MUSCLEPHARM CORP – 10-K/A OF OPERATIONS

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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. All amounts in this report are in U.S. dollars, unless
otherwise noted.



Overview


MusclePharm is 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, MusclePharm and 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.



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Results of operations for the year ended December 31, 2021 Compared to the year ended December 31, 2020



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                          $   50,042               100 %   $   64,440               100 %
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 %   $    3,185                 5 %




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
million compared to $64.4 million for the year ended December 31, 2020, a
decline of approximately $14.4 million or 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.



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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 million net 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, 2021 primarily 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 million compared to $13.0 million for the year ended
December 31, 2020, or a decline of approximately $3.1 million or 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 million or 25%; Office and IT expenses
are
down $0.8 million or 46%.


Expressed as a percentage of net revenues, general and administrative expenses were approximately 20% for the year ended December 31, 2021compared to 20% for the year ended December 31, 2020.


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 million compared to $3.9 million for the year ended December
31, 2020; an increase of $0.5 million or 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.



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Expressed as a percentage of net revenues, selling and promotion expenses were approximately 9% for the year ended December 31, 2021compared to 6% for the year ended December 31, 2020. The increase in 2021 spending is mainly due to a 23% increase in outbound freight.

Impairment of intangible assets



For the year ended December 31, 2020, we incurred approximately $0.2 million of
impairment of intangible assets. For the year ended December 31, 2021 we had no
impairment.


Loss of obligation settlement

For the year ended December 31, 2021, our loss on settlement of obligation was
approximately $2,000 compared to $95,000 for 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 $95,000
for the year related to these obligations.



Gain on debt settlement

For the year ended December 31, 2020we recorded amounts totaling approximately $1.7 million as a gain on settlement of liabilities, the result of charging interest due to the long-term nature of the payments as follows:

? On September 25, 2020we have entered into a settlement agreement with Nutrablend,

a manufacturer of our products, under which we have agreed to pay

approximately $3.1 million in monthly installments of September 1, 2020 by

June 30, 2023.

? On December 16, 2020we entered into a transactional agreement with Excelsior

Nutrition, manufacturer of our products, under which we have agreed to pay

approximately $4.8 million in monthly installments starting January 5, 2020 and

    thereafter until the settlement amount is paid in full.



For the year ended December 31, 2021, we did not record any gain on the settlement of debts. Outstanding amounts related to these settlements are reflected in accrued liabilities and other liabilities.


Interest Expense



For the year ended December 31, 2021, interest expense was approximately $5.4
million compared to $1.5 million for the year ended December 31, 2020, or an
increase of $3.9 million or 260%.



Interest expense increased due to a higher debt balance due to the issuance of the senior secured debt offering during the year ended December 31, 2021.



Other Income, Net



The Company's other income increased from $0.5 million for the year ended
December 31, 2020 to $1.5 million for the year ended December 31, 2021. During
2021, the Company recognized a gain of $1.0 million related 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 $8,000 compared to a tax benefit of approximately $19,000 for 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.



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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 $780 from the December 31, 2020 balance 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 million and an accumulated deficit of $205.5
million resulting 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 $8.0 million for the year ended
December 31, 2021 compared to the net cash used in operating activities of $0.9 million for the year ended December 31, 2020.

Net cash investing activities



Our net cash used in investing activities for the year ended December 31, 2021,
was $0.002 million compared to net cash provided by investing activities of $0.2
million for the year ended December 31, 2020.



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Net Cash Financing Activities



Our net cash provided by financing activities for the year ended December 31,
2021, was $7.3 million compared to $1.1 million for 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




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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.



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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 $.7794 per 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, 2026 the
"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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