Our gross profit was $23,556 (47.9%) and $24,498 (48.2%) for the three and six month periods ended June 30, 2009, respectively, compared to a gross profit of $424 (47.9%) and $2,176 (23.5%) for the comparable three and six month periods in fiscal 2008. The increase in our gross profit for the three month period ended June 30, 2009 was due to a sale to a major stationery supplier previously discussed.
The increase in our gross profit for the six month period ended June 30, 2009 was due an increase in revenue to a sale to a major stationery supplier previously discussed, partially offset by to the specialized promotional product that we manufactured and delivered in the first quarter of 2008.
Research and development expenses decreased by $1,438 and $19,520 for the three and six month periods ended June 30, 2009, respectively, to $37,198 and $52,198, respectively, from $38,636 and $71,718 for the comparable three and six month periods of 2008.
The decrease for the three month period ended June 30, 2009 of $1,438 was primarily related to a decrease in patent related costs from the prior year’s comparable period of $3,772 partially offset by a change in the method of allocating various personnel costs of $2,525.
The decrease for the six month periods ended June 30, 2009 was primarily due to specific costs incurred relating to a necessary change in the primary raw materials used in manufacturing our Luminescent Product. The change required us to change our manufacturing and a decrease in patent costs for the same period.
Selling and marketing expenses consisted of payroll and related taxes, website maintenance costs, travel costs and fees paid in connection with promotional activities and press releases and shareholder communications. Selling and marketing expenses increased $7,709 to $56,352 from $48,643 for the three month period ended June 30, 2009 compared with the three month period of 2008. Selling and marketing expenses increased by $13,824 for the six month period ended June 30, 2008, to $118,284 from $104,460.
The increase for the three month period ended June 30, 2009 is primarily related to consulting costs associated with the upcoming PlayGlo™ product introduction.
The increase for the six month period ended June 30, 2009 is primarily related to consulting costs associated with the upcoming PlayGlo™ product introduction and certain material costs to produce our new samples used for the toy fair earlier this year.
We anticipate beginning a major sales and marketing effort in conjunction with the launch of the PlayGlo™ line. This effort will target independent retailers in the toy, gift and book stores, as well as tourist, museum, science center, aquarium and zoo shops. Our sales and marketing costs will increase significantly as our marketing samples are produced and distributed in the third and fourth quarters. Our sales and marketing effort began in the second quarter 2009 with identifying our initial selection of our target group of independent retailers. We anticipate that the cost of our 2009 sales and marketing effort to be between $300,000 to $450,000, which includes, but is not limited to, the costs to produce all of our marketing collateral and samples, travel costs, employee compensation. This estimate is less than initially anticipated due the launch occurring later in the year that originally planned.
General and administrative expenses consisted primarily of the compensation of our executive officer, other payroll and related taxes and benefits, deferred financing expenses and rent as well as legal and accounting fees. General and administrative expenses decreased by $23,221 and $37,710 for the three and six month periods ended June 30, 2009, respectively to $95,961 and $175,147, respectively, from $119,182 and $212,857 for the comparable three and six month periods of 2008.
The decrease for the three month period ended June 30, 2009 is primarily related to a reduction of accounting and legal and a decrease in payroll and payroll related costs due to higher allocations to selling and marketing partially offset by increases in rent, health care.
The decrease for the six month period ended June 30, 2009 is primarily related to a reduction of accounting and legal costs and a decrease in payroll and payroll related costs due to higher allocations to selling and marketing partially offset by increase in rent and health care costs.
General and administrative costs included consulting fees of $7,469 and $15,135 for the three and six month periods ended June 30, 2009, related to a two-year consulting contract with a significant stockholder, commencing on September 11, 2007. The consulting contract fees, with this stockholder for the prior year’s comparable time periods of 2008 were $7,469 and $14,938, respectively.
OTHER INCOME (EXPENSE)
Interest Expense
For the three and six month periods ended June 30, 2009 and 2008, interest expense was $19,696, $55,328, $40,662 and $82,281, respectively. Interest expense is dependent on the outstanding balance of our line of credit and the outstanding balance of unsecured cash advances we received from Mr. Planche, our president. The interest rate charged by Ross/Fialkow on the outstanding balances under the line of credit was reduced from 20% to 10% effective April 1, 2009. The interest rate charged by Mr. Planche is the Internal Revenue Service short term “Applicable Federal Rate.”
For the three and six month periods ended June 30, 2009 and 2008, we incurred interest of $16,327, $48,970, $35,389, and $70,778, respectively, on our Loan Agreement with Ross/Fialkow. We also incurred interest on unsecured cash advances from our president of $3,313, $5,266, $6,303 and $11,496, respectively. For the six months ended June 30, 2009, we incurred other miscellaneous interest costs of $56.
For the three and six month periods ended June 30, 2009 and 2008, interest expense decreased by $20,966 and $26,953, respectively. Of this decrease in interest, $19,062 and $21,808 is attributed to the reduction in the interest rate on the outstanding balance of our line of credit, and $1,953 and $5,193 is attributable to the decrease in the interest rate on the outstanding balance of unsecured cash advances we received from Mr. Planche. The remaining change is attributable to a net change in miscellaneous interest income expense of $49 and $48, respectively.
Income Taxes
We have not calculated the tax benefits of our net operating losses, since we do not have the required information. Due to the uncertainty over our ability to utilize these operating losses, any deferred tax assets, when determined, would be fully offset by a valuation allowance. The Company paid $456 along with its extension for a state tax return.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2009
Since inception, our operations have not generated sufficient cash flow to satisfy our capital needs. We have financed our operations primarily through the private sale of shares of our common stock, warrants to purchase shares of our common stock and debt securities. Our net working capital deficit at June 30, 2009 was $2.8 million compared to a deficit of $2.7 million as of December 31, 2008.
The current financing for our operations is derived primarily from unsecured, interest bearing cash advances from Mr. Planche. While we believe that he will be able to continue funding our operations, there is no guarantee that he will have the ability to continue to do so. Mr. Planche has not committed to provide any additional cash advances to the Company. In light of the recent economic turmoil in the global credit markets, Mr. Planche may not be able to fund our operations on a timely basis to enable us to take advantage of various economic opportunities. We do have the ability to borrow $86,000 under our Loan Agreement with Ross/Fialkow (seeNOTE 8 - LINE OF CREDIT in the notes to our condensed consolidated financial statements included in this Form 10-Q); however, it is inadequate based on our current and future funding requirements.
15
Due to the recent turmoil in the global economy, it is uncertain that the necessary funds will be available when we require them. We feel that we may benefit from, and take advantage of, the recent economic uncertainty. As it becomes more difficult for companies to stay in business, we believe they will need to find more creative and unique ways to differentiate themselves from their competition. We believe those companies will be more open to our products as they try to maintain their market share.
In addition, our current sales and marketing efforts will require substantial funding beyond our current operating requirements. We currently intend to attempt raising capital from various sources, however, we feel that we will be unable to attract the necessary debt and/or equity financing unless our current sales and marketing efforts are successful and until additional commercial and retail sales can be generated to demonstrate that there is a market for our Luminescent Products beyond our current limited successes.
As previously discussed, we estimate that it will require $500,000 to $750,000 in additional funding, to be used for various purposes, to make this sales and marketing effort successful. An ability to raise capital to fund this effort, or fund it timely, may influence how successful our sales and marketing effort is and consequently, affect our ability to attract future debt and/or equity financing for future operations.
Cash increased to $87,441 at June 30, 2009 from $10,271 at December 31, 2008.
Net cash used for operating activities for the six months ended June 30, 2009 was $270,757. The primary reason for the cash usage was to fund the loss for the period.
Net cash provided by financing activities for the six months ended June 30, 2009 was $350,000. The net cash provided was derived from a sale of 2,000,000 shares of common stock valued at $0.15 per share for $300,000 to ARAGONE S.A. of Geneva, Switzerland in connection with a private placement on April 27, 2009, unsecured cash advances received from our president of $36,000 and advances from our line of credit of $14,000.
Credit Availability
We have a $750,000 Loan Agreement with Ross/Fialkow, as described inNOTE 8 – LINE OF CREDIT of our condensed consolidated financial statements. We have borrowed $664,000 of the $750,000 available under this loan agreement. As of June 30, 2009, the outstanding balance under the line of credit was $664,000.
Effects of Inflation
We believe that our financial results have not been significantly impacted by inflation and price changes. We have experienced only minimally modest increases in the cost of transporting our inventory to and between our manufacturing vendors and our warehouse and the costs of shipping our Luminescent Products to purchasers, as our vendors have added fuel surcharges to our normal shipping costs.
Subsequent Event
The Company received a Notice of Federal Tax Lien dated August 6, 2009. The IRS is claiming the Company owes payroll taxes for the second and third quarters of 2006 as well as interest and penalties totaling approximately $53,000. The lien attaches to all assets currently owned and to all property the Company may acquire in the future. An administrative assessment of payroll liability was determined as a result of the Company not filing required quarterly payroll reports. The Company’s calculations indicate that no payroll tax liability was due during these two periods.
The Company believes that it does not owe the delinquent taxes, penalties and interest and plans on contesting the lien. The Company has replied to all correspondence, filed all outstanding quarterly reports and all other requested documentation with the IRS. Our latest reply on July 13, 2009 is currently under review at the IRS. We believe that upon review, this matter will be resolved without an assessment of liability or interest. It is our understanding that the administrative review process of our case will take 4 to 5 months from the date of submission. The Company did not accrue the amounts due under the lien as of and for the six and three months ended June 30, 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” defined by Item 10 of Regulation S-K, we are not required to provide this information.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer (one individual) have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of June 30, 2009 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer (one individual), as appropriate to allow timely decisions regarding required disclosure.
16
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the second quarter of 2009, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
17
| |
PART II. | OTHER INFORMATION |
| |
ITEM 1. | LEGAL PROCEEDINGS |
| |
There are no material legal proceedings pending to which the Company is a party or to which any of its properties are subject. |
| |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| |
None. |
| |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
| |
None. |
| |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| |
None. |
| |
ITEM 5. | OTHER INFORMATION |
| |
The Company received a Notice of Federal Tax Lien dated August 6, 2009. The IRS is claiming the Company owes payroll taxes for the second and third quarters of 2006 as well as interest and penalties totaling approximately $53,000. The lien attaches to all assets currently owned and to all property the Company may acquire in the future. An administrative assessment of payroll liability was determined as a result of the Company not filing required quarterly payroll reports. The Company’s calculations indicate that no payroll tax liability was due during these two periods. |
| |
The Company believes that it does not owe the delinquent taxes, penalties and interest and plans on contesting the lien. The Company has replied to all correspondence, filed all outstanding quarterly reports and all other requested documentation with the IRS. Our latest reply on July 13, 2009 is currently under review at the IRS. We believe that upon review, this matter will be resolved without an assessment of liability or interest. It is our understanding that the administrative review process of our case will take 4 to 5 months from the date of submission. The Company did not accrue the amounts due under the lien as of and for the six and three months ended June 30, 2009. |
18
ITEM 6. EXHIBITS
| | | | |
Number | | Description of Exhibit | | |
| | | | | |
| | | | |
10.30 | | Standard Form Commercial Lease dated September 12, 2008 between Brightec, Inc. and William Dolan on behalf of Pleasant Street Realty Trusts I & II | | |
| | | | |
31 | | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | | E-1 |
| | | | |
32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | | E-2 |
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| BRIGHTEC, INC. |
| | |
Date: August 14, 2009 | By: | /s/ Patrick Planche |
| | |
| | Patrick Planche, President, Chief Executive |
| | Officer, Treasurer, Director Chief Financial Officer, Principal Executive Officer and Principal Financial and Accounting Officer |
20
