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MSLP > SEC Filings for MSLP > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for MUSCLEPHARM CORP

Form 10-Q for MUSCLEPHARM CORP


5-May-2014

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, 2013 that was filed with the SEC on March 31, 2014.

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 approval which are not statements of historical fact constitute forward-looking statements within the meaning of the Securities Act and the Exchange Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of capital expenditures, revenues, income or loss, earnings or loss per share, capital structure, and other financial items,
(ii) statements of our plans and objectives of our management or Board of Directors including those relating to planned development of future products,
(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. Important factors that could cause actual results to differ materially from the forward looking statements. include, but are not limited to:

· Significant competition in our industry;

· Unfavorable publicity or consumer perception of our products;

· Increases in the cost of borrowings and limitations on availability of additional debt or equity capital;

· Incurrence of material product liability and product recall costs;

· Loss or retirement of directors or key members of management;

· Costs of compliance and our failure to comply with new and existing governmental regulations including, but not limited to, tax regulations;

· Costs of litigation and the failure to successfully defend lawsuits and other claims against us;

· Economic, political and other risks associated with our international operations;

· Failure to keep pace with the demands of our customers for new products and services;

· Disruptions in our manufacturing system or losses of manufacturing certifications;

· Disruptions in our distribution network;

· Lack of long-term experience with human consumption of ingredients in some of our products;

· Failure to adequately protect or enforce our intellectual property rights against competitors;

· Changes in raw material costs and pricing of our products;

· Failure to successfully execute our growth strategy, including any delays in our planned future growth;

· Damage or interruption to our information systems;

· Impact of current economic conditions on our business;

· Natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and geo-political events; and

· Failure to maintain effective internal controls.

Consequently, forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.

Business Overview

MusclePharm Corporation is 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.

Our Growth Strategy

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.

MusclePharm is an aggressive growth company with a portfolio of brands that we believe fuels growth across all categories and geographies. For the three months ended March 31, 2014 we grew net sales to $50.2 million, up 123%, with a 2-year 74% compound annual growth rate ("CAGR").

Biozone Acquisition

As more fully discussed in Note 16, the Company closed the transactions contemplated in the Asset Purchase Agreement (the "APA") dated November 12, 2013 with BioZone Pharmaceuticals, Inc. ("BioZone") and its subsidiaries, BioZone Laboratories, Inc., and Baker Cummins Corporation (collectively, the "Seller"). At closing, the Company acquired substantially all of the operating assets of BioZone, including all assets associated with QuSomes, HyperSorb and EquaSomes drug delivery technologies and the name "Biozone", "Biozone Laboratories" and similar names and domain names.

Biozone is a developer, manufacturer, and marketer of over-the-counter drugs and preparations, cosmetics, and nutritional supplements. The acquisition of Biozone was completed to allow us to take the first steps in vertically integrating our supply chain, and will give us the opportunity to start manufacturing some of our own products, which are currently produced by third party manufacturers. We also anticipate leveraging Biozone's research and development assets to reduce operating expenses paid to third parties for testing and certification of our products.

Results of Operations



For the Three Months Ended March 31, 2014 and 2013 (unaudited):



                                                           Three Months Ended
                                                                March 31,
                                                          % of Net                     % of Net
                                             2014           Sales         2013           Sales

Sales - net                                50,209,454                   22,561,167
Cost of sales                              32,336,385       64.4%       14,396,406       63.8%
Gross profit                               17,873,069       35.6%        8,164,761       36.2%
Operating expenses                         15,449,181       30.8%        8,886,241       39.4%
Income (loss) from operations               2,423,888       4.8%          (721,480 )    (3.2%)
Other income (expenses) - net                 344,507       0.7%        (6,640,501 )    (29.4%)
Net income (loss) before taxes           $  2,768,395       5.5%      $ (7,361,981 )    (32.6%)
Income tax provision                          (32,161 )    (0.1%)                -       0.0%
Net income (loss) after taxes               2,736,234       5.4%        (7,361,981 )    (32.6%)
Net income (loss) per share - basic      $       0.27                 $      (1.78 )
Net income (loss) per share - diluted    $       0.23                 $      (1.78 )
Weighted average number of common
shares outstanding during the period -
basic                                      10,307,350                    4,128,679
Weighted average number of common
shares outstanding during the period -
diluted                                    11,951,923                    4,128,679

Revenue

Net sales increased approximately $27.6 million or 123% to $50.2 million for the three months ended March 31, 2014, compared to $22.6 million for the three months ended March 31, 2013. This increase in sales was due to the successful execution of 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 for the three months ended March 31, 2014 was increased sales in international markets. International sales are included in the results of operations and increased approximately $11 million or 176% to $17.2 million for the three months ended March 31, 2014, compared to $6.3 million for the three months ended March 31, 2013.

Discounts and sales allowances

Discounts and sales allowances for the three months ended March 31, 2014 increased to approximately $6.5 million, or 11% of gross sales as compared to $2.4 million or 9% of gross sales for the three months ended March 31, 2013. This 2% of gross sales increase is primarily due to promotions surrounding our Arnold product line during the Arnold Fitness Expo during first quarter. Our Arnold product line is a new product line that we developed and co-branded with Arnold Schwarzenegger and was launched in September 2013.

Gross Profit

Gross profit increased approximately $9.7 million or 119% to $17.9 million for the three months ended March 31, 2014, compared to $8.2 million for the three months ended March 31, 2013. The increase was due to the successful execution of our growth strategy as well as 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 three months ended March 31, 2014 increased to approximately $15.4 million, compared to approximately $8.9 million for the three months ended March 31, 2013, a $6.6 million increase. As a percent of sales, operating expenses decreased from 39.4% for the three months ended March 31, 2013 to 30.8% for the same period in 2014. These expenses included necessary infrastructure improvements, new growth platforms and initiatives, and staffing increases to establish a scalable organization.

Advertising and promotion expenses were $6.3 million, or 12.6% of revenue, for the three months ended March 31, 2014 compared to $2.3 million, or 10.3% of revenue, for the three months ended March 31, 2013. Of this increase, $2.2 million is for expenses related to the strategic partnership that we entered into with Arnold Schwarzenegger as more fully discussed in Note 15.

Salaries and benefits were $5.4 million, or 10.7% of revenue, for the three months ended March 31, 2014 up from $1.2 million, or 5.5% for the same period in 2013. Included in this increase is $2.3 million related to amortization of restricted stock awards granted to employees, directors and executives.

Professional fees decreased significantly for the three months ended March 31, 2014 to $0.8 million from $4.1 million for the same period in 2013. Expenses in 2013 included the final settlement of legacy consulting agreements and legal fees that were incurred as part of the recapitalization of the Company.

The following table provides an overview of total operating expense by category and percentage of each of net revenue:

                                            Three Months Ended March 31,
                                               % of Net                       % of Net
                                 2014          Revenue          2013          Revenue
Advertising and promotion    $  6,328,487           12.6 %   $ 2,317,377           10.3 %
Salaries and benefits           5,366,806           10.7 %     1,248,459            5.5 %
General and administrative      1,872,368            3.7 %     1,145,556            5.1 %
Research and development        1,096,946            2.2 %        90,129            0.4 %
Professional Fees                 784,574            1.6 %     4,084,720           18.1 %
Total operating expenses     $ 15,449,181           30.8 %   $ 8,886,241           39.4 %

Income (loss) from Operations

Our net income from operations for the three months ended March 31, 2014, was $2.4 million, compared to a net loss of $0.7 million for the three months ended March 31, 2013.

Other Income (Expenses)



Other income was $0.3 million for the three months ended March 31, 2014,
compared to other expense of $6.6 million for the three months ended March 31,
2013. Components of other income (expense) are as follows:



                                                                   Three Months Ended
                                                                        March 31,
                                                                  2014            2013

Derivative expense                                             $        -     $    (96,913 )
Change in fair value of derivative liabilities                    484,234       (6,044,643 )
Gain on settlement of accounts payable and debt                     5,499          276,985
Interest expense                                                  (39,373 )       (780,320 )
Foreign currency transaction loss                                 (30,106 )         (5,610 )
Interest income                                                   222,756                -
Unrealized loss on derivative instrument and debt securities     (386,103 )              -
Other income                                                       87,600           10,000
Total other income (expense)                                   $  344,507     $ (6,640,501 )

The change in the fair value of the derivative liability went from expense of $6.0 million for the three months ended March 31, 2013 to a gain of $0.5 million for the three months ended March 31, 2014. Interest expense also decreased by $0.7 million for the same time period due to the elimination of convertible debt in 2013.

Net Income (Loss)

Net income for the three months ended March 31, 2014 was $2.7 million, or $0.27 per basic share outstanding and $0.23 per diluted share outstanding compared to a net loss for the same period of $7.4 million, or $(1.78) per basic and diluted share. Inflation did not have a material impact on our operations for the period.

Liquidity and Capital Resources



The following table summarizes total current assets, liabilities and working
capital at March 31, 2014, compared to December 31, 2013.



                       March 31, 2014       December 31, 2013       Increase/Decrease
Current Assets        $     48,998,928     $        44,526,480     $         4,472,448
Current Liabilities   $    (30,701,369 )   $       (32,368,521 )   $         1,667,152
Working Capital       $     18,297,559     $        12,157,959     $         6,139,600

Our primary source of operating cash has been through product sales. Our principal use of cash has been to purchase inventory, pay for operating expenses, and acquire capital assets. At March 31, 2014, we had cash of $3.3 million and working capital of approximately $18.3 million, compared to cash of $5.4 million and working capital of approximately $12.2 million at December 31, 2013. The working capital increase of approximately $6.1 million was due to a net increase in accounts receivables of $5.9 million, an increase in inventory of $0.9 million, a decrease in accounts payable and accrued liabilities of $1.2 million, a decrease in derivative liabilities of $0.5 million offset by a decrease in cash of $2.1 million and a decrease in prepaid expense of $0.3 million.

Included in our working capital as of March 31, 2014 and December 31, 2013 are restricted cash balances of $2,500,630 and $2,500,014, respectively. The restricted cash balance 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.

The Company's management believes that with continued growth and increased sales expansion, we will be able to fund operations with operating cash flow; 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.

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

                                                               Three Months Ended March 31,
                                                                  2014                2013
Operating Activities                                         $      (784,801 )    $ (3,216,116 )
Investing Activities                                              (1,303,387 )        (225,426 )
Financing Activities                                                  (2,902 )      11,922,620
Effect of exchange rates on cash and cash equivalents                 (4,247 )           1,849
Net (decrease) increase in cash                              $    (2,095,337 )    $  8,482,927

Cash used in operating activities was $0.8 million for the three months ended March 31, 2014, as compared to cash used in operating activities of $3.2 million for the three months ended March 31, 2013. The decrease in cash used in operating activities of approximately $2.4 million was primarily due to an increase in our net income of $10.1 million and unrealized losses of $0.4 million derivative assets and debt securities, offset by a decrease in non-cash expenses and income of $2.5 million, an increase in accounts receivable, prepaid expenses, and inventory of $1.4 million, and a decrease of $4.2 million in accounts payable and accrued liabilities.

Cash used in investing activities increased to $1.3 million from $0.2 million for the three months ended March 31, 2014 and 2013 due to increased investments in fixed assets including leasehold improvements.

Cash used in financing activities was nil for the three months ended March 31, 2014, compared to cash flows provided by financing activities of $11.9 million for the three months ended March 31, 2013. The $11.9 million decrease was due to $16.4 million decrease in the proceeds from issuance of preferred and common shares offset by a decrease in the repayment of debt of $4.4 million and $0.1 million for the purchase of treasury shares.

Off-Balance Sheet Arrangements

Other than the operating leases, as of March 31, 2014, we did not have any off-balance sheet arrangements. We are obligated under operating leases for the rental of office space. Future minimum rental commitments with a remaining term in excess of one year as of March 31, 2014 are as follows:

Years Ending December 31,
2014 (9 months)                $   967,816
2015                               868,844
2016                               355,916
2017                               291,528
2018                               291,528
Thereafter                       3,206,808
Total minimum lease payments   $ 5,982,440

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 1 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. There have been no significant changes to our critical accounting policies and estimates from those disclosed in annual report on Form 10-K filed on March 31, 2014.

Recent Accounting Pronouncements

In March 2013, the FASB issued ASU 2013-05, which indicates that the entire amount of a cumulative translation adjustment (CTA) related to an entity's investment in a foreign entity should be released when one of the following occur:

· Sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity.

· Loss of a controlling financial interest in an investment in a foreign entity

· Step acquisition for a foreign entity

The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. ASU 2013-5 is effective for fiscal years (and interim periods within those fiscal years) beginning on or after December 15, 2013. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

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