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 Quarterly Report on Form 10-Q (the "Form 10-Q"), and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"), as filed with theSecurities and Exchange Commission onMarch 29, 2021 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could 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 entitled "Risk Factors" included elsewhere in this Form 10-Q. Except as otherwise indicated herein, the terms "MusclePharm ," "Company," "we," "our" and "us" refer toMusclePharm Corporation and its subsidiaries. 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 Club retail channels. Our primary distribution channels are Specialty, International and FDM. COVID-19 Our results of operations have been 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. As COVID-19 infections have been reported throughoutthe United States , certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the infection. Additionally, more restrictive 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. 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. 22 Results of Operations
Comparison of the Three Months Ended
For the Three Months Ended
June 30,
2021 2020 $ Change % Change
Revenue, net $ 14,908 $ 16,993 $ (2,085 ) (12 )%
Cost of revenue 12,728 12,009 719 6
Gross profit 2,180 4,984 (2,804 ) (56 )
Operating expenses:Advertising and promotion 145 188 (43 ) (23 ) Salaries and benefits 1,181 1,774 (593 ) (33 ) Selling, general and administrative 2,115 1,807
306 17
Professional fees 482 865 (383 ) (44 )
Total operating expenses 3,923 4,634 (713 ) (15 )
Income from operations (1,743 ) 350 (2,091 ) (597 )
Other expense:Interest and other expense, net (501 ) (581 ) 80 (14 ) Income (loss) before provision for income taxes (2,244 ) (231 ) (2,011 ) (871 ) Provision for income taxes 7 22
(15 ) (68 )
Net income (loss) $ (2,251 ) $ (253 ) $ (1,996 ) (789 )%
Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June
30, 2020 ($ in thousands):
For the Six Months Ended
June 30,
2021 2020 $ Change % Change
Revenue, net $ 28,029 $ 33,224 $ (5,195 ) (16 )%
Cost of revenue 22,160 23,431 (1,271 ) (5 )
Gross profit 5,869 9,793 (3,924 ) (40 )
Operating expenses:
Advertising and promotion 489 313 176 56
Salaries and benefits 2,229 3,455 (1,226 ) (35 )Selling, general and administrative 3,512 3,718
(208) (6 ) Professional fees 1,109 1,406 (297 ) (21 ) Total operating expenses 7,339 8,892 (1,555 ) (21 ) Income from operations (1,470 ) 901 (2,369 ) (263 ) Other expense:
Interest and other expense, net (680 ) (1,170 ) 490 (42 ) Income (loss) before provision for income taxes (2,148 ) (269 ) (1,879 ) (699 ) Provision for income taxes 7 44 (37 ) (84 ) Net income (loss)$ (2,157 ) $ (313 ) $ (1,842 ) (588 )% 23
The following table presents our operating results as a percentage of revenue, net for the periods presented:
For the Three Months For the Six Months Ended
Ended June 30, June 30,
2021 2020 2021 2020
Revenue, net 100 % 100 % 100 % 100 %
Cost of revenue 85 71 79 71
Gross profit 15 29 21 29
Operating expenses:
Advertising and promotion 1 1 2 1
Salaries and benefits 8 10 8 10Selling, general and administrative 14 11
13 11
Professional fees 3 5 4 4
Total operating expenses 26 27 26 26
Gain (loss) from operations (12 ) 2 (5 ) 3
Other income (expense):Interest and other expense, net (3 ) (3 ) (2 ) (4 ) Loss before provision for income taxes (15 ) (1 )
(8 ) (1 )
Provision for income taxes - - - -
Net loss (15 )% (1 )% (8 )% (1 )%
Revenue, net
We derive our revenue through the sales of our various branded nutritional
supplements. Revenue is recognized when control of a promised good is
transferred to a customer in an amount that reflects the consideration that the
Company expects to be entitled to in exchange for that 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.
The MusclePharm brands are marketed across major global retail distribution
channels. Below is a table of revenue, net by distribution channel (in
thousands):
For the Three Months Ended June 30,
% of % of
2021 Total 2020 Total
Distribution Channel
Specialty $ 9,983 67 % $ 8,933 53 %
International 1,775 12 % 3,479 20 %
FDM 3,150 21 % 4,581 27 %
Total $ 14,908 100 % $ 16,993 100 %
For the Six Months Ended June 30,
% of % of
2021 Total 2020 TotalDistribution Channel Specialty$ 17,055 61 %$ 16,969 51 % International 6,148 22 % 7,863 24 % FDM 4,826 17 % 8,392 25 % Total$ 28,029 100 %$ 33,224 100 %
Revenue, net reflects the transaction prices for contracts, which includes products 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 volume incentive rebates and 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.
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Revenue, net decreased$2.1 million , or 12%, to$14.9 million for the three months endedJune 30, 2021 , compared to$17.0 million for the three months endedJune 30, 2020 . Revenue, net for the three months endedJune 30, 2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. Discounts and sales allowances decreased to 11% of gross revenue, or$1.9 million , for the three months endedJune 30, 2021 , from 17% of gross revenue, or$3.6 million for the same period in 2020. The reduction in discounts as a percent of gross revenue was due to changes in customer mix and discretionary promotional activity.
During the three months ended
Revenue, net decreased$5.2 million , or 16%, to$28.0 million for the six months endedJune 30, 2021 , compared to$33.2 million for the six months endedJune 30, 2020 . Revenue, net for the six months endedJune 30, 2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. Discounts and sales allowances decreased to 11% of gross revenue, or$4.3 million , for the six months endedJune 30, 2021 , from 27% of gross revenue, or$7.6 million for the same period in 2020. The reduction in discounts as a percent of gross revenue was due to changes in customer mix and discretionary promotional activity.
During the six months ended
Cost of Revenue and Gross Profit
Cost of revenue forMusclePharm products is directly related to the production, manufacturing, and freight-in of the related products purchased from third party contract manufacturers. We primarily use contract manufacturers to drop ship products directly to our customers. Our gross profit fluctuates primarily 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, and pricing. Costs of revenue increased 6%, despite the decrease in sales volume, to$12.7 million for the three months endedJune 30, 2021 , compared to$12.0 million for the same period in 2020. This increase was due to increased commodity costs, specifically protein, the prices of which have risen significantly year over year, along with increased freight costs. Gross profit for the three months endedJune 30, 2021 decreased 15% to$2.2 million , compared to$5.0 million for the same period in 2020. Gross profit was 15% of revenue, net for the three months endedJune 30, 2021 compared to 29% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage were higher commodity prices, specifically for protein and freight costs. Costs of revenue decreased 5% to$22.2 million for the six months endedJune 30, 2021 , compared to$23.4 million for the same period in 2020. This decrease was due to lower sales volume along with increased commodity costs, specifically protein, prices of which have risen significantly year over year, along with increased freight costs. Gross profit for the six months endedJune 30, 2021 decreased 21% to$5.9 million , compared to$9.8 million for the same period in 2020. Gross profit was 21% of revenue, net for the six months endedJune 30, 2021 compared to 29% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage were higher commodity, specifically for protein and freight costs. 25 Operating ExpensesAdvertising and Promotion Our advertising and promotion expense consists primarily of expenses related to club demonstrations, print and online advertising, trade shows and strategic partnerships with athletes and sports teams. 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 through endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and teams. In connection with our restructuring plan, we terminated the majority of these contracts in a strategic shift away from such costly arrangements and moved toward more cost-effective programs, including digital advertising, ambassador programs and sampling/promotional materials. Advertising and promotion expense decreased 23% to$0.1 million for the three months endedJune 30, 2021 , or 1% of revenue, net compared to$0.2 million , or 1% of revenue, net for the same period in 2020. The decrease for 2021 is related to decreased marketing expenses. Advertising and promotion expense increased 56% to$0.5 million for the six months endedJune 30, 2021 , or 2% of revenue, net compared to$0.3 million , or 1% of revenue, net for the same period in 2020. The increase for 2021 is related to increased demonstrations and sampling due to the launch of a new flavor for our performance powders with one of our largest customers during the first
quarter of 2021. Salaries and Benefits
Salaries and benefits consist primarily of salaries, bonuses, benefits, and stock-based compensation. Personnel costs are a significant component of our operating expenses.
Salaries and benefits decreased 16% to
Salaries and benefits decreased 37% to$2.2 million , or 7% of revenue, net for the six months endedJune 30, 2021 compared to$3.5 million , or 10% of revenue, net for the same period in 2020 primarily due to a reduction in headcount as we have focused on reducing operating costs.
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of depreciation and amortization, research and development, 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, and other corporate expenses. Selling, general and administrative expenses increased 17% to$2.1 million , or 14% of revenue, net for three months endedJune 30, 2021 , compared to$1.8 million , or 11% of revenue, net for the same period in 2020 primarily due to an increase in bad debt reserves, partially offset by reduction in board member compensation and office expenses associated with closure of headquarters and warehouses.
Selling, general and administrative expenses decreased 5% to$3.5 million , or 13% of revenue, net for six months endedJune 30, 2021 , compared to$3.7 million , or 11% of revenue, net for the same period in 2020 primarily due to a reduction in board member compensation and office expenses associated with closure of headquarters and warehouses, partially offset by an increase in
bad debt reserves. Professional Fees
Professional fees consist primarily of legal fees, accounting and audit fees, consulting fees, which includes both cash and stock-based compensation, and investor relations costs.
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Professional fees decreased 44% to$0.5 million , or 3% of revenue, net for the three months endedJune 30, 2021 , compared to$0.9 million , or 5% of revenue, net for the same period in 2020 primarily due to the deceased costs in consulting fees. Professional fees decreased 21% to$1.1 million , or 4% of revenue, net for the six months endedJune 30, 2021 , compared to$1.4 million , or 4% of revenue, net for the same period in 2020 primarily due to decreased consulting fees.
Interest and other expense, net
For the three months ended
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
Interest expense, related party$ (147 ) $ (76 ) $ (282 ) $ (152 ) Interest expense, other (235 ) (175 ) (443 ) (332 ) Interest expense, secured borrowing arrangement (258 ) (383 ) (424 ) (748 ) Foreign currency transaction loss 34 16 32 (18 ) Other 105 74 438 167 Total interest and other expense, net$ (501 ) $ (544 ) $
(679 )$ (1,083 )
"Other" includes sublease income.
Net interest and other expense for the three months endedJune 30, 2021 decreased 14%, or$0.1 million , compared to the same period in 2020. The decrease is primarily related to reduced interest expense for secured borrowing arrangements, partially offset by an increase in interest expense for related party and other debt. Net interest and other expense for the six months endedJune 30, 2021 decreased 42%, or$0.4 million , compared to the same period in 2020. The decrease is primarily due to reduced interest expense for secured borrowing arrangements, partially offset by an increase in interest expense for related party and other debt. Provision for Income Taxes Provision for income taxes consists primarily of federal and state income taxes in theU.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 carry-forwards, 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.
Liquidity and Capital Resources
The Company has incurred significant losses and experienced negative cash flows since inception. As ofJune 30, 2021 , the Company had cash of$1.0 million , a decline of$1.0 million from theDecember 31, 2020 balance of$2.0 million . As ofJune 30, 2021 , we had a working capital deficit of$22.8 million , a stockholders' deficit of$26.3 million and an accumulated deficit of$194.8 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. For financial information concerning more recent periods, see our reports for such periods filed with theSEC . 27
The 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. Management is 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. During the fourth quarter of 2019, the Company focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU's and negotiate pricing for raw materials. These steps improved gross margins in the fourth quarter of 2019 and this trend has continued throughJune 30, 2021 . However, with the recent increases in commodity prices, the company's gross margins have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2020. During 2020, the Company experienced a slowdown in sales from retail customers, including our largest customer, which was partially offset by an increase in sales from our largest online customer. In addition, the Company negotiated lower cost of sold with its co-manufactures. In 2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive. The Company plans to launch 3 new energy products in the summer of 2021. The Company believes with the launch of its new energy products, reductions in operating costs and continued focus on gross profit and top line sales growth will allow it to ultimately achieve sustained profitability, however, the Company can give no assurances that this will occur. In addition, the cost to launch new energy products along with the recent increase 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 customers' demands. Although, the Company believes entering the functional energy space will help to increase sales and gross margin, and reduce exposure to commodity prices, the Company can give no assurances that this will occur. Management believes reductions in operating costs and continued focus on gross profit will allow us to ultimately achieve profitability, however, the Company can give no assurances that this will occur. To manage cash flow, we have entered into numerous financing arrangements outlined in "Note 8. Debt" to the Notes to Consolidated Financial Statements (unaudited) contained herein.
Our net consolidated cash flows are as follows (in thousands):
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