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

Show all filings for MUSCLEPHARM CORP

Form 10-Q for MUSCLEPHARM CORP


5-Aug-2014

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 notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2013 found in the Form 10-K.

Forward-Looking Information

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may,""intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings, the effect of cost-saving measures, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, the levels of customer spending or research and development activities, general economic conditions, and the sufficiency of financial resources to support future operations and capital expenditures. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading "Risk Factors" within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the "SEC"), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

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 sports nutrition supplements including 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 of new products, serve the needs of athletes and fuel the engine of sport through new products and brand extension;

· Increase our product distribution and sales through increased market penetration both domestically and internationally;

· Increase our margins by streamlining our operations and seeking operating efficiencies;

· Continue to conduct 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 many marketing categories and geographies. For the three months ended June 30, 2014 we grew net sales to $46.7 million, up 83% from the same period in 2013, with a 2-year 74% compound annual growth rate ("CAGR"). For the six months ended June 30, 2014, we grew net sales to $96.9 million up 102% from the same period in 2013 with a 2-year CAGR of 74%.

Results of Operations



For the Three Months Ended June 30, 2014 and 2013 (unaudited):



                                                         Three Months Ended
                                                            June 30, 2014
                                                       % of Net                         % of Net        Increase/          %
                                         2014           Sales             2013           Sales          (Decrease)       Change

Sales - net                          $ 46,739,987                     $ 25,480,059                     $ 21,259,928         83.4 %
Cost of sales                          31,093,224           66.5 %      17,566,718           68.9 %      13,526,506         77.0 %
Gross profit                           15,646,763           33.5 %       7,913,341           31.1 %       7,733,422         97.7 %
Operating expenses                     15,167,248           32.5 %      10,654,272           41.8 %       4,512,976         42.4 %
Income (loss) from operations             479,515            1.0 %      (2,740,931 )        (10.8 )%      3,220,446       (117.5 )%
Other income (expense) - net              (26,401 )         (0.1 )%        319,123            1.3 %        (345,524 )     (108.3 )%
Net income (loss) before taxes            453,114            1.0 %      (2,421,808 )         (9.5 )%      2,874,922        118.7 %
Income tax provision                      (44,786 )         (0.1 )%              -            0.0 %         (44,786 )       (100 )%
Net income (loss) after taxes        $    408,328            0.9 %    $ (2,421,808 )         (9.5 )%   $  2,830,136        116.9 %
Net income (loss) per share -
basic                                $       0.04                     $      (0.34 )
Net income (loss) per share -
diluted                              $       0.03                     $      (0.34 )
Weighted average number of shares
used in per share calculations -
basic                                  10,610,022                        7,226,849
Weighted average number of shares
used in per share calculations -
diluted                                12,064,122                        7,226,849

Sales - Net

Net sales increased approximately $21.3 million or 83% to $46.7 million for the three months ended June 30, 2014, compared to $25.5 million for the three months ended June 30, 2013. The increase in sales was due primarily to new sales channels, new product lines, and increased brand awareness.

The sales increases in our product lines are due to the successful execution of our growth strategy, which includes increasing our product distribution and sales through increased brand awareness, marketing and promotion, and sponsorships and endorsements both domestically and internationally. The following is a summary of the growth in the channels:

· Food, Drug and Mass (FDM) is a new distribution channel for us in 2014, which was launched in fourth quarter 2013 and accounted for $5.0 million of our sales increase.

· Our international distribution channel has been another key area of growth in 2014, with an increase of $10.7 million, or 119%, to $19.7 million compared to $9.0 million during the same period 2013.

· Our Specialty distribution channel, which includes distributors and online retailers grew by $2.6 million, or 16%, to $19.0 million compared to $16.4 million during the same period 2013.

· Biozone Laboratories, Inc., which we acquired in January 2014, accounted for $2.9 million of our sales growth.

Discounts and Sales Allowances

Discounts and sales allowances as a percent of gross sales for the three months ended June 30, 2014 decreased from 11% of gross sales for the three month period ended June 30, 2013 to 10% of gross sales for the three months ended June 30, 2014. This decrease in discounts and allowances is a result of continued efforts to evaluate and refine customer promotions to improve the efficiency of our marketing and promotion initiatives.

Cost of Sales

Cost of sales as a percent of net sales decreased by 2.4 percentage points from 68.9% of net sales for the three months ended June 30, 2013 to 66.5% of sales for the same period in 2014. This decrease is due to higher margins realized on Biozone products, which contributed 1.7 percentage points of the decrease, 0.4 percentage points of the decrease was due to the effect of vendor rebates and early payment discounts taken in 2014 and not taken in 2013, and the remainder of the decrease was due to improved product pricing from product vendors.

Operating Expenses

Operating expenses for the three months ended June 30, 2014, increased to approximately $15.2 million, compared to $10.7 million, a 42% increase.

Advertising and promotion expenses increased $2.6 million, or 81%, to $5.9 million for the three months ended June 30, 2014 compared to $3.3 million for the same period in 2013. Of this increase, $1.8 million was for marketing expenses in conjunction with strategic partnership agreements. The remaining increase is for continued marketing efforts to increase our brand awareness, brand extension, and develop new distribution channels. As a percent of sales, advertising expense remained consistent quarter over quarter at 12.7% of net sales for the three months ended June 30, 2014 and 12.9% for the same period in 2013.

Salaries and benefits were $5.8 million, or 12% of revenue, for the three months ended June 30, 2014 up from $1.6 million, or 6.1% of revenue for the same period in 2013. Of this increase, $1.9 million relates to amortization of stock-based compensation for awards granted to employees, directors, and officers in July 2013, the Biozone acquisition in January 2014 contributed $0.7 million, and the remaining increase was due to salary increases and additional headcount to support our continued growth strategy.

Professional fees decreased by $3.8 million from $3.7 million for the three months ended June 30, 2013 to $(0.1) million for the three months ended June 30, 2014. The majority of the decrease in 2014 was due to consulting fees related to the recapitalization of the Company in 2013 of $3.0 million, which we did not have in 2014. Non-SEC related legal fees decreased $0.2 million and consulting fees decreased by $0.2 million. Legal fees were further decreased by $0.4 million due to a receivable we recorded in second quarter for reimbursement of legal fees and expenses related to the SEC investigation. During the quarter the Company received confirmation from our insurance carrier that certain legal fees and expenses related to the SEC investigation would be reimbursable under our existing insurance policies, and as such, we recognized a $1.3 million receivable for those legal fees and expenses resulting in a $0.4 million credit to legal expenses previously recorded in first quarter 2014.

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

                                                      Three Months Ended June 30,
                                                          % of                            % of         Increase/          %
                                           2014          Revenue           2013          Revenue       (Decrease)       Change
Advertising and promotion              $  5,919,263          12.7 %    $  3,275,200          12.9 %   $  2,644,063         80.7 %
Salaries and benefits                     5,777,488          12.4 %       1,563,909           6.1 %      4,213,579        269.4 %
Selling, general, and administrative      2,356,940           5.0 %       1,918,665           7.5 %        438,275         22.8 %
Research & development                    1,163,883           2.5 %         169,231           0.7 %        994,652        587.7 %
Professional fees                           (50,326 )        (0.1 )%      3,727,267          14.6 %     (3,777,593 )     (101.4 )%
Total Operating expenses               $ 15,167,248          32.5 %    $ 10,654,272          41.8 %   $  4,512,976         42.4 %

Other Income (Expense)



Other income and (expense) was nil for the three months ended June 30, 2014,
compared to the $0.3 million for the six months ended June 30, 2013.



                                                            Three Months Ended
                                                                 June 30,
                                                            2014          2013

Change in fair value of derivative liabilities           $ (110,289 )   $ 272,681
Gain (loss) on settlement of accounts payable and debt       25,978        47,671
Interest expense                                            (17,015 )      (1,125 )
Foreign currency loss                                        (4,390 )        (104 )
Other income (expense) - net                                 79,315             -
Total other income (expense)                             $  (26,401 )   $ 319,123

The change in fair value of derivative liability went from a gain of $0.3 million for the three months ended June 30, 2013 to a loss of $0.1 million for the three months ended June 30, 2014. The loss in 2014 was due to the final market to market adjustment as a result of the change in market value of the underlying MusclePharm common stock prior to the conversion of the remaining Series D preferred shares on April 2, 2014.

For the Six Months Ended June 30, 2014 and 2013 (unaudited):



                                                          Six Months Ended
                                                            June 30, 2014
                                                       % of Net                         % of Net        Increase/          %
                                         2014           Sales             2013           Sales          (Decrease)       Change

Sales - net                          $ 96,949,441                     $ 48,041,226                     $ 48,908,215        101.8 %
Cost of sales                          63,429,609           65.4 %      31,963,124           66.5 %      31,466,485         98.4 %
Gross profit                           33,519,832           34.6 %      16,078,102           33.5 %      17,441,730        108.5 %
Operating expenses                     30,616,428           31.6 %      19,540,512           40.7 %      11,075,916         56.7 %
Income (loss) from operations           2,903,404            3.0 %      (3,462,410 )         (7.2 )%      6,365,814       (183.9 )%
Other income (expense) - net              318,105            0.3 %      (6,321,379 )        (13.2 )%      6,639,484       (105.0 )%
Net income (loss) before taxes          3,221,509            3.3 %      (9,783,789 )        (20.4 )%     13,005,298       (132.9 )%
Income tax provision                      (76,947 )         (0.1 )%              -            0.0 %         (76,947 )       (100 )%
Net income (loss) after taxes        $  3,144,562            3.2 %    $ (9,783,789 )        (20.4 )%   $ 12,928,351       (132.1 )%
Net income (loss) per share -
basic                                $       0.30                     $      (1.72 )
Net income (loss) per share -
diluted                              $       0.27                     $      (1.72 )
Weighted average number of shares
used in per share calculations -
basic                                  10,459,522                        5,686,323
Weighted average number of shares
used in per share calculations -
diluted                                11,863,882                        5,686,323

Sales - Net

Net sales increased approximately $48.9 million or 102% to $96.9 million for the six months ended June 30, 2014, compared to $48.0 million for the six months ended June 30, 2013. The increase in sales was due primarily to new sales channels, new product lines, and continued increase in brand awareness.

The sales increases in our product lines are due to the successful execution of our growth strategy, which includes increasing our product distribution and sales through increased brand awareness, marketing and promotion, and sponsorships and endorsements both domestically and internationally. The following is a summary of the growth in the channels:

· Food, Drug and Mass (FDM) is a new distribution channel for us in 2014, which was launched in fourth quarter 2013 and accounted for $10.2 million of our sales increase.

· International distribution channel has been another key area of growth in 2014, with an increase of $22.7 million, or 148%, to $38.0 million compared to $15.3 million during the same period 2013.

· Our Specialty distribution channel, which includes distributors and online retailers grew by $10.6 million, or 33%, to $42.8 million compared to $32.2 million during the same period 2013.

· Biozone Laboratories, Inc., which we acquired in January 2014, accounted for $5.4 million of our sales growth.

Discounts and Sales Allowances

Discounts and sales allowances as a percent of gross sales for the six months ended June 30, 2014 increased slightly to 10.7% of gross sales for the six months ended June 30, 2014 from 10.1% of gross sales for the same period in 2013. This increase in discounts and sales allowances is due to promotions surrounding our Arnold Schwarzenegger product line during the Arnold Fitness Expo during first quarter of 2014. Our Arnold product line is a new product line that we developed and co-branded with Arnold Schwarzenegger and was launched in September 2013.

Cost of Sales

Cost of sales as a percent of net sales decreased by 1.1 percentage points to 65.4% for the six months ended June 30, 2014 from the same period in 2013. Of this decrease, 1.7 percentage points was due to higher margins realized on Biozone product sales, 0.2 percentage points of the decrease was due to the effect of vendor rebates and early payment discounts taken in 2014 and not taken in 2013, and 0.3 percentage points of the decrease was due to improved product pricing from our vendors. These decreases were offset by a 1.1 percentage point increase in shipping expense.

Operating Expenses

Operating expenses for the six months ended June 30, 2014 were $30.6 million as compared to $19.5 million for the six months ended June 30, 2013, a 57% increase.

Advertising and promotion expenses increased $6.7 million, or 119%, to $12.2 million for the six months ended June 30, 2014 compared to $5.6 million for the same period in 2013. Of this increase, $4.0 million was for expenses in conjunction with strategic partnership agreements. The remaining increase is for continued marketing efforts to increase our brand awareness, brand extension, and develop new distribution channels.

Salaries and benefits were $11.1 million, or 12% of revenue, for the three months ended June 30, 2014 up from $2.8 million, or 6.0% of revenue for the same period in 2013. Of this increase, $4.1 million relates to amortization of stock-based compensation for awards granted to employees, directors, and officers in July 2013, the Biozone acquisition in January 2014 contributed $1.1 million of the increase, and the remaining increase was due to salary increases and additional headcount to support our continued growth strategy.

Professional fees decreased by $7.1 million from $7.8 million for the six months ended June 30, 2013 to $0.7 million for the six months ended June 30, 2014. The majority of the decrease in 2014 was due to consulting fees related to the recapitalization of the Company in 2013 of $6.6 million. Additionally, consulting fees decreased by $0.5 million year over year due to finalization of legacy consulting agreement during 2013 and 2014. During the quarter the Company received confirmation from our insurance carrier that certain legal fees and expenses related to the SEC investigation would be reimbursable under our existing insurance policies, and as such, we recognized a $1.3 million receivable for those legal fees and expenses. Professional fees would have been $2.0 million for the period without giving effect to the insurance recovery receivable.

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

                                                       Six Months Ended June 30,
                                                          % of                           % of         Increase/          %
                                           2014          Revenue          2013          Revenue       (Decrease)      Change
Advertising and promotion              $ 12,247,749          12.6 %   $  5,592,577          11.6 %   $  6,655,172       119.0 %
Salaries and benefits                    11,144,295          11.5 %      2,812,368           5.9 %      8,331,927       296.3 %
Selling, general, and administrative      4,229,308           4.4 %      3,064,220           6.4 %      1,165,088        38.0 %
Research & development                    2,260,829           2.3 %        259,361           0.5 %      2,001,468       771.7 %
Professional fees                           734,247           0.8 %      7,811,986          16.3 %     (7,077,739 )     (90.6 )%
Total Operating expenses               $ 30,616,428          31.6 %   $ 19,540,512          40.7 %   $ 11,075,916        56.7 %

Other Income (Expense)

Other income and (expense) was $0.3 million for the six months ended June 30, 2014, compared to the $(6.3) million for the six months ended June 30, 2013.

                                                              Six Months Ended
                                                                  June 30,
                                                            2014            2013

Derivative expense                                       $        -     $    (96,913 )
Change in fair value of derivative liabilities              373,944       (5,771,963 )
Gain (loss) on settlement of accounts payable and debt       31,477          324,656
Interest expense                                            (56,388 )       (781,445 )
Foreign currency transaction loss                           (34,496 )         (5,714 )
Loss on derivative instrument and debt security            (386,103 )              -
Interest income                                             223,049                -
Other income                                                166,622           10,000
Total other expenses                                     $  318,105     $ (6,321,379 )

The change in the fair value of derivative liability decreased from expense of $5.8 million for the six months ended June 30, 2013 to a gain of $0.4 million for the six months ended June 30, 2014. The gain in 2014 was for the market to market adjustments for the change in the market value of the underlying MusclePharm common stock prior to the conversion of the remaining Series D preferred shares on April 2, 2014. Interest expense also decreased during the same period due to the elimination of convertible debt in 2013.

Liquidity and Capital Resources



The Company's cash position is as follows:



                                     June 30, 2014       December 31, 2013
Cash                                $     3,768,840     $         5,411,515

Cash as a percent of total assets                 6 %                    10 %

The following table summarizes total current assets, liabilities and working capital at June 30, 2014, compared to December 31, 2013.

                                                                  Working Capital
                      June 30, 2014       December 31, 2013          Increase
Current Assets        $   50,547,702     $        44,526,480     $       6,021,222
Current Liabilities      (28,473,117 )           (32,368,521 )           3,895,404
Working Capital       $   22,074,585     $        12,157,959     $       9,916,626

Product sales have been the primary source of generating working capital and free cash flow. At June 30, 2014 we had cash of $3.8 million and working capital of $22.1 million, compared to cash of $5.4 million and working capital of $12.2 million at December 31, 2013. During the six months ended June 30, 2014, the Company increased working capital $9.9 million mainly from positive cash flows. The following is a summary of the use the positive cash flow; 1) funded a $3.2 million increase in inventory for anticipated continued growth of product sales,
2) supported a $4.8 million increase in customer accounts receivable balances,
3) paid down $1.3 million, net in accounts payable and accruals, 4) funded $2.7 million, net, for prepaid operating expenses, and 5) to acquire $2.4 million of capital assets to support business expansion.

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 is evaluating opportunities for asset-based lending arrangements with various banking institutions to enable us to further execute our business plan, which includes buying more inventory, broadening the sales platform, and expanding overseas operations. We are currently in negotiations for a line of credit arrangement with a financial institution for $8 million, and we expect the line of credit to be in place by mid-third quarter 2014.

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

                                                               Six Months Ended June 30,
                                                                 2014              2013
Operating Activities                                         $     539,888     $ (5,173,958 )
Investing Activities                                               315,632         (344,418 )
Financing Activities                                            (2,516,902 )     14,168,061
Effect of exchange rates on cash and cash equivalents               18,707            6,076
Net (decrease) increase in cash                              $  (1,642,675 )   $  8,655,761

Cash provided by operating activities was $0.5 million for the six months ended June 30, 2014, primarily due to our net income of $3.1 million being positively adjusted for non-cash items including depreciation of $0.6 million, amortization of employee and director stock compensation of $4.5 million, amortization of non-employee prepaid stock expense of $1.6 million, amortization of prepaid sponsorships of $3.4 million, amortization of intangibles of $0.6 million. These were partially offset by $0.1 million of various other non-cash adjustments to net income and changes in operating assets and liabilities of $13.2 million. . . .

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