MUSCLEPHARM CORPORATION The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
below. See "Forward Looking Statements" and "Item 1A. Risk Factors." Except as
otherwise indicated herein, the terms "
Overview
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 Club retail channels, including Amazon, Costco, Kroger,
Walgreens,
Our consolidated financial statements are prepared using the accrual method of
accounting in accordance with generally accepted accounting principles in
During the fourth quarter of 2019, management implemented the following measures to improve gross profit:
1) reduced or eliminated sales to low or negative margin customers;
2) reduced product discounts and promotional activity;
3) implemented a more aggressive SKU reduction; and
4) negotiated and purchased certain raw materials directly from the
manufacturers lowering the costs of goods sold
As a result of these measures, as well as a reduction in protein prices, the
Company realized increased gross profit in the fourth quarter of 2019, a trend
which continued throughout 2020. In
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.
18 COVID-19
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.
The COVID-19 pandemic has led federal and certain state and local governmental authorities to issue stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the infection. It is uncertain how long certain of these measures will last or whether additional proclamations and/or directives may be issued in the future.
The ultimate impact of the COVID-19 pandemic on the Company's operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations.
While revenue, net is down for 2020 compared to 2019, there are multiple factors contributing to this decline. Our revenue for 2020 is down primarily as a result of a reduction in promotional discounts, resulting in lower sales volume with certain customers, and to a lesser degree, due to the impact of COVID-19, resulting in a decline in our Specialty, International, and Food, Drug, and Mass ("FDM") sales. Management continues to monitor the business environment for any significant changes that could impact the Company's operations. The Company has taken proactive steps to manage costs and discretionary spending, such as remote working and reducing facility related expense.
Outlook
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. In addition, we expect our gross margin to increase in future periods due to a decrease in protein prices which began in the fourth quarter of 2019, although protein prices will continue to fluctuate.
19 Results of Operations Comparison of the Year EndedDecember 31, 2020 to the Year EndedDecember 31, 2019 ($ in thousands) For the Years Ended December 31, 2020 2019 $ Change % Change Revenue, net$ 64,440 $ 79,667 $ (15,227 ) (19 )% Cost of revenue 44,831 70,979 26,148 (37 ) Gross profit 19,609 8,688 10,921 126 Operating expenses: Advertising and promotion 507 2,487 (1,980 ) (80 ) Salaries and benefits 6,430 7,910 (1,480 ) (19 ) Selling, general and administrative 7,139 9,792 (2,653 ) (27 ) Professional fees 2,764 3,606 (842 ) (23 ) Impairment of operating lease right-of-use assets 167 - 167 - Total operating expenses 17,007 23,795 (6,788 ) (29 ) Income (loss) from operations 2,602 (15,107 ) 17,709 (117 ) Other (expense) income: Loss on settlement of obligations (95 ) (125 ) 30 (24 ) Gain on settlement of payables 1,687 - 1,687 - Interest and other expense, net (1,028 ) (3,609 ) 2,581 (72 ) Income (loss) before provision for income taxes 3,166 (18,841 ) 22,007 (117 ) (Benefit) provision for income taxes (19 ) 86 (105 ) (122 ) Net income (loss)$ 3,185 $ (18,927 ) $ 22,112 (117 )%
The following table presents our operating results as a percentage of revenue, net for the periods presented:
For the Years Ended
December 31,
2020 2019
Revenue, net 100 % 100 %
Cost of revenue 70 89
Gross profit 30 11
Operating expenses:
Advertising and promotion 1 3
Salaries and benefits 10 10
Selling, general and administrative 11 12
Professional fees 4 5
Impairment of operating lease right-of-use assets 0 0
Total operating expenses 26 30
Income (loss) from operations 4 (19 )
Other (expense) income:
Loss on settlement of obligations - -
Gain on settlement of payables 2 -
Interest and other expense, net (2 ) (5 )
Income (loss) before provision for income taxes 4 (24 )
Provision for income taxes - -
Net income (loss) 4 % (24 )%
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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. We accrue for sales discounts over the period they are earned. 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.
MusclePharm brands are marketed across major global retail distribution channels - Specialty, International, and Food, Drug, and Mass ("FDM"). Below is a table of net revenue by our major distribution channel:
For the Years Ended December 31,
% of % of
2020 Total 2019 Total
Distribution Channel
Specialty $ 26,643 41 % $ 35,812 45 %
International 17,862 28 % 22,691 28 %
FDM 19,935 31 % 21,164 27 %
Total $ 64,440 100 % $ 79,667 100 %
Net revenue decreased
Discounts and sales allowances decreased to 22% of gross revenue, or
During the year ended
21
Cost of Revenue and Gross Margin
Cost of revenue for
Our gross profit fluctuates due to several factors, including sales incentives, new product introductions and upgrades to existing product lines, changes in customer and product mixes, the mix of product demand, shipment volumes, our product costs, pricing, and inventory write-downs. Cost of revenue will continue to fluctuate, primarily due to changes in protein prices, which prices are impacted, in part, by our ability to negotiate better pricing with our manufacturers. Protein prices increased for most of 2019, before declining at the end of the year.
Costs of revenue decreased 37% to
Operating Expenses
Operating expenses for the year ended
Advertising and Promotion
Our advertising and promotion expenses consist primarily of digital, print and media advertising, promotional giveaways, in store product demonstrations, and in store product displays and trade show events.
Advertising and promotion expense decreased
The reductions in 2020 were made in an effort to reduce overall spending as we shift our promotional costs, in part, from general branding and product awareness to acquiring customers and driving sales from existing customers.
Salaries and Benefits
Salaries and benefits consist primarily of salaries, bonuses, benefits and stock-based compensation paid or provided to our employees.
Salaries and benefits continued to decrease primarily due to headcount
reductions and terminations, including certain higher salaried employees. This
decrease was offset, in part, by an increase in consulting fees to assist us in
preparing our delinquent annual and quarterly
Salaries and benefits decreased by
22
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of depreciation and amortization, information technology equipment and network costs, facilities related expenses, director's fees, which include both cash and stock-based compensation, insurance, rental expenses related to equipment leases, supplies, legal settlement costs, broker fees and other corporate expenses.
Selling, general and administrative expenses decreased by 27% to
Professional Fees
Professional fees consist primarily of legal fees, accounting and audit fees,
consulting fees and investor relations costs. Professional fees decreased 23% to
The decrease was primarily due to reduced legal fees of
To the extent our ongoing legal matters are reduced, we expect to see a further decline in legal costs for specific settlement activities. We intend to continue to invest in strengthening our governance, internal controls, and process improvements, which is expected to require support from third-party service providers.
Settlement of obligations
We recorded settlement expenses of
Gain on settlement of payables
On
On
We recorded
23
Interest and other expense, net
For the years ended
For the Year Ended December 31,
2020 2019
Interest expense, related party $ (329 ) $ (1,597 )
Interest expense, related party debt discount - (60 )
Interest income (expense), other 202 (894 )
Interest expense, secured borrowing arrangement (1,366 ) (1,205 )
Foreign currency transaction loss (8 ) (236 )
Other 473 383
Total interest and other expense, net $ (1,028 ) $ (3,609 ) "Other" includes sublease income and gain on disposal of fixed assets.
Interest and other expense, net for the year ended
Provision for income taxes
Provision for income taxes consists primarily of federal and state income taxes
in the
Liquidity and Capital Resources
The Company has historically incurred significant losses and experienced
negative cash flows since inception. However, the Company generated net income
of
The ability to continue as a going concern is dependent upon us maintaining profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities when they come due. Management is on an ongoing basis evaluating 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. There is no assurance that we will be able to obtain additional financing on acceptable terms or at all or to generate an adequate level of revenues.
During the fourth quarter of 2019, management implemented the following measures to improve gross margin:
1) reduced or eliminated sales to low or negative margin customers;
2) reduced product discounts and promotional activity;
3) implemented a more aggressive SKU reduction; and
4) negotiated and purchased certain raw materials directly from the
manufacturers lowering the costs of goods sold
24
As a result of these measures, as well as a reduction in protein prices, the
Company realized increased gross margins in the fourth quarter of 2019, a trend
which continued throughout 2020. In
Management believes reductions in operating costs, and continued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the Company's customers, will allow us to ultimately achieve sustained profitability, however, we can give no assurances that this will occur. In particular, fluctuations in the cost of protein may have a material impact on the Company's profitability, as well as the ability of our third-party manufacturers to meet our customer's demands.
Cash Flows
Our net consolidated cash flows are as follows (in thousands):
For the Years Ended December 31,
2020 2019
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities $ (868 ) $ (6,524 )
Net cash provided by (used in) investing activities 218 (13 )
Net cash provided by financing activities 1,121 5,742
Effect of exchange rate changes on cash - 10
Net change in cash $ 471 $ (785 )
Operating Activities
Our cash used in operating activities is driven primarily by inventory purchases, personnel-related expenditures, manufacturing costs, professional fees (including legal and accounting fees), and other general expenses such as rent and maintenance expenses. Our cash flows from operating activities is expected to continue to be affected principally by results of operations and the extent to which we increase spending on personnel expenditures, sales and marketing activities, and our working capital requirements.
Our operating cash outflows improved
During the year ended
During the year ended
25 Investing Activities
Cash provided by investing activities was
Cash used in investing activities was
Financing Activities
Cash provided by financing activities was
Cash provided by financing activities was
To manage cash flow, we have entered into numerous financing arrangement outlined below.
Indebtedness Agreements
Related-Party Refinanced Convertible Note
On
Interest rate on the
The Refinanced Convertible Note contained customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, interest would accrue at the rate of 14% per annum. In addition, following an event of default, any conversion, redemption, payment or prepayment of the Refinanced Convertible Note would be at a premium of 105%. The Refinanced Convertible Note also contained customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the Refinanced Convertible Note.
26
As part of the Refinancing, the Company and
On
On
On
On
The 2020 Refinanced Convertible Note contains customary restrictions on the
ability of the Company to, among other things, grant liens or incur indebtedness
other than certain obligations incurred in the ordinary course of business. The
restrictions are also subject to certain additional qualifications and
carveouts, as set forth in the 2020 Refinanced Convertible Note. The 2020
Refinanced Convertible Note is subordinated to certain other indebtedness of the
Company held by Prestige Capital Corporation ("Prestige") and
27
All outstanding principal and accrued but unpaid interest under the 2020
Refinanced Convertible Note were due and payable on
On
The
For the years ended
Related Party Secured Revolving Promissory Note
On
As of
28
Line of Credit - Inventory Financing
On
During the year, the Company made payments of
On
On
On
Secured Borrowing Arrangement
In
At
On
29
For the years ended
Paycheck Protection Program Loan
Due to economic uncertainty as a result of the ongoing pandemic (COVID-19), on
The Note is expected to mature on
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in accordance with GAAP, this 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, amortization of prepaid sponsorship fees, interest and other expense, net, depreciation of property and equipment, amortization of intangible assets, provision for doubtful accounts, 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. The exclusion of non-cash charges, including stock-based compensation and depreciation and amortization, gain on settlement of payables and impairment of assets, is useful in measuring the Company's cash available for operations and performance of the Company. Management believes these 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.
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Set forth below are reconciliations of our reported GAAP net income (loss) to Adjusted EBITDA (in thousands):
Year ended Year ended
Dec. 31, 2020 Dec. 31, 2019
Net income (loss) $ 3,185 $ (18,927 )
Non-GAAP adjustments:
Stock-based compensation 144 284
(Gain) loss on disposal of property and
equipment (160 ) 5
Gain on settlement of payables (1,687 ) -
Interest and other expense, net 1,188 3,609
Depreciation and amortization of property and
equipment 145 339
Amortization of intangible assets 320 320
Impairment of operating lease right-of-use
assets 167 -
Bad debt expense 172 21
(Benefit) Provision for income taxes (19 ) 86
Adjusted EBITDA $ 3,455 $ (14,263 ) Critical 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.
Revenue Recognition
Our revenue represents sales of finished goods inventory and is recognized when control of the promised goods is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The reserves for trade promotions and product discounts, including sales incentives, are established based on our best estimate of the amounts necessary to settle future and existing credits for product 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 payable to our customers is reflected in the transaction price at inception and reassessed routinely.
31
For the years ended
Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified assets for a period of time in exchange for consideration. An entity controls the use when it has a right to obtain substantially all of the benefits from the use of the identified asset and has the right to direct the use of the asset. The Company determines if an arrangement is a lease at contract inception. For all classes of underlying assets, the Company includes both the lease and non-lease components as a single component and accounts for it as a lease. Lease liabilities are recognized based on the present value of the lease payments over the lease term at the commencement date.
Advertising and Promotion
Our advertising and promotion expenses consist primarily of digital, print and media advertising, athletic endorsements and sponsorships, promotional giveaways, trade show events and various partnering activities with our trading partners, and are expensed as incurred. For major trade shows, the expenses are recognized within a calendar year over the period in which we recognize revenue associated with sales generated at the trade show. Some of the contracts provide for contingent payments to endorsers or athletes based upon specific achievement in their sports, such as winning a championship. We record expense for these payments if and when the endorser achieves the specific achievement.
Contingencies
The Company records loss contingencies when management determines that the outcome of future events is probable of occurring and when the amount of the loss can be reasonably estimated. Gain contingencies are recognized in the consolidated financial statements when they are realized. The determination of an accrual for a loss contingency is based on management's judgment and estimates with respect to the likely outcome of the matter. Liabilities are recorded or adjusted when events or circumstances cause these judgments or estimates to change.
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.
See additional information in "Note 9. Commitment and Contingencies."
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 of significance, or potential significance, to us.
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