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MSLP > SEC Filings for MSLP > Form 10-Q on 20-Aug-2012All Recent SEC Filings

Show all filings for MUSCLEPHARM CORP

Form 10-Q for MUSCLEPHARM CORP


20-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report on Form 10-Q and other reports filed by our Company from time to time with the United States Securities and Exchange Commission (collectively the "Filings") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management and made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. 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 us or our management identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including those set forth in the Risk Factors in Part II Item 1A, and elsewhere in our annual report on Form 10-K/A for the year ended December 31, 2011. 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 we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do 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 management's judgment in its application. There are also areas in which management's 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

Headquartered in Denver, Colorado, with sales offices in Idaho and Canada, MusclePharm is a rapidly expanding healthy life-style company that develops and distributes a full line of scientifically approved, nutritional supplements that are 100% free of any banned substances. Based on years of research, MusclePharm products are created through an advanced six-stage research protocol involving the expertise of top nutritional scientists and field tested by more than 100 elite professional athletes from various sports including the National Football League, mixed martial arts, and Major League Baseball. The Company's propriety and award winning products address all categories of an active lifestyle including muscle building, weight loss, and maintaining general fitness through a daily nutritional supplement regimen. MusclePharm is sold in over 120 countries and available in over 5,000 U.S. retail outlets, including GNC, Vitamin Shoppe, and Vitamin World. The Company also sells its products in over 100 online stores, including bodybuilding.com, amazon.com and vitacost.com.

Our primary focus over the next 12 months is on the following:

(1) Increase our distribution and sales;

(2) Continue aggressive marketing campaign to further build upon our brand and market awareness; and,

(3) Conduct additional testing of the safety and efficacy of our products; and,

(4) Hire additional key employees to continue to strengthen the Company; and,

(5) Raising of capital through debt and /or equity markets

Results of Operations



For the Six Months Ended June 30, 2012 and 2011 (unaudited):



                                                                 Six Months Ended June 30,
                                                                  2012               2011
Sales - net                                                  $    31,990,020     $   6,431,678
Cost of sales                                                     25,837,767         4,914,361
Gross profit                                                       6,152,253         1,517,317
General and administrative expenses                                8,543,887         4,498,310
Loss from operations                                              (2,391,634 )      (2,980,993 )
Other expense - net                                               (7,461,755 )      (9,467,552 )
Net loss                                                     $    (9,853,389 )   $ (12,448,545 )
Other comprehensive income                                            40,719                 -
Total comprehensive income (loss)                            $    (9,812,670 )   $ (12,448,545 )
Net loss per share - basic and diluted                       $         (0.01 )   $       (0.07 )
Weighted average number of common shares outstanding
during the period - basic and diluted                          1,301,222,184       174,365,323

Sales

Sales increased approximately $25,558,000 or 397%, to approximately $31,990,000 for the six months ended June 30, 2012, as compared to approximately $6,432,000 for the six months ended June 30, 2011. The increase in sales was primarily attributable to increased brand awareness, and the Company's continued efforts to expand sales by adding more customers. Since inception, the Company has focused on an aggressive marketing plan to penetrate the market. As such, new promotional efforts have been made to increase sales by adding new customers and expanding our product line. The Company has continued to add new products to meet our customer's needs. The inclusion of new Gel squeeze tubes in various flavors has increased sales and more customers are now adding the Muscle Gel to their shelf line. The Company has added new sales staff familiar with international sales, and this effort is now beginning to show results through increased sales in the international markets. Overall, as a direct result of the aggressive marketing plan, our products are currently being offered in more retail stores, both domestic and international, and our products are receiving better shelf placement, all of these efforts have increased sales.

Cost of Sales

The cost of sales for the six months ended June 30, 2012, was approximately $25,838,000 compared to approximately $4,914,000 for the same period last year 2011. Cost of sales as a percent of revenue increased from 76% for the six months ended June 30, 2011 to 81% of revenue for the six months ended June 30, 2012. This increase in cost of sales was the result of adding Canadian shipping, and product cost for the second quarter of 2012 that had not previously existed, and an overall increase in shipping costs. There was also a slight increase in product damages in 2012 over the same period in 2011.

Gross Profit

Gross profit for the six months ended June 30, 2012, is approximately $6,152,000 and increased approximately $4,635,000 over the six months ended June 30, 2011. Meanwhile the gross profit percentage decreased to approximately 19% during the six months ended June 30, 2012 from 24% for the same period ended June 30, 2011, mainly the result of providing deeper discounts for customer's purchases in the second quarter of 2012.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2012, increased to approximately $8,544,000 or approximately $4,046,000 or 90%, compared to the same six months ended June 30, 2011. The increased sales for the quarter ending June 30, 2012 had corresponding increases in the general and administrative expenses as compared to the six months ended June 30, 2011, mainly for foreign transaction fees and Canadian operations, while the general and administrative costs rose correspondingly to the increase in sales.

Other major increases were approximately $1,800,000 in advertising, $900,000 in increases for stock based compensation $800,000 in salaries and benefits, $200,000 in travel, $200,000 in depreciation and $100,000 in office expenses.

Loss from Operations

The loss from operations for the six months ended June 30, 2012, was $2,391,634 as compared to a loss of $2,980,993 for the comparable six months ended June 30, 2011.

Other Expenses



Other net expenses for the six months ended June 30, 2012, were $7,461,755, as
compared to $9,467,552 for the six months ended June 30, 2011. The components of
other expenses are shown in the table below:



                                                           Six Months Ended
                                                   June 30, 2012       June 30, 2011
Derivative expense                                $    (2,486,451 )   $    (4,057,859 )
Change in fair value of derivative liabilities          1,496,874             634,770
Loss on settlement of accounts payable and debt        (2,941,826 )        (2,542,073 )
Interest expense                                       (3,547,202 )        (3,502,390 )
Foreign currency transaction loss                          (1,573 )                 -
Other income (expense)                                     18,423                   -
 Total other expense - net                        $    (7,461,755 )   $    (9,467,552 )

The decrease in this expense category of $2,005,797 was mainly attributed to the changes in fair value of derivative contracts and derivative expense approximately $2,400,000.

Net Loss

Net loss for the six months ended June 30, 2012, was $9,853,389, or $(0.01) per share as compared to $12,448,545 or loss per share of $(0.07) for the six months ended June 30, 2011.

Inflation did not have a material impact on the Company's operations for the period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company's results of operations.

Other Comprehensive Income

The Company recognized $40,719 of other comprehensive income related to translation adjustments for transactions entered into in Canadian Dollars and translated to US Dollars for the six months ended June 30, 2012.

For the Three Months Ended June 30, 2012 and 2011 (unaudited):



                                                                Three Months Ended June 30,
                                                                  2012               2011
Sales - net                                                  $    15,429,340     $   3,397,742
Cost of sales                                                     12,942,605         2,512,828
Gross profit                                                       2,486,735           884,914
General and administrative expenses                                4,151,076         2,778,682
Loss from operations                                              (1,664,341 )      (1,893,768 )
Other income (expense) - net                                       7,846,245        (5,542,855 )
Net income (loss)                                            $     6,181,904     $  (7,436,623 )
Other comprehensive income                                            40,719                 -
Total comprehensive income (loss)                            $     6,222,623     $  (7,436,623 )
Net loss per share - basic and diluted                       $          0.00     $       (0.04 )
Weighted average number of common shares outstanding
during the period - basic and diluted                          1,388,624,267       201,864,655

Sales

Sales increased 354% to approximately $15,429,000 for the three months ended June 30, 2012, as compared to approximately $3,398,000 for the three months ended June 30, 2011. The increase of approximately $12,031,000 in this three month period in sales was primarily attributable to increased brand awareness combined with strategic marketing efforts to add new customers with higher volume of product sales. Since inception, the Company has focused on an aggressive marketing plan to penetrate the market. As such, new promotional efforts have been made which increased sales. The inclusion of new Gel squeeze tubes in various flavors has increased sales and seems to be reaching new customer demands. Another area of the increase is due to the growth in the international markets. Overall as a direct result of the aggressive marketing plan, our products are currently being offered in more retail stores, both domestic and international, and our in products are receiving better shelf placement.

Cost of Sales

The cost of sales for the three months ended June 30, 2012 was approximately $12,943,000 compared to approximately $2,513,000 for the same period last year. Cost of sales as a percent of revenue increased from 74 % for the three months ended June 30, 2011 to 84% of revenue for the three months ended June 30, 2012. This increase in cost of sales was the result of adding Canadian shipping, and product cost for the second quarter of 2012 that had not previously existed, and an overall increase in product cost and shipping costs as a percent of revenue.

Gross Profit

Gross profit increased to approximately $2,487,000 or approximately $1,602,000 more for the three months ended June 30, 2012 than the same three months ended June 30, 2011. Meanwhile the gross profit percentage decreased to approximately 16% during the three months ended June 30, 2012 from approximately 26% for the same period ending June 30, 2011, as a result of adding the Canadian operations.

In the second quarter ending June 30, 2012 the Company provided aggressive promotional sales discounts which totaled $3,440,000 or 19% off of the regular selling prices. The total product sold in this period was approximately $18,869,000. This discounting of product was approximately 10% more than normal, thereby decreasing overall gross profit to approximately 16% compared to the 26% gross profit margin for the same three months ending June 30, 2011.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2012 increased approximately $1,372,000 over the same three months ended June 30, 2011. The increases seen in sales had corresponding increases in the general and administrative expenses with additional sales staff and office related expenses bringing the total to approximately $4,151,000 for the quarter ending June 30, 2012, as compared to approximately $2,779,000 for the comparable three months ended June 30, 2011.

The major increases were the result of approximately $400,000 in advertising, $300,000 in legal fees, $400,000 for salaries and benefits, $200,000 in stock based compensation, and $200,000 in increased travel and office expenses.

Loss from Operations

The loss from operations for the three months ended June 30, 2012, was $1,664,341 as compared to a loss of $1,893,768 for the comparable three months ended June 30, 2011.

Other Income and Expenses

Other income for the three months ended June 30, 2012, were $7,846,245, as compared to other expenses of $5,542,855 for the comparable three months ended June 30, 2011. The increase in other income of $13,389,100 is comprised of items shown in the table below:

                                                          Three Months Ended
                                                   June 30, 2012       June 30, 2011

Derivative expense                                $    (1,029,541 )   $    (2,698,490 )

Change in fair value of derivative liabilities    $     9,854,045     $       766,487

Loss on settlement of accounts payable and debt   $             -     $      (627,384 )

Interest expense                                  $      (976,686 )   $    (2,983,468 )

Foreign currency transaction loss                 $        (1,573 )   $             -

Other income (expense)                            $             -     $             -

Total other income and expenses                   $     7,846,245     $    (5,542,854 )

The increase in this income category was mainly attributed to the changes in fair value of derivative contracts and derivative expense of approximately $10,800,000.

Net Income (Loss)

Net income for the three months ended June 30, 2012, was $6,181,904, or $0.00 per share, as compared to a net loss of $7,436,623 or loss per share of $(0.04) for the three months ended June 30, 2011.

Inflation did not have a material impact on the Company's operations for the period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company's results of operations.

Other Comprehensive Income

The Company recognized $40,719 of other comprehensive income related to translation adjustments for transactions entered into in Canadian Dollars and translated to US Dollars for the three months ended June 30, 2012.

Liquidity and Capital Resources



The following table summarizes total current assets, liabilities and working
capital at June 30, 2012, compared to December 31, 2011.



                                                  December 31,
                              June 30, 2012           2011           Increase/Decrease
Current Assets              $     2,956,242     $    4,016,833     $        (1,060,591 )
Current Liabilities         $    15,624,259     $   17,710,100     $        (2,085,841 )
Working Capital (Deficit)   $   (12,668,017 )   $  (13,693,267 )   $         1,025,250

Our primary source of operating cash has been through the sale of equity and the issuance of convertible secured promissory notes and other short term debt as discussed below.

At June 30, 2012, the Company had cash of $291,971 and working capital deficit of approximately $12,668,000, compared to cash of $659,764 and a working capital deficit of approximately $13,700,000 at December 31, 2011.

Cash provided by operating activities was approximately $438,000 for the six months ended June 30, 2012, as compared to cash used in operating activities of approximately $2,600,000 for the six months ended June 30, 2011. The increase in cash provided by operating activities of approximately $3,100,000 for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was primarily due to increased payables and deferred revenues of approximately $1,000,000.

Cash used in investing activities increased to approximately $600,000 from approximately $300,000 for the six months ended June 30, 2012 and 2011, due to slightly higher spending on fixed assets. Future investments in property and equipment, as well as further development of our Internet presence will largely depend on available capital resources.

Cash flows used in financing activities were approximately $266,000 for the six months ended June 30, 2012, as compared to cash flows provided by financing activities of approximately $3,400,000 for six months ended June 30, 2011. The approximately $3,700.000 decrease is due to the $4,100,000 increase in repayments of debt.

                                                                   June 30,         June 30
Cash Flows From Financing Activities: For the Six Months Ended       2012            2011

Proceeds from issuance of debt                                   $  4,073,950     $ 3,648,083
Repayment of debt                                                  (4,058,442 )
Debt issuance costs                                                  (106,950 )      (204,093 )
Repurchase of common stock                                           (460,978 )
Proceeds from issuance of common stock and warrants                   285,760
Net Cash (Used In) Provided By Financing Activities              $   (266,660 )   $ 3,443,990

Going Concern

As reflected in the accompanying unaudited interim consolidated financial statements, the Company had a net loss of $9,853,389 for the six months ended June 30, 2012, and a working capital deficit and stockholders' deficit of $12,668,017 and $11,013,113 respectively, at June 30, 2012. These factors raise substantial doubt about the Company's ability to continue as a going concern.

The ability of the Company to continue its operations is dependent on management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, sale of aged debt to third parties in exchange for free trading stock, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur liabilities with certain related parties to sustain the Company's existence.

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.

In response to these problems, management has taken the following actions:

seeking additional third party debt and/or equity financing; and,
continue with the implementation of the business plan; and,
allocate sufficient resources to continue with advertising and marketing efforts.

Financing

Our primary source of operating cash has been through the sale of equity and the issuance of secured promissory notes.

The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to consolidate lower costs. The Company needs to continue to raise money in order execute the business plan.

Off-Balance Sheet Arrangements

In August 2010, the Company leased office space under a non-cancelable operating lease, expiring in December 2015 for their Denver office.

In February 2012, the Company leased office space under a non-cancelable operating lease, expiring in February 2013 for a warehouse in Idaho.

In April 2012, the Company leased office space under a non-cancelable operating lease, expiring in March 2014 for an office in Canada.

In July 2012, the Company leased office space under a non-cancelable operating lease, expiring in August 2015 for a Tennessee warehouse.

Future minimum annual rental payments for the above leases are approximately as follows:

2012 (6 months)                $   157,000
2013                               375,000
2014                               402,000
2015                               306,000
Total minimum lease payments   $ 1,240,000

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly from estimates.

Risks and Uncertainties

The Company operates in an industry that is subject to rapid change and intense competition. The Company's operations will be subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.

Principles of Consolidation

All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with United States of America generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly from estimates.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms. The accounts receivable are sent directly to the Company's third party manufacturer and netted with any outstanding liabilities to the manufacturer. Liabilities to the manufacturer totaled $2,351,060 at June 30, 2012, and are included in accounts payable and accrued liabilities. The Company periodically evaluates the collectability of its accounts receivable and considers the need to establish an allowance for doubtful accounts based upon historical collection experience and specific customer information. Accordingly, the actual amounts could vary from the recorded allowances. There is also a review of customer discounts at the period end and an accrual made for discounts earned but not yet received by quarter end.

Fair Value of Financial Instruments

The Company measures assets and liabilities at fair value based on an expected exit price which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices . . .

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