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GTMM > SEC Filings for GTMM > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for GUITAMMER CO


14-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis should be read in conjunction with Guitammer's Audited Consolidated Annual Financial Statements and notes thereto included elsewhere in this Form 10-K (the "Financial Statements"). Except for the historical information contained herein, the discussion in this Form 10-K contains certain forward looking statements that involve risks and uncertainties, such as statements of Guitammer's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. These statements include, without limitation, statements concerning the potential operations and results of Guitammer described below. Guitammer's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in Guitammer's Form 10 Registration Statement.

RESULTS OF OPERATIONS

Fiscal Year ended December 31, 2012 compared to Fiscal year ended December 31, 2011

All references below to per share and shares of Common Stock of the Company reflect the Reorganization.

Results of Operations

Revenue increased $829,171 or 64%, to $2,132,624 for the year ended December 31, 2012, compared to revenue of $1,303,453 for the year ended December 31, 2011. During the year ended December 31, 2012, the Company did not significantly change our product line, distributions channels or pricing. Management believes our increase in revenues is primarily attributable to an increase in organic growth due to word of mouth and customer referrals which have resulted in an increased demand for ButtKicker brand products. Additionally, the effect of the equity capital raised from the Company's Private Placement offering ($1,685,000 raised in the year ending December 31, 2012) has enabled the Company to increase inventory levels (inventory increased by $573,024 or 1,019% to $629,251 at December 31, 2012 from $56,227 at December 31, 2011), reduce backorders, and has allowed the Company to meet customer demand. In the third and fourth quarters of 2011, the Company was out of stock on some inventory items which dampened sales during this time period. Also, the Company added an international distributor in France which also contributed to the sales increase.

In the past, the Company experienced some seasonality in sales as the 1st quarter and 4th quarter of the year typically experience higher sales volumes attributable to the holiday season and the recurring increase in consumer electronic sales after the holiday season. For 2012, sales showed less seasonality than in the past years.

Cost of goods sold increased $526,127 or 70%, to $1,282,168, for the year ended December 31, 2012, compared to cost of goods sold of $756,041 for the year ended December 31, 2011. The 70% increase in the cost of goods sold for the year ended December 31, 2012 is slightly more than the 64% increase in revenue for the same time period, due to variations in the sales mix of products sold as the profit margin on some products are lower and due to increased sales to distributors, which are charged slightly lower pricing.


Gross profit increased by $303,044 or 55% to $850,456 for the year ended December 31, 2012, compared to gross profit of $547,412 for the year ended December 31, 2011. Our gross margin percentage decreased to 40% for the year ended December 31, 2012 from 42% for the year ended December 31, 2011. The decrease in gross margin of 2% was due to variations in the sales mix of products sold as the profit margin on some products are lower and due to increased sales to distributors, which are charged slightly lower pricing.

General and administrative expenses increased $351,944, or 29%, to $1,568,067 for the year ended December 31, 2012, compared to general and administrative expenses of $1,216,123 for the year ended December 31, 2011. Significant variations within the general and administrative expenses were as follows:

                                       December 31,       December 31,       Increase
                                           2012               2011          (Decrease)

Professional fees                     $      420,385     $      224,995     $   195,390
Stock warrant expense                         80,141            220,212        (140,071 )
Payroll                                      483,253            400,144          83,109
Advertising and marketing                     72,971              6,808          66,163
Freight expense                              154,500             96,209          58,291
Duty and customs fees                         50,263             10,013          40,250
Travel and entertainment                      64,896             34,500          30,396
All other general & admin. expenses          241,658            223,242          18,416
                                      $    1,568,067     $    1,216,123     $   351,944

Professional fees increased by $195,390 for the year ended December 31, 2012 compared to the year ended December 31, 2011, due primarily due to the increase in professional fees associated with investor relations, much of which are non-cash expenses as detailed in the table below which shows adjusted EBITDA.

Stock warrant expense decreased by $140,071 for the year ended December 31, 2012 compared to the year ended December 31, 2011, due to the updated lower valuation of warrants previously issued offset partially by the charge to expense for stock warrants issued to note holders relating to the terms of certain debt instruments. As shown in footnote 6 of the Notes to the Company's Consolidated Financial statements, the Company has recorded a warrant liability of $179,771 and $234,371 as of December 31, 2012 and 2011, respectively, which is based on the Black-Scholes valuation model to estimate the fair value of the warrants. The significant assumptions considered by the model were the remaining term of the warrants, the fair value per share stock price of $.16 and $.20, a risk free treasury rate for 2.5 years and 3.5 years of .31% and 3.30% at December 31, 2012 and 2011, respectively and an expected volatility of 60%.

Payroll expense increased by approximately $83,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011, due primarily to $41,002 in additional expense in 2012 for the cost of the employee stock option plan and the addition of 2 employees.

Advertising and marketing increased approximately $66,000 due to an increase in advertising, contracted web-site improvements, and investor relations efforts.

Freight expense increased approximately $58,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011, due to an increased volume of shipped goods that were necessary as a result of sales increasing by 64% for the year ended December 31, 2012 compared to the year ended December 31, 2011.


Duty and customs fees increased $40,250 to $50,263 for year ended December 31, 2012, compared to $10,013 for the year ended December 31, 2011. Increased Duty and customs fees resulted from the Company receiving more containers of our products from our overseas manufacturers, which was needed to increase sales 64% and to increase inventory by 1,019% for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Travel and entertainment expenses increased $30,396 to $64,896 for year ended December 31, 2012, compared to $34,500 for the year ended December 31, 2011. In 2012, increase travel included sales trips to Europe and Asia which helped boost our growth in revenue by 64% in 2012.

Research and development expenses increased $43,282 to $75,474 for year ended December 31, 2012, compared to $32,192 for the year ended December 31, 2011. Increased Research and development expense has resulted from an increase in field testing of our patented "ButtKicker Live!" broadcast technology with a professional sports team.

Loss from operations increased by $92,183 or 13% for the year ended December 31, 2012 to $793,085 as compared to $700,902 for the year ended December 31, 2011. The additional operating loss was primarily caused by the increase in professional fees, payroll, advertising and marketing, freight expense, research and development expense, and duty and custom fees, offset partially by a decrease in stock warrant expense as shown above.

Interest expense decreased $186,994 or 40%, to $278,928 for the year ended December 31, 2012, compared to interest expense of $465,922 for the year ended December 31, 2011. The decrease was due primarily to total debt conversion of approximately $1,450,000 in the years ending December 31, 2012 and 2011 as illustrated in Notes to consolidated Financial Statements, note number 7.

Our net loss decreased $94,803 for the year ended December 31, 2012. We had net loss of $1,071,968 (or basic and diluted net loss per share of $0.02) compared to net loss of $1,166,771 (or basic and diluted net loss per share of $0.02) for the year ended December 31, 2011. The decrease in net loss was primarily attributable to the 64% increase in revenue and an increase in gross margin of approximately $303,000 as mentioned above, but was partially offset by an increase in general and administrative and research and development expenses. Much of the increase in general and administrative and research and development expenses was attributable to non-cash expenses of approximately $300,000 as shown below in the adjusted EBITDA calculation. Some of the increase in general and administrative expenses was the result of expenses that have the potential of benefiting the company's future such as: the increase in research and development of $43,250, the increase in advertising of $66,163 and the increase in freight expense of $58,291, some of which was needed to build inventory levels for 2013 sales.

The following table sets forth EBITDA and adjusted EBITDA for the Company, which is a non-GAAP measurement. EBITDA is defined as earnings (loss) before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is defined as earnings before net interest expense, income taxes, depreciation, amortization, and non-cash expenses such as stock warrant expense and stock based compensation to consultants and employees. Although EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"), management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of the business and facilitate meaningful comparison of the results in the current period to those in prior periods and future periods. However, investors should not consider these measures in isolation or as a substitute for net income
(loss), operating income (loss), or any other measure for determining the Company's operating performance that is calculated in accordance with GAAP. A reconciliation of EBITDA and Adjusted EBITDA to the most comparable GAAP financial measure, net loss, follows:


                                               December 31,      December 31,
                                                   2012              2011

Net Loss                                       $  (1,071,968 )   $  (1,166,771 )
Adjustments
 Interest Expense                                    278,928           465,922
 Depreciation and Amortization                        34,337            37,744
 Taxes                                                     -                 -
EBITDA                                              (758,703 )        (663,105 )
Less non-cash expenses from:
Stock warrant expense                                 80,141           220,212
Payment of stock and warrants to consultants         183,239            68,801
Employee stock options expense                        41,002                 -
Adjusted EBITDA                                $    (454,321 )   $    (374,092 )

EBITDA decreased $95,598 or 14% to $(758,703) for the year ended December 31, 2012, compared to $663,105 for the year ended December 31, 2011. Interest, depreciation and amortization were all lower in 2012, which when these expenses are adjusted out of our 2012 net loss, the resulting EBITDA is lower for the year ended December 2012, when compared with the year ended December 31, 2011.

Adjusted EBITDA, decreased $80,229 or 21% to $(454,321) for year ended December 31, 2012, compared to EBITDA, net of above listed non-cash items of $(374,092) for the year ended December 31, 2011. The decrease in adjusted EBITDA, was less than the decrease in EBITDA for the year ended December 31, 2012, compared to the year ended December 31, 2011 by $15,369 due to the increase in the payment of stock and warrants to consultants plus and employee stock options expense mostly offset by the decrease in Stock warrant expense.

Liquidity and Capital Resources

Total current assets were $861,037 at year ended December 31, 2012, consisting of cash of $79,136, net accounts receivable of $21,011, inventory of $629,251 and prepaid and other current assets of $131,639.

Total current liabilities were $2,441,655 as of December 31, 2012, consisting of accounts payable and accrued expenses of $1,201,619, current maturities of long-term debt of $1,071,128 and other current liabilities of $168,908.

As of December 31, 2012, our working capital deficit decreased $1,746,346 or 52% to $(1,580,618) compared to our working capital deficit of $(3,326,964) for the year ended December 31, 2011.

Cash Flows during the year ended December 31, 2012

During the year ended December 31, 2012, we had a net increase in cash and cash equivalents of $24,004 mostly consisting of net cash used in operating activities of $1,449,464 and net cash provided by financing activities of $1,477,318.


Net cash used by operating activities was $1,449,464 for the year ended December 31, 2012, consisting of an increase in: net inventory of $573,024, prepaid expenses of $64,807, accounts receivable and provision for credit losses of $19,892, accounts payable and accrued expenses of $13,612 and decreases in deferred revenue of $69,854. These changes were reduced by net loss of $1,071,968 which had adjustments for depreciation and amortization of $34,337, employee stock options of $41,002, warrants issued in connection with debt requirements of $134,741, and stock and warrants issued for services of $180,989, and change in fair value of warrant liability of $(54,600).

Net cash used in investing activities was $3,850 for the year ended December 31, 2012, consisting of the purchase of equipment.

Net cash provided by financing activities was $1,477,318 for the year ended December 31, 2012, primarily consisting of proceeds from the sale of stock and warrants of $1,685,000, proceeds from options exercised of $1,702, and net proceeds from debt of $313 partially offset by the payment of debt of $209,696.

The Company also expects to need approximately $2,200,000 of cash to purchase inventory: $900,000 within the next six months and $1,300,000 more within the succeeding 6 months. The Company expects to generate the majority of these funds from operations. We estimate that for the next 12 months we will also need $300,000 for debt service.

The Company historically has incurred net losses, negative cash flows from operating activities, and has an accumulated deficit of approximately $7,900,000 at December 31, 2012. In addition, at December 31, 2012 the Company had a cash balance of $79,136 and working capital deficiency of approximately $1,580,000. Although the working capital deficiency has improved by $1,746,346 in one year, in both the near and long term, without additional financing, the Company is and will be in an illiquid position. The Company received cash through the sales of Common Stock and warrants to purchase Common Stock in the amount of $150,000 in the third quarter of 2011, $250,000 in the fourth quarter of 2011, $375,000 in the first quarter of 2012, $770,000 in the second quarter of 2012 and an additional $540,000 in the third quarter of 2012. The Company believes that its operations, exclusive of any research and development costs, can become operationally cash flow positive on an ongoing basis by the end of the third quarter of 2013, assuming the Company raises additional capital of $500,000 through the timely sales of stock. The Company believes that the receipt of additional equity will enable it to purchase adequate inventory to meet its existing sales demand and to be able to increase sales through advertising. There is no assurance that the Company will have any additional sales of stock or that the Company will be able to become operationally cash flow positive.

If the Company is successful in raising significant additional capital (of which there is no assurance), the Company intends to increase its budgets for advertising and marketing, targeting consumers who have shown an interest in the Company's or similar products. Additionally, the Company intends to increase its advertising and marketing expense with key resellers and partners such as large online resellers and international distributors. The Company also intends to hire one or more sales people to sell the Company's products to key markets including the home theater, commercial cinema and international markets.

We believe the combination of increased advertising and marketing spending combined with more sales people can increase our product's awareness, therefore increasing demand for our products and allowing the Company to have sales staff to secure more sales.


At this time, we have not secured additional financing. We do not have any commitments for additional capital from third parties or from our officers or directors or any of our shareholders to supplement our operations or provide us with financing in the future. There can be no assurance that additional capital will be available to us, or that, if available, it will be on terms satisfactory to us. If we are unable to increase revenues from operations, to raise additional capital from conventional sources and/or additional sales of stock in the future, we may be forced to curtail or cease our operations. These factors raise doubt in our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. There is substantial doubt that we can continue as a going concern for the next 12 months unless additional funding is secured by the Company.

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