UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year ended December 31, 2014

Commission File Number – 000-53166

 

MusclePharm Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

77-0664193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4721 Ironton Street, Building A

Denver, Colorado

 

80239

(Address of principal executive offices)

 

(Zip code)

(303) 396-6100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each class

Common Stock, Par Value $0.001 Per Share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated file, an accelerated file, a non-accelerated filer, or a smaller reporting company. (Check one):

 

Large accelerated filer

o

 

Accelerated filer

x

 

 

 

 

 

Non-accelerated filer

o 

 

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2014: $98,998,280

Number of shares of the registrant’s common stock outstanding at March 6, 2015: 13,468,876 excludes 875,621 common shares held in treasury.

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders will be filed with the Commission within 120 days after the close of the registrant’s 2014 fiscal year and are incorporated by reference in Part III.  

 

 

 

 


 

MusclePharm Corporation

Form 10-K

For the Year Ended December 31, 2014

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I

 

 

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

10

Item 1B.

 

Unresolved Staff Comments

 

18

Item 2.

 

Properties

 

18

Item 3.

 

Legal Proceedings

 

18

Item 4.

 

Mine Safety Disclosures

 

19

 

 

 

 

 

 

 

PART II

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

20

Item 6.

 

Selected Financial Data

 

22

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 8.

 

Consolidated Financial Statements and Supplementary Data

 

39

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

76

Item 9A.

 

Controls and Procedures

 

76

Item 9B.

 

Other Information

 

77

 

 

 

 

 

 

 

PART III

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

78

Item 11.

 

Executive Compensation

 

78

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

78

Item 13.

 

Certain Relationships, Related Transactions and Director Independence

 

78

Item 14.

 

Principal Accounting Fees and Services

 

78

 

 

 

 

 

 

 

PART IV

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

79

 

 

Signatures

 

84

 

 

 

 


 

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

·

Significant competition in our industry;

·

Unfavorable publicity or consumer perception of our products;

·

Increases in the cost of borrowings and limitations on availability of additional debt or equity capital;

·

Incurrence of material product liability and product recall costs;

·

Loss or retirement of directors or key members of management;

·

Costs of compliance and our failure to comply with new and existing governmental regulations including, but not limited to, tax regulations;

·

Costs of litigation and the failure to successfully defend lawsuits and other claims against us;

·

Economic, political and other risks associated with our international operations;

·

Failure to keep pace with the demands of our customers for new products and services;

·

Disruptions in our manufacturing system or losses of manufacturing certifications;

·

Disruptions in our distribution network;

·

Lack of long-term experience with human consumption of ingredients in some of our products;

·

Failure to adequately protect or enforce our intellectual property rights against competitors;

·

Changes in raw material costs and pricing of our products;

·

Failure to successfully execute our growth strategy, including any delays in our planned future growth;

·

Damage or interruption to our information systems;

·

Impact of current economic conditions on our business;

·

Natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and geo-political events; and

·

Failure to maintain effective internal controls.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

 

 

1


 

PART I

Item 1. Business

Overview

MusclePharm Corporation is a scientifically driven, performance lifestyle company that develops, manufactures, markets and distributes branded nutritional supplements through a broad range of powders, capsules, tablets and gels. Our portfolio of recognized brands, including MusclePharm® Hybrid and Core Series, Arnold Schwarzenegger Series™, and FitMiss® are marketed and sold in more than 110 countries and available in over 35,000 retail outlets globally. These clinically developed, scientifically driven nutritional supplements are developed through a six-stage research process that utilizes the expertise of leading nutritional scientists, doctors and universities.

MusclePharm is a growth company with a portfolio of brands that we believe fuels this growth across all nutritional supplement categories and geographies. We had net revenue of $177.4 million in 2014, representing an annual growth rate of 60%, and a 2-year compound annual growth rate of 63%. We had net revenue of $110.9 million and $67.1 million in 2013 and 2012 respectively. We compete in the global $37 billion supplements market. During 2014, we opened offices in Dublin, Ireland. We created a subsidiary in Sydney, Australia in 2015 and have plans to open an office in Sao Paulo, Brazil during 2015.

We were incorporated in the State of Nevada in 2006. As used in this annual report on Form 10-K, the terms the “Company”, “we”, “our”, “MusclePharm”, or “MP” refer to MusclePharm Corporation and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet addresses are www.musclepharmcorp.com and www.musclepharm.com.

The reference to our websites does not constitute incorporation by reference.

New Product Introductions

In addition to the growth of our existing products, the growth of our business is also fueled by the following new product introductions:

MP Energy Sport – An energy sports beverage containing 39 grams of sugar and total carbs, 120 mg of caffeine, and the use of the patented and clinically-tested performance ingredient CarnoSyn Beta-Alanine.  We launched this product in the first of quarter 2015 with two initial flavors: Original and Electric Lime.

MP Energy Sport Zero – An energy sports beverage containing 0 grams of sugar and total carbs, 120 mg of caffeine, and the use of the patented and clinically-tested performance ingredient CarnoSyn Beta-Alanine. We launched this product in the first of quarter 2015 with three initial flavors: Citrus Edge, Power Punch, and Onyx Cherry.

Arnold Muscle Bar – These bars are complete, quality nutrition protein bars containing 30 grams of protein, 370 calories, and zero trans-fat, available in three flavors: Chocolate Peanut Butter, Frosted Cinnamon Bun, and Chocolate Brownie. The bars are made using a proprietary baking process for superior taste and a softer texture. 

Combat Crunch Protein Bar – These protein bars are high in protein, and fiber, containing 12 grams of fiber with low active carbs and tons of fiber.  Currently available in five flavors: Cookie Dough, Chocolate Peanut Butter Cup, Cinnamon Twist, White Chocolate Raspberry, and Chocolate Brownie.  The bars are made using a proprietary baking process for superior taste and a softer texture.

Coco Protein – The first sports drink that gives you both protein and coconut water in one convenient drink which is both gluten and lactose free available in two flavors: Chocolate and Pina Colada.

Combat 100% Isolate – Scientifically-engineered to deliver 24 grams of 100% whey isolate protein per 27 gram serving.  Contains no fat, carbohydrates, sugar or lactose and available in three flavors: Banana Split, Chocolate Swirl, and Vanilla Ice Cream.

Combat 100% Casein – Micellar Casein protein digests slowly, infusing valuable and powerful amino acids over the course of several hours and delivers 28 grams of micellar casein.  Available in three flavors: Chocolate Milk, Vanilla, and Cookies N Cream.

2


 

Recent Developments

Capstone Nutrition

On November 27, 2013, we entered into a Manufacturing Agreement (the “Manufacturing Agreement”) with Capstone Nutrition (“Capstone”) which was amended on March 2, 2015 (the “Amendment”) for Capstone to continue to be the nonexclusive manufacturer of dietary supplements and food products through January 1, 2022. Under the Amendment, we are required to purchase a minimum of $90 million of products per year from Capstone. The Amendment includes amended pricing payment terms. The initial term may be extended by the Company for up to three successive twenty-four month periods following termination, unless Capstone notifies the Company of nonrenewal at least ninety days prior to the end of the then current term.  In connection with the Amendment the Company agreed to pay $2.5 million towards expansion of Capstone’s facilities and acquire a Class B Common Stock Warrant issued by INI Parent, Inc., (“INI”).

Also on March 2, 2015, the parent company of Capstone, issued us a Class B Common Stock Warrant to purchase 19.9% of INI on a fully-diluted basis at an exercise price of $0.01 per share (the “Warrant”).  We have the right to exercise the Warrant in full only immediately prior to or in connection with the consummation of a sale of INI or within  5 business days of the expiration of the initial term of the Manufacturing Agreement; (ii) we have been and continue to be as of the date of the sale of INI in compliance with the terms of the Manufacturing Agreement; and (iii) we comply with the provisions of the Warrant. The Warrant provides for customary “tag along-drag along” rights which, under circumstances, require us to participate in any transaction approved by INI, and a right of first refusal permitting the Company to acquire INI on the terms of any third party offer through June 30, 2016 in which case, we would have the right to exercise the Warrant prior to such transaction.

We have also entered into an option agreement dated March 2, 2015 under which, at any time on or prior to June 30, 2016, we may purchase all of the remaining outstanding shares of INI’s common stock for cash not already owned by us after giving effect to the exercise of the Warrant, based on an aggregate enterprise value of $200 million.

MusclePharm Apparel

During the first quarter of 2015, we regained the exclusive right to develop and sell MusclePharm branded apparel and accessories.  We intend to aggressively develop, market and sell MusclePharm apparel and accessories directly and in conjunction with third parties.

International Expansion

MusclePharm has begun an international expansion project to align local offices with our customers, manage and reduce product costs and enhance our customer experience.  In December 2014, we opened a European Sales and Operations office in Dublin, Ireland.  In February 2015, we created a subsidiary in Sydney, Australia.  We currently are finalizing our location in San Paulo, Brazil, and expect to be operational by the second quarter 2015. We could incur additional costs in connection with its future international expansion.

Chief Financial Officer Resignation and Appointment

On March 2, 2015, Mr. Donald Prosser, the Company’s Chief Financial Officer (“CFO”) submitted his resignation to the Company as its CFO. Mr. Prosser will continue to be employed by the Company as a non-executive officer of the Company through the remainder of his employment agreement, which terminates on April 15, 2015. In submitting his resignation as the Company’s CFO, Mr. Prosser did not express any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On March 5, 2015, the Board of Directors of the Company appointed Mr. John Price, the Company’s Executive Vice President of Finance, as the Company’s new Chief Financial Officer and also designated him as the Company’s Principal Financial Officer.

Products

We employ a master brand strategy driven by science, customer experience and innovation. We market our branded products in multiple performance and active-lifestyle channels that reach athletes of all demographics. Our goal is to serve the needs of all types of athletes, while fueling the engine of sport for all ages and genders. MusclePharm’s product portfolio are designed primarily for specific athletic use and athletes' needs. A large percentage of our products are for active lifestyle purposes as well. We place considerable emphasis on high-quality ingredients, innovation and science. Our portfolio of brands target every type of fitness enthusiast, from football, combat sports, weight training, bodybuilding, runners, basketball, soccer, cross fit, golf, tennis, volleyball and other outdoor activities for athletic and recreational enthusiasts.

3


 

MusclePharm Hybrid and Core Series – Scientifically-advanced, performance-driven supplements that cover all needs for athletes and their workout needs. This line of innovative, University-tested products, help fuel athletes safely by increasing strength, endurance, hydration, recovery, and overall athletic performance. MusclePharm Hybrid Series products like Assault, Amino1 and Combat Protein Powder contain ingredients that deliver performance. MusclePharm Core products, such as BCAA 3:1:2, CLA Core and Fish Oil, balance the essentials to meet the day-in and day-out demands of athletes.

Arnold Schwarzenegger Series – Physique supplements tailored for the fitness and bodybuilding enthusiasts. They are comprised of physique-enhancing ingredients like protein gainers, muscle builders, multivitamins, and nitric oxide boosters. Arnold Schwarzenegger worked side-by-side with MusclePharm’s scientific team to create a line of high-quality nutritional supplements that not only carry his iconic name, but represent his lifelong commitment to fitness and bodybuilding as well.

FitMiss® – Designed and formulated specifically for the active woman’s lifestyle utilizing ingredients that covers the range of busy women's needs including weight loss, multi-vitamins, protein shakes, detox, skin care, and pre-workout energy mixes.

Our wholly  owned subsidiary, BioZone Labs, develops, manufactures and distributes over-the-counter drugs and preparations, cosmetics and nutritional supplements.

Our wholly  owned subsidiary, Canada MusclePharm Enterprises Corp. (“MusclePharm Canada”), markets and distributes MusclePharm products to Canadian markets.

Our two new wholly  owned subsidiaries, MusclePharm Ireland Holdings and MusclePharm Limited, LLC market and distribute MusclePharm products to European Union.

Our new wholly  owned subsidiaries, MusclePharm Australia PTY, LLC markets and distributes MusclePharm products to Australia, New Zealand and surrounding area.

Sales and Marketing

We utilize knowledgeable salespeople and digital media tools in order to attract and retain customers who principally consist of wholesale buyers and consumers obtained through direct selling such as our website or partner websites. We strive to innovate as we continue to enhance our ability to serve the athlete, inspire the consumer, educate the customer and expand the market place.

Our sales force consists of dedicated sales professionals who are assigned to major accounts, classes of trade and/or geographic territories. These sales professionals work directly with retailers and distributors to increase their knowledge of our products, consumers and specific nutritional supplement benefits. They also solicit orders for our products, design customized programs, maximize our distribution, optimize our shelf presence, develop effective merchandising, and create promotions that drive consumer traffic. In addition, we complement our direct sales team with strategic brokers to represent our products in certain accounts and classes of trade.

The MusclePharm brands are marketed across all major retail distribution channels including specialty, international, and Food, Drug, and Mass (FDM), which includes club stores.

Specialty Market: This is comprised of brick-and-mortar sales and e-commerce. We use distributors, as well as selling direct to larger customers. We will continue to grow this portion of our business by offering continued line extensions, as well as leveraging our retailers to grow new customer acquisitions within their channels.

International: We intend to focus on growing our international presence by continuing to offer new products, as well as improving the supply cycles and opening new distribution centers in select regions of the world to reduce both tariff fees, as well as shipping time.

FDM (Food, Drug, and Mass): This is a new sales channel that we intend to also grow by expanding the distribution platform for our current line of brands and products. In 2014 and 2013, this sales channel represented 14% and 7% of our business, respectively.

4


 

Below is a table of net revenue by our major distribution channel:

 

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

% of
Total

 

 

2013

 

 

% of
Total

 

 

2012

 

 

% of
Total

 

 

 

 

 

(in thousands)

 

 

 

 

Distribution Channel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty

 

$

73,847

  

 

42

%

 

$

68,606

 

 

62

%

 

$

46,881

 

 

70

%

International

 

 

66,407

 

 

37

%

 

 

34,113

 

 

31

%

 

 

20,174

 

 

30

%

FDM

 

 

24,790

 

 

14

%

 

 

8,159

 

 

7

%

 

 

 

 

 

BioZone Net Revenue

 

 

12,345

 

 

7

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

177,389

 

 

100

%

 

$

110,878

 

 

100

%

 

$

67,055

 

 

100

%

 

We market our products using a mix of trade and consumer promotions including strategic partnerships, athlete endorsements, product sampling, promotional events, consumer education efforts and television, print, digital and social media. Our advertising and marketing expenditures, excluding promotional incentives reflected as reductions in net revenue or increases in cost of revenue, were $28.1 million, $15.5 million and $8.4 million respectively in each of our fiscal years ended 2014, 2013 and 2012.

We believe along with our innovative products, providing superior brand customer experience drives our success. With that aim, we believe that we have built one of the industry's strongest social media communities that, all brands combined, boasts over 2 million followers across our brands and continues to grow. Through our social media and websites we provide educational programs, daily workouts and training advice that create high-level brand interaction with our customers and key influencers that educate customers about the benefits of our innovative and beneficial nutritional supplement products. Our web sites, including musclepharm.com, Arnold.com, fitmiss.com, and mpssi.com also provide additional educational information to consumers, customers and healthcare professionals.

Sponsorships and endorsements with athletes, celebrities and sporting organizations are key components of our marketing strategy. We believe that brand influencer partners such as Ultimate Fighting Championship (UFC)—which reaches more than 800 million households globally—along with Tiger Woods, Arnold Schwarzenegger, professional football star Colin Kaepernick and USA Wrestling, help boost brand credibility by exposing our brand to millions of potential customers.

Charitable Youth Sports Program

In March 2014, the Board of the Company approved and the Company established a charitable youth sports grant program (the “Program”) pursuant to which the Company will donate product giveaways, equipment purchases and cash disbursements to different organizations such as schools, sports teams and training facilities. The Company has tentatively established an annual budget of approximately $250,000 for the Program. The primary intent of the Program is to build MusclePharm brand awareness with youth athletes. The Company’s other business purposes in establishing the Program is to help needy organizations achieve their goals, promote the Company’s brand, help athletes develop stronger and better skills and to build the reputation of the Company as a contributor to the community. The Program is intended to be managed pursuant to written guidelines contained in a standard operating procedure adopted in March 2014. A committee consisting of the Company’s President, Director of Team Development and Chief Operating Officer oversee the Program. The Company approved an initial grant in the amount of approximately $250,000 to Arvada West High School.  Additionally, the Company made similar charitable contributions to other charitable youth sports organizations in the amount of approximately $30,000.  The Company’s Chief Executive Officer, Mr. Pyatt, is a graduate of Arvada West High School (Class of 1999) and serves as a volunteer football coach. In conjunction with input from school administration, the contributions were utilized for equipment and apparel purchases as well as training and fitness programs. During 2014, Mr. Pyatt received approximately $100.00 as compensation for his services. Pursuant to SEC guidance, including the guidance set forth in Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06, the Company’s Disclosure Committee determined that the amount of the grant under the Program to Arvada West High School should not be treated as a perquisite to Mr. Pyatt.

5


 

Product Research, Development and Quality Control

Science, product research and innovation is a continued emphasis for our  nutritional supplements that are designed to help service athletes at every level. We believe our research and development efforts are key factors in past and future brand success. Customers' belief in the science behind our products is critical. Continued innovation delivery techniques and ingredients, new product line extensions for existing products and new product offerings are important to the nutritional supplement industry in order to create new market opportunities, meet consumer demand and strengthen consumer relationships. We maintain an extensive research library and consult with a variety of key opinion leaders and experts to identify new research and development projects offering health and wellness benefits. To support our research and development efforts, we maintain a staff of scientific and technical personnel, invest in formulation, processing and packaging development, perform product quality and stability studies, invest in product efficacy and safety studies, and conduct consumer market research to sample consumer opinions on product concepts, product design, packaging, advertising and marketing campaigns. For research and development initiatives, we conduct research and development in our own state-of-the-art facility and in conjunction with third parties.

Our quality control team follows detailed and comprehensive supplier selection and certification processes, validation of raw material verification processes, analytical testing and process audits, and other quality control procedures. The quality management systems we employ also include a professionally equipped and staffed laboratory enabling finished goods testing for compliance to our specifications. Our products are also subject to extensive shelf life stability testing. We also use outside laboratories to routinely evaluate our internal testing processes and to supplement our internal testing procedures and capabilities.

MusclePharm’s comprehensive lines of supplements are developed through a six-stage research process that utilizes the expertise of leading nutritional scientists, doctors and universities and strives to assure that every necessary step is done properly and at a high level to promote quality and safety for our customers.

Stage 1: The Athletes Vision

We believe that the motivating force driving the MusclePharm business is our executive management team and their passion and commitment for sport. Our company is not only comprised of talented business people, but many individuals who are athletes and avid health and fitness enthusiasts that live the same active lifestyle as like our target customers. As athletes, scientists and workout enthusiasts, we envision new products by considering how they need to work and how they affect athletes’ bodies and wellbeing. We at MusclePharm strive to utilize the drive, knowledge and focus that marked our experiences in the sports world, and channel our experiences into building a business that benefits everyone who shares our passion for sport and belief for a healthy and active lifestyle.

Stage 2: Formulation Process

In addition to MusclePharm’s own staff of doctors and scientists who specialize in such fields as biomechanics, chemistry, exercise physiology and related fields, we also utilize research committees and advisory boards comprised of doctors, athletes, sports nutritionists, coaches and other experts. These advisory teams consult with us and review concepts for product improvement as well as compliance with international safety regulations that create MusclePharm’s proprietary combinations and ingredient ratios that form the backbone of our award-winning supplements.

Stage 3: MP Sports Science Institute

MusclePharm is committed to science and sport being equal in our product development. We believe real-world applications are essential. The MP Sports Science Institute in Denver, Colorado is a state-of-the-art, 30,000 square-foot training and performance facility—the only professional facility in the world to use the ultrasound, Omega Wave, DEXA and Keiser performance equipment to gather cutting-edge feedback about our formulations. In addition, in our clinic we can perform bone scans, blood work and ultrasounds to determine body composition as well as muscle and fat evaluations. We offer a range of kidney, liver and cortisol tests. In addition, we can measure choice reaction time, and more. Everything we learn helps our team strive to improve our products and allows MusclePharm to continue to be an innovator. As our doctors and researchers formulate, they perfect the products by turning to our network of professional athletes, coaches and trainers for feedback through product sampling. MusclePharm scientists study how the products affect athletes in the following ways: during high-intensity interval training, aerobic and anaerobic power, repeated sprint ability, training volume, strength levels, body composition and cognitive function. Active athlete testing allows us to fine tune dosages, ensure proper ingredient combinations, and implement consumer safety measures.

6


 

Stage 4: University Research Programs

We have multi-year partnerships with several universities including the University of North Carolina, Auburn University and the University of Tampa. These world-renowned research universities test our products for safety, efficacy, performance and validation. We also collaborate with the (ISSN) International Society of Sports Nutrition to establish educational grants, which will further test our products using multiple avenues of research, both university and private, to focus on safety, efficacy and performance benefits.

Stage 5: Quality Assurance

Attention to quality assurance, personal health and safety are integral to our products which we believe are one-of-a-kind and far superior to the competition. We qualify ingredients, suppliers and facilities by performing site assessments and conducting on-going performance and process reviews. Dedicated quality teams regularly audit and assess manufacturing facilities against Good Manufacturing Practices (“GMPs”), as promulgated by the US FDA in 21 CFR, to ensure our compliance with all MusclePharm, regulatory and certification standards and requirements. To ensure overall consistency, our Quality Assurance team adheres to strict written procedures. From the raw ingredient stage to finished product, we monitor and perform quality control checks. Before distributing our products, we placed our products under quarantine to test for environmental contaminants, and ultimately verify that the finished product meets or exceeds label claims. Once a product has successfully passed Quality Assurance testing and conforms to specifications for identity, purity, strength and composition, we then test it via a third-party analytics firm for added label claim verification. Multi-level practices are part of our product development process to ensure athletes and our consumers receive what we believe to be the most scientifically-innovative and safe supplements on the market. Post-distribution, we have standard operating procedures in place for investigating and documenting any adverse events or product quality complaints.

Stage 6: Banned Substance Certifications

We are a sport-driven company, dedicated to providing athletes around the world with not only what we believe to be the most innovative nutritional products, but also the safest ones for sport. We are committed to the process of having all of our products certified to be banned-substance-free before they are available to our athletes and consumers. We stand behind our quality by taking the extra steps of completing third party analytical testing on our products through Eurofins. We also have engaged one of the world's most capable, industry-leading and independent labs, HFL® Sports Science. They validate our quality processes and conduct banned-substance testing on every branded MusclePharm product. As a quality assurance testing group, they represent confirmation that nutritional supplements and/or ingredients registered in their Informed Choice program have been tested for banned substances by their world class sports anti-doping lab. HFL Sport Science works with more than 100 sports authorities globally, and is the testing agency for the World Anti-Doping Agency (WADA) Prohibited List along with testing lists from organizations like the National Football League, National Collegiate Athlete Association and Major League Baseball. HFL testing methods are accredited, meeting the ISO 17025 standard of supplements and ingredients testing.

Manufacturing

Currently, the majority our products are produced through third party manufacturers. The majority of our products are manufactured in powder and capsule manufacturing facilities located in Tennessee, New York, Texas and California. We have our main distribution center in Franklin, Tennessee, and a second distribution center in Pittsburg, California. All of our manufacturing and distribution facilities are designed and operated to meet the current GMPs as promulgated by the US FDA in 21 CFR. We recently entered an agreement with Capstone Nutrition to be our non-exclusive manufacturer of dietary supplements and food products and plan to consolidate a significant portion of our domestic contract manufacturing with Capstone Nutrition.

We participate in banned substance testing for all of our products and batches with the third party testing firm Informed Choice. The testing of our batches create unique lot numbers for all batches. We also complete third party analytical testing on all products through Eurofins Scientific.

Our manufacturing process generally consists of the following operations: (i) qualifying ingredients for products, (ii) testing of all raw ingredients, (iii) measuring ingredients for inclusion in such products, (iv) granulating, blending and grinding ingredients into a mixture with a homogeneous consistency, (v) encapsulating or filling the blended mixture into the appropriate dosage form using either automatic or semiautomatic equipment, and (vi) testing finished products prior to distribution.

We maintain and operate a system that is integrated with distribution, warehousing and quality control, which provides real-time lot and quality tracking of raw materials, work in progress and finished goods. We also have a strategic working relationship with multiple contract manufacturers along with integrating our own manufacturing facility in California.

7


 

We employ a supply chain staff that works with sales, marketing, product development and quality control personnel to develop our products. We seek to mitigate out of stocks through our relationships with our principal suppliers, including dual sourcing of all products.

Industry Overview

According to the “Nutrition Business Journal,” the market for supplements in the United States was estimated to be $37 billion in 2014 ($35 billion in 2013).  We believe that the market has reached its present size due to a number of factors, including:

·

Increased interest in health and wellness as consumers increasingly embrace healthy lifestyles and more proactively manage their individual health needs;

·

Increased awareness of the health benefits of dietary supplements, especially as reports and medical research indicating a correlation between consumption of specific nutrients and better health continue to heighten public knowledge of the benefits of dietary supplements for health;

·

A growing population of older Americans, who are more likely to consume dietary supplements and nutritional products, with an increasing interest in more proactively managing one's own health needs;

·

Successful new product introductions in part due to new scientific findings; and

·

A trend towards preventative measures and healthy living due, in part, to rising health care costs, dissatisfaction with existing health care systems, and greater acceptance of alternative/preventative care.

In recent years, nutritional supplement companies, analysts, publications and other industry sources have referenced a consistent growth rate of between 6% and 10% annually, particularly in terms of sales dollar growth, in the nutritional supplement industry. According to “Nutrition Business Journal” the total market for supplements is expected to continue to grow at a 6% to 7% growth rate over the projected growth period of 2014 to 2020 with the sports nutrition category expected to grow between 8.8% and 12.3%; or 10% on average per year.

Although specific data from the fragmented international markets is not readily available, we believe similar demographics, events and other trends affect the nutritional supplement market internationally.

Our Competitors

The nutritional supplements market is very competitive and the range of products is diverse. Competitors use price, efficacy claims, customer service, name recognition, trade relationships and new product innovation to create share of market.

Our range of competitors includes numerous nutritional supplement companies that are highly fragmented in terms of geographic market coverage, distribution channels and product categories. In addition, large pharmaceutical companies and packaged food and beverage companies compete with us in the nutritional supplement market. Many of these companies have greater financial and distribution resources available to them than MusclePharm and many of these companies can compete through vertical integration. Private label entities have gained a foothold in many nutrition categories and are direct competitors. A few of these are private label entities have become market leaders.

In this industry, most of the companies are privately held. With respect to retailer sales, we cannot fully gauge their sizes and our relative ranking. The world of nutritional supplements is constantly changing and we believe that retailers look to partner with suppliers who demonstrate financial stability, brand awareness, market intelligence, customer service and science. With this in mind, we believe we are competitive in all of these areas.

Government Regulation

The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of our major product groups are subject to regulation by one or more governmental agencies. The most active of these is the Food and Drug Administration (“FDA”), which regulates our products under the Federal Food, Drug and Cosmetic Act (“FDCA”) and regulations promulgated thereunder. The FDCA defines the terms “food” and “dietary supplement” and sets forth various conditions that, unless complied with, may constitute adulteration or misbranding of such products. The FDCA has been adjusted several times with respect to dietary supplements, most recently by the Nutrition Labeling and Education Act of 1990 (the “NLEA”) and the Dietary Supplement Health and Education Act of 1994.

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FDA regulations relating specifically to foods and dietary supplements for human use are set forth in Title 21 of the Code of Federal Regulations. These regulations include basic labeling requirements for both foods and dietary supplements. Additionally, FDA regulations require us to meet relevant good manufacturing practice regulations for the preparation, packaging and storage of our food and dietary supplements.

Our business practices and products are also regulated by the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the United States Department of Agriculture (“USDA”) and the Environmental Protection Agency. Our activities, including our direct selling distribution activities, are also regulated by various agencies of the states, localities and foreign countries in which our products are sold.

In foreign markets, prior to commencing operations and prior to making or permitting sales of our products in the market, we may be required to obtain an approval, license or certification from the country’s ministry of health or comparable agency. Prior to entering a new market in which a formal approval, license or certificate is required, we work extensively with local consultants and authorities in order to obtain the requisite approvals. We must also comply with product labeling and packaging regulations that vary from country to country. Our failure to comply with these regulations can result in a product being removed from sale in a particular market, either temporarily or permanently.

Intellectual Property

We regard our trademarks and other proprietary rights as valuable assets and believe that protecting our key trademarks is crucial to the successful implementation of our business strategy of building strong brand name recognition. Since we regard our intellectual property as a crucial element of our business with significant value in the marketing of our products, our policy is to pursue registrations for all of the trademarks and patents associated with our products.

We own 155 patents and patent application and own trademarks registered with the United States Patent and Trademark Office for our MusclePharm brands and certain of our products and slogans.

We also have filed for protection of various marks throughout the world and are committed to a significant long-term strategy to build and protect the MusclePharm brand globally. The “MusclePharm” mark is pending registration in 14 countries. The mark has been granted final trademark registration in six countries, and we believe the remaining registrations will be granted within the next several months.

Seasonality

Our business does not typically experience seasonal variations due to our global sales and distribution model.

Employees

As of December 31, 2014, we had 273 total employees of which 176 were full time.

Insurance

We maintain commercial liability, including product liability coverage, and property insurance. We also carry property coverage on our office facilities to cover our legal liability, tenant’s improvements, business property and inventory.

Corporate Information

Our principal executive offices are located at 4721 Ironton Street, Building A, Denver, Colorado 80239 and our telephone number is (303) 396-6100. We were incorporated in the State of Nevada in 2006. As used in this annual report on Form 10-K, the terms the “Company”, “we”, “our”, “MusclePharm”, or “MP” refer to MusclePharm Corporation and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet addresses are www.musclepharma.com and www.musclepharmcorp.com. The reference to our websites does not constitute incorporation by reference.

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Available Information

On our MusclePharm corporate web site, located at www.musclepharmcorp.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended. All such filings on our MusclePharm corporate web site are available free of charge. Also available on the MusclePharm Corporate web site are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to MusclePharm Investor Relations, 4721 Ironton Street, Building A, Denver, CO 80239.

 

 

Item 1A. Risk Factors

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Our business and operations are experiencing rapid growth. If we fail to effectively manage our growth, our business and operating results could be harmed.

We have experienced and expect to continue to experience rapid growth in our business both domestically and abroad, which has placed, and will continue to place, significant demands on our management, and our operational and financial infrastructure. To effectively manage this growth, we expect that we will need to continue to improve significantly our operational, financial and management controls and our reporting systems and procedures. To accomplish these objectives we may need to hire additional employees, make certain enhancements to our technology systems, make significant capital expenditures and utilize management resources. Failure to implement these proposed growth objectives could have a material adverse effect on our business and operating results.

We have a history of losses, and our revenue growth rate may not sustain the levels experienced in recent years. As our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability.

We have incurred a net loss in each year since our inception, including a net loss of $13.8 million, $17.7 million and $19.0 million in 2014, 2013, and 2012, respectively. As of December 31, 2014, and since our inception we had incurred accumulated losses from operations of $95.7 million. For 2014 and 2013, our revenue was $177.4 million and $110.9 million, respectively, representing a 60% increase. In future years, our revenue growth rate may not sustain the levels reflected by our past performance. We may not be able to generate sufficient revenue to achieve or sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:

·

investing in research and development and the development or acquisition of new products and product families,

·

expenses related to international expansion;

·

improving our infrastructure and hiring additional employees to support it;

·

strategic acquisitions;

·

sales and marketing expenses, including a significant expansion of our direct salesforce; and

·

selling, general and administrative expenses, including legal, accounting, and other expenses.

These investments may not result in increased revenue or growth of our business.  If we fail to continue to grow our revenue, our operating results and business will be harmed.

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We are exposed to fluctuations in currency exchange rates, which could negatively affect our results of operations.

Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The majority of our revenue is denominated in U.S. Dollars, with the exception of Canada and Ireland, where we invoice primarily in local currencies. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in North America and Europe. Revenue resulting from selling in local currencies and costs incurred in local currencies are exposed to foreign currency exchange rate fluctuations that can affect our operating income. As exchange rates vary, our operating income may differ from expectations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments.

Our failure to respond appropriately to competitive challenges, changing consumer preferences and demand for new products could significantly harm our customer relationships and product sales.

The nutritional sports supplement industry is characterized by intense competition for product offerings and rapid and frequent changes in consumer demand. Our failure to predict accurately product trends could negatively impact our products and cause our revenues to decline.

Our success with any particular product offering (whether new or existing) depends upon a number of factors, including our ability to:

·

Deliver quality products in a timely manner in sufficient volumes;

·

Accurately anticipate customer needs and forecast accurately to our manufacturers in an expanding business;

·

Differentiate our product offerings from those of our competitors;

·

Competitively price our products; and

·

Develop new products.

Products often have to be promoted heavily in stores or in the media to obtain visibility and consumer acceptance. Acquiring distribution for products is difficult and often expensive due to slotting and other promotional charges mandated by retailers. Products can take substantial periods of time to develop consumer awareness, consumer acceptance and sales volume. Accordingly, some products may fail to gain or maintain sufficient sales volume and as a result may have to be discontinued. In a highly competitive marketplace it may be difficult to have retailer’s open stock-keeping units (SKU’s) for new products.

In the past, we have discovered material weakness in our internal controls and procedures with respect to insurance reimbursement, perquisites, stock issuances and similar. We may not have rectified all of these matters and may continue to face problems and legal or regulatory issues, if we fail to take corrective actions.

Our industry is highly competitive, and our failure to compete effectively could adversely affect our market share, financial condition and future growth.

The nutritional supplement industry is highly competitive with respect to:

·

Price;

·

Shelf space and store placement;

·

Brand and product recognition;

·

New product introductions; and

·

Raw materials.

Most of our competitors are larger, more established companies and possess greater financial, personnel, distribution and other resources than we have. MusclePharm faces competition in the supplement market from a limited number of large nationally known manufacturers, private label brands and many smaller manufacturers of  supplements.

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We rely on a limited number of customers for a substantial portion of our sales, and the loss of or material reduction in purchase volume by any of these customers would adversely affect our sales and operating results.

During 2014, our two largest customers, Costco and Bodybuilding.com, accounted for 29% of our net revenue. During 2013, our two largest customers, Bodybuilding.com and Europa, accounted for 35% of our net revenue. During 2012, our two largest customers Bodybuilding.com and General Nutrition Corp. (GNC), accounted for 45% of our net revenue. Net revenue is equal to our gross revenue less product discounts, customer rebates and similar incentives. The loss of any of our major customers, a significant reduction in purchases by any major customer, or any serious financial difficulty of a major customer could have a material adverse effect on our revenue and results of operations.  

Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.

Our operating results may fluctuate as a result of a number of factors, many of which may be outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly, year-to-date, and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations. Each of the following factors may affect our operating results:

·

Our ability to deliver products in a timely manner in sufficient volumes;

·

Our ability to recognize product trends;

·

Our loss of one or more significant customers;

·

The introduction of successful new products by our competitors; and

·

Adverse media reports on the use or efficacy of nutritional supplements.

Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results.

Adverse publicity or consumer perception of our products and any similar products distributed by others could harm our reputation and adversely affect our sales.

We believe we are highly dependent upon positive consumer perceptions of the safety and quality of our products as well as similar products distributed by other sports nutrition supplement companies. Consumer perception of sports nutrition supplements and our products in particular can be substantially influenced by scientific research or findings, national media attention and other publicity about product use. Adverse publicity from these sources regarding the safety, quality or efficacy of nutritional supplements and our products could harm our reputation and results of operations. The mere publication of news articles or reports asserting that such products may be harmful or questioning their efficacy could have a material adverse effect on our business, financial condition and results of operations, regardless of whether such news articles or reports are scientifically supported or whether the claimed harmful effects would be present at the dosages recommended for such products.

We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel, hire qualified personnel, we may not be able to grow effectively.

Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization, particularly sales and marketing. Competition in our industry for qualified employees is intense. In addition, our compensation arrangements, such as our bonus programs, may not always be successful in attracting new employees or retaining and motivating our existing employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted.

Key management employees are primarily responsible for our day-to-day operations, and we believe our success depends in large part on our ability to retain them and to continue to attract additional qualified individuals to our management team and operating staff. Currently, we have executed employment agreements with our key management employees that extend through December 31, 2016. The loss or limitation of the services of any of our key management employees or the inability to attract additional qualified personnel could have a material adverse effect on our business and results of operations.

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Our share price has been and may continue to be volatile.

The market price of our common shares is subject to significant fluctuations in response to a multitude of factors, including variations in our quarterly operating results. Factors other than our financial results that may affect our share price include, but are not limited to, market expectations of our performance, market perception or our industry, the activities of our managers, customers, and investors, and the level of perceived growth in the industry in which we participate, general trends in the markets for our products, general economic, business and political conditions in the countries and regions in which we conduct our business, and changes in government regulation affecting our business, many of which are not within our control.

Changes in the economies of the markets in which we do business may affect consumer demand for our products.

Consumer spending habits, including spending for our products, are affected by, among other things, prevailing economic conditions, levels of employment, fuel prices, changes in exchange rate, salaries and wages, the availability of consumer credit, consumer confidence and consumer perception of economic conditions. Economic slowdowns in the markets in which we do business and an uncertain economic outlook may adversely affect consumer spending habits and customer traffic, which may result in lower sales of our products in future periods. A prolonged global or regional economic downturn could have a material negative impact on our financial position, results of operation or cash flows.

We may be exposed to material product liability claims, which could increase our costs and adversely affect our reputation and business.

As a marketer and distributor of products designed for human consumption, we could be subject to product liability claims if the use of our products is alleged to have resulted in injury or not desired results. Our products consist of vitamins, minerals, herbs and other ingredients that are classified as dietary supplements and in most cases are not subject to pre-market regulatory approval in the United States or internationally. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur.

We have not had any significant product liability claims filed against us, but in the future we may be subject to various product liability claims, including among others that our products had inadequate instructions for use, or inadequate warnings concerning possible side effects and interactions with other substances. The cost of defense can be substantially higher than the cost of settlement even when claims are without merit. The high cost to defend or settle product liability claims could have a material adverse effect on our business and operating results and our insurance, if any, may not be adequate.

Taxation and transfer pricing affect our operations.

As a U.S. company doing business in international markets, we are subject to foreign tax and intercompany pricing laws, including those relating to the flow of funds between our parent Company and our subsidiaries. These pricing laws are designed to ensure that appropriate levels of income and expense are reported by our U.S. and foreign entities, and that they are taxed appropriately. If regulators challenge our corporate structures, transfer pricing methodologies or intercompany transfers, our operations may be harmed, and our effective tax rate may increase. We are eligible to receive foreign tax credits in the United States for certain foreign taxes actually paid abroad. In the event any audits or assessments are concluded adversely to us, we may not be able to offset the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future. The various customs, exchange control and transfer pricing laws are continually changing, and are subject to the interpretation of governmental agencies.

Despite our efforts to be aware of and to comply with such laws and changes to the interpretations thereof, there is a risk that we may not continue to operate in compliance with such laws. We may need to adjust our operating procedures in response to these interpretational changes, and such changes could have a material negative impact on our financial position, results of operation or cash flows.

Our insurance coverage or third party indemnification rights may not be sufficient to cover our legal claims or other losses that we may incur in the future.

We maintain insurance at adequate levels for property, general and product liability, directors and officer’s liability, and workers’ compensation to protect ourselves against potential loss exposures. In the future, insurance coverage may not be available at adequate levels or on adequate terms to cover potential losses, including on terms that meet our customer’s requirements. If insurance coverage is inadequate or unavailable, we may face claims that exceed coverage limits or that are not covered, which could increase our costs and adversely affect our operating results.

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As a manufacturer and distributor of products that are ingested, we face an inherent risk of exposure to product liability claims in the event that, among other things, the use of our products results in alleged injury to consumers due to tampering by unauthorized third parties or product contamination and/or other causes. We have historically had no product claims or reports from individuals who have asserted that they have suffered adverse consequences as a result of using our products.

During 2014 we submitted claims for coverage of our costs associated with the Investigation by the SEC to our insurance carriers who have denied payment of our claims.  We have commenced litigation against our insurers.  The claims and the litigation may make more difficult our ability to obtain insurance at competitive prices or at all and our insurance costs may increase as a result.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brand.

We have invested significant resources to protect our brands and intellectual property rights. However, we may be unable or unwilling to strictly enforce our intellectual property rights, including our trademarks, from infringement. Our failure to enforce our intellectual property rights could diminish the value of our brands and product offerings and harm our business and future growth prospects.

We may be subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to sell some of our products.

Our industry is characterized by vigorous pursuit and protection of intellectual property rights, which has resulted in protracted and expensive litigation for several companies. Third parties may assert claims of misappropriation of trade secrets or infringement of intellectual property rights against us or against our end customers or partners for which we may be liable.

As our business expands, the number of products and competitors in our markets increases and product overlaps occur, infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we would be successful in defending ourselves against intellectual property claims. Further, many potential litigants have the capability to dedicate substantially greater resources than we can to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing products or performing certain services.

An increase in product returns could negatively impact our operating results and profitability.

We permit the return of damaged or defective products and accept limited amounts of product returns in certain instances. While such returns from established customers have historically been nominal and within management’s expectations and the provisions established, future return rates may differ from those experienced in the past. Any significant increase in damaged or defective products or expected returns could have a material adverse effect on our operating results for the period or periods in which such returns materialize.

We outsource manufacturing and anticipate continued reliance on third-party manufacturers for the development and commercialization of many of our products.

Currently, we rely on third-party manufacturers to produce bulk products required to meet our sales needs. We plan to continue to rely upon contract manufacturers to produce commercial quantities of most of our products until fully integrated. We recently entered an agreement with Capstone Nutrition to be our non-exclusive manufacturer of dietary supplements and food products and plan to consolidate a significant portion of our domestic contract manufacturing with Capstone Nutrition.

We leverage multiple contract manufacturing locations and failure to achieve and maintain high manufacturing standards and processes could harm our business. In the event of a natural disaster or business failure the replacement in a timely manner and the production of our products could be interrupted, resulting in delays, additional costs and reduced revenues.

A shortage in the supply of key raw materials could increase our costs or adversely affect our sales.

All of our raw materials for our products are obtained from third-party suppliers. Since all of the ingredients in our products are commonly used, we have not experienced any shortages or delays in obtaining raw materials. If circumstances changed, shortages could result in materially higher raw material prices or adversely affect our ability to have a product manufactured. Price increases from a supplier would directly affect our profitability if we are not able to pass price increases on to customers. Our inability to obtain adequate supplies of raw materials in a timely manner or a material increase in the price of our raw materials could have a material adverse effect on our business, financial condition and results of operations.

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Because we are subject to numerous laws and regulations, and we may become involved in litigation from time to time, we could incur substantial judgments, fines, legal fees and other costs.

Our industry is highly regulated. The manufacture, labeling and advertising for our products are regulated by various federal, state and local agencies as well as those of each foreign country to which we distribute. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of our product claims or the ability to manufacture and sell our products in the future. The U.S. Food and Drug Administration, or FDA, regulates our products to ensure that the products are not adulterated or misbranded. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Our advertising is subject to regulation by the Federal Trade Commission, or FTC, under the Federal Trade Commission Act. In recent years the FTC has initiated numerous investigations of dietary supplement and weight loss products and companies. Additionally, some states also permit advertising and labeling laws to be enforced by private attorney generals, who may seek relief for consumers, seek class action certifications, seek class wide damages and product recalls of products sold by us. Any of these types of adverse actions against us by governmental authorities or private litigants could have a material adverse effect on our business, financial condition and results of operations.

We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business, and the anti-bribery laws of other jurisdictions. Nevertheless, a finding of FCPA noncompliance could subject the Company to, among other things, penalties and legal expenses, as well as reputational harm, which could have a material adverse effect on its business, financial condition and results of operations.

System and technology failures and obsolescence could harm our business.

Like many companies, our business is highly dependent upon our information technology infrastructure (websites and ERP applications) to manage effectively and efficiently our operations, including order entry, customer billing, accurately tracking purchases and managing accounting, finance and inventory. The occurrences of natural disasters, security breaches or other unanticipated problems could result in interruptions in our day-to-day business that could adversely affect our business.

We are under an investigation with the U.S. Securities and Exchange Commission.

In July 2013, we received a formal order of investigation (the “Investigation”) from the Denver Regional Office of the Securities and Exchange Commission (“SEC”) which is actively investigating various areas of potential violation of the federal securities laws involving the Company and its management.  The SEC has issued subpoenas for documents and testimony and has deposed numerous witnesses in connection with the Investigation. As a result of a review undertaken by the Company’s personnel in conjunction with the Audit Committee of the Board of Directors, during 2014 we amended certain prior reports to revise various disclosures concerning executive compensation and disclosure of perquisites, among other things, and filed amendments to our annual reports on Form 10-K for the fiscal years ended December 31, 2013, 2012 and 2011.  The Investigation is ongoing.  The Investigation could lead to the SEC seeking fines, penalties, injunctive relief and the adoption of corrective plans to establish reporting and other practices affecting the Company.  Neither the nature of the relief, the amount of any monetary relief, nor the nature of the corrective actions, whether voluntary or imposed as a result of court proceedings that could be sought by the SEC, can be predicted.  The result of any of the foregoing could have a material adverse affect on the Company or its management.

During 2014, we incurred significant expense for professional and other fees in connection with the Investigation and expect to continue to incur costs in the future.

We may, in the future, issue additional shares of common stock and/or preferred stock, which would reduce investors’ percent of ownership and may dilute our share value.

Our articles of incorporation, as amended, authorize the issuance of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, As of December 31, 2014, we do not have any outstanding shares of preferred stock. The articles of incorporation authorize our Board of Directors to prescribe the series and the voting powers, designations, preferences, limitations, restrictions and relative rights of any undesignated shares of our preferred stock. The future issuance of common stock and preferred stock may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. We may value any common stock or preferred stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.

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Our cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.

As of December 31, 2014, we had a line of credit with a balance of $8.0 million. Additionally in February 2015, the Company entered a commercial loan agreement for $4.0 million. Currently, there is no additional borrowings available with either debt instrument.

Our indebtedness could have important consequences to the Company. For example, it could:

·

make it difficult for us to satisfy our debt obligations;

·

make us more vulnerable to general adverse economic and industry conditions;

·

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;

·

expose us to interest rate fluctuations because the interest rate on the debt under the line of credit facility is variable (prime +2%);

·

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;

·

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

·

place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.

In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:

·

economic and demand factors affecting our industry;

·

pricing pressures;

·

increased operating costs;

·

competitive conditions; and

·

other operating difficulties.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, seek to obtain additional capital, or restructure our debt. There is no assurance we will be able to access capital on terms that would be acceptable. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to the loan documents are secured by a security interest in all of our operating company's inventories, receivables and proceeds from those items. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.

We may incur additional indebtedness in the future. Our incurrence of additional indebtedness would intensify the risks described above.

For a description of our indebtedness see Management Discussion and Analysis–Liquidity and Capital Resources.

Certain loan documents governing our indebtedness contain various covenants limiting the discretion of our management in operating our business.

Certain loan documents we have entered into with third parties contain, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:

·

incur additional debt;

·

grant liens on assets;

·

make investments, including capital expenditures;

·

sell or acquire assets outside the ordinary course of business;

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·

engage in transactions with affiliates; and

·

make fundamental business changes.

Certain of such loan documents require us to (i) maintain certain financial ratios and (ii) limit our capital expenditures (to the extent we require additional financings). If we and our subsidiaries fail to comply with the restrictions in such loan documents, a default may allow the creditors under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds. Certain of such loan documents governing our indebtedness also contain various covenants that may limit our ability to pay dividends. We were not in compliance with several of the loan covenants at December 31, 2014 but we received a written waiver on this non-compliance subsequent to year end.

For a description of our covenants and related restrictions see Management Discussion Analysis.

We may issue additional shares of preferred stock in the future that may adversely impact your rights as holders of our common stock.

Our articles of incorporation, as amended, authorizes us to issue shares of preferred stock in various series. In addition, our Board of Directors has the authority to fix and determine the relative rights and preferences of our authorized but undesignated preferred stock, as well as the authority to issue shares of such preferred stock, without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred stock, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your ownership interests in us. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult, which may not be in your interest as a holder of common stock.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our business could be adversely impacted. Continued effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed and investors could lose confidence in our reported financial information. In the past, we have discovered significant deficiencies in our internal controls and procedures with respect to perquisites, related party transactions and certain other matters that did not amount to material weaknesses. We may not have rectified all of these matters and may continue to face problems and legal or regulatory issues, if we fail to takes corrective actions.

Our common stock is quoted on the OTCQB which may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTCQB. The OTCQB is an automated quotation service operated by OTC Markets, LLC. The quotation of our shares on the OTCQB may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, in part because of the inability or unwillingness of certain investors to acquire shares of common stock not traded on a national securities exchange, and could depress the trading price of our common stock and have a long-term adverse impact on our ability to raise capital in the future.

Nevada corporation laws limit the personal liability of corporate directors and officers and require indemnification under certain circumstances.

Section 78.138(7) of the Nevada Revised Statutes provides that, subject to certain very limited statutory exceptions or unless the articles of incorporation provide for greater individual liability, a director or officer of a Nevada corporation is not individually liable to the corporation or its stockholders for any damages as a result of any act or failure to act in his or her capacity as a director or officer, unless it is proven that the act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and such breach involved intentional misconduct, fraud or a knowing violation of law. We have not included in our articles of incorporation any provision intended to provide for greater liability as contemplated by this statutory provision.

17


 

In addition, Section 78.7502(3) of the Nevada Revised Statutes provides that to the extent a director or officer of a Nevada corporation has been successful on the merits or otherwise in the defense of certain actions, suits or proceedings (which may include certain stockholder derivative actions), the corporation shall indemnify such director or officer against expenses (including attorneys’ fees) actually and reasonably incurred by such director or officer in connection therewith.

 

 

Item 1B. Unresolved Staff Comments

We received a letter dated September 16, 2013 from the Division of Corporation Finance of the SEC, with comments related to our Registration Statement on Form S-1 filed with the SEC on August 21, 2013 (the “Registration Statement”). In light of the ongoing investigation as of the date of this annual report on form 10K, no response has been provided to the SEC with regard to these comments and an amendment to such registration statement has not yet been filed with the SEC.

In July 2013, we received a formal order of investigation (the “Investigation”) from the Denver Regional Office of the SEC which is actively investigating various areas of potential violation of the federal securities laws involving the Company and its management.  The SEC has issued subpoenas for documents and testimony and has deposed numerous witnesses in connection with the Investigation. As a result of a review undertaken by the Company’s personnel in conjunction with the Audit Committee of the Board of Directors, during 2014 we amended certain prior reports to revise various disclosures concerning executive compensation and disclosure of perquisites, among other things, and filed amendments to our annual reports on Form 10-K for the fiscal years ended December 31, 2013, 2012 and 2011.  The Investigation remains ongoing. The Investigation could lead to the SEC seeking fines, penalties, injunctive relief and the adoption of corrective plans to establish reporting and other practices affecting the Company. Neither the nature of the relief, the amount of any monetary relief, nor the nature of the corrective actions, whether voluntary or imposed as a result of court proceedings that could be sought by the SEC, can be predicted.  The result of any of the foregoing could have a material adverse effect on the Company or its management.

 

 

Item 2. Properties

As of December 31, 2014, we leased office facilities across the U.S., Canada and Ireland totaling approximately 200,000+ square feet, including 30,000+ square feet for our corporate headquarters in Denver, Colorado. Our office space and locations can be seen in the below table.

 

Location

 

Function

 

Approximate Square Feet

 

Expiration

Date of Lease

 

Monthly

Rent

 

Denver, CO

 

Company Headquarters, MP Sports Science Center

 

30,302

 

December 31, 2020

 

$

10,500

 

Denver, CO

 

Clinical study testing

 

496

 

March 31, 2015

 

$

1,033

 

Denver, CO

 

General Office and Finance

 

10,300

 

June 30,2020

 

$

7,717

 

Hamilton, Ontario, CA

 

MP Canada subsidiary including warehouse, distribution, and sales

 

10,000

 

March 31, 2016

 

CAD

8,333

 

Miami, FL

 

Sales, product development, and strategy

 

1,450

 

April 30, 2017

 

$

3,730

 

Franklin, TN

 

Warehouse and distribution

 

152,562

 

August 31, 2015

 

$

25,833

 

Boise, ID

 

Finance and sales

 

14,376

 

January 31, 2015

 

$

8,000

 

Boise, ID

 

Finance and sales

 

9,600

 

January 31, 2020

 

$

6,233

 

Columbus, OH

 

Social media and customer service center

 

8,500

 

September 15, 2016

 

$

1,500

 

Dublin, Ireland

 

European sales and operations

 

450

 

December 31, 2015

 

1,800

 

Pittsburg, California

 

Liquid, gel manufacturing and distribution

 

101,511

 

August 31, 2015

 

$

32,426

 

Pittsburg, California

 

Research and development quality control

 

17,500

 

February 28, 2029

 

$

24,294

 

 

 

Item 3. Legal Proceedings

From time to time, we have become involved in various legal proceedings that arise in the ordinary course of business or otherwise. Legal proceedings are subject to inherent uncertainties as to timing, outcomes, costs, expenses and time expenditures by our management and others on our behalf. Although there can be no assurance, based on information currently available, we believe that the outcome of legal proceedings that are pending or threatened against us will not have a material effect on our financial condition. However, the outcome of any of these matters is neither probable nor reasonably estimable.

The legal proceedings information set forth under “Commitments and Contingencies” in Note 10 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K is incorporated herein by reference.

 

 

18


 

Item 4. Mine Safety Disclosures

None.

 

 

 

19


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table shows the reported high and low bid quotations per share for our common stock based on information provided by the OTCQB, based upon the closing price. Our common stock is quoted on the OTCQB under the symbol “MSLP”. These prices reflect the 1 for 850 reverse stock split of our common stock on November 26, 2012.

 

 

 

High

 

 

Low

 

2014

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

14.04

 

 

$

8.18

 

Third Quarter

 

$

13.80

 

 

$

10.91

 

Second Quarter

 

$

12.15

 

 

$

6.65

 

First Quarter

 

$

9.20

 

 

$

6.25

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

10.50

 

 

$

7.30

 

Third Quarter

 

$

13.10

 

 

$

9.60

 

Second Quarter

 

$

12.47

 

 

$

8.06

 

First Quarter

 

$

11.50

 

 

$

3.90

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

6.21

 

 

$

3.40

 

Third Quarter

 

$

17.43

 

 

$

5.02

 

Second Quarter

 

$

31.88

 

 

$

10.20

 

First Quarter

 

$

31.03

 

 

$

5.10

 

 

Quotations on the OTCQB reflect bid and ask quotations, may reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

Our transfer agent is Corporate Stock Transfer, Inc. is located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.

Holders of Record

As of March 6, 2015, there were approximately 340 holders of record of our common stock. This figure does not take into account those stockholders whose certificates are held in street name by brokers and other nominees.

Unregistered Sale of Securities

None

Dividend Policy

We have never declared dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the foregoing, approved by ANB Bank under the current loan the payment of cash dividends in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board of Directors.

 

 

Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of MusclePharm Corporation under the Securities Act or the Exchange Act.

20


 

The following graph compares the performance of our common stock to the Standard & Poor's 500 Stock Index (S&P 500 Index) and the Nasdaq Composite Index (NASDAQ Composite) from November 26, 2012 (the effective date of our 1 for 850 reverse stock split) through December 31, 2014. The comparison assumes $4.59 (the closing price of our common stock on November 26, 2012) was invested in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any.

 

You should read the following selected consolidated financial data in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included in Part II, Item 8, "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

21


 

Item 6. Selected Financial Data

The consolidated statements of operations data for each of the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheets data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements included in Part II, Item 8, "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2011 and 2010 and the consolidated balance sheets data as of December 31, 2012, 2011 and 2010 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

 

 

(in thousands, except share and per share data)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

 

$

177,389

 

 

$

110,878

 

 

$

67,055

 

 

$

17,213

 

 

$

3,203

 

Cost of revenue

 

 

121,379

 

 

 

77,686

 

 

 

52,727

 

 

 

14,845

 

 

 

2,804

 

Gross profit

 

 

56,010

 

 

 

33,192

 

 

 

14,328

 

 

 

2,368

 

 

 

399

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and promotion

 

 

28,053

 

 

 

15,535

 

 

 

8,430

 

 

 

 

 

 

 

Salaries and benefits

 

 

25,347

 

 

 

11,831

 

 

 

4,597

 

 

 

 

 

 

 

Selling, general and administrative

 

 

13,354

 

 

 

7,173

 

 

 

4,634

 

 

 

18,588

 

 

 

18,650

 

Research and development

 

 

3,997

 

 

 

1,119

 

 

 

278

 

 

 

 

 

 

 

Professional fees

 

 

4,635

 

 

 

11,831

 

 

 

5,125

 

 

 

 

 

 

 

Total operating expenses

 

 

75,386

 

 

 

47,489

 

 

 

23,064

 

 

 

18,588

 

 

 

18,650

 

Loss from operations

 

 

(19,376

)

 

 

(14,297

)

 

 

(8,736

)

 

 

(16,220

)

 

 

(18,251

)

Other income (expense), net

 

 

5,577

 

 

 

(3,306

)

 

 

(10,217

)

 

 

(7,061

)

 

 

(1,318

)

Loss before provision for income taxes

 

 

(13,799

)

 

 

(17,603

)

 

 

(18,953

)

 

 

(23,281

)

 

 

(19,569

)

Provision for income taxes

 

 

33

 

 

 

115

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,832

)

 

$

(17,718

)

 

$

(18,953

)

 

$

(23,281

)

 

$

(19,569

)

Net loss per share, basic and diluted

 

$

(1.25

)

 

$

(2.46

)

 

$

(13.00

)

 

$

(70.30

)

 

$

(0.48

)

Weighted-average shares used to compute net loss per share, basic and diluted

 

 

11,038,761

 

 

 

7,193,784

 

 

 

1,458,757

 

 

 

331,158

 

 

 

41,141,549

 

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,020

 

 

$

5,412

 

 

$

 

 

 

660

 

 

 

44

 

Working capital (deficit)

 

 

3,587

 

 

 

12,158

 

 

 

(11,571

)

 

 

(13,693

)

 

 

(1,721

)

Property and equipment, net

 

 

7,805

 

 

 

2,614

 

 

 

1,356

 

 

 

908

 

 

 

139

 

Total assets

 

 

66,356

 

 

 

52,158

 

 

 

6,767

 

 

 

5,046

 

 

 

2,721

 

Total indebtedness

 

 

8,046

 

 

 

2,563

 

 

 

4,468

 

 

 

1,589

 

 

 

539

 

Total liabilities

 

 

42,976

 

 

 

32,423

 

 

 

16,525

 

 

 

18,017

 

 

 

4,466

 

Total stockholders' equity (deficit)

 

 

23,380

 

 

 

19,735

 

 

 

(9,758

)

 

 

(12,971

)

 

 

(1,745

)

 

 

 

22


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Form 10-K. 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-K. All share amounts and per share amounts in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflect the 1-for-850 reverse stock split of our common stock that we effected on November 26, 2012.

Overview

We are a scientifically driven, performance lifestyle Company that develops, manufactures, markets and distributes branded nutritional supplements. We offer a broad range of powders, capsules, tablets and gels. Our portfolio of recognized brands, including MusclePharm® Hybrid and Core Series, Arnold Schwarzenegger Series™, and FitMiss®, are marketed and sold in more than 110 countries and available in over 35,000 retail outlets globally. These clinically developed scientifically driven nutritional supplements are developed through a six-stage research process that utilizes the expertise of leading nutritional scientists, doctors and universities. We believe we are an innovator in the sports nutrition industry.

Our primary growth strategy is to:

·

drive innovation, serve the needs of all athletes and fuel the engine of sport through new products and brand extension;

·

increase our product distribution and sales through increased market penetrations both domestically and internationally;

·

increase our margins by focusing on streamlining our operations and seeking operating efficiencies in all areas of our operations;

·

continue to conduct additional testing of the safety and efficacy of our products and formulate new products; and

·

increase awareness of our products by increasing our marketing and branding opportunities through endorsements, sponsorships and brand extensions.

Our core marketing strategy is to brand MusclePharm as the “must have” fitness brand for workout enthusiasts and elite athletes. We seek to be known as The Athletes Company®, run by athletes who create their products for other athletes both professional and otherwise. We believe that our marketing mix of endorsers, sponsorships and providing sample products for our retail resellers to use is an optimal strategy to increase sales.

Our revenue has been consistently increasing year-over-year as we continue to grow our brand and develop industry-leading supplemental nutrition and lifestyle products. Revenues in 2014, 2013 and 2012 were $177.4 million, $110.9 million and $67.1 million, respectively, while our net losses were $13.8 million, $17.7 million and $19.0 million, respectively, for the same periods.

Components of Results of Operations

Revenue

We derive our revenues through the sales of our various branded nutritional supplements. As discussed further in “Critical Accounting Policies and Estimates—Revenue Recognition”, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured which generally occurs upon shipment or delivery of the products. We record sales discounts as a direct reduction of revenue for various discounts provided to our customers consisting primarily of volume incentive rebates and advertising 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.

During 2014, our two largest customers, Costco and Bodybuilding.com, accounted for 29% of our net revenue. During 2013, our two largest customers, Bodybuilding.com and Europa, accounted for 35% of our net revenue. During 2012, our two largest customers Bodybuilding.com and General Nutrition Corp. (GNC), accounted for 45% of our net revenue.

23


 

Cost of Revenue and Gross Margin

Cost of net revenue for MusclePharm products is directly related to the production, manufacturing and freight-in of the related products purchased from third party contract manufacturers. We mainly ship customer orders from our distribution centers in Franklin, Tennessee and Pittsburg, California. The facilities are operated with our equipment and employees, and we own the related inventory. We also use contract manufacturers to drop ship products directly to our customers.

In addition, BioZone Laboratories, Inc., (“BioZone”) who we acquired in 2014, does manufacture products and, therefore, derives costs of revenue through the costs of raw materials, direct labor, freight-in and other supply and equipment rental expenses. We mainly ship BioZone customer orders from our distribution center in Pittsburg, California.

Our historical experience has been that over the life cycle of a particular product, the cost of revenues as a percentage of total revenue has typically declined as a result of decreases in our product costs. The decrease in cost generally results from an increase in the volume purchased from manufacturing suppliers, as well as yield improvements and test enhancements.

Our gross profit fluctuates due to several factors, including 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. We expect cost of revenues to increase in absolute dollars as our revenue continues to increase, however, cost of revenue is expected to decrease as a percentage of revenue due primarily to our ability to efficiently increase our revenue while realizing respective cost efficiencies associated with such increase.

Operating Expenses

Advertising and Promotion

Our advertising and promotions consists primarily of digital and print advertising, trade show events, athletic endorsements and sponsorships and promotion giveaways. Advertising and promotions are a large part of both our growth strategy and brand awareness. We build strategic partnerships with sports athletes like Tiger Woods and fitness enthusiasts like Arnold Schwarzenegger through endorsements licensing, co-branding agreements and co-developing product lines. We expect our advertising and promotion expenses to increase in absolute dollars in future periods as this is a key strategy for our growth, however, advertising and promotion expense is expected to remain consistent as a percentage of revenue due primarily to our ability to efficiently increase our revenue while realizing respective cost efficiencies associated with such increase.

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 and we expect these expenses to increase in absolute dollars in future periods as we continue to grow our business and add employees, however, salaries and benefits is expected to remain consistent as a percentage of revenue due primarily to our ability to efficiently increase our revenue while realizing respective cost efficiencies associated with such increase.

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of depreciation, amortization, sales commissions, travel and miscellaneous expenses incurred by our executive, finance, legal, human resources, and other administrative functions, freight out, legal settlement costs, director fees, and other corporate expenses. We expect our selling, general and administrative expenses to increase in absolute dollars in future periods, however, selling, general and administration expense is expected to remain consistent as a percentage of revenue due primarily to our ability to efficiently increase our revenue while realizing respective cost efficiencies associated with such increase.

Research and Development

Research and development expenses primarily consist of personnel, laboratory development of our scientific nutritional supplements, testing and compliance and allocated facilities costs. We expense research and development costs as incurred. Research and development is not the primary driver of our operating expenses but we expect research and development to increase in absolute dollars in future periods, however, research and development expense is expected to remain consistent as a percentage of revenue due primarily to our ability to efficiently increase our revenue while realizing respective cost efficiencies associated with such increase.

24


 

Professional Fees

Professional fees consist primarily of fees for outside legal, accounting and tax services and we expect these expenses to increase in absolute dollars in future periods as we continue to grow our business and utilize assistance from professional service providers, defend ongoing and new legal matters, professional fees are expected to increase as a percentage of revenue due primarily to ongoing legal matters.

Charitable Youth Sports Program

In March 2014, the Board of the Company approved and the Company established a charitable youth sports grant program (the “Program”) pursuant to which the Company will donate product giveaways, equipment purchases and cash disbursements to different organizations such as schools, sports teams and training facilities. The Company has tentatively established an annual budget of approximately $250,000 for the Program. The primary intent of the Program is to build MusclePharm brand awareness with youth athletes. The Company’s other business purposes in establishing the Program is to help needy organizations achieve their goals, promote the Company’s brand, help athletes develop stronger and better skills and to build the reputation of the Company as a contributor to the community. The Program is intended to be managed pursuant to written guidelines contained in a standard operating procedure adopted in March 2014. A committee consisting of the Company’s President, Director of Team Development and Chief Operating Officer oversee the Program. The Company approved an initial grant in the amount of approximately $250,000 to Arvada West High School.  Additionally, the Company made similar charitable contributions to other charitable youth sports organizations in the amount of approximately $30,000.  The Company’s Chief Executive Officer Mr. Pyatt is a graduate of Arvada West High School (Class of 1999) and serves as a volunteer football coach. In conjunction with input from school administration, the contributions were utilized for equipment and apparel purchases as well as training and fitness programs. During 2014 Mr. Pyatt received approximately $100.00 as compensation for his services. Pursuant to SEC guidance, including the guidance set forth in Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06, the Company’s Disclosure Committee determined that the amount of the grant under the Program to Arvada West High School should not be treated as a perquisite to Mr. Pyatt.

Other Income (Expense), Net

Other income (expense), net consists of interest, bargain purchase gain and contingent asset gain from a business acquisition, expenses related to the issuance and change in fair value of derivative liabilities, gains and losses on foreign currency transactions and marketable securities, settlement of accounts payable and debt, and foreign currency transactions, and other miscellaneous expenses. The most significant of these consist of the change in the fair value of our derivative liabilities and the bargain purchase gain and contingent asset gain from the business acquisition. Our derivative liabilities were related to embedded conversion features in certain shares of previously outstanding convertible preferred stock and warrants. These derivative instruments were no longer outstanding as of December 31, 2014, however, prior to their settlement, they were marked to fair value each period with a corresponding gain or loss recognized through the consolidated statements of operations. Our bargain purchase gain and contingent asset gain was a one-time event related to the 2014 BioZone acquisition. We do not expect to recognize any amounts from changes in fair value of derivative instruments or any bargain purchase gains going forward unless we enter into similar transactions again in the future.

Provision for Income Taxes

Provision for income taxes consists primarily of federal and state income taxes in the United States 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. Further, we recently engaged a Big 4 accounting firm to advise us on our global international tax strategy.

25


 

Results of Operations

The following table presents our historical operating results in dollars and as a percentage of revenues for the periods presented:

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

 

$

177,389

 

 

$

110,878

 

 

$

67,055

 

Cost of revenue

 

 

121,379

 

 

 

77,686

 

 

 

52,727

 

Gross profit

 

 

56,010

 

 

 

33,192

 

 

 

14,328

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and promotion

 

 

28,053

 

 

 

15,535

 

 

 

8,430

 

Salaries and benefits

 

 

25,347

 

 

 

11,831

 

 

 

4,597

 

Selling, general and administrative

 

 

13,354

 

 

 

7,173

 

 

 

4,634

 

Research and development

 

 

3,997

 

 

 

1,119

 

 

 

278

 

Professional fees

 

 

4,635

 

 

 

11,831

 

 

 

5,125

 

Total operating expenses

 

 

75,386

 

 

 

47,489

 

 

 

23,064

 

Loss from operations

 

 

(19,376

)

 

 

(14,297

)

 

 

(8,736

)

Other income (expense), net

 

 

5,577

 

 

 

(3,306

)

 

 

(10,217

)

Loss before provision for income taxes

 

 

(13,799

)

 

 

(17,603

)

 

 

(18,953

)

Provision for income taxes

 

 

33

 

 

 

115

 

 

 

 

Net loss

 

$

(13,832

)

 

$

(17,718

)

 

$

(18,953

)

 

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

Percentage of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

 

 

100

%

 

 

100

%

 

 

100

%

Cost of revenue

 

 

68

 

 

 

70

 

 

 

79

 

Gross profit

 

 

32

 

 

 

30

 

 

 

21

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and promotion

 

 

16

 

 

 

14

 

 

 

13

 

Salaries and benefits

 

 

14

 

 

 

11

 

 

 

7

 

Selling, general and administrative

 

 

8

 

 

 

6

 

 

 

7

 

Research and development

 

 

2

 

 

 

1

 

 

 

0

 

Professional fees

 

 

3

 

 

 

11

 

 

 

8

 

Total operating expenses

 

 

42

 

 

 

43

 

 

 

34

 

Loss from operations

 

 

(11

)

 

 

(13

)

 

 

(13

)

Other income (expense), net

 

 

3

 

 

 

(3

)

 

 

(15

)

Net income loss before taxes

 

 

(8

)

 

 

(16

)

 

 

(28

)

Provision for income taxes

 

 

 

 

 

 

 

Net loss

 

(8)%

 

 

(16)%

 

 

(28)%

 

 

Revenue

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue, net

 

$

177,389

 

 

$

110,878

 

 

$

67,055

 

 

 

60

%

 

 

65

%

 

26


 

2014 compared to 2013. Our net revenue increased 60% to $177.4 million in 2014, compared to $110.9 million in 2013. Revenue in 2014 increased due primarily to the introduction of two brands to our product portfolio as we continue to extend our brand and reach utilizing well known current and former athletes and moving into new and expanding markets. In particular, our Arnold Schwarzenegger Series™, which launched in the fourth quarter of 2013, resulted in an increase of $33.1 million from $16.5 million in 2013 to $49.6 million in 2014. In addition, our FitMiss® series, which launched in the third quarter of 2013, resulted in an increase of $6.9 million from $2.6 million in 2013 to $9.5 million in 2014. We also recognized an increase of $28.5 million due to sales of our existing products as we continued to execute our growth strategy that includes driving innovation, serving the needs of all athletes, fueling the engine of sport through new products, brand extensions, and increasing our product distribution and sales through increased market penetrations both domestically and internationally. We also acquired BioZone, a pharmaceutical and laboratory testing company in the first quarter of 2014 in order to maintain a competitive edge and continue to drive growth, which resulted in a $12.4 million increase of revenue in 2014 compared to zero in 2013. Discounts and sales allowances increased to $28.2 million, or 14%, of gross revenue in 2014 from $17.4 million, or 14%, of gross revenue in 2013. The decrease in discounts and allowances as a percent of gross revenue is a result of continued focus to define customer terms and allowances.

2013 compared to 2012. Our net revenue increased 65% to $110.9 million in 2013, compared to $67.1 million in 2012. Revenue in 2013 increased due to executing our growth strategy that included driving innovation, serving the needs of all athletes, fueling the engine of sport through new products, brand extensions, and increasing our product distribution and sales through increased market penetrations both domestically and internationally. A key area of growth in 2013 was increased sales in international markets which increased 69% to $34.1 million in 2013, compared to $20.2 million in 2012. Discounts and sales allowances, which are netted against our revenue, increases to $17.4 million, or 14%, of gross revenue from $10.7 million, or 13.8%, of gross revenue in 2012. The increases in discounts and allowances was a result of continued focus to define customer terms and allowances.

Cost of Revenue and Gross Profit

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

121,379

 

 

$

77,686

 

 

$

52,727

 

 

 

56

%

 

 

47

%

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Gross profit

 

$

56,010

 

 

$

33,192

 

 

$

14,328

 

 

 

69

%

 

 

132

%

 

2014 compared to 2013. Costs of revenue increased 56% to $121.4 million in 2014, compared to $77.7 million in 2013. Accordingly, gross profit for 2014 was $56.0 million, or 32% of revenue, compared to $33.2 million, or 30% of revenue in 2013. Our cost of revenue increased consistent with the related revenue and the primary components of the increase were an $18.0 million increase from the Arnold Schwarzenegger Series™, a $3.0 million increase from the FitMiss series, and an $18.4 million increase from existing products related primarily to executing our growth strategy. In addition, we recognized an increase in cost of revenue in the amount of $5.8 million due to the inclusion of BioZone which was acquired in the first quarter of 2014. The increase in gross profit was generally due to improved focus on process efficiencies throughout all departments including a decrease in spoilage, and the integration and continued improvement of enterprise resource planning (ERP) and reporting systems.

2013 compared to 2012. Costs of revenue increased 47% to $77.7 million in 2013, compared to $52.7 million in 2012. Accordingly, gross profit for 2013 was $33.2 million, or 30% of revenue, compared to $14.3 million, or 21% of revenue, for 2012. The increase in gross profit was due to improved supply chain optimization, operational infrastructure improvements, enterprise resource planning (ERP) and reporting systems integration and key management hires.

Operating Expenses

2014 compared to 2013. Operating expenses in 2014 were $75.4 million, compared to $47.5 million in 2013. These expenses primarily included costs for advertising and promotions, specifically tradeshow costs to generate visibility and connect with our customers and end-users, costs of strategic partnerships, with star athletes and strategic advertising agreements to promote our brand, and investing in our staffing needs in order to stay competitive in our industry by developing and testing new products, including stock-based compensation.

2013 compared to 2012. Operating expenses in 2013 were $47.5 million, compared to $23.1 million in 2012. These expenses included necessary infrastructure improvements, new growth platforms and initiatives, a re-capitalization and staffing increases to establish a scalable organization.

27


 

Advertising and Promotion

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Advertising and promotion

 

$

28,053

 

 

$

15,535

 

 

$

8,430

 

 

 

81

%

 

 

84

%

Percentage of revenue

 

 

16

%

 

 

14

%

 

 

13

%

 

 

 

 

 

 

 

 

 

2014 compared to 2013. Advertising and promotion expenses increased 81% to $28.1 million in 2014, or 16% of revenue, compared to $15.5 million, or 14% of revenue, in 2013. Advertising and promotion expenses in 2014 included expenses related to strategic partnerships entered into with Tiger Woods and Johnny Manziel. These partnerships, along with our Arnold Schwarzenegger Series™ introduced in 2013, have increased our strategic partnership stock expenses to $10.2 million in 2014, compared to $1.4 million in 2013.

2013 compared to 2012. Advertising and promotion expenses increased 84% to $15.5 million in 2013, or 14% of revenue, compared to $8.4 million, or 13% of revenue, in 2012. Advertising and promotion expenses in 2013 included expenses related to the launch of our Arnold Schwarzenegger Series™.

Salaries and Benefits

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

$

25,347

 

 

$

11,831

 

 

$

4,597

 

 

 

114

%

 

 

157

%

Percentage of revenue

 

 

14

%

 

 

11

%

 

 

7

%

 

 

 

 

 

 

 

 

 

2014 compared to 2013. Salaries and benefits increased 114% to $25.3 million, or 14% of revenue, in 2014 compared to $11.8 million, or 11% of revenue, in 2013. The increase was due to additional resources added to both our domestic operations and our Canadian subsidiary. Another primary driver of the increase in salaries and benefits is due to an increase of $7.3 million in expenses related to expense related to restricted stock award grants.

2013 compared to 2012. Salaries and benefits increased 157% to $11.8 million, or 11% of revenue, in 2013 compared to $4.6 million, or 7% of revenue, in 2012. The increase was due to warehouse implementation and adding additional resources to our finance and sales organizations. Salaries and benefit expenses include $3.0 million related to amortization of expense for restricted stock awards granted to employees and executives.

Selling, General and Administrative

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

$

13,354

 

 

$

7,173

 

 

$

4,634

 

 

 

86

%

 

 

55

%

Percentage of revenue

 

 

8

%

 

 

6

%

 

 

7

%

 

 

 

 

 

 

 

 

 

2014 compared to 2013. Selling, general and administrative expenses increased 86% to $13.4 million, or 8% of revenue, in 2014 compared to $7.2 million, or 6% of revenue, in 2013. The increase was primarily due to amortization of intangible assets related to our acquisition of Biozone, depreciation of acquired capital assets, rent expense insurance and investments in infrastructure costs and freight out expense, sales as our selling, general and administrative costs are driven by our continued growth in all aspects of operations.

2013 compared to 2012. Selling, general and administrative expenses increased 55% to $7.2 million, or 6% of revenue, in 2013 compared to $4.6 million, or 7% of revenue, in 2012. The increase was related to the BioZone acquisition and the remaining increase was for expenses to support our continued growth.

28


 

Research and Development

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,997

 

 

$

1,119

 

 

$

278

 

 

 

257

%

 

 

303

%

Percentage of revenue

 

 

2

%

 

 

1

%

 

 

0

%

 

 

 

 

 

 

 

 

 

2014 compared to 2013. Research and development expenses increased 257% to $4.0 million, or 2% of revenue, in 2014 compared to $1.1 million, or 1% of revenue, in 2013. The increase was due to a $0.7 million increase in quality control costs as we improve the quality of our product and the operations that go into formulating and developing the product. Other cost increases were due to an increase of $0.4 million related to researching fees as we continue to develop and test new products and a $0.4 million increase in depreciation expense allocated to research and development.

2013 compared to 2012. Research and development expenses increased 303% to $1.1 million, or 1% of revenue, in 2013 compared to $0.3 million, or 0% of revenue, in 2012.

Professional Fees

 

 

 

Year Ended December 31,

 

 

2013 to 2014

 

2012 to 2013

 

 

 

2014

 

 

2013

 

 

2012

 

 

% Change

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

Professional fees

 

$