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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 033-55254-27
ADVANCED LUMITECH, INC.
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(Name of small business issuer in its charter)
Nevada 87-0438637
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8C Pleasant Street, First Floor, South Natick, MA 01760
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(Address of principal executive offices, Zip code)
(508) 647-9710
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
Check whether the Company (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. [X] Yes [ ] No
Indicate by check mark whether the Company is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The Company had 100,000,000 shares of Common Stock, $.001 par value, issued and
outstanding as of August 21, 2006.
Transitional Small Business Disclosure Format: [X] Yes [ ] No
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STATEMENT REGARDING THIS AMENDMENT
The Company is amending its Form 10-QSB for the period June 30, 2006, as
previously filed on August 21, 2006.
1. The Company determined that the satisfaction of its obligation under a
subscription for the purchase of the Company's common stock was not properly
recognized. As a result, as of June 30, 2006, the Company reduced its stock
subscriptions received by $25,000 and increased additional paid-in capital by
$25,000.
2. The Company determined that the stock redemption agreements between the
Company and certain stockholders were improperly marked-to-market, with the
changes in the fair value improperly reported as gains or losses in fair value
of derivative liabilities on the Company's statement of operations. As a result,
the Company increased its liability to stockholders for shares redeemed by
$1,296,097, increased additional paid-in capital by $214,094 and increased its
accumulated deficit by $1,377,036 to reverse the net gains recognized resulting
from mark-to market adjustments prior to January 1, 2006. For the three- and six
month periods ending June 30, 2006, the Company reversed recognized gains of
$1,271,759 and $133,155, respectively.
3. The Company determined that subscriptions received for the purchase of the
Company's common stock totaling $470,000, were improperly classified as a
component of stockholders' deficit and should have been recognized as a
liability.
The effect of these restatements was to decrease net income by $1,271,759 ($0.01
per share) and $133,155 (less than $0.01 per share) for the three- and six month
periods ended June 30, 2006, respectively. As of June 30, 2006, current
liabilities were increased by $1,271,097 and stockholders' deficit was increased
by $1,271,097.
Our stockholders should refer to the financial statements and accompanying notes
for a detailed explanation of the adjustments to the financial results of the
Company that are contained in this amended Form 10-QSB/A.
In all other material respects, this amended Quarterly Report on Form 10-QSB/A
is unchanged from the Quarterly Report on Form 10-QSB previously filed by the
Company on August 21, 2006. This amendment should also be read in conjunction
with our amended Quarterly Reports on Form 10-QSB/A for the quarters ended March
31, 2005, June 30, 2005, September 30, 2005 and March 31, 2006, as well as our
Amended Annual Reports on Form 10-KSB/A for the years ended December 31, 2004
and December 31, 2005.
2
INDEX
Page Number
-----------
Statement Regarding Amendment 2
Restatement of June 30, 2006 Interim Consolidated
Financial Statements 4
Note Regarding Forward Looking Statements 4 - 5
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 2006 - Unaudited 6
Consolidated Statements of Operations and Accumulated
Deficit and Comprehensive Income (Loss) for the Three
and Six Months Ended June 30, 2006 and 2005 - Unaudited 7
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 - Unaudited 8
Notes to Consolidated Financial Statements - Unaudited 9 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 19
Item 3. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
Exhibit 31 Certification of Chief Executive and Financial
Officer Pursuant to 18 U.S.C Section 1850, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith). E-1
Exhibit 32 Certification of Chief Executive and Financial
Officer Pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C Section 1850, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith). E-2
3
RESTATEMENT OF JUNE 30, 2006 CONSOLIDATED FINANCIAL STATEMENTS
The Company is amending its Form 10-QSB for the period June 30, 2006, as
previously filed on August 21, 2006.
1. The Company determined that the satisfaction of its obligation under a
subscription for the purchase of the Company's common stock was not properly
recognized. As a result, as of June 30, 2006, the Company reduced its liability
for stock subscriptions received by $25,000 and increased additional paid-in
capital by $25,000.
2. The Company determined that the stock redemption agreements between the
Company and certain stockholders were improperly marked-to-market, with the
changes in the fair value improperly reported as gains or losses in fair value
of derivative liabilities on the Company's statement of operations. As a result,
the Company increased its liability to stockholders for shares redeemed by
$1,296,097, increased additional paid-in capital by $214,094 and increased its
accumulated deficit by $1,377,036 to reverse the net gains recognized resulting
from mark-to market adjustments prior to January 1, 2006. For the three- and six
month periods ending June 30, 2006, the Company reversed recognized gains of
$1,271,759 and $133,155, respectively.
3. The Company determined that subscriptions received for the purchase of the
Company's common stock totaling $470,000, were improperly classified as a
component of stockholders' deficit and should have been recognized as a
liability.
The effect of these restatements was to decrease net income by $1,271,759 ($0.01
per share) and $133,155 (less than $0.01 per share) for the three- and six month
periods ended June 30, 2006) respectively. As of June 30, 2006, current
liabilities were increased by $1,271,097 and stockholders' deficit was increased
by $1,271,097.
Note Regarding Forward Looking Statements:
This Form 10-QSB/A and other reports filed by the Company from time to time with
the Securities and Exchange Commission, as well as the Company's press releases,
contain or may contain forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The information provided is based upon beliefs
of, and information currently available to, the Company's management, as well as
estimates and assumptions made by the Company's management. Statements that are
not statements of historical fact may be deemed to be forward-looking
statements. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes", "may", "should", "anticipates",
"estimates", "expects", "future", "intends", "hopes", "plans" or the negative
thereof. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause actual results of the Company
to vary materially from historical results or from any future results expressed
or implied in such forward-looking statements.
Any statements contained in this Form 10-QSB/A that do not describe historical
facts, including without limitation statements concerning expected revenues,
earnings, product introductions and general market conditions, may constitute
forward-looking statements as that term is within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 193, as amended. Any such forward-looking statements contained
herein are based on current expectations, but are subject to a number of risks
and uncertainties that may cause actual results to differ materially from
expectations. The factors that could cause actual future results to differ
materially from current expectations include the following: the Company's
ability to raise the financing required to support the Company's operations; the
Company's ability to establish its intended operations; fluctuations in demand
for the Company's products and services; the Company's ability to manage its
growth; the Company's ability to develop, market and introduce new and enhanced
products on a timely basis; the Company's lack of customers; and the ability of
the Company to compete successfully in the future. Further information on
factors that could cause actual results to differ from those anticipated is
detailed herein in Item 3, Quantitative and Qualitative Disclosures About Market
Risk, and in various filings made by the Company from time to time with the
Securities and Exchange Commission. Any forward-looking statements should be
considered in light of those factors.
4
The Company will provide upon request, copies of its quarterly and annual
reports, including interim unaudited and audited financial statements to its
security holders. We also file periodic reports with the Securities and Exchange
Commission as well as reports on Form 8-K, proxy or information statements and
other reports required of publicly held reporting companies. The public may read
and copy any materials the Company files with the SEC at the SEC's Public
Reference Room at 100 F Street, NE,, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains the
reports, proxy and information statements, and other information that the
Company files electronically with the SEC, which is available on the Internet at
www.sec.gov. Further information about the Company and its subsidiaries may be
found at www.brightec.com.
5
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Consolidated Balance Sheet
June 30, 2006 (As Restated)
(Unaudited)
ASSETS
Current assets
Cash $ 108,289
Accounts receivable 6,373
Inventory 92,645
Prepaid expenses 9,517
Deferred financing expenses 97,611
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TOTAL CURRENT ASSETS 314,435
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Office and photographic equipment 23,511
Less: accumulated depreciation (23,511)
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-
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Interest receivable from related party 53,849
Note receivable from related party 250,000
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303,849
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TOTAL ASSETS $ 618,284
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Line of credit $ 350,000
Accounts payable 198,473
Accrued liabilities 320,672
Advances from related parties 42,372
Liability for shares to be issued 403,000
Warrant liability 273,337
Liability for stock subscriptions received 470,000
Liability to stockholders for shares redeemed 2,580,393
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TOTAL CURRENT LIABILITIES 4,638,247
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Stockholders' deficit
Common stock 100,000
Additional paid-in capital 6,438,110
Accumulated deficit (10,740,045)
Accumulated other comprehensive income 181,972
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TOTAL STOCKHOLDERS' DEFICIT (4,019,963)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 618,284
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The accompanying notes are an integral part of these financial statements.
6
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Consolidated Statements of Operations and
Accumulated Deficit and Comprehensive Income (Loss)
(Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
2006 2005 2006 2005
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(As Restated) (As Restated) (As Restated) (As Restated)
Sales $ 7,012 $ 48,916 $ 10,588 $ 84,358
Cost of sales 3,141 37,312 4,901 71,415
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Gross profit 3,871 11,604 5,687 12,943
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Operating expenses
Research and development 30,832 61,661 53,620 80,255
Selling and marketing 1,885 4,071 4,351 37,523
General and administrative (includes related
party expenses of $0, $20,000, $0 and
$20,000, respectively) 89,193 189,153 167,679 301,448
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121,910 254,885 225,650 419,226
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Operating loss (118,039) (243,281) (219,963) (406,283)
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Other income (expense)
Interest income 3,148 3,148 6,261 6,261
Foreign exchange gains 17,656 - 17,656 129
Gain (loss) on value of derivative liabilities 56,373 72,348 235,487 (34,721)
Financing costs - (92,825) - (92,825)
Interest expense (5,404) (2,700) (6,499) (6,080)
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71,773 (20,029) 252,905 (127,236)
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Net income (loss) (46,266) (263,310) 32,942 (533,519)
Accumulated deficit - beginning (10,693,779) (10,269,428) (10,772,987) (9,999,219)
------------- ------------- ------------- -------------
Accumulated deficit - ending $ (10,740,045) $ (10,532,738) $ (10,740,045) $ (10,532,738)
============= ============= ============= =============
Basic and diluted net income per share $ 0.00 $ 0.00 $ 0.00 $ (0.01)
============= ============= ============= =============
Weighted average number of shares used
in computation of basic and diluted
net loss per share 100,000,000 100,000,000 100,000,000 100,000,000
============= ============= ============= =============
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (46,266) $ (263,310) $ 32,942 $ (533,519)
Foreign currency translation gain (loss) (18,225) 1,421 (14,249) (1,366)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ (64,491) $ (261,889) $ 18,693 $ (534,885)
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The accompanying notes are an integral part of these financial statements.
7
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2006 2005
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(As Restated) (As Restated)
Cash flows from operating activities
Net income (loss) $ 32,942 $ (533,519)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Accrued interest on note receivable - related party (3,518) (6,037)
Amortization of deferred financing expense 8,874 -
(Gain) loss on value of derivative liabilities (235,487) 34,721
Financing costs 92,825
General and administrative expense associated with stock based
transactions - 30,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,190) -
Inventory (34,540) (36,290)
Prepaid expenses (1,411) -
Increase (decrease) in:
Accounts payable (35,830) (148,618)
Accrued liabilities 40,353 (6,311)
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Net cash used for operating activities (231,807) (573,229)
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Cash flows from financing activities
Cash received for sale of common stock, exercise of warrants and
stock subscribed 120,000 787,000
Advances from line of credit 350,000 -
Advances received from related parties 95,600 -
Repayment of advances from related parties (176,200) (166,974)
Payment of deferred finance costs (37,500) -
Principal payments on note payable - related party - (2,593)
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Net cash provided by financing activities 351,900 617,433
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Effects of changes in foreign exchange rates (14,249) (1,366)
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Net increase in cash and cash equivalents 105,844 42,838
Cash - beginning 2,445 4,310
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Cash - ending $ 108,289 $ 47,148
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Supplemental disclosures of cash flows information
Cash paid during the period for interest $ - $ 10,468
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Issuance of stock to settle accounts payable $ - $ 20,000
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Schedule of non-cash activities
Issuance of warrants in connection with line of credit $ 68,985 $ -
============= =============
Liability to stockholders for shares redeemed $ 26,208 $ 2,443,907
============= =============
Issuance of warrants relating to private placements $ 193,176 $ 537,528
============= =============
Issuance of warrants for financing costs $ - $ 92,825
============= =============
Exercise of warrants classified as liabilities $ (25,450) $ (82,341)
============= =============
The accompanying notes are an integral part of these financial statements.
8
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 1 - OPERATIONS
Advanced Lumitech, Inc. d/b/a Brightec, a Nevada corporation, ("ADLU" or
"Company") develops and markets luminescent films incorporating luminescent or
phosphorescent pigments (the "Luminescent Product"). These pigments absorb and
reemit visible light producing a "glow" which accounts for the common
terminology "glow in the dark." The Company's Luminescent Product has been and
will be sold primarily as a printable luminescent film designed to add
luminescence to existing or new products. The Company uses third parties for
manufacturing, and markets and sells graphic quality printable luminescent films
(the "Luminescent Product"). These films are based on the Company's proprietary
and patented technology, which enables prints to be of photographic quality by
day and luminescent under low light or night conditions. The Company expects
that its Luminescent Product will be available for sale in a number of versions
appropriate for commonly used commercial and personal printing technology,
including offset printing, laser or inkjet printing, plus a variety of "print on
demand" digital technologies. The Company offers its products in sheets and
rolls.
Restatement of June 30, 2006 Interim Consolidated Financial Statements
The Company is amending its Form 10-QSB for the period June 30, 2006, as
previously filed on August 21, 2006.
1. The Company determined that the satisfaction of its obligation under a
subscription for the purchase of the Company's common stock was not properly
recognized. As a result, as of June 30, 2006, the Company reduced its liability
for stock subscriptions received by $25,000 and increased additional paid-in
capital by $25,000. See NOTE 13 - LIABILITY FOR STOCK SUBSCRIPTIONS RECEIVED.
2. The Company determined that the stock redemption agreements between the
Company and certain stockholders were improperly marked-to-market, with the
changes in the fair value improperly reported as gains or losses in fair value
of derivative liabilities on the Company's statement of operations. As a result,
the Company increased its liability to stockholders for shares redeemed by
$1,296,097, increased additional paid-in capital by $214,094 and increased its
accumulated deficit by $1,377,036 to reverse the net gains recognized resulting
from mark-to market adjustments prior to January 1, 2006. For the three- and six
month periods ending June 30, 2006, the Company reversed recognized gains of
$1,271,759 and $133,155, respectively. See NOTE 14 - LIABILITY TO STOCKHOLDERS
FOR SHARES REDEEMED.
3. The Company determined that subscriptions received for the purchase of the
Company's common stock totaling $470,000, were improperly classified as a
component of stockholders' deficit and should have been recognized as a
liability. See NOTE 12 - LIABILITY FOR STOCK SUBSCRIPTIONS RECEIVED.
The effect of these restatements was to decrease net income by $1,271,759 ($0.01
per share) and $133,155 (less than $0.01 per share) for the three- and six month
periods ended June 30, 2006) respectively. As of June 30, 2006, current
liabilities were increased by $1,271,097 and stockholders' deficit was increased
by $1,271,097.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements at June 30, 2006
and for the three- and six month periods ended June 30, 2006 and 2005 include
the accounts of the Company and its wholly-owned subsidiary (Brightec S.A.). All
inter-company transactions and balances have been eliminated in consolidation.
In our opinion, these unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements
included in our Annual Reports on Form 10-KSB and 10-KSB/A for the year ended
December 31, 2005, and include all adjustments, necessary to make the financial
statements not misleading. Certain footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in
accordance with rules of the Securities and Exchange Commission for interim
reporting. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in our Annual
Reports on Form 10-KSB and 10-KSB/A for the year ended December 31, 2005.
9
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 3 - LIQUIDITY, MANAGEMENT PLANS AND GOING CONCERN
The Company has a working capital deficit of $4,323,812 and an accumulated
deficit of $10,740,045 at June 30, 2006, and recurring net losses since
inception. The ability of the Company to continue to operate as a going concern
is primarily dependent upon the ability of the Company to raise the necessary
financing, to effectively produce and market Brightec products at competitive
prices, to establish profitable operations and to generate positive operating
cash flows. If the Company fails to raise funds, or the Company is unable to
generate operating profits and positive cash flows, there are no assurances that
the Company will be able to continue as a going concern and it may be unable to
recover the carrying value of its assets. Management believes that it will
continue to be successful in raising the necessary financing to fund the
Company's operations through the 2006 calendar year; however, there can be no
assurances that such financing can be obtained.
NOTE 4 - DERIVATIVE INSTRUMENTS
In connection with the issuances of equity instruments or debt, the Company may
issue options or warrants to purchase common stock. In certain circumstances,
these options or warrants may be classified as liabilities, rather than as
equity. In addition, the equity instrument or debt may contain embedded
derivative instruments, such as conversion options or listing requirements,
which in certain circumstances may be required to be bifurcated from the
associated host instrument and accounted for separately as a derivative
liability instrument. The Company accounts for derivative liability instruments
under the provision of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities".
NOTE 5 - EARNINGS PER SHARE
The Company computes earnings or loss per share in accordance with SFAS No. 128,
Earnings per Share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if securities or other agreements to issue common stock were
exercised or converted into common stock, only in the periods in which the
effect is dilutive. The following securities have been excluded from the
calculation of net income per share, as their issuance prices were in excess of
the average market price for the period:
2006 2005
------------ ------------
Warrants (weighted average) 4,888,193 1,253,039
============ ============
Convertible line of credit (weighted average) 260,417 -
============ ============
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
value and consist of the following at June 30, 2006:
Raw materials $ 55,488
Work in process 30,812
Finished goods 6,345
------------
$ 92,645
============
NOTE 7 - DEFERRED FINANCING EXPENSES
In connection with the Loan and Security Agreement (the "Loan and Security
Agreement") entered into on June 8, 2006 between the Company and Ross/Fialkow
Capital Partners, LLC, Trustee of Brightec Capital Trust ("Ross/Fialkow") (see
NOTE 10 - LINE OF CREDIT), the Company agreed to pay a commitment fee of $37,500
to Ross/Fialkow and issued a warrant to Ross/Fialkow to purchase 1,500,000
shares of common stock at an exercise price of $0.12 per share. The warrant was
valued at $68,985 using the Black/Scholes method of valuing options and
warrants. These amounts are being amortized over the term of the Agreement
(twelve months). As of June 30, 2006, the balance of deferred financing expense
consisted of the following:
10
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 7 - DEFERRED FINANCING EXPENSES - continued
Commitment fee $ 37,500
Value of warrants issued 68,985
Less: accumulated amortization (8,874)
------------
$ 97,611
============
NOTE 8 - INCOME TAXES
The Company has not calculated the tax benefits of its net operating losses as
of June 30, 2006 and December 31, 2005 since it does not have the required
information. The Company has not filed its federal and state corporate tax
returns for years ended December 31, 2005, 2004, 2003, 2002 and 2000. The tax
return filed for 2001 will need to be amended if permitted by statute. Due to
the uncertainty over the Company's ability to utilize these operating losses,
any deferred tax assets, when determined, would be fully offset by a valuation
allowance.
NOTE 9 - RELATED PARTY TRANSACTIONS
As of June 30, 2006, a ten-year note of $250,000 was receivable from the
Company's president, who is also a director and stockholder. The note, due no
later than December 31, 2011, bears interest at a fixed rate of 5.05% and is
full-recourse. Interest on the note is accrued quarterly and due annually. No
interest payments on such note have been received to date. The Company
recognized interest income of $3,148 for each of the three month periods ended
June 30, 2006 and 2005 and $6,261 for each of the six month periods ended June
30, 2006 and 2005.
At December 31, 2005, the Company owed the president $114,472 in connection with
advances made by him to the Company during 2005 and in prior years. During the
six month period ended June 30, 2006, he made advances to the Company of $11,900
and was repaid $84,000 of the outstanding advances due. All such advances bear
interest at the Internal Revenue Service short term "Applicable Federal Rate"
(4.88% at June 30, 2006) calculated and accrued monthly. For the three month
periods ended June 30, 2006 and 2005, the Company incurred $932 and $2,700,
respectively, of interest expense on the outstanding advances. For the six month
periods ended June 30, 2006 and 2005, the Company incurred $2,027 and $6,080,
respectively, of interest expense on the outstanding advances.
The Company offsets the amount of interest expense recognized on outstanding
cash advances due against the amount of interest income recognized on the
outstanding note receivable. As of June 30, 2006, net interest receivable from
the Company's president was $53,849.
In addition to the amounts described above, certain stockholders and related
parties made unsecured, non-interest bearing cash advances to the Company,
without specific repayment terms. As of December 31, 2005, one stockholder made
a cash advance of $8,500. During the six month period ended June 30, 2006, other
stockholders and related parties made cash advances of $83,700. As of June 30,
2006, the entire amount of outstanding cash advances due to these shareholders
and related parties was paid in full.
In 2005, the Company paid consulting fees to its major stockholder who is also a
director of the Company. Fees totaled $20,000 for each of the three month and
six month periods ended June 30, 2005.
NOTE 10 - LINE OF CREDIT
On June 8, 2006, the Company entered into the Loan and Security Agreement with
Ross/Fialkow, in the amount of $750,000. The significant terms of the agreement
are as follows:
1. Convertible note: Principal amount of $750,000
2. Due date: June 8, 2007, subject to acceleration upon an Event of Default
(as defined in the Loan Agreement) at the discretion of Ross/Fialkow.
3. Interest rate: 20% per year.
11
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 10 - LINE OF CREDIT - continued
4. Interest payments dates: Due monthly commencing July 8, 2006.
5. Commitment fee paid to Ross: $37,500.
6. Conversion right: The principal amount of the loan plus accrued but unpaid
interest, if any, is convertible at any time prior to payment, at the
election of Ross/Fialkow, into the Company's common stock at the rate of
$0.12 per share. If the full principal amount of the loan were advanced and
converted, the number of shares of common stock to be issued upon conversion
would be 6,250,000 (such shares, the "Conversion Shares"). The Conversion
Shares carry piggy-back registration rights.
7. Warrant: A common stock purchase warrant (the "Warrant") has been issued to
Ross/Fialkow to purchase up to 1,500,000 shares (the "Warrant Shares") of
the Company's common stock at an exercise price of $0.12 per share, expiring
on May 31, 2009. The Warrant Shares carry piggy-back registration rights.
8. Collateral and other security: All assets of the Company have been pledged,
including the assets of the Company's wholly owned subsidiary, Brightec
S.A., a Swiss corporation (the "Subsidiary"), and a pledge of the capital
stock of the Subsidiary; the Subsidiary has fully guaranteed the payment and
performance of the Agreement, the Convertible Note and the Warrant.
9. Representations and covenants: The Pledge and Security Agreement contains
customary representations of the Company as borrower, including a
prohibition on the payment of dividends or other distributions on the
Company's common stock.
10. Events of Default: The Pledge and Security Agreement and the Convertible
Note contain customary Events of Default which, if not waived by
Ross/Fialkow, would entitle Ross/Fialkow to accelerate the due date of the
Note. The Events of Default include, among other things, a change in the
condition or affairs (financial or otherwise) of the Company which in the
reasonable opinion of Ross/Fialkow, materially impairs Ross/Fialkow's
security or materially increases Ross/Fialkow's risk.
As of June 30, 2006, the outstanding balance of the line of credit was $350,000.
NOTE 11 - LIABILITY FOR SHARES TO BE ISSUED
Liability for shares to be issued represents commitments to issue shares of
common stock in exchange for services provided or the settlement of debt. Such
shares remain unissued at June 30, 2006. As of March 31, 2006, 2,890,000 shares
with an aggregate value of $403,000 were committed but unissued.
During the quarter ended June 30, 2006, the Company did not enter into any
agreement to issue shares of its common stock in exchange for services or the
settlement of debt.
Accordingly, as of June 30, 2006, 2,890,000 shares of common stock with an
aggregate value of $403,000 remained committed but unissued.
NOTE 12 - WARRANT LIABILITY
On June 8, 2006, in connection with the Loan and Security Agreement (see NOTE
10 - LINE OF CREDIT) the Company issued to Ross/Fialkow a warrant to purchase
1,500,000 shares of common stock at a price of $0.12 per share. The warrant
expires on May 31, 2009. There were no warrants exercised during the quarter
ended June 30, 2006.
The Company evaluated the warrants to determine if they gave rise to an embedded
derivative that would need to be accounted for separately under SFAS No. 133 and
Emerging Issues Task Force (EITF) 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The
Company determined that, as it did not have sufficient authorized and unissued
shares of common stock available to settle the warrants, such warrants should be
recorded as a liability. From the date of each issuance, the Company values the
warrants at fair value, at the end of each reporting period, using the
Black/Scholes valuation method, with changes in the fair value recorded as
charges or credits to gain or loss on value of derivative liabilities in the
period in which the change occurred. The fair value of the warrants at June 30,
2006 was $273,337. For the three- and six month periods ended June 30, 2006 and
2005, the Company recognized income (loss) from the change in the fair value of
the derivative liabilities of $56,373, $72,348, $235,487 and ($34,721),
respectively.
12
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 12 - WARRANT LIABILITY - continued
The fair value of the warrants was estimated at the date of grant using the
Black/Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.74% to 4.92%; no dividend yield; an expected life of the
options of 25 months to 35 months; and a volatility factor of 88.10% to 307.10%.
NOTE 13 - LIABILITY FOR STOCK SUBSCRIPTIONS RECEIVED
Liability for stock subscribed represents amounts received for equity
investments for which shares of common stock remain unissued at June 30, 2006.
As of March 31, 2006, 4,126,668 shares with an aggregate purchase price of
$470,000 were subscribed but unissued.
On May 12, 2006, the Company received $25,000 for the purchase of 208,334 shares
of common stock. On the same date, as a result of a certain stock redemption
from a certain stockholder and former director, the Company issued all of these
shares.
As a result of the aforementioned transactions, 4,126,668 shares with an
aggregate purchase price of $470,000 remained subscribed and unissued as of June
30, 2006.
NOTE 14 - LIABILITY TO STOCKHOLDERS FOR SHARES REDEEMED
In December 2004 and at various times during 2005, the Company's president and
other stockholders agreed to allow the Company to redeem shares of their
respective common stock in order to allow the Company to fulfill its obligations
to certain consultants and investors. This was as a result of the Company having
already issued all of its shares of authorized common stock. The agreement
states that the Company will reissue to its president and the other stockholders
the same number of shares redeemed as soon as is reasonably practical and that
the president and other stockholders will receive no additional compensation
beyond the re-issuance of the number of shares of common stock redeemed.
As of March 31, 2006, the Company had redeemed 17,123,933 shares with an
aggregate value of $2,567,893, which is the liability's carrying value at that
date. During the quarter ended June 30, 2006, the Company redeemed an additional
208,334 shares of its common stock from a stockholder and former director to be
reissued to a certain investor in satisfaction of a stock subscription received
on May 12, 2006. The value of the additional shares redeemed, on the redemption
date, was $12,500 which will be added to the liability's carrying value.
As a result of the aforementioned redemption, 17,332,267 shares of common stock
with an aggregate carrying value of $2,580,393 had been redeemed and remained
unissued. If and when authorized shares are sufficient to reissue the shares,
the amount will be reclassified to additional paid-in capital.
NOTE 15 - CAPITAL STOCK
NUMBER OF SHARES OF COMMON STOCK AUTHORIZED, ISSUED AND OUTSTANDING
Under the Company's charter, 100,000,000 shares of $0.001 par value common stock
are authorized. As of June 30, 2006, 100,000,000 shares of Common Stock were
issued and outstanding.
On August 18, 2006, at a special meeting of the Company's stockholders, the
stockholders approved the increase in the Company's authorized common stock from
100 million shares to 245 million shares.
As of June 30, 2006, the Company was committed to re-issuing 17,332,267 shares
of common stock to various shareholders in satisfaction of various redemption
agreements.
The Company had entered into agreements with various vendors to issue shares of
common stock in satisfaction of amounts payable for services rendered to the
Company during 2005 and in prior years. In addition, there are stock
subscriptions representing equity investments for which shares of common stock
have not been issued (see below). The total number of shares to be issued as of
June 30, 2006 was 7,225,002 shares.
13
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 15 - CAPITAL STOCK - continued
NUMBER OF SHARES OF COMMON STOCK AUTHORIZED, ISSUED AND OUTSTANDING - continued
In total, as of June 30, 2006, the Company was committed to issue an additional
24,557,269 shares of common stock.
ISSUANCES OF COMMON STOCK
On January 27, 2006, a stockholder partially exercised warrants to purchase
195,834 shares of the Company's common stock at an exercise price of $0.12 per
share, for an aggregate exercise price of $23,500.
On May 12, 2006, an investor subscribed for the purchase of 208,334 shares of
the Company's common stock at a purchase price of $0.12 per share, for an
aggregate purchase price of $25,000. These shares were issued on May 12, 2006.
NOTE 16 - STOCK OPTIONS
ACCOUNTING FOR STOCK OPTIONS
In the second quarter of 2005, the Company's Board of Directors granted options
to employees and/or directors to purchase 20,000,000 shares of common stock at
an exercise price of $0.12 per share, to be fully vested as of April 28, 2005
and exercisable for a period of ten years. However, these options cannot be
exercised because the number of potential common shares to be issued upon
exercise of the options exceeds the number of shares authorized under the
Company's charter. Any increase to the number of shares of common stock the
Company is authorized to issue requires the approval of the stockholders, which
has not yet occurred. Awards made that are subject to stockholder approval are
not deemed to be granted for accounting purposes until that approval is
obtained. Accordingly, any obligation related to these options has not yet been
estimated for disclosure in accordance with the Company's accounting policies.
Effective January 1, 2006, the Company adopted SFAS Statement No. 123(R), "Share
Based Payment" ("SFAS 123(R)"), utilizing the "modified prospective" method as
described in SFAS 123(R). In the "modified prospective" method, compensation
cost is recognized for all share-based payments granted after the effective date
and for all unvested awards granted prior to the effective date. In accordance
with SFAS 123(R), prior period amounts were not restated. SFAS 123(R) also
requires the tax benefits associated with these share-based payments to be
classified as financing activities in the Statement of Cash Flows, rather than
operating cash flows as required under previous regulations. There was no effect
to the Company's financial position or results of operations as a result of the
adoption of this Standard.
Prior to the effective date, the Company accounted for stock-based employee
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations.
There were no stock options granted to employees of the Company during the six
months ended June 30, 2006.
Stock options and warrants granted to non-employees are recorded at their fair
value, as determined in accordance with SFAS 123(R) and Emerging Issues Task
Force Consensus No. 96-18 and recognized over the related service period.
NOTE 17 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") Statement No. 154, "Accounting Changes
and Error Corrections", replacing APB Opinion No. 20, "Accounting Changes" and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements" (SFAS 154). SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. SFAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of SFAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the Company's financial
position or results of operations.
14
ADVANCED LUMITECH, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
For the Six Months Ended June 30, 2006 (As Restated)
NOTE 17 - RECENT ACCOUNTING PRONOUNCEMENTS - continued
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" (SFAS 155), which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" (SFAS 140). SFAS 155 amends SFAS 133 to narrow the scope
exception for interest-only and principal-only strips on debt instruments to
include only such strips representing rights to receive a specified portion of
the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140
to allow qualifying special-purpose entities to hold a passive derivative
financial instrument pertaining to beneficial interests that, in itself, is a
derivative instrument. The adoption of the provisions of SFAS 155 is not
expected to have a material impact on the Company's financial position or
results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48) an interpretation of SFAS No. 109,
Accounting for Income Taxes, which clarifies the accounting for uncertainty in
income taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on de-recognition of a previously recognized tax position,
classification, interest and penalties, accounting in interim periods and
disclosures. The provisions of FIN 48 are effective beginning January 1, 2007
with the cumulative effect of the change in accounting principle recorded as an
adjustment to the opening balance of retained earnings. The Company will assess
the potential impact the adoption of this Interpretation may have on its
financial position or results of operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Amended Quarterly Report
on Form 10-QSB/A and our Annual Reports on Forms 10-KSB and 10-KSB/A for the
year ended December 31, 2005. This Quarterly Report on Form 10-QSB/A contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections about the Company and our industry. These
forward-looking statements are usually accompanied by words such as "believes",
"anticipates", "plans", "expects" and similar expressions. Forward-looking
statements involve risks and uncertainties and our actual results may differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors.
CRITICAL ACCOUNTING POLICIES
Certain of the Company's accounting policies are particularly important to the
portrayal and understanding of its financial position and results of operations
and require the application of significant judgment by management. As a result,
these policies are subject to an inherent degree of uncertainty. In applying
these policies, the Company uses its judgment in making certain assumptions and
estimates. The Company's critical accounting policies, which include revenue
recognition, account receivable reserves and inventories, are described in the
Amended Annual Report on Form 10-KSB/A for the year ended December 31, 2005.
Except as described in NOTE 1 - OPERATIONS - Restatement of June 30, 2006
Interim Consolidated Financial Statements, there have been no material changes
to the Company's critical accounting policies as of and for the six months ended
June 30, 2006.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2006 COMPARED WITH THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 2005
REVENUES
The Company's revenue, net of returns, allowances and discounts, for the three-
and six month periods ended June 30, 2006, was $7,012 and $10,588, respectively,
compared to $48,916 and $84,358, respectively for the comparable three and six
month periods of 2005. This decrease in revenue is primarily due to the fact
that in the comparable periods of 2005, the Company made commercial sales of the
Company's Luminescent Product, which was sold to a major poster board and inkjet
paper marketer that introduced a "Glow-in-the-Dark Sign Kit" that includes two
sheets of Brightec's glow-in-the dark paper in an 11"x14" poster board format
and two "Inkjet Glow in the Dark Photo Quality Paper Packs" one including five
sheets of Brightec glow-in-dark paper in an 4"x6" format and the second
including three sheets of Brightec glow-in-dark paper in an 8.5"x11" format.
The Company was unable to make additional sales of its product because it had
not achieved sufficient cost reductions to make the Luminescent Product
commercially viable and realize the margins that the Company sought to realize.
The cost to produce the Luminescent Product was at a level that drove the retail
price point higher and did not allow the Company to introduce its product in the
retail market at a price which retail customers were willing to pay. The Company
is attempting to reduce its production costs in order to compete favorably in
the marketplace.
GROSS PROFIT
The Company's gross profit was $3,871 (55.21%) and $5,687 (53.71%) for the
three- and six month periods ended June 30, 2006, respectively, compared to a
gross profit percentage of $11,604 (23.72%) and $12,943 (15.34%) for the
comparable three- and six month periods in fiscal 2005. The increase in the
gross profit percentage was primarily due to continued improvement in the
manufacturing cost of the Company's products for the three- and six month
periods ended June 30, 2006. In order to continue to increase its gross profit
percentage and compete favorably in the marketplace, the Company will need to
continue lower its manufacturing costs.
In addition, during the comparable period of 2005, the Company was required to
reduce its sales price to the marketer to which it made the commercial sale, in
order for that marketer to maintain its own profit margins. Sales occurring
during the three- and six month periods ended June 30, 2006, were made directly
to online customers through the Company's website and to another company for
resale. These sales did not require any reductions in sales price, thereby
resulting in the increased gross profit margin achieved.
16
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased by $22,788 to $30,832 from $53,620,
for the three month periods ended June 30, 2006 and 2005. Research and
development expenses decreased by $18,594 to $61,611 from $80,255, for the six
month periods ended June 30, 2006 and 2005.
The decrease in research and development expenses for the three- and six month
periods ended June 30, 2006 was primarily due to a shift in the Company's focus
from research and development related to developing a commercially viable
product, which was achieved by the end of the first quarter of 2006, to selling
and marketing that commercially viable product, beginning by the end of the
second quarter of 2006.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased $2,466 to $1,885 from $4,351, for the
three month periods ended June 30, 2006 and 2005. Selling and marketing expenses
decreased $33,452 from $37,523 to $4,071, for the six month periods ended June
30, 2006 and 2005.
The decrease in selling and marketing expenses was primarily due to a decrease
in professional fees and consulting services, which consisted primarily of
terminating the services of a marketing consultant, a marketing and corporate
branding consultant and a public relations firm.
Although the Company began concentrating its efforts on selling and marketing
the commercially viable product that it achieved during the first quarter, it
did not start those selling and marketing efforts until late in the second
quarter.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consisted primarily of the compensation of
the executive officer, payroll and related taxes and benefits, rent, as well as
legal, accounting and consulting fees.
General and administrative expenses decreased by $78,486 to $89,193 from
$167,679, for the three month periods ended June 30, 2006 and 2005. General and
administrative expenses decreased by $112,295 from $301,448 to $189,153, for the
six month periods ended June 30, 2006 and 2005.
The decrease in 2006 was primarily due to a decrease in legal and accounting
fees relating to filings with the Securities and Exchange Commission and a
decrease in consulting fees. The decrease in 2006 was offset by increased
payroll costs for current employees who were not employed by the Company during
the comparable periods in 2005.
OTHER INCOME (EXPENSE)
INTEREST INCOME
For each of the three- and six month periods ended June 30, 2006 and 2005,
interest income was $3,148 and $6,261, respectively. Interest income was earned
on the note receivable from a related party.
FOREIGN EXCHANGE GAINS (LOSSES):
The Company pays all of the expenses of its subsidiary, which are comprised of
general and administrative expenses and expenses for research and development.
Expenses of the subsidiary are denominated in Swiss francs, translated into U.S.
dollars and recorded by the Company on the invoice date. Differences between the
amount of U.S dollars required to purchase sufficient Swiss francs to pay the
subsidiary's liabilities on the invoice date, and the required amount of US
dollars to purchase Swiss francs when the subsidiary's liabilities are actually
paid, are recorded as charges or credits to the income statement under the
caption "Foreign exchange gains (losses)." For the three- and six month periods
ended June 30, 2006 and 2005, gains recognized from these differences were
$17,656, $0, $17,656 and $129, respectively.
GAIN (LOSS) ON VALUE OF DERIVATIVE LIABILITIES:
The gain (loss) on value of derivative liabilities of $56,373, $72.348, $235,487
and ($34,721) for the three- and six months ended June 30, 2006 and 2005,
respectively, relates to derivative liabilities of the warrants. Such derivative
liabilities are required to be marked-to-market under generally accepted
accounting principles. See NOTE 12 - WARRANT LIABILITY in the Consolidated
Financial Statements for a further discussion.
17
INTEREST EXPENSE
For the three month period ended June 30, 2006, interest expense, net of
interest income was $5,404 and $2,700, respectively. Interest expense in 2006
included $4,472 relating to borrowings under the Line of Credit and $932 to
related parties. Interest expense in 2005 was solely to related parties. For the
six month periods ended June 30, 2006 and 2005, interest expense was $6,499 and
$6,080, respectively. Interest expense in 2006 included $4,472 relating to
borrowings under the Line of Credit and $2,027 to related parties. Interest
expense in 2005 was solely to related parties.
INCOME TAXES
The Company has not calculated the tax benefits of its net operating losses,
since it does not have the required information. Due to the uncertainty over the
Company's ability to utilize these operating losses, any deferred tax assets,
when determined, would be fully offset by a valuation allowance. The Company
currently anticipates beginning the process of preparing all of its outstanding
tax reporting obligations by the end of the third quarter of 2006, with
completion anticipated by the end of the third quarter of 2007.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2006 Since inception, the
Company's operations have not generated sufficient cash flow to satisfy the
Company's capital needs. The Company has financed its operations primarily
through the private sale of shares of its common stock, warrants to purchase
shares of the Company's common stock and debt securities. The Company has
generated, from inception through June 30, 2006, cumulative net cash proceeds
from the sale of its equity of approximately $4.95 million. The Company's net
working capital deficit at June 30, 2006 was $4,323,812.
The Company's authorized capital stock consists of 100,000,000 shares of common
stock, of which, 100,000,000 were issued and outstanding at June 30, 2006. As of
June 30, 2006, the Company had also made commitments to issue an additional
24,557,269 shares of common stock. The number of shares committed excludes
shares of common stock to be issued upon the exercise of outstanding options and
warrants. Amounts received for certain of these additional committed shares,
which were purchased for cash, are reflected on the Company's balance sheet as
"Stock Subscribed." Amounts received for the remaining additional committed
shares, that are to be issued in exchange for consulting services or in exchange
for settlement of obligations owed by the Company, are reflected in the
Company's balance sheet, as "Liability for Shares to be Issued."
In addition, on June 8, 2006, the Company secured a $750,000 Loan and Security
Agreement with Ross/Fialkow. The terms of the of the Loan and Security Agreement
with Ross/Fialkow are as disclosed in Form 8-K filed with the Securities and
Exchange Commission on June 30, 2006 and as disclosed in the financial
statements annexed hereto. A summary of the significant terms of the Agreement
are as follows:
1. A credit line of up to $750,000.
2. Principal and accrued interest are due on May 31, 2007, unless extended by
Ross/Fialkow in writing at its sole discretion.
3. At Ross/Fialkow's option to be exercised in writing prior to May 31, 2007,
all or any portion of the loan as may be outstanding as of the date of such
exercise may be converted at any time into common stock at a purchase price
of $.12 per share.
4. There is a commitment fee of five (5%) percent of the credit line ($37,500).
5. Interest on the outstanding balances will be equal to a per annum rate of
twenty (20%) percent, which shall be payable monthly in arrears on the
eighth day of each month, commencing on June 8, 2006.
6. The Company issued a warrant to purchase up to 1,500,000 shares of common
stock at a price of $0.12 per share.
7. The Company has granted a security interest in substantially all of its
assets.
As of June 30, 2006, the Company borrowed $350,000 under the Agreement.
At various times in 2004 and 2005, the Company's principal stockholder and other
stockholders of the Company agreed to allow the Company to redeem 16,928,099
shares of their common stock for no consideration to allow the Company to
fulfill its commitments to issue shares to consultants and investors of the
Company. On January 27, 2006 and May 12, 2006, a stockholder and former director
of the Company, agreed to allow the Company to redeem an additional 404,168
shares of his common stock in order to allow the Company to fulfill its
obligation under the partial exercise of an outstanding stock warrant by another
stockholder.
18
Cash increased to $108,289 at June 30, 2006 from $2,445 at December 31, 2005.
Net cash used for operating activities for the six months ended June 30, 2006
was $231,807. The primary reason for the decrease was to fund operations for the
period. Without the gain on value of derivative liabilities of $235,487, the
Company would have lost $202,545.
Net cash provided by financing activities for the six months ended June 30, 2006
was $351,900. The net cash provided was the result of borrowings under the
aforementioned Loan and Security Agreement of $350,000, cash received of
$120,000 from the sale and subscription of common stock and the exercise of
warrants and advances made by related parties of $95,600, net of repayment of
advances from related parties of $176,200 and payment of deferred financing
expenses of $37,500.
ABILITY TO CONTINUE AS A GOING CONCERN
At June 30, 2006, the Company has generated minimal revenues from commercial
sales of the Company's products. To date, the Company's operations have
generated accumulated losses of $10,740,045. At June 30, 2006, the Company's
current liabilities exceed its current assets by $4,323,812. The Company's
ability to remedy this condition is uncertain due to the Company's current
financial condition. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Company believes it has
the ability to obtain additional funds from its principal stockholders or
through the issuance of additional debt or equity securities. In June 2006, the
Company entered into a $750,000 Agreement as described above. The Company is
continuing discussions with investors in its effort to obtain additional
financing. However, there can be no assurances that the Company will be able to
raise the funds it requires, or that if such funds are available, that they will
be available on commercially reasonable terms. Our auditors have included a
"going concern" qualification in their auditors' opinion for the year ended
December 31, 2005. Such a "going concern" qualification may make it more
difficult for the Company to raise funds when needed.
The ability of the Company to continue to operate as a going concern is
primarily dependent upon the ability of the Company to generate the necessary
financing to effectively market and produce Brightec products, to establish
profitable operations and to generate positive operating cash flows. If the
Company fails to raise funds or the Company is unable to generate operating
profits and positive cash flows, there are no assurances that the Company will
be able to continue as a going concern and it may be unable to recover the
carrying value of its assets. Management believes that it will be successful in
generating the necessary financing to fund the Company's operations through the
2006 calendar year. Accordingly, management believes that no adjustments or
reclassifications of recorded assets and liabilities are necessary at this time.
CREDIT AVAILABILITY
On June 8, 2006, the Company entered into a $750,000 Loan and Security Agreement
as described above and in the Company's Form 8-K filing on June 30, 2006.
COMMITMENTS
The Company had no material capital expenditure commitments as of June 30, 2006.
EFFECTS OF INFLATION
Management believes that financial results have not been significantly impacted
by inflation and price changes.
19
ITEM 3. CONTROLS AND PROCEDURES
During the last five years, the Company did not have an accounting department,
but instead relied on outside bookkeeping services to record financial activity
and consultants to assist in the preparation of its financial statements. Upon
the completion of the audit of the December 31, 2005 financial statements, the
Company received a letter from its independent registered public accounting firm
indicating that the Company has material weaknesses with respect to (1)
accurately recording day-to-day transactions, (2) the lack of segregation of
duties, (3) the approval of significant transactions in a timely manner by the
Company's Board of Directors and (4) the preparation of its financial
statements, in an accurate and timely fashion. The Company's management agrees
with the assessment of the Company's independent registered public accounting
firm and is developing a plan to address these material weaknesses.
As of June 30, 2006, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer, Chief Financial Officer and Treasurer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities and
Exchange of 1934, as amended.
During the calendar years ended December 31, 2004 and 2005, as well as during
the six months ended June 30, 2006, the Company had insufficient numbers of
internal personnel possessing the appropriate knowledge, experience and training
in applying accounting principles generally accepted in the United States and
reporting financial information in accordance with the requirements of the SEC.
The evaluation found insufficient controls over dissemination of information
regarding non-routine and complex transactions, which resulted in incorrect
treatment and lack of proper analysis of such transactions by accounting staff.
This weakness resulted in material adjustments proposed by our independent
registered accountants with respect to our financial statements for our calendar
years ended December 31, 2004 and 2005. As a result, the figures for the three
and six months ended March 31, 2006, which are presented in this document,
required restatement from their previous filing. Management believes this issue
to be material and therefore, deemed the design and operation of internal
control in place at December 31, 2004 and 2005 and for the three- and six months
periods ended June 30, 2006, to be ineffective.
In late 2005, the Company hired a CPA to oversee the accounting department and
coordinate the efforts of analysis and dissemination. These efforts include
design changes and related monitoring of the internal control system. While
there has been a tremendous improvement in the internal control system in the
first six months of 2006, the system is still undergoing change in order to
satisfy the requirements of appropriate internal controls. It is management's
intention to address accounting issues on a timely basis, and prevent
misstatement based on errors and/or lack of understanding.
The Company's management and board of directors are fully committed to the
review and evaluation of the procedures and policies designed to assure
effective internal control over financial reporting. It is management's opinion
that this new addition to the internal accounting staff will assist in the
establishment of an effective design and operation of the internal control
system and therefore, improve the quality of future period financial reporting.
20
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
The following equity transactions occurred during the period April 1, 2006 to
June 30, 2006 and were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
On May 12, 2006, the Company received and issued shares for a stock subscription
received from an investor to purchase 208,334 shares of the Company's common
stock for an aggregate purchase price of $25,000.
On June 8, 2006, the Company entered into the $750,000 Loan and Security
Agreement with Ross/Fialkow. At the election of Ross/Fialkow, the principal
amount of the loan plus accrued but unpaid interest, if any, is convertible at
any time prior to payment into the Company's common stock at the rate of $0.12
per share. If the full principal amount of the loan were converted, the number
of shares of common stock to be issued upon conversion would be 6,250,000 (the
"Conversion Shares"). The Conversion Shares carry piggy-back registration
rights.
In connection with the Loan and Security Agreement, the Company issued to
Ross/Fialkow a warrant to purchase up to 1,500,000 shares (the "Warrant Shares")
of the Company's common stock at an exercise price of $0.12 per share, expiring
May 31, 2009. The Warrant Shares carry piggy-back registration rights. The
Warrant's fair market value on the date of issuance, using the Black/Scholes
method of valuing options and warrants, was $68,975. The value of the Warrant
was recorded as a deferred financing expense and an increase to additional
paid-in capital on the Company's balance sheet. The value of the Warrant is
being amortized over the term of the related Loan and Security Agreement (12
months).
All shares of common stock issued by the Company were issued without
registration pursuant to the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended. All purchasers of shares of the
Company's common stock who purchased such shares of common stock for cash
represented that they were acquiring the securities for investment and for their
own account. All purchasers of the Company's common stock who are United States
residents and purchased such securities for cash also represented to the Company
that they were accredited investors as of the date of such investment. A legend
was placed on the stock certificates representing all securities purchased
stating that the securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration or
an exemption there from.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
21
ITEM 6. EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------
31 Certification of Patrick Planche, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
32 Certification of Patrick Planche, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
22
SIGNATURES
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.
ADVANCED LUMITECH, INC.
Date: May 7, 2007 By: /s/ Patrick Planche
-------------------------------------
Patrick Planche
President and Chief Executive Officer
23
EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------
31 Certification of Chief Executive and Financial Officer Pursuant to 18
U.S.C Section 1850, As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith) E-1
32 Certification of Chief Executive and Financial Officer Pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1850, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed
herewith) E-2
24