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 Months Ended March 31, 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 March 31, 2013 and 2012. Percentages discussed throughout this analysis are stated on an approximate basis.
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Three Months Ended March 31,
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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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Cost of sales
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57
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%
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56
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%
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Gross profit
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43
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%
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44
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%
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Total operating expenses
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133
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%
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103
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%
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Loss from operations before other expenses
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(90
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%)
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(59
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%)
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Total other expenses
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(648
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%)
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(80
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%)
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Net Loss
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(738
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%)
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( 139
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%)
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First quarter of 2013 vs. first quarter of 2012
Total revenues for the three months ended March 31, 2013 (“
first quarter
”) were $27,181 a 10% decrease ($3,070) from revenues of $30,251 for the first quarter March 31, 2012. The decrease is attributed to lower product demand. Cost of sales for the first quarter of 2013 were $15,543, a 9% decrease ($1,492) compared to $17,035 for the first quarter of 2012, primarily attributed to the decrease in revenues for the period. As a percentage of revenues, cost of sales were 57% for the first quarter of 2013 compared to 56% for the first quarter of 2012.
Gross profit decreased 12% ($1,578) to $11638 for the first quarter of 2013 compared to $13,216 for first quarter of 2012. The decrease is attributed to the decrease in revenues. Gross profit for the first quarter of 2013 represented 43% of revenues compared to 44% for 2012 period.
Total operating expenses for the first quarter of 2013 were $36,073, a 16% increase ($4,937) compared to $31,136 for 2012 first quarter. As a percentage of revenues, total operating expenses increased from 103% in 2012 to 133% for the first quarter of 2013. The increase in operating expenses is primarily attributed to increased in-house manufacturing of products. Interest expense for the first quarter of 2013 totaled $22,843 a 10% decrease ($2,627) when compared to interest expense of $25,470 for the first quarter of 2012. The decrease in interest expense was due to the conversion of certain outstanding notes to common stock. We also recorded a $153,082 loss on change in derivative liability for the first quarter of 2013, compared to a gain of $1,481 for the first 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.
Our net loss for the first quarter of 2013 was $200,464 compared to a net loss of $42,008 for the first quarter of 2012. The increased net loss is primarily attributed to the $153,082 loss due to derivative liability valuation during the quarter and our increased loss from operations.
Liquidity and Capital Resources
At March 31, 2013, current assets decreased to $26,956 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 $1,254 at March 31, 2013. Accounts receivables also decreased from $10,614 at December 31, 2012 to $9,403 at March 31, 2013 due to lower sales during the first quarter.
Working capital at March 31, 2013 was a negative $705,023,858 compared to a negative $517,202 at December 31, 2012. This result is primarily attributed to the increase in derivative liabilities to $226,644 from $58,562 at December 31, 2012, due to the issuance of additional convertible notes, and periodic re-valuation of previously existing derivative liabilites. Also contributing to the decrease in working capital were the increase in accrued expenses from $34,908 at December 31, 2012 to $36,243 at March 31, 2013 and the increase in accrued interest from $80,353 at December 31, 2012 to $85,624 at March 31, 2013. Outstanding convertible promissory notes remained constant during the period at $110,000.
Net cash used in operating activities for the three months ended March 31, 2013 was $17,868 compared to $18,295 for the 2012 period, which decrease in cash used primarily reflects the increased net loss for the 2013 period, partially offset by the loss on change in derivative liability. We also realized $15,000 for amortization of debt discounts during the first quarter of 2013 compared to $19,906 for the 2012 period.
At March 31, 2013, we had total assets of $49,203 and a shareholders’ deficit of $682,776, 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.
There was no significant impact on the company’s operations as a result of inflation for the three months ended March 31, 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.
Item 4(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our management, including our chief executive officer and chief financial officer, concluded that, as of March 31, 2013, our disclosure controls and procedures were not effective due to a lack of adequate segregation of duties and the absence of an audit committee.
Changes in Internal Control Over Financial Reporting
. Management has evaluated whether any change in our internal control over financial reporting occurred during the first quarter of fiscal 2013. Based on its evaluation, management, including the chief executive officer and chief financial officer, has concluded that there has been no change in our internal control over financial reporting during the first quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
