UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 31, 2008
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ___________ to _______________
Commission
File Number 0-16530
BRANDPARTNERS
GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
DELAWARE
|
13-3236325
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
10
MAIN ST., ROCHESTER, NEW HAMPSHIRE 03839
(Address
of Principal Executive Offices)
(603)
335-1400
Registrant’s
Telephone number, Including Area Code
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or 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.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
x
Smaller
reporting company
o
Indicate
by check mark whether the registrant is a shell company.
Yes
o
No
x
The
number of shares of common stock outstanding on May 12, 2008 was
39,173,359.
BRANDPARTNERS
GROUP, INC.
TABLE
OF
CONTENTS
Part
I
|
Financial
Statements
|
|
|
Item
1
|
Financial
Statements
|
|
|
|
Consolidated
Balance Sheets March 31, 2008 (unaudited) and December 31,
2007
|
3
|
|
|
Consolidated
Statements of Operations (unaudited) for the Three Months Ended
March 31,
2008 and 2007
|
4
|
|
|
Consolidated
Statements of Cash Flows (unaudited) for the Three Months Ended
March 31,
2008 and 2007
|
5
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
19
|
|
Item
4
|
Controls
and Procedures
|
19
|
Part
II
|
Other
Information
|
|
|
Item
1A
|
Risk
Factors
|
19
|
|
Item
5
|
Other
Information
|
20
|
|
Item
6
|
Exhibits
|
20
|
Part
I
Financial
Statements
Item
1
Financial
Information
BrandPartners
Group, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
$
|
416,386
|
|
$
|
184,504
|
|
Accounts
receivable,net of allowance for
doubtful
accounts of $140,090 and $193,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,825,284
|
|
|
4,967,674
|
|
Costs
and estimated earnings in excess of billings
|
|
|
|
|
|
904,821
|
|
|
1,271,043
|
|
Inventories,
net
|
|
|
|
|
|
739,579
|
|
|
758,944
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
198,588
|
|
|
319,052
|
|
Total
current assets
|
|
|
|
|
|
8,084,658
|
|
|
7,501,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
858,353
|
|
|
933,430
|
|
Goodwill,
net
|
|
|
|
|
|
12,271,969
|
|
|
12,271,969
|
|
Deferred
financing costs
|
|
|
|
|
|
19,366
|
|
|
38,565
|
|
Other
assets
|
|
|
|
|
|
281,532
|
|
|
281,532
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
$
|
21,515,878
|
|
$
|
21,026,713
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
|
|
$
|
3,328,545
|
|
$
|
3,582,895
|
|
Billings
in excess of cost and estimated earnings
|
|
|
|
|
|
3,517,663
|
|
|
4,426,664
|
|
Short
term debt
|
|
|
|
|
|
2,744,536
|
|
|
1,688,325
|
|
Total
current liabilities
|
|
|
|
|
|
9,590,744
|
|
|
9,697,884
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current maturities
|
|
|
|
|
|
6,465,631
|
|
|
6,403,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 20,000,000 shares
authorized; none outstanding.
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 100,000,000 shares
authorized; issued and outstanding 39,173,359
and 34,923,359
|
|
|
|
|
|
391,734
|
|
|
349,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid in capital
|
|
|
|
|
|
45,091,135
|
|
|
45,133,635
|
|
Accumulated
deficit
|
|
|
|
|
|
(39,758,283
|
)
|
|
(40,294,603
|
)
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency adjustment
|
|
|
|
|
|
47,417
|
|
|
49,332
|
|
Treasury
stock, 100,000 shares at cost
|
|
|
|
|
|
(312,500
|
)
|
|
(312,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
5,459,503
|
|
|
4,925,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
21,515,878
|
|
$
|
21,026,713
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
BrandPartners
Group, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
3
Months Ended
|
|
3
Months Ended
|
|
|
|
March
31
|
|
March
31
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,247,317
|
|
$
|
13,888,165
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
6,476,887
|
|
|
10,651,903
|
|
Selling,
general and administrative
|
|
|
1,935,037
|
|
|
2,474,567
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
8,411,924
|
|
|
13,126,470
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
835,393
|
|
|
761,695
|
|
|
|
|
|
|
|
|
|
Other
(expense)
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(299,073
|
)
|
|
(316,530
|
)
|
NET
INCOME
|
|
$
|
536,320
|
|
$
|
445,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Weighted
- average shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
37,351,930
|
|
|
34,923,359
|
|
Diluted
|
|
|
37,675,930
|
|
|
35,328,359
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
BrandPartners
Group, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Cash
flows (used in) operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
536,320
|
|
$
|
445,165
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
125,424
|
|
|
166,450
|
|
Provision
for doubtful accounts
|
|
|
(32,083
|
)
|
|
(417
|
)
|
Allowance
for obsolete inventory
|
|
|
55,839
|
|
|
22,578
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(825,527
|
)
|
|
48,827
|
|
Costs
and estimated earnings in excess of billings
|
|
|
366,222
|
|
|
(684,134
|
)
|
Inventories
|
|
|
(36,474
|
)
|
|
(314,991
|
)
|
Prepaid
expenses and other assets
|
|
|
120,463
|
|
|
83,460
|
|
Accounts
payable and accrued expenses
|
|
|
(254,350
|
)
|
|
(2,219,343
|
)
|
Billings
in excess of costs and estimated earnings
|
|
|
(909,001
|
)
|
|
(446,611
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) operating activities
|
|
|
(853,167
|
)
|
|
(2,899,016
|
)
|
|
|
|
|
|
|
|
|
Cash
flows (used in) investing activities
|
|
|
|
|
|
|
|
Acquisition
of equipment
|
|
|
(31,147
|
)
|
|
(89,659
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Net
borrowings on short term debt
|
|
|
1,225,052
|
|
|
2,809,492
|
|
Proceeds
from long term debt
|
|
|
64,241
|
|
|
61,035
|
|
Payments
on long term debt
|
|
|
(171,182
|
)
|
|
(172,046
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,118,111
|
|
|
2,698,481
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
233,797
|
|
|
(290,194
|
)
|
Effect
of exchange rates on cash and equivalents
|
|
|
(1,915
|
)
|
|
11
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of periods
|
|
|
184,504
|
|
|
504,684
|
|
|
|
|
|
|
|
|
|
Cash,
end of periods
|
|
$
|
416,386
|
|
$
|
214,501
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
218,260
|
|
$
|
203,371
|
|
Cash
paid during the period for income taxes
|
|
$
|
64,494
|
|
$
|
33,784
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
A -
NATURE OF BUSINESS AND BASIS OF PRESENTATION
The
accompanying consolidated financial statements of BrandPartners Group, Inc.
(“BrandPartners”) and Subsidiaries (the “Company”) have been prepared by the
Company pursuant to the rules of the Securities and Exchange Commission (“SEC”)
for quarterly reports on Form 10-Q and do not include all of the information
and
note disclosures required by accounting principles generally accepted in the
United States of America for annual financial statements and should be read
in
conjunction with our consolidated financial statements and notes for the fiscal
year ended December 31, 2007 and filed with the SEC on Form 10-K. The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include all adjustments (consisting of normal recurring adjustments), which
are, in the opinion of management, necessary for a fair presentation of
financial position, results of operations and cash flows. The consolidated
statements of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results expected for the entire year.
BrandPartners
operates through its wholly-owned subsidiaries:
BrandPartners
Retail, Inc.
|
“Brand
Retail”
|
Building
Partners, Inc.
|
“Build
Partners”
|
BRAND
RETAIL
Brand
Retail was formerly known as Willey Brothers, Inc. On January 16, 2001, the
Company acquired the stock of Brand Retail for a combination of cash, common
stock of the Company, options in the Company’s stock, and notes payable. The
total purchase price was approximately $33.1 million.
BUILD
PARTNERS
Build
Partners was incorporated in Delaware in January of 2006 and provides general
contracting services.
Through
its subsidiaries, the Company provides integrated products and services to
the
financial services industry and other retail markets. Those products and
services include:
·
|
Strategic
retail positioning and branding
|
·
|
Environmental
design and constructions services
|
·
|
Retail
merchandising analysis, display systems and
signage
|
·
|
Point-of-sale
communications and marketing
programs
|
These
products and services are offered as a complete turnkey package or as individual
offerings, based upon the client’s needs.
RISK
We
cannot
determine at the present time when or if any of these subsidiaries will remain
or be profitable in the future. We have relied and continue to rely upon cash
payments from our operating subsidiaries to, among other things, pay creditors,
maintain capital and meet our operating requirements. Regulations, legal
restrictions, and contractual agreements could restrict any needed payments
from
our subsidiaries. If we were unable to receive cash from our subsidiaries,
or
from any operating subsidiaries that we may acquire in the future, our
operations and financial condition would be materially and adversely
affected.
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The
accounting policies followed by the Company are set forth in Note B to the
Company’s consolidated financial statements in its Form 10-K for December 31,
2007.
NOTE
B -
INVENTORIES, NET
Inventories
are priced at the lower of cost (determined by the weighted-average method,
which approximates first-in, first-out) or market. Inventories consist of the
following at:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
543,493
|
|
$
|
482,674
|
|
Raw
materials
|
|
|
257,150
|
|
|
266,890
|
|
Work
in process
|
|
|
5,673
|
|
|
20,278
|
|
|
|
$
|
806,316
|
|
$
|
769,842
|
|
Less
- Reserves
|
|
|
(66,737
|
)
|
|
(10,898
|
)
|
Total
Net Inventories
|
|
$
|
739,579
|
|
$
|
758,944
|
|
NOTE
C -
GOODWILL AND DEFERRED FINANCING COSTS
Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. We evaluate the recoverability and measure the potential
impairment of goodwill under the Financial Accounting Standards (“SFAS”) No. 142
Goodwill
and Other Intangible Assets
.
SFAS
No. 142 requires that the Company analyze goodwill for impairment on at least
an
annual basis. In assessing the recoverability of our goodwill, management must
make certain assumptions regarding estimated future cash flows and other factors
to determine its fair value. If the calculated fair value of the goodwill is
less than its carrying value, an impairment loss is recognized in an amount
equal to the difference. For the three months ended March 31, 2008 and 2007,
no
impairments were present and no indications of impairment were
identified.
Deferred
financing costs are being amortized on a straight-line basis over three to
seven
years, which represents the life of the related debt.
NOTE
D -
RECENT ACCOUNTING PRONOUNCEMENT
In
March
2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No.
161,
Disclosures
about Derivative Instruments and Hedging Activities.
The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors
to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued
for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. We are currently evaluating this new statement and
anticipate that the statement will not have a significant impact on the
reporting of our results of operations.
.
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
E -
SHORT TERM DEBT
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Current
portion long term debt (1)
|
|
$
|
111,111
|
|
$
|
277,778
|
|
Revolving
credit facility (1)
|
|
|
2,597,874
|
|
$
|
1,364,722
|
|
Capital
lease, current portion
|
|
$
|
19,351
|
|
$
|
21,525
|
|
Put
warrant (2)
|
|
$
|
16,200
|
|
$
|
24,300
|
|
|
|
|
|
|
|
|
|
Total
Short Term Debt
|
|
$
|
2,744,536
|
|
$
|
1,688,325
|
|
(1)
On
May 5, 2005, the Company negotiated a credit facility (the “Facility”) with a
commercial
lender.
The Facility provides for the following:
·
|
$2,000,000
Term Loan, requiring 36 equal monthly
payments
|
·
|
$5,000,000
Revolving Line of Credit
|
·
|
Prime
Interest Rate on Term Loan principal not subject to the LIBOR
rate
|
·
|
Prime
Rate interest plus 25 basis points (0.25%) on Revolving Line of Credit
Loan principal not subject to the LIBOR
rate
|
·
|
LIBOR
rate equals LIBOR plus 275 basis points
(2.75%)
|
Under
the
terms of the agreement, the Company is required to maintain certain financial
covenants and ratios. At March 31, 2008 the Company was in compliance with
the
covenants and ratios. The Facility expires on April 30, 2009, pursuant to an
extension negotiated on March 19, 2008. On March 31, 2008, the LIBOR rate was
3.086%, and the adjusted interest rate was 5.84% for the term loan and 6.12%
for
the revolving line of credit. At March 31, 2008, approximately $2.1 million
was
available under the line of credit. On May 5, 2008, the $2,000,000 Term Loan
was
paid in full.
On
March
22, 2007, certain of the financial covenants were waived and adjusted. As part
of the waiver agreement, the amount available under the Revolving Line of Credit
was adjusted to be the lesser of (1) $5 million or (2) 70% of acceptable
accounts receivable, plus 50% of the cost in excess of billings (capped at
$1
million), less an available reserve of
$250,000.
The Prime Rate interest premium was increased to 50 basis points (0.50%) for
the
Revolving Line of Credit and to 25 basis (0.25%) points for the Term Loan
principal.
On
July
13, 2007 the Company’s commercial lender consented to the Company exceeding the
revolving line of credit limit on a temporary basis. Effective October 3, 2007
the amount outstanding under the revolving
line
of
credit was reduced and was within the limits provided by the March 28, 2007
amendment to the Company’s banking facility.
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On
November 12, 2007 the Company received a waiver and adjustment of certain
financial covenants from its commercial lender and its subordinated promissory
note holder.
(2)
The
put warrant is related to the subordinated promissory note in the principal
amount of
$5,000,000,
which is discussed further in Note F (2).
NOTE
F -
LONG TERM DEBT
Long-Term
Debt consists of the following:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Note
payable (1)
|
|
$
|
111,111
|
|
$
|
277,778
|
|
Capital
lease (2)
|
|
|
67,248
|
|
$
|
71,763
|
|
Note
payable (3)
|
|
|
5,000,000
|
|
|
5,000,000
|
|
Interest
payable (3)
|
|
|
1,417,734
|
|
|
1,353,493
|
|
|
|
|
6,596,093
|
|
|
6,703,034
|
|
Less
current maturities (1)
|
|
|
(111,111
|
)
|
|
(277,778
|
)
|
Less
capital lease current portion (2)
|
|
|
(19,351
|
)
|
|
(21,525
|
)
|
Total
Long Term Debt
|
|
$
|
6,465,631
|
|
$
|
6,403,731
|
|
(2)
|
The
Company leases the telephone system for its main location and other
equipment under capital leases commenced in 2006. The leases expire
in
2009 and 2011. The economic substance of the leases is that the Company
is
financing the acquisition of certain assets through the leases, and
accordingly, they are recorded in the Company’s assets and liabilities.
The lease agreements contain a bargain purchase option at the end
of the
lease term. For a complete listing see the Company’s Form 10-K as of
December 31, 2007.
|
(3)
|
A
subordinated promissory note (“the Note”) in the principal amount of
$5,000,000 was issued on October 22, 2001 by an unrelated third party.
The
Note bears interest at 16% per annum, with 12% payable quarterly in
cash
and 4% being accreted to the unpaid principal (“PIK amount”). The Note
matures on October 22, 2009, at which time the principal and all PIK
amounts are due. Under the terms of the Note, the Company is required
to
maintain certain financial covenants and is in compliance as of March
31,
2008.
|
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Concurrently
and in connection with the 2001 issuance of the Note, the Company issued 405,000
warrants to purchase common stock of the Company at $0.01 per share. The
warrants expire on October 11, 2011 and can be “put” to the Company under any of
the following conditions:
(a)
|
Following
October 22, 2006, the fifth anniversary of the closing
date;
|
(b)
|
Repayment
in full of the aggregate principal amount, together with interest,
after
the third anniversary of the closing
date;
|
(c)
|
Effective
declaration by any holder of the Note that the Note has become due
and
payable;
|
(d)
|
Change
in control; or
|
(e)
|
Sale
of all or substantially all of the assets of the
Company.
|
The
warrant transaction has been treated as a debt discount and has been amortized
to interest expense over prior periods. A liability for the “put warrant” has
been recorded. Changes to the future fair value of the “put warrants” are
recorded in accordance with FASB No. 133 and been charged to selling, general
and administrative expenses. As of March 31, 2008, the liability of the put
warrant has been disclosed under Short Term Debt (Note E).
If
the
Company is unable to pay the Put Warrant repurchase price, the Put Note can
be
issued to the holder of the warrants. That Put Note would have the following
characteristics:
a)
|
Interest
rate of 18% per annum
|
b)
|
Due
and payable on October 22, 2009
|
c)
|
No
financial covenants
|
On
January 7, 2004, the Company amended and restructured the Note. In exchange
for
the waiver of certain covenants through December 31, 2003 and a reduction in
the
interest rate on the note, the Company issued to the note-holder a common stock
purchase warrant to purchase 250,000 shares of the Company’s common stock at
$0.26 per share. The interest rate reduction was for a period of two years,
commencing January 1, 2004. The interest rate was reduced from 16% per annum
to
10% per annum - 8% payable in cash per quarter and 2% accreted to the PIK
amount.
In
March
2008 the Company negotiated an extension of the maturity date of the Note to
October 22, 2009. In addition certain of the financial covenants were
revised.
At
March
31, 2008 and December 31, 2007, the Company had a liability of $16,200 and
$24,300 related to the “put warrants,” respectively, included as part of
short-term debt within the consolidated balance sheet.
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
G -
FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157). SFAS
157 clarifies the definition of fair value, prescribes methods for measuring
fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets
or
liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities
in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing
the
asset or liability based on the best available information.
The
adoption of SFAS No. 157 did not have a material impact on our fair value
measurements.
The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value.
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
- Other assets
|
|
$
|
250,000
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
250,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
- Put warrant (See Note F)
|
|
$
|
16,200
|
|
$
|
16,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
16,200
|
|
$
|
16,200
|
|
$
|
-
|
|
$
|
-
|
|
NOTE
H -
SIGNIFICANT CUSTOMERS
For
the
three months ended March 31, 2008, one customer accounted for approximately
38%
of the Company’s revenue. Accounts receivable for this customer as of March 31,
2008 were $2.6 million. For the three months ended March 31, 2007, two customers
accounted for approximately 23% and 16% of the Company’s revenue
respectively.
BrandPartners
Group, Inc. and Subsidiaries
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
I -
SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
NONE
NOTE
J -
COMMITMENTS AND CONTINGENCIES
As
of
March 31, 2008, the Company had booked orders, consisting of signed contracts
not yet completed, for approximately $9 million.
The
Company has provided various representations, warranties and other standard
indemnifications in the ordinary course of business, in agreements to acquire
and sell business assets and in financing arrangements. The Company is subject
to various legal proceedings and claims, which arise in the ordinary course
of
business.
Management
believes the ultimate liability with respect to these contingent obligations
will not have a material effect on the Company’s financial position, results of
operations or cash flows.
NOTE
K -
STOCK BASED COMPENSATION
The
Company did not grant any stock options for the quarter ending March 31, 2008
nor did any options vest.
For
the
periods ended March 31, 2008 and 2007 there were no share-based compensation
recognized in the consolidated statement of operations.
NOTE
L -
INCOME TAXES
At
March
31, 2008, the Company utilized net operating losses (“NOL’s”) to reduce its
exposure to federal income tax expense.
The
Company has NOL’s of approximately $8.3 million available to offset future
taxable income. These NOL’s expire at various dates through 2027. At December
31, 2007, the Company had deferred tax assets of approximately $7.1 million.
The
deferred tax assets consist primarily of net operating loss carry-forwards
and
previously accrued reserves. Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which is uncertain.
Accordingly, the deferred tax assets have been fully offset by a valuation
allowance of the same amount. Pursuant to Section 382 of the Internal Revenue
Code, NOL carry-forwards may be limited in use in any given year in the event
of
a significant change in ownership.
There
may
be state tax expense in certain states where the tax statutes do not recognize
or do limit the use of NOL’s.
NOTE
M -
SUBSEQUENT EVENTS
NONE
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
March 31, 2008, the Company had a working capital deficit of approximately
$(1.5
million), stockholders’ equity of approximately $5.5 million, and a current
ratio of approximately .84 to 1. At December 31, 2007, the Company had working
capital deficit of approximately $(2.2 million), stockholders’ equity of
approximately $4.9 million and a working capital ratio of approximately .77
to
1. This change in working capital arises primarily from the increase in accounts
receivable partially offset by a decrease in costs and estimated earnings in
excess of billings.
As
of
March 31, 2008, the Company had cash of approximately $416,000. As of December
31, 2007, the Company had cash of approximately $185,000.
For
the
three months ended March 31, 2008, the net cash used in operating activities
of
approximately ($0.9 million) noted in the Statements of Cash Flows resulted
primarily from an increase in accounts receivable ($0.8 million) and a decrease
in billings in excess of costs and estimated earnings ($0.9 million) partially
offset by net income before non-cash expenses ($0.7 million).
Due
to
the nature of the project accounting used for large contracts, all vendor and
labor costs are entered on the balance sheet until the associated revenue is
recognized. Upon revenue recognition, the associated expenses and profit are
transferred to the statement of operations. The Cost in Excess of Billings
account reflects the costs which have been incurred by the Company with
resultant revenue recognition in completing a contractual obligation, which
according to the terms of the contract, cannot be invoiced as of the end of
the
fiscal period and is therefore an asset since those charges will be invoiced
in
the future. Its companion account, Billings in Excess of Cost, reflects the
balance of those invoices to clients for which work to the level of the billing
deposits has not yet occurred. Thus, a liability exists on the balance sheet
for
the obligation on the part of the Company to perform work to the level of the
deposits invoiced to the client. Due to the size of the contracts, these
accounts can fluctuate considerably as of the end of the fiscal period and
during the interim periods.
The
accompanying consolidated balance sheets include the following captions
at:
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Difference
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cost
in excess of billings
|
|
$
|
904,821
|
|
$
|
1,271,043
|
|
$
|
(366,222
|
)
|
Billings
in excess of costs
|
|
|
(3,517,663
|
)
|
|
(4,426,664
|
)
|
|
909,001
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(2,612,842
|
)
|
$
|
(3,155,621
|
)
|
$
|
542,779
|
|
We
used
cash flows to principally fund the acquisition of property and equipment
amounting to approximately $31,000 during the three months ended March 31,
2008.
Our
cash
flows from financing activities were principally provided from additional net
short-term borrowings of $1,225,000 and additional long-term borrowings of
$64,000, partially offset by payments on long-term debt of
$171,000.
INDEBTEDNESS
BRANDPARTNERS
FACILITY
BrandPartners
negotiated a credit facility (the “Facility”) with a commercial lender effective
May 5, 2005. The Facility provides for the following:
·
|
$2,000,000
Term Loan, requiring 36 equal monthly
payments
|
·
|
$5,000,000
Revolving Line of Credit
|
·
|
Prime
Interest Rate on Term Loan principal not subject to the LIBOR
rate
|
·
|
Prime
Rate interest plus 25 basis points (0.25%) on Revolving Line of Credit
Loan principal not subject to the LIBOR
rate
|
·
|
LIBOR
rate equals LIBOR plus 275 basis points
(2.75%)
|
Under
the
terms of the agreement, the Company is required to maintain certain financial
covenants and ratios. The Facility expires on April 30, 2009, pursuant to an
extension negotiated on March 19, 2008. On March 31, 2008, the LIBOR rate was
3.086%, and the adjusted interest rate was 5.84% for the term loan and 6.12%
for
the revolving line of credit. At March 31, 2008, approximately $2.1 million
was
available under the line of credit. On May 5, 2008, the $2,000,000 Term Loan
was
paid in full.
On
March
22, 2007, certain of the financial covenants were waived and adjusted. As part
of the waiver agreement, the amount available under the Revolving Line of Credit
was adjusted to be the lesser of (1) $5 million or (2) 70% of acceptable
accounts receivable, plus 50% of the cost in excess of billings (capped at
$1
million), less an available reserve of
$250,000.
The Prime Rate interest premium was increased to 50 basis points (0.50%) for
the
Revolving Line of Credit and to 25 basis (0.25%) points for the Term Loan
principal.
On
July
13, 2007 the Company’s commercial lender consented to the Company exceeding the
revolving line of credit limit on a temporary basis. Effective October 3, 2007
the amount outstanding under the revolving
line
of
credit was reduced and was within the limits provided by the March 28, 2007
amendment to the Company’s banking facility.
On
November 12, 2007 the Company received a waiver and adjustment of certain
financial covenants from its commercial lender and its subordinated promissory
note holder.
If
for
any reason the Company defaults on the Facility, the amount outstanding under
the Facility becomes due and payable, and the lender has the right to proceed
against the collateral granted to secure the indebtedness under the Facility,
including substantially all of the assets of BrandPartners.
THE
BRAND
RETAIL SUBORDINATED NOTE PAYABLE
A
subordinated promissory note (“the Note”) in the principal amount of $5,000,000
was issued on October 22, 2001 by an unrelated third party. The Note bears
interest at 16% per annum, with 12% payable quarterly in cash and 4% being
accreted to the unpaid principal (“PIK amount”). The Note matures on October 22,
2009, at which time the principal and all PIK amounts are due. Under the terms
of the Note, the Company is required to maintain certain financial covenants
and
is in compliance as of March 31, 2008.
Concurrently
and in connection with the 2001 issuance of the Note, the Company issued 405,000
warrants to purchase common stock of the Company at $0.01 per share. The
warrants expire on October 11, 2011 and can be “put” to the Company under any of
the following conditions:
(a)
|
Following
October 22, 2006, the fifth anniversary of the closing
date;
|
(b)
|
Repayment
in full of the aggregate principal amount, together with interest,
after
the third anniversary of the closing
date;
|
(c)
|
Effective
declaration by any holder of the Note that the Note has become due
and
payable;
|
(d)
|
Change
in control; or
|
(e)
|
Sale
of all or substantially all of the assets of the
Company.
|
The
warrant transaction has been treated as a debt discount and has been amortized
to interest expense over prior periods. A liability for the “put warrant” has
been recorded. Changes to the future fair value of the “put warrants” are
recorded in accordance with FASB No. 133 and been charged to
selling,
general and administrative expenses.
If
the
Company is unable to pay the Put Warrant repurchase price, the Put Note can
be
issued to the holder of the warrants. That Put Note would have the following
characteristics:
(a)
|
Interest
rate of 18% per annum
|
(b)
|
Due
and payable on October 22, 2009
|
(c)
|
No
financial covenants
|
On
January 7, 2004, the Company amended and restructured the Note. In exchange
for
the waiver of certain covenants through December 31, 2003 and a reduction in
the
interest rate on the note, the Company issued to the note-holder a common stock
purchase warrant to purchase 250,000 shares of the Company’s common stock at
$0.26 per share. The interest rate reduction was for a period of two years,
commencing January 1, 2004. The interest rate was reduced from 16% per annum
to
10% per annum - 8% payable in cash per quarter and 2% accreted to the PIK
amount.
In
March
2008 the Company negotiated an extension of the maturity date of the Note to
October 22, 2009. In addition the Company received an adjustment to certain
of
the financial covenants.
At
March
31, 2008 and December 31, 2007, the Company had a liability of $16,200 and
$24,300 related to the “put warrants,” respectively.
LIQUIDITY
ISSUES
The
Company’s ability to generate cash flow from operations sufficient to make
scheduled payments on its debts as they become due will depend on its future
performance and the Company’s ability to successfully implement business and
growth strategies. The Company’s performance will also be affected by prevailing
economic conditions. Many of these factors are beyond the Company’s control. If
future cash flows and capital resources are insufficient to meet the Company’s
debt obligations and commitments, the Company may be forced to reduce or delay
activities and capital expenditures, obtain additional equity capital or
restructure or refinance its debt. In the event that the Company is unable
to do
so, the Company may be left without sufficient liquidity, and it may not be
able
to meet its debt service requirements. In such a case, an event of default
would
occur and could result in all of the Company’s indebtedness becoming immediately
due and payable.
COMMITMENTS
AND CONTINGENCIES
As
of
March 31, 2008, booked orders, consisting of signed contracts not yet completed,
for the Company totaled approximately $9 million.
The
Company has provided various representations, warranties and other standard
indemnifications in the ordinary course of business, in agreements to acquire
and sell business assets and in financing arrangements. The Company is subject
to various legal proceedings and claims, which arise in the ordinary course
of
business.
Management
believes the ultimate liability with respect to these contingent obligations
will not have a material effect on the Company’s financial position, results of
operations or cash flows.
OFF
BALANCE SHEET ARRANGEMENTS
We
have
no off-balance sheet arrangements that provide financing, liquidity, market
or
credit risk support or involve leasing, hedging or research and development
services for our business or other similar arrangements that may expose us
to
liability that is not expressly reflected in the financial statements, except
for facilities operating leases.
As
of
March 31, 2008, we did not have any relationships with unconsolidated entities
or financial partnerships, often referred to as structured finance or special
purpose entities, established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As such we
are
not subject to any material financing, liquidity, market or credit risk that
could arise if we had engaged in such relationships.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31,
2007
REVENUES:
Revenues are recognized as products and services are delivered. If the Company
is managing the project for its customers, these services and their related
products are accounted for using the percentage of completion method.
Revenues
for the first three months of 2008 compared to the first three months of 2007
decreased by 33%, or approximately $4.6 million. The decrease was due to various
projects that were anticipated to close with prospective clients in the
community banking market were either put on hold or lost.
COST
OF
REVENUES: Cost of revenues decreased 39% or approximately $4.2 million primarily
due to lower revenues in the first three months of 2008 versus the same 2007
period. In addition, due to the change in our product and services mix, our
cost
of revenues as a percentage of revenue was 70% for the first quarter 2008 as
compared to 77% for the first quarter 2007.
SELLING,
GENERAL & ADMINISTRATIVE EXPENSES: Selling, general and administrative
expenses (SG&A) amounted to approximately $1.9 million in the first three
months of 2008 versus $2.5 million for the same period in 2007, a decrease
of
approximately $0.5 million or 22%. The reduced SG&A expense was principally
due to the implementation in 2007 by management of a cost savings initiative
program. This program resulted in reduced costs including compensation
(approximately $271,000), professional fees (approximately $92,000) and other
general overhead costs.
OPERATING
INCOME: Operating income for the first three months of 2008 in the amount of
$0.8 million increased approximately $74,000 or 10% due to the factors noted
above.
INTEREST
EXPENSE, NET: Interest expense, net for the three months ended March 31, 2008
was relatively unchanged versus the same period in 2007.
NET
INCOME: Net income for the first quarter 2008 of approximately $536,000 compares
to net income of $445,000 for the first quarter 2007, an increase of $91,000
or
approximately 21%.
HOLDING
COMPANY AND OPERATING SUBSIDIARIES
We
conduct our business through our wholly owned subsidiaries (Brand Retail and
Build Partners). We have relied and continue to rely on cash payments from
our
operating subsidiaries to, among other things, pay creditors, maintain capital,
and meet our operating requirements. Regulations, legal restrictions, and
contractual agreements could restrict any needed payments from our present
subsidiaries and any other operating subsidiaries we may subsequently acquire.
If we were unable to receive cash funds from any of our operating subsidiaries,
our operations and financial condition would be materially and adversely
affected.
STOCK
PRICE FLUCTUATIONS
The
market price of our common stock has fluctuated significantly and may be
affected by our operating results, changes in our business and management,
changes in the industries in which we conduct our business, and general and
market conditions. In addition, the stock markets commonly experience price
and
volume fluctuations. These fluctuations have affected stock prices of many
companies without regard to their specific operating performance. The price
of
our common stock may fluctuate significantly in the future.
INFLATION
We
do not
believe that inflation has had a material effect on the Company’s results of
operations.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains 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, that are not historical
facts, but rather reflect the Company’s current expectations concerning future
results and events. The words “believes,” “anticipates,” “expects,” and similar
expressions, which identify forward-looking statements, are subject to certain
risks, uncertainties and factors, including those which are economic,
competitive, and technological, that could cause actual results to differ
materially from those forecast or anticipated. Such factors include, among
others:
·
|
The
continued services of James Brooks as Chairman of the Board and Chief
Executive Officer of BrandPartners Group and other key senior management
members.
|
·
|
Our
ability to identify appropriate acquisition candidates, finance and
complete such acquisitions and successfully integrate the acquired
businesses
|
·
|
Changes
in our business strategies or development
plans
|
·
|
Our
ability to grow within the financial services
industry
|
·
|
Our
ability to successfully penetrate other
markets
|
·
|
General
economic and business conditions, both nationally and in the regions
in
which we operate
|
·
|
Our
ability to pass vendor cost increases on to our
customers
|
Readers
are cautioned not to place undue reliance on those forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to
republish revised forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of the unanticipated events.
Readers are also urged to carefully review and consider the various disclosures
made by the Company in this report, as well as the Company’s periodic reports on
Form 10-K, Form 10-Q, and other filings with the Securities and Exchange
Commission.
ITEM
1A. RISK FACTORS
For
information regarding factors that could affect the Company’s results of
operations, financial condition or liquidity, see the risk factors discussed
under “Management's Discussion and Analysis of Financial Condition and Results
of Operations” in Item 7 of BrandPartners’ most recent Annual Report on
Form 10-K. See also “Forward-Looking Statements,” included in Item 2
of this Quarterly Report on Form 10-Q. There have been no material
changes from the risk factors previously disclosed in CSX’s most recent Annual
Report on Form 10-K.
ITEM
3.
QUALITATIVE AND QUANTATIVE DISCLOSURES ABOUT MARKET RISK
Our
Term
Loan and Revolving Credit Facility expose us to the risk of earnings or cash
flow loss due to changes in market interest rates. The Term Loan and a portion
of the Revolving Credit Facility accrue interest at LIBOR plus an applicable
margin. The balance of the Facility accrues interest at the Wall Street
Journal’s published prime rate. For a description of the terms of the Term Loan
and Revolving Credit Facility, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources”
above.
The
table
below provides information on our market sensitive financial instruments as
of
March 31, 2008.
|
|
Principal
Balance
|
|
Interest
Rate at
March
31, 2008
|
|
|
|
|
|
|
|
Term
Loan
|
|
$
|
111,111
|
|
|
5.84
|
%
|
Revolving
Credit Facility
|
|
$
|
2,597,874
|
|
|
6.12
|
%
|
ITEM
4.
CONTROLS AND PROCEDURES
Evaluation
of the Company’s Disclosure and Internal Controls
The
Company evaluated the effectiveness of the design and operation of its
“disclosure controls and procedures” as of the end of the period covered by this
report. This evaluation was done with the participation of management, under
the
supervision of the Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”)
Limitations
on the Effectiveness of Controls
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are being
met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may be inadequate because of changes
in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and may not be detected.
The Company conducts periodic evaluations of its internal controls to enhance,
where necessary, its procedures and controls.
Conclusions
Based
on
our evaluation, the CEO and CFO concluded that the registrant’s disclosures,
controls, and procedures are effective to ensure that information required
to be
disclosed in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Security Exchange Commission rules and forms.
ITEM
5.
OTHER INFORMATION
NONE
ITEM
6.
EXHIBITS
31.1
|
Certification
of Chief Executive Officer and President Pursuant to 17 C.F.R.
240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Accounting Officer to 17 C.F.R. 240.13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
BRANDPARTNERS
GROUP, INC.
|
|
|
|
|
By:
|
/s/ JAMES
F.
BROOKS
|
|
James
F. Brooks
|
|
Chief
Executive Officer and President
|