior to the business combination 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 betweeen Blu Vu and Radikal prior to the business combination with Deltron. On August 4, 2010, Deltron entered into an agreement with Radikal to purchase its intellectual property involving said technology (the “Radikal Agreement”). The Radikal Agreement requires Deltron to pay a per unit fee 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 will transfer all U.S. and international patent rights to Deltron. Deltron expects that the transfer of those rights will be completed in the next 90 days. If the per unit fee payments are not made when due, Radikal has the right to the return of the intellectual property transferred.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 of Blu Vu as of and for the years ended December 31, 2009 and 2008, and the quarters ended Mach 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.
The following discussion and analysis of the Company’s financial condition and results of operations are based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
Results of Operations
We generated revenues from sales of our products in the amount of $603,503 and $373,149 for the quarters ended March 31, 2010 and 2009, respectively, and incurred $150,257 and $280,504 in selling, general and administrative expenses for the quarters ended March 31, 2010 and 2009, respectively.
Revenues increased due to new efforts by the Company to increase revenue in 2010 compared to 2009 by the introduction of new products and an improvement in the overall national economy.
We incurred cost of goods sold of $390,523 and $559,311 for the quarters ended March 31, 2009 and 2010, respectively. The increase corresponded to the increase in revenue of $230,354, but at a smaller percentage increase than revenues due to operating efficiencies realized in 2010.
Expenses decreased due to a decrease in salaries and consulting fees..
We generated revenues from sales of our products in the amount of $
2,022,689
and
3,048,659
for the years ended December 31, 2009 and 2008, respectively, and incurred
$
984,969
and $
603,265
in selling, general and administrative expenses for the years ended December 31, 2009 and 2008, respectively.
The following table provides selected financial data about our company for the years ended December 31, 2009 and 2008, and the quarter ended March 31, 2010.
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
March 31, 2010
|
|
December 31, 2009
|
|
December 31, 2008
|
|
Cash and cash equivalents
|
$
|
55,338
|
$
|
29,986
|
$
|
59,597
|
|
Total assets
|
$
|
773,762
|
$
|
697,238
|
$
|
783,277
|
|
Total liabilities
|
$
|
1,640,247
|
$
|
1,443,579
|
$
|
1,075,776
|
|
Shareholders’ equity (deficit)
|
$
|
(866,485)
|
$
|
(746,341)
|
$
|
(292,499)
|
In August 2009, Blu Vu loaned an unrelated entity $41,000. The loan from Blu Vu was due on demand. The obligation has been assigned to Deltron after the business combination with Blu Vu, and is evidenced by a note which accrues interest from August 1, 2010 until paid. The note is expected to be repaid to Deltron in the third quarter of 2010.
Net cash provided by financing activities for the quarter ended March 31, 2010 was $39,500, compared to $44,519 for 2009. For the years ended December 31, 2009 and 2008, net cash provided by financing activities were $230,033 and $41,250, respectively.
Financing activities decreased due to Blu Vu stock being sold in 2009 and where no shares were issued in 2010.
Liquidity and Capital Resources
Our cash and cash equivalents balance as of March 31, 2010 and December 31, 2009 were $55,338 and $29,986, respectively. We have a working (deficit)/capital of ($87,195) and $91,002 as of March 31, 2010 and December 31, 2009, respectively. .
Loans to the Company
On March 17, 2010, we received $10,000, in an unsecured convertible promissory note bearing interest of 5% from a stockholder. The note is due on September 1, 2010, and is automatically convertible on September 17, 2010, in lieu of payment of the indebtedness, for a number of shares of our common stock equal to the indebtedness at the amount of 30% of the bid price on an average of the closing of the previous three days of trading.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.