FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2006.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ____________ to _________________
Commission File Number 000-30563
DELTA MUTUAL, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 14-1818394
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 NORTH BRANCH STREET, SELLERSVILLE, PA 18960
(215) 258-2800
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(Address and telephone number, including area code, of
registrant's principal executive office)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At August 7, 2006, there were 53,124,068 shares of Common Stock, $.0001 par
value, outstanding.
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DELTA MUTUAL, INC.
INDEX
Page
Part I. Financial Information 1
Item 1. Financial Statements 1
Consolidated Balance Sheets as of June 30, 2006 (unaudited) 2
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2006 and 2005 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2006 and 2005 (unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 21
Item 3. Controls and Procedures 25
Part II. Other Information 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Certain information and footnote disclosures required under accounting
principles generally accepted in the United States of America have been
condensed or omitted from the following consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2005.
The results of operations for the six months ended June 30, 2006 and 2005
are not necessarily indicative of the results for the entire fiscal year or for
any other period.
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Page 1
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30,
-----------
2006
-----------
Current Assets:
Cash $ 104,599
Accounts receivable 277,674
Prepaid expenses 342,540
-----------
Total Current Assets 724,813
Property and equipment - net 465,878
Intangible asset 137,042
Other assets 1,401
-----------
TOTAL ASSETS $ 1,329,134
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 503,185
Accrued expenses 844,426
Accretion of convertible debt 451,765
Notes payable 240,655
-----------
TOTAL LIABILITIES 2,040,031
-----------
Minority interest in consolidated subsidiaries 422,886
-----------
Stockholders' Deficiency:
Common stock $0.0001 par value - authorized
100,000,000 shares; 48,460,788
outstanding 4,846
Additional paid-in-capital 6,636,393
Accumulated deficit (7,765,022)
Subscription receivable (10,000)
-----------
Total Stockholders' Deficiency (1,133,783)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 1,329,134
===========
See Notes to Consolidated Financial Statements
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Page 2
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ 260,704 $ -- $ 99,982 $ --
------------ ------------ ------------ ------------
Costs and Expenses
Cost of Sales 79,432 -- 29,694 --
General and administrative
expenses 1,363,702 897,743 620,288 521,750
------------ ------------ ------------ ------------
1,443,134 897,743 649,982 521,750
------------ ------------ ------------ ------------
Loss from operations (1,182,430) (897,743) (550,000) (521,750)
Accretion of convertible debt (146,751) (203,713) (58,798) (105,013)
Interest expense (23,543) (110,356) (11,604) (98,772)
------------ ------------ ------------ ------------
Loss before minority interest (1,352,724) (1,211,812) (620,402) (725,535)
Minority interest share of (income)
loss of consolidated subsidiaries (92,059) (74,689) (21,680) (26,346)
Benefit from income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,444,783) $ (1,286,501) $ (642,082) $ (751,881)
============ ============ ============ ============
Loss per common share-
basic and diluted $ (0.04) $ (0.07) $ (0.02) $ (0.03)
============ ============ ============ ============
Weighted average number of
common shares outstanding-
basic and diluted 41,030,224 19,330,944 41,865,537 21,856,808
============ ============ ============ ============
See Notes to Consolidated Financial Statements
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Page 3
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
2006 2005
----------- -----------
Cash flows from operating
activities:
Net loss $(1,444,783) $(1,286,501)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 22,896 2,676
Non-cash employee compensation -- 61,300
Non-cash compensation 168,432 134,370
Accretion of convertible debt 146,751 203,713
Compensatory element of option
issuance 447,435 --
Minority interest in income (losses) of
consolidated subsidiaries 92,059 74,689
Changes in operating assets
and liabilities 103,250 419,695
----------- -----------
Net cash used in operating activities (463,960) (390,058)
----------- -----------
Cash flows from investing activities:
Increase in preconstruction costs -- (240,000)
Purchase of fixed assets -- (1,500)
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Net cash used in
investing activities -- (241,500)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 333,000 371,000
Proceeds from exercise of warrants 73,000 30,000
Proceeds from loans 30,000 282,386
Repayment of loan (23,910) (23,910)
Proceeds from borrowings 16,000 --
Payments to minority interests (6,514) --
Proceeds from minority interest 79,941 (77,704)
----------- -----------
Net cash provided by
financing activities 501,517 581,772
----------- -----------
Net increase (decrease) in cash 37,557 (49,786)
Cash - Beginning of period 67,042 113,780
----------- -----------
Cash - End of period $ 104,599 $ 63,994
=========== ===========
See Notes to Consolidated Financial Statements
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Page 4
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six Months Ended June 30,
-------------------------
2006 2005
----------- -----------
Supplementary information:
Cash paid during year for:
Interest $ 1,564 $ 1,105
=========== ===========
Income taxes $ -- $ --
=========== ===========
Changes in operating assets and
liabilities consists of:
(Increase) in accounts receivable (257,674) --
(Increase) decrease in prepaid expenses 17,809 (12,105)
(Increase) decrease in deposits (49,000) 84,000
(Increase) in other assets (1,052)
Increase in accounts payable
and accrued expenses 392,115 348,852
----------- -----------
$ 103,250 $ 419,695
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Non-cash financing activities:
Issuance of common stock for debt $ 292,634 $ 73,980
=========== ===========
Issuance of common stock for settlement $ 42,750 $ --
=========== ===========
Issuance of common stock for services $ 307,841 $ --
=========== ===========
See Notes to Consolidated Financial Statements
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Page 5
DELTA MUTUAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Delta Mutual, Inc. and subsidiaries ("Delta" or the "Company") are engaged in
providing environmental and construction technologies and services to certain
geographic reporting segments in the Far East, the Middle East, the United
States and Puerto Rico.
BASIS OF PRESENTATION
The consolidated balance sheets as of June 30, 2006, and the consolidated
statements of operations and cash flows for the periods presented herein have
been prepared by Delta Mutual, Inc. (the "Company" or "Delta") and are
unaudited. In the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly, the financial
position, results of operations and cash flows for all periods presented have
been made.
The consolidated financial statements for the period ended June 30, 2006 have
been prepared on a going concern basis which contemplates the realization of
assets and settlement of liabilities and commitments in the normal course of
business. Management recognizes that the Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and revenue to cover expenses as the Company
continues to incur losses.
The Company's business is subject to most of the risks inherent in the
establishment of a new business enterprise. The likelihood of success of the
Company must be considered in light of the expenses, difficulties, delays and
unanticipated challenges encountered in connection with the formation of a new
business, raising operating and development capital, and the marketing of a new
product. There is no assurance the Company will ultimately achieve a profitable
level of operations.
The Company presently does not have sufficient liquid assets to finance its
anticipated funding needs and obligations. The Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and achieve a level of sales adequate to support
its cost structure. Management is actively seeking additional capital to ensure
the continuation of its development activities and complete the proposed joint
ventures. However, there is no assurance that additional capital will be
obtained or that the joint ventures will be profitable. These uncertainties
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties should the Company be
unable to continue as a going concern.
Far East (Indonesia)
In Indonesia the Company formed a local joint venture company to commence energy
and waste recovery operations. The joint venture company, PT. Triyudha -
Envirotech, began operations on December 15, 2005, pursuant to a contract with
Pertamina. During the second quarter, the operation processed 985 metric tons of
oil sludge from designated oil sludge pools under the initial 3,000 metric ton
contract. The remaining 190 metric tons are expected to be processed before the
end of the third quarter.
Middle East
In January 2004, the Company's Delta-Envirotech subsidiary, entered into a
strategic alliance with ZAFF International, Ltd., a technology company in Saudi
Arabia, to pursue soil and water reclamation projects in Saudi Arabia and other
areas in the Middle East. In November, 2004, ZAFF International, Ltd. received
its operating license from the Saudi Arabia environmental authorities to employ
all soil, refinery waste and waste water technologies held by Delta for
environmental projects in that country. In August 2005, Delta-Envirotech reached
a working agreement to provide a turn-key factory to manufacture insulating
concrete wall forming (ICF) products for the building industry. During the first
quarter of 2006, a memorandum of understanding was signed that provides for two
additional ICF factories in the Middle East. A detailed proposal for the first
factory has been submitted.
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Page 6
In August 2005, an additional working agreement was reached with a private Saudi
Arabia company, on the structure of a proposed operation to recover silver from
used x-ray film. During the second quarter of 2006, a letter of intent was
signed to supply the equipment to the Saudi Gulf Environmental Protection
Company (SEPCO) subject to environmental authority approval. An equipment
inspection is scheduled for late August 2006 as part of the approval process.
During the first quarter of 2006, Delta-Envirotech secured the Middle East
distribution rights for an organic emulsifier used in the petroleum industry.
Testing of these products, for environmental approval and performance
validation, is expected to take place during the third quarter of 2006.
United States
In August 2005, the Company acquired, through a wholly-owned subsidiary,
intellectual property and filed a patent application for a new insulating
concrete wall forming (ICF) system. In addition to the patent filing, the
Company engaged a technical consultant and a business development consultant to
further the design and development of the Company's ICF products. The mold that
is required to produce the new product was completed in July 2006. Production
samples ready for testing should be available during August.
Puerto Rico
The plans to proceed to build low income homes under the Puerto Rico Section 124
low income housing program have been delayed as a result of the failure to
obtain required zoning approval for the initial project for approximately 270
homes in Aguadilla. After unsuccessful administrative appeals of the original
decision by the Planning Board of Puerto Rico, the property owners filed a
motion requesting a review of that decision by the Supreme Court of Puerto Rico.
The motion was denied in July 2006 and the Company is evaluating alternative
courses of action on this project.
In December 2004, the Company formed a second joint venture, and secured the
rights to a 40-acre tract to build approximately 300 homes as part of a 150-acre
development located in Guayanilla for a second Section 124 project. The master
plan for this entire project is still being prepared by the project's developer.
The acreage included in this master plan may be affected by a proposed zoning
reclassification by the Planning Board of Puerto Rico.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of all
majority-owned subsidiaries where its ownership is more than 50 percent of
common stock. The consolidated statements also include the accounts of any
Variable Interest Entities ("VIEs") where the Company is deemed to be the
primary beneficiary, regardless of its ownership percentage. All significant
intercompany balances and transactions with consolidated subsidiaries are
eliminated in the consolidated financial statements. Where the Company's
ownership interest is less than 100 percent, the minority ownership interests
are reported in the consolidated balance sheets as a liability. The minority
ownership interest of the Company's earnings or loss, net of tax, is classified
as "Minority interest in earnings of consolidated subsidiaries" in the
consolidated statements of operations.
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Page 7
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
LOSS PER SHARE
Basic and diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the year. Potential
common shares are excluded from the loss per share calculation because the
effect would be antidilutive. Potential common shares relate to the convertible
debt, stock options and common stock purchase warrants. As of June 30, 2006,
there were 5,679,867 potential common shares related to convertible debt,
8,778,000 potential common shares related to stock options and no potential
common shares related to common stock purchase warrants issued by the Company.
As of June 30, 2005 there were 12,503,200 potential common shares related to
convertible debt; 8,000,000 potential common shares related to stock options and
7,780,000 potential common shares related to common stock purchase warrants
issued by the Company.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104 "Revenue Recognition Financial Statements"
(SAB No. 104). Revenue is recognized from the Company's environmental
remediation operation as the services are performed over the life of the
remediation contracts.
EVALUATION OF LONG-LIVED ASSETS
The Company reviews property and equipment and finite-lived intangible assets
for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable in accordance with guidance in Statement of
Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." If the carrying value of the long-lived asset
exceeds the undiscounted amount of the related estimated future cash flows, the
asset would be adjusted to its fair value and an impairment loss would be
charged to operations in the period identified.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is provided for by the
straight-line method over the estimated useful lives of the related assets.
STOCK-BASED COMPENSATION
The Company has a stock-based compensation plan under which stock options and
stock awards are granted to employees. Effective January 1, 2006, the Company
accounts for stock based compensation under Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment." The Company adopted SFAS
123(R) using the modified prospective method. Under modified prospective
application, this SFAS applies to new awards and to awards for which the
requisite service has not been rendered that are outstanding as of the required
effective date shall be recognized as the requisite service is rendered on or
after the required effective date. The compensation cost for the portion of
awards shall be based on the grant-date fair value of those awards as calculated
for either recognition or pro forma disclosures under SFAS 123. Changes to the
grant-date fair value of equity awards granted before the required effective
date of this Statement are precluded. The compensation cost for those earlier
awards shall be attributed to periods beginning on or after the required
effective date of this SFAS using the attribution method that was used under
SFAS 123, except that the method of recognizing forfeitures only as they occur
shall not be continued. Prior to January 1, 2006, the Company accounted for
stock option grants issued to employees in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," along with the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," and for periods prior to January 1, 2006, the Company made
disclosure of pro forma net earnings and earnings per share as if the
fair-value-based method of accounting had been applied as required by SFAS
No.123.
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Page 8
Prior to January 1, 2006, the Company adopted the disclosure provisions of SFAS
No. 123. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards for the six and
three months ended June 30, 2005, consistent with the provisions of SFAS No.
123, the Company's net loss and net loss per share would have been reduced to
the pro forma amounts indicated below:
For the six months For the three months
ended June 30, ended June 30,
-----------------------------------------
2005 2005
------------------- -------------------
Net loss-as reported $ (1,286,501) $ (751,881)
Deduct: Total stock-based
employee compensation
expense determined
under the fair value
based method for all
awards, net of taxes 293,568 192,000
------------------- -------------------
Net loss-pro forma $ (1,580,069) $ (943,881)
=================== ===================
Loss per common share
basic and diluted -
as reported $ (0.07) $ (0.03)
Loss per common share
basic and diluted-
pro forma $ (0.08) $ (0.04)
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
under which deferred taxes are recognized by applying enacted tax rates
applicable to future years to the differences between financial statement
carrying amounts and the tax basis of reported assets and liabilities. The
principal item giving rise to deferred taxes are future tax benefits of certain
net operating loss carryforwards.
FOREIGN CURRENCY TRANSLATION
The functional currency for some foreign operations is the local currency.
Assets and liabilities of foreign operations are translated at balance sheet
date rates of exchange and income, expense and cash flow items are translated at
the average exchange rate for the period. Translation adjustments in future
periods will be recorded in Accumulated Other Comprehensive Income. The
translation gains or losses were not material for the period ended June 30,
2006.
INTANGIBLES
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 specifies the financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
that have indefinite useful lives are not amortized but rather they are tested
at least annually for impairment unless certain impairment indications are
identified.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash, accounts payable, accrued expenses,
and convertible debt, it was assumed that the carrying amount approximated fair
value because of the short maturities of such instruments.
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RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to
the current year presentation.
NEW FINANCIAL ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48").
The interpretation Requires a two step approach for recognizing and measuring
tax benefits based on a recognition threshold of "more likely than not." FIN 48
also requires explicit disclosures about Uncertainties in tax positions
including a detailed rollforward of tax benefits that do not qualify for
financial statement recognition. The adoption of FIN 48 is effective for fiscal
years beginning after December 15, 2006, The implementation of FIN 48 could have
a material effect on the consolidated balance sheets and results of operations
but the effect of such implementation is not determinable at this time.
In December 2004, the FASB issued SFAS No. 153, an amendment of APB Opinion No.
29, "Exchange of Nonmonetary Assets". SFAS No. 153 amends APB Opinion 29 by
eliminating the exception under APB No. 29 for nonmonetary assets of similar
productive assets and replaces it with a general exception for exchanges on
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flow of the entity is expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 did not
have a material effect on the Company consolidated financial position or results
of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," that
required compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the reward. SFAS No.
123(R) is effective as to the Company as of the beginning of the Company's 2006
fiscal year. The Company accounted for the stock-based compensation costs using
the modified prospective method at the time of adoption. The adoption of SFAS
123(R) resulted in incremental stock-based compensation expense of $292,500
during the six months ended June 30, 2006. The adoption of SFAS 123(R) did have
a material effect on the consolidated balance sheets as of June 30, 2006 and
the consolidated statements of cash flows for the six months ended June 30,
2006.
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2. PROPERTY AND EQUIPMENT
June 30, 2006
-------------
Equipment $ 485,478
Leasehold improvements 7,807
-------------
493,285
Less accumulated
Depreciation 27,407
-------------
$ 465,878
=============
Depreciation expense fore the six months and three months ended June 30,
2006 and 2005, amounted to $19,321 and $9,661; and $2,676 and $879,
respectively.
3. INTANGIBLE ASSETS
Intellectual property costs are intellectual property included in a patent
application. If the patent is not issued, the Company will write-off the
unamortized amounts immediately. Other intangibles are being amortized over 20
years. Amortization expense was $3,575 and $1,788; and -$0-, and -$0- for the
six months and three months ended June 30, 2006 and 2005, respectively. Other
intangible assets consist of the following:
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Page 11
June 30, 2006
Gross Carrying Accumulated
Amount Amortization
--------------- --------------
Intellectual property costs $ 143,000 $ 5,958
Organization Costs 2,834 2,834
--------------- --------------
$ 145,834 $ 8,792
=============== ==============
Estimated amortization expense for intangible assets for the next five
years is as follows:
Estimated
Year Ending Amortization
December 31, Expense
-------------- -------------
2006 $ 3,575
2007 7,150
2008 7,150
2009 7,150
2010 7,150
2006 represents amortization from July 1, 2006 through December 31, 2006.
4. INVESTMENT IN JOINT VENTURES
a) In December 2003, the Company formed a joint venture project to develop
government sponsored, Section 124, low income housing in the Commonwealth
of Puerto Rico. The Company became the general partner and the 75%
majority owner of a limited partnership, Delta Development Partners, LP,
that holds the 85% majority share of Delta Developers Corp., a Puerto Rico
corporation, formed to manage the construction and related activities
required to build approximately 270 low income homes under Section 124.
The operations of the joint venture have been consolidated with the
Company for the six months ended June 30, 2006 and 2005, respectively.
During the year ended December 31, 2004, Neil Berman, an investor,
purchased a 25% interest in Delta Development Partners, LP for $148,000.
On October 6, 2004, the Company entered into a second joint venture
agreement to develop government sponsored, Section 124 low income housing
in the Commonwealth of Puerto Rico. The Company became the general partner
and majority owner of a limited partnership, Delta Development Partners
II, LP, that holds the 85% majority share of Delta Developers Guayanilla
Corp., a Puerto Rico corporation formed to manage the construction and
related activities required to build approximately 300 low income homes
under Section 124. The operations of the joint venture have been
consolidated with the Company since October 6, 2004.
During the period October 6, 2004 through December 31, 2004, Ebony
Finance, Ltd. and T & T Asset Management, investors, purchased a 4%
interest from the existing partners in Delta Development Partners II, LP
for $40,000.
See Note 1 to Unaudited Consolidated Financial Statements for information
regarding accounting for minority interests.
b) On January 14, 2004, the Company entered into a joint venture agreement
forming Delta-Envirotech, Inc. for the purpose of providing environmental
technologies and services to markets in the Middle East. The joint venture
company is based in Virginia and focuses on participating in foreign
government sponsored pollution remediation projects. Upon formation, David
Razmara was named President and became an employee of Delta-Envirotech.
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On January 22, 2004, the Company announced the conclusion of a strategic
alliance agreement Between Delta-Envirotech, Inc. and ZAFF International,
Ltd., an advanced technology company located in Saudi Arabia. The
strategic alliance states that the two companies will jointly pursue
projects related to soil and water reclamation projects in the Middle
East.
On July 14, 2004, the Company and Hi-Tech, pursuant to an agreement to
purchase stock dated January 14, 2004, each sold 75 shares of the joint
venture to a third party, representing a ten percent (10%) interest for
$2. The Company and Hi-Tech each own forty-five percent (45%) of the joint
venture.
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Page 13
The operations of the joint venture have been consolidated with the
Company for the six months ended June 30, 2006 and 2005. Delta-Envirotech,
Inc. meets the definition of a Variable Interest Entity as defined in
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" requiring the primary
beneficiaries of a variable interest entity to consolidate that entity.
The primary beneficiary of a variable interest entity is the party that
absorbs the majority of the expected losses of the entity or receives a
majority of the entity's expected residual return, or both, as a result of
ownership, contractual or other financial interest in the entity
See Note 1 of Notes to Unaudited Consolidated Financial Statements for
information regarding accounting for minority interests.
c) Minority interests primarily consist of ownership interest in
Delta-Envirotech, Inc.; Delta Development Partners, L.P.; Delta
Development Partners II, L.P.; PT Triyudha - Envirotech; Delta Developers
Corp. and Delta Developers Guayanilla Corp. The income and losses from
operations of these entities and their respective minority interests have
been reflected in the Company's statement of operations for the six months
ended June 30, 2006 and 2005. There are excess losses not absorbed by the
minority interests due to limitations of their capital contributions. In
future periods, the profits first attributable to the minority interests
will be first absorbed against any unused losses until the losses are
fully absorbed. The amount on the Company's balance sheets represents the
minority interests as of June 30, 2006.
The following represents a schedule of minority interests as of June 30,
2006
-----------
Delta Development Partners L.P. $ 145,150
Delta Development Partners II, L.P. 39,745
Delta Developers Guayanilla, Corp. --
Delta-Envirotech, Inc. --
PT Triyudha - Envirotech 210,867
Delta Developers Corp. 27,125
------------
$ 422,887
============
5. NOTES PAYABLE
On April 5, 2005, the Company issued 8% term notes to private investors in
the amount of $210,655, with the principal and interest due at maturity on
October 2, 2005. Pursuant to note modification agreements, the maturity
dates of these notes was extended to June 2006. In June 2006, by further
amendment, these notes became payable on written demand by the lenders.
Interest expense for the six months and three months ended June 30, 2006
and 2005 amounted to $8,426 and $4,213; and $3,971 and $3,971,
respectively. As of June 30, 2006 and 2005, accrued interest of $12,582
and $3,971 is included in accrued interest expense on the Company's
consolidated balance sheets.
6. CONVERTIBLE DEBT
During the year ended December 31, 2004, the Company issued convertible
notes in the principal amounts of $961,400. The convertible notes bear
interest at rates from 4% to 6% and mature at various dates between May
12, 2006 and January 16, 2007. Theses notes are convertible into common
stock at a conversion price of $0.05 to $0.125 per share. A portion of
these convertible notes, in the principal amount of $440,000, have an
initial conversion price of $0.05 per share subject to adjustment if the
Company issues common stock at a price below $0.05 per share. On September
16, 2004, the Company's board of directors resolved to prohibit the
issuance of shares of common stock at a price below $0.05 per share for as
long as any of the $440,000 convertible notes are outstanding.
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In connection with the issuance of the $440,000 convertible notes, the
Company issued 8,880,000 common stock purchase warrants at an exercise
price of $0.10 per share. The warrants expired March 31, 2006.
The Company accounted for the warrants and the convertible debt with
detachable warrants in accordance with Emerging Issues Task Force 00-27
and 00-19 and SFAS No. 33. The Company performed calculations allocating
the proceeds of convertible debt with detachable warrants to each
respective security at their fair values. The Company used the conversion
value of the convertible debt and calculated fair value of the warrants
using the Black-Scholes valuation model for its estimate of fair value.
The Company compared the allocated proceeds of the convertible debt to the
difference between its conversion value and face amount. The calculated
fair value of the convertible debt of $722,855 was recorded as the value
of the Beneficial Conversion Feature and accordingly credited to
Additional Paid-in Capital. The value of the warrants of $235,545 was
recorded as a reduction of the convertible debt. The convertible debt was
recorded at zero. The convertible debt will be accreted to its current
face value of $480,400, after 2004 and 2005 conversions, under the
interest method per APB No. 21 until it is either converted or matures. As
of June 30 2006, the accretion amounted to $451,765, all of which is
current.
During the year ended December 31, 2005 and 2004, the note holders
converted $232,500 and $70,000 into 4,650,000 and 1,400,000 shares of
common stock, respectively. During the six months ended June 30, 2006, the
noteholders converted an additional $194,500 principal amount into
3,890,000 shares of common stock. At June 30, 2006, the Company's
outstanding convertible notes were convertible into 5,679,867 shares of
common stock.
On May 3, 2006, the Company issued a convertible note to a related party
in the principal amount of $16,000. The note bears interest at 6% per
annum and matures on November 3, 2007. The note is convertible into common
stock at a conversion price of $0.06 per share.
The following table shows the maturities by year of total face amount of
the long-term convertible debt obligations at June 30, 2006:
2006 $ 464,400
2007 16,000
-----------
$ 480,400
===========
For the six months and the three months ended June 30, 2006 and 2005, the
Company recorded interest expense of $23,380 an $11,521; and $25,596 and
$15,106, respectively. As of June 30, 2006 and 2005, accrued interest of
$53,492 and $39,089, respectively, is included in accrued expenses on the
Company's consolidated balance sheets.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30
2006
--------
Professional fees $ 86,217
Interest expense 53,492
Payroll Expense 132,633
Payroll expense officers 422,385
Payroll tax expense 35,829
Other accrued expenses 113,870
--------
$844,426
========
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8. LOANS FROM RELATED PARTIES
On March 22, 2005, the Company borrowed $71,731 from Neil Berman, a
shareholder and noteholder of the Company, with interest at 6% per annum
and the principal and interest due in three equal installments on June 21,
September 19, and December 20, 2005. On May 6, 2005, the Company paid the
first installment consisting of $23,910 principal and $1,105 interest. On
September 19, 2005, the Company paid the second installment consisting of
$23,910 principal and $1,029 interest. The note was amended on December
16, 2005 to extend the final installment payment until February 20, 2006.
On February 3, 2006, the Company made the final payment consisting of
$23,910 of principal and $1,563 of accrued interest. Interest expense for
the six months and the three months ended June 30, 2006 and 2005 amounted
to $349 and $1,192, respectively.
On May 17, 2006, the Company borrowed $30,000 from a shareholder of the
Company, at interest of 6% per annum with the principal and interest due
on May 17, 2008. Interest expense for the six months ended June 30, 2006
amounted to $222. The balance due to the shareholder is included in Notes
Payable on the Company's consolidated balance sheets at June 30, 2006.
9. RELATED PARTY TRANSACTIONS
The Company's subsidiary, Delta-Envirotech, Inc. ("Envirotech") pays
monthly office rent to David Razmara, the president of Envirotech and a
shareholder of the Company, in the amount of $1,000. The rent expense for
the six months ended June 30, 2006 and 2005 amounted to $6,000 and -0-,
respectively.
10. STOCKHOLDER'S DEFICIENCY
The Company issues shares of common stock for services or repayment of
debt valued at fair market value at time of issuance.
a) For the six months ended June 30, 2006, the Company issued 3,890,000
shares of common stock upon the conversion of a convertible notes in the
original principal amount of $194,500, valued at $0.05 per share, and
issued 321,826 shares of common stock for payment of accrued interest in
the amount of $16,091, also valued at $0.05 per share. For the six months
ended June 30, 2005, the Company issued 1,450,000 shares of common stock
upon the conversion of convertible notes in the principal amount of
$72,500, valued at $0.05 per share, and 29,586 shares of common stock for
payment of accrued interest in the amount of $1,480, also valued at $0.05
per share.
b) For the six months ended June 30, 2006, the Company issued 1,490,152
shares of common stock for services valued at $307,841 at a price per
share of $0.11 - $0.22. For the six months ended June 30, 2005, the
Company issued 224,000 shares of common stock for services valued at
$125,865, at prices per share of $0.30 - $0.66.
c) For the six months ended June 30, 2006, the Company sold 6,482,212 shares
of common stock and issued 55,545 shares of common stock as associated
commissions for net proceeds of $333,000, valued at $0.05 - $0.12 per
share. For the six months ended June 30, 2005, the Company sold 1,536,667
shares of common stock for net proceeds of $401,000, valued at $0.05 -
$0.12 per share.
d) For the six months ended June 30, 2006, the Company issued 730,000 shares
of common stock upon the exercise of the Company's common stock purchase
warrants at a conversion price of $73,000, valued at $0.10 per share.
For the six months ended June 30, 2005, the Company issued 300,000 shares
of common stock upon the exercise of the Company's common stock purchase
warrants at a conversion price of $30,000, valued at$0.10 per share.
e) For the six months ended June 30, 2005, the Company issued, to five
employees, 613,000 shares of common stock, in the aggregate, from the
Company's 2001 Employee Stock Option Plan (the "Plan"), for $61,300,
valued at $0.10 per share. There were no shares of common stock from the
Plan issued during the six months ended June 30, 2006.
f) For the six months ended June 30, 2006, the Company issued 225,000 shares
of common stock in settlement of a lawsuit for $42,750, valued at $0.19
per share, which expense was included in the Company's consolidated
statements of operations for the year ended December 31, 2005.
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11. BUSINESS SEGMENT INFORMATION
The Company operates in four reportable segments. The segments are
geographic and include the Far East (Indonesia), the Middle East, North
America (United States) and Puerto Rico. The primary criteria by which
financial performance is evaluated and resources allocated are revenue and
operating income.
The following is a summary of key financial data:
Six Months Three Months
ended June 30 ended June 30
2006 2005 2006 2005
------------------------- -------------------------
Total Revenue:
North America $ -- -- $ -- --
Indonesia 260,704 -- 99,982 --
Middle East -- -- -- --
Puerto Rico -- -- -- --
----------- ----------- ----------- -----------
$ 260,704 -- $ 99,982 --
=========== ===========
Profit (Loss) from Operations:
North America $(1,077,311) $ (897,743) $ (540,283) $ (521,750)
Indonesia 75,319 -- 25,705 --
Middle East (29,400) -- (14,700) --
Puerto Rico (151,038) -- (20,722) --
----------- ----------- ----------- -----------
$(1,182,430) $ (897,743) $ (550,000) $ (521,750)
=========== =========== =========== ===========
12. SHARE BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123(R) "Share-Based Payment,"
requiring the recognition of compensation expense in the Consolidated Statements
of Operations related to the fair value of its employee share-based options and
awards. SFAS No. 123(R) revises SFAS No. 123 "Accounting for Stock-Based
Compensation" and supercedes APB Opinion No. 25 "Accounting for Stock Issued to
Employees." SFAS No. 123(R) is supplemented by SEC Staff Accounting Bulletin
("SAB") No. 107 "Share-Based Payment." SAB No. 107 expresses the SEC staff's
views regarding the interaction between SFAS No. 123(R) and certain SEC rules
and regulations including the valuation of share-based payment arrangements.
The Company recognizes the cost of all employee stock options on a straight-line
attribution basis over their respective vesting periods, net of estimated
forfeitures. The Company has selected the modified prospective method of
transition; accordingly, prior periods have not been vested. Prior to adopting
SFAS No. 123(R), the Company applied APB Opinion No. 25, and related
interpretation in accounting for its stock-based compensation plans. All
employee stock options were granted at or above the grant date market price.
Accordingly, no compensation cost was recognized for fixed stock option grants.
On June 30, 2006, the Company had one share-based compensation plan, which is
described below. During the first six months of 2006, the adoption of SFAS No.
123(R) resulted in incremental stock-based compensation expense of $292,500. The
incremental stock-based compensation expense caused earnings before provision
for income taxes and net earnings to decrease by $292,500, and basic and diluted
earnings per common share to decrease by $-0- per share.
Under the provisions of SFAS 123(R), the recognition of deferred compensation,
representing the amount of unrecognized restricted stock expense that is reduced
as expense is recognized, at the date restricted stock is granted, is not longer
required. Therefore, in the quarter ended March 31, 2006, the amount that had
been in "Deferred compensation" in the consolidated balance sheets was reversed
to zero.
Stock Option Plan
In December 2001, the Company's stockholders approved a stock option plan
entitled the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant to
which 2,000,000 shares of common stock were reserved for issuance. In August
2004, the Company's stockholders approved the 2004 Stock Option Plan (the "2004
Plan"), pursuant to which 10,000,000 shares of common stock were reserved for
issuance. As of June 30, 2005, all shares under the 2001 Plan had been issued,
and 1,222,000 shares of common stock remained available for issuance under the
2004 Plan.
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The Company was also authorized to issue shares of stock to its employees from
its 2001 Employee Stock Option Plan (the "2001 Plan"). The Company expensed the
issuance of stock awards in accordance with SFAS No. 123. Shares issued from the
2001 Plan were expensed at the time of issuance, as common stock issued had no
restrictions to the employees. The Company issued no stock awards to employees
from the 2001 Plan during the six months ended June 30, 2006 and issued 613,000
shares to five employees during the similar period of 2005. The shares issued
were at fair market value as compensation to employees. The Company recorded
compensation expense of $-0- and $61,300 in the Company's consolidated
statements of operations for the six months ended June 30, 2006 and 2005,
respectively.
The Company issues shares of its common stock to employees and non-employees as
stock based compensation. The Company accounts for the services using the fair
market value of the services rendered. For the six months ended June 30, 2006,
the Company issued 1,490,152 common shares, and recorded expense of $307,841, of
which $ 250,000 was included in prepaid expenses on the consolidated balance
sheets at June 30, 2006, in conjunction with the issuance of these shares.
The Company did not issue any common stock warrants during the six months ended
June 30, 2006 and 2005, respectively.
On March 31,2006, 6,850,000 common stock warrants issued by the Company expired
according to their terms without being exercised.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2005: dividends yield of 0%, expected volatility
of 116% and expected life of 10 years. During the six months ended June 30,
2006, the Company issued 778,000 stock options to five employees. The Company
recorded an expense of $447,435 which is included in the consolidated statements
of operations for the six months ended June 30, 2006.
A summary of option activity under the 2004 Plan as of December 31, 2005 and
changes during the six months ended June 30, 2006 is presented below:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Options Shares Exercise Price Term Value
------- --------- -------------- ----------- ----------
Outstanding at January 1, 2006 8,000,000 $ 0.25 -- --
Granted 778,000 0.17 -- --
Exercised -- -- --
Forfeited or expired -- -- --
Outstanding at June 30, 2006 8,778,000 0.24 3.2 --
Exercisable at June 20, 2006 7,500,000 0.25 3.2 --
A summary of the status of the Company's non vested options as of December 31,
2005 and changes during the six months ended June 30, 2006 is presented below:
Weighted-Average
Grant-Date
Nonvested Options Options Fair Value
----------------- ------- ----------------
Nonvested at December 31, 2005 1,000,000 0.25
Granted 778,000 0.17
Vested (500,000) 0.25
Forfeited --
Nonvested at June 30, 2006 1,278,000 0.20
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At June 30, 2006 there was $2,196,250 of total unrecognized compensation cost
related to non vested share-based compensation arrangements granted under the
Plan. The cost is expected to be recognized over a weighted average period of 2
years. The total fair value of shares vested during the six months ended June
30, 2006 and 2005 was $125,000 and $-0-, respectively.
A summary of the warrant activity as of December 31, 2005 and changes during the
six months ended June 30, 2006 is presented below:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Warrants Shares Exercise Price Term Value
-------- ----------- -------------- ----------- -----------
Outstanding at January 1, 2006 7,580,000 $ 0.10 -- 0.10
Granted -- -- -- --
Exercised (730,000) 0.10 -- 0.10
Forfeited or expired (6,850,000) -- 0.10
-----------
Outstanding at June 30, 2006 -- 0.10 -- --
-----------
Exercisable at June 30, 2006 -- 0.10 -- --
-----------
13. COMMITMENTS AND CONTINGENCIES
Consulting Agreements
On August 26, 2005, the Company entered into a consulting agreement with
Juan B. Rodriguez Pagan ("Rodriguez") to provide certain services and
assistance to the Company in developing its construction and building
materials businesses. The Company agreed to pay Rodriguez 48 monthly
payments of $6,000 over the four-year term of the agreement and issue him
shares of common stock upon his execution of the agreement and at
subsequent intervals during the term of the agreement. As of June 30,
2006, the Company issued Rodriguez $500,000 of its common stock. In
addition, Rodriguez is entitled to a commission of 5% of the sales of
Delta Technologies, Inc. Either party may terminate the agreement upon
written notice, however, if the Company terminates the agreement,
Rodriguez is entitled to all of the remaining monthly payments he would
have been entitled to receive during the term of the agreement.
For the six months ended June 30, 2006, consulting fees of $36,000 are
included in accrued expenses on the Company's consolidated statements of
operations. For the six months ended June 30, 2006, the Company expensed
$94,500 in consulting fees in conjunction with the issuance of common
stock to Rodriguez. The remainder of the stock value of $342,500 is
included as a prepaid expense on the Company's consolidated balance
sheets.
On August 26, 2005, Delta Technologies, Inc., a wholly-owned subsidiary of
the Company ("Technologies"), entered into a consulting agreement with
Richard F. Straub, Jr. ("Straub") for a period of three years, to provide
ongoing technical assistance and support in the production of
Technologies' insulating concrete wall forming products. Technologies
agreed to pay Straub $4,400 per month over the term of the agreement and
issue him shares of common stock at subsequent intervals during the term
of the agreement. As of June 30, 2006, no shares have been issued.
Technologies can terminate the agreement at any time, but only for cause
(defined, among other things, as a breach of the agreement by Straub). In
the event of termination for cause, Technologies has no further liability
to Straub.
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For the six months ended June 30, 2006, consulting fees of $26,400 have
been expensed and $41,667 of the stock value is included in accrued
expenses on the Company's consolidated statement of operations.
14. SUBSEQUENT EVENTS
a) On July 3, 2006, the Company cancelled options to purchase a total of
7,978,000 shares of common stock granted in November 2004, December 2005
and February 2006 to four employees and an employee of a subsidiary under
the Company's 2004 Stock Option Plan. Exercise prices for these options
ranged from $0.17 to $0.25 per share. On July 3, 2006, the Company
replaced these cancelled options by granting 7,978,000 new stock options
with an exercise price of $0.11 per share. In accordance with SFAS No. 123
(R), the Company will incur a quarterly non-cash charge of approximately
$44,000 per quarter beginning with the third quarter of 2006, and
extending over the five-year period of the option grants. This non-cash
charge represents the incremental compensation cost associated with the
issuance of the new stock option grants.
b) On July 14, 2006, the Company issued 233,280 shares of common stock upon
the conversion of $29,160 principal amount of a convertible promissory
note, valued at $0.125 per share.
c) During July 2006, the Company issued 430,000 shares of common stock to two
consultants for consulting services valued, in the aggregate, at $42,500
or $0.09 - $0.10 per share.
d) During July 2006, the Company sold 4,000,000 shares of common stock to
three accredited investors for net proceeds of $180,000 after paying
associated commissions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and notes thereto
and other financial information included elsewhere in this report.
Certain statements contained in this report, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import, constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including our ability to create, sustain, manage
or forecast our growth; our ability to attract and retain key personnel; changes
in our business strategy or development plans; competition; business
disruptions; adverse publicity; and international, national and local general
economic and market conditions.
GENERAL
We were incorporated in the State of Delaware on November 17, 1999 and will
require additional capital to execute our planned business operations.
RESULTS OF OPERATIONS
During the six months ended June 30, 2006, we had revenue of $260,704 but
incurred a net loss of $1,444,783 because our revenue was not sufficient to
offset operating expenses. The loss in the first six months was primarily
attributable to general and administrative expenses of approximately $1,364,000,
including consulting and professional fees of approximately $411,000, non-cash
compensation of $168,400 and compensatory element of stock options of $447,000.
In addition, we had accretion of convertible debt of approximately $147,000, and
an increase in cost of sales of about $79,000.
SECOND QUARTER
The Note 1 of the Notes to Unaudited Consolidated Financial Statements
accompanying this report states that substantial doubt has been raised about our
ability to continue as a going concern. Our present business operations do not
generate enough revenue with which to cover our expenses. We will have to raise
capital through the placement of our securities in order to remain viable. We
are continuing to incur management and administrative costs, professional fees
and other expenses. If we are unable to raise capital we will be unable to fund
our plan of operations. Because we will continue to incur net losses, we may
have to cease operations entirely. This factor, among others, raises substantial
doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to
obtain funds to meet our obligations on a timely basis, obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. There are no assurances that we will be able to obtain any
additional financing or, if we are able to obtain additional financing, that
such financing will be on terms favorable to us. The inability to obtain
additional financing when needed would have a material adverse effect on our
operating results.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005.
The net loss increased from approximately $1,287,000 for the six months ended
June 30, 2005 to approximately $1,445,000 for the six months ended June 30,
2006.
The items of significant increase or decrease in the six months ended June 30,
2006 over the comparable period of the prior year were an increase in general
and administrative expense from approximately $898,000 in 2005 to approximately
$1,364,000 for the six months ended June 30, 2006; an increase in cost of sales
of approximately $79,000 and an increase in the minority share of income of
consolidated subsidiaries from approximately $75,000 in 2005 to approximately
$92,000 for the six months ended June 30, 2006.
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CRITICAL ACCOUNTING ISSUES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets, liabilities, and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to intangible assets, operation of joint ventures,
income taxes and contingencies and litigation. The Company bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
PLAN OF OPERATION
The Company has established a joint venture subsidiary and two limited
partnerships, primarily to establish business operations focused on providing
environmental and construction technologies and services in the Far East, the
Middle East, the United States and Puerto Rico.
Our environmental remediation operations are carried out through
Delta-Envirotech, Inc., a joint venture company formed in January 2004, with Hi
Tech Consulting and Construction, Inc., to provide environmental technology
services for certain business segments located in the Far East and the Middle
East. We have operating control of, and a forty-five percent ownership interest
in Delta-Envirotech.
Although we have entered into strategic alliance agreements with several United
States-based entities with technologies and products in the environmental field
to support the Company's worldwide activities and have these technologies
available, in the Far East we are currently utilizing in-country technology.
We intend to expand on our operations in the Far East. Additional capital is
required to pursue this expansion as well as our planned operations in Saudi
Arabia and the United States. Our first low-income housing project in Puerto
Rico has been rejected for re-zoning and cannot go forward as submitted. We are
currently evaluating our alternative courses of action with respect to this
project.
Far East (Indonesia)
In Indonesia we formed a local joint venture company to commence energy and
waste recovery operations. The joint venture company, PT. Triyudha-Envirotech,
began operations on December 15, 2005, pursuant to a contract with Pertamina.
During the second quarter, the operation processed 985 metric tons of oil sludge
from designated oil sludge pools under the initial 3,000 metric ton contract.
Processing of the remaining 190 metric tons will be completed during August.
Upon completion of the initial contact we expect to be awarded a second
contract.
Middle East
On January 22, 2004, we entered into a strategic alliance agreement between our
environmental remediation joint venture, Delta-Envirotech, Inc. ("Envirotech"),
and ZAFF International, Ltd., to jointly pursue soil and water reclamation
projects in the Middle East. In November 2004, ZAFF International, Ltd. received
its operating license from the Saudi Arabia environmental authorities to employ
all soil, refinery waste and waste water technologies held by Delta for
environmental recovery projects. In August, 2005, we reached a working agreement
to provide a turn-key factory to manufacture insulating concrete form (ICF)
products for the building industry in Saudi Arabia. In the first quarter of
2006, a memorandum of understanding was signed that provided for two additional
ICF factories. Also in August 2005, we reached a working agreement on our
proposed operation to provide technology and equipment, on a turn-key basis, to
recover silver from used x-ray film.
During July 2006, representatives of one of the potential purchasers of a
turn-key ICF factory conducted a site visit to similar factory in Kuwait.
Subsequently, a detailed proposal was prepared and submitted to the potential
purchaser by Envirotech.
On July 18, the Company announced that Envirotech has expanded its product line
by securing the master distribution rights for the Middle East, among other
areas, for environmentally friendly organic emulsifiers used in oil tank
cleaning and to enhance oil well production. Testing of these products is
expected to take place during the third quarter of 2006 for the purpose of
receiving environmental approvals and to validate the product performance.
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Page 22
Recently, we announced that during the second quarter of 2006, a Letter of
Intent was signed to supply equipment to the Saudi Gulf Environmental Protection
Company (SEPCO)to recover silver from used x-ray film, subject to approval from
the Saudi environmental authority (PME). PME is currently scheduled to inspect
this equipment in the US in late August 2006 for the purpose of issuing its
approval.
United States
On August 26, 2005, we acquired, through a wholly-owned subsidiary, certain
intellectual property and filed a patent application for a new insulating
concrete wall forming (ICF) system. The innovative and patent pending design of
the system allows for integrated attachment strips molded into the inner and
outer surfaces and superior "R" Value of the block itself. In addition to the
patent filing, the Company engaged a technical consultant and a business
development consultant to further the design and development of the Company's
ICF products. The mold that is required to produce the new product was completed
in July 2006. We expect to have production samples ready for testing during
August.
Puerto Rico
Our plans are to continue, primarily through joint ventures, with construction
and related activities to build low income homes under the Section 124 low
income housing program. Our initial project for approximately 270 homes on a 36
acre tract in Aguadilla was rejected by the Planning Board. Subsequent appeals
to change the zoning of the land were also unsuccessful. In July 2006, we were
notified that the Supreme Court of Puerto Rico denied a motion by the property
owners to review the previous decisions. As submitted, this project, known as "
Brisas del Atlantico," cannot proceed. We are currently evaluating whether or
not to submit a new project for this property with less housing density,
possibly including some non-Section 124 housing. In addition, we have efforts
underway to locate and secure a suitable parcel of land that is already zoned
for residential housing.
Our second majority owned joint venture was established to build approximately
300 Section 124 homes on a 40 acre tract located in Guayanilla. This tract of
land is part of a 150 acre development that will also include other residential
properties, commercial/retail buildings and a hotel. The current status of this
project remains unchanged. The master plan for this entire project is still
under development by the project's developer, however, the acreage included in
this master plan may be affected by an overall review now underway of the zoning
classifications in Puerto Rico by the Planning Board.
FUNDING
We are currently dependent on equity investments or borrowing from private
investors to pay our operating expenses. There are no assurances that such
investors will continue to advance funds or invest in the Company's securities.
In the event we are unable to obtain additional capital or funding we may be
unable to pursue our business plans. We anticipate that we will be required to
raise capital in the approximate amount of $1,000,000 in the next nine months in
order to continue to fund our initial operations and to finance our planned
business operations.
LIQUIDITY
We have generated limited revenue from our current operations and must rely
primarily on private placements of Company stock or debt to pay operating
expenses.
At June 30, 2006 we had a working capital deficit of $1,315,218 compared with
$1,099,555 at June 30, 2005. The increase in our working capital deficit is a
result of the net loss incurred during the six months ended June 30, 2006, and
increases in accounts payable, accrued expenses, accretion of convertible debt
and increases in notes payable; partially offset by increases in accounts
receivable and prepaid expenses. Since we have limited sources of revenue, our
working capital deficit will continue to increase as we incur additional
operating expenses. Presently, although we have some revenue, we are dependent
upon private placements of our stock and loans from private investors for
funding.
In the six month period ended June 30, 2006, we raised $333,000 of equity
capital through the sale of 6,482,212 shares of common stock. In addition, we
raised $73,000 through the exercise of our common stock warrants and borrowed
$46,000 from two shareholders, to provide financing for our activities. In July,
we raised an additional $200,000 through the sale of 4,000,000 shares of common
stock.
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ASSETS
At June 30, 2006, we had total assets of $1,329,134, compared to total assets of
$559,638 at June 30, 2005. The increase in current assets as of June 30, 2006
was due to an increase in cash, accounts receivable and prepaid expenses, plus
an increases in fixed assets and intangible assets.
CRITICAL ACCOUNTING ISSUES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets, liabilities, and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to intangible assets, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Other Matters
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48").
The interpretation Requires a two step approach for recognizing and measuring
tax benefits based on a recognition threshold of "more likely than not." FIN 48
also requires explicit disclosures about Uncertainties in tax positions
including a detailed rollforward of tax benefits that do not qualify for
financial statement recognition. The adoption of FIN 48 is effective for fiscal
years beginning after December 15, 2006, The implementation of FIN 48 could have
a material effect on the consolidated balance sheets and results of operations
but the effect of such implementation is not determinable at this time.
In December 2004 the FASB issued SFAS No. 153, an amendment of APB Opinion No.
29, "Exchange of Nonmonetary Assets." SFAS No. 153 amends APB Opinion No.29 by
eliminating the exception under APB No. 29 for nonmonetary assets of similar
productive assets and replaces it with a general exception for exchanges on
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS no. 153 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 did not
have a material effect on the Company's consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," that
required compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the reward. SFAS No.
123(R) is effective as to the Company as of the beginning of the Company's 2006
fiscal year. The Company accounted for the stock-based compensation costs using
the modified prospective method at the time of adoption. The adoption of SFAS
123(R) resulted in incremental stock-based compensation expense of $292,500
during the six months ended June 30, 2006. The adoption of SFAS 123(R) did have
a material effect on the consolidated balance sheets as of June 30, 2006 and the
consolidated statements of cash flows for the six months ended June 30, 2006.
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FOREIGN CURRENCY TRANSLATION
The functional currency for some foreign operations is the local currency.
Assets and liabilities of foreign operations are translated at balance sheet
date rates of exchange and income, expense and cash flow items are translated at
the average exchange rate for the period. Translation adjustments in future
periods will be recorded in Accumulated Other Comprehensive Income. The
translation gains or losses were not material for the six months ended June 30,
2006.
INTANGIBLES
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 specifies the financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
that have indefinite useful lives are not amortized but rather they are tested
at least annually for impairment unless certain impairment indications are
identified.
Quantitative and Qualitative Disclosures About Market Risk
Fair Value of Financial Instruments - The following disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The
estimated fair values of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
The Company has not entered into, and does not expect to enter into, financial
instruments for trading or hedging purposes. The Company does not currently
anticipate entering into interest rate swaps and/or similar instruments.
The Company's carrying values of cash, marketable securities, accounts
receivable, accounts payable and accrued expenses are a reasonable approximation
of their fair value.
Item 3. Controls and Procedures
a) Disclosure controls and procedures.
As of the end of the Company's most recently completed fiscal quarter (the
fourth fiscal quarter in the case of an annual report) covered by this report,
the Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms.
(b) Changes in internal controls over financial reporting.
During the Company's previous fiscal quarter to which this report relates, we
expanded our disclosure controls and procedures in certain respects; such
expansion is reasonably likely to materially affect the Company's internal
controls over financial reporting. In the first quarter of fiscal 2006, we
initiated a review procedure that included discussion of the pertinent
accounting and disclosure issues by a group including the Chief Executive
Officer(and sole director), the Chief Financial Officer, outside counsel and the
Company's independent auditors. The Company's internal controls and procedures
also have been, and will in the future continue to be, reviewed by the Company's
independent auditors in connect with their audit work.
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PART II - OTHER INFORMATION
ITEM 5. Other Information - Organization Changes
On July 1, 2006, the employment agreement with Jerome Kindrachuk, Vice
President-International, expired and was not renewed by the Company. Mr.
Kindrachuk, although no longer an officer, remains an employee of the Company.
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELTA MUTUAL, INC.
BY: /s/ Peter F. Russo
------------------------------
Peter F. Russo
President and Chief
Executive Officer
Dated: August 11, 2006
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EXHIBIT INDEX
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
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