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| BRTE.OB > SEC Filings for BRTE.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
The following discussion of our financial condition and results of our operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008. This Quarterly Report on Form 10-Q contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements are usually accompanied by words such as "believes," "may," "should," "anticipates," "estimates," "expects," "future," "intends," "hopes," "plans," and similar expressions, and the negative thereof. 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 our accounting policies are particularly important to the portrayal
and understanding of our financial position and results of operations and
require us to apply significant judgment in their application. As a result,
these policies are subject to an inherent degree of uncertainty. In applying
these policies, we use our judgment in making certain assumptions and estimates.
Our critical accounting policies, which consist of revenue recognition, accounts
receivable reserves, inventories, derivative instruments (including stock
options) and income taxes are described in our Annual Report on Form 10-K for
the year ended December 31, 2008. There have been no material changes to our
critical accounting policies as of and for the three and six month periods ended
June 30, 2009.
OVERVIEW
We develop and market luminescent films incorporating luminescent or phosphorescent pigments (the "Luminescent Products"). These pigments absorb and re-emit visible light producing a "glow" which accounts for the common terminology "glow in the dark". Our Luminescent Products have been and will be sold primarily as a printable luminescent film designed to add luminescence to existing or new products. We manufacture through third-party manufacturers, market and sell graphic quality printable luminescent films. These films are based on our proprietary and patented technology that enables prints to be of photographic quality by day and luminescent by night. We expect that our Luminescent Products will be available for sale in a number of versions appropriate for commonly used commercial and personal printing technology, including offset printing or inkjet printing, plus a variety of "print on demand" digital technologies. We currently expect to offer our products in sheets and rolls.
We completed the process of redesigning our website and began to introduce our new product lines to the marketplace. We started launching our new products in September 2007.
Products that we introduced by the end of the 2007 included a line of new and improved printing quality inkjet sheets of different formats, which are being sold in small packs and bulk packs for the home, office and photographic digital printing market, a line of inkjet rolls and sheets for the wide format digital printing market, and a line of offset sheets and flexo rolls for the commercial printing market.
We launched our new website in September 2007 and we began to introduce our new product line shortly thereafter. We anticipated having all of our currently planned products introduced to the market by the end of 2007. However, due to a manufacturing complication, we were forced into re-working our manufacturing process, which caused us not to be able to introduce all of the new product lines that we had anticipated.
At the end of 2008, the Company has decided to add to its Brightec films product offering for 2009 a new line of finished products for children under the brand name PlayGlo™. This new PlayGlo™ product line uses Brightec's films, will be manufactured in the USA and will comprise puzzles and stickers.
The Company sold 2,000,000 shares of its common stock valued at $0.15 per share for $300,000 to ARAGONE S.A. of Geneva, Switzerland ("Aragone") in connection with a private placement on April 27, 2009. The 2,000,000 shares of common stock were issued and delivered May 1, 2009. The Company intends to use the proceeds of this sale to satisfy outstanding obligations and build inventory for the up coming launch of the PlayGlo™ line of products.
We believe we have the ability to obtain additional funds from new investors, our principal stockholders and employees through the issuance of additional debt, equity securities and/or the exercise of warrants and stock options. However, until we identify alternative sources of funding, we will be totally dependent on Mr. Planche to fund our operations. We do not have any current plans to access typical sources of credit until our sales volume increases and we have no plans to make significant investments in property, plant or equipment. Mr. Planche has made $1.7 million in unsecured cash advances to us through June 30, 2009.
There can be no assurances that we will be able to raise the funds we require, or that if such funds are available, that they will be available on commercially reasonable terms. Our ability to continue to operate as a going concern is primarily dependent upon our ability to generate the necessary debt and/or equity financing to effectively market and produce our products, to establish profitable operations and to generate positive operating cash flows. If we fail to raise funds or are unable to generate operating profits and positive cash flows, there are no assurances that we will be able to continue as a going concern and we may be unable to recover the carrying value of our assets.
Due to the recent turmoil in the global economy, it is uncertain that the necessary funds will be available when we require them. We feel that we may benefit from, and take advantage of, the recent economic uncertainty. As it becomes more difficult for companies to stay in business, we believe they will need to find more creative and unique ways to differentiate themselves from their competition. We believe those companies will be more open to our products as they try to maintain their market share.
We believe that we will be successful in generating the necessary financing to fund our operations through the 2009 calendar year. Accordingly, we believe that no adjustments or reclassifications of our recorded assets and liabilities are necessary at this time.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2009 COMPARED WITH THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2008
Revenues
Our revenues, net of returns, allowances and discounts, for the three and six
month periods ended June 30, 2009 were $49,101 and $50,843 respectively,
compared to $884 and to $9,269 for the comparable three and six month periods of
2008. The increase in our revenue for the three month period ended June 30, 2009
was due to a sale of several thousand sheets of our paper-backed offset product
to a major stationery supplier for $48,270, and an increase in sales through our
internet webstore.
For the six month period ended June 30, 2009, the increase in our revenue was due to a sale of several thousand sheets of our paper-backed offset product to a major stationery supplier for $48,270, partially offset by the decline in the number of commercial sales we made and because of a specialized promotional product that we manufactured and delivered in the first quarter of 2008 of $7,207.
During the second quarter of 2009, while we had one commercial sale of our Luminescent Product to a major stationery supplier, we concentrated our efforts on building inventory of our PlayGlo™ line of products and their planned launch during the second quarter 2009. The launch of the line is now in effect and sales will be recorded during third quarter 2009.
Our gross profit was $23,556 (47.9%) and $24,498 (48.2%) for the three and six month periods ended June 30, 2009, respectively, compared to a gross profit of $424 (47.9%) and $2,176 (23.5%) for the comparable three and six month periods in fiscal 2008. The increase in our gross profit for the three month period ended June 30, 2009 was due to a sale to a major stationery supplier previously discussed.
The increase in our gross profit for the six month period ended June 30, 2009 was due an increase in revenue to a sale to a major stationery supplier previously discussed, partially offset by to the specialized promotional product that we manufactured and delivered in the first quarter of 2008.
Research and Development Expenses
Research and development expenses decreased by $1,438 and $19,520 for the three and six month periods ended June 30, 2009, respectively, to $37,198 and $52,198, respectively, from $38,636 and $71,718 for the comparable three and six month periods of 2008.
The decrease for the three month period ended June 30, 2009 of $1,438 was primarily related to a decrease in patent related costs from the prior year's comparable period of $3,772 partially offset by a change in the method of allocating various personnel costs of $2,525.
The decrease for the six month periods ended June 30, 2009 was primarily due to specific costs incurred relating to a necessary change in the primary raw materials used in manufacturing our Luminescent Product. The change required us to change our manufacturing and a decrease in patent costs for the same period.
Selling and Marketing Expenses
Selling and marketing expenses consisted of payroll and related taxes, website maintenance costs, travel costs and fees paid in connection with promotional activities and press releases and shareholder communications. Selling and marketing expenses increased $7,709 to $56,352 from $48,643 for the three month period ended June 30, 2009 compared with the three month period of 2008. Selling and marketing expenses increased by $13,824 for the six month period ended June 30, 2008, to $118,284 from $104,460.
The increase for the three month period ended June 30, 2009 is primarily related to consulting costs associated with the upcoming PlayGlo™ product introduction.
The increase for the six month period ended June 30, 2009 is primarily related to consulting costs associated with the upcoming PlayGlo™ product introduction and certain material costs to produce our new samples used for the toy fair earlier this year.
We anticipate beginning a major sales and marketing effort in conjunction with the launch of the PlayGlo™ line. This effort will target independent retailers in the toy, gift and book stores, as well as tourist, museum, science center, aquarium and zoo shops. Our sales and marketing costs will increase significantly as our marketing samples are produced and distributed in the third and fourth quarters. Our sales and marketing effort began in the second quarter 2009 with identifying our initial selection of our target group of independent retailers. We anticipate that the cost of our 2009 sales and marketing effort to be between $300,000 to $450,000, which includes, but is not limited to, the costs to produce all of our marketing collateral and samples, travel costs, employee compensation. This estimate is less than initially anticipated due the launch occurring later in the year that originally planned.
General and Administrative Expenses
General and administrative expenses consisted primarily of the compensation of our executive officer, other payroll and related taxes and benefits, deferred financing expenses and rent as well as legal and accounting fees. General and administrative expenses decreased by $23,221 and $37,710 for the three and six month periods ended June 30, 2009, respectively to $95,961 and $175,147, respectively, from $119,182 and $212,857 for the comparable three and six month periods of 2008.
The decrease for the six month period ended June 30, 2009 is primarily related to a reduction of accounting and legal costs and a decrease in payroll and payroll related costs due to higher allocations to selling and marketing partially offset by increase in rent and health care costs.
General and administrative costs included consulting fees of $7,469 and $15,135 for the three and six month periods ended June 30, 2009, related to a two-year consulting contract with a significant stockholder, commencing on September 11, 2007. The consulting contract fees, with this stockholder for the prior year's comparable time periods of 2008 were $7,469 and $14,938, respectively.
OTHER INCOME (EXPENSE)
Interest Expense
For the three and six month periods ended June 30, 2009 and 2008, interest
expense was $19,696, $55,328, $40,662 and $82,281, respectively. Interest
expense is dependent on the outstanding balance of our line of credit and the
outstanding balance of unsecured cash advances we received from Mr. Planche, our
president. The interest rate charged by Ross/Fialkow on the outstanding balances
under the line of credit was reduced from 20% to 10% effective April 1, 2009.
The interest rate charged by Mr. Planche is the Internal Revenue Service short
term "Applicable Federal Rate."
For the three and six month periods ended June 30, 2009 and 2008, we incurred interest of $16,327, $48,970, $35,389, and $70,778, respectively, on our Loan Agreement with Ross/Fialkow. We also incurred interest on unsecured cash advances from our president of $3,313, $5,266, $6,303 and $11,496, respectively. For the six months ended June 30, 2009, we incurred other miscellaneous interest costs of $56.
For the three and six month periods ended June 30, 2009 and 2008, interest expense decreased by $20,966 and $26,953, respectively. Of this decrease in interest, $19,062 and $21,808 is attributed to the reduction in the interest rate on the outstanding balance of our line of credit, and $1,953 and $5,193 is attributable to the decrease in the interest rate on the outstanding balance of unsecured cash advances we received from Mr. Planche. The remaining change is attributable to a net change in miscellaneous interest income expense of $49 and $48, respectively.
Income Taxes
We have not calculated the tax benefits of our net operating losses, since we do
not have the required information. Due to the uncertainty over our ability to
utilize these operating losses, any deferred tax assets, when determined, would
be fully offset by a valuation allowance. The Company paid $456 along with its
extension for a state tax return.
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 2009
Since inception, our operations have not generated sufficient cash flow to satisfy our capital needs. We have financed our operations primarily through the private sale of shares of our common stock, warrants to purchase shares of our common stock and debt securities. Our net working capital deficit at June 30, 2009 was $2.8 million compared to a deficit of $2.7 million as of December 31, 2008.
The current financing for our operations is derived primarily from unsecured, interest bearing cash advances from Mr. Planche. While we believe that he will be able to continue funding our operations, there is no guarantee that he will have the ability to continue to do so. Mr. Planche has not committed to provide any additional cash advances to the Company. In light of the recent economic turmoil in the global credit markets, Mr. Planche may not be able to fund our operations on a timely basis to enable us to take advantage of various economic opportunities. We do have the ability to borrow $86,000 under our Loan Agreement with Ross/Fialkow (see NOTE 8 - LINE OF CREDIT in the notes to our condensed consolidated financial statements included in this Form 10-Q); however, it is inadequate based on our current and future funding requirements.
In addition, our current sales and marketing efforts will require substantial funding beyond our current operating requirements. We currently intend to attempt raising capital from various sources, however, we feel that we will be unable to attract the necessary debt and/or equity financing unless our current sales and marketing efforts are successful and until additional commercial and retail sales can be generated to demonstrate that there is a market for our Luminescent Products beyond our current limited successes.
As previously discussed, we estimate that it will require $500,000 to $750,000 in additional funding, to be used for various purposes, to make this sales and marketing effort successful. An ability to raise capital to fund this effort, or fund it timely, may influence how successful our sales and marketing effort is and consequently, affect our ability to attract future debt and/or equity financing for future operations.
Cash increased to $87,441 at June 30, 2009 from $10,271 at December 31, 2008.
Net cash used for operating activities for the six months ended June 30, 2009 was $270,757. The primary reason for the cash usage was to fund the loss for the period.
Net cash provided by financing activities for the six months ended June 30, 2009 was $350,000. The net cash provided was derived from a sale of 2,000,000 shares of common stock valued at $0.15 per share for $300,000 to ARAGONE S.A. of Geneva, Switzerland in connection with a private placement on April 27, 2009, unsecured cash advances received from our president of $36,000 and advances from our line of credit of $14,000.
Credit Availability
We have a $750,000 Loan Agreement with Ross/Fialkow, as described in NOTE 8 -
LINE OF CREDITof our condensed consolidated financial statements. We have
borrowed $664,000 of the $750,000 available under this loan agreement. As of
June 30, 2009, the outstanding balance under the line of credit was $664,000.
Effects of Inflation
We believe that our financial results have not been significantly impacted by
inflation and price changes. We have experienced only minimally modest increases
in the cost of transporting our inventory to and between our manufacturing
vendors and our warehouse and the costs of shipping our Luminescent Products to
purchasers, as our vendors have added fuel surcharges to our normal shipping
costs.
Subsequent Event
The Company received a Notice of Federal Tax Lien dated August 6, 2009. The IRS
is claiming the Company owes payroll taxes for the second and third quarters of
2006 as well as interest and penalties totaling approximately $53,000. The lien
attaches to all assets currently owned and to all property the Company may
acquire in the future. An administrative assessment of payroll liability was
determined as a result of the Company not filing required quarterly payroll
reports. The Company's calculations indicate that no payroll tax liability was
due during these two periods.
The Company believes that it does not owe the delinquent taxes, penalties and interest and plans on contesting the lien. The Company has replied to all correspondence, filed all outstanding quarterly reports and all other requested documentation with the IRS. Our latest reply on July 13, 2009 is currently under review at the IRS. We believe that upon review, this matter will be resolved without an assessment of liability or interest. It is our understanding that the administrative review process of our case will take 4 to 5 months from the date of submission. The Company did not accrue the amounts due under the lien as of and for the six and three months ended June 30, 2009.
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