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

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Form 10-Q for MUSCLEPHARM CORP


14-Nov-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 Costco, 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 September 30, 2013 and 2012 (unaudited):

                                                                    Three Months Ended
                                                                      September 30,
                                                                  2013             2012

Sales - gross                                                 $  31,080,225   $   20,627,691
Discounts and sales allowances                                  (5,736,257)      (2,053,965)
Sales - net                                                      25,343,968       18,573,726
Cost of sales                                                    17,937,768       14,507,761
Gross profit                                                      7,406,200        4,065,965
Operating expenses                                               12,278,980        7,876,778
Loss from operations                                            (4,872,780)      (3,810,813)
Other income (expense)                                              926,944      (2,263,224)
Net (Loss) Income                                             $ (3,945,836)   $ (6,074,037 )
Net (loss) income per share - basic and diluted               $      (0.47)   $      (3.21 )
Weighted average number of common shares outstanding during
  the period - basic and diluted                                  8,475,084        1,894,202

Sales - gross

Gross sales increased approximately $10.5 million or 51% to $31,080,000 for the three months ended September 30, 2013, compared to $20,628,000 for the three months ended September 30, 2012. The increase in sales was a result of the Company hiring experienced sales managers, penetrating new markets, developing new product lines and hiring strategic planning individuals to measure the efforts of marketing our product brand. The Company has added new distribution channels and products in an effort to expand our customer base. Since inception, the Company has focused on an aggressive marketing plan to penetrate the market domestically and internationally. 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 entered into an Endorsement Licensing and Co-Branding agreement by and between Arnold Schwarzenegger, Marine MP, LLC, and Fitness Publications, Inc. Under the terms of the agreement Mr. Arnold Schwarzenegger will endorse the Company's products and a special Arnold Schwarzenegger product line, which will be marketed under Mr. Schwarzenegger's name and likeness. The product line was launched this quarter and accounted for approximately $3.7 million of gross sales. We believe we will continue to build on the strong sales realized in third quarter, and that the Arnold product line will account for a larger portion of our gross sales going forward. As part of the agreement, the Company must make minimum royalty payments until sales meet certain pre-determined thresholds at which time the Company will pay a percentage of net sales of the Arnold product line. Payments for minimum royalty payments are included as a component of Advertising and Promotion in the Consolidated Statement of Operations. Future payments in excess of the minimum royalty will be recorded as a component of Cost of Goods Sold.

We have also realized continued growth in our FitMiss product line, which was launched in second quarter. The momentum is beginning to show increasing sales for this new product line, and accounted for approximately $982,000 of gross sales. 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 2013 Bodybuilding.com Supplement Awards, we received seven Awards of Excellence; (i) the "Recovery Supplement of the Year" award and "Amino Supplement of the Year" award for our Amino 1 products, (ii) the "Best Packaging of the Year" award, (iii) the "Men's Support Supplement of the Year" award for our Battle Fuel XT product, (iv) the "Glutamine Supplement of the Year" award for our Glutamine product, (v) the "RTD Supplement of the Year" award for our MuscleGel product, (vi) and "Clothing Brand of the Year" for our MusclePharm Sportswear products, 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 September 30, 2013 increased to approximately $5,736,000 or 18.5% of gross sales as compared to $2,054,000 or 10.0% of gross sales for the three months ended September 30, 2012. This increase in discounts and allowances is primarily related to our campaign to close out and sell the remainder of our old Assault™ products due to the launch of our new pre-workout Assault™ formulation during the quarter. This Assault™ campaign resulted in additional discounts and sales allowances of approximately $1,880,000, which represents 32.8% of the total discounts for the quarter.

Sales - net

Net sales increased approximately $6.8 million or 36% to $25,344,000 for the three months ended September 30, 2013, compared to $18,574,000 for the three months ended September 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 $1.7 million or 28% to $7,891,000 for the three months ended September 30, 2013, compared to $6,165,000 for the three months ended September 30, 2012.

Gross Profit

Gross profit increased approximately $3.3 million or 82% to $7,406,000 for the three months ended September 30, 2013, compared to $4,066,000 for the three months ended September 30, 2012. The gross profit percentage increased to approximately 29% of net sales during the three months ended September 30, 2013, from 22% for the three months ended September 30, 2012. This increase was primarily due to new product pricing from our Tennessee manufacturer, taking over our own order fulfillment effective July 1, 2013, and the reduction of shipping costs. As discussed in Note 2 of the financial statements, 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 September 30, 2013 was 2.4% of net sales down from 3.3% of net sales for the three months ended September 30, 2012.

We have experienced a decrease in cost of goods sold as a result of improved product pricing. For the three months ended September 30, 2013 the cost of goods as a percentage to sales was 58% compared to the three months ended September 30, 2012 of 70%. We expect to focus on streamlining our operations and seek operating efficiencies in order to further improve our gross profit percentage.

Operating Expenses

Operating expenses for the three months ended September 30, 2013, increased to
approximately $12,279,000, compared to approximately $7,877,000 for the three
months ended September 30, 2012 a 56% increase.  Part of the reason for this
increase in Operating expenses were non-cash expenses totaling $4,241,339 as
summarized in the table below.

Three months ended September 30,                        2013
Professional fee stock compensation amortization    $ 2,039,322
Depreciation expense                                    178,316
Non-cash legal settlement expense                       260,000
Legal fee accrual                                       250,000
Employee & director restricted stock amortization     1,513,701
                                                    $ 4,241,339

The 51% increase in sales necessitated increases in our operating expenses and included $1,443,000 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 salaries and benefit expenses of $2,615,000. Our 51% increase in sales necessitated increases in staffing in sales, finance and operations to help support the Company's growth.

The $4.4 million increase in operating expenses including the significant items listed above were partially offset by the decrease of $452,000 in professional fees.

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

                                             Three Months Ended September 30,
                                                     % of                      % of
                                         2013       Revenue        2012       Revenue
Advertising expense                  $  4,043,064     15.95 %   $ 2,599,691     14.00 %
General and administrative expense      1,936,610      7.64 %     1,141,435      6.15 %
Professional & R&D expense              2,429,361      9.59 %     2,881,235     15.51 %
Salary and wage expense                 3,869,945     15.27 %     1,254,417      6.75 %
Total operating expenses             $ 12,278,980     48.45 %   $ 7,876,778     42.41 %

Loss from Operations

The net loss from operations for the three months ended September 30, 2013, was approximately $4,873,000, compared to a net loss from operations of approximately $3,811,000 for the three months ended September 30, 2012.

Other Income (Expenses)

Other income was $927,000 for the three months ended September 30, 2013,
compared to net expense of $2,263,000 for the three months ended September 30,
2012. Refer to Note 8 for further detail of costs related to derivative
agreements.

                                                             Three Months Ended
                                                               September 30,
                                                            2013          2012
Derivative expense                                       $        -   $ (1,922,763)
Change in fair value of derivative liabilities           $  305,421   $   4,403,875
Gain (loss) on settlement of accounts payable and debt   $   67,489   $ (1,510,613)
Gain on marketable securities                            $  444,059   $           -
Accretion of note discount                               $  115,429   $           -
Interest expense                                         $ (1,302 )   $ (3,265,053)
Other (expense) income                                   $  (4,152)   $      31,330
Total other income (expense)                             $  926,944   $ (2,263,224)

Net Loss

For the foregoing reasons, we had a net loss of approximately $3,946,000 for the three months ended September 30, 2013, compared to net loss of approximately $6,074,000 for the three months ended September 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 Nine Months Ended September 30, 2013 and 2012 (unaudited):

                                                          Nine Months Ended
                                                            September 30,
                                                        2013             2012

Sales - gross                                      $   84,519,744   $   58,799,563
Discounts and sales allowances                       (11,134,551)      (8,235,818)
Sales - net                                            73,385,193       50,563,746
Cost of sales                                          49,900,891       40,345,528
Gross profit                                           23,484,302       10,218,218
Operating expenses                                     31,819,494       16,420,665
Loss from operations                                  (8,335,192)      (6,202,447)
Other income (expenses) - net                         (5,394,435)      (9,724,979)
Net Loss                                           $ (13,729,627)   $ (15,927,426)
Net loss per share - basic and diluted             $       (2.07)   $       (9.62)
Weighted average number of common shares
outstanding during
  the period - basic and diluted                        6,626,125        1,656,218

Sales - gross

Gross sales increased approximately $25.7 million or 44% to $84,520,000 for the nine months ended September 30, 2013, compared to $58,800,000 for the nine months ended September 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.

During third quarter the Company entered into an Endorsement Licensing and Co-Branding agreement by and between Arnold Schwarzenegger, Marine MP, LLC, and Fitness Publications, Inc. Under the terms of the agreement Mr. Arnold Schwarzenegger will endorse the Company's products and a special Arnold Schwarzenegger product line, which will be marketed under Mr. Schwarzenegger's name and likeness. The product line was launched during third quarter and accounted for approximately $3.7 million gross sales. We believe we will continue to build on the strong sales realized in third quarter, and that the Arnold product line will account for a larger portion of our gross sales going forward. As part of the agreement, the Company must make minimum royalty payments until sales meet certain pre-determined thresholds at which time the Company will pay a percentage of net sales of the Arnold product line. Payments for minimum royalty payments are included as a component of Advertising and Promotion in the Consolidated Statement of Operations. Future payments in excess of the minimum royalty will be recorded as a component of Cost of Goods Sold.

We have also realized continued growth in our FitMiss product line, which was launched in second quarter. The momentum is beginning to show increasing sales for this new product line, and accounted for $1,418,000 of gross sales. 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 2013 Bodybuilding.com Supplement Awards, we received seven Awards of Excellence; (i) the "Recovery Supplement of the Year" award and "Amino Supplement of the Year" award for our Amino 1 products, (ii) the "Best Packaging of the Year" award, (iii) the "Men's Support Supplement of the Year" award for our Battle Fuel XT product, (iv) the "Glutamine Supplement of the Year" award for our Glutamine product, (v) the "RTD Supplement of the Year" award for our MuscleGel product, (vi) and "Clothing Brand of the Year" for our MusclePharm Sportswear products, and MusclePharm remains the product of choice for the Ultimate Fighting Championship, UFC.

Discounts and sales allowances

Discounts and sales allowances for the nine months ended September 30, 2013 decreased to approximately $11,135,000 or 13.2% of gross sales as compared to $8,234,000 or 14.0% of gross sales for the nine months ended September 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 $22,800,000 million or 45% to $73,385,000 for the nine months ended September 30, 2013, compared to $50,564,000 for the nine months ended September 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 $8.4 million or 54% to $24,045,000 for the nine months ended September 30, 2013, compared to $15,620,000 for the nine months ended September 30, 2012.

Gross Profit

Gross profit increased approximately $13.3 million or 130% to $23,484,000 for the nine months ended September 30, 2013, compared to $10,218,000 for the nine months ended September 30, 2012. The gross profit percentage increased to approximately 32% of net sales during the nine months ended September 30, 2013, from 20% for the nine months ended September 30, 2012. This increase was primarily due to the reduction in discounts as a percentage of sales, new product pricing from our Tennessee manufacturer, taking over our own order fulfillment effective July 1, 2013, and the reduction of shipping costs. As discussed in Note 2 of the financial statements, 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 nine months ended September 30, 2013 was 2.3% of net sales down from 3.3% of net sales for the nine months ended September 30, 2012.

For the nine months ended September 30, 2013 the discounts as a percentage of gross sales was 13.2% compared to the nine months ended September 30, 2012 of 14%. We have also experienced a decrease in cost of goods sold as a result of improved product pricing For the nine months ended September 30, 2013 the cost of goods as a percentage to sales was 59% compared to the nine months ended September 30, 2012 of 69%. We expect to focus on streamlining our operations and seek operating efficiencies in order to further improve our gross profit percentage.

Operating Expenses

Operating expenses for the nine months ended September 30, 2013, increased to
approximately $31,819,000, compared to approximately $16,421,000 for the nine
months ended September 30, 2012, a 94% increase. Part of the reason for this
increase in Operating expenses were non-cash expenses totaling $11,641,911 as
summarized in the table below.

Nine months ended September 30,                          2013
Professional fee stock compensation amortization    $  8,938,834
Depreciation expense                                     511,699
Non-cash legal settlement expense                        320,000
Legal fee accrual                                        250,000
Employee & director restricted stock amortization      1,621,378
                                                    $ 11,641,911

The 44% increase in sales necessitated increases in our operating expenses and included $3,059,000 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. As more fully described in Note 8 above, the Company recognized expense of $1,588,000 related to amortization of compensation expense for certain employee RSUs and RSA agreements.

Another area of increase is salaries and benefit expenses of $3,809,000. Our 44% increase in sales necessitated increases in staffing in sales, finance and operations to help support the Company's growth. The remaining increase of $1,516,000 was due to other various operating expense increases necessitated by our 44% increase in year over year sales. Included in the $1,516,000 is approximately $504,000 in settlement expenses related to various legal proceedings that the Company has been involved in during the first three quarters of 2013.

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

                                              Nine Months Ended September 30,
                                                      % of                       % of
                                         2013        Revenue         2012       Revenue
Advertising expense                  $  9,635,642      13.13 %   $  6,576,531     13.01 %
General and administrative expense      5,000,831       6.82 %      3,146,029      6.22 %
Professional & R&D expense             10,452,208      14.24 %      3,776,033      7.47 %
Salary and wage expense                 6,730,813       9.17 %      2,922,072      5.78 %
Total operating expenses             $ 31,819,494      43.36 %   $ 16,420,665     32.48 %

Loss from Operations

Our net loss from operations for the nine months ended September 30, 2013, was approximately $8,335,000, compared to approximately $6,202,000 for the nine months ended September 30, 2012.

Other Income (Expenses)

Other expenses were approximately $5,394,000 for the nine months ended September 30, 2013, compared to approximately $9,725,000 for the nine months ended September 30, 2012. During the nine months ended September 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 8 for further detail of costs related to derivative agreements.

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