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GTMM > SEC Filings for GTMM > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for GUITAMMER CO

Form 10-Q for GUITAMMER CO


15-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Guitammer's Unaudited Condensed Consolidated Interim Financial Statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of Guitammer plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. 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.

OVERVIEW

Guitammer Company ("Guitammer-Ohio") was incorporated in Ohio on March 6, 1990, as a research, development and licensing company and manufacturer and marketer of low frequency audio transducers that allows users to feel low frequency sound ("bass") like a subwoofer but silent.

On May 18, 2011, Guitammer-Ohio caused the formation of a Nevada corporation with the same name (the "Registrant" "Company", "Guitammer-Nevada", "we", "us" and "our") and entered into a Plan and Agreement of Reorganization with Guitammer-Nevada pursuant to which (i) the shareholders of Guitammer-Ohio would exchange (on a one (1) for thirty-one thousand, two hundred and six (31,206) shares basis) their aggregate 1,602.3 issued and outstanding shares of common stock for an aggregate of 50,001,374 shares of Common Stock, par value $0.001 per share, of Guitammer-Nevada evidencing the same proportional interest in Guitammer-Nevada as they held in Guitammer-Ohio, and (ii) option and warrant holders to purchase an aggregate of 1,397.7 shares of common stock of Guitammer-Ohio would exchange (on a one (1) for thirty-one thousand, two hundred and six (31,206) shares basis) their options and warrants for options and warrants to purchase an aggregate of 43,616,626 shares of Common Stock, par value $0.001 per share, of Guitammer-Nevada in the same proportional interest in Guitammer-Nevada as they held in Guitammer-Ohio (the "Reorganization"). In addition, the Company issued to two lenders warrants to purchase shares of Guitammer-Ohio which because of the Reorganization would be converted into warrants to purchase an aggregate of 225,000 shares of our Common Stock, par value $0.001 per share. In order to save time and expense of creating and issuing new Guitammer-Nevada options and warrants, the Company's Board of Directors passed a resolution that the outstanding Guitammer- Ohio options and warrants would be and are deemed to be and constitute the Guitammer- Nevada options and warrants (on the said 1 for 31,206 shares basis) to purchase an aggregate of 43,841,626 shares of our Common Stock.


Critical Accounting Policies and Estimates

"Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of our significant accounting policies is included in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Our management regularly reviews our accounting policies to make certain they are current and also to provide readers of the interim condensed consolidated financial statements with useful and reliable information about our operating results and financial condition. Implementation of these accounting policies includes estimates and judgments by management based on historical experience and other factors believed to be reasonable. This may include judgments about the carrying value of assets and liabilities based on considerations that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies are most important to the portrayal of our financial condition and results of operations and require more significant judgments and estimates in the preparation of our interim condensed consolidated financial statements.

Accounts Receivable

Accounts receivable are carried at cost less an allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on current economic conditions.

Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. The Company recorded an allowance of approximately $4,600 at March 31, 2014 and December 31, 2013.

Inventory

Inventory, consisting of finished goods, is stated at the lower of cost or market. Cost is determined using the weighted average method. Inventory that is determined to be obsolete or not sellable is expensed immediately. The Company recorded a reserve for obsolete items of $10,415 at March 31, 2014 and December 31, 2013.


Revenue Recognition

The Company recognizes revenue from the sale of its products when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed and determinable, and collectability is reasonably assured.

Deferred Revenue

The Company received prepayment for products from some of its customers as the Company requires prepayment before goods are shipped to almost all international customers. As of March 31, 2014 and December 31, 2013 the Company had deferred revenue of $56,284 and $68,823, respectively. The Company recognizes revenue and decreases deferred revenue in accordance with the revenue recognition policy.

Income Taxes

Prior to the creation of the Nevada holding company formed on May 18, 2011, the Company had elected S Corporation status for Federal and Ohio state income tax purposes. Under these elections, the Company's taxable income was included on the stockholders individual income tax returns, and the Company made no provision for Federal and State income tax.

Effective with the Company redomiciling to Nevada on May 18, 2011, the Company elected C Corporation status for both Federal and State income tax purposes.

There were no uncertain tax positions at March 31, 2014 or December 31, 2013, as the Company's tax positions for open years meet the recognition thresholds of more likely than not to be sustained upon examinations. Tax returns for the years 2010 through 2012 are currently open to examination. Tax returns prior to 2010 are no longer subject to examination by tax authorities.

Shipping and Handling

Shipping and handling costs of approximately $25,859 and $46,997 for the periods ending March 31, 2014 and 2013, respectively, are included in general and administrative expenses in the statements of operations.

Research and development costs

The costs of research and development activities are expensed when incurred.

Stock Based Compensation

Share-based compensation is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest and is recorded over a defined service period. Compensation expense is recognized based on the estimated grant date fair value method using a Black-Scholes valuation model. It is the Company's policy to recognize expense using the straight-line method over the vesting period.


RESULTS OF OPERATIONS

Three months ended March 31, 2014

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

Results of Operations

During the second half of 2013 and the first quarter of 2014, the Company spent considerable capital resources implementing and commercializing its patented tactile broadcast technology for the ESPN2 broadcasts of the National Hot Rod Association (NHRA) and in related activities with other broadcast parties in order to prove that it has the ability to bring the actual feel of live sporting events to sports fans while watching in the comfort of their own home. Because of this, the Company experienced a shortage of available working capital required to fund certain inventory requirements related to its existing consumer products business and this had a corresponding negative effect on revenues for the quarter.

Management believes that the further development and implementation of this broadcast technology will produce the greatest amount of long term value for its shareholders and will help to enable it to secure the financing needed to purchase adequate levels of all inventory items in future periods while continuing the implementation and commercializing its patented tactile broadcast technology for live sporting events.

Revenue decreased $214,375 or 40.8%, to $311,052 for the three months ended March 31, 2014, compared to revenue of $525,427 for the three months ended March 31, 2013. Management believes revenues for the three months ended March 31, 2014, could have been significantly larger, but the company sold out of the Bk4-4 transducer in mid-February, a key component in our best-selling home theater kit, which was a major factor in the Company's sales backorders accumulating to approximately $100,000 at March 31, 2014.

Cost of goods sold decreased $139,155, or 45.4%, to $167,463, for the three months ended March 31, 2014, compared to cost of goods sold of $306,618 for the three months ended March 31, 2013. The 45.4% decrease in the cost of goods sold for the three months ending March 31, 2014 corresponds closely with the 40.8% decrease in revenue for the same time period, but is slightly larger due to variations in the sales mix of products sold as the profit margin on some products are slightly higher.

Gross profit decreased by $75,220 or 34.4% to $143,589 for the three months ended March 31, 2014, compared to gross profit of $218,809 for the three months ended March 31, 2013. Our gross margin percentage increased to 46.2% for the three months ended March 31, 2014 compared to 41.6% for the three months ended March 31, 2013, for the reasons mentioned in the cost of goods sold paragraph above.


General and administrative expenses decreased $3,880, or .9%, to $435,545 for the three months ended March 31, 2014, compared to general and administrative expenses of $439,425 for the three months ended March 31, 2013. Significant variations within the general and administrative expenses were as follows:

                                      March 31,      March 31,        Increase
                                         2014           2013         (Decrease)
Advertising and marketing             $   47,275     $    7,949     $     39,326
Freight and related expenses              26,950         63,730          (36,780 )
Stock warrant expense                    (11,050 )        8,858          (19,908 )
Professional fees                        105,149        122,279          (17,130 )
Travel and entertainment expense          23,655         12,307           11,348
Depreciation                              10,956          1,111            9,845
All other general & admin. expenses      232,610        223,191            9,419
                                      $  435,545     $  439,425     $      3,880

Advertising and marketing increased by $39,326 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to advertising and marketing activities related to its agreement with the NHRA including an onsite fan experience trailer and television commercials airing on ESPN2.

Freight and related expenses decreased $36,780 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to the receipt of fewer containers of finished product from our overseas manufactures during the three months ending March 31, 2014.

Stock warrant expense decreased by approximately $19,908 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to adjusting the stock warrants liability based the Black-Scholes valuation model which is used to estimate the fair value of the warrants.

Professional fees decreased $17,130 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to a decrease in consulting expenses.

Depreciation expense increased by $9,845 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, due to the increased depreciation associated with equipment purchased for the tactile enhanced live sports broadcast of the NHRA.

Travel and entertainment expense increased by $11,348 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to the increase in travel related to the tactile enhanced live sports broadcast of the NHRA.

Research and development expenses increased $9,489 to $10,782 for the three months ended March 31, 2014, compared to $1,293 for the three months ended March 31, 2013. The increase was attributable to development costs for its haptic-tactile broadcast technology for live sports broadcasts including a series of successful integration and broadcast tests on a regional sports network with a major sports team. The Company was able to capture, process, and broadcast the tactile effect of a live sporting event from the sports arena to the home for a second type of major sporting event, the first being the NHRA.

Loss from operations increased by $80,829 or 36.4% for the three months ended March 31, 2014 to $302,738 as compared to $221,909 for the three months ended March 31, 2013. The increase was caused by the decrease in gross profit and research and development expense as explained above offset partially by the decrease in general and administrative expenses. Management believes that the increase in loss from operations is due to being sold out of the Bk4-4 transducer in mid-February, a key component in our best-selling home theater kit, as mentioned above.


Interest expense decreased $1,634 or 3.0%, to $52,200 for the three months ended March 31, 2014, compared to interest expense of $53,834 for the three months ended March 31, 2013. The decrease was due primarily to the conversion of debt to equity, as illustrated in Notes to the Financial Statements, Note number 7, and the refinancing of the Ohio innovation loan in December of 2012.

Our net loss increased $79,200 for the three months ended March 31, 2014. We had net a loss of $354,937 (or basic and diluted net loss per share of $0.005) for the three months ended March 31, 2014, compared to net loss of $275,737 (or basic and diluted net loss per share of $0.004) for the three months ended March 31, 2013. The decrease was caused primarily by the decrease in gross profit and by the increase in research and development expense, partially offset by the decrease in interest expense and general and administrative expense.

The following table sets forth EBITDA for the Company, which is a non-GAAP measurement. EBITDA is defined as earnings (loss) before net interest expense, taxes, depreciation and amortization. Although EBITDA is not a measure 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 this measure in isolation or as a substitute for net income, operating income, or any other measure for determining the Company's operating performance that is calculated in accordance with GAAP. A reconciliation of EBITDA to the most comparable GAAP financial measure, net loss, follows: For the three months ended:

                                       March 31,      March 31,
                                          2014           2013
Net loss                               $ (354,937 )   $ (275,737 )
Adjustments
Interest expense                           52,200         53,834
Depreciation and patent amortization       12,762          2,938
Taxes                                           -              -
EBITDA                                   (289,975 )     (218,965 )

EBITDA decreased $71,010 or 32.4% to $(289,975) for the three months ended March 31, 2014, compared to EBITDA of $(218,965) for the three months ended March 31, 2013. The decrease in 2014 EBITDA was caused by the decrease in gross margin and the increase in research and development expense, offset partially by the decrease in interest expense and general and administrative expense.


Liquidity and Capital Resources

Total current assets were $590,502 as of March 31, 2014, consisting of cash of $34,815, net accounts receivable of $130,780, inventory of $419,936 and prepaid and other current assets of $4,971. Current assets decreased by $62,136 or 9.5% compared to current assets of $652,638 as of December 31, 2013 mainly due to the decrease in cash which resulted from the decrease in revenue as noted above.

Total current liabilities were $2,292,445 as of March 31, 2014, consisting of accounts payable of $647,522, accrued expenses of $383,119, current maturities of long-term debt of $1,165,997, deferred revenue of $56,284 and other current liabilities of $39,523. Current liabilities increased by $130,134 or 6.0% compared to current liabilities of $2,162,311 as of December 31, 2013 mainly due to the increase in Accounts payable.

The working capital deficit increased by $192,270 or 12.7% to $(1,701,943) for the three months ending March 31, 2014 compared to the working capital deficit of $(1,509,673) at December 31, 2013.

Cash Flows during the three Months Ended March 31, 2014

During the three months ended March 31, 2014 we had a net decrease in cash and cash equivalents of $105,416 primarily consisting of net cash used in operating activities of $203,380 partially offset by net cash provided by financing activities of $98,397.

Net cash used in operating activities was $203,380 for the three months ended March 31, 2014, consisting of an increase in: accounts receivable of $68,275, accounts payable and accrued expenses of 152,245 and decreases in: inventory of $23,825, prepaid expenses of $1,170, and deferred revenue of $12,539. These changes were reduced by net loss of $354,937 which had adjustments for depreciation and patent amortization of $12,762, amortization of deferred financing fees of $6,683, amortization of debt discount of $1,672 employee stock options of $35,868, stock and warrants issued for services of $29,375, and the decrease in fair value of warrant liability of $11,050.

Net Cash used in investing activities was $433 for the three months ended March 31, 2014 for the purchases of property and equipment.

Net cash provided by financing activities was $78,218 for the three months ended March 31, 2014, consisting of net proceeds from debt of $100,000 and the payment of debt of $21,782.

In order to meet current consumer product backlog and anticipated orders, the Company also expects to need approximately $2,000,000 of cash to purchase inventory in the next 12 months. The Company expects to generate these funds from operations with any deficit to be funded through capital raises. We estimate that for the next 12 months we will also need approximately $405,000 for debt service.


The Company historically has incurred net losses, negative cash flows from operating activities, and has an accumulated deficit of approximately $9,562,000 at March 31, 2014. In addition, at March 31, 2014 the Company had a cash balance of approximately $35,000 and working capital deficiency of approximately $1,702,000. Although the working capital deficiency has improved by approximately $1,625,000 since December 31, 2011, 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, $540,000 in the third quarter of 2012, $250,000 in the first quarter of 2013, $675,000 in the second quarter of 2013, and an additional $175,000 in the third quarter of 2013. 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 and marketing related activities. 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 expenses by advertising directly to customers who experience its products in ButtKicker equipped cinemas. 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 the Company's recent success in tactically enhancing the NHRA on ESPN2, increased advertising and marketing spending and the addition of one or more sales people will drive demand for our products and will increase revenue and cash flow.

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 by June of 2014, 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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