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MSLPD > SEC Filings for MSLPD > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for MUSCLEPHARM CORP


13-Nov-2012

Quarterly Report


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

The following is discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2011.

Forward-Looking Information

Certain statements contained in this report on Form 10-Q are not statements of historical fact and constitute forward-looking statements within the meaning of the various provisions of the Securities Act of 1933, as amended, (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, the statements specifically identified as forward-looking statements within this report. Many of these statements contain risk factors as well. In addition, certain statements in our future filings with the U.S. Securities and Exchange Commission (the "SEC"), in press releases and in oral and written statements made by or with our approval which are not statements of historical fact constitute forward-looking statements within the meaning of the Securities Act and the Exchange Act. Examples of forward-looking statements, include, but are not limited to:
(i) projections of capital expenditures, revenues, income or loss, earnings or loss per share, capital structure, and other financial items, (ii) statements of our plans and objectives or our management or board of directors,
(iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such forward-looking statements are subject to a number of risks and uncertainties, including those identified in the "Risk Factors" section of our Annual Report on Form 10-K/A for the year ended December 31, 2011.

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 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.

Business Overview

We develop, market and sell athlete-focused, high quality nutritional supplements primarily to specialty resellers. Our products have been formulated to enhance active fitness regimens, including muscle building, weight loss and maintaining general fitness. Our nutritional supplements are available for purchase in over 10,000 U.S. retail outlets, including Dick's Sporting Goods, GNC, Vitamin Shoppe and Vitamin World. We also sell our products to over 100 online channels, including bodybuilding.com, amazon.com, gnc.com and vitacost.com. Internationally, our nutritional supplements are sold in over 110 countries, and we expect that international sales will be a significant part of our sales for the foreseeable future.

We started formulating our nutritional supplements in 2008 for consumption by active individuals, high performance athletes and fitness enthusiasts. We launched our sales and marketing programs in late 2008 through our internal sales executives and staff targeting specialty retail distributors.

Our wide-range variety of nutritional supplements, include Assault™, Combat Powder™, MusclePharm Musclegel®, MusclePharm Shred Matrix®, and Re-Con®. These products are comprised of amino acids, herbs, and proteins tested by our scientists for the overall health of athletes. We developed these nutritional supplements to enhance the effects of workouts, repair muscles, and nourish the body for optimal physical fitness.

Our Growth and Core Marketing Strategy

Our primary growth strategy is to:

· increase our product distribution and sales through increased market penetrations both domestically and internationally;

· increase our margins by focusing on streamlining our operations and seeking operating efficiencies in all areas of our operations;

· continue to conduct additional testing of the safety and efficacy of our products and formulate new products; and

· increase awareness of our products by increasing our marketing and branding opportunities through endorsements, sponsorships and brand extensions.

Our core marketing strategy is to brand MusclePharm as the "must have" fitness brand for workout enthusiasts and elite athletes. We seek to be known as the athlete's company, run by athletes who create their products for other athletes both professional and otherwise. We believe that our marketing mix of endorsers, sponsorships and providing sample products for our retail resellers to use is an optimal strategy to increase sales.

We have experienced significant growth in our product sales. Our net sales for the years ended December 31, 2010 and 2011 were $3.2 million and $17.2 million, respectively. Our net sales for the nine months ended September 30, 2011 and 2012 were $10.9 million and $50.6 million, respectively.

Results of Operations



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



                                                                      Three Months Ended
                                                                         September 30,
                                                                    2012               2011

Sales - net                                                    $    18,573,726     $   4,443,571
Cost of sales                                                       14,507,761         3,928,628
Gross profit                                                         4,065,965           514,943
General and administrative expenses                                  7,876,778         2,927,287
Loss from operations                                                (3,810,813 )      (2,412,344 )
Other income (expenses) - net                                       (2,263,224 )       2,528,653
Net Income (loss)                                              $    (6,074,037 )   $     116,309
Net loss per share - basic and diluted                         $             -     $           -
Weighted average number of common shares outstanding during
the period - basic and diluted                                   1,610,071,688       326,088,629

Sales

Sales increased approximately $14.1 million or 318% to $18,573,726 for the three months ended September 30, 2012, compared to $4,443,571 for the three months ended September 30, 2011. The increase in sales was due primarily to increased awareness of our product brand. Since inception, we have focused on an aggressive marketing plan to penetrate the market. As such, significant promotional expenditures have been made to increase product sales through adding new customers and expanding our product line. We have hired additional sales and marketing staff along with adding new products in an effort to expand our customer base. Another growth area was nutritional product sales in international markets. International sales are included in the results of operations and increased approximately $3.5 million or 502% to $4,149,956 for the three months ended September 30, 2012, compared to $689,085 for the three months ended September 30, 2011.

Overall as a direct result of our aggressive marketing plan, our products are currently being offered in more retail stores, both domestically and internationally, receiving better shelf placement, and receiving recognized awards compared to the prior period. At the 2012 Bodybuilding.com Supplement Awards, we received three Awards of Excellence; we received (i) the "Brand of the Year" award, (ii) the "Packaging of the Year" award, and (iii) the "Pre-Workout Supplement of the Year" award for AssaultTM.

Gross Profit

Gross profit increased approximately $3.6 million or 690% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Meanwhile, our gross profit percentage increased to approximately 22% during the three months ended September 30, 2012, from 12% for the three months ended September 30, 2011. The increase was primarily due to the reduction to discounts as a percentage of sales. For the three months ended September 30, 2012 the discounts as a percentage to sales was 10% compared to the three months ended September 30, 2011 of 23.5%. We expect to focus on streamlining our operations and seek operating efficiencies in order to further improve our gross profit percentage.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2012, increased approximately $4.9 million, or 169%, compared to the three months ended September 30, 2011. Our 318% increase in sales necessitated substantial increases in our general and administrative expenses to $7,876,778 of such costs for the three months ended September 30, 2012 compared to $2,927,287 for the like period in 2011.

The major increases were the result of: $1,220,636 in investment advisory costs due to two consulting contracts that require us to issue 8.4% of our common stock on an ongoing, fully diluted basis; $843,118 in increases of other professional fees due primarily to significant activity required to obtain financings and resolve disputes; $1,326,722 in increased advertising and promotions due to our increased levels of sales activities; and other increases in general administrative expenses of $1,704,702. The total increase in general administrative costs was partially offset by decreases in research and development costs of approximately $145,000.

With respect to our increase in advertising and promotions during the 2012 quarter, approximately $145,000 was due to increased trade show costs due to our increased sales activities, approximately $570,000 was due to product discounts at a major bodybuilding event in September 2012 to achieve broader overall show exposure and increase sales volumes, approximately $217,000 was due to greater multi-media advertising expense and approximately $594,000 was due to product sponsorships and athlete endorsements due to our increased level of sales activities. Also, we expect that as we continue to promote our brand and products, sponsorships and athlete endorsements will hold steady or possibly increase slightly if it is beneficial to our brand and product awareness and sales.

Although salaries and benefits increased significantly, they were approximately 6% of net sales for 2012 compared to approximately 12% of net sales in the 2011 period. We are seeking to maintain salaries and benefits at approximately 6% of net sales.

Loss from Operations

Our net loss from operations for the three months ended September 30, 2012, was $3,810,813, compared to $2,412,344 for the three months ended September 30, 2011. The decrease was primarily attributable to our aggressive plan we implemented to raise additional capital and retire warrants and existing debt which resulted in increased expenses during the three months ended September 30, 2012, compared to the three months ended September 30, 2011 discussed below.

Other Income (Expenses)

Other expenses were $2,263,224 for the three months ended September 30, 2012, compared to the $2,528,653 in other income for the three months ended September 30, 2011. Because almost all of our outstanding warrants were converted into common stock during the third quarter of 2012, we do not expect such significant charges per quarter for interest expenses, changes in fair value of derivate securities or losses on settlement of accounts payable and debt, and the resulting net expenses should be significantly lower. The components of our other income (expenses) are as follows:

                                                       Three Months Ended
                                                         September 30,
                                                      2012            2011

Derivative (expense) income                       $ (1,922,763 )   $   481,667
Change in fair value of derivative liabilities    $  4,403,875     $ 1,547,185
Loss on settlement of accounts payable and debt   $ (1,510,613 )   $         0
Interest (expense) income                         $ (3,265,053 )   $   499,801
Other income or expense                           $     31,330     $         0
                                                  $ (2,263,224 )   $ 2,528,653

Net Loss

For the foregoing reasons, we had a net loss of $6,074,307 for the three months ended September 30, 2012, compared to net income of $116,309 for the three months ended September 30, 2011.

Inflation did not have a material impact on our 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 our results of operations.

For the Nine Months Ended September 30, 2012 and 2011 (unaudited):



                                                                   Nine Months Ended
                                                                     September 30,
                                                                2012               2011

Sales - net                                                $    50,563,746     $  10,875,249
Cost of sales                                                   40,345,528         8,842,990
Gross profit                                                    10,218,218         2,032,259
General and administrative expenses                             16,420,665         7,425,596
Loss from operations                                            (6,202,447 )      (5,393,337 )
Other expenses                                                  (9,724,979 )      (6,938,899 )
Net loss                                                   $   (15,927,426 )   $ (12,332,236 )
Net loss per share - basic and diluted                     $         (0.01 )   $       (0.05 )
Weighted average number of common shares outstanding
during the period - basic and diluted                        1,407,785,680       225,410,157

Sales

Sales increased approximately $39.4 million or 365% to $50,263,746 for the nine months ended September 30, 2012, compared to $10,875,249 for the nine months ended September 30, 2011. The increase in sales was due primarily to increased awareness of our product brand. Since inception, we have focused on an aggressive marketing plan to penetrate the market. As such, significant promotional expenditures have been made to increase product sales by adding new customers and expanding our product line. We have hired additional sales and marketing staff and added new products in an effort to expand our customer base. Another growth area was nutritional product sales in international markets. International sales are included in the results of operations and increased to $17,357,099 for the nine months ended September 30, 2012, compared to $2,845,879 for the nine months ended September 30, 2011, an increase of approximately $14.5 million or 510%.

Overall as a direct result of our aggressive marketing plan, our products are currently being offered in more retail stores, both domestically and internationally, receiving better shelf placement, and receiving nationally recognized awards. At the 2012 Bodybuilding.com Supplement Awards, we received three Awards of Excellence; we received (i) the "Brand of the Year" award, (ii) the "Packaging of the Year" award; and (iii) the "Pre-Workout Supplement of the Year" award for AssaultTM.

Gross Profit

Our gross profit for the nine months ended September 30, 2012 of $10,218,218 increased approximately $8.2 million or 403% for the nine months ended September 30, 2012, compared to $2,032,259 for the nine months ended September 30, 2011. Meanwhile, the gross profit percentage increased slightly to approximately 20% during the nine months ended September 30, 2012, from 19% for the nine months ended September 30, 2011. We expect to focus on streamlining our operations and seeking operating efficiencies in order to further improve our gross profit percentage.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2012, increased approximately $9.0 million, compared to the nine months ended September 30, 2011. The increase in sales had corresponding increases in the general and administrative expenses bringing the total to $16,420,665 for the nine months ended September 30, 2012, compared to $7,425,596 for the nine months ended September 30, 2012.

The major increases were the result of: $1,220,636 in investment advisory costs due to two consulting contracts that require us to issue 8.4% of our common stock on an ongoing, fully diluted basis; $1,389,040 in increases of other professional fees due primarily to significant activity required to obtain financings, resolve disputes and restate certain prior period financial statements, as well as increased fees due for overall increased levels of activities and preparing to seek an exchange listing for our common stock; $3,108,329 in increased advertising and promotions due to our increased levels of sales activities, (which included $1,395,025 in increased product sponsorships and athlete endorsement costs); $1,474,055 in increased salaries and benefits expenses due to our overall significantly higher level of sales; and other increases in general administrative expenses of $2,092,482. These other increases in expenses included $514,122 in stock compensation, $235,795 in depreciation, and $225,795 in travel. The total increase in general and administrative costs was offset by decreases in research and development costs of approximately $299,494 and company support of $106,850.

We expect that as we continue to promote our brand and products, sponsorships and athlete endorsements will hold steady or possibly increase slightly if it is beneficial to our brand and product awareness and sales.

Although salaries and benefits increased significantly, they were 6% of net sales for the period compared to 12% of net sales in 2011. We are seeking to maintain salaries and benefits at 6% of net sales.

Loss from Operations

Our loss from operations for the nine months ended September 30, 2012, was $6,202,447, compared to $5,393,337 for the nine months ended September 30, 2011. The decrease is primarily attributable to our aggressive plan to raise additional capital and retire warrants and existing debt which result in increased expenses that were only partially offset by the resulting increase in sales as a result of such efforts during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.

Other Expenses

Other expenses were $9,724,979 for the nine months ended September 30, 2012, compared to the $6,938,899 for the nine months ended September 30, 2011. Because almost all of our outstanding warrants were converted into common stock during the third quarter of 2012, we do not expect such significant charges per quarter for interest expenses, changes in fair value of derivate securities or losses on settlement of accounts payable and debt, and the resulting net expenses should be significantly lower. The components of our other income (expenses) for the periods indicated are reflected in the table below:

                                                        Nine Months Ended
                                                          September 30,
                                                      2012             2011

Derivative expense                                $ (4,409,214 )   $ (3,576,192 )
Change in fair value of derivative liabilities    $  5,900,749     $  2,181,955
Loss on settlement of accounts payable and debt   $ (4,452,439 )   $ (2,542,073 )
Interest expense                                  $ (6,812,255 )   $ (3,002,589 )
Other income or expense                           $     48,180     $          -
                                                  $ (9,724,979 )   $ (6,938,899 )

Net Loss

For the foregoing reasons, net loss was $15,927,426, or $(0.01) per share, for the nine months ended September 30, 2012, compared to $12,332,236, or $(0.05) per share, for the nine months ended September 30, 2011.

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

Liquidity and Capital Resources



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



                                                   September 30, 2012       December 31, 2011       Increase/Decrease
Current Assets                                    $          5,833,776     $         4,016,833     $         1,816,943
Current Liabilities                               $         14,948,002     $        17,710,100     $        (2,762,098 )
Working Capital (Deficit)                         $         (9,114,226 )   $       (13,693,267 )   $        (4,579,041 )

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

At September 30, 2012, we had cash of $634,870 and a working capital deficit of approximately $9.1 million, compared to cash of $659,764 and a working capital deficit of approximately $13.7 million at December 31, 2011. The working capital deficit decrease of approximately $4.6 million was primarily due to a net decrease in derivative liabilities of approximately $7.0 million, an increase in accounts receivable of approximately $1.5 million, offset by an increase in customer deposits of approximately $0.9 million, an increase in the current portion of debt of approximately $2.6 million and an increase in accounts payable and accrued liabilities of approximately $0.8 million.

Cash provided by operating activities was $286,825 for the nine months ended September 30, 2012, as compared to cash used in operating activities of $4,075,448 for the nine months ended September 30, 2011. The increase in cash provided by operating activities of approximately $4.4 million for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was primarily due to an increased payables and customer deposits of approximately $6.1 million, an increase in depreciation and amortization of approximately $3.2 million, a decrease in accounts receivable of approximately $1.8 million and an increase in derivative expense of approximately $0.8 million offset by an increase net loss of approximately $3.6 million and a decrease in derivative liabilities of approximately $3.7 million.

Cash used in investing activities increased to $934,823 from $771,652 for the nine months ended September 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 provided by financing activities were $615,548 for the nine months ended September 30, 2012, compared to cash flows provided by financing activities of $4,803,396 for the nine months ended September 30, 2011. The approximately $4.2 million decrease was due to primarily to the approximately $5.2 million repayments of debt and approximately $0.5 million purchase of treasury stock offset by an increase in proceeds from issuance of debt of approximately $0.3 million and an increase in proceeds from warrant exercises of approximately $1.1 million.

                                                           Nine Months Ended
Cash Flows From Financing Activities:                        September 30,
                                                          2012            2011

Proceeds from issuance of debt                        $  4,823,950     $ 4,495,756
Repayment of debt                                       (5,241,234 )             -
Debt issuance costs                                       (166,950 )      (219,368 )
Repurchase of common stock                                (460,978 )             -
Proceeds from issuance of common stock and warrants      1,660,760         500,000
Cash overdraft                                                   -          27,008
Net Cash Provided By Financing Activities             $    615,548     $ 4,803,396

Going Concern

As reflected in the accompanying unaudited interim consolidated financial statements, we incurred a net loss of $15,927,426 and had net cash provided by operations of $286,825 for the nine months ended September 30, 2012 and a working capital deficit and stockholders' deficit of $9,114,226 and $7,297,593 respectively, at September 30, 2012. These factors raise substantial doubt about our ability to continue as a going concern.

Our ability to continue our 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 our working capital requirements. We may need to incur liabilities with certain related parties to sustain our existence.

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

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

• seeking additional third party debt and/or equity financing;

• continuing with the implementation of the business plan; and

• allocating sufficient resources to continue with advertising and marketing efforts.

We continue to explore potential expansion of products in order to boost sales, while leveraging distribution systems to achieve lower costs. We need to continue to raise capital in order to execute our business plan.

Off-Balance Sheet Arrangements

Other than the operating leases, as of September 30, 2012, we did not have any off-balance sheet arrangements. We are obligated under an operating lease for . . .

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