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MSLP > SEC Filings for MSLP > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for MUSCLEPHARM CORP

Form 10-K for MUSCLEPHARM CORP


31-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with our consolidated financial statements and the related notes thereto reflected in the index to the consolidated financial statements in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this report. All 2012 share amounts and per share amounts in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect the 1-for-850 reverse stock split of our common stock that we effected on November 26, 2012.

Plan of Operation

We are a scientifically driven, performance lifestyle Company that develops, manufactures, markets and distributes branded nutritional supplements. We offer a complete range of powders, capsules, tablets and gels. Our portfolio of recognized brands, including MusclePharm® Hybrid and Core Series, Arnold Schwarzenegger Series™, and FitMiss® are marketed and sold in more than 110 countries and available in over 35,000 retail outlets globally. These clinically proven, scientific nutritional supplements are developed through a six-stage research process that utilizes the expertise of leading nutritional scientists, doctors and universities. We believe we are an innovator in the sports nutrition industry.

Our primary growth strategy is to:

· Drive innovation, serve the needs of all athletes and fuel the engine of sport through new products and brand extension;

· 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 Athletes 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

Year ended December 31, 2013 compared to the year ended December 31, 2012.

                                                          Year Ended December 31,
                                                          2013               2012

Sales - net                                          $  110,877,591     $   67,055,215
Cost of sales                                            77,685,396         52,726,934
Gross profit                                             33,192,195         14,328,281
Operating expenses                                       47,488,657         23,064,092
Loss from operations                                    (14,296,462 )       (8,735,811 )
Other expense                                            (3,305,996 )      (10,216,984 )
Net loss before tax                                     (17,602,458 )      (18,952,795 )
Income tax provision                                       (115,483 )                -
Net loss after tax                                      (17,717,941 )      (18,952,795 )
Net loss per share - basic and diluted               $        (2.46 )   $       (13.00 )
Weighted average number of common shares
outstanding during the period - basic and diluted         7,193,784          1,458,757

Revenue

Our net revenues increased 65% to approximately $110.9 million for the year ended December 31, 2013, compared to approximately $67.1 million for the year ended December 31, 2012. Sales during the year ended December 31, 2013 increased due to executing our growth strategy that includes driving innovation, serving the needs of all athletes, fueling the engine of sport through new products, brand extensions, and increasing our product distribution and sales through increased market penetrations both domestically and internationally.

A key area of growth in 2013 was increased sales in international markets. International sales are included in the results of operations and increased approximately $13.9 million or 69% to $34.1 million for the year ended December 31, 2013, compared to $20.2 million for the year ended December 31, 2012.

Discounts and Sales Allowances

Sales discounts and allowances are a significant part of our marketing plan to our customers as they help to drive increased sales and brand awareness with end users through promotions that we support through our distributors and re-sellers. Discounts and sales allowances decreased to $17.4 million or 13.6% of gross sales from $10.7 million, or 13.8% of gross sales in 2012. The decrease in discounts and allowances as a percent of gross sales is a result of continued efforts to place controls around discounting and greater efforts to define customer terms and allowances.

Gross Profit

Gross profit for the year ended December 31, 2013 was approximately $33.2 million or 30% of revenue, compared to approximately $14.3 million or 21% of revenue for the year ended December 31, 2012. The increase was due to improved supply chain optimization, operational infrastructure improvements, enterprise resource planning (ERP) and reporting systems integration and key management hires.

Operating Expenses

Operating expenses for the year ended December 31, 2013 were $47.5 million, compared to $23.1 million for the year ended December 31, 2012. These expenses included necessary infrastructure improvements, new growth platforms and initiatives, company re-capitalization and staffing increases to establish a scalable organization.

Salaries and benefits were $11.8 million, or 11% of revenue for 2013 compared to $4.6 million, or 7% of revenue in 2012. The increase was due to warehouse implementation and adding additional resources to our finance and sales organizations. Salaries and benefit expenses include $2,988,793 related to amortization of expense for restricted stock awards granted to employees and executives.

Professional fees were $11.8 million in 2013 compared to $5.1 million in 2012. Expenses in 2013 included the one time settlement of legacy consulting agreements and legal fees that were incurred as part of the recapitalization of the company.

Advertising and promotion expenses were $15.5 million in 2013, or 14% of revenue, compared to $8.4 million, or 13% of revenue, in 2012. Advertising and promotion expenses in 2013 included expenses related to the strategic partnership that we entered into with Arnold Schwarzenegger as more fully described in Note 16 in the Notes to Consolidated Financial Statements.

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

                                       2013          % of Net Revenue          2012          % of Net Revenue
Advertising and promotion          $ 15,534,646                   14.0 %   $  8,430,401                   12.6 %
Salaries and benefits                11,830,967                   10.7 %      4,596,530                    6.9 %
Professional fees                    11,830,910                   10.7 %      5,124,641                    7.6 %
General and administrative            7,173,526                    6.4 %      4,634,370                    6.9 %
Research and development              1,118,608                    1.0 %        278,150                    0.4 %
Total Operating Expenses           $ 47,488,657                   42.8 %   $ 23,064,092                   34.4 %

Operating Loss

Operating loss for the year ended December 31, 2013 was approximately $14.3 million, compared to approximately $8.7 million for the year ended December 31, 2012.

Other Expense



Other expenses for the year ended December 31, 2013 were approximately $3.3
million, compared to approximately $10.2 million for the year ended December 31,
2012, a decrease of 68%. The components of our other expense are as follows:



                                                              Year Ended December 31,
                                                               2013             2012
Derivative expense                                         $    (96,913 )   $  (4,409,214 )
Change in fair value of derivative liabilities               (4,853,964 )       5,899,968
Gain/(loss) on settlement of accounts payable and debt          573,906        (4,447,732 )
Interest expense                                               (783,316 )      (7,335,070 )
Foreign currency transaction (loss)/gain                        (31,243 )          15,030
Licensing income                                                 10,000            10,000
Interest income                                               1,442,179                 -
Gain on marketable securities                                   500,000                 -
Unrealized loss on derivative instrument                        (55,326 )
Other (expense) income                                          (11,319 )          50,034
                                                           $ (3,305,996 )   $ (10,216,984 )

Interest expense for the year ended December 31, 2013 was approximately $0.8 million, as compared to approximately $7.3 million for the year ended December 31, 2012. The decrease in interest expense primarily relates to the elimination of convertible debt in 2013, which resulted in significant interest expense in 2012 related to the amortization of debt discounts.

Income Taxes

In 2013, the Company incurred income tax expense of $0.1 million compared to none in 2012. The tax expense is primarily related to foreign tax owed on net income from our Canadian subsidiary as well as a small amount for minimum state income tax in certain states where we have nexus. At December 31, 2013, the Company had a net operating loss carry-forward of approximately $36.2 million available to offset future taxable income. Utilization of future net operating losses may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code of 1986, as amended.

Net Loss

Net loss for the year ended December 31, 2013 was approximately $17.7 million, or $(2.46) per share, compared to the net loss of approximately $19 million or $(13.00) per share, for the year ended December 31, 2012. Inflation did not have a material impact on our operations for the years ended December 31, 2013 and 2012.

Summary of Quarterly Operations - Unaudited



The following table presents the Company's unaudited summary of quarterly
operations during 2013 and 2012 for each of the three month periods ended March
31, June 30, September 30, and December 31, 2013 and 2012.



                                                          For the Quarter Ended
                                    March 31,         June 30,        September 30,      December 31,
                                       2013             2013              2013               2013
Net sales                          $ 22,561,167     $ 25,480,059     $    25,343,968     $  37,492,397
Cost of goods sold                   14,396,406       17,566,718          17,937,768        27,784,504
Gross profit                          8,164,761        7,913,341           7,406,200         9,707,893

Total Operating Expenses              8,886,241       10,654,272          12,278,980        15,669,164
Loss from operations                   (721,480 )     (2,740,931 )        (4,872,780 )      (5,961,271 )
Other income and expense             (6,640,501 )        319,123             926,944         2,088,438
Net income (loss) before taxes       (7,361,981 )     (2,421,808 )        (3,945,836 )      (3,872,833 )
Income tax provision                          -                -                   -           115,483
Net income (loss)                  $ (7,361,981 )   $ (2,421,808 )   $    (3,945,836 )   $  (3,988,316 )

Basic and diluted net income
(loss) per common share            $      (1.78 )   $      (0.34 )   $         (0.47 )   $       (0.45 )




                                                          For the Quarter Ended
                                     March 31,         June 30,        September 30,      December 31,
                                       2012              2012              2012               2012
Net sales                          $  16,560,680     $ 15,429,340     $    18,573,726     $  16,491,469
Cost of goods sold                    12,895,162       12,942,605          14,507,761        12,381,406
Gross profit                           3,665,518        2,486,735           4,065,965         4,110,063

Total Operating Expenses               4,392,811        4,151,076           7,876,778         6,643,427
Loss from operations                    (727,293 )     (1,664,341 )        (3,810,813 )      (2,533,364 )
Other income and expense             (15,308,000 )      7,846,245          (2,263,224 )        (492,005 )
Net income (loss) before taxes       (16,035,293 )      6,181,904          (6,074,037 )      (3,025,369 )
Income tax provision                           -                -                   -                 -
Net income (loss)                  $ (16,035,293 )   $  6,181,904     $    (6,074,037 )   $  (3,025,369 )

Basic and diluted net income
(loss) per common share            $      (11.23 )   $       3.78     $         (3.21 )   $       (1.12 )

Basic and diluted income (loss) per share is computed independently for each of the quarter presented. Therefore, the sum of the quarterly net loss per share may not equal the total computed for the year.

Liquidity and Capital Resources

The following table summarizes total current assets, current liabilities and working capital at December 31, 2013, compared to a working capital deficit at December 31, 2012:

                                                December 31, 2013       December 31, 2012       Increase/(Decrease)

Current Assets                                 $        44,526,480     $         4,949,881     $          39,576,599
Current Liabilities                                    (32,368,521 )           (16,520,456 )             (15,848,065 )
Working Capital (Deficit)                      $        12,157,959     $       (11,570,575 )   $          23,728,534

Other than revenue from product sales, our primary source of operating cash has been from the sale of equity, the issuance of convertible secured promissory notes and other short-term debt as discussed below. On February 4, 2013, the Company issued an S-1 registration for a Series D preferred share issuance. Each share of Series D preferred stock was convertible into to two shares of voting common stock. At the date of this report, all but 131,500 of our Series D shares had been converted to common shares. The remaining 131,500 shares have been requested to be converted by the remaining shareholder into 263,000 common shares subject to a 61 day waiting period for conversion. Through this S-1 registration the Company raised gross proceeds of $12.0 million. Additionally, the Company issued four private placements of common stock during 2013, as more fully described in the Financing section below.

The Company's management believes that with increased sales expansion and the opening of the Franklin, Tennessee distribution center, there will be opportunities to increase sales; however, the Company may need to continue to raise capital in order execute the business plan, which includes buying more inventory and broadening the sales platform. There can be no assurance that such capital will be available on acceptable terms or at all.

Included in our working capital as of December 31, 2013 and December 31, 2012 are restricted cash balances of $2,500,014 and $9,148, respectively. The restricted cash balance as of December 31, 2013 is cash collateral for a line of credit that we secured through US Bank in December 2013 as more fully discussed in Note 8(A) in our Notes to Consolidated Financial Statements below. The restricted cash balance of $9,148 as of December 31, 2012 was for cash deposits as required by our mezzanine debt agreements, which required 10% of the gross receipts of loan proceeds to be restricted and used for payment of interest and principle. This mezzanine debt was fully paid off and retired in early 2013.

Our principal use of cash is to purchase inventory, pay for operating expenses, acquire capital assets, and repurchase Company stock. At December 31, 2013, we had cash of $5,411,515 and working capital of approximately $12.2 million, compared to cash of $0 and a working capital deficit of approximately $11.6 million at December 31, 2012. The increase in working capital of approximately $23.7 million was primarily due to an increase in cash and restricted cash of $7.9 million, a net increase in accounts receivable of $10.4 million, an increase in inventory of $15.5 million, an increase in prepaid assets of approximately $4.9 million, a decrease in debt of approximately $1.9 million, and an increase in other current assets of approximately $1.1 million offset by an increase in accounts payable and accrued liabilities of approximately $16.7 million, an increase in derivative liabilities of approximately $1.1 million and various other net decreases of $0.2 million.

Our net consolidated cash inflows (outflows) are as follows:

                                          Years Ended December 31,
                                             2013             2012
                 Operating Activities   $   (9,972,580 )   $   10,051
                 Investing Activities       (3,523,233 )     (974,475 )
                 Financing Activities       18,913,453        312,577

Cash used in operating activities was approximately $10.0 million for the year ended December 31, 2013, as compared to cash provided by operating activities of approximately $0.0 million for the year ended December 31, 2012. The increase in cash used in operating activities of approximately $10.0 million was primarily due to a decrease in net loss of approximately $1.2 million, an increase in payables and customer deposits of approximately $12.6 million, a net increase in depreciation, amortization, and accretion of approximately $5.7 million, an increase in change in fair value of derivative assets and liabilities of approximately $10.8 million offset by an increase in accounts receivable of approximately $9.9 million, an increases in prepaid expenses and inventory, and other liabilities of approximately $22.0 million, a decrease in derivative expense of approximately $4.3 million, a decrease in losses related to debt retirement and contract settlements of approximately $2.0 million, and $2.1 million in various other gains and losses.

Cash used in investing activities increased to $3.5 million from $1.0 million for the year ended December 31, 2013 and 2012, respectively, due primarily to an increase in sales of marketable securities and note repayments received of approximately $3.8 million and an increase in our restricted cash balance of $2.5 million offset by increases in purchases of marketable securities and notes of approximately $2.3 million, gain on the sale of marketable securities of $0.5 million and increased net purchases of property and equipment of $1.0 million. 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 approximately $18.9 million for the year ended December 31, 2013, compared to cash flows provided by financing activities of approximately $0.3 million for the year ended December 31, 2012. The approximately $18.6 million increase was due primarily to increases in net equity offerings of approximately $20.2 million, a decrease in debt repayment of approximately $1.4 million, and a decrease in deferred equity costs $0.7 million offset by a decrease in net proceeds from debt issuances of approximately $3.1 million and repurchase of common stock of $0.6 million.

                                                                Year Ended December 31,
                                                                 2013             2012
Cash Flows From Financing Activities:
Proceeds from issuance of debt                               $          -     $  5,823,950
Proceeds from line of credit                                    2,500,000                -
Repayment of debt                                              (4,405,061 )     (5,847,575 )
Debt issuance costs                                                (7,500 )       (234,450 )
Repurchase of common stock                                     (1,037,320 )       (460,978 )
Proceeds from issuance of preferred stock                      12,000,000                -
Preferred stock issuance costs                                   (695,999 )              -
Proceeds from issuance of common stock and warrants - net
of issuance costs                                              10,559,333        1,660,760
Deferred equity costs                                                   -         (698,500 )
Cash overdraft                                                          -           69,370
Net Cash Provided By Financing Activities                    $ 18,913,453     $    312,577

Financing

The Company's primary source of operating cash for the year ended December 31, 2013 was from the sale of equity and debt.

In the fourth quarter of 2012, the Company filed a Form S-1 registration statement whereby the Company offered preferred stock for $8.00 per share that was convertible into two shares of common stock, subject to adjustment. This registration was not fully completed until February 4, 2013; whereby, the Company issued 1.5 million shares of Series D Convertible Preferred Stock in exchange for gross proceeds of $12.0 million. The Company's net proceeds from the offering were approximately $10.6 million after placement agent discounts and other offering expenses of $1.4 million.

On March 26, 2013, the Company entered into subscription agreements with non-affiliated accredited investors for the issuance of 703,236 shares of common stock pursuant to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $8.50 per share. The gross proceeds to the Company of $6.0 million were reduced by commissions and issuance costs of $0.2 million.

On May 3, 2013, the Company entered into subscription agreements with a non-affiliated accredited investor for the issuance of 100,000 shares of common stock pursuant to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $8.50 per share for gross proceeds to the Company of $0.9 million.

On June 3, 2013, the Company entered into subscription agreements with a non-affiliated accredited investor for the issuance of 150,000 shares of common stock pursuant to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $10.50 per share. The gross proceeds to the Company of $1.5 million were reduced by commissions and issuance costs of $0.1 million.

On August 9, 2013, the Company entered into subscription agreements with several non-affiliated accredited investors and one affiliated accredited investor for the issuance of 238,096 shares of common stock pursuant to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $10.50 per share for gross proceeds to the Company of $2.5 million.

Off-Balance Sheet Arrangements

Other than the operating leases detailed below, as of December 31, 2013, the Company did not have any off-balance sheet arrangements.

The Company is obligated under various operating lease for the rental of office and warehouse space. Future minimum rental commitments with a remaining term in excess of one year as of December 31, 2013 are summarized as follows:

Years Ending December 31,

2014                           $   623,114
2015                               439,033
2016                               121,322
2017                                19,965
Total minimum lease payments   $ 1,203,434

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations. Management has discussed the development, selection and disclosure of these estimates with the Board of Directors and Audit Committee.

A summary of our significant accounting policies is provided in Note 2 of the Notes to Consolidated Financial Statements in Item 8 of this report. We believe the critical accounting policies and estimates described below reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements. The impact and any associated risks on our business that are related to these policies are also discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect reported and expected financial results.

Principles of Consolidation

The consolidated financial statements include the accounts of MusclePharm Corporation and its wholly-owned subsidiary MusclePharm Canada Enterprises Corp ("MusclePharm Canada"). MusclePharm Canada began operations in April 2012. All intercompany accounts and transactions between MusclePharm Corporation and MusclePharm Canada have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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

Accounts Receivable and Allowance for Doubtful Accounts

. . .

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