Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Overview
Vitamin Blue, Inc. designs, manufactures, and distributes water boardsports wear and water boardsports accessories. Our focus is on building and maintaining a strong foundation at the core water boardsport market level by distributing product to surfboard and standup paddleboard manufacturers and surf and standup paddle shops, which in turn sell to retail customers. Our goal is to expand product offerings and increase brand penetration into the mainstream. We plan to extend our product distribution into specialty stores and department stores. In order to maintain brand awareness Vitamin Blue, Inc. will continue to support the core of the water boardsports industry through sponsorship of athletes, competitions and other grassroots activities.
We manufacture in-house most of our water boardsports accessories and nearly all of our boardsports wear. We outsource only the manufacturing of some board bags and the sewing of board shorts (trunks). We do not have any ongoing contracts for the outsourcing of goods.
Vitamin Blue has launched product lines annually beginning in the summer of 2000. We have concentrated sales and marketing efforts along the entire coastline of California, into northern Baja California (Mexico), Hawaii and the Eastern coastline. Distribution is centered on surfboard and standup paddleboard manufacturers and surf and standup paddle shops, which we believe are the core of the boardsports market.
Results of Operations: Comparison of Three and Six Months Ended June 30, 2013 and 2012
The following table sets forth the percentage relationship to total revenues of principal items contained in our financial statements of operations for the three months ended June 30, 2013 and 2012. Percentages discussed throughout this analysis are stated on an approximate basis.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2013
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2012
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2013
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2012
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Revenue
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100
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%
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100
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%
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100
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%
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100
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%
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Cost of sales
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58
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%
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57
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%
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58
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%
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57
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%
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Gross profit
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42
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%
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43
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%
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42
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%
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43
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%
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|
Total operating expenses
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|
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132
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%
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|
143
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%
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131
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%
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123
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%
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Loss form operations before other expenses
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( 90
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%)
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( 100
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%)
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( 89
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%)
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|
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( 80
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%)
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Total other expenses
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(1744
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%)
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( 111
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%)
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(1305
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%)
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(95
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%)
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Net Loss
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(1833
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%)
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( 211
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%)
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(1395
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%)
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(175
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%)
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Three months ended June 30, 2013 vs. three months ended June 30, 2012
Total revenues for the three months ended June 30, 2013 (“
second quarter
”) were $40,737 a 35% increase ($10,569) from revenues of $30,168 for the second quarter June 30, 2012. The increase is primarily attributed to increased Internet sales of our products. Cost of sales for the second quarter of 2013 was $23,644, a 37% increase ($6,323) compared to $17,321 for the second quarter of 2012, primarily attributed to the increase in revenues for the period. As a percentage of revenues, cost of sales were 58% for the second quarter of 2013 compared to 57% for the second quarter of 2012.
Gross profit increased 33% ($4,246) to $17,093 for the second quarter of 2013 compared to $12,847 for second quarter of 2012. The increase in gross profits is due to increase sales. Gross profit for the second quarter of 2013 represented 42% of revenues compared to 43% for 2012 period.
Total operating expenses for the second quarter of 2013 were $53,183, a 23% increase ($9,873) compared to $42,832 for 2012 second quarter. As a percentage of revenues, total operating expenses decreased from 143% in 2012 to 132% for the second quarter of 2013. The decrease in operating expenses is primarily attributed to the sale of higher margin products.
Interest expense for the second quarter of 2013 totaled $199,114 a 598% increase ($170,583) when compared to interest expense of $28,531 for the second quarter of 2012. The increase in interest expense was due to the conversion of certain outstanding convertible notes to common stock. We also recorded a $241,261 loss on change in derivative liability for the second quarter of 2013, compared to a loss of $4,753 for the second quarter of 2012. The 2013 amount represents the periodic adjustment in the company’s derivative liability related to its outstanding convertible promissory notes according to stock price fluctuations. We also recorded a $270,096 loss on the settlement of debt during the second quarter of 2013 reflecting the issuance of shares upon conversion of the notes.
Our net loss for the second quarter of 2013 was $746,669 compared to a net loss of $63,766 for the second quarter of 2012. The increased net loss is primarily attributed to the loss due to derivative liability valuation during the quarter and the loss on the settlement of debt.
Six months ended June 30, 2013 vs. six months ended June 30, 2012
Total revenues for the six months ended June 30, 2013 (“
first half
”) were $67,918 a 12% increase ($7,499) from revenues of $60,419 for the first half of June 30, 2012. The increase is attributed to increased Internet sales. Cost of sales for the first half of 2013 was $39,186, a 14% increase ($4,830) compared to $34,356 for the first half of 2012, primarily attributed to the increase in revenues for the period. As a percentage of revenues, cost of sales were 58% for the first of 2013 compared to 57% for the comparable 2012 period.
Gross profit increased 10% ($2,669) to $28,732 for the first half of 2013 compared to $26,063 for first half of 2012, attributed to the increased revenues. Gross profit for the first half of 2013 represented 42% of revenues compared to 43% for the comparable 2012 period.
Total operating expenses for the first half of 2013 were $89,257, a 20% increase ($14,904) compared to $74,353 for first half of 2012. As a percentage of revenues, total operating expenses increased from 123% in 2012 to 131% in 2013. The increase in operating expenses is primarily attributed to our increased Internet activity.
Interest expense for the first half of 2013 totaled $221,957 a 311% increase ($167,955) when compared to interest expense of $54,002 for the first half of 2012. The increase in interest expense was due to the conversion of convertible notes to common stock. We also recorded a $394,342 loss on change in derivative liability for the first half of 2013, compared to a loss of $3,272 for the first half of 2012. The loss represents the periodic adjustment in the company’s derivative liability related to its outstanding convertible promissory notes according to stock price fluctuations. We also recorded a $270,096 loss on the settlement of debt during the first half of 2013.
Our net loss for the first half of 2013 was $947,132 compared to a net loss of $105,775 for the first half of 2012. The increased net loss is also attributed to the loss due to derivative liability valuation during the quarter and the loss on the settlement of debt.
Liquidity and Capital Resources
At June 30, 2013, current assets decreased to $27,924 from $30,481 at December 31, 2012. This decrease is primarily attributed to the decrease in cash from $3,940 at December 31, 2012 to $2,504 at June 30, 2013. Accounts receivables also decreased from $10,614 at December 31, 2012 to $9,784 at June 30, 2013 due to more timely accounts receivable.
Working capital at June 30, 2013 was a negative $980,818 compared to a negative $517,202 at December 31, 2012. This result is primarily attributed to the increase in derivative liabilities to $487,904 from $58,562 at December 31, 2012, due to the issuance of additional convertible notes. Also contributing to the decrease in working capital was the increase in convertible promissory notes from $145,296 at December 31, 2012 to $185,587 at June 30, 2013 due to additional borrowing evidenced by the notes.
Net cash used in operating activities for the six months ended June 30, 2013 was $36,436 compared to $27,383 for the comparable 2012 period. The results are primarily due to the increased net loss for the first half of 2013, partially offset by the loss on change in derivative liability, the amortization of debt discounts and the loss on settlement of debt during the period.
At June 30, 2013, we had total assets of $44,343 and a shareholders’ deficit of $964,399, compared to total assets of $58,556 and a shareholders’ deficit of $489,127 at December 31, 2012. We expect to incur additional losses in the foreseeable future. While we have funded our operations since inception through investor and related party loans and through collection of our accounts receivable, there can be no assurance that adequate financing will continue to be available to us and, if available, on terms that are favorable to us.
In order to secure additional operating funds, we entered into three new convertible promissory notes with James M. Yeung. The notes are for $10,000 each and dated April 2, 2013, May 9, 2013 and July 12, 2013. Each note is for a term of 180 days, bears interest at 8% per annum and is convertible into shares of our common stock at the lower of $0.0002 per share or 60% of the average closing price of the shares for the three trading days preceding conversion. Additionally, on April 17, 2013 we entered into an amended and restated convertible promissory note with Mr. Yeung that replaces and extinguishes previously executed notes totaling $145,000 dated from September 24, 2010 through February 5, 2013. The amended note bears interest at 8% per annum and is convertible into shares of our common stock at $0.0001 per share.
There was no significant impact on the company’s operations as a result of inflation for the six months ended June 30, 2013.
Recent Accounting Pronouncements
The company has evaluated recent accounting pronouncements and their adoption has not had nor is not expected to have a material impact on the company’s financial position or statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Forward-Looking and Cautionary Statements
Statements contained in this report which are not historical facts, may be considered "forward-looking statements," which term is defined by the Private Securities Litigation Reform Act of 1995. Any “safe harbor” under this Act does not apply to a “penny stock” issuer, which definition would include the company. Forward-looking statements are based on current expectations and the current economic environment. We caution readers that such forward-looking statements are not guarantees of future performance. Unknown risks and uncertainties as well as other uncontrollable or unknown factors could cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements.