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MSLP > SEC Filings for MSLP > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for MUSCLEPHARM CORP


15-May-2013

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 for the year ended December 31, 2012 that was filed with the SEC on April 1, 2013.

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 SEC, in press releases and in oral and written statements made by or with our approvals 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 for the year ended December 31, 2012.

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 on Form 10-Q.

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 currently 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 three months ended March 31, 2013 and 2012 were $22.6 million and $16.6 million, respectively.

Results of Operations



For the Three Months Ended March 31, 2013 and 2012 (unaudited):



                                                            Three Months Ended
                                                                 March 31,
                                                          2013               2012

Sales - gross                                        $   24,924,036     $   19,302,769
Discounts and sales allowances                           (2,362,869 )       (2,742,089 )
Sales - net                                              22,561,167         16,560,680
Cost of sales                                            14,396,406         12,895,162
Gross profit                                              8,164,761          3,665,518
General and administrative expenses                       8,886,241          4,392,811
Loss from operations                                       (721,480 )         (727,293 )
Other income (expenses) - net                            (6,640,501 )      (15,308,000 )
Net Loss                                             $   (7,361,981 )   $  (16,035,293 )
Net loss per share - basic and diluted               $        (1.78 )   $       (11.23 )
Weighted average number of common shares
outstanding during the period - basic and diluted
This needs to have correct weighted shares post
reverse 850:1                                             4,128,679          1,428,024

Sales - gross

Gross sales increased approximately $5.6 million or 29% to $24,924,000 for the three months ended March 31, 2013, compared to $19,303,000 for the three months ended March 31, 2012. The increase in sales was due primarily to increased awareness of our product brand, combined with hiring additional sales and marketing staff, and adding new products in an effort to expand our customer base. 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.

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; (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, and MusclePharm remains the product of choice for the Ultimate Fighting Championship, UFC.

Discounts and sales allowances

Discounts and sales allowances for the three months ended March 31, 2013 decreased to approximately $2,363,000 as compared to $2,742,000 for the three months ended March 31, 2012. This decrease is driven by the continued efforts to place controls around this area and greater efforts to define customer terms and allowances.

Sales - net

Net sales increased approximately $6.0 million or 36% to $22,561,000 for the three months ended March 31, 2013, compared to $16,561,000 for the three months ended March 31, 2012. A significant growth area for the Company was nutritional product sales in international markets. International sales are included in the results of operations and increased approximately $3.5 million or 107% to $6,703,000 for the three months ended March 31, 2013, compared to $3,251,000 for the three months ended March 31, 2012.

Gross Profit

Gross profit increased approximately $4.5 million or 123% to $8,164,000 for the three months ended March 31, 2013, compared to $3,666,000 for the three months ended March 31, 2012. The gross profit percentage increased to approximately 36% of net sales during the three months ended March 31, 2013, from 22% for the three months ended March 31, 2012. This increase was primarily due to the reduction to discounts as a percentage of sales, new product pricing from our Tennessee manufacturer, and the reduction of shipping costs. As discussed in Note 2 of the financial statements for shipping, the Company is handling its own shipping and has decreased the cost to ship product to the customer thereby increasing gross profit. Shipping expense for the three months ended March 31, 2013 and 2012 respectively was $569,240 and $439,821.

For the three months ended March 31, 2013 the discounts as a percentage of net sales was 9.5% compared to the three months ended March 31, 2012 of 14%. We have also experienced a decrease in cost of goods sold as a result of improved product pricing For the three months ended March 31, 2013 the cost of goods as a percentage to sales was 64% compared to the three months ended March 31, 2012 of 78%. 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 ("G&A") expenses for the three months ended March 31, 2013, increased to approximately $8,886,000, compared to approximately $4,393,000 for the three months ended March 31, 2012 a 102%, increase. The main reason for this increase in G&A is the two consulting contracts of GRQ and Melechdavid. These contracts, categorized in the table below as professional fees, were entered into by the Company to promote the growth and expansion necessary to expand and raise capital and repay the previous existing debt by which the Company was encumbered. The total amount booked as expense for these advisory contracts in the first quarter of 2013 totaled approximately $3,579,000 and these contracts were satisfied as explained in Note 10 - Subsequent Events. This expense represents 80% of the total increase in the general and administrative expenses.

The 119% increase in sales necessitated increases in our general and administrative expenses and included $871,000 in the area of advertising and promotions used to promote brand and product awareness. We expect as we continue to promote our brand and products, these areas and levels of promotion will hold steady or increase relative to overall efforts to increase product awareness and sales. This increase was partially offset by a decrease in apparel and athlete endorsement/sponsorship of $384,000.

Another area of increase is legal fees of $194,000 related to efforts required to obtain financing and dispute resolutions

The $4.5 million increase in general and administrative expenses including the significant items listed above were partially offset by the decrease of $892,000 in stock based compensation.

The following table provides an overview of expense categories and percentage of net revenue:

                                          Three Months Ended March 31,
                                               % of                          % of
                                2013          Revenue         2012          Revenue
Advertising Expense          $ 2,317,377          10.3 %   $ 1,976,319          11.9 %
Operating Expense              1,145,556           5.3 %       662,719           4.0 %
Professional & R&D Expense     4,159,849          18.5 %       282,559           1.7 %
Salary and Wage Expense        1,263,459           5.6 %     1,471,214           8.9 %
Total G&A Expense            $ 8,886,241          39.6 %   $ 4,392,811          26.5 %

Loss from Operations

Our net loss from operations for the three months ended March 31, 2013, was $721,000, compared to $727,000 for the three months ended March 31, 2012.

Other Income (Expenses)

Other expenses were $6,641,000 for the three months ended March 31, 2013, compared to the $15,308,000 for the three months ended March 31, 2012. During the three months ended March 31, 2013, the Company issued warrants to convert 1,500,000 shares of preferred stock into 3,000,000 shares of common stock. Refer to Note 5 for further detail of costs related to derivative agreements.

                                                                   Three Months Ended
                                                                       March 31,
                                                                 2013             2012

Derivative expense                                           $    (96,913 )   $  (1,456,910 )
Change in fair value of derivative liabilities               $ (6,044,643 )   $  (8,357,171 )
Gain (loss) on settlement of accounts payable and debt       $    276,985     $  (2,941,826 )
Interest expense                                             $   (780,320 )   $  (2,570,516 )
Other income                                                 $      4,390     $      18,423
                                                             $ (6,640,501 )   $ (15,308,000 )

Net Loss

For the foregoing reasons, we had a net loss of approximately $7,362,000 for the three months ended March 31, 2013, compared to approximately $16,036,000 for the three months ended March 31, 2012.

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.

Liquidity and Capital Resources



The following table summarizes total current assets, liabilities and working
capital at March 31, 2013, compared to December 31, 2012.



                                                   March 31, 2013       December 31, 2012       Increase/Decrease
Current Assets                                    $     18,982,167     $         4,949,881     $        14,032,286
Current Liabilities                               $     13,309,425     $        16,520,456     $        (3,211,031 )
Working Capital (Deficit)                         $      5,672,742     $       (11,570,575 )   $        17,243,317

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.

On March 27, 2013, MusclePharm sold an aggregate of 703,236 shares of its common stock, $0.001 par value per share (the "Common Stock") at a per share price of $8.50 in a private placement (the "Private Placement") to certain accredited investors (the "Purchasers") for an aggregate purchase price of approximately $5,977,506, thereby providing working capital.

The Common Stock was sold pursuant to subscription agreements dated March 27, 2013 (the "Subscription Agreements") between the Company and the Purchasers. The Subscription Agreements contained customary terms regarding, among other things, representations and warranties and indemnification.

At March 31, 2013, we had cash of $8,483,000 and working capital of approximately $5,673,000, compared to cash of $0 and a working capital deficit of approximately $11,571,000 at December 31, 2012. The working capital increase of approximately $17,243,000 was primarily due to a net increase in cash of $8,493,000, an increase in accounts receivable of $4,726,000 and a decrease in current portion of debt of $4,008,000.

Cash used in operating activities was $3,206,969 for the three months ended March 31, 2013, as compared to cash provided by operating activities of $1,423,375 for the three months ended March 31, 2012. The increase in cash used in operating activities of approximately $4.6 million for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, was primarily due to a decrease in payables and customer deposits of approximately $2.5 million, a decrease in depreciation and amortization of approximately $2 million, an increase in accounts receivable of approximately $2.5 million, a decrease in loss on settlement of accounts payable of approximately $3.2million and a decrease in derivative expense and change in fair value of derivatives of approximately $3.7 million offset by a decrease net loss of approximately $8.7 million.

Cash used in investing activities decreased to $234,573 from $305,781 for the three months ended March 31, 2013 and 2012, due to slightly lower 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 $11,922,620 for the three months ended March 31, 2013, compared to cash flows provided by financing activities of $478,123 for the three months ended March 31, 2012. The approximately $12.4 million increase was due to primarily to the net increase of approximately $16.1 million net proceeds from equity offerings and a decrease of approximately $0.1 million in repurchases of shares, offset by a decrease of approximately $2.8 million in proceeds from issuance of debt and an increase in debt repayment of approximately $1 million.

                                                           Three Months Ended
Cash Flows From Financing Activities:                           March 31,
                                                          2013             2012

Proceeds from issuance of debt                        $          -     $  2,842,950
Repayment of debt                                       (4,390,386 )     (3,346,433 )
Debt issuance costs                                              -          (30,000 )
Repurchase of common stock                                (103,537 )       (230,400 )
Proceeds from issuance of common stock and warrants      5,977,499          285,760
Proceeds from issuance of preferred stock               12,000,000                -
Stock issuance costs                                    (1,560,956 )              -
Net Cash Provided By Financing Activities             $ 11,922,620     $   (478,123 )

Off-Balance Sheet Arrangements

Other than the operating leases, as of March 31, 2013, we did not have any off-balance sheet arrangements. We are obligated under an operating lease for the rental of office space. Future minimum rental commitments with a remaining term in excess of one year as of March 31, 2013 are as follows:

Years Ending December 31,

2013(9 months)                 $   260,210
2014                               436,688
2015                               311,209
Total minimum lease payments   $ 1,008,107

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP 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. We periodically evaluate the collectability of our 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.

We perform ongoing evaluations of our customers' financial condition and generally do not require collateral. Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects management's best estimate of amounts that may not be collectible. Allowances, if any, for uncollectible accounts receivable are determined based upon information available and historical experience.

We do not charge interest on past due receivables. Receivables are determined to be past due based on the payment terms of the original invoices.

Fair Value of Financial Instruments

We measure assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, 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 that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

· Level 3: Unobservable inputs reflecting our assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

Revenue Recognition

We record revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) product has been shipped or delivered,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.

Depending on individual customer agreements, sales are recognized either upon shipment of products to customers or upon delivery. We record sales allowances and discounts as a direct reduction of sales.

We have determined that advertising related credits that were granted to customers fell within the guidance of ASC No. 605-50-55 ("Revenue Recognition" - Customer Payments and Incentives - Implementation Guidance and Illustrations). The guidance indicates that, absent evidence of benefit to the vendor, appropriate treatment requires netting these types of payments against revenues and not expensing as advertising expense.

We have an informal seven day right to return products. There were nominal returns at the three month periods ended March 31, 2013 and 2012.

Foreign Currency

We began operations in Canada in April 2012. The Canadian Dollar was determined to be the functional currency as the majority of the transactions related to the day to day operations of the business are exchanged in Canadian Dollars. At the end of the period, the financial results of the Canadian operation are translated into United States Dollars, which is the reporting currency, and added to the U.S. operations for consolidated company financial results. The revenue and expense items are translated using the average rate for the period and the assets and liabilities at the end of period rate. Transactions that have completed the accounting cycle and resulted in a gain or loss related to translation are recorded in realized gain or loss due to foreign currency translation under other income expense on the income statement. Transactions that have not completed their accounting cycle but appear to have gain or loss due to the translation process are recorded as unrealized gain or loss due to translation and held in the equity section on the balance sheet until such date the accounting cycle of a transaction is complete and the actual realized gain or loss is recognized.

Beneficial Conversion Feature

For conventional convertible debt where the rate of conversion is below market value, we record a "beneficial conversion feature" ("BCF") and related debt discount.

When we record a BCF, the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt.

Derivative Liabilities

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, we use the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, we will continue our evaluation process of these instruments as derivative financial instruments.

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.

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