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EX-31.1 - BRANDPARTNERS GROUP INCv166211_ex31-1.htm
EX-32.1 - BRANDPARTNERS GROUP INCv166211_ex32-1.htm
EX-10.1 - BRANDPARTNERS GROUP INCv166211_ex10-1.htm
EX-10.2 - BRANDPARTNERS GROUP INCv166211_ex10-2.htm
EX-31.2 - BRANDPARTNERS GROUP INCv166211_ex31-2.htm

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 September 30, 2009

OR

¨
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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yes    ¨ No ¨ (Not yet applicable to Registrant)

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 ¨
Accelerated filer ¨
   
Non-accelerated filer ¨
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company.     Yes ¨ No x

The number of shares of the Company’s common stock outstanding as of November 19, 2009 was 43,960,859.

 
 

 

BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS

Part I Financial Statements
 
   
Item 1 Financial Statements
 
   
Consolidated Balance Sheets September 30, 2009 (unaudited) and December 31, 2008
3
   
Consolidated Statements of Operations (unaudited) for the Nine and Three Months Ended September 30, 2009 and 2008
4
   
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009 and 2008
5
   
Notes to Consolidated Financial Statements (unaudited)
6
   
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
   
Item 3 Quantitative and Qualitative Disclosures about Market Risk
21
   
Item 4 Controls and Procedures
21
   
Part II Other Information
 
   
Item 1A Risk Factors
21
   
Item 6 Exhibits
22
   
Signatures
23
 
 
2

 

Part I  Financial Statements
Item 1 Financial Information
 
BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

   
September 30, 2009
   
December 31, 2008
 
   
(unaudited)
       
             
ASSETS
           
Cash
  $ 341,280     $ 1,348,271  
Accounts receivable, net of allowance for doubtful accounts of $56,721 and $87,064
    2,961,314       7,555,631  
Costs and estimated earnings in excess of billings
    681,491       986,616  
Inventories, net
    365,624       640,112  
Prepaid expenses and other current assets
    220,733       300,416  
Total current assets
    4,570,442       10,831,046  
                 
Property and equipment, net
    443,944       670,039  
Goodwill, net
    10,271,969       10,271,969  
Other assets
    31,432       31,532  
                 
Total assets
  $ 15,317,787     $ 21,804,586  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued expenses
  $ 2,479,350     $ 4,601,753  
Billings in excess of costs and estimated earnings
    3,070,509       7,790,590  
Short term debt
    1,275,246       32,903  
Total current liabilities
    6,825,105       12,425,246  
                 
Long term debt, net of current maturities
    6,836,203       6,648,041  
                 
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 44,060,859 and 38,823,859
    440,609       388,234  
Additional paid in capital
    45,351,757       45,181,302  
Accumulated deficit
    (43,870,804 )     (42,573,154 )
Accumulated other comprehensive income
               
Foreign currency adjustment
    47,417       47,417  
Treasury stock, 100,000 shares at cost
    (312,500 )     (312,500 )
                 
Total stockholders' equity
    1,656,479       2,731,299  
                 
Total liabilities and stockholders' equity
  $ 15,317,787     $ 21,804,586  

The accompanying notes are an integral part of these financial statements.

 
3

 

BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
9 Months Ended
   
9 Months Ended
   
3 Months Ended
   
3 Months Ended
 
   
September 30
   
September 30
   
September 30
   
September 30
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues
  $ 25,352,988     $ 26,894,801     $ 5,395,865     $ 8,916,657  
                                 
Costs and expenses
                               
Cost of revenues
    19,673,326       19,411,414       5,016,648       6,862,391  
Selling, general and administrative
    6,113,505       5,951,461       1,942,049       1,950,583  
                                 
Total expenses
    25,786,831       25,362,875       6,958,697       8,812,974  
                                 
Operating income (loss)
    (433,843 )     1,531,926       (1,562,832 )     103,683  
                                 
Interest expense, net
    (827,566 )     (890,704 )     (280,009 )     (304,827 )
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    (1,261,409 )     641,222       (1,842,841 )     (201,144 )
                                 
Provision for Income Taxes
    36,240       58,746       8,813       32,118  
                                 
NET INCOME (LOSS)
  $ (1,297,649 )   $ 582,476     $ (1,851,654 )   $ (233,262 )
                                 
Basic and diluted earnings per share
                               
Basic
  $ (0.03 )   $ 0.02     $ (0.04 )   $ (0.01 )
Diluted
  $ (0.03 )   $ 0.01     $ (0.04 )   $ (0.01 )
                                 
Weighted - average shares outstanding
                               
Basic
    41,277,755       38,685,585       43,868,468       39,573,359  
Diluted
    41,277,755       39,023,085       43,868,468       39,573,359  

The accompanying notes are an integral part of these financial statements.

 
4

 

BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
9 months ended
   
9 months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
 
             
Cash flows provided by operating activities
           
Net income (loss)
  $ (1,297,649 )   $ 582,476  
                 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
               
Depreciation
    253,325       340,398  
Amortization of deferred financing costs
    -       38,565  
Bad debt expense
    17,254       (96,224 )
Allowance for obsolete inventory
    78,395       142,166  
Stock-based compensation
    177,830       73,715  
Loss on disposal of assets
    -       1,750  
                 
Changes in operating assets and liabilities
               
                 
Accounts receivable
    4,577,063       (433,331 )
Costs and estimated earnings in excess of billings
    305,125       (32,698 )
Inventories
    196,093       51,073  
Prepaid expenses and other assets
    79,783       104,721  
Accounts payable and accrued expenses
    (2,107,404 )     436,630  
Billings in excess of costs and estimated earnings
    (4,720,081 )     (1,359,311 )
                 
Net cash (used in) operating activities
    (2,440,266 )     (150,070 )
                 
Cash flows used in investing activities
               
Acquisition of equipment
    (27,230 )     (143,821 )
                 
Cash flows provided by financing activities
               
Net borrowings on short term debt
    1,231,205       476,831  
Proceeds from long term debt
    202,716       195,398  
Payments on long term debt
    (3,416 )     (291,673 )
Proceeds from issuance of common stock
    30,000       -  
                 
Net cash provided by financing activities
    1,460,505       380,556  
                 
NET INCREASE (DECREASE) IN CASH
    (1,006,991 )     86,665  
Effect of exchange rates on cash
    -       (1,915 )
                 
Cash, beginning of period
    1,348,271       184,504  
                 
Cash, end of period
  $ 341,280     $ 269,254  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for interest
  $ 613,694     $ 677,792  
Cash paid during the period for income taxes
  $ 90,517     $ 115,949  

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

On Feburary 12, 2009, the Company issued a warrant to purchase 1,500,000 shares at $0.25 per share as part of the consideration under a Consulting Agreement entered into on May 12, 2008.
A $15,000 non-cash expense was recognized in 2008 and was included in accounts payable and accrued expenses.

The accompanying notes are an integral part of these financial statements.

 
5

 

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, 2008 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 nine and three months ended September 30, 2009 are not necessarily indicative of the results expected for the entire year.

Subsequent events have been evaluated through the filing date of the unaudited consolidated financial statements.

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 to purchase 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 and debt borrowings 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 or to satisfy our loan covenants, our operations and financial condition would be materially and adversely affected.

 
6

 

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, 2008.

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:

   
September 30, 2009
   
December 31, 2008
 
   
(unaudited)
       
             
Finished goods
  $ 332,789     $ 351,931  
Raw materials
    155,514       341,058  
Work in process
    855       32,314  
    $ 489,158     $ 725,303  
Less - Reserves
    (123,534 )     (85,191 )
Total Inventories, Net
  $ 365,624     $ 640,112  

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 Accounting Standards Codification (“ASC”) ASC 350 “Intangibles-Goodwill and Other”ASC 350 requires that the Company analyze goodwill for impairment on at least an annual basis or if such an event or change in circumstances occur.  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.  The fair value of the reporting unit is reconciled to the Company’s current market capitalization based upon the two year stock price average. For the nine months ended September 30, 2009 and 2008, no impairment loss was recognized.

Deferred financing costs are being amortized on a straight-line basis over three to seven years, which represents the life of the related debt.

 
7

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS

On July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental agencies, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities law are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Section and Paragraph structure.

In May 2009, the FASB issued SFAS 165 “Subsequent Events,” which was subsequently incorporated into FASB ASC topic 855 “Subsequent Events.” This ASC establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this ASC sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this ASC, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. Subsequent events were evaluated through November 19, 2009 which is the date the financial statements were issued. The impact of adoption of this ASC did not have a material impact on the results of operations or financial position of the Company.

 
8

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE E – SHORT TERM DEBT

   
September 30, 2009
   
December 31, 2008
 
   
(unaudited)
       
             
Revolving Credit Facility
  $ 1,231,205     $ -  
Capital lease, current portion
    19,741       20,753  
Put warrant (1)
    24,300       12,150  
                 
Total Short Term Debt
  $ 1,275,246     $ 32,903  

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, which required 36 equal monthly payments

 
·
$5,000,000 Revolving Line of Credit

 
·
Prime Interest Rate on Term Loan principal not subject to LIBOR

 
·
Prime Rate interest plus 25 basis points (0.25%) on Revolving Line of Credit Loan principal not subject to LIBOR

 
·
LIBOR 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 September 30, 2009, the Company was not in compliance with the covenants and ratios.  The Facility expires on April 30, 2010, pursuant to an extension negotiated on March 30, 2009.  On September 30, 2009, LIBOR was 0.25%, and the adjusted interest rate was 3.75% for the revolving line of credit.  At September 30, 2009, approximately $1.2 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 November 17, 2009, the Company received a waiver of certain financial covenants from its commercial lender.  Additionally, the Company has been in active negotiations with its subordinated lender on restructuring its subordinated debt facility. As a part of these ongoing negotiations on November 17, 2009, the Company and its wholly owned subsidiaries entered into a Waiver and Amendment Agreement with its subordinated lender whereby it received a waiver of certain financial covenants and the original promissory note as issued and subsequently amended was further modified to provide that effective as of September 30, 2009, interest on the note shall accrue on the accreted principal amount of the note at the rate of 18% per annum, of which 12% per annum shall be paid in cash on each interest payment date and 6% per annum shall be paid on each interest payment date by addition to the accrued and unpaid interest to the principal outstanding under the note.  The interest payment originally payable on September 30, 2009 will now be payable on January 15, 2010 under the waiver and amendment agreement.

(1)
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).

 
9

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE F – LONG TERM DEBT

Long Term Debt consists of the following:

   
September 30, 2009
   
December 31, 2008
 
   
(unaudited)
       
             
Capital lease (1)
  $ 37,393     $ 52,959  
Note payable (2)
    5,000,000       5,000,000  
Interest payable
    1,818,551       1,615,835  
      6,855,944       6,668,794  
Less capital lease current portion (1)
    (19,741 )     (20,753 )
Total Long Term Debt
  $ 6,836,203     $ 6,648,041  

 
(1)
The Company leases the telephone system for its main location and other equipment under capital leases which 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 of the Company’s capital leases see the Company’s Form 10-K as of December 31, 2008.

 
(2)
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 terms of the Note were modified effective March 30, 2009 whereby the maturity date was extended to October 29, 2010, at which time the principal and all PIK amounts of approximately $7.1 million will be due. Under the terms of the amendment, the Company will be required to make a mandatory prepayment of $1 million on or prior to July 31, 2010. If the Company fails to make the timely payment of $1 million, the accreted principal amount of the Note will then bear interest at a rate of 17% per annum with interest of 13% per annum payable in accordance with the term of the Note and interest of 4% accruing.  Under the terms of the Note, the Company is required to maintain certain financial covenants and is not in compliance as of September 30, 2009.
 
On November 17, 2009, the Company received a waiver of certain financial covenants from its commercial lender.  Additionally, the Company has been in active negotiations with its subordinated lender on restructuring its subordinated debt facility. As a part of these ongoing negotiations on November 17, 2009, the Company and its wholly owned subsidiaries entered into a Waiver and Amendment Agreement with its subordinated lender whereby it received a waiver of certain financial covenants and the subordinated promissory note (“the Note”) as issued and subsequently amended was further modified to provide that effective as of September 30, 2009, interest on the Note shall accrue on the accreted principal amount of the Note at the rate of 18% per annum, of which 12% per annum shall be paid in cash on each interest payment date and 6% per annum shall be paid on each interest payment date by addition to the accrued and unpaid interest to the principal outstanding under the Note.  The interest payment originally payable on September 30, 2009 will now be payable on January 15, 2010 under the waiver and amendment agreement.

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.

The warrant transaction has been treated as a debt discount and has been amortized to interest expense over prior periods.  Changes to the future fair value of the “put warrants” are recorded in accordance with ASC 815 and charged to selling, general and administrative expenses.   As of September 30, 2009 and December 31, 2008, the liability of the put warrant has been disclosed in the amounts of $24,300 and $12,150, respectively, under Short Term Debt (Note E).

 
10

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

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 29, 2010
 
c)
No financial covenants

 
11

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE G – FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted ASC 820 “Fair Value Measurements and Disclosures”. ASC 820 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 ASC 820 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
   
Significant Other
   
Significant
 
         
Identical Assets
   
Observable Inputs
   
Unobservable
 
Description
 
September 30, 2009
   
(Level 1)
   
(Level 2)
   
Inputs (Level 3)
 
                         
Liabilities - Put warrant (See Note E)
  $ 24,300     $ 24,300                  
                                 
Total
  $ 24,300     $ 24,300     $ -     $ -  

NOTE H – SIGNIFICANT CUSTOMERS

For the nine months ended September 30, 2009, one customer accounted for approximately 24% of the Company’s revenue. For the three months ended September 30, 2009, one customer accounted for approximately 23% of the Company’s revenue.  Accounts receivable for this customer as of September 30, 2009 were approximately $0.4 million.  For the nine months ended September 30, 2008, one customer accounted for approximately 19% of the Company’s revenue.  For the three months ended September 30, 2008, three customers accounted for approximately 15%, 12% and 11% of the Company’s revenue, respectively. Accounts receivable for these customers as of September 30, 2008 were $1.6 million.

 
12

 

BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE I – COMMITMENTS AND CONTINGENCIES

As of September 30, 2009, the Company had booked orders, consisting of signed contracts not yet completed, for approximately $7.7 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 J – STOCK-BASED COMPENSATION

The Company did not grant any stock options for the nine months ending September 30, 2009 and 2008, nor did any options fully vest.

For the nine month period ended September 30, 2009, the Company issued an aggregate of 2,900,000 shares of restricted common stock to officers and directors as well as employees of its wholly-owned subsidiary BrandPartners Retail, Inc. pursuant to the Company’s 2004 Stock Incentive Plan, of which 300,000 shares were subsequently cancelled. The Company also issued 2,000,000 shares of restricted common stock as consideration for consulting and/or service agreements that were entered into in May 2009 and September 2009.

In 2008, the Company awarded 4,750,000 shares of restricted common stock to key officers, employees and directors in accordance with the Company’s 2004 Stock Incentive Plan, of which 1,212,500 shares were subsequently cancelled.

Compensation expense for the number of shares issued is recognized over the vesting period.  For the nine and three month period ended September 30, 2009, this expense totaled approximately $178,000 and $81,000, respectively. For the nine and three month period ended September 30, 2008, this expense totaled approximately $74,000 and $31,000, respectively.

NOTE K – INCOME TAXES

At September 30, 2009, the Company utilized net operating losses (“NOL’s”) to reduce its exposure to federal income tax expense.

The Company has NOL’s of approximately $9.0 million available to offset future taxable income.  These NOL’s expire at various dates through 2028.  At December 31, 2008, the Company had deferred tax assets of approximately $4.1 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.

 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2009, the Company had a working capital deficit of approximately $2.3 million, stockholders’ equity of approximately $1.7 million, and a current ratio of approximately .67 to 1.  At December 31, 2008, the Company had a working capital deficit of approximately $1.6 million, stockholders’ equity of approximately $2.7 million, and a current ratio of approximately .87 to 1.

As of September 30, 2009, the Company had cash of approximately $341,000.  As of December 31, 2008, the Company had cash of approximately $1.3 million.

For the nine months ended September 30, 2009, the net cash used in operating activities amounted to approximately $2.4 million, which resulted primarily from a net loss before non-cash expenses of $0.8 million and a decrease in (i) billings in excess of costs and estimated earnings of $4.7 million and (ii) accounts payable and accrued expenses of $2.1 million. These negative variances were partially offset by the decrease in (i) accounts receivable of $4.6 million and (ii) costs and estimated earnings in excess of billings of $0.3 million.

Due to the nature of the project accounting used for large contracts, all vendor and labor costs are recorded 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 accompanying consolidated balance sheets include the following captions at:

   
September 30,
   
December 31,
       
   
2009
   
2008
   
Difference
 
   
(unaudited)
             
Costs and estimated earnings in excess of billings
  $ 681,491     $ 986,616     $ (305,125 )
Billings in excess of costs and estimated earnings
    (3,070,509 )     (7,790,590 )     4,720,081  
                         
Totals
  $ (2,389,018 )   $ (6,803,974 )   $ 4,414,956  

 Investing activities used cash flows to principally fund the acquisition of equipment amounting to approximately $27,000 during the nine month period ended September 30, 2009.

 Financing activities cash flows include borrowings from short-term debt of $1.2 million, proceeds from long-term debt of $203,000 and issuance of common stock of $30,000 during the nine month period ended September 30, 2009.

 
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INDEBTEDNESS

BRANDPARTNERS CREDIT 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, which required 36 equal monthly payments

 
·
$5,000,000 Revolving Line of Credit

 
·
Prime Interest Rate on Term Loan principal not subject to LIBOR

 
·
Prime Rate interest plus 25 basis points (0.25%) on Revolving Line of Credit Loan principal not subject to LIBOR

 
·
LIBOR 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, 2010, pursuant to an extension negotiated on March 30, 2009.  On September 30, 2009, LIBOR was 0.25%, and the adjusted interest rate was 3.75% for the revolving line of credit.  At September 30, 2009, approximately $1.2 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.

Effective March 30, 2009, the Company entered into an amendment to its Loan Agreement with its commercial lender whereby its revolving facility was renewed. The line of credit as renewed continues to be a demand facility subject to the terms and conditions of the Company’s Loan Agreement and Revolving Line of Credit.

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. Under the terms of the Facility, the Company is required to maintain certain financial covenants and is not in compliance as of September 30, 2009.
 
On November 17, 2009, the Company received a waiver of certain financial covenants from its commercial lender.  Additionally, the Company has been in active negotiations with its subordinated lender on restructuring its subordinated debt facility. As a part of these ongoing negotiations on November 17, 2009, the Company and its wholly owned subsidiaries entered into a Waiver and Amendment Agreement with its subordinated lender whereby it received a waiver of certain financial covenants and the original promissory note as issued and subsequently amended was further modified to provide that effective as of September 30, 2009, interest on the note shall accrue on the accreted principal amount of the note at the rate of 18% per annum, of which 12% per annum shall be paid in cash on each interest payment date and 6% per annum shall be paid on each interest payment date by addition to the accrued and unpaid interest to the principal outstanding under the note.  The interest payment originally payable on September 30, 2009 will now be payable on January 15, 2010 under the waiver and amendment agreement.

 
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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 to 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 29, 2010, at which time the principal and all PIK amounts of approximately $7.1 million will be due.  Under the terms of the Note, the Company is required to maintain certain financial covenants and is not in compliance as of September 30, 2009.

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.

The warrant transaction has been treated as a debt discount and has been amortized to interest expense over prior periods.  Changes to the future fair value of the “put warrants” are recorded in accordance with ASC 815 and charged to selling, general and administrative expenses.

At September 30, 2009 and December 31, 2008, the Company had a liability of $24,300 and $12,150 related to the “put warrants,” respectively.

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 29, 2010
 
(c)
No financial covenants

As part of the extension and amendment, the terms of the Note were modified so that the Company will be required to make a mandatory prepayment of $1 million on or prior to July 31, 2010. If the Company fails to make timely prepayment of $1 million, the accreted principal amount of the Note will then bear interest at a rate of 17% per annum with interest of 13% per annum payable quarterly in cash and 4% being accreted to the unpaid principal (“PIK amount”).

While we are seeking to modify terms of the facility, if we are unable to modify same or make payment on this facility at any time or at the maturity date of same, or if we are unable to abide by the financial covenants of the facility, we may be deemed in default of the subordinate loan agreement.
 
On November 17, 2009, the Company received a waiver of certain financial covenants from its commercial lender.  Additionally, the Company has been in active negotiations with its subordinated lender on restructuring its subordinated debt facility. As a part of these ongoing negotiations on November 17, 2009, the Company and its wholly owned subsidiaries entered into a Waiver and Amendment Agreement with its subordinated lender whereby it received a waiver of certain financial covenants and the Note as issued and subsequently amended was further modified to provide that effective as of September 30, 2009, interest on the Note shall accrue on the accreted principal amount of the Note at the rate of 18% per annum, of which 12% per annum shall be paid in cash on each interest payment date and 6% per annum shall be paid on each interest payment date by addition to the accrued and unpaid interest to the principal outstanding under the Note.  The interest payment originally payable on September 30, 2009 will now be payable on January 15, 2010 under the waiver and amendment agreement.

 
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LIQUIDITY ISSUES

During the nine months ended September 30, 2009, the Company used net cash to support its business operations of approximately $2,440,000 versus $150,000 for the same period in the prior year. As of September 30, 2009, the Company had access to approximately $1.2 million under its revolving line of credit. Also, the Company will be required to make a mandatory prepayment of $1 million on the subordinated promissory note (“the Note”) on or prior to July 31, 2010. If the Company fails to make the timely payment of $1 million, the accreted principal amount of the Note will then bear interest at a rate of 17% per annum with interest of 13% per annum payable in accordance with the term of the Note and interest of 4% accruing.  Further, the Company is required to pay in full approximately $7.1 million (principal plus PIK amount) on October 24, 2010, the maturity date of the Note.

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 September 30, 2009 booked orders for the Company, consisting of signed contracts not yet completed, totaled approximately $7.7 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 September 30, 2009, 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.

 
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RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008

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 nine months of 2009 compared to the first nine months of 2008 decreased by 6%, or approximately $1.5 million. The decrease was due to various projects that were anticipated to close with prospective clients that were either delayed or put on hold due to the economic environment.

COST OF REVENUES:  Due to the change in our product and services mix, our cost of revenues as a percentage of revenue was 77% for the first nine months of 2009 as compared to 72% for the first nine months of 2008.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES:  SG&A amounted to approximately $6.1 million in the first nine months of 2009 versus $6.0 million for the same period in 2008. The increased SG&A expense was principally due an increase in consulting and other professional fees of approximately $640,000 which was offset by a decrease in compensation, depreciation and travel expenses of approximately $485,000.

OPERATING INCOME (LOSS):  The Company incurred an operating loss for the first nine months of 2009 of approximately $0.4 million compared to operating income of $1.5 million for the first nine months of 2008, a decrease of $1.9 million due to the factors mentioned above.

INTEREST EXPENSE, NET:  Interest expense, net for the nine months ended September 30, 2009 decreased by approximately $63,000 or 7.1% versus the same period in 2008 primarily due to a lower level of outstanding borrowed funds on the line of credit in 2009 versus 2008. The average outstanding level of borrowed funds under the line of credit amounted to approximately $0.7 million and $2.3 million for the nine months ended September 30, 2009 and 2008.

NET INCOME (LOSS):  The Company incurred a net loss for the first nine months of 2009 of approximately $1.3 million compared to net income of $582,000 for the first nine months of 2008, a decrease of $1.9 million.

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2008

REVENUES:  Revenues for the third quarter of 2009 compared to the third quarter of 2008 decreased by 39%, or approximately $3.5 million, which was primarily due to certain projects which were anticipated to close with prospective clients being either delayed or put on hold as previously discussed.

COST OF REVENUES:  Our cost of revenues as a percentage of revenue was 93% for the third quarter of 2009 as compared to 77% for the third quarter of 2008 due to the change in our products and services mix.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES:  SG&A amounted to approximately $1.9 million in the third quarter of 2009 and 2008, respectively.

OPERATING INCOME (LOSS):  The Company incurred an operating loss for the third quarter of 2009 of approximately $1.6 million compared to operating income of $0.1 million for the third quarter of 2008, a decrease of $1.7 million due to the factors mentioned above.

INTEREST EXPENSE, NET:  Interest expense, net for the third quarter of 2009 decreased by approximately $25,000 or 8% versus the same period in 2008 as previously discussed.

 
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NET INCOME (LOSS):  The Company incurred a net loss for the third quarter of 2009 of approximately $1.9 million compared to a net loss of $233,000 for the third quarter of 2008, a decrease of $1.6 million.

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 and debt borrowings 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 or to satisfy our loan covenants, our operations and financial condition would be materially and adversely affected.

 
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STOCK PRICE FLUCTUATIONS

The market price of our common stock 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 results forecasted 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

 
·
Competition

 
·
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.

 
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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 BrandPartner’s most recent Annual Report on Form 10-K.

ITEM 3.  QUALITATIVE AND QUANTATIVE DISCLOSURES ABOUT MARKET RISK

Our Revolving Credit Facility exposes us to the risk of earnings or cash flow loss due to changes in market interest rates.  A portion of the Revolving Credit Facility accrues 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 September 30, 2009.

   
Principal
Balance
   
Weighted Average
Interest Rate at
September 30,
2009
 
             
Revolving Credit Facility
  $ 1,231,205       3.75 %

A 1% change in the weighted average interest rate would amount to an additional annual interest cost of approximately $12,000.

ITEM 4T.  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” pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period of this quarterly report on Form 10-Q for the third quarter ended September 30, 2009.  This evaluation was done with the participation of management, under the supervision of our Chief Executive Officer (“CEO) and the Chief Accounting Officer (“CAO”).

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.

 
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Conclusions

Based on our evaluation, the CEO and the CAO concluded that the registrant’s disclosures, controls, and procedures are effective as of the end of such period 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.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 6.  EXHIBITS

10.1
Form of Waiver letter agreement dated as of November 17, 2009, between the Company, BrandPartners Retail, Inc., Grafico Incorporated and TD Bank, N.A..
   
10.2
Form of Waiver and Amendment No. 4 to Note between the Company, BrandPartners Retail, Inc., Grafico Incorporated and Corporate Mezzanine II, L.P. dated as of November 17, 2009.
   
31.1
Certification of Chief Executive Officer.

31.2
Certification of Chief Accounting Officer.
 
32.1
Certification of Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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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.
     
Dated: November 19, 2009
   
     
 
By:
/S/ James F. Brooks
     
   
James F. Brooks
   
Chief Executive Officer and President
     
Dated: November 19, 2009
   
     
 
By:
/S/ Jane E. Quilliam
     
   
Jane E. Quilliam
   
Chief Accounting Officer
 
 
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