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MSLP > SEC Filings for MSLP > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for MUSCLEPHARM CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MUSCLEPHARM CORP


14-Aug-2013

Quarterly Report


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

The following 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 and filed with the SEC on April 1, 2013.

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.

Results of Operations



For the Three Months Ended June 30, 2013 and 2012 (unaudited):



                                                                  Three Months Ended
                                                                       June 30,
                                                                 2013             2012

Sales - gross                                                $ 28,515,483     $ 18,869,103
Discounts and sales allowances                                 (3,035,424 )     (3,439,763 )
Sales - net                                                    25,480,059       15,429,340
Cost of sales                                                  17,566,718       12,942,605
Gross profit                                                    7,913,341        2,486,735
General and administrative expenses                            10,654,272        4,151,076
Loss from operations                                           (2,740,931 )     (1,664,341 )
Other income - net                                                319,123        7,846,245
Net (Loss) Income                                            $ (2,421,808 )   $  6,181,904
Net (loss) income per share - basic and diluted              $      (0.34 )   $       3.78
Weighted average number of common shares outstanding
during the period - basic and diluted                           7,226,849        1,633,676

Sales - gross

Gross sales increased approximately $9.6 million or 51% to $28,516,000 for the three months ended June 30, 2013, compared to $18,869,000 for the three months ended June 30, 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.

In this quarter the Company launched a women's line named FitMiss. The momentum is beginning to show increasing sales for this new product line. The Company believes it has a good position for market share with a women's line of products. The Company is also considering other new products. 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 June 30, 2013 decreased to approximately $3,035,000 or 10.6% of gross sales as compared to $3,440,000 or 18.2% of gross sales for the three months ended June 30, 2012. This decrease in discounts and allowances is a result driven by continued efforts to place controls around discounting and greater efforts to define customer terms and allowances.

Sales - net

Net sales increased approximately $10.1 million or 65% to $25,480,000 for the three months ended June 30, 2013, compared to $15,429,000 for the three months ended June 30, 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 56% to $9,833,000 for the three months ended June 30, 2013, compared to $6,302,000 for the three months ended June 30, 2012.

Gross Profit

Gross profit increased approximately $5.4 million or 218% to $7,913,000 for the three months ended June 30, 2013, compared to $2,487,000 for the three months ended June 30, 2012. The gross profit percentage increased to approximately 31% of net sales during the three months ended June 30, 2013, from 16% for the three months ended June 30, 2012. This increase was primarily due to the reduction in 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 June 30, 2013 was 2.6% of net sales down from 3.2% of net sales for the three months ended June 30, 2012.

For the three months ended June 30, 2013 the discounts as a percentage of gross sales was 10.6% compared to the three months ended June 30, 2012 of 18.2%. We have also experienced a decrease in cost of goods sold as a result of improved product pricing For the three months ended June 30, 2013 the cost of goods as a percentage to sales was 69% compared to the three months ended June 30, 2012 of 84%. 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 June 30, 2013, increased to approximately $10,654,000, compared to approximately $4,151,000 for the three months ended June 30, 2012 a 157% increase. Part of the reason for this increase in G&A is 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 second quarter of 2013 totaled approximately $3.0 million and these contracts were satisfied as explained in Note 7 Stockholder's Equity. This expense represents 46% of the total increase in the general and administrative expenses. The Company's obligations under the GRQ and Melechdavid agreements were completely satisfied as of July 12, 2013 and the agreements have not been renewed or extended.

The 65% increase in sales necessitated increases in our general and administrative expenses and included $1,231,000 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.

Another area of increase is consulting expenses of $567,000 related to consulting on a variety of matters including investor relations, product research and development, product certifications, capital acquisition, and debt retirement.

The $6.5 million increase in general and administrative expenses including the significant items listed above were partially offset by the decrease of $182,000 in stock based compensation.

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

                                          Three Months Ended June 30,
                                                % of                         % of
                                 2013         Revenue         2012         Revenue
Advertising Expense          $  3,275,200        12.90 %   $ 2,044,005        13.20 %
Operating Expense               1,918,665         7.50 %     1,298,392         8.40 %
Professional & R&D Expense      3,862,997        15.10 %       612,239         4.00 %
Salary and Wage Expense         1,597,410         6.30 %       196,440         1.30 %
Total G&A Expense            $ 10,654,272        41.80 %   $ 4,151,076        26.90 %

Loss from Operations

The net loss from operations for the three months ended June 30, 2013, was approximately $2,741,000, compared to a net loss of approximately $1,664,000 for the three months ended June 30, 2012.

Other Income (Expenses)



Other income was $319,000 for the three months ended June 30, 2013, compared to
the $7,846,000 for the three months ended June 30, 2012. Refer to Note 5 for
further detail of costs related to derivative agreements.



                                                             Three Months Ended
                                                                  June 30,
                                                           2013            2012

Derivative expense                                       $       -     $ (1,029,541 )
Change in fair value of derivative liabilities           $ 272,681     $  9,854,045
Gain (loss) on settlement of accounts payable and debt   $  47,671     $          -
Interest expense                                         $  (1,125 )   $   (976,686 )
Other income                                             $    (104 )   $     (1,573 )
Total other expenses                                     $ 319,123     $  7,846,245

Net (Loss) Income

For the foregoing reasons, we had a net loss of approximately $2,422,000 for the three months ended June 30, 2013, compared to net income of approximately $6,182,000 for the three months ended June 30, 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.

For the Six Months Ended June 30, 2013 and 2012 (unaudited):



                                                            Six Months Ended
                                                                June 30,
                                                          2013             2012

Sales - gross                                         $ 53,439,519     $ 38,171,872
Discounts and sales allowances                          (5,398,293 )     (6,181,852 )
Sales - net                                             48,041,226       31,990,020
Cost of sales                                           31,963,124       25,837,767
Gross profit                                            16,078,102        6,152,253
General and administrative expenses                     19,540,512        8,543,887
Loss from operations                                    (3,462,410 )     (2,391,634 )
Other income (expenses) - net                           (6,321,379 )     (7,461,755 )
Net Loss                                              $ (9,783,789 )   $ (9,853,389 )
Net loss per share - basic and diluted                $      (1.72 )   $      (6.44 )
Weighted average number of common shares
outstanding during the period - basic and diluted        5,686,323        1,530,850

Sales - gross

Gross sales increased approximately $15.3 million or 40% to $53,440,000 for the six months ended June 30, 2013, compared to $38,172,000 for the six months ended June 30, 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.

In this quarter the Company launched a women's line named FitMiss. The momentum is beginning to show increasing sales for this new product line. The Company believes it has a good position for market share with a women's line of products. The Company is also considering other new products. 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 six months ended June 30, 2013 decreased to approximately $5,398,000 or 10.1% of gross sales as compared to $6,182,000 or 16.2% of gross sales for the six months ended June 30, 2012. This decrease in discounts and allowances is a result driven by continued efforts to place controls around discounting and greater efforts to define customer terms and allowances.

Sales - net

Net sales increased approximately $16.1 million or 50% to $48,041,000 for the six months ended June 30, 2013, compared to $31,990,000 for the six months ended June 30, 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 $7.5 million or 84% to $16,456,000 for the six months ended June 30, 2013, compared to $8,963,000 for the six months ended June 30, 2012.

Gross Profit

Gross profit increased approximately $9.9 million or 161% to $16,078,000 for the six months ended June 30, 2013, compared to $6,152,000 for the six months ended June 30, 2012. The gross profit percentage increased to approximately 33% of net sales during the six months ended June 30, 2013, from 19% for the six months ended June 30, 2012. This increase was primarily due to the reduction in 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 six months ended June 30, 2013 was 2.3% of net sales down from 3.3% of net sales for the six months ended June 30, 2012.

For the six months ended June 30, 2013 the discounts as a percentage of gross sales was 10.1% compared to the six months ended June 30, 2012 of 16.2%. We have also experienced a decrease in cost of goods sold as a result of improved product pricing For the six months ended June 30, 2013 the cost of goods as a percentage to sales was 67% compared to the six months ended June 30, 2012 of 81%. 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 six months ended June 30, 2013, increased to approximately $19,541,000, compared to approximately $8,544,000 for the six months ended June 30, 2012 a 129%, increase. A primary reason for this increase in G&A is 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 half of 2013 totaled approximately $6,592,000 and these contracts were satisfied as explained in Note 7 Stockholder's Equity. This expense represents 60% of the total increase in the general and administrative expenses. The Company's obligations under the GRQ and Melechdavid agreements were completely satisfied as of July 12, 2013 and the agreements have not been renewed or extended.

The 50% increase in sales necessitated increases in our general and administrative expenses and included $1,616,000 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 $307,000. Another area of increase is legal fees of $276,000 related to efforts required to obtain financing and dispute resolutions.

The $11 million increase in general and administrative expenses including the significant items listed above were partially offset by the decrease of $342,000 in stock based compensation.

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

                                           Six Months Ended June 30,
                                                % of                         % of
                                 2013         Revenue         2012         Revenue
Advertising Expense          $  5,592,577        11.60 %   $ 3,976,840        12.40 %
Operating Expense               3,064,221         6.40 %     2,004,595         6.30 %
Professional & R&D Expense      8,022,846        16.70 %       894,798         2.80 %
Salary and Wage Expense         2,860,868         6.00 %     1,667,654         5.20 %
Total G&A Expense            $ 19,540,512        40.70 %   $ 8,543,887        26.70 %

Loss from Operations

Our net loss from operations for the six months ended June 30, 2013, was $3,462,000, compared to $2,392,000 for the six months ended June 30, 2012.

Other Income (Expenses)

Other expenses were $6,321,000 for the six months ended June 30, 2013, compared to the $7,462,000 for the six months ended June 30, 2012. During the six months ended June 30, 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.

                                                               Six Months Ended
                                                                   June 30,
                                                             2013             2012

Derivative expense                                       $    (96,913 )   $ (2,486,451 )
Change in fair value of derivative liabilities           $ (5,771,963 )   $  1,496,874
Gain (loss) on settlement of accounts payable and debt   $    324,656     $ (2,941,826 )
Interest expense                                         $   (781,445 )   $ (3,547,202 )
Other income                                             $      4,286     $     16,850
Total other expenses                                     $ (6,321,379 )   $ (7,461,755 )

Net Loss

For the foregoing reasons, we had a net loss of approximately $9,784,000 for the six months ended June 30, 2013, compared to approximately $9,853,000 for the six months ended June 30, 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 June 30, 2013, compared to December 31, 2012.



                                                   June 30, 2013       December 31, 2012       Increase/Decrease
Current Assets                                    $    21,748,744     $         4,949,881     $        16,798,863
Current Liabilities                               $    10,641,490     $        16,520,456     $        (5,878,966 )
Working Capital (Deficit)                         $    11,107,254     $       (11,570,575 )   $        22,677,829

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.

The Company's management believes current levels of liquidity are sufficient for current operations, but additional capital may be needed to execute the business plan, which includes buying more inventory. There can be no assurance that such capital will be available on acceptable terms or at all.

On March 27, 2013, MusclePharm sold an aggregate of 703,236 shares of its common stock, $0.001 par value per share at a per share price of $8.50 in a private placement to certain accredited investors 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 between the Company and the Purchasers. The Subscription Agreements contained customary terms regarding, among other things, representations and warranties and indemnification.

On May 6, 2013, MusclePharm sold an aggregate of 100,000 shares of its common stock, $0.001 par value per share at a per share price of $8.50 in a private placement to certain accredited investors, thereby providing working capital.

The common stock was sold pursuant to subscription agreements dated May 6, 2013 between the Company and the Purchasers. The Subscription Agreements contained customary terms regarding, among other things, representations and warranties and indemnification.

On June 3, 2013, MusclePharm sold an aggregate of 150,000 shares of its common stock, $0.001 par value per share at a per share price of $10.00 in a private placement to certain accredited investors, for an aggregate purchase price of approximately $1,398,139 thereby providing working capital.

The common stock was sold pursuant to subscription agreements dated June 3, 2013 . . .

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