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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 September 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
BRIGHTEC, INC.
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(Name of small business issuer in its charter)
Nevada 87-0438637
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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)
Advanced Lumitech, Inc.
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(Former name if changed from last report)
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, $0.001 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, $0.001 par value, issued and
outstanding as of November 17, 2006.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
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STATEMENT REGARDING THIS AMENDMENT
The Company is amending its Form 10-QSB for the period September 30, 2006, as
previously filed on November 20, 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 September 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 $1,296,098, increased additional paid-in capital by $55,745 and
increased accumulated deficit by $1,326,842 to reverse the net gains
recognized resulting from mark-to market adjustments prior to January 1,
2006. For the three- and nine month periods ending September 30, 2006, the
Company reversed recognized gains of $0 and $133,155, respectively.
The effect of these restatements was to decrease net income by $0 (less than
$0.01 per share) and $133,155 (less than $0.01 per share) for the three- and
nine month periods ended September 30, 2006, respectively. As of September 30,
2006, current liabilities were also increased by $1,296,098 and stockholders'
deficit was increased by $1,296,098.
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 November 20, 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, March 31, 2006 and June 30, 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
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Statement Regarding Amendment 2
Restatement of September 30, 2006 Consolidated Financial Statements 4
Note Regarding Forward Looking Statements 4 - 5
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 2006 - Unaudited 6
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three and Nine Months Ended September 30, 2006 and 2005 -
Unaudited 7
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2006 and 2005 - Unaudited 8
Notes to Condensed Consolidated Financial Statements - Unaudited 9 - 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17 - 21
Item 3. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23 - 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
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 SEPTEMBER 30, 2006 CONSOLIDATED FINANCIAL STATEMENTS
The Company is amending its Form 10-QSB for the period September 30, 2006, as
previously filed on November 20, 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 September 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 original carrying values of certain 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 $1,296,098, increased
additional paid-in capital by $55,745 and increased accumulated deficit by
$1,326,842 to reverse the net gains recognized resulting from prior period
mark-to market adjustments. For the three- and nine month periods ending
September 30, 2006, the Company reversed recognized gains of $0 and
$133,155, respectively.
The effect of these restatements was to decrease net income by $0 (less than
$0.01 per share) and $133,155 (less than $0.01 per share) for the three- and
nine month periods ended September 30, 2006, respectively. As of September 30,
2006, current liabilities were also increased by $1,296,098 and stockholders'
deficit was increased by $1,296,098.
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 November 20, 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, March 31, 2006 and June 30, 2006,
as well as our Amended Annual Reports on Form 10-KSB/A for the years ended
December 31, 2004 and December 31, 2005.
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 1934, 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
4
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. Any forward-looking statements should be
considered in light of those factors.
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
BRIGHTEC, INC. AND SUBSIDIARY
Consolidated Balance Sheet
September 30, 2006 (As Restated)
(Unaudited)
ASSETS
Current assets
Cash $ 28,207
Inventory 109,204
Prepaid expenses 6,968
Deferred financing expense 70,990
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TOTAL CURRENT ASSETS 215,369
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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 57,381
Note receivable from related party 250,000
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307,381
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TOTAL ASSETS $ 522,750
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Line of credit $ 550,000
Accounts payable 202,444
Accrued liabilities 348,895
Advances from related party 14,372
Liability for shares to be issued 403,000
Liability to stockholders for shares redeemed 2,580,393
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TOTAL CURRENT LIABILITIES 4,099,104
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Stockholders' deficit
Preferred stock --
Common stock 100,000
Additional paid-in capital 8,473,991
Stock subscribed 470,000
Accumulated deficit (12,811,711)
Accumulated other comprehensive income 191,366
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(3,576,354)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 522,750
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The accompanying notes are an integral part of these financial statements.
6
BRIGHTEC, INC. AND SUBSIDIARY
Consolidated Statements of Operations and Accumulated Deficit
and Comprehensive Income(Loss)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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2006 2005 2006 2005
-------------- -------------- -------------- --------------
(As Restated) (As Restated) (As Restated) (As Restated)
Sales $ 294 $ 38,951 $ 10,882 $ 123,309
Cost of sales 118 25,193 5,019 96,608
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Gross profit 176 13,758 5,863 26,701
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Operating expenses
Research and development 25,729 67,681 79,349 147,936
Selling and marketing 22,490 7,334 26,841 44,857
General and administrative (includes
related party expenses of $0, $0, $0
and $20,000) 240,718 55,275 408,397 356,723
Stock based employee compensation 1,600,000 -- 1,600,000 --
-------------- -------------- -------------- --------------
1,888,937 130,290 2,114,587 549,516
-------------- -------------- -------------- --------------
Operating loss (1,888,761) (116,532) (2,108,724) (522,815)
-------------- -------------- -------------- --------------
Other income (expense)
Interest income - related party 3,182 3,182 9,443 9,443
Foreign exchange gain (loss) -- (258) 17,656 (129)
Financing costs -- -- -- (92,825)
Gain (loss) on value of derivative
liabilities (162,545) 110,290 72,942 75,569
Interest expense (including related party
interest of $375, $1,015, $7,095 and
$7,095) (23,542) (1,015) (30,041) (7,095)
-------------- -------------- -------------- --------------
(182,905) 112,199 70,000 (15,037)
-------------- -------------- -------------- --------------
Net loss (2,071,666) (4,333) (2,038,724) (537,852)
Accumulated deficit - beginning (10,740,045) (10,532,738) (10,772,987) (9,999,219)
-------------- -------------- -------------- --------------
Accumulated deficit - ending $ (12,811,711) $ (10,537,071) $ (12,811,711) $ (10,537,071)
============== ============== ============== ==============
Basic and diluted net loss per share $ (0.02) $ -- $ (0.02) $ (0.01)
============== ============== ============== ==============
Weighted average number of shares used
in computation of basic and diluted net
diluted net loss per share 100,000,000 100,000,000 100,000,000 100,000,000
============== ============== ============== ==============
COMPREHENSIVE INCOME (LOSS)
Net loss $ (2,071,666) $ (4,333) $ (2,038,724) $ (537,852)
Foreign currency translation gain (loss) 9,394 8,274 (4,855) 6,908
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ (2,062,272) $ 3,941 $ (2,043,579) $ (530,944)
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
7
BRIGHTEC, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2006 2005
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(As Restated) (As Restated)
Cash flows from operating activities
Net loss $ (2,038,724) $ (537,852)
Adjustments to reconcile net loss to net cash used for
operating activities:
Accrued interest on note receivable - related party (7,050) (8,732)
Foreign exchange gain -- (7,721)
Gain on value of derivative liabilities (72,942) (75,569)
Financing costs -- 92,825
Amortization of deferred financing costs 35,495 --
Stock based compensation 1,600,000 --
General and administrative expense associated with
stock based transactions -- 65,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 3,183 (30,767)
Inventory (51,099) (25,793)
Prepaid expenses 1,138 (987)
Increase (decrease) in:
Accounts payable (31,859) (108,705)
Accrued liabilities 68,575 (79,228)
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Net cash used for operating activities (493,283) (717,529)
-------------- --------------
Cash flows from financing activities
Principal payments on long-term debt -- (3,430)
Principal payments on note payable - related party -- (100,000)
Advances received from related parties 130,600 --
Repayment of advances from related parties (239,200) (93,755)
Advances from line of credit 550,000 --
Payment of deferred financing expense (37,500) --
Cash received for sale of exercise of warrants and
stock subscribed 120,000 917,000
-------------- --------------
Net cash provided by financing activities 523,900 719,815
-------------- --------------
Effects of changes in foreign exchange rates (4,855) 6,908
-------------- --------------
Net increase in cash and cash equivalents 25,762 9,194
Cash - beginning 2,445 4,310
-------------- --------------
Cash - ending $ 28,207 $ 13,504
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Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 20,874 $ 13,611
============== ==============
Schedule of non-cash activities
Issuance of stock to settle accounts payable $ -- $ 60,000
============== ==============
Liability to stockholders for shares redeemed and cancelled $ 26,208 $ 2,534,234
============== ==============
Issuance of warrants relating to private placements $ 193,176 $ 550,166
============== ==============
Issuance of warrants for financing costs $ -- $ 92,825
============== ==============
Exercise of warrants classified as liabilities $ (5,472) $ (158,129)
============== ==============
Issuance of warrants in connection with line of credit $ 68,985 $ --
============== ==============
The accompanying notes are an integral part of these financial statements.
8
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - OPERATIONS
Brightec, Inc. ("BRTE" 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. 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.
On September 25, 2006, at a special meeting of the Company's stockholders, the
stockholders approved changing the name of the Company from Advanced Lumitech,
Inc., to Brightec, Inc. In addition, effective November 13, 2006, the Company's
stock trading symbol changed from "ADLU" to "BRTE."
Restatement of September 30, 2006 Interim Consolidated Financial Statements
The Company is amending its Form 10-QSB for the period September 30, 2006, as
previously filed on November 20, 2006.
1. The Company determined that the satisfaction its obligation under a
subscription for the purchase of the Company's common stock was not
properly recognized. As a result, as of September 30, 2006, the Company
reduced its stock subscriptions received by $25,000 and increased
additional paid-in capital by $25,000. See NOTE 14 - CAPITAL STOCK - STOCK
SUBSCRIBED.
2. The Company determined that original carrying values of certain 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 $1,296,098, increased
additional paid-in capital by $55,745 and increased accumulated deficit by
$1,326,842 to reverse the net gains recognized resulting from prior period
mark-to market adjustments. For the three- and nine month periods ending
September 30, 2006, the Company reversed recognized gains of $0 and
$133,155, respectively. See NOTE 13 - LIABILITY TO STOCKHOLDERS FOR SHARES
REDEEMED.
The effect of these restatements was to decrease net income by $0 (less than
$0.01 per share) and $133,155 (less than $0.01 per share) for the three- and
nine month periods ended September 30, 2006, respectively. As of September 30,
2006, current liabilities were also increased by $1,296,098 and stockholders'
deficit was increased by $1,296,098.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements at September 30,
2006 and for the three and nine month periods ended September 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 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 Form 10-KSB/A for the year ended December 31,
2005.
9
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 3 - LIQUIDITY, MANAGEMENT PLANS AND GOING CONCERN
The Company has a working capital deficit of $3,883,735 and an accumulated
deficit of $12,811,711 at September 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. Accordingly, management believes
that no adjustments or reclassifications of recorded assets and liabilities are
necessary at this time.
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 effect would be anti-dilutive or
their issuance prices were in excess of the average market price for the period:
September 30, 2006 September 30, 2005
------------------ ------------------
Warrants (weighted average) 5,796,295 1,618,934
================== ==================
Convertible line of credit (weighted average) 1,606,924 --
================== ==================
Stock options (weighted average) 367,647 --
================== ==================
NOTE 6 - COMPREHENSIVE INCOME
The Company reports components of comprehensive income under the requirements of
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes rules
for the reporting of comprehensive income and its components which require that
certain items be presented as separate components of stockholders' equity. For
the periods presented, the Company's comprehensive gain or loss consisted solely
of foreign currency translation adjustments.
NOTE 7 - INCOME TAXES
The Company has not calculated the tax benefits of its net operating losses as
of September 30, 2006 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. If permitted, the tax
returns filed for 2001 will need to be amended. 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.
10
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 8 - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
value and consist of the following at September 30, 2006:
Raw materials $ 20,988
Work in process 85,044
Finished goods 3,172
----------
$ 109,204
==========
NOTE 9 - 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 11 - 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 Loan and
Security Agreement (twelve months). As of September 30, 2006, the balance of
deferred financing expense consisted of the following:
Commitment fee $ 37,500
Value of warrants issued 68,985
Less: accumulated amortization (35,495)
------------
$ 70,990
============
NOTE 10 - RELATED PARTY TRANSACTIONS
As of September 30, 2006, a ten year note of $250,000 was receivable from the
Company's president who is also a director and stockholder. This full recourse
note bears interest at a fixed rate of 5.05% and is due no later than December
31, 2011. Interest on the note is accrued quarterly and due annually. No
interest payments on such note have been made to date. During the three- and
nine month periods ended September 30, 2006 and 2005, the Company recognized
interest income of $3,182 and $9,443, respectively.
At September 30, 2006, the Company owed the president $14,372 in connection with
advances made by him to the Company. During the three- and nine month periods
ended September 30, 2006, he made advances to the Company of $35,000 and
$46,900, respectively and the Company repaid $63,000 and $147,000, respectively,
of the outstanding advances due. All such advances bear interest at the Internal
Revenue Service short term "Applicable Federal Rate," (5.02% at September 30,
2006), calculated and accrued monthly. For the three- and nine month periods
ended September 30, 2006 and 2005, the Company incurred $375, $2,402, $1,015 and
$7,095, 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 September 30, 2006, net interest receivable
from the Company's president was $57,381.
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 nine month period ended September 30, 2006,
other stockholders and related parties made cash advances of $83,700. As of
September 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 $0 and $20,000 for each of the three- and
nine month periods ended September 30, 2005, respectively.
11
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 11 - 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.
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.
Interest expense amounted to $23,167 and $27,639 for the three- and nine month
periods ended September 30, 2006.
As of September 30, 2006, the outstanding balance of the line of credit was
$550,000.
NOTE 12 - 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 September 30, 2006.
During the three- and nine month periods ending September 30, 2006, the Company
did not enter into any agreements for the issuance of shares of common stock in
exchange for services or for the settlement of debt.
As of September 30, 2006, 2,890,000 shares with an aggregate value of $403,000
are committed but un-issued.
On September 25, 2006, a special meeting of the Company stockholders, the
stockholders voted to increase the authorized number of shares of common stock
the Company can issue from 100 million to 245 million. As a result of the
increase, the Company will issue shares of common stock in satisfaction of all
its outstanding commitments to issue shares for services received and the
settlement of debt, as soon as is reasonably possible.
NOTE 13 - LIABILITY TO STOCKHOLDERS FOR REDEEMED SHARES
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
12
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 13 - LIABILITY TO STOCKHOLDERS FOR REDEEMED SHARES - continued
its shares of authorized common stock. The agreements state that the Company
will reissue to its president and the other stockholders the same number of
shares redeemed as soon as is reasonable 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.
On January 27, 2006 and May 12, 2006, a stockholder, a former director of the
Company and the brother of the Company's president, agreed to allow the Company
to redeem an additional 195,834 and 208,334 shares, respectively, of his common
stock, for no additional consideration, in order to fulfill the Company's
obligation to another shareholder and a new investor under the partial exercise
of a stock warrant and the subscription for the purchase of shares of common
stock, for the same number of shares, respectively. These shares had an
aggregate value of $13,708 and $12,500, respectively, on the redemption dates.
As of September 30, 2006, the liability representing the Company's obligation to
its stockholders for the common stock shares redeemed was $2,580,393.
On September 25, 2006, at a special meeting of the Company's stockholders, the
stockholders voted to increase the number of authorized shares of common stock
the Company can issue from 100 million to 245 million. As a result of the
increase, the Company will re-issue the redeemed shares to the respective
stockholders as soon as is reasonable possible.
NOTE 14 - 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. On September 25, 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 September 30,
2006, 100,000,000 shares of common stock were issued and outstanding.
As of September 30, 2006, the Company was committed to issue an additional
17,123,933 shares of common stock to various shareholders in satisfaction of
various redemption agreements.
The Company had entered into various 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 and in satisfaction of claims made
against the Company. 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 September 30, 2006 was
7,016,668.
In total, as of September 30, 2006, the Company was committed to issue an
additional 24,140,601 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, the Company issued 208,334 shares of common stock to an
investor with an aggregate purchase price of $25,000.
STOCK SUBSCRIBED
As of June 30, 2006, 4,126,668 shares of the Company's common stock with an
aggregate purchase price of $470,000 were subscribed but remained unissued.
During the three month period ended September 30, 2006, the Company did not
receive any additional stock subscriptions for the purchase of shares of the
Company's common stock.
As a result, as of September 30, 2006, 4,126,668 shares with an aggregate
purchase price of $470,000 remain subscribed and unissued.
13
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 14 - CAPITAL STOCK - continued
ISSUANCE OF WARRANTS
The Company evaluated all warrants to determine if they give rise to an embedded
derivative that would need to be accounted for separately under SFAS No. 133 and
EITF 00-19. The Company determined that, as it did not have a sufficient number
of 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 (quarterly) with the change in value reported on the statement
of operations as a "Gain (Loss) on Value of Derivative Liabilities," in the
period in which the change occurred.
For the three- and nine month periods ended September 30, 2006 and 2005, the
Company recognized a gain (loss) on the value of derivative liabilities of
$(162,545), $110,290 and $72,942 and $75,569, respectively.
As previously described, on September 25, 2006, at a special meeting of the
Company's stockholders, the stockholders voted to increase the number of
authorized shares of common stock from 100 million to 245 million. This resulted
in the elimination of the requirement to classify the value of the warrants as a
liability. From the date of the various issuances through September 25, 2006,
the Company valued the warrants at the end of each reporting period. On
September 25, 2006, the fair value of the warrants of $435,882 was reclassified
to additional paid-in capital.
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 4.59% to 5.01%; no dividend yield; an expected life of the
warrant, equal to the full term of the warrant, ranging from 6 months to 32
months; and a volatility factor of 154.80% to 178.00%.
PREFERRED STOCK
On September 25, 2006, at a special meeting of the Company's stockholders, the
stockholders approved the creation of five million shares of "blank check"
preferred stock. Subject to the provisions of the Company's Certificate of
Amendment to the Articles of Incorporation and the limitations prescribed by
law, the Board of Directors is expressly authorized at its discretion, without
further stockholder action, to adopt resolutions to issue shares, to fix the
number of shares and to change the number of shares constituting any series and
to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether the dividends are cumulative), dividends rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the preferred
stock, in each case without any further action or vote by the stockholders. The
Board of Directors would be required to make any determination to issue shares
of preferred stock based on its judgment as to the best interests of the Company
and its stockholders.
NOTE 15 - 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. For accounting purposes, these
options were not deemed granted because the Company did not have a sufficient
number of shares of authorized common stock available to issue upon the exercise
of any of the options.
As previously discussed, on September 25, 2006, at a special meeting of the
Company stockholders, the stockholders approved an increase in the amount of the
Company's authorized shares of common stock from 100 million to 245 million.
14
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 15 - STOCK OPTIONS - continued
ACCOUNTING FOR STOCK OPTIONS - continued
Since the required approval has been obtained from the stockholders, the Company
has recognized $1,600,000 of stock based compensation for the three- and nine
month periods ended September 30, 2006.
The fair value of these options was determined using the Black/Scholes option
pricing model with the following assumptions: risk-free interest rate of 4.19%;
no dividend yield; an expected life of the options of 103 months; and a
volatility factor of 352%.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share Based
Payment" utilizing the "modified prospective" method as described in SFAS No.
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 No.
123(R), prior period amounts were not restated. SFAS No. 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 nine
months ended September 30, 2006.
Stock options and warrants granted to non-employees are recorded at their fair
value, as determined in accordance with SFAS No. 123(R) and EITF 96-18 and
recognized over the related service period.
2006 STOCK INCENTIVE PLAN
On September 25, 2006, at a special meeting of the Company's stockholders, the
stockholders approved the creation of the 2006 Stock Incentive Plan (the
"Plan").
Awards under the 2006 Stock Incentive Plan may include non-qualified stock
options, incentive stock options, stock appreciation rights ("SARs"), restricted
shares of common stock, restricted units and performance awards. For a complete
description of the Plan, see the Company's Definitive Proxy Statement filed with
the SEC on July 26, 2006. The Plan became effective on September 25, 2006.
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS No. 155
amends SFAS No 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 155, permits fair
value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation (separation),
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on the financial position or results of operations of the Company.
15
BRIGHTEC, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS - continued
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), which
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB No. 109, "Accounting for 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 provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN 48 and
cannot yet determine the impact of its adoption until approximately the third
quarter of 2007 when the Company anticipated fulfilling all of its outstanding
federal and state tax reporting obligations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which amends and puts in one place guidance on the use of fair value
measurements which had been spread through four APB Opinions and thirty-seven
FASB Standards. No extensions of the use of fair value measurements are
contained in this new pronouncement and with some special industry exceptions
(e.g., broker-dealers) no significant changes in practice should ensue. The
standard is to be applied to financial statements beginning after November 15,
2007. The adoption of SFAS No. 157 is not expected to have a material impact on
the financial position or results of operations of the Company.
In addition, in September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension Plans and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)." This standard requires
recognition in the balance sheet of the funded status of pension plans, rather
than footnote disclosure which is current practice. Publicly traded companies
are to reflect the new standard in financial statements ending after December
15, 2006 and non-public companies are to apply it in statements ending after
June 15, 2007. As the Company does not maintain a defined benefit pension plan
and has no plans to do so, this standard should not have any impact on the
Company's financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108), to provide
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. Under SAB 108, companies should evaluate a misstatement based on its
impact on the current year income statement, as well as the cumulative effect of
correcting such misstatements that existed in prior years existing in the
current year's ending balance sheet. SAB 108 will become effective for the
Company in its fiscal year ending June 30, 2007. The Company is currently
evaluating the impact of the provisions of SAB 108 on its consolidated financial
statements.
16
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 Amended 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 consist of revenue
recognition, account receivable reserves, inventories and financial instruments,
are described in the Annual Reports on Forms 10-KSB and 10-KSB/A for the year
ended December 31, 2005. There have been no material changes to the Company's
critical accounting policies as of September 30, 2006.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2005
REVENUES
The Company's revenue, net of returns, allowances and discounts, for the three-
and nine month periods ended September 2006, was $294 and $10,882, respectively,
compared to $38,951 and $123,309, respectively, for the comparable three- and
nine 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 its Luminescent Product, which was sold to a major poster board and inkjet
paper marketer. The marketer 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 $176 (59.86%) and $5,863 (53.88%) for the three-
and nine month periods ended September 30, 2006, compared to a gross profit of
$13,758 (35.32%) and $26,701 (21.65%) for the comparable three- and nine month
periods ended September 30, 2005, respectively. The increase in the level of the
gross profit margin was primarily due to continued significant improvement in
the manufacturing cost of the Company's products.
In addition, during the comparable periods 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 nine month periods ended September 30, 2006, were made
directly to online customers through the Company's website and one sale to
another company for their use. These sales did not require any reductions in
sales price, thereby resulting in the increased gross profit margin achieved.
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.
17
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased by $41,952 to $25,729 from $67,681
for the three month periods ended September 30, 2006 and 2005 and decreased by
$68,587 to $79,349 from $147,936 for the nine month periods ended September 30,
2006 and 2005.
The decrease in research and development expenses for the three- and nine month
periods ended September 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. Unexpected delays due to the Company's amendments and
restatements of its previously filed SEC reports and delays in shipment of
alternative materials to produce the product caused the Company to delay the
launch of the product until the first quarter of 2006.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased by $15,156 to $22,490 from $7,334 for
the three month periods ended September 30, 2006 and 2005 and decreased by
$18,016 to $26,841 from $44,857 for the nine month periods ended September 30,
2006 and 2005.
The increase in selling and marketing expenses for the three month period ended
September 30, 2006 was primarily due to the Company's shift in focus, during the
second quarter of 2006, from research and development to marketing its
commercially viable product achieved in the first quarter of 2006. In addition,
a portion of the compensation of the Company's president was allocated to
selling and marketing expenses since more of his efforts were spent on selling
and marketing efforts, rather than general and administrative functions of the
Company.
The decrease in selling and marketing expenses for the nine month period ended
September 30, 2006 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consisted primarily of the compensation of
the executive officer, payroll and related taxes and benefits, rent and
consultants, as well as legal and accounting fees.
General and administrative expenses increased by $185,433 to $240,718 from
$55,275 for the three month periods ended September 30, 2006 and increased by
$51,674 to $408,397 from $356,723 for the nine month periods ended September 30,
2006 and 2005.
The increase in general and administrative expenses for the three- and nine
month periods ended September 30, 2006 resulted from an increase in accounting
and legal fees related to the amendments and restatements of the Company
quarterly reports for the first, second, and third quarters of 2005 and the
first quarter of 2006 and the annual reports for the years ended December 31,
2004 and 2005. The increase also results from the amortization of deferred
financing costs relating to the line of credit agreement entered into by the
Company with Ross/Fialkow Capital Partners, LLP, Trustee of Brightec Capital
Trust.
STOCK BASED COMPENSATION
On April 28, 2005, the Board of Directors voted to grant to certain employees,
options for the purchase of 20,000,000 shares of the Company's common stock at
an exercise price of $0.12 per share, exercisable for a period of ten years. For
accounting purposes, these options were not deemed granted because the Company
did not have a sufficient number of shares of authorized common stock available
to issue upon the exercise of any of the options.
As previously discussed, on September 25, 2006, at a special meeting of the
Company's stockholders, the stockholders approved an increase in the Company's
authorized shares of common stock from 100 million to 245 million.
18
Since the required approval has been obtained from the stockholders, the Company
has recognized $1,600,000 of stock based compensation for the three- and nine
month periods ended September 30, 2006.
OTHER INCOME (EXPENSE)
INTEREST INCOME
For each of the three- and nine month periods ended September 30, 2006 and 2005,
interest income was $3,182 and $9,443, 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 paid, are
recorded as charges or credits to the income statement under the caption
"Foreign exchange gains (losses)." For the three- and nine month periods ended
September 30, 2006 and 2005, gains (losses) recognized from these differences
were $0, ($258) $17,656, and ($129), respectively.
GAIN (LOSS) ON VALUE OF DERIVATIVE LIABILITIES
Gain (loss) on value of derivative liabilities for the three- and nine month
periods ended September 30, 2006 and 2005 of $(162,545), $110,290, $72,942 and
$75,569, respectively, relates to the warrant liability. Such derivative
liabilities are required to be marked-to-market under generally accepted
accounting principles. See a further discussion in NOTE 14 - CAPITAL STOCK -
ISSUANCE OF WARRANTS.
FINANCING COSTS
In April 2005, the Company issued to a stockholder a stock warrant for 3,600,000
shares of common stock as an inducement to exercise other stock warrants for
3,335,000 shares of common stock with an aggregate exercise price of $375,000.
The value of the new warrants was $467,825. As the value of the new warrants was
in excess of the amount received from the exercise of the older warrants, the
value of the new warrants was first applied to additional paid-in capital with
the difference of $92,825 being charged as financing costs. See NOTE 14 -
CAPITAL STOCK - ISSUANCE OF WARRANTS.
INTEREST EXPENSE
For the three month period ended September 30, 2006 and 2005, interest expense
was $23,542 and $1,015, respectively. Interest expense for the three month
period ended September 30, 2006 included $23,167 relating to borrowings under
the Line of Credit and $375 to related parties. Interest expense for the three
month period ended September 30, 2005 was solely to related parties. For the
nine month periods ended September 30, 2006 and 2005, interest expense was
$30,041 and $7,095, respectively. Interest expense for the nine month period
ended September 30, 2006 included $27,639 relating to borrowings under the Line
of Credit and $7,095 to related parties. Interest expense for the nine month
period ended September 30, 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. During the
fourth quarter of 2006, the Company has begun the process of meeting it
delinquent tax reporting obligations and anticipates having all of it delinquent
filings resolved during 2007.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 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 September 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 September 30, 2006 was $3,883,735
compared to a deficit of $4,150,075 at December 31, 2005.
19
The Company's authorized capital stock consists of 245,000,000 shares of common
stock, of which 100,000,000 were issued and outstanding at September 30, 2006
and 5,000,000 shares of preferred stock, none of which were outstanding as of
September 30, 2006. As of September 30, 2006, the Company had also made
commitments to issue an additional 24,348,935 shares of common stock. These
additional shares of common stock had not been issued because prior to September
25, 2006, the Company had an insufficient number of authorized and unissued
shares of common stock. The number of shares previously 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."
On September 25, 2006, the Company's stockholders authorized the increase in the
number of authorized shares of common stock from 100 million shares to 245
million shares. The Company intends to issue shares of common stock to satisfy
all of its obligations under the various redemption agreements, stock
subscriptions and agreements to issue shares of common stock in satisfaction of
various amounts payable for services rendered, as soon as is reasonable
practical.
At various times in 2004, 2005 and 2006, the Company's principal stockholder and
other stockholders of the Company agreed to allow the Company to redeem
17,332,267 shares of their common stock for no additional consideration to allow
the Company to fulfill its commitments to issue shares to consultants and
investors of the Company. The Company anticipates issuing these shares in the
fourth quarter of 2006.
Cash increased to $28,207 at September 30, 2006 from $2,445 at December 31,
2005.
Net cash used for operating activities for the nine months ended September 30,
2006 was $493,283. The primary reason for the decrease was to fund the loss for
the period.
Net cash provided by financing activities for the nine months ended September
30, 2006 was $523,900.
The net cash provided was the result of cash received of $120,000 from the sale
and subscription of common stock and the exercise of warrants, advances from
related parties of $130,600, borrowings of $550,000 under the Company's line of
credit, less net repayments of advances from related parties of $239,200 and
payment of deferred financing expenses of $37,500.
ABILITY TO CONTINUE AS A GOING CONCERN
At September 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 $12,811,711. At September 30, 2006, the
Company's current liabilities exceed its current assets by $3,883,735. 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 Loan and Security Agreement as described above
and in NOTE 11 - LINE OF CREDIT. 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" paragraph in
their auditors' opinion for the year ended December 31, 2005. Such a "going
concern" paragraph 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.
20
CREDIT AVAILABILITY:
As of September 30, 2006, the Company has a $ 750,000 line of credit with
Ross/Fialkow Capital Partners, LLP, Trustee of the Brightec Capital Trust, of
which $200,000 is unused. See NOTE 11 - LINE OF CREDIT for a discussion of the
major terms of the agreement.
COMMITMENTS:
The Company had no material capital expenditure commitments as of September 30,
2006.
EFFECTS OF INFLATION:
Management believes that financial results have not been significantly impacted
by inflation and price changes.
21
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 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.
During the quarter ended September 30, 2006, the Company carried out an
evaluation 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. The evaluation included the effectiveness of
the design and operation of the Company's disclosure and control procedures as
they relate to the following: (1) the recognition, valuation and recording of
derivative liabilities of the Company; (2) the valuation and recording of stock
options and warrants issued and (3) the recording of stock subscriptions. The
Company's evaluation, under the control of the Chief Executive Officer and a
consultant who is a certified public accountant with knowledge and experience in
the area of derivative liabilities, considered whether the Company's controls
and procedures ensured that the information required to be recorded in the
Company's accounting records and required to be disclosed in the Company's
periodic reports is communicated, summarized, valued, recorded and reported
within the time periods specified in the SEC's rules and forms as of the
evaluation date.
At the conclusion of the evaluation it was determined that the Company had an
insufficient numbers of internal personnel possessing the appropriate knowledge,
experience and training in applying US GAAP and in reporting financial
information in accordance with the requirements of the Commission and had
insufficient controls over the dissemination of information regarding
non-routine and complex transactions. The results were incorrect treatments and
a lack of proper analysis of such transactions by our staff.
As a result of the above matters, the Company restated its Form 10-KSB and
audited financial statements for the years ended December 31, 2004 and December
31, 2005 as well as its Form 10-QSB and financial statements for the quarterly
periods March 31, 2005, June 30, 2005, September 30, 2005 and March 31, 2006 and
June 30, 2006.
As a result of this evaluation and the subsequent inquiry from the Securities
and Exchange Commission, the Company has made certain changes to its internal
controls surrounding all aspects of the Company's handling of derivative
liabilities, stock warrants, stock options, stock subscriptions and the
valuation methods applied to all of the aforementioned items.
The Company has concluded that additional controls and procedures should be
implemented to assure the proper application of appropriate accounting
standards. Specifically, the Company has hired the aforementioned certified
public accountant to consult with us on all non-routine and complex accounting
matters, including those areas mentioned above, to determine the proper
accounting treatment under a particular set of circumstances.
The Company believes that the new controls and procedures that the Company has
implemented have addressed the Company's internal control failures and are
reasonable to avoid a similar deficiency in the future.
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.
Other than the matters described above, no changes in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) under the
Exchange Act) occurred during the nine months ended September 30, 2006, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
22
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
There were no unregistered sales of equity securities or other equity
transactions that occurred during the three month period ended September 30,
2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Special Meeting of Stockholders was held on September 25, 2006. The
following matters were voted on (1) to elect two members to serve on the Board
of Directors until the next annual meeting of stockholders and until their
successors are duly elected and qualified; (2) to vote on a proposal to amend
the Company's Articles of Incorporation to increase the total number of
authorized shares of all classes of stock that the Company is authorized to
issue from 100 million shares to 250 million shares and to increase the total
number of authorized shares of Class A Common Stock from 100 million shares to
245 million shares; (3) to amend the Articles of Incorporation to create five
million shares of "blank check" Preferred Stock; (4) to amend the Company's
Articles of Incorporation to change the Company's name to "Brightec, Inc."; (5)
to adopt a new long-term stock incentive plan (the "2006 stock incentive plan")
pursuant to which 50 million of the Company's common stock will be reserved for
issuance and available under such plan.
The vote tallies were as follows:
(1) Proposal to elect two members to serve on the Board of Directors until the
next annual meeting of the stockholders and until their successors are duly
elected and qualified.
FOR WITHHOLD
------------ ------------
Patrick Planche 60,947,401 5,797,215
David J. Geffen 60,947,401 5,797,215
(2) Proposal to amend the Company's Articles of Incorporation to increase the
total number of authorized shares of classes of stock that the Company is
authorized to issue from 100 million shares to 250 million shares, and to
increase the total number of authorized shares of Class A Common Stock from
100 million shares to 245 million shares.
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------------- ---------------- ---------------- ----------------
66,660,661 58,955 25,000 0
(3) Proposal to amend the Articles of Incorporation to create 5 million shares
of "blank check" Preferred Stock
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------------- ---------------- ---------------- ----------------
61,512,231 5,206,885 25,500 0
(4) Proposal to amend the Company's Articles of Incorporation to change the
Company's name to "Brightec, Inc."
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------------- ---------------- ---------------- ----------------
66,718,761 355 25,500 0
23
(5) Proposal to adopt a new long-term stock incentive plan (the "2006 stock
incentive plan") pursuant to which 50 million of the Company's common stock
will be reserved for issuance and available under such plan.
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ---------------- ---------------- ---------------- ----------------
53,041,476 13,678,140 25,000 0
All proposals, having received the requisite number of votes, were approved.
There were no other matters that were properly brought before the special
meeting, which were considered and voted upon by the stockholders.
ITEM 5. OTHER INFORMATION
Not Applicable
24
ITEM 6. EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------
31 Certification of Patrick Planche, President and Chief Executive Officer
and Chief Financial 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
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.
25
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.
BRIGHTEC, INC.
Date: May 7, 2007 By: /s/ Patrick Planche
-------------------------------------
Patrick Planche
President and Chief Executive Officer
26
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
27