The Company has retained four Manufacturers Representative Firms (MRFs) with a total of about sixty sales persons, to represent our PlayGlo™ line of glow-in-the-dark puzzles and stickers. These four MRFs cover the thirty 30 States and the District of Columbia in the following regions:
New England Region (6): Connecticut, Maine, Massachusetts, New Hampshire, Rode Island and Vermont.
Mid-Atlantic Region (7): Delaware, Maryland, New Jersey, New York, Pennsylvania, Northern Virginia and Washington, D.C.
Midwest Region (7): Illinois, Indiana, Michigan, Minnesota, North Dakota and South Dakota and Wisconsin.
Southeast and Southwest Region (11): Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee and Texas.
The Company issued and sold 2,000,000 shares of its common stock valued at $0.15 per share for $300,000 to Aragone S.A. of Geneva, Switzerland (“Aragone”) in connection with a private placement on April 27, 2009. The 2,000,000 shares of common stock were issued and delivered May 1, 2009. The Company used the proceeds of this sale to satisfy outstanding obligations and build inventory for the up-coming launch of the PlayGlo™ line of products.
At September 30, 2009, we have a working capital deficit of approximately $2.9 million, an accumulated deficit of approximately $16.1 million and recurring negative operating cash flows since inception. Our future viability is dependent upon our ability to obtain additional debt and/or equity financing and achieve profitability in future operations. These circumstances raise substantial doubt about our ability to continue as a going concern. Our auditors have included a “going concern” qualification in their auditor’s report for the year ended December 31, 2008. Such a “going concern” qualification may make it more difficult for us to raise funds when needed.
We believe we have the ability to obtain additional funds from new investors, our principal stockholders and employees through the issuance of additional debt, equity securities and/or the exercise of warrants and stock options. However, until we identify alternative sources of funding, we will be totally dependent on Mr. Planche to fund our operations. We do not have any current plans to access typical sources of credit until our sales volume increases and we have no plans to make significant investments in property, plant or equipment. Mr. Planche has made $1.7 million in unsecured cash advances to us through September 30, 2009.
There can be no assurances that we will be able to raise the funds we require, or that if such funds are available, that they will be available on commercially reasonable terms. Our ability to continue to operate as a going concern is primarily dependent upon our ability to generate the necessary debt and/or equity financing to effectively market and produce our products, to establish profitable operations and to generate positive operating cash flows. If we fail to raise funds or are unable to generate operating profits and positive cash flows, there are no assurances that we will be able to continue as a going concern and we may be unable to recover the carrying value of our assets.
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.
We believe that we will be successful in generating the necessary financing to fund our operations through the 2009 calendar year. Accordingly, we believe that no adjustments or reclassifications of our recorded assets and liabilities are necessary at this time.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008
Revenues
Our revenues, net of returns, allowances and discounts, for the three and nine month periods ended September 30, 2009 were $2,935 and $53,778 respectively, compared with $2,234 and $11,503 for the comparable three and nine month periods of 2008. The increase in our revenue for the three month period ended September 30, 2009 was due to a sale of PlayGlo™ puzzles and stickers.
For the nine month period ended September 30, 2009, the increase in our revenue was due to a sale of several thousand sheets of our paper-backed offset product to a major stationery supplier for $48,270 and the launch of our PlayGlo™ line of puzzles and stickers, partially offset by the decline in the number of commercial sales we made and as a result of a specialized promotional product that we manufactured and delivered in the first quarter of 2008 of $7,207.
During the second quarter of 2009, while we had one commercial sale of our Luminescent Products to a major stationery supplier, we concentrated our efforts on building inventory of our PlayGlo™ line of products and their planned launch during the second quarter 2009. The launch of the line is now in effect and sales have been recorded during third quarter 2009.
Gross Profit
Our gross profit was $1,488 (50.7%) and $25,986 (48.3%) for the three and nine month periods ended September 30, 2009, respectively, compared to a gross profit of $590 (26.4%) and $2,766 (24.1%) for the comparable three and nine month periods of 2008. The increase in our gross profit for the three month period ended September 30, 2009 was due to a sale of inventory with a low costs and a high margin on our puzzles and stickers.
The increase in our gross profit for the nine month period ended September 30, 2009 was due to an increase in revenue on sales to a major stationery supplier previously discussed, partially offset by the specialized promotional product that we manufactured and delivered in the first quarter of 2008.
Research and Development Expenses
Research and development expenses were $15,550 and $67,748 for the three and nine month periods ended September 30, 2009 compared to $12,758 and $84,476 for the comparable three and nine month periods of 2008. This was an increase of $2,792 for the three month period and a decrease of $16,728 for the nine month period ended September 30, 2009.
The increase for the three month period ended September 30, 2009 of $2,792 was primarily related to a change in the method of allocating various personnel costs of $2,890.
The decrease for the nine month period ended September 30, 2009 was primarily due to non-recurring costs incurred during 2008. These costs related to a necessary change in the primary raw materials used in manufacturing our Luminescent Products. Also, a decrease in patent costs from the prior year was partially offset by an increase in the payroll allocation to Research and Development from General and Administrative cost accounted for the remainder of the change.
Selling and Marketing Expenses
Selling and marketing expenses consist 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 decreased $7,435 to $43,708 from $51,143 for the three month period ended September 30, 2009 compared with the three month period of 2008. Selling and marketing expenses increased by $6,389 for the nine month period ended September 30, 2009, to $161,992 from $155,603 in 2008.
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The decrease for the three month period ended September 30, 2009 is primarily related to costs for developing and storing various materials associated with our 2008 campaign that was not a recurring event on 2009 along with a reallocation of personnel costs, partially offset by postage costs associated with the up-coming PlayGlo™ product introduction.
The increase for the nine month period ended September 30, 2009 is primarily related to consulting costs associated with the up-coming PlayGlo™ product introduction and certain material costs to produce our new samples used for the toy industry 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 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 and employee compensation. This estimate is less than initially anticipated due the launch occurring later in the year that originally planned.
General and Administrative
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 were $85,776 and $260,923 for the three and nine month periods ended September 30, 2009 compared to $139,163 and $352,020 for the comparable three and nine month periods of 2008. This was a decrease of $53,387 and $91,097 for the three and nine month periods ended September 30, 2009, respectively
The decrease for the three month period ended September 30, 2009 is primarily related to a reduction of accounting and legal and deferred financing costs associated with a Stand By Equity Distribution SEDA financing, $21,335, and a decrease in payroll and payroll related costs due to higher allocations to selling and marketing partially offset by increases in rent and health care.
The decrease for the nine month period ended September 30, 2009 is primarily related to a reduction of accounting and legal, deferred financing 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 include consulting fees of $5,631 and $20,766 for the three and nine month periods ended September 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 $7,551 and $22,234, respectively.
OTHER INCOME (EXPENSE)
Interest Expense
For the three and nine month periods ended September 30, 2009 and 2008, interest expense was $20,369, $44,354, $75,697 and $126,641, 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. The interest rate charged by our lender, Ross/Fialkow on the outstanding balances under our 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.”
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For the three and nine month periods ended September 30, 2009 and 2008, we incurred interest of $16,600, $65,570, $35,612, and $106,390, respectively, on our Loan Agreement with Ross/Fialkow. We also incurred interest on unsecured cash advances from Mr. Planche of $3,574, $8,738, $9,877 and $20,234, respectively. For the nine months ended September 30, 2009, we incurred other miscellaneous interest costs of $195.
For the three and nine month periods ended September 30, 2009 and 2008, interest expense decreased by $23,985 and $50,938, respectively. Of this decrease in interest, $19,012 and $40,820 is attributed to the reduction in the interest rate on the outstanding balance of our line of credit, and $5,164 and $10,357 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 $191 and $239, 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
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 September 30, 2009 was $2.9 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.
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.
Our cash decreased to $8,152 at September 30, 2009 from $10,271 at December 31, 2008.
Net cash used for operating activities for the nine months ended September 30, 2009 was $345,694. The primary reason for the cash usage was to fund the loss for the period.
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Net cash provided by financing activities for the nine months ended September 30, 2009 was $346,663. The net cash provided was derived from an issuance and 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 and unsecured cash advances received from Mr. Planche of $32,663, net a repayment of $3,800 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 the Loan Agreement. As of September 30, 2009, the outstanding balance under that 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.
Federal Tax Lien
The Company received a Notice of Federal Tax Lien dated August 6, 2009. The IRS is claiming that 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 by the Company 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 its 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 these taxes, penalties and interest and plans on vigorously 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 by the IRS. We believe 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 three months and nine months ended September 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 4. 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) has 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 September 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.
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Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the third 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.
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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 default from the Ross/Fialkow dated November 3, 2009 for the non-payment of accrued interest of $22,686 and certain legal fees incurred with the Loan Agreement and the balance due under the Loan Agreement upon maturity. On November 13, 2009 the Company and Ross/Fialkow signed an Amendment and Waiver Agreement extending terms of the Loan Agreement. SeeNOTE 8 – LINE OF CREDIT.
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ITEM 6. EXHIBITS
| | | | |
Number | | Description of Exhibit | | Location |
| | | | | |
| | | | |
10.1 | | Amendment and Waiver Agreement Dated November 12, 2009 to Loan Agreement Dated June 6, 2006 Between Ross/Fialkow Capital Partners LLP, Trustee of Brightec Capital Trust and Brightec, Inc. | | Provided herein |
| | | | |
31 | | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | | Provided herein |
| | | | |
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). | | Provided herein |
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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: November 16, 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 |
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