UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

or

o 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: 333-130197

DELTRON, INC.
(Exact name of Registrant as specified in its charter)
Nevada		86-1147933
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
11377 Markon Drive Garden Grove, CA 92841
(Address of principal executive offices)
(714) 891-1795
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No x [Not required]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

 As of February 16, 2011, there were 758,478,980 shares of the issuer’s common stock, par value $0.001, outstanding.

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DELTRON, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010

TABLE OF CONTENTS

		PAGE
	PART I - FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	16
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	17
	SIGNATURES	18

2

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PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's September 30, 2010 Form 10-K filed with the SEC on January 13, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

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Deltron, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
								December 31,		September 30,
								2010		2010
								Unaudited
Assets
	Current Assets:
		Cash						$    35,861		$  1,852
		Accounts receivable, net of allowance of doubtful accounts of $2,630
		and $2,630 at December 31, 2010 and September 30, 2010, respectively						418,320		660,395
		Inventory, net of allowance for obsolescence of $9,795 and $9,795 at
		December 31, 2010 and September 30, 2010, respectively						375,900		332,676
		Loan receivable						41,000		41,000
		Prepaid expenses and other receivables						48,314		19,826
	Total Current Assets							919,395		1,055,749
	Property and equipment, net							29,389		32,239
Total Assets								$  948,784		$1,087,988
Liabilities and Stockholders' (Deficit) Equity
	Current liabilities
		Line of credit						$   100,000		$   125,000
		Bank overdraft						-		10,506
		Accounts payable						289,708		452,318
		Accrued expenses						52,969		75,091
		Income taxes payable						800		1,600
		Accrued expenses - related parties						180,000		150,000
		Accrued interest - related parties						79,826		63,541
		Convertible notes - related parties, net of note discount of $20,304
		and $79,333 at December 31, 2010 and September 30, 2010, respectively						155,196		96,167
		Convertible notes -  net of note discount of $43,695
		and $0 at December 31, 2010 and September 30, 2010, respectively						33,805		-
		Derivative liability – conversion options						65,874		-
		Current portion of long term debt - related party						374,848		334,587
	Total Current Liabilities							1,333,026		1,308,810
	Notes payable - related party, net of current portion							720,262		760,523
Total Liabilities								2,053,288		2,069,333
Stockholders' (Deficit) Equity
	Common stock, $0.001 par value; 10,000,000,000 shares
	authorized, 758,478,980 and 678,478,980 shares issued and outstanding
	at December 31, 2010 and September 30, 2010, respectively							758,479		678,479
	Additional paid-in capital							1,398,767		1,418,767
	Accumulated deficit							(3,261,750)		(3,078,591)
		Total Stockholders' (Deficit) Equity						(1,104,504)		(981,345)
Total Liabilities and Stockholders' (Deficit) Equity								$   948,784		$1,087,988
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Deltron, Inc. and Subsidiary
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
							For the three Months ended
							December 31,
							2010		2009
Sales							$   905,401		$   511,556
Cost of sales							778,016		435,062
Gross profit							127,385		76,494
Selling, general and administrative expenses							210,480		161,231
Operating income (loss)							(83,095)		(84,737)
Other income (expenses)
Change in fair value of derivative liability							(6,854)		-
Interest expense, net							(92,375)		(14,562)
Total other income (expense)							(99,229)		(14,562)
Loss before provision for income taxes							(182,324)		(99,299)
Provision for income taxes							835		-
Net loss							$  (183,159)		$    (99,299)
Per share information
Net loss per common share
	Basic						$     (0.000)		$     (0.001)
	Fully diluted						$     (0.000)		$     (0.001)
Weighted average number of common
	stock outstanding - basic						718,478,980		107,206,877
Weighted average number of common
	stock outstanding - diluted						718,478,980		107,206,877
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Deltron, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
								Additional
				Common Stock				paid-in		Accumulated
				Number of shares		Amount		Capital		Deficit		Totals
Balance - December 31, 2008				14,403,074		$  14,403		$1,911,235		$(2,218,137)		$   (292,499)
Recapitalization in reverse acquisition								(624,200)				(624,200)
Issuance of stock for cash				76,031,699		76,032		529,190				605,222
Net loss										(400,564)		(400,564)
Balance - September 30, 2009 (Unaudited)				90,434,773		90,435		1,816,225		(2,618,701)		$   (712,041)
Issuance of stock for cash				33,544,207		33,544		31,456				65,000
Net loss										(99,299)		(99,299)
Balance - December 31, 2009				123,978,980		123,979		1,847,681		(2,718,001)		(746,341)
Beneficial conversion feature
- convertible notes payable - related parties				-		-		175,500		-		175,500
Recapitalization in reverse acquisition				554,500,000		554,500		(604,414)		-		(49,914)
Net loss				-		-		-		(360,590)		(360,590)
Balance - September 30, 2010				678,478,980		$678,479		$1,418,767		$(3,078,591)		$   (981,345)
Issuance of common stock for service				80,000,000		80,000		(20,000)				60,000
Net loss										(183,159)		(183,159)
Balance - December 31, 2010 (Unaudited)				758,478,980		$758,479		$1,398,767		$(3,261,750)		$(1,104,504)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Deltron, Inc. and Subsidiary
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
							For the three Months ended
							December 31,
							2010		2009
Cash Flows from Operating Activities:
	Net (loss)						$ (183,159)		$   (99,299)
Adjustments to reconcile net loss to net cash used
	in operating activities:
	Depreciation						2,850		2,500
	Change in fair value of derivative liability						6,854		-
	amortization of discount on note payable						74,354		-
	(Increase) Decrease in accounts receivable						242,075		102,779
	(Increase) Decrease in inventory						(43,224)		(13,999)
	(Increase) Decrease in prepaid expenses and other receivables						31,512		27,480
	Increase (decrease) in accounts payable						(162,610)		(51,990)
	Increase (decrease) in accrued expenses						(22,922)		(41,366)
	Increase (decrease) in accrued expenses - related parties						30,000		-
	Increase (decrease) in accrued interest - related parties						16,285		12,713
Net Cash (Used) by Operating Activities							(7,985)		(61,182)
Net Cash Used in Investing Activities							-		-
Cash Flows from Financing Activities
	Proceeds from sale of common stock						-		65,000
	Decrease in bank overdraft						(10,506)		-
	Borrowing on related party notes						77,500		-
	Payments on line of credit						(25,000)		-
Net Cash Provided by Financing Activities							41,994		65,000
Net Increase (decrease) in Cash							34,009		3,818
Cash and Cash Equivalents - Beginning of Period							1,852		26,168
Cash and Cash Equivalents - End of Period							$    35,861		$    29,986
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest expense						$     2,054		$            -
	Cash paid for income taxes						$        800		$            -
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In November 2010, the Company issued 80,000,000 shares of its common stock valued at $60,000
to Elasco's president, $10,000 was recorded as a bonus and $50,000 is prepaid salary to be
expensed over six months beginning mid November 2010.
The accompanying notes are an integral part of these unaudited condensed consolidated  financial statements.

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Deltron, Inc. & Subsidiary.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2010

NOTE 1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

 

 

Business Description

Deltron, Inc. (the “Company”) is a Nevada Corporation incorporated on September 14, 2005.  It is based in Garden Grove, California.  Through May 26, 2010 the Company was in the development stage. On May 26, 2010 the Company acquired all of the assets and liabilities of Blu Vu Deep Oil & Gas Exploration, Inc. including its ownership of 100% of the outstanding stock of Elasco, Inc. by issuance of 123,978,980 restricted common shares of its stock.  

Elasco was incorporated on October 25, 1979 in the state of California.  Its principal business is manufacturing and selling of open cast molded polyurethane elastomer products such as skateboard, roller skate, and industrial wheels.

After the acquisition of Blu Vu’s assets, the Company is engaged in potential manufacture and mass-market of proprietary breathing equipment developed specifically for the oil and gas, mining and safety industries, and military and recreational divers. The technology is still under development. Production and manufacture of the equipment (primarily Closed-Circuit Rebreathers “CCRs” and components used for all types of rebreathers) will be produced by the wholly-owned subsidiary, Elasco, while the Company provides financial, operational and technical expertise.

On August 4, 2010, Deltron entered into an agreement with Radikal, AS (“Radikal”), the owner of intellectual property involving rebreather technology, to purchase its intellectual property involving said technology (the “Radikal Agreement”).  The Radikal Agreement requires the Company to pay a per unit fee of $35 for at least 500 units per year for 2 years, after which the obligation to Radikal will be fulfilled. The Company is required to begin making payments in January 2012.

Pursuant to the terms of the Radikal Agreement, Radikal has transferred all U.S. and international patent rights to the Company.  However, if the per unit fee payments are not made when due, Radikal has the right to the return of the intellectual property transferred.

The acquisition of Blu Vu’s assets and Elasco, Inc. by the Company has been accounted for as a reverse capitalization.  The reverse recapitalization was the acquisition of a private operating company into a non-operating shell corporation with nominal net assets and is treated as a capital transaction, rather than a business combination.  As a result no goodwill is recorded.  In this situation Deltron is the legal acquirer because it acquired all of the assets and liabilities of Blu Vu and 100% of the stock of Elasco and Elasco is the legal acquiree because its equity interests were acquired.  However, Elasco is the acquirer and Deltron is the acquiree for accounting purposes.  The pre-acquisition financial statements of Elasco are treated as the historical

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financial statements of the consolidated companies except that the equity section and earnings per share have been retroactively restated to reflect the reverse recapitalization.

Principles of consolidations

The accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S generally accepted accounting principles. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elasco.  All significant intercompany transactions have been eliminated in consolidation.

Interim Periods

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for annual financial statements.  In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three months ended December 31, 2010 are not necessarily indicative of results for any future period.  These statements should be read in conjunction with the consolidated financial statements and notes for the year ended September 30, 2010 thereto included in the Company’s Form 10-K filed on January 13, 2010.

Use of Estimates

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all short term debt securities purchases with a maturity of three months or less to be cash equivalents. The Company deposits its cash with major financial institutions and may at times exceed the federally insured limit of $250,000.  At December 31, 2010 cash did not exceed the federally insured limit.  The Company believes that the risk of loss is minimal. To date, the Company has not experienced any losses related to cash deposits with financial institutions. As of December 31, 2010, the Company had a cash balance of $35,861.

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Accounts Receivable

The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer.  Allowances are provided for specific receivables deemed to be at risk for collection. As of December 31, 2010, accounts receivable amounted to $418,320, net of allowance of doubtful accounts of $2,630.

Inventory

Inventory consists of raw material, work in progress, and finished goods.  It is stated at the lower of cost or market on a first in, first out (FIFO) basis. The Company also evaluates and reserves allowance of obsolescence of its inventories.

Property and Equipment and Depreciation Policy

Property and equipment are recorded at cost, less accumulated depreciation.  Cost of repairs and maintenance are expensed as they are incurred. Major repairs that extend the useful life of equipment are capitalized and depreciated over the remaining estimated useful life. When property and equipment are sold or otherwise disposed, the related cost and accumulated depreciation are removed from the respective accounts and the gains or losses realized on the disposition are reflected in operations. The Company uses the straight - line method in computing depreciation for financial reporting purposes.

Income Taxes

The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income, regardless of when reported for tax purposes.  Deferred taxes are provided in the financial statements under ASC 740-20 to give effect to the resulting temporary differences which may arise from differences in the bases of fixed assets, depreciation methods, allowances, and start-up costs based on the income taxes expected to be payable in future years.

The Company follows the provisions of uncertain tax positions as addressed in ASC 740-10-65-1.  The Company recognized approximately no increase in the liability for unrecognized tax benefits.  The Company has no tax position as of December 31, 2010 for which the ultimate deductibility is highly certain but for which there is uncertainty about such timing of such deductibility.  The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.  No such interest or penalties were recognized during the periods presented.  The Company had no accruals for interest and penalties at December 31, 2010.  The Company’s utilization of any net operating loss carry forward may be unlikely as a result of its continued losses.

Fair Value of Financial Instruments

The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial

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instruments held by the Company. The Company considers the carrying amount of cash, prepaid expenses, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.

The Company has also adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) which  defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follow:

	·	Level 1   inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	·	Level 2   inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
	·	Level 3   inputs to the valuation methodology are unobservable and significant to the fair value.

As of December 31, 2010, the Company used level 3 inputs for its valuation methodology for the fair value of its notes payable and derivative liability as following:

		Carrying Value			Fair Value Measurements at
		As of			December 31, 2010
		December 31,			Using Fair Value Hierarchy
		2010			Level 1			Level 2			Level 3
Liabilities
Notes payable – related party			1,095,110			-			-			1,219,900
Convertible notes – related parties			155,196			-			-			177,600
Convertible notes			33,805									81,300
Derivative liability – conversion options			65,874			-			-			65,874
Total		$	1,349,985		$	-		$	–		$	1,544,674

 

As of December 31, 2010 the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820-10.

Revenue Recognition

The Company recognizes revenues through its consolidated fully owned subsidiary. Revenues are recognized from product sales upon delivery, at which time title passes to the customer provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable and collectability is deemed probable.

Advertising Costs

Advertising costs are charged to operations when incurred.

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Share-Based Compensation

 

The Company has adopted ASC 718-20 (formerly SFAS No. 123R, Share-Based Payment -revised 2004) (“ASC718-20”) and related interpretations which establish the accounting for equity instruments exchanged for employee services. Under ASC 718-20, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award.

Segment Information

Based on the criteria established by ASC Topic 280 “Segment report” (formerly SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”), the Company uses the management approach for determining which, if any, of its products and services, locations, customers or management structures constitute a reportable business segment. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of any reportable segments. As of December 31, 2010, the Company mainly operated in two principal segments – development of the rebreather system and sales of polyurethane elastomer products. The rebreather system is still under development and has not generated any revenue. The following tables present summarized information by segments:

		Three Months Ended December 31,
		2010			2009
Revenues
	Rebreather	$	-		$	-
	Polyurethane		905,401			511,556
		$	905,401		$	511,556
Cost of sales
	Rebreather	$	-		$	-
	Polyurethane		778,016			435,062
		$	778,016		$	435,062
Gross Profit
	Rebreather	$	-		$	-
	Polyurethane		127,385			76,494
		$	127,385		$	76,494
Selling, general and administrative expenses
	Rebreather	$	104,973		$	71,046
	Polyurethane		105,507			90,185
		$	210,480		$	161,231
Income / (Loss) from operations
	Rebreather	$	(104,973)		$	(71,046)
	Polyurethane		21,878			(13,691)
		$	(83,095)		$	(84,737)

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			December 31,			September 30,
			2010			2010
Total Assets
	Rebreather	$	77,374		$	42,852
	Polyurethane		871,410			1,045,136
		$	948,784		$	1,087,988

Comprehensive Income (Loss)

 

ASC 220-10 (formerly, SFAS No. 130, Reporting Comprehensive Income) (“ASC 220-10”), requires disclosure of all components of comprehensive income (loss) on an annual and interim basis.  Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  The Company’s comprehensive income (loss) is the same as its reported net income (loss) for the three months ended December 31, 2010 and 2009.

Basic and Diluted Per Common Share

The Company has adopted ASC 260-10, “Earnings per Share,” (EPS) which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.  In the accompanying unaudited condensed consolidated financial statements, basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.  Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the three months ended December 31, 2010, the Company has excluded all common equivalent shares from the calculation of diluted net loss per share as such securities are anti-dilutive. For the three months ended December 31, 2009, the Company did not have common equivalent shares.

Significant Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Codification Topic No. 605, Multiple-Deliverable Revenue Arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable and expands the disclosures required for multiple-deliverable revenue arrangements. This guidance is effective for revenue arrangements that are entered into or are materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption will have no material impact on the Company’s financial statements.

In January 2010, the FASB issued ASU No.  2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the

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reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company does not expect the adoption of this ASU to have a material impact on our financial statements.

In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU 2010-09”) as amendments to certain recognition and disclosure requirements. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Those amendments remove potential conflicts with the SEC’s literature. All of the amendments in ASU 2010-09 were effective upon issuance for interim and annual periods. The adoption of ASU 2010-09 did not have a material impact on the Company’s consolidated financial statements

In March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-11, which is included in the Codification under ASC 815, “Derivatives and Hedging” (“ASC 815”).  This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements.  Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption.  This guidance is effective for interim and annual reporting periods beginning January 1, 2010.  The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

NOTE 2 – GOING CONCERN

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of December 31, 2010 the company had a net deficit in retained earnings of $(3,261,750) and a net loss of $(183,159) for the quarter then ended.  These matters create substantial doubt about the Company’s ability to continue as a going concern.  For the quarter ended December 31, 2010, the Company is able to pay its obligations to vendors from funds raised from issuance of convertible notes.  The Company intends on financing its future development activities from the same sources, until such time that funds provided by operations are sufficient to fund working capital requirements.

NOTE 3 – INVENTORY

Inventory consisted of the following at December 31, 2010 and September 30, 2010.

	December 31, 2010		September 30, 2010
Raw material	$                231,879		$                 232,962
Work in process	40,226		41,513
Finished goods	113,590		67,996
	385,695		342,471
Less allowance for obsolete inventory	(9,795)		(9,795)

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	$                375,900		$                 332,676

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2010 and September 30, 2010.

	December 31, 2010		September 30, 2010
Machinery & equipment	$               237,377		$                237,377
Tooling	139,138		139,138
Computer equipment	94,383		94,383
Leasehold improvements	38,720		38,720
Furniture, fixtures and office equipment	17,033		17,033
	526,651		526,651
Less accumulated depreciation	497,262		494,412
	$                 29,389		$                  32,239

NOTE 5 – LINE OF CREDIT

The Company has entered into a line of credit agreement with a bank.  The maximum borrowing is $100,000.  Interest is calculated at prime plus 1.5% (with an interest rate floor of 6.5%) and is paid monthly.  The agreement expires December 5, 2011 at which time the entire principal balance is due.  The line of credit is personally guaranteed by the Trust of the former owner of Elasco, who is the president of the Company.  The outstanding balance at December 31, 2010 and September 30, 2010 is $100,000 and $125,000, respectively, at 6.5%.

NOTE 6 – NOTES PAYABLE – RELATED PARTIES

Concurrent with the sale of Elasco to Blu Vu, the previous owner, Henry Larrucea,who is the current officer and director of the Company,  agreed to exchange his outstanding demand note, with an outstanding balance of $856,750, for a 10 year note at 5% for $600,000.  The difference of $256,750 was recorded as a gain in other income in the year ended September 30, 2009.  Total interest paid or accrued for the shareholder for the three months ending December 31, 2010 was $7,347 and the balance of the note as of December 31, 2010 was $587,684. Payments have not been made on this note since July 2009.  There was $43,151 of accrued interest at December 31, 2010.

Mr. Larrucea also received a promissory note for the stock of Elasco for $540,000.  The note is due in monthly payments of $10,000 and bears interest at 4.23%.  The note is secured by the stock of Elasco.  Total interest paid or accrued for the three months ending December 31, 2010 was $5,367 and the balance of the note as of December 31, 2010 was $507,425.  Payments have not been made on this note since August 2009.  There was $30,528 of accrued interest at December 31, 2010.

Both of these notes are currently in default due to non-payment of principal and interest.  Upon default the loans become due on demand.  Mr. Larrucea has granted a waiver which waives the

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default under the terms of the notes and releases the company from liquidated damages provision.

The Company has two notes payable to shareholders for $20,000 and $19,500, which it acquired under the May 26 Blu Vu asset purchase agreement.  These notes are due on May 28, 2011 and bear interest at 5.0%.  Both notes are convertible into shares of the Company’s common stock at a conversion discount of 70% of the stocks bid price but in no event shall the conversion price be less than par value of $0.001.  

The Company has nine notes payable to shareholders for a total of $136,000.  These notes are due ranging from September 17, 2010 to March 28, 2011 all bearing interest at 5.0%.  All nine notes are convertible into shares of the Company’s common stock at a conversion discount of 70% of the stocks bid price but in no event shall the conversion price be less than par value of $0.001.  

As of December 31, 2010, the Company had authorized unissued common stock of 9,241,521,020 shares, which is sufficient to cover shares to be issued upon conversion of all convertible notes.

Current maturities of the notes payable for each of the five years ending September 30 are as follows:  

Year		Amount
2011	$	546,442
2012		163,779
2013		171,275
2014		118,656
2015		62,355
Thereafter		208,103
Total	$	1,270,610

NOTE 7 – CONVERTIBLE NOTES PAYABLE

In October, November and December 2010, the Company entered into securities purchase agreements (the “Purchase Agreements”) with an investor and issued three 10% convertible promissory notes with face amounts of $35,000, $30,000 and $12,500 respectively  (the “Convertible Notes”) and received cash proceeds of $77,500.  The Notes mature in eight months from the date of issuance, and provide for nominal interest at the rate of ten (10%) percent per annum. The Notes may be converted into unregistered shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at the Conversion Price, as defined below, in whole, or in part, at any time beginning 180 days after the date of the Notes, at the option of the holder. The Conversion Price shall be equal to 50% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the Common Stock during the ten (10) trading day period prior to the date of conversion.  The 50% discounted Conversion Price establishes a conversion feature which is required to be treated as a derivative

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liability and presented at fair value. The derivative obligation arises because, based on historical trading patterns of the Company’s stock, the formula for determining the Conversion Rate is expected to result in a lower Conversion Rate than the closing price of the stock on the actual date of conversion (hereinafter referred to as the “Variable Conversion Rate Differential”). The Company selected the historical simulation approach to value this derivative liability believing that this method results in a valuation that most closely relates to the economic reality of these transactions. Under this approach, the Company computed the Variable Conversion Rate Differential for each trading day during the twelve month period prior to the date of issuance of each convertible promissory note and then computed the average of these daily Variable Conversion Rate Differentials over the twelve month period. In accordance with GAAP, the derivative liability is required to be re-evaluated at each balance sheet date.  The total unamortized discount represented by the value of the conversion feature and the derivative liability is being accreted over the eight month period until the conversion of the convertible promissory notes into common stock is permitted. This results in an overall effective interest rate of 83% on the $77,500 convertible notes. Accordingly, on issuance date, the Company recorded derivative liability and discount on the Convertible Notes of $59,020. For the three month period ended December 31, 2010, the amount of interest expense resulting from accretion of the unamortized discount on the convertible promissory notes amounted to $15,325.  The remaining unamortized balance of this discount, which amounted to $43,695, has been netted against the face amount of the convertible promissory notes resulting in a net carrying amount of $33,805 which is included in the accompanying balance sheet at December 31, 2010.    As of December 31, 2010, fair value of the derivative liability was $65,874 and the change in fair value of $6,854 was recorded against income for the quarter ended December 31, 2010.

NOTE 8 – CONCENTRATION OF CREDIT RISK

A material part of the Company’s account receivables is outstanding with five customers.  The amount owed by these customers at December 31, 2010 was $344,131,  approximately 82% of the Company’s receivables.  Sales to the top five customers represented 79% of total sales.  The amount owed by these customers at September 30, 2010 was $518,092, approximately 78% of the Company’s receivables.  Sales to these five customers represented 76% of total sales for the quarter ended December 31, 2009. Sales are concentrated in the western United States.

For the three months ended December 31, 2010 and 2009, the Company purchased approximately $324,808 and 115,166, respectively, of raw material from five suppliers, representing 80% and 71%, respectively, of the Company’s total purchases. As of December 31, 2010 and September 30, 2010, amounts owed to these five suppliers were approximately $233,284 and $186,000 representing 80% and 41%, respectively, of the total accounts payable.  

NOTE 9 – COMMITMENTS – RELATED PARTIES

The Company leases a manufacturing and office facility from a related partnership as an operating lease which expires in 2015.  This lease currently requires monthly payments of $5,533 plus related insurance and maintenance.  Rental expense under this lease for the three months ended December 31, 2010 was $16,599 all of which was paid to a related party.

Future rental payments required under this operating lease are as follows:

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Year Ended

              September 30,

       2011

 

 $ 49,797

      2012

                                                                66,396

      2013                                                                          66,396

                  2014

                66,396

      2015

    66,396

          

The Company has an employment agreement with Jeff Bozanic to develop its re-breather technology.  The agreement is for three years starting January 1, 2010 at a cost of $10,000 per month. As of December 31, 2010, the Company owed Mr. Bozanic $120,000.

Prior to the asset purchase agreement  between Blu Vu and Deltron, Blu Vu was in negotiations with Radikal, AS (“Radikal”), the owner of intellectual property involving rebreather technology, to purchase its intellectual property involving said technology.  At that time, Blu Vu did not own any rebreather technology.  No agreement was reached between Blu Vu and Radikal prior to the asset purchase agreement with Deltron.   On August 4, 2010, the Company entered into an agreement with Radikal to purchase its intellectual property involving said technology (the “Radikal Agreement”).  The Radikal Agreement requires the Company to pay a per unit fee of $35 for at least 500 units per year for 2 years, after which the obligation to Radikal will be fulfilled.

Pursuant to the terms of the Radikal Agreement, Radikal has transferred all U.S. and international patent rights to the Company. If the per unit fee payments are not made when due, Radikal has the right to the return of the intellectual property transferred. Payments for these rights are not required to begin until January 2012.

NOTE 10 – STOCK HOLDER EQUITY

At December 31, 2009 the Company had 5,545,000 shares of common stock, par value $.001, outstanding.  On March 10, 2010, the Corporation’s Board of Directors approved a one hundred-for-one (100:1) forward split of the Corporation’s common stock, par value $0.001 per share. The forward split was for shareholders of record as of the close of business on Friday, April 30, 2010, and the market effective date for the reverse stock split was May 3, 2010. As a result of the forward stock split, for every one share of the Corporation’s old common stock shareholders received ninety-nine additional shares of the Corporation’s new common stock.  Immediately following the forward split, the number of shares of the Corporation’s outstanding issued common stock was increased from 5,545,000 shares to approximately 554,500,000 shares, par value $.001.

On May 26, 2010, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Blu Vu Deep Oil & Gas Exploration, Inc., a Nevada corporation.  Under the terms of the Agreement, the Company purchased substantially all of the assets of Blue Vu, consisting of, but not limited to, all stock of Blu Vu’s subsidiary, Elasco, Inc., certain intellectual properties, computer programs and software, contracts, claims and accounts receivables associated with the operation of Blu Vu’s business of developing underwater deep breathing apparatus.  In

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consideration of the sale of the assets of Blu Vu, the shareholders of Blu Vu, received restricted common shares of the Company totaling 123,978,980.  No other consideration was exchanged in the transaction.

In November 2010, the Company issued 80,000,000 shares to Elasco’s president as a bonus of $10,000 and prepaid salary of $50,000 over the next six months under an Employee Stock Incentive Program (ESIP).

As of December 31, 2010, the number of common shares issued and outstanding was 758,478,980.

NOTE 11 – INCOME TAXES

The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

The Company incurred no income taxes for the periods ended December 31, 2010 and December 31, 2009 except for $800 each year for state franchise taxes.  For the three months ended December 31, 2010 the Company had incurred a loss and had a state income tax payable of $800 at December 31, 2010.  No income tax benefit was recognized as of December 31, 2010 and December 31, 2009 as a result of the valuation allowance applied to deferred tax assets, due to the uncertainty of recognizing any future tax benefits from the NOL.

The Company’s net loss of approximately $(183,159) will be carried forward to offset future taxable income.  As of December 31, 2010, the Company’s federal NOL is approximately $386,000 expiring in 2025, and its California NOL is approximately $296,000 expiring 2015. The Company has book/tax differences of approximately $270,000 comprised of accrued officer’s compensation of $70,000, accrued consulting of $120,000 and accrued interest of $80,000. These differences result in a deferred tax asset of approximately $91,000.  The federal and California NOLs result in a deferred tax asset of approximately $124,000.  Due to the uncertainty of recognizing any future benefit, the Company has recorded a valuation allowance of $215,000 to offset the deferred tax asset.  The valuation allowance increased $69,600 from September 30, 2010, as a result of the uncertainty of utilizing the deferred tax assets.  

The deferred tax asset comprised the following at December 31, 2010:

Deferred tax asset:
	Federal benefit of NOL carryover			$              96,500
	California benefit of NOL carryover			27,500
	Accrued officer's compensation			24,000
	Accrued consulting			40,000
	Accrued interest			27,000

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	Total			215,000
	Valuation allowance			(215,000)
	Net deferred tax asset			$                      -

NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated subsequent event for purposes of recognition or disclosure in the financial statements through the date of issuance of its financial statements. 

On January 21, 2011, the Company issued a convertible note for $50,000.  The note is due on October 24, 2011 and accrues interest at 8.0%.  The Note may be converted into unregistered shares of the Company’s common stock, par value $0.001 per share  at the Conversion Price, as defined below, in whole, or in part, at any time beginning 180 days after the date of the Notes, at the option of the holder. The Conversion Price shall be equal to 50% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the Common Stock during the ten (10) trading day period prior to the date of conversion.

   

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses.  Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to, those discussed herein as well as in the “Description of Business – Risk Factors” section in our Annual Report on Form 10-K for the year ended September 30, 2010.  You should carefully review the risks described in our Annual Report and in other documents we file from time to time with the Securities and Exchange Commission.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

All references in this Form 10-Q to the “Company,” “Deltron,” “we,” “us,” or “our” are to Deltron, Inc.

Overview

As previously described, we completed an Asset Purchase under which Deltron acquired the assets of Blu Vu Deep Oil & Gas Exploration, Inc.  The transaction was treated as a reverse recapitalization, with Blu Vu’s wholly owned subsidiary, Elasco, Inc. (“Elasco”) becoming the accounting acquirer.  Therefore, Deltron assumed the fiscal year end of Elasco of December 31.  On August 13, 2010, following the completion of the Asset Purchase Agreement, the Company adopted the fiscal year end of the former shell Company of September 30 for financial reporting purposes.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.  The discussion reflects the financial condition and results of operations as of and for the three-months periods ended December 31, 2010 and 2009.  This discussion contains forward-looking statements.  Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.

We are a manufacturing company with two distinct business segments polyurethane and rebreather.  Our primary business is Elasco which is focused on manufacturing technology for plastic and polyurethane products.  Our secondary business segment is focused on the development of deep-sea exploration breathing technology marketed as Blu Vu.

Polyurethane Products

Our polyurethane products are manufactured and sold by our wholly owned subsidiary, Elasco, which makes products for the recreational roller skate and skateboarding markets.  They are of the high

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performance type used by dedicated enthusiasts in those sports.  These products are sold to O.E.M. customers, who market and distribute them through channels specific to their individual retail outlets, as well as by direct marketing through their internet sales sites.  Most are sold through distribution channels of specialty stores and roller rinks.  They are differentiated from the typical product found in larger retail stores in that they are not considered a toy category, but rather a sporting good.

Elasco also produces a variety of industrial products that are used on assemblies and machinery where a long life cycle is needed.  Some typical products are exercise equipment rollers, bowling pin setter pads and liners, and fire hydrant seals.  Elasco’s polyurethane polymers excel in the gap between rubber and plastics, but can mimic many rubbers and plastics with specific formulations that optimize those characteristics.  A recent formula developed exclusively by Elasco uses a natural soy-based resin as an ingredient to make an elastomer that performs like other hydrocarbon derived polyurethanes.  This reduces related carbon emissions from the manufacturing process for that resin by 36%.  This product is marketed as a green alternative to oil based products, and is finding favor in the youth market that many of Elasco’s products service.  

Rebreather System

“Normal” scuba is an open circuit system.  Combining a high-pressure cylinder and a demand regulator, a diver inhales gas at ambient pressure, uses a little of the oxygen in the gas, and then exhales.  When the diver exhales the gas, it bubbles to the surface, carrying as much as 98% of the original oxygen it contained.  The “open circuit” comes from the fact that the exhaled gas is released on every breath.

The advantage that a rebreather has over “normal” scuba system is that it recirculates the gas a diver is breathing, allowing the diver to breath from the same gas over and over again, after removing the carbon dioxide generated by human metabolism.  Rebreathers provide gas to the diver in an optimal mix for the depth at which they are diving.  The system adds oxygen and other gases to make up what is consumed.  Because the gas is reused, instead of being “thrown away” with every breath, a diver can remain underwater far longer on much less gas.  In fact, for some dives, rebreathers can be as much as fifty times more efficient on gas consumption than standard scuba tanks. This minimizes decompression obligations, or in some cases eliminates it for shallower working dives.  Less decompression time means more working time, and greater cost efficiency for the project.

Business operations

As of December 31, 2010, we had an accumulated deficit of approximately $3.26 million, and as of September 30, 2010, our accumulated deficit was approximately $3.08 million.  We incurred operating losses of $83,095 and $84,737 for the three months ended December 31, 2010 and 2009, respectively, and incurred net losses of $183,159 and $99,299 for those respective periods.  We expect our net losses to continue for at least the next couple of years.  We anticipate that a substantial portion of our capital resources and efforts will be focused on the scale up due to expansion via acquisition, product development and other general corporate purposes, including the payment of legal fees due to our acquisitions.

As of December 31, 2010, our current liabilities of approximately $1.33 million exceeded our current assets of $919,395 by $413,631 and our net losses will continue for the foreseeable future.  As part of the $1.33 million of current liabilities we have $155,196, net of note discount of $20,304, of convertible notes to related parties and $33,805, net of note discount of $43,695 of convertible notes to unrelated parties.  We are currently planning to issue additional stocks and convertible notes to support our expansion.  As a result, the additional equity funding may result in significant dilution to existing stockholders. If adequate funds are not available, we may be required to delay or curtail significantly our

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development and commercialization activities.  This would have a material adverse effect on our business, financial condition and/or results of operations and could ultimately cause us to have to cease operations.

Financial Operations Overview

Sales

Our sales are derived from the sale of plastic and polyurethane products.  Customers are generally billed at shipping of products.  We currently have not generated any revenues from the sale of rebreather system for the three month periods ended December 31, 2010 and 2009.

Cost of Sales

Cost of sales for plastic and polyurethane products represents the cost of direct labor, raw material, supplies and other miscellaneous support expenses.  No cost of sales for rebreather system is recorded because we have not generated any revenues from the sale of rebreather system.

Selling, General and Administrative

Our selling expenses consist primarily of personnel, media, support and travel costs to inform user organizations and consumers of our products.  Our general and administrative expenses consist primarily of personnel, occupancy, legal, consulting and administrative and support costs for our operations.

Critical Accounting Policies and Significant Judgments and Estimates

 

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods.  We evaluate our estimates and judgments on an ongoing basis.  We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could therefore differ materially from those estimates under different assumptions or conditions.  Our significant accounting policies are described in Note 1 to our unaudited condensed consolidated financial statements included in Item 1 of this report.  We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements.

Revenue Recognition

 

Sales for our polyurethane products are recognized when our plastic or polyurethane products are shipped to our customers.  Currently for rebreather system, there have not been any revenues recognized from the sale of its products.

Results of Operations for the Three Months Ended December 31, 2010 and 2009

As earlier described, we operate in two business segments: Polyurethane products and Rebreather system.  Our Elasco business focuses on the delivery of plastic and polyurethane product to our customer.  Its

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principal business is manufacturing and selling of open cast molded polyurethane elastomer products such as skateboard, roller skate, and industrial wheels.  Our Rebreather system, which is marketed as Blu Vu, is engaged in the potential manufacture and mass-market of proprietary breathing equipment developed specifically for the oil and gas, mining and safety industries, and military and recreational divers.

The following table presents unaudited consolidated statement of operations data for each of the periods indicated as:

			Three months ended
			December 31,				Percent
			2010		2009		Change
			(Unaudited)		(Unaudited)
Sales			905,401		511,556		77%
Cost of sales			778,016		435,062		79%
Gross profit			127,385		76,494		67%
	Selling, general and administrative		210,480		161,231		31%
Operating loss			(83,095)		(84,737)		(2)%
	Other income (expense), net		(99,229)		(14,562)		(581)%
Net (loss)			(183,159)		(99,299)		84%

Sales

With respect to our polyurethane business, our sales increased by $393,845 for the three months ended December 31, 2010, compared to the same period in 2009, due to recovery in the economy and introduction of our new products to our current customer base.

In respect to our rebreather product, we have not produced sales as of December 31, 2010 and 2009.

Cost of Sales

 

Cost of sales consists of payroll, raw material, supplies and other miscellaneous costs for the Polyurethane products.  For the three-month period ended December 31, 2010, costs of sales of $778,016 consist primarily of labor cost of $310,840, raw material cost of $400,705 and other costs of $66,471.  For the three-month period ended December 31, 2009, cost of sales of $435,062 consisted primarily of labor costs of $232,697, raw material cost of $163,044, and other costs of $39,321.  We expect costs of sales will increase as an absolute number as more plastic and polyurethane products are produced.  However, we expect the cost of sales to decrease as a percentage of revenues as we improve our operating efficiency and increase the automation of certain processes.

 

Selling, General and Administration

For the three months ended December 31, 2010 and 2009, our selling, general and administrative expenses for each segment are as follows (unaudited):

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		2010			2009
Rebreather	$	104,973		$	71,046
Polyurethane		105,507			90,185
	$	210,480		$	161,231

Selling, general and administrative expenses associated with our polyurethane business consist primarily of payroll costs, rental fee, professional fee, insurance, and other expense.  For the three months ended December 31, 2010, selling, general and administrative expenses included the following: payroll and benefits $63,651, professional fees $8,163, rent expense $16,599, insurance expenses $2,289, and other expenses $14,805. For the comparable period in 2009 expenses were as follows: payroll and benefits $37,826, rent expense $16,599, consulting $13,712, professional fee $1,331, insurance expenses $2,503 and other expenses $18,214.

Comparing the three months ended December 31, 2010, with the same period in 2009, the increase in selling, general and administrative expenses were primarily due to an increase in payroll expenses resulting from increase in wages and bonus while other expenses decreased because of more outsourced services were done in-house in 2010.  Other expenses remained consistent for the three months ended December 31, 2010 and 2009.  General and administrative expenses associated with our Blu Vu rebreather system consist primary of consulting and professional fees.

Other income (expense)

For the three months ended December 31, 2010, we incurred other expenses of $99,229, which consisted primarily $74,354 amortization of note discount on the $253,000 convertible notes; total interest of $18,534 paid and accrued on the $100,000 line of credit, $1,095,110 long term promissory notes, and $253,000 convertible notes due to certain shareholders and officer, net of an accrued interest income of $513 on the $41,000 loan receivable; and change in fair value of derivative liability

For the comparable period in 2009, we incurred interest expense of $14,562 paid and accrued on the $125,000 line of credit and $1,095,110 long term promissory notes due to a shareholder and officer.  

Net Loss

The increase in net loss of $83,860 for the three months ended December 31, 2010, compared to the same period in 2009, was a net result of: an increase in our polyurethane product sales, an increase in selling, general and administration expenses due to the increase in salaries and professional fees in 2010 and the increase in interest expense resulted from amortization of beneficial conversion option embedded in the convertible notes in 2010.

Liquidity and Capital Resources 

Since our inception, we have incurred significant losses.  As of December 31, 2010, we had an accumulated deficit of approximately $3.26 million, and as of September 30, 2010, our accumulated deficit was approximately $3.08 million.  We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future.  We expect that our sales and general and administrative expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability.  We may never achieve profitability.

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Due to the continued losses incurred from our operations, as of December 31, 2010, we had $35,861 in cash and cash equivalents and a working capital deficit of $413,631 compared to $1,852 in cash and cash equivalents and a working capital of $253,061 at September 30, 2010.

Operating Capital and Capital Expenditure Requirements

Our continued operating losses and limited capital raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds in the next 12 months in order to continue to conduct our business.  Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations.

We need additional funds to continue our operations and will need substantial additional funds before we can generate revenue from our Blu Vu rebreather system.  We are currently exploring additional sources of capital; however, we do not know whether additional funding will be available on acceptable terms, or at all, especially given the economic conditions that currently prevail.  In addition, any additional equity funding may result in significant dilution to existing stockholders, and, if we incur additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities.

We expect to continue to incur operating losses in the future and to make capital expenditures to expand our polyurethane operations and to market our Blu Vu rebreather system (including upgrading our plant equipment) and to scale up our sales efforts.  We expect that our existing cash will be used to fund working capital and for capital expenditures and other general corporate purposes, including the repayment of debt incurred as a result of our acquisitions.  Although since September 30, 2010, we have raised gross proceeds of $127,500 through the sale of convertible promissory notes, we anticipate that our cash on hand (including the proceeds from these promissory notes) and cash generated through our operations will not be sufficient to fund our operations for the next 12 months.  In addition we will have to repay the outstanding notes plus interest. We therefore anticipate raising additional funds in the near future.

Sources of Liquidity

Since our inception substantially all of our operations have been financed primarily from sales of our polyurethane products and equity and debt financings.  For the three months ended December 31, 2010, we had received $77,500 from issuance of convertible notes.

In addition, in order to decrease the cash outflows, in November 2010, the Company issued 80 million shares of its common stock valued at $60,000 to the President of its subsidiary, Elasco, as a payment of a bonus of $10,000 and prepayment of salary of $50,000 for the following six months.

Cash Flows

Net cash used in operating activities was $7,985 for the three months ended December 31, 2010, compared to $61,182 for the same period ended December 31, 2009.  The decrease in cash used of $53,197 was primarily attributable to increases in our polyurethane product sales.

There was no net cash used in investing activities for the three months ended December 31, 2010 and 2009.

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Net cash proceeds from financing activities for the three months ended December 31, 2010, were $41,994 which was primarily derived from the issuance of convertible notes and the paydown of the line of credit.

For the three months ended December 31, 2009, proceeds from sales of common stocks were $65,000, net of offering costs, through a Regulation S offering.

Contractual Obligations and Commercial Commitments

As of December 31, 2010, we have a contractual obligation to pay the line of credit of $100,000 with an interest rate of prime plus 1.5%.  There was also a total remaining balance on two promissory notes of $1,095,110 due to a shareholder and officer in connection with our acquisitions.  The notes bear interests at a rate of 5.0% and 4.23% per annum, respectively.  Our total lease obligations are $ 315,381 for our Southern California facility, which expires on December 31, 2015.

Income Taxes

Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for federal income taxes for any periods presented.  As of December 31, 2010, we had net operating loss carryforwards for federal income tax purposes of $386,000.  If not utilized, the federal net operating loss carryforwards will expire in 2025.  Utilization of net operating loss and credit carryforwards may be subject to a substantial annual limitation due to restrictions contained in the Internal Revenue Code that are applicable if we experience an “ownership change”.  The annual limitation may result in the expiration of our net operating loss and tax credit carryforwards before they can be used.

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements or financing activities with special purpose entities.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Our Disclosure Controls

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, Randall Fernandez, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective and identified the following material weaknesses:

1. The Company has insufficient internal personnel resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions;

2. Due to our small size, the Company did not maintain effective internal controls to assure segregation as the same employee was responsible for initiating and recording of transactions, thereby creating the segregation of duties weakness; and

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3. The Company did not have an independent board of directors for oversight of the Company’s operations and financial reporting process.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In the ordinary course of our business, we may from time to time become subject to routine litigation or administrative proceedings which are incidental to our business. We are not a party to nor are we aware of any existing, pending or threatened lawsuits or other legal actions involving us.

ITEM 1A.

RISK FACTORS

Not applicable.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not issue any equity securities during the quarter ended December 31, 2010.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

[REMOVED AND RESERVED] 

 

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

Exhibit No.

Description

31.1 / 31.2

Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive and Financial Officer

32.1 / 32.2

Rule 1350 Certification of Principal Executive and Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DELTRON, INC.

Dated February 16, 2011                                            By:           /s/ Henry Larrucea                                                      

Henry Larrucea
President, Principal Executive and Financial Officer

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