Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This quarterly report on Form 10-Q and other reports (collectively, the Filings) filed by Bergio International, Inc. (Bergio or the Company) from time to time with the U.S. Securities and Exchange Commission (the SEC) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Companys management as well as estimates and assumptions made by Companys management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words anticipate, believe, estimate, expect, future, intend, plan, or the negative of these terms and similar expressions as they relate to the Company or the Companys management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the Risk Factors section of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on April 15, 2014, relating to the Companys industry, the Companys operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require managements judgment in its application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
Plan of Operation
We concentrate our business on boutique, upscale jewelry stores. We currently sell our jewelry to approximately 50 independent jewelry retailers across the United States and 16 stores in Russia and have spent over $3 million in branding the Bergio name through tradeshows, trade advertising, national advertising and billboard advertising since launching the line in 1995. Our products consist of a wide range of unique styles and designs made from precious metals such as, gold, platinum, and Karat gold, as well as diamonds and other precious stones. We have approximately 100 to 150 product styles in our inventory, with prices ranging from $1,500 to $200,000. We have manufacturing control over our line as a result of having a manufacturing facility in New Jersey and an arrangement with a manufacturing company in Russia as well as subcontracts with facilities located in Italy.
It is our intention to establish Bergio as a holding company for the purpose of acquiring established jewelry design and manufacturing firms who possess branded product lines. Branded product lines are products and/or collections whereby the jewelry manufacturers have established their products within the industry through advertising in consumer and trade magazines as well as possibly obtaining federally registered trademarks of their products and collections. This is in line with our strategy and belief that a brand name can create an association with innovation, design and quality which helps add value to the individual products as well as facilitate the introduction of new products.
We intend to acquire design and manufacturing firms throughout the United States and Europe. If and when we pursue any potential acquisition candidates, we intend to target the top 10% of the worlds jewelry manufactures that have already created an identity and brand in the jewelry industry. We intend to locate potential candidates through our relationships in the industry and expect to structure the acquisition through the payment of cash, which will most likely be provided from third party financing, as well as our common stock but not cash generated from our operations. In the event we obtain financing from third parties for any potential acquisitions, Bergio may agree to issue our common stock in exchange for the capital received. However, as of the date of this report, we do not have any binding agreements with any potential acquisition candidates or arrangements with any third parties for financing.
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Results of Operations
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Three Months Ended
March 31,
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2014
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2013
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Dollar
Increase (Decrease)
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Percent
Increase(Decrease)
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Sales - Net
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$
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263,552
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$
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316,770
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$
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(53,218)
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(16.8)%
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Gross Profit
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$
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102,753
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$
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124,704
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$
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(21,951)
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(17.6)%
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Gross Profit as a Percentage of Revenue
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39.0%
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39.4%
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-
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-
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Sales
Net sales for the three months ended March 31, 2014 decreased $53,218 (16.8%) to $263,552 as compared to $316,770 for the three months ended March 31, 2013. The decrease in sales is primarily attributed to the weakness in the U.S. market offset partially by an increase in sales to Russia.
Typically, revenues experience significant seasonal volatility in the jewelry industry. The first two quarters of any given year typically represent approximately 25%-35% of total year revenues, based on historic results. The holiday buying season during the last two quarters of every year typically account for the remainder of annual sales. This year there has been a general slowdown in the market.
Gross Profit
Gross profit for the three months ended March 31, 2014 decreased $21,951 (17.6%) to $102,753 as compared to $124,704 for the three months ended March 31, 2013. The decrease in gross profit is primarily due to a decrease in sales. During the three months ended March 31, 2014, our gross profit as a percentage of sales was 39.0% as compared to a gross profit as a percentage of sales of 39.4% for the three months ended March 31, 2013.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $147,372 (69.3%) to $359,909 for the three months ended March 31, 2014 as compared to $212,537 for three months ended March 31, 2013. This increase is attributed to higher marketing and travel expenses as well as increased investment banking fees.
Income (Loss) from Operations
As a result of the above, we had a loss from operations of $256,346 for three months ended March 31, 2014 as compared $87,833 for the three months ended March 31, 2013.
Other Income (Expense)
For the three months ended March 31, 2104, the Company had other expense of $64,714 as compared to $192,585 for the three months ended March 31, 2013. The decrease in other expense is mostly attributed to the lower derivative expense and the gain on the extinguishment of derivative offset mostly by loss on the change in the fair value of the derivative. These are non-cash transactions and are primarily attributed to the effect of the price of the underlying stock on the derivative liability.
Net Income (Loss)
As a result of the above, the Company incurred a net loss of $321,059 for the three months ended March 31, 2014 as compared to a net loss of $280,418 for the three months ended March 31, 2013.
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Liquidity and Capital Resources
The following table summarizes working capital at March 31, 2014, compared to December 31, 2013.
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March 31, 2014
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December 31, 2013
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Increase/
(Decrease)
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Current Assets
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$
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2,366,766
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$
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2,390,979
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$
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(24,213)
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Current Liabilities
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$
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608,659
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$
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666,420
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$
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(57,761)
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Working Capital
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$
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1,758,107
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$
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1,724,559
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$
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33,548
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At March 31, 2014, we had cash of $132,012 as compared to a cash balance of $-0- at December 31, 2013, an increase of $132,012. Over the next twelve months we believe that our existing capital combined with available borrowing under our bank line of credit and anticipated cash flow from operations will be sufficient to sustain our current operations. Additionally, our major stockholder has agreed to continue, from time to time as needed, to advance funds under similar terms as his current advances. It is anticipated that we will need to sell additional equity and/or debt securities in the event we locate potential mergers and/or acquisitions.
Our working capital increased $33,548. This increase is primarily attributed to a decrease in convertible debt and derivative liability and an increase in cash offset partially lower accounts receivable and higher bank lines of credit and accounts payable and accrued liabilities.
Accounts receivable - net at March 31, 2014 and December 31, 2013, was $524,419 and $763,187, respectively, representing a decrease of $238,768 or 31.3%. We typically offer our customers 60, 90 or 120 day payment terms on sales, depending upon the product mix purchased. When setting terms with our customers, we also consider the term of the relationship with individual customers and managements assessed credit risk of the respective customer, and may at managements discretion, increase or decrease payment terms based on those considerations. The decrease is mainly attributed to collecting receivables from prior periods. Inventory at March 31, 2014 and December 31, 2013, was $1,684,154 and $1,611,584, respectively. Our management seeks to maintain a very consistent inventory level that it believes is commensurate with current market conditions and manufacturing requirements related to anticipated sales volume. We historically do not have an inventory reserve for slow moving or obsolete products due to the nature of our inventory of precious metals and stones, which are commodity-type raw materials and rise in value based on quoted market prices established in actively trade markets. This allows for us to resell or recast these materials into new products and/or designs as the market evolves.
Accounts payable and accrued liabilities at March 31, 2014, were $141,277, compared to $119,333 at December 31, 2013, which represents an 18.4% increase. The main reason for the increase is managements attempt to control our payables in these economic conditions in order to improve our cash flow. Advances from our major stockholder at March 31, 2014, were $144,011, compared to $153,550 at December 31, 2013. The decrease is a result of making re-payments to our major stockholder.
During the three months ended March 31, 2014, the Company had a net increase in cash of $132,012. The Companys principal sources and uses of funds were as follows:
Cash used in operating activities.
For the three months ended March 31, 2014, the Company used $19,297 in cash for operations as compared to $100,459 in cash for the three months ended March 31, 2013. This decrease is primarily attributed to the lower change in inventories.
Cash used in investing activities.
Net cash used in investing activities was $10,490 for the three months ended March 31, 2014 as compared to $15,844 for the three months ended March 31, 2013, due to a decrease in purchases of equipment.
Cash provided by financing activities.
Net cash provided by financing activities for the three months ended March 31, 2014 was $161,799 as compared to $64,567 for the three months ended March 31, 2013. This increase was primarily the result of the increase in proceeds from bank lines of credit and from the sale of common stock and lower payments towards the advances to the shareholder offset partially by lower proceeds from convertible debt.
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Bank Lines of Credit and Notes Payable
Our indebtedness is comprised of various bank credit lines, term loans, capital leases and credit cards intended to provide capital for the ongoing manufacturing of our jewelry line, in advance of receipt of the payment from our retail distributors.
In December 2011, we entered into a $75,000 bank line of credit agreement with Columbia Bank. During 2013, the Company increased the credit line to $175,000. Interest is at the banks prime rate plus 1.75% with a minimum rate of 5.75%. The line is collateralized by our assets as well as a personal guarantee by our Chief Executive Officer, Berge Abajian. As of March 31, 2014, we had an outstanding balance of $170,000.
In addition to term loans, we have a number of various unsecured credit card obligations. These obligations require minimal monthly payments of interest and principal and as of December 30, 2013, have interest rates ranging from 3.99% to 8.75%. As of March 31, 2014, we have outstanding balances related to these obligations of $65,550.
Convertible Debt
We have convertible debt notes maturing in various months during 2014 with the latest maturity of October 23, 2014. The notes carry an interest rate of 8%. The conversion feature is accounted for as an embedded derivative carried on our balance sheet at fair value and any unrealized change in fair value is a component on our statement of operations. The embedded derivative is valued using the Black-Scholes pricing model. At March 31, 2014, convertible debt of $76,291 is net of debt discount of $5,513. We have made a concerted effort to reduce convertible debt, because of its dilutive effects, and have significantly reduced this debt over the last few years.
Satisfaction of Our Cash Obligations for the Next 12 Months
A critical component of our operating plan impacting our continued existence is to efficiently manage the production of our jewelry lines and successfully develop new lines through our Company or through possible acquisitions and/or mergers. Our ability to obtain capital through additional equity and/or debt financing, and joint venture partnerships will also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to reduce the growth of our operations. This may materially impact our ability to increase revenue and continue our growth.
Over the next twelve months we believe that our existing capital combined with cash flow from operations and advances from our major stockholder will be sufficient to sustain our current operations. However, in the event we locate potential acquisitions and/or mergers we will most likely need to obtain additional funding through the sale of equity and/or debt securities. There can be no assurance that if additional funding is required we will be able to secure it on terms that are favorable to us or at all.
Research and Development
We are not anticipating significant research and development expenditures in the near future.
Expected Purchase or Sale of Plant and Significant Equipment
We do not anticipate the purchase or sale of any plant or significant equipment; as such items are not required by us at this time.
Significant Changes in the Number of Employees
We currently have three full-time employees and three part-time employees. Of our current employees, one is in sales and marketing p, two are manufacturing and three hold administrative and executive positions. None of our employees are subject to any collective bargaining agreements. We do not anticipate a significant change in the number of full time employees over the next 12 months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results or operations, liquidity, capital expenditures or capital resources that is deemed material.
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Critical Accounting Policies
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported period.
Our critical accounting policies are described in Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on April 15, 2014 (the Annual Report). There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2014 consolidated financial statements included in our Annual Report.
Recently Issued Accounting Standards
For the three months ended March 31, 2014, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Companys financial position, operations or cash flows.