You should read the following discussion and analysis of our financial condition and plan of operations together with and our consolidated financial statements and the related notes appearing elsewhere in this Amendment No. 1 to the Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Amendment No. 1 to the Annual Report on Form 10-
K. Allamounts in this report are in U.S.dollars, unless
otherwise noted. Overview
MusclePharmis a scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. We offer a broad range of performance powders, capsules, tablets, gels and on-the-go ready to eat snacks that satisfy the needs of enthusiasts and professionals alike. Our portfolio of recognized brands, MusclePharmand FitMiss, is marketed and sold in more than 100 countries globally. Our offerings are clinically developed through a six-stage research process, and all of our manufactured products are rigorously vetted for banned substances by the leading quality assurance program, Informed-Choice. While we initially drove growth in the Specialty retail channel, in recent years we have expanded our focus to drive sales and retailer growth across leading e-commerce, Food Drug & Mass ("FDM"), and Specialty and international channels. Our consolidated financial statements are prepared using the accrual method of accounting in accordance with generally accepted accounting principles in the United States("GAAP") and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in
the normal course of business. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. We are actively managing our business to respond to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties. COVID-19
The worldwide spread of COVID-19, including the emergence of variants, has resulted, and may continue to result in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time until the COVID-19 pandemic is contained, or economic activity normalizes. With the current uncertainty in economic activity, the impact on our revenue and results of operations is likely to continue and the size and duration of the impact we are currently unable to accurately predict. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on a variety of factors, including the duration and spread of COVID-19 and its variants, and its impact on our customers, contract manufacturers, vendors, industry and employees, all of which are uncertain at this time and cannot be accurately predicted. See "Item 1.A Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
Factors affecting our performance
As we continue to execute our growth strategy and focus on our core products, we believe that we can, over time, continue to improve our operating margins and expense structure. In addition, we have implemented plans focused on cost containment, customer profitability, product and pricing controls that we believe will improve our gross margin and reduce our losses. We expect that our advertising and promotion expense will continue to decrease as we focus on reducing our expenses and shifting our promotional costs, in part, from general branding and product awareness to acquiring customers and driving sales from existing customers. We expect that our discounts and allowances will continue to decrease, both overall and as a percentage of revenue, as we further reduce certain discretionary promotional activity that does not result in a commensurate increase in revenues. - 26 -
Results of operations for the year ended
The following table sets forth certain financial information from our consolidated statements of operations along with a percentage of net revenue and should be read in conjunction with the consolidated financial statements and related notes (in thousands). For the Years Ended December 31 2021 2020 Amount % of Revenue Amount % of Revenue Revenue, net
$ 50,042100 % $ 64,440100 % Cost of revenue 44,671 89 % 44,831 70 % Gross profit 5,371 11 % 19,609 30 % Operating expenses: General and administration 9,891 20 % 12,952 20 % Selling and promotion 4,393 9 % 3,888 6 %
Impairment of intangible assets - -
167 - Total operating expenses 14,284 29 % 17,007 26 % Income (loss) from operations (8,913 ) -18 % 2,602 4 % Other (expense) income: Interest expense (5,460 ) -11 % (1,493 ) -2 %
Loss on settlement of obligations (2 ) - (95 ) - Other income, net 1,501 3 % 465 1 % Gain on settlement of payables - - 1,687 3 % Income (loss) before provision for income taxes (12,874 ) -26 % 3,166 5 % Benefit for income taxes (8 ) -0.02 % (19 ) -0.03 % Net income (loss)
$ (12,866 )-26 % $ 3,1855 % Revenue, net We derive our revenue through the sales of our various branded sports nutrition products and nutritional supplements. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the good. This usually occurs when finished goods are delivered to the Company's customers or when finished goods are picked up by a customer or a customer's carrier. Net revenue reflects the transaction prices for contracts, which includes goods shipped at selling list prices reduced by variable consideration. We record sales incentives as a direct reduction of revenue for various discounts provided to our customers, consisting primarily of promotional related credits. Sales discounts are a significant part of our marketing plan to our customers as they help drive increased sales and brand awareness with end users through promotions that we support through our distributors and re-sellers. For the year ended December 31, 2021, our net revenues were approximately $50.0 millioncompared to $64.4 millionfor the year ended December 31, 2020, a decline of approximately $14.4 millionor 22%. During the year ended December 31, 2021, the Company had three customers who individually accounted for 38%, 14% and 13% of our net revenue. During the year ended December 31, 2020, the Company had three customers who individually accounted for 41%, 17% and 12%
of our net revenue. Discounts and sales allowances declined to approximately 16% of gross revenue, or
$9.3 million, for the year ended December 31, 2021, compared to approximately 22% of gross revenue, or $17.7 million, for the year ended December 31, 2020. Discounts and sales allowances fluctuate based on customer mix and changes in discretionary promotional activity. We continue to monitor our discounts and allowances, reducing where practical to continue to meet our gross margin expectations. - 27 - Net revenue decreased primarily due to industry wide supply shortages on protein and components, which delayed production of our products. During the fourth quarter of 2021, the Company instituted price increases of approximately 7.4% with select customers, contributing an additional $0.2 millionnet revenue.
Revenue cost and gross profit
Cost of revenue for our products is related to the production, manufacturing, and freight-in of the related products purchased from third-party manufacturers. We primarily use contract manufacturers to drop ship products directly to our customers. We experienced cost increases for raw materials during the year ended
December 31, 2021primarily due to industry shortages in supply and consistent with market demand. Compared to the prior year, commodity protein costs have increased 133% negatively affecting our gross margin. We are taking steps to manage the increase and shortages by entering into agreements with additional protein brokers to diversify our protein sources, along with working with new vendors to source other component such as tubs, trays and bags. We have focused on cost containment and improving gross margins by concentrating on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU's and negotiating improved pricing for raw materials. With recent increases in commodity prices, our gross margins have eroded and will continue to be impacted. General and Administration
Our general and administrative expenses primarily include salaries and benefits, professional fees, depreciation and amortization, research and development, computer equipment and network costs, facilities expenses, attendance fees , legal fees, accounting and auditing fees, advisory fees, stock-based compensation, investor relations fees, insurance and other corporate expenses.
For the year ended
December 31, 2021, our general and administration expenses were approximately $9.9 millioncompared to $13.0 millionfor the year ended December 31, 2020, or a decline of approximately $3.1 millionor 24% due to a decrease in salaries and benefits associated with a reduction in headcount, reducing operating costs and board member compensation, as well as a reduction in office expenses associated with closure of headquarters and warehouses. Salaries and benefits are down $1.6 millionor 25%; Office and IT expenses
$0.8 millionor 46%.
Expressed as a percentage of net revenues, general and administrative expenses were approximately 20% for the year ended
Selling and Promotion
Our selling and promotion expense consists primarily of expenses related to freight-out, print and online advertising, club demonstrations, and stock-based compensation. Historically, advertising and promotions were a large part of both our growth strategy and brand awareness, in particular strategic partnerships with sports athletes and fitness enthusiasts and endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and teams. In connection with our restructuring plan, we terminated most of these contracts in a strategic shift away from such costly arrangements and moved toward digital advertising, ambassador programs and sampling promotional materials. For the year ended
December 31, 2021, our selling and promotion expenses were approximately $4.4 millioncompared to $3.9 millionfor the year ended December 31, 2020; an increase of $0.5 millionor 13%. The increase was primarily related to an increase in freight-out and other increases in Club Demonstrations and stock-based compensation related to our Energy business. - 28 -
Expressed as a percentage of net revenues, selling and promotion expenses were approximately 9% for the year ended
Impairment of intangible assets
For the year ended
December 31, 2020, we incurred approximately $0.2 millionof impairment of intangible assets. For the year ended December 31, 2021we had no impairment.
Loss of obligation settlement
For the year ended
December 31, 2021, our loss on settlement of obligation was approximately $2,000compared to $95,000for the year ended December 31, 2020. During the year ended December 31, 2020, the Company settled with two contract manufactures, Nutrablend and Excelsior Nutrition and recorded a loss of $95,000for the year related to these obligations.
Gain on debt settlement
For the year ended
a manufacturer of our products, under which we have agreed to pay
Nutrition, manufacturer of our products, under which we have agreed to pay
thereafter until the settlement amount is paid in full.
For the year ended
Interest Expense For the year ended
December 31, 2021, interest expense was approximately $5.4 millioncompared to $1.5 millionfor the year ended December 31, 2020, or an increase of $3.9 millionor 260%.
Interest expense increased due to a higher debt balance due to the issuance of the senior secured debt offering during the year ended
Other Income, Net The Company's other income increased from
$0.5 millionfor the year ended December 31, 2020to $1.5 millionfor the year ended December 31, 2021. During 2021, the Company recognized a gain of $1.0 millionrelated to the forgiveness of the Company's Paycheck Protection Program loan and sublease income $0.4 million, partially offset by the Company's foreign currency translation gain/loss, primarily related to trade with Canadian customers. Provision for Income Taxes For the year ended December 31, 2021, we recognized a tax benefit of approximately $8,000compared to a tax benefit of approximately $19,000for the year ended December 31, 2020. Our provision for income taxes consists primarily of federal and state income taxes in the U.S.and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty, as to the realization of benefits from our deferred tax assets, including net operating loss carryforwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term. - 29 -
Cash and capital resources
We have incurred significant losses and experienced negative cash flows since inception. As of
December 31, 2021, the Company had cash of approximately $1.2 million, a decline of $780from the December 31, 2020balance of $2.0 million. As of December 31, 2021, we had a working capital deficit of $30.1 million, a stockholders' deficit of $32.2 millionand an accumulated deficit of $205.5 millionresulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon us generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We are evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. We have funded our operations from proceeds from the sale of equity and debt securities. We will require significant additional capital to make the investments we need to execute our longer-term business plan. Our ability to successfully raise sufficient funds through the sale of debt or equity securities when needed is subject to many risks and uncertainties and, even if it were successful, future equity issuances would result in dilution to our existing shareholders and future debt securities may contain covenants that limit our operations or ability to enter into certain transactions. We will need to raise additional funding through strategic relationships, public or private equity or debt financings, grants or other arrangements to develop and seek regulatory approvals for our existing and new product candidates. If such funding is not available, or not available on terms acceptable to us, our current development plan and plans for expansion of our general and administrative infrastructure may be curtailed. Cash Flows
Here is a summary of our cash flows (in thousands):
For the Years Ended December 31, 2021 2020 Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (8,042 ) $ (868 ) Net cash (used in) provided by investing activities (2 ) 218 Net cash provided by financing activities 7,264
1,121 Net change in cash $ (780 ) $ 471
Net cash from operating activities
Our net cash used in operating activities was
Net cash investing activities
Our net cash used in investing activities for the year ended
December 31, 2021, was $0.002 millioncompared to net cash provided by investing activities of $0.2 millionfor the year ended December 31, 2020. - 30 - Net Cash Financing Activities Our net cash provided by financing activities for the year ended December 31, 2021, was $7.3 millioncompared to $1.1 millionfor the year ended December
31, 2020. Non-GAAP Adjusted EBITDA In addition to disclosing financial results calculated in accordance with GAAP, this Amendment No. 1 to Form 10-K discloses Adjusted EBITDA, which is net loss adjusted for stock-based compensation, gain on settlement of accounts payable, (gain) loss on disposal of property and equipment, interest expense, depreciation of property and equipment, amortization of intangible assets, and (benefit) provision for income taxes. Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, as well as the Company's ability to meet future working capital requirements. Management believes this non-GAAP measures will provide investors with important additional perspectives in evaluating the Company's ongoing business performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net income (loss). Adjusted EBITDA is not a presentation made in accordance with GAAP and has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Below are reconciliations of our GAAP net income (loss) and Adjusted EBITDA (in thousands):
Year ended Year ended December 31, 2021 December 31, 2020 Net income (loss) (GAAP) $ (12,866 ) $ 3,185 Non-GAAP adjustments:
Gain on disposal of property and equipment - (160 ) Loss on settlements (143 ) (1,687 ) Impairment of operating lease right of use asset - 167 Stock compensation expense 653 144 Interest and other expense, net 5,039 1,188 Depreciation of Property and Equipment 10 145 Amortization of Intangible Assets 321
320 PPP Loan Forgiveness (965 ) - Benefit for income taxes (8 ) (19 ) Loss foreign currency 28 - Adjusted EBITDA (non-GAAP) $ (7,931 ) $ 3,283 - 31 -
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of the consolidated 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. We evaluate our estimates and assumptions on a regular basis. 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 business, financial condition and results of operations.
The preparation of our Financial Statements and the related disclosures in conformity with GAAP, requires our management to make judgments, assumptions, and estimates that affect the amounts of revenue, expenses, income, assets, and liabilities, reported in our Financial Statements and accompanying notes. Understanding our accounting policies and the extent to which our management uses judgment, assumptions, and estimates in applying these policies is integral to understanding our Financial Statements. We describe our most significant accounting policies in "Note 2, Significant Accounting Policies" of our consolidated notes to our Financial Statements and found elsewhere in this Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions. Revenue Recognition
Our revenue represents sales of finished goods inventory and is recognized when control of the promised goods is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. The reserves for trade promotions and product discount s, including sales incentives, are established based on our best estimate of the amounts necessary to settle existing credits for products sold as of the balance sheet date. All such costs are netted against sales. These costs include end-aisle or other in-store displays, contractual advertising fees and product discounts, and other customer specific promotional activity. We provide reimbursement to our customers for such amounts as credits against amounts owed. To determine the appropriate timing of recognition of consideration payable to a customer, all consideration that is payable to our customers is reflected in the transaction price at inception and reassessed routinely.
Accounts receivable and allowance for doubtful accounts
Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced amount, net of any sales discounts and allowance for doubtful accounts, and do not typically bear interest. The Company assesses the collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of "General and administrative" expenses in the consolidated statements of operations. The Company reserves the receivable balance against the allowance when management determines a balance is uncollectible. The Company also reviews its customer discounts and an accrual is made for discounts earned but not yet utilized at each period end.
Estimates and accruals
In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. - 32 -
Share-based payments and stock-based compensation
Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable awards' grant date, based on the estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are also recorded at fair value on the grant date. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price. The fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by the Company's assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the awards. Due to the Company's limited experience with the expected term of options, the simplified method was utilized in determining the expected option term as prescribed in ASC 718 Compensation - Stock Compensation. We recognize our stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
There were no material changes to our significant accounting policies during the period covered by this report.
Warrants In conjunction with the Securities Purchase Agreement (SPA), the Company issued 18,463,511 warrants to the senior note holders. The warrants entitle the holder to purchase one share of the Company's common stock at an exercise price equal to
$.7794per share at any time on or after October 13, 2021(the "Initial Exercise Date") and on or prior to the close of business on October 13, 2026the "Termination Date"). The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the debt instruments. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as equity pursuant to ASC 470. In accordance with the accounting guidance, the outstanding warrants are recognized as equity on the balance sheet. The proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants, and of the warrants themselves at time of issuance. The allocation of the portion of the value resulted in a discount of the debt instrument. The fair value of the warrants were measured using the Black Scholes option pricing model.
Recently issued accounting pronouncements
See Note 2 to the accompanying consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are material, or potentially material, to us.
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