10QSB 1 0001.txt FORM 10-QSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT Commission file number 0-24506 Delta-Omega Technologies, Inc. --------------------------------------------------------------- (Exact name of small business issuer as specified in its Charter) Colorado 84-1100774 ---------------------- -------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 119 Ida Road, Broussard, Louisiana 70518 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) (337) 837-3011 -------------------------------------------------- (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:...17,508,120 shares of common stock as of June 30, 2000 This document is comprised of 17 pages ================================================================================ Delta-Omega Technologies, Inc. Index to Quarterly Report Part I Financial Statements Item 1. Financial Statements Page Consolidated Balance Sheet as of May 31, 2000 .............. 2 Consolidated Statements of Operations, three and nine months ended May 31, 2000 and May 31, 1999 ........................................ 3 Statements of Cash Flows, nine months ended May 31, 2000 and May 31, 1999 .......................... 4 Notes to consolidated financial statements ................. 5 Item 2. Management's discussion and analysis of financial condition and results of operations ........................ 11 Part II Other Information Item 2. Changes in Securities ......................................... 16 Item 6. Exhibits And Reports on Form 8-K ............................... 16 Signatures ............................................................. 17 Part I. Item 1. Financial Statements Delta-Omega Technologies, Inc. Consolidated Balance Sheet (Unaudited) ASSETS ------ May 31, 2000 ------------ Current Assets Accounts and notes receivable Trade, net of allowance for losses 87,490 Accounts receivable-factored 200,638 Other 39,573 Inventories 157,491 Prepaid expenses 29,134 ------------ Total current assets 514,326 Property and equipment, net of accumulated depreciation 184,827 Intangible assets, net of accumulated amortization 93,306 Other assets 11,746 ------------ Total assets $ 804,205 ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities Bank overdraft 7,813 Accounts payable 259,101 Customer prepayments 32,046 Note payable-board of director loans 394,000 Current maturities of long-term debt and leases 37,349 Advance from factor 160,510 Other current and accrued liabilities 69,516 ------------ Total current liabilities 960,335 Long-term debt and leases, net of current maturities 212,007 Shareholders' equity: Convertible, 7 percent cumulative, non-participating preferred stock, $.001 par value, shares authorized, 40,000,000; issued and outstanding 1,335,000 series B, 2,396,667 series C 3,732 Common stock, $.001 par value, shares authorized, 100,000,000; issued and outstanding 17,508,120 17,508 Additional paid-in capital 12,064,909 Retained deficit (12,454,286) ------------ Total shareholders' equity (368,137) ------------ Total liabilities and shareholders' equity $ 804,205 ============ See accompanying notes to consolidated financial statements. 2
Delta-Omega Technologies, Inc. Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended May 31 May 31 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales and gross revenues Net product sales $ 370,644 $ 400,420 $ 971,865 $ 1,017,281 Cost of sales and revenues 254,737 263,611 686,020 678,383 ------------ ------------ ------------ ------------ Gross profit 115,907 136,809 285,845 338,898 Cost and expenses Selling, general and administrative 228,713 229,915 652,539 603,342 Research and development 29,275 45,912 86,869 158,578 ------------ ------------ ------------ ------------ Operating Loss (142,081) (139,018) (453,563) (423,022) Other operating income, net 22,835 103 55,797 13,941 Interest expense (34,820) (9,722) (124,351) (14,556) ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (154,066) $ (148,637) $ (522,117) $ (423,637) ============ ============ ============ ============ Weighted average shares outstanding 17,236,453 14,996,589 16,361,494 14,996,589 ============ ============ ============ ============ Net loss per common share $ (.01) $ (.01) $ (.03) $ (.03) ============ ============ ============ ============ See accompanying notes to consolidated financial statements. 3 Delta-Omega Technologies, Inc. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended May 31, 2000 1999 --------- --------- Net cash used in operating activities $(458,511) $(570,927) Cash flows from investing activities: Property acquisitions (43,222) (15,118) Proceeds from sale of property and equipment 700 15,850 Patent costs 0 (2,023) --------- --------- Net cash flows used in investing activities (42,522) (1,291) Cash flows from financing activities: Principal payments on long-term debt and capital leases (24,283) (17,062) Re payments on borrowings (20,000) 0 Proceeds from factoring 30,712 183,566 Proceeds from issuance of common stock 248,900 0 Proceeds from borrowing 253,033 240,815 --------- --------- Net cash flows provided by (used in) financing activities 488,362 407,319 Net increase (decrease) in cash and equivalents (12,671) (164,899) Cash and equivalents, beginning of period 4,858 150,674 --------- --------- Cash and equivalents, end of period $ (7,813) $ (14,225) ========= ========= See accompanying notes to consolidated financial statements. 4
Delta-Omega Technologies, Inc. Notes to Consolidated Financial Statements May 31, 2000 Note A: Basis of presentation --------------------- The financial statements presented herein include the accounts of Delta-Omega Technologies, Inc. and Delta-Omega Technologies, Ltd. Intercompany balances and transactions have been eliminated in consolidation. The financial statements presented herein have been prepared by the Company in accordance with the accounting policies in its annual 10-KSB report for the year ended August 31, 1999 and should be read in conjunction with the notes thereto. Results of operations for the interim periods are not necessarily indicative of results of operations which will be realized for the fiscal year ending August 31, 2000. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of operating results for the interim periods presented have been made. Interim financial data presented herein are unaudited. Since the Company commenced operations, it has incurred recurring losses and negative cash flows from operations. The Company does not have sufficient working capital available as of May 31, 2000, to maintain operations at their current levels. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon obtaining additional capital investments or generation of adequate sales revenue and profitability from operations. The Company is in the process of raising additional capital with a Private Placement Memorandum offered solely to accredited and sophisticated investors. Approximately 3,500,000 shares of the Company's common stock are being offered at a price of $.16 per share. The Company anticipates closing the Private Placement Memorandum during the month of July 2000 with the net proceeds to the Company expected to be approximately $550,000. To date the Company has raised funds totaling $248,900 relative to this Private Placement Memorandum. The Company also has the option to sell 1 million common shares at an undetermined price per share. These shares are remaining from 2 million shares authorized for sale to accredited and sophisticated investors by the Company's board of directors in January 1998. 5 For immediate capital requirements, the Company negotiates loans from board of director members and major shareholders and factors selected accounts receivable until sufficient funds are generated from operations or the financial instrument discussed above is completed. Note B: Related party transactions -------------------------- During fiscal year 1999, the Company negotiated nine (9) promissory notes totaling $270,000 with related parties, of which $225,000 were with members of the board of directors, in order to maintain its current level of operations. Each promissory note bears an interest rate of 8.25% per annum. These notes are short-term and were due during the fiscal year 1999. Extensions were negotiated on these notes which are included as current liabilities in the balance sheet. As part of the loans, the Company also issued the note holders warrants to purchase one share of the Company's common stock for each dollar loan at an average purchase of $.25 per share. During the first quarter of Fiscal 2000, the Company negotiated a thirty (30) day short term promissory note totaling $15,000 with a member of the board of directors. The note bears an interest rate of 9.25% per annum and is included as a current liability in the balance sheet. This promissory note was paid in full plus interest at the beginning of the second quarter of Fiscal 2000. During the second quarter, the Company negotiated three additional thirty (30) day short term promissory notes totaling $150,000 with related parties. Each note bears an interest rate of 8.25% per annum. Any amount of principal and interest not paid when the notes are due shall accrue interest at the rate of 12 percent per annum until paid. The notes were due on or before April 30, 2000 and are included in the current liability section of the balance sheet. Attached to each promissory note is a warrant agreement granting the holder warrants to purchase 50,000 shares of common stock at an exercise price of $.15 per share. Related party notes totaled $394,000 as of May 31, 2000. The Company expects to repay these loans with funds generated from continuing operations or proceeds from the sale of common stock previously authorized by the board of directors; however these directors may elect to convert the debt into equity. 6 Note C: Accounts and notes receivable ----------------------------- In February 1999, the Company entered into a factoring agreement with Texas Capital Funding, Inc. ("TCF"). The Company agreed to sell, assign, transfer, convey and deliver submitted accounts receivable with recourse to TCF and TCF agreed to purchase and accept delivery from the Company. TCF agreed to transfer funds to the Company equal to 80% of the invoice amount submitted. The remaining 20% is retained by TCF until the submitted invoices are collected in full. Fees for the service rendered by TCF are based upon the collection period of each submitted invoice. Based upon the collection of submitted accounts receivable, fees incurred averaged between 3% and 20% of the invoiced amount with an average of 5% as of May 31, 2000. Fees incurred are classified as interest expense and reflected in the consolidated statements of operations. Interest expense related to the factoring of accounts receivable for the current fiscal quarter totaled $26,810. Repayment of any advances is guaranteed by two (2) members of the Company's board of directors. Accounts and Notes Receivable at the end of May 31, 2000 consists of the following: Accounts Receivable, Trade $ 97,490 Accounts Receivable, Factored 200,638 Allowance for Doubtful Accounts (10,000) -------- Total $288,128 ======== Note D: Shareholders' Equity -------------------- During the second quarter, the board of directors authorized the issuance of 20,558 shares of common stock at a price of $.46 per share and 13,618 shares of common stock at a price of $.24 per share. The common stock was issued to Wellesley Capital Group, Inc. as remuneration for expenses incurred during fund raising efforts for the period January 1998 through September 1999. In December 1999, the Company issued three (3) warrant agreements granting the holder warrants to purchase 50,000 shares of common stock at an exercise price of $.15 per share. The warrants are attached to promissory notes negotiated by the Company with major shareholders. Each warrant agreement grants the holder the option to purchase one (1) share of common stock for every dollar loaned to the Company. 7 Note E: Disclosures about Reportable Segments ------------------------------------- Delta-Omega Technologies, Ltd. has four reportable segments: solvents and cleaners, firefighting and spill response, oilfield and SafeScience. The solvents and cleaners division produce products to serve the aviation market and institutional and industrial markets. The firefighting and spill response division produce U.L. listed fire foam products that are non-toxic, non-hazardous and non-reportable. The oilfield division produces products that cater to the needs of the oil and gas industry. The SafeScience line of products serves the consumer with products that are defined exclusively for safety-for human health and the environment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Delta-Omega Technologies evaluates performance base on profit or loss from operations before income taxes and interest expense not including nonrecurring gains and losses. Delta-Omega Technologies' reportable segments are business units that offer different products. Each reportable segment is allocated a percentage of administrative costs not attributable to a particular segment according to the percentage of gallons sold by the segment. The reportable segments are managed separately because each business unit requires different technology and marketing strategies.
Delta-Omega Technologies, Inc. Disclosure of Reported Segment Profit or Loss, and Segmented Assets Nine Month Period Ended May 31, 2000 Solvents & Firefighting & Oilfield SafeScience *All Cleaners Spill Response Other Revenues from external Customers $ 271,381 $ 248,940 $ 205,833 $ 245,711 $ -- Intersegment revenues -- -- -- -- -- Interest & Royalty Rev -- -- -- 55,275 522 Interest expense -- -- -- -- 124,351 Depreciation and Amortization 15,023 13,910 11,684 15,023 23,922 Segment Profit (99,007) (91,674) (77,006) (99,007) (86,869) Segment Assets -- -- -- -- 796,392 Expenditures for segment Assets -- -- -- -- 43,222 8 Delta-Omega Technologies, Inc. Disclosure of Reported Segment Profit or Loss, and Segmented Assets Nine Month Period Ended May 31, 1999 Solvents & Firefighting & Oilfield SafeScience *All Cleaners Spill Response Other Revenues from external Customers $ 460,593 $ 281,289 $ 225,895 $ 49,504 -- Intersegment revenues -- -- -- -- -- Interest & Royalty Rev -- -- -- 12,809 1,132 Interest expense -- -- -- -- 14,556 Depreciation and Amortization 23,099 13,859 11,293 3,080 33,996 Segment Profit (119,000) (71,400) (58,178) (15,866) (158,578) Segment Assets -- -- -- -- 978,344 Expenditures for segment Assets -- -- -- -- 15,118 Delta-Omega Technologies, Inc. Reconciliations of Reportable Segment Revenues Profit or Loss, and Assets May 31, May 31, 2000 1999 Revenues -------- Total revenues for reportable segments $ 971,865 $ 1,017,281 =========== =========== Profit or Loss -------------- Total profit or loss for reportable segments ($ 366,694) ($ 264,444) Other profit or loss (86,869) (158,578) ----------- ----------- Income before income taxes and extraordinary items ($ 453,563) ($ 423,022) =========== =========== Assets ------ Other assets $ 796,392 $ 978,344 Total assets for reportable segments -- -- ----------- ----------- Consolidated total $ 796,392 $ 978,344 =========== =========== Other significant Items ----------------------- Research and Development Expenses $ 86,869 $ 158,578 Depreciation Expense-R&D Equipment 18,272 27,640
9 *Research and Development expenses not directly accounted for in the totals of a specific reporting segment is included in the classification "All Other" for the nine month period ended May 31, 2000 and 1999. Delta-Omega Technologies, Inc. - Disclosures of Geographic Information and Major Customers -------------------------------------------------------------------------------- Products sales for each reportable segment are concentrated in the continental United States. Revenues from the Company's SafeScience reportable segment represents approximately twenty-five percent (25%) of the Company's total consolidated revenues for the nine month period ended May 31, 2000. Also, revenues from one customer of the solvents and cleaners reportable segment represents approximately twenty-two (22%) percent of the Company's total consolidated revenues for the nine month period ended May 31, 1999. 10 Item 2. Management's discussion and analysis of financial condition and results of operations This Quarterly Report on Form 10-QSB includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-QSB that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including such matters as future capital, research and development expenditures (including the amount and nature thereof), repayment of debt, business strategies, expansion and growth to the Company's operations and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including general economic and business opportunities (or lack thereof) that may be presented to and pursued by the Company, changes in laws or regulations and other factors, many of which are beyond the control of the Company. Readers are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. RESULTS OF OPERATIONS --------------------- Net sales for the third quarter of Fiscal 2000 decreased $29,776 or 7% when compared to the same quarter in the prior year. The decrease in net sales was due primarily to the June 1999 expiration of the Air Force contract to supply an aircraft cleaning compound. Net sales for the nine month period decreased $45,416 or 4% when compared to the same period in the prior year. During this period, sales from the solvent and cleaners division decreased $189,212 or 41% due to the expiration of the Air Force contract in June 1999 that supplied an aircraft cleaning compound. Oilfield product sales also decreased $20,062 or 9% due to the expiration in fiscal 1999 of a private labeling contract to furnish oilfield degreasers. Sales generated from the Company's consumer and industrial and institutional line of products to SafeScience increased from $49,504 to $245,711 which offset a majority of the decrease in the solvent replacement division and oilfield products division. 11 Cost of sales for the current quarter ended decreased $8,874 or 3% when compared to the same period in Fiscal 1999. As a percentage of sales, cost of sales increased from 65% to 68%. The increase in cost of sales as a percentage of sales during the current period was attributable to a large portion of net sales being generated from low gross margin products, the SafeScience household products. Management expects as sales continue to increase, cost of sales as a percentage of sales will decrease as the estimated plant capacity is reached. On a year to date basis, cost of sales increased $7,637 or 1%. As a percentage of sales year-to-date, cost of sales increased from 66% to 70%. Operating expenses for the third quarter remained relatively constant when compared to the same period in the prior fiscal year. For the nine months ended, total operating expenses decreased $22,512 or 3%. The decrease was due to the decrease in research and development expenses associated with the project located in Colombia. Net other operating income for the third quarter was $22,835, an increase of $22,732 when compared with the same period in the prior year. In comparing the two nine month periods, net other operating income increased by $41,856, from $13,941 to $55,797. Net other operating income for the current period and nine month period ended of fiscal year 2000 consists primarily of royalty income generated from the Company's consumer line of products produced for SafeScience. Interest expense was $34,820 for the current quarter as compared to $9,722 for the same period in the prior year. For the nine month period ended, interest expense increased from $14,556 to $124,351. This increase is due to the fees incurred by the factoring of accounts receivable and interest accrued on promissory notes negotiated with members of the board of directors, major shareholders and SafeScience, Inc. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company considers cash and cash equivalents as its principal measure of liquidity. At May 31, 2000, the Company had an overdraft cash balance of $7,813. The Company's primary cash requirements are for operating expenses, particularly Research and Development expenses, raw material purchases and capital expenditures. Since the Company commenced operations, it has incurred recurring losses and negative cash flows from operations. The Company does not have sufficient working capital available as of May 31, 2000, to maintain operations at their current levels. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon obtaining additional capital investments or generation of adequate sales revenue and profitability from operations. 12 The Company is in the process of raising additional capital with a Private Placement Memorandum offered solely to accredited and sophisticated investors. Approximately 3,500,000 shares of the Company's common stock are being offered at a price of $.16 per share. The Company anticipates closing the Private Placement Memorandum during the month of July 2000 with the net proceeds to the Company expected to be approximately $550,000. To date the Company has raised funds totaling $248,900 relative to this Private Placement Memorandum. The Company also has the option to sell 1 million common shares at an undetermined price per share. These shares are remaining from 2 million shares authorized for sale to accredited and sophisticated investors by the Company's board of directors in January 1998. For immediate capital requirements, the Company negotiated loans from board of director members and major shareholders in order to maintain its current level of operations. The Company negotiated nine (9) promissory notes totaling $270,000 during fiscal year 1999, one (1) promissory note totaling $15,000 during the first quarter of fiscal 2000 and three (3) promissory notes totaling $150,000 during the second quarter. The promissory notes were negotiated with members of the board of directors and major shareholders. The promissory notes are short term and bear interest rates ranging from 8.25% - 9.25% per annum. In June 1999, the Company negotiated a $150,000 loan agreement with SafeScience, Inc. (SFAS) in order to comply with demands specified in the supply and distribution agreement between SAFS and the Company. The note bears interest at a rate of 8.25% per annum on the outstanding principal amount of the note, and the interest shall be payable quarterly. The Company has been contracted to furnish products to SafeScience, Inc., that has entered the I&I and household goods markets. During the nine months ended May 31, 2000, revenues of approximately $250,000 have been generated by sales to SafeScience. The Company anticipates a steady increase in the amount of revenues generated by this contract as SafeScience, Inc. enters the industrial market in a focused manner, while continuing to develop and expand existing consumer product distribution accounts. On September 1, 1999, the Company and SafeScience entered into an exclusive License Agreement concerning retail sales of certain proprietary formulations developed by the Company and produced exclusively for SafeScience. Terms of the License Agreement provide for SafeScience to provide confidential access to these formulations to third party manufacturers for the purpose of manufacturing large volumes of finished 13 goods for resale. This arrangement allows SafeScience to outsource much greater product blending capacities than the Company can provide with its existing facilities. A provision of the License Agreement grants a royalty to the Company based upon net sales of SafeScience products. In the current quarter, royalties totaling approximately $24,000 have been accrued and this total is included as other operating income in the consolidated statement of operations. The Company recently introduced a line of products to serve the needs of the oil, gas exploration and production industries. This line of products includes degreasers, paraffin cutters, downhole tubing and casing cleaners and marine transportation storage vessel cleaning compounds. The multi-functional properties of these products allow the customer greater flexibility by reducing cleaning time, minimizing storage requirements, enhancing worker safety and lessening environmental liabilities. The Company furnishes specialized cleaning and treatment chemicals to Environmental Concepts, Inc. (E.C.I.), a company that provides cleaning equipment, products and services to the oil and gas industry. Sales of the Company's products totaling approximately $100,000 have been made to E.C.I., with increasing volumes anticipated when E.C.I. begins full service cleaning, which is scheduled to begin in the next quarter. The Company's attainment of six (6) UL listings for its fire foam products gives the Company an opportunity to gain a significant market share in the municipal fire sector and airport fire fighting markets. The Company also developed a Class "A" foam used for extinguishing wildland and structural fires. The Company plans to obtain approval for use in the forestry service market. Sales of the firefighting foams are expected to increase over the next quarter as the Company markets emergency response products to the municipal and petroleum sectors. During the last three years, the Company developed a unique technology for recovering barite and oil from spent drilling mud. The Company, working on location in Colombia with M-I Overseas Limited, successfully completed the first phase of its oil based mud processing application. "Base Fluid Destruction" (BFD) is a version of MRP, a proprietary process for recovering barite and oil from spent drilling muds. BFD was demonstrated for a major oil exploration and production company. Based upon the success of this application, the Company was requested to expand its process to include the treatment of the water/solids phase that remains after initial processing. No estimate of revenues is possible at this stage of development because the results of this technology have yet to be commercially explored. 14 Management believes that the sources of funds and anticipated increases in sales volume discussed above will enable the Company to sustain its current operations and meet its short term obligations in fiscal 2000. As sales volumes of the Company's fire foam product line and industrial chemicals increase, the Company expects cash flow from operations in fiscal 2000 to improve, although no assurances can be made. The Company has no unused credit facilities at this time. 15 Part II Other Information Part II. Item 6. Exhibits And Reports On Form 8-K a) Exhibits Exhibit Description Location No. ------- ----------- ------------ 27 Financial Data Schedule Filed herewith 16 SIGNATURES The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the three months and nine months ended May 31, 2000 and May 31, 1999 have been included. 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. Delta-Omega Technologies, Inc. (Registrant) /s/ James V. Janes, III ------------------------------------ James V. Janes III President (Principal Officer) /s/ Marian A. Bourque ------------------------------------ Marian A. Bourque Chief Accounting Officer Date: July 14, 2000 17