UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2000
Commission File Number 000-28283
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
(Exact name of registrant as specified in charter)
Utah
87-0392000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12885 HWY 183, STE 108-A, AUSTIN, TEXAS 78750
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 335-1494
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes_X_ No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2000, the Company had
outstanding 22,453,657 shares of its common stock, par value $0.001.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
Unaudited Audited
March 31 June 30
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash on deposit $ 4,809 $ 2,647
Accounts receivable 20,000 45,000
Less allowance for doubtful accounts (20,000) 0
Prepaid expenses 10,000 0
--------- ---------
Total Current Assets 14,809 47,647
Fixed Assets:
Furniture and equipment 161,049 149,045
Less accumulated depreciation (92,960) (92,712)
--------- ---------
Total Fixed Assets 68,089 56,333
Other Assets:
Patent pending costs 0 9,912
Less accumulated amortization 0 (248)
Deposits 11,000 1,000
--------- ---------
Total Other Assets 11,000 10,664
Total Assets $ 93,898 $ 114,644
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 129,844 $ 46,108
Promissory note payable 0 57,898
Current portion of long-term debt 0 26,852
Other 0 4,388
--------- ---------
Total Current Liabilities 129,844 135,246
Long Term Liabilities
Long term notes payable 33,623 52,541
Note payable to shareholder 88,270 55,420
--------- ---------
Total Long Term Liabilities 121,737 107,961
Total Liabilities 251,737 243,207
Stockholders' Equity
Common stock, $0.001 par value, 100,000,000
share authorized, 22,453,657 issued and
outstanding 148,774 22,454
Additional paid-in capital 2,223,893 2,223,892
Retained earnings (deficit) (2,319,975) (2,164,379)
Subscriptions receivable (210,530) (210,530)
--------- ---------
(157,839) (128,563)
Total Liabilities and Stockholders' Equity $ 93,898 $ 114,644
========= =========
</TABLE>
The accompanying notes are an intregal part of these consolidated financial
statements.
<PAGE>
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Unaudited
Three Months Ended
March 31 March 31
2000 1999
---------- ---------
<S> <C> <C>
Revenues:
Material sales $ 0 $ (399)
Cost of sales 0 9,050
---------- ---------
Gross profit 0 (9,449)
Operating Expenses:
Selling, general and administrative 40,410 29,220
Wages and benefits 19,285 15,129
Interest expense 4,665 4,268
---------- ---------
64,361 48,618
Operating Income (Loss) (64,361) (58,067)
Other Income and Expense
Other income 0 0
---------- ---------
Total Other Income and Expense 0 0
Net Income (Loss) Before Income Tax (64,361) (58,067)
Income Tax Expense 0 0
---------- ---------
Net Income (Loss) $ (64,361) $(58,067)
========== =========
Loss per common share $ (0.003) $ (0.003)
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Unaudited
Nine Months Ended
March 31 March 31
2000 1999
---------- ---------
<S> <C> <C>
Revenues:
Material sales $ 0 $ 2,693
Cost of sales 6,035 18,055
---------- ---------
Gross profit (6,035) (15,361)
Operating Expenses:
Selling, general and administrative 83,859 85,260
Wages and benefits 54,355 31,044
Interest expense 14,747 13,378
---------- ---------
152,962 129,581
Operating Income (Loss) (158,997) (144,943)
Other Income and Expense
Other income 3,400 0
---------- ---------
Total Other Income and Expense 3,400 0
Net Income (Loss) Before Income Tax (155,597) (144,943)
Income Tax Expense 0 0
---------- ---------
Net Income (Loss) $(155,597) $(144,943)
========== =========
Loss per common share $ (0.007) $ (0.006)
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Unaudited
Three Months Ended
March 31 March 31
2000 1999
---------- ---------
<S> <C> <C>
Cash Flow from Operating Activities:
Net Income (Loss) $ (64,361) $ (58,067)
Adjustments to Reconcile Cash Flow:
Decrease (Increase) in Current Assets
Advances 850 130
Due from Cyberlink Systems Inc. 0 (47,029)
Due from Keystone Services Inc. 0 (50,000)
Due from Jim Vaden 0 (20,000)
Increase (Decrease) in Current Liabilities
Accounts payable -- AmEx Optima (170) 94
Accounts payable -- AmEx Delta (394) (2,364)
Accounts payable -- Diners Club (2,613) 1,600
Depository -- FIT & FICA 0 (2,460)
Accounts payable (6,000) 0
Line of credit -- Norwest Bank (7,406) 0
Note payable -- Tom Ray 0 50,000
Note payable -- Peter Des Camp 0 (445)
Federal withholding payable 0 493
FICA tax payable 137 905
Federal unemployment payable 101 26
State unemployment payable 918 762
---------- ---------
Total Adjustments (15,777) (68,288)
Cash Provided (Used) by Operations (80,138) (126,355)
Cash Flow From Investing Activities
Sales (Purchases) of Assets
Furniture and fixtures 0 (237)
---------- ---------
Cash Provided (Used) by Investing 0 (237)
Cash Flow From Financing Activites
Cash (Used) or Provided by:
Note payable -- Americorp (1,616) (1,382)
Note payable -- Copelco Capital (1,643) (1,455)
Note payable -- GE Capital (1,663) (1,451)
Note payable -- Green Tree (1,615) (1,362)
Note payable -- Lou DeMarco 0 50,000
Note payable -- Victor DeMarco 23,000 11,000
Common stock -- par 67,280 73,860
---------- ---------
Cash Provided (Used) by Financing 83,742 129,211
Net Increase (Decrease) in Cash 3,605 2,619
Cash at Beginning of Period 1,204 3,394
Cash at End of Period $ 4,809 $ 6,013
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the accounting principles stated in the audited financial
statements for the year ended June 30, 1999 and reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the
financial position as of March 31, 2000 and the results of operations for the
periods presented. These statements have not been audited or reviewed by the
Company's independent certified public accountants. The operating results for
the interim periods are not necessarily indicative of results for the full
fiscal year.
The notes to consolidated financial statements appearing in the Company's Annual
Report on form 10SB12G for the year ended June 30, 1999 and the notes to the
quarterly 10-QSB for the period ended December 31,1999 as filed with the
Securities Exchange Commission should be read in conjunction with this Quarterly
Report on Form 10-QSB. There have been no significant changes in the information
in those notes other than from normal business activities of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The financial information set forth in the following discussion should be read
in conjunction with, and qualified in its entirety by, the financial statements
of the Company included elsewhere herein.
BUSINESS
The Company currently competes in two business segments: (1) the installation of
heating and cooling systems and (2) the installation of lighting systems using
new, more efficient, systems. Each of these products can be used to retrofit
less efficient systems. While each of these products can be and is marketed and
installed independently of each other, the Company has begun offering the
heating and cooling system and the lighting products as a comprehensive energy
services product.
Through December of 1999, the Company operated primarily as a research and
development entity. Its primary research activities centered around exploring
and investigating energy products and services, specifically within the heating
and cooling markets. The development of the Energy Miser system has produced
alternate mediums to which the system may operate from, forging new patent
opportunities. Previous sales conducted prior to April 1, 2000, were to
determine product viability, service requirements, liabilities, and costs
associated with installation and operation of the Energy Miser system. The
Company is formally prepared to release for commercial sale the Energy Miser
heating and cooling system in the second quarter of the calendar year 2000. The
release will be coupled with the completion of the engineering manual.
Forecasted release date for the manual is in June of 2000.
THE PRODUCTS
The DeMarco Energy Miser Heating and Cooling System
The Energy Miser is a patented earth-coupled heat pump utilizing the municipal
water main or any other underground piping loop to heat, cool and provide
domestic hot water for buildings. Earth-coupled heat pumps are from 50% to 70%
more efficient than other methods for heating and air conditioning. Monthly
operating costs are significantly lower than other methods.
In the cooling mode, heat pumps operate by removing heat from the inside of a
building to an exterior heat "sink." In the heating mode, the process is
reversed. Heat is moved from an exterior source to the inside of a building.
Earth-coupled heat pumps normally use the heat absorbing, or heat supplying,
capacity of large bodies of water such as lakes, ponds, water wells or specially
constructed networks of pipe called ground loops. The requirements for a "large
body of water" as the external source/sink or the costly excavating required for
the heat pump, imposes three constraints on anyone wanting to take advantage of
the system. The first is the need to be located near such a body of water if a
natural source/sink is going to be used. The second is the added expense of
drilling a water well. The third is the need for enough property to accommodate
the underground installation of several hundred feet of plastic pipe.
The Energy Miser removes those three constraints by utilizing the thermal
properties of public water supplies. Because the thermal properties of the water
in the underground piping infrastructure is used as a medium (and not for
consumption or re-distribution), the need for large external bodies of water and
expensive wells or land acquisitions for ground loops are eliminated. There is
no cross flow between the water supply and the heat pump. The integrity of the
water is retained with any application of the Energy Miser system.
<PAGE>
Energy Efficient Lighting Systems
In 1999, the Company introduced a second product for their comprehensive Energy
Services program - lighting retrofit services. In commercial facilities,
lighting typically represents 30 to 40 percent of a commercial facility's energy
consumption. By reducing the kilowatts used for lighting, utility costs can be
reduced. Efficient lighting systems can reduce consumption by as much as 50
percent, without reducing lumens.
The lighting retrofit services are offered as a combined package with the
DeMarco Energy Miser system, creating a marketing/sales program based upon
return on investment time parameters. Sub-contractors generally located within
the geographic region of the project perform lighting retrofit installations.
These sub-contractors are identified, recruited and managed by internal Company
Project Managers for DeMarco. Typical installation time for a complete retrofit
is not more than one day. As of March 31, 2000, the Company has not initiated
sales efforts.
The Company has signed a Strategic Partnership agreement with Lighting
Management Consultants (LMC) in Houston, Texas. The agreement provides for
forthcoming lighting projects awarded to DeMarco to be performed by LMC within
their geographic business environment.
Current Developments
DeMarco Energy Systems received notice in May, 2000 that the basis for claims
made within the second patent application have been found to be patentable by
the United States Patent office.
The second Patent is for an invention that relates to heat pumps, which are
automatically thermodynamically balanced to operate at optimum conditions using
water, and in this case gray water systems. This patent was designed to utilize
gray water from private, public or other types of managed secondary water lines
with the DeMarco Energy Miser heating and cooling system. Gray water is defined
as treated sewer water that falls below the standards of drinking water. For
many years, gray water has been used in secondary water systems for watering
lawns, charging fire hydrants, as well as other non-potable water applications.
It has only been in recent years that the secondary water systems have been
given greater consideration due to water shortages.
The DeMarco Energy Miser excels in any managed water system, saving consumers as
much as seventy percent off of their heating and cooling bill. The system is
available for both residential and commercial applications. The Energy Miser
system also thrives in potable water, reuse water, and other similar managed
water systems. Incorporating the FDA approved Alfa Laval heat exchanger within
the DeMarco Energy Miser system, the potential for cross-contamination is
eliminated in all potable water systems.
The Energy Miser system has only utilized potable water systems as demonstrated
within several military bases, as well as other commercial and institutional
applications nationwide. DeMarco Energy has organized marketing efforts to
launch its sales program in cities using or proposing to implement gray water
systems. Although the Company anticipates a significant increase in revenue as a
result of this patent approval there can be no assurances that such marketing
efforts will have their intended effect of increasing such revenues or
profitability.
The Counsel of Governments in Washington, D.C. has awarded a contract estimated
to be worth over $1 billion over the life of the program to PG&E Energy Services
(an Energy Services Company , or ESCO), whose bid included the DeMarco Energy
Miser as the first choice for heating and cooling system for upgrades and
retrofits.
The heating and cooling portion represents a major portion of the program's
total expected revenues. Work on the contract is expected to begin as early as
the summer of 2000.
The Counsel of Governments includes municipalities and local governments
surrounding Washington, D.C., which may include the public school systems in
several counties and municipalities as well as public housing authorities. Other
agencies who may become users of this program, greatly expanding the scope and
business potential, include agencies of the Federal Government and other
municipalities outside of the immediate Washington, D.C. metropolitan area.
DeMarco has also been invited to bid lighting portions of the project from the
ESCO.
<PAGE>
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The following analysis of historical financial condition and results of
operations are not necessarily reflective of the on-going operations of the
Company.
Overall Operating Results
Three months ended March 31, 2000 compared to three months ended March 31, 1999:
The Company had no gross profit for the current quarter as there were no
revenues or cost of goods sold generated during the period. The prior year
quarter had a negative gross profit of $9 thousand based on negative sales of
$400 and cost of sales of $9 thousand. The Company anticipates that increased
marketing efforts in the future (based on the aforementioned recent approval of
the second Company patent) will generate the required revenues to sustain the
anticipated growth of the Company. There can be no assurances that such sales
will occur. Operating expenses increased $16 thousand or 32% to $64 thousand as
compared to the prior year quarter $49 thousand. The primary area where expenses
increased was in professional fees as they relate to fees incurred in receiving
the recent patent approval as well as expenses incurred in registering the
Company's securities in connection with the filing of SEC form 10SB12G.
The Company incurred a net loss for the current quarter of $64 thousand as
compared to a net loss of $58 thousand for the comparable quarter of the prior
year. Management continues to closely monitor expenses.
Currently, the Company has more than $50 million in gross sales under bid. One
sale was completed during the first quarter of 2000. During the final quarter of
1999, the US Government authorized the Marine Air Station in Beaufort, South
Carolina to purchase the DeMarco Energy Miser heating and cooling system and
employ the base's water main. The gross sale for the system was $250,000, and
during the second quarter of 2000, the Company anticipates receiving its royalty
compensation of ten percent from the sale. The Company and FHP Manufacturing
have previously agreed to a standard royalty fee of twenty percent, however,
under certain circumstances, and with the prior approval of the Company, this
fee may be negotiated as part of the bidding process. The Beaufort, South
Carolina installation was subject to such negotiation. The sales process for
this installation site from bid notification until contract award required
approximately one year. The sales process for the Energy Miser systems can range
from as little as one month to as much as 2 years. The heating and cooling
systems require an average of 9-12 months per system. The lighting systems
retrofits have no historical sales data on which to base averages.
Nine months ended March 31, 2000 compared to nine months ended March 31, 1999:
The Company had no revenues for the nine month period ended March 31, 2000 but
had labor costs of $6 thousand which resulted in a negative gross profit of $6
thousand. The prior nine-month period had a negative gross profit of $15
thousand based on sales of $3 thousand and associated costs of $18 thousand.
Operating expenses increased $23 thousand over the comparable prior year nine
month period. In addition to the aforementioned increase in professional fees,
the Company also retained a marketing/acquisition employee which attributed to
an increase in wage expenses.
For the nine months ended March 31, 2000, net loss was $156 thousand as compared
to a net loss for the prior year of $145 thousand.
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently financed through a cumulative convertible debenture
that began in the first quarter of 2000, a private 504 offering which ended
during the third quarter of 1999, and is supported in interim by the President,
Victor DeMarco. The current debt offering will assist towards capitalizing the
strategic growth model under implementation. There can be no assurances that the
Company will be successful in attracting investors for this offering.
The Company had negative working capital of $115 thousand at the end of the
quarter as compared to a negative working capital of $87 thousand at the end of
the prior fiscal year end, June 30, 1999. This increase in negative working
capital is primarily the result of the funding of operations to date.
Variations in shareholder/insider debt are attributed to the settlement of the
estate of Louis DeMarco, the prior majority shareholder, and the dissolution of
Cyberlink Systems, Inc. The Company continues reducing outside debts through the
funding of a note payable due to the current majority shareholder and President,
Victor DeMarco. The balance of that note payable was approximately $88 thousand
at the end of the current quarter.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted FASB Statement 128. It is not expected that the Company
will be impacted by other recently issued standards. FASB Statement 128 presents
new standards for computing and presenting earnings per share (EPS). The
Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997.
FASB Statement 131 presents news standards for disclosures about segment
reporting. The Company does not believe that this accounting standard applies to
the Company as all operations of the Company are integrated for financial
reporting and decision-making purposes.
YEAR 2000 PREPAREDNESS
The Company recognizes that computer systems and all forms of electronic
technologies, information technologies and non-information technologies, could
be adversely affected by the year 2000 date. This is because many systems and
technology components use a two-digit field to represent the year in dates
(e.g., "98" rather than "1998"). With the advent of year 2000, systems and
programs may fail or produce incorrect data believing it is the year 1900,
causing not just information technology problems but also business and
operations problems.
The Company continues to evaluate its information technology infrastructure for
Year 2000 compliance. The Company currently does not expect that the cost of its
Year 2000 compliance program will be material to its financial condition or
results of operations or that its business will be adversely affected by the
Year 2000 issue in any material respect. Nevertheless, achieving Year 2000
compliance is dependent on many factors, some of which are not completely within
the Company's control. Should either the Company's internal systems or the
internal systems of one or more significant vendors or suppliers fail to achieve
Year 2000 compliance, the Company's business and its results of operations could
be adversely affected.
The Company has not been materially affected with Y2K problems since March 31,
2000 to the date of this filing.
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions other than those
previously mentioned in this management's discussion and analysis that could
have a material adverse effect on the Company's consolidated financial position,
future results of operations, or liquidity. However, investors should also be
aware of factors that could have a negative impact on the Company's prospects
and the consistency of progress in the areas of revenue generation, liquidity,
and generation of capital resources. These include: (i) variations in revenue,
(ii) possible inability to attract investors for its equity securities or
otherwise raise adequate funds from any source should the Company seek to do so,
(iii) increased governmental regulation, (iv) increased competition, (v)
unfavorable outcomes to litigation involving the Company or to which the Company
may become a party in the future and, (vi) a very competitive and rapidly
changing operating environment.
The risks identified here are not all inclusive. New risk factors emerge from
time to time and it is not possible for management to predict all of such risk
factors, nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
b. Reports on Form 8-K
None
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
By /s/ Victor M. DeMarco
Victor M. DeMarco, President/ Chief Operating Officer
Date May 3, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Victor M. DeMarco
Victor M. DeMarco, President/ Chief Financial Officer, Sole Director
Date May 3, 2000
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,809
<SECURITIES> 0
<RECEIVABLES> 20,000
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,809
<PP&E> 161,049
<DEPRECIATION> 92,960
<TOTAL-ASSETS> 93,898
<CURRENT-LIABILITIES> 129,844
<BONDS> 0
0
0
<COMMON> 148,774
<OTHER-SE> (2,319,975)
<TOTAL-LIABILITY-AND-EQUITY> 93,898
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 6,035
<TOTAL-COSTS> 6,035
<OTHER-EXPENSES> 152,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,747
<INCOME-PRETAX> (155,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> (155,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,597)
<EPS-BASIC> (.006)
<EPS-DILUTED> (.006)
</TABLE>
