UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2010
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 000-53166
MUSCLEPHARM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 77-0664193
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
3390 Peoria Street, #307, Aurora, CO 80010
(Address of Principal Executive Offices)
(800) 210-7369
(Registrant's Telephone Number, Including Area Code)
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 [ ] No
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. NOT APPLICABLE
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On August 1, 2010, there
were 34,597,248 Common Shares issued outstanding.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
MUSCLEPHARM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated financial statements (unaudited):
Balance Sheets ......................................... 3
Statements of operations ............................... 4
Statements of cash flows ............................... 5
Statements of stockholders' deficit .................... 6
Notes to unaudited consolidated financial statements ... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ..................................................... 23
Item 4. Controls and Procedures .................................. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 25
Item 1A. Risk Factors ............................................. 25
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................. 25
Item 3. Defaults Upon Senior Securities .......................... 25
Item 4. Submission of Matters to a Vote of Security Holders ...... 25
Item 5. Other Information ........................................ 25
Item 6. Exhibits ................................................. 25
Signatures ............................................... 26
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MUSCLEPHARM CORPORATION
Consolidated Balance Sheets
June 30, December 31,
2010 2009
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash $ - $ -
Accounts receivable, net of allowance of
$2,710 and $821, respectively 338,227 111,476
Inventory 74,917 4,245
Deposits on product 87,170 32,115
Prepaid expenses and other current assets 22,275 76,686
----------- -----------
Total Current Assets 522,589 224,522
Fixed assets, net 40,244 39,815
Other assets 4,932 2,665
----------- -----------
Total Assets $ 567,765 $ 267,002
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 1,636,225 $ 765,534
Accrued liabilities 456,840 103,519
Bank overdrafts 47,482 17,841
Customer deposits 309,905 15,018
Due to related parties 46,023 85,820
Notes payable 1,552,504 459,864
----------- -----------
Total Current Liabilities 4,048,979 1,447,596
----------- -----------
Stockholders' Deficit
Series A convertible preferred stock,
$.001 par value, 833,333 shares authorized,
67,916 shares issued and outstanding 68 -
Common stock, $.001 par value, 195,000,000
shares authorized, 31,902,961 and
26,000,000 shares issued and outstanding 31,903 26,000
Additional paid in capital 5,303,829 1,099,508
Services prepaid with common stock (709,536) -
Accumulated deficit (8,107,478) (2,306,102)
----------- -----------
Total Stockholders' Deficit (3,481,214) (1,180,594)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 567,765 $ 267,002
=========== ===========
The accompanying notes are an integral part of these financial statements.
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MUSCLEPHARM CORPORATION
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2010 2009 2010 2009
----------- ----------- ----------- -----------
Sales of product, net $ 468,109 $ 252,374 $ 1,726,697 $ 436,857
Cost of sales 361,250 163,319 1,192,608 283,025
----------- ----------- ----------- -----------
Gross Margin 106,859 89,055 534,089 153,832
Operating Expenses:
Advertising and promotion 1,817,540 201,042 3,055,512 357,214
Salaries and benefits 913,983 44,741 1,155,705 71,544
Professional fees 99,822 11,664 1,184,404 18,057
General and administrative 147,501 50,795 259,046 100,935
Depreciation and amortization 3,390 1,686 6,455 3,312
----------- ----------- ----------- -----------
Total Operating Expenses 2,982,236 309,928 5,661,122 551,062
----------- ----------- ----------- -----------
Operating Loss (2,875,377) (220,873) (5,127,033) (397,230)
----------- ----------- ----------- -----------
Other Expenses
Interest expense 311,087 3,212 669,147 3,939
Other expense 5,196 - 5,196 -
----------- ----------- ----------- -----------
Total Other Expense 316,283 3,212 674,343 3,939
----------- ----------- ----------- -----------
Net Loss $(3,191,660) $ (224,085) $(5,801,376) $ (401,169)
=========== =========== =========== ===========
Basic and diluted loss per share $ (.11) $ (.01) $ (.21) $ (.02)
Weighted average shares
outstanding, basic and diluted 29,247,811 25,863,428 27,702,640 25,846,662
The accompanying notes are an integral part of these financial statements.
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MUSCLEPHARM CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
2010 2009
----------- -----------
Operating Activities:
Net Loss $(5,801,376) $ (401,169)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 6,455 3,312
Allowance for bad debt 660 (812)
Amortization of debt discount 594,351 -
Non-cash interest expense 34,500 -
Loss on sale of accounts receivable 5,196 -
Common stock issued for services 2,010,077 -
Stock based compensation expense 630,990 -
Cash provided by (used in) changes in
operating assets and liabilities:
Accounts receivable (459,454) (55,873)
Inventory (70,672) 82,065
Deposits on products (55,055) 45,815
Prepaid expenses and other current assets 54,411 7,821
Other assets (2,267) (1,206)
Accounts payable 870,691 141,388
Accrued liabilities 358,809 25,008
Customer deposits 294,887 66,000
Due to related parties (39,797) 29,913
----------- -----------
Net cash used in operating activities (1,567,594) (57,738)
----------- -----------
Investing Activities:
Purchases of fixed assets (6,884) -
----------- -----------
Net cash used in investing activities (6,884) -
----------- -----------
Financing Activities:
Proceeds from issuance of notes payable 1,026,000 30,000
Proceeds from issuance of common stock 317,098 -
Proceeds from sale of accounts receivable 226,847 -
Capital contributions - 30,000
Payments for recapitalization from merger (25,108) -
Bank overdrafts 29,641 (2,294)
----------- -----------
Net cash provided by financing activities 1,574,478 57,706
----------- -----------
Net decrease in cash - (32)
Beginning cash - 32
----------- -----------
Ending cash $ - $ -
=========== ===========
Non-cash Investing and Financing Activities:
Beneficial conversion features on convertible
notes payable $ 366,000 $ -
Conversions of convertible debt and accrued
interest $ 167,199 $ -
Conversion of preferred stock $ 15 $ -
The accompanying notes are an integral part of these financial statements.
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MUSCLEPHARM CORPORATION
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Services
Prepaid
Preferred Stock Common Stock Additional With
--------------- ------------------ Paid-In Common Accumulated
Shares Amount Shares Amount Capital Stock Deficit Total
------ ------ ---------- ------- ---------- ---------- ------------ -----------
Balance, January 1, 2010 - $ - 26,000,000 $26,000 $1,099,508 $ - $(2,306,102) $(1,180,594)
Recapitalization
resulting from merger 83,333 83 70,838 71 (25,262) - - (25,108)
Surrender of common
stock for re-distri-
bution - - (2,425,000) (2,425) 2,425 - - -
Common stock re-issued
for services - - 2,425,000 2,425 1,307,075 (270,000) - 1,039,500
Common stock issued for
services - - 1,302,000 1,302 1,408,811 (577,073) - 833,040
Common stock issued for
debt extension 30,000 30 34,470 - 34,500
Issuance of common stock
for cash 767,423 767 316,331 - 317,098
Beneficial conversion
features on convertible
notes payable - - - - 366,000 - - 366,000
Conversions of convertible
notes payable - - 649,500 650 166,549 - - 167,199
Conversion of preferred
stock (15,416) (15) 3,083,200 3,083 (3,068) - - -
Amortization of prepaid
services 137,537 137,537
Stock based compensation 630,990 630,990
Net loss (5,801,376) (5,801,376)
------ ---- ---------- ------- ---------- --------- ----------- -----------
Balance, June 30, 2010 67,917 $ 68 31,902,961 $31,903 $5,303,829 $(709,536) $(8,107,478) $(3,481,214)
====== ==== ========== ======= ========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
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MUSCLEPHARM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
On February 18, 2010, in accordance with a Securities Exchange Agreement
dated February 1, 2010, Tone in Twenty, a Nevada Corporation, acquired all
the outstanding equity and voting interests of Muscle Pharm, LLC
("MusclePharm"), a Colorado limited liability corporation formed on April 22,
2008), for an aggregate of 26,000,000 shares of our common stock. In
addition, pursuant to the terms and conditions of the Securities Exchange
Agreement ("share exchange"), MusclePharm paid $25,000 to the former
president of Tone in Twenty for his 366,662 shares of common stock, and these
shares were cancelled. Upon closing of the transaction, MusclePharm became a
wholly owned subsidiary of Tone in Twenty. Also concurrent with the closing
of the acquisition, the Tone in Twenty's President and Director issued his
resignation. The board of directors was reconstituted to consist of the two
original founders and initial members of MusclePharm. Following the share
exchange and related transactions, a total of 26,070,838 shares of Tone in
Twenty's common stock was issued and outstanding, with MusclePharm members
owning approximately 99.7% of the outstanding common stock. The share
exchange is being accounted for as a "reverse acquisition," as the members of
MusclePharm owned a majority of the outstanding shares of Tone in Twenty
common stock immediately following the share exchange and now control the
board of directors. Tone in Twenty was deemed to be the legal acquirer in
the reverse acquisition, while MusclePharm was deemed to be the accounting
acquirer. Also, as a result of the completion of the reverse acquisition,
Tone in Twenty amended its articles of incorporation to change its name to
MusclePharm Corporation (the "Company"), and also changed its fiscal year
from August 31 to December 31. Upon completion of the share exchange, the
operations of Tone in Twenty ceased.
The Company currently manufactures and markets eight branded sports nutrition
products with the trade name: Combat Powder[R], Assault[TM], Battle
Fuel[TM], Bullet Proof[R], Shred Matrix[TM], Recon[R], Energel Shot[TM] and
MuscleGel[TM].
The consolidated financial statements are presented as a continuation of the
financial statements of MusclePharm. As such, for all disclosures
referencing shares authorized, issued, outstanding, per share amounts and
other disclosures related to equity, amounts have been retroactively adjusted
to reflect the legal capital of the legal acquirer (Tone in Twenty).
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP") for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures
required by U.S. GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2010, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2010. The balance sheet at December 31, 2009, has been derived from the
audited financial statements at that date but does not include all of the
information and disclosures required by U.S. GAAP for complete financial
statements. For further information, refer to the financial statements and
notes thereto included in the Company's Current Report on Form 8-K for the
year ended December 31, 2009.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is responsible
for their integrity and objectivity. These accounting policies conform to US
GAAP and have been consistently applied in the preparation of the financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared on the
basis of U.S. GAAP and include the accounts of the Company and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ materially from those estimates. The Company's
significant estimates made in connection with the preparation of the
accompanying financial statements include allowance for doubtful accounts,
value of long lived assets and the valuation of stock options and warrants.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include highly liquid
investments with original maturities of 90 days or less. Those are readily
convertible into cash and not subject to significant risk from fluctuations
in interest rates and market trends. The recorded amounts for cash
equivalents approximate fair value due to the short-term nature of these
financial instruments.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk include cash equivalents, trade accounts
receivable, inventory and deposits on product. The Company maintains its
cash and investment balances in the form of bank demand deposits and money
market accounts with financial institutions that management believes to be of
high credit quality. Accounts receivable are typically unsecured and are
derived from transactions with customers primarily located in the United
States. For the six months ended June 30, 2010, the Company had made sales to
17 customers. Four of these customers represent approximately 85% of the
Company's gross sales during this period.
At June 30, 2010, the Company was using two vendors to manufacture the
Company's inventory.
ACCOUNTS RECEIVABLE
The Company performs ongoing evaluations of its customer's financial
condition and generally does not require collateral. Management reviews
accounts receivable periodically and reduces the carrying amount by a
valuation allowance that reflects management's best estimate of amounts that
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may not be collectible. Allowances, if any, for uncollectible accounts
receivable are determined based upon information available and historical
experience.
INVENTORY
Inventory is stated at the lower of cost or market. Costs are determined by
the first-in first-out or average cost methods. Cost includes all costs of
purchase, cost of conversion and other costs incurred in bringing the
inventory to its present location and condition.
SHIPPING AND HANDLING
Product sold is typically shipped directly to the customer from the
manufacturer and distributor. Any freight billed to customers is offset
against shipping costs and included in cost of goods sales.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Included in
fixed assets are website development costs which represent capitalized costs
of design, configuration, coding, installation, and testing of the Company's
website. Depreciation is computed on the straight-line method over the
asset's useful lives which range from three to five years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are
capitalized.
LONG-LIVED ASSETS
The Company's primary long-lived assets are fixed assets. The Company
assesses the recoverability of its long-lived assets whenever events and
circumstances indicate the carrying value of an asset or asset group may not
be recoverable from estimated future cash flows expected to result from its
use and eventual disposition. Management does not believe that its long-lived
assets are impaired, and no impairment charges have been recorded as of June
30, 2010.
FAIR VALUE MEASUREMENT
Financial instruments consist of cash, accounts receivable, inventory,
deposits on product, prepaid expenses, accounts payable and accrued expenses.
The carrying amount of these financial instruments approximates fair value
due to their short-term nature or the current rates at which the Company
could borrow funds with similar remaining maturities. Unless otherwise noted,
it is management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial statements.
STOCK BASED COMPENSATION
ASC Topic 718, "Stock Compensation," establishes fair value as the
measurement objective in accounting for share based payment arrangements, and
requires all entities to apply a fair value based measurement method in
accounting for share based payment transactions with employees. Stock-based
compensation cost is measured at the grant date based on the fair value of
the award and is recognized as expense on a straight-line basis over the
period during which the holder is required to provide services in exchange
for the award, i.e., the vesting period.
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ADVERTISING
The Company expenses the cost of advertising when incurred. Advertising
expenses are included with advertising and promotions in the accompanying
consolidated statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of a revenue
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company has been developing its presence in the marketplace and
establishing distribution channels for its products, and therefore the
Company has incurred significant costs for sales allowances, and discounts
provided. For the three and six months ended June 30, 2010, the Company
recorded discounts and allowances of $23,042 and $84,909, respectively. For
the three and six months ended June 30, 2009, the Company recorded discounts
and allowances of $90,409 and $202,723, respectively.
SPONSORSHIP AND ENDORSEMENT AGREEMENTS
As a component of its marketing strategy, the Company enters into sponsorship
and endorsement agreements with prominent athletes, trainers, and other high
profile individuals that provide the Company ongoing sources of exposure to
its products. The agreements sometimes specify certain contingencies that
must be met to receive payments, others may require regular or periodic
payments with no specified service or events that trigger payments under an
agreement, or a combination of both. Agreements that are contingent upon the
successful completion of an event prior to payment are considered unearned
until the completion of the triggering event, and as such, no expense or
liability is recorded until the successful completion of the triggering
event. Where agreements are based on time and not on specific triggering
events, the services are considered to be earned ratably over the period of
the agreement, and as such expenses and liabilities are recorded ratably over
the term of the agreement.
INCOME TAXES
As discussed elsewhere in this report, on February 18, 2010 the Company
completed a reverse merger with Tone in Twenty which had a fiscal year ending
August 31. MusclePharm is deemed to be the accounting acquirer in the
merger, while Tone in Twenty is deemed the legal acquirer. As such, the
combined entity subsequently changed the fiscal year end to December 31. As
a result of the reverse merger, the Company will be subject to corporate U.S.
federal, state, and local taxes beginning in February 2010. The Company is
currently evaluating the effects of the reverse acquisition to its income
taxes.
EARNINGS PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing the net income (loss)
attributable to common shareholders for the period by the weighted average
number of common shares outstanding during the period. Diluted loss per
share is computed based on the weighted average number of common shares and
potentially dilutive common shares outstanding. The calculation of diluted
net income (loss) per share excludes potential common shares if the effect
would be anti-dilutive. Potential common shares consist of incremental common
shares issuable upon the exercise of outstanding stock options and stock
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purchase warrants or other financial instruments considered to be common
stock equivalents.
At June 30, 2010 the Company had common stock equivalents of 18,692,900 which
are excluded from the calculation of diluted loss per share as the effect
would be anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2010, the U.S. Congress passed and the President
signed into law the Patient Protection and Affordable Care Act as well as the
Health Care and Education Reconciliation Act of 2010, which represent
significant changes to the current U.S. health care system. The legislation
is far-reaching and is intended to expand access to health insurance coverage
over time by increasing the eligibility thresholds for most state Medicaid
programs and providing certain other individuals and small businesses with
tax incentives to subsidize a portion of the cost of health insurance
coverage. The legislation includes a requirement that most individuals obtain
health insurance coverage beginning in 2014 and that most large employers
offer coverage to their employees or they will be required to pay a financial
penalty. Some of the more significant changes, including the requirement that
individuals obtain coverage, do not become effective until 2014 or later. It
is too early to fully understand the impacts of the legislation on our
business.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
US GAAP, which contemplates continuation of the Company as a going concern.
However, the Company has negative working capital and stockholders' deficits,
and has incurred net losses, which raises substantial doubt about its ability
to continue as a going concern. In view of these matters, realization of
certain of the assets in the accompanying balance sheet is dependent upon its
ability to meet its financing requirements, raise additional capital, and the
success of its future operations. There is no assurance that future capital
raising plans will be successful in obtaining sufficient funds to assure its
eventual profitability. Management believes actions planned and presently
being taken provide the opportunity for the Company to continue as a going
concern, including:
* Increasing prices of products;
* Reducing discounts and free samples;
* Obtaining manufacturers which have substantially decreased
manufacturing costs, and
* Securing additional working capital through additional sales of debt
or equity to investors.
The financial statements do not include any adjustments that might result
from these uncertainties.
NOTE 4 - RELATED PARTY TRANSACTIONS
Certain members of the Company have utilized personal credit cards owned by
them and immediate family members to assist in financing its operations. As
of June 30, 2010 the Company owed $8,374 on these credit cards. The balance
owed at June 30, 2010 represents an amount owed to the Company's President.
The Company does not plan to use such credit in the future.
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The Company has a payable of $37,649 due to investors who paid various legal
and accounting fees and other administrative expenses on behalf of the
company.
NOTE 5 - NOTES PAYABLE
Convertible notes payable $ 1,000,000
Less discount (184,996)
-------------
Convertible notes discount, net 815,004
Original issue discount notes 187,500
Unsecured notes payable 550,000
-------------
Total Notes Payable $ 1,552,504
=============
Convertible Notes Payable
During 2009 and the six months ended June 30, 2010, the Company sold
convertible secured promissory notes ("convertible notes") in the amount of
$1,258,000 (including $356,000 sold during the six months ended June 30,
2010),to various investors. All the convertible notes accrue interest at 8%
per annum and are convertible to common stock by the note holder under terms
designed to provide the holder with a dollar amount of common stock equal to
a designated percentage of the note amount plus any accrued interest, ranging
from 120% to 350%. In accordance with ASC 470, the conversion terms are
considered beneficial conversion features, and as such for the six months
ended June 30, 2010, the Company recorded an additional debt discount of
$366,000 representing the intrinsic value of the beneficial conversion
features. The debt discount is being accreted to interest expense over the
term of the convertible notes. All the Notes are collateralized by all the
assets of the Company and have maturity dates ranging from March 2010 to
January 2011. Convertible notes totaling $527,500 have matured as of June
2010 and are currently in default. As of the date of this report, none of
the note holders have presented demands for payment or conversion notices to
the Company.
At June 30, 2010, the total interest accrued on the convertible notes, net of
amounts previously converted, was $44,726. For the three and six months
ended June 30, 2010 a total of $238,690 and $556,851, respectively, of the
debt discount was accreted and is included in interest expense in the
accompanying consolidated statements of operations.
During the six months ended June 30, 2010, convertible notes totaling
$253,500, together with $5,488 of accrued interest, and $91,789 of un-
accreted discounts on the convertible notes converted, were converted to
649,500 shares of the Company's common stock.
Original Issue Discount Notes
In February 2010, the Company issued two Original Issue Discount Secured
Promissory Notes (the "OID Notes") to two accredited investors. The first OID
Note was issued on February 18, 2010 with a face value of $125,000 and
maturity date of May 18, 2010. The second Note was issued on February 26,
2010 with a face value of $62,500 and a maturity of May 26, 2010. The OID
Notes are secured by all the Company's accounts receivable. The total
proceeds from the issuance of the OID Notes were $150,000. The discount of
$37,500 was amortized to interest expense over the life of the OID Notes.
For the six months ended June 30, 2010, $37,500 of the discount was amortized
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and is included in interest expense in the accompanying consolidated
statement of operations. At June 30, 2010, the OID Notes are in default and
the Company is in discussion with the OID Notes' holders to extend the
maturity dates.
Unsecured Notes Payable
The Company has two unsecured notes payable with an investor in the aggregate
of $520,000. These notes bear interest at the rate of 8% per year and require
no periodic principal or interest payments. The notes mature on March 31,
2011 and June 29, 2011 at which times all unpaid principal and interest is
due.
At June 30, 2010, the Company had two short term uncollateralized promissory
notes in the amount of $30,000. The uncollateralized promissory notes accrue
interest at 10% per annum require no periodic payments, and matured on March
2, 2010. On May 5, 2010, the Company issued 30,000 shares of common stock as
consideration for an extension of the maturity date of these notes to
September 2, 2010. See Note 6 for further discussion.
NOTE 6 - STOCKHOLDERS' DEFICIT
MusclePharm founders and initial investors
There were two initial founders of MusclePharm, both of whom are current
officers and directors of the Company. One founder received a 60% interest in
the original privately owned entity in exchange for his contribution of
formulations for potential products, contacts with GNC Canada and other
potential customers, and contacts with professional athletes. The other
initial founder received a 40% interest in the original privately owned
entity in exchange for his contacts with key contacts including potential
distributors, professional athletes and potential investors. No accounting
value was placed on these respective contributions since it was considered
immaterial.
During 2008 and 2009, MusclePharm sold to various other investors equity
interests totaling $562,000 to provide working capital during its
development. These other investor equity interests represented a 10%
interest at the time of the share exchange. Upon completion of the share
exchange, the original founders of MusclePharm received 23,377,782 shares of
the Tone in Twenty's common stock, with the other equity investors receiving
a total of 2,622,218 shares of Tone in Twenty's common stock, for a total of
26,000,000 shares issued in the share exchange to the MusclePharm equity
interests.
Series A Convertible Preferred Stock
As of June 30, 2010, the Company has issued 83,333 shares of Series A
Convertible Preferred Stock ("Convertible Preferred Stock"). The Convertible
Preferred Stock are non-voting, and have no dividend or liquidation rights.
Each share is convertible into two hundred (200) shares of Common Stock,
provided, however, no holder of the Convertible Preferred Stock will have the
right to convert any of such shares to the extent that after giving effect to
such conversion, the beneficial owner of such shares would beneficially own
in excess of 4.9% of the shares of the common stock outstanding immediately
after giving effect to such conversion.
During the six months ended June 30, 2010, 15,416 shares of the Convertible
Preferred Stock were converted into 3,083,200 shares of the Company's common
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stock. At June 30, 2010, the Company had 67,917 outstanding shares of
Convertible Preferred Stock which were convertible into 13,583,400 shares of
common stock (without giving effect to the aforementioned limitation on
conversion).
Common Stock
Immediately prior to the share exchange, Tone in Twenty had 437,500 shares
issued and outstanding. Concurrent with the share exchange, MusclePharm
purchased a total of 366,662 shares of the outstanding common stock owned by
a prior executive of Tone in Twenty for total consideration of $25,000.
These shares were subsequently retired. With the issuance of 26,000,000
shares of common stock to the MusclePharm founders and equity investors as
discussed above, immediately after the completion of the share exchange, the
Company had 26,070,838 shares issued and outstanding.
During the six months ended June 30, 2010, the Company's two founders and
executive officers surrendered an aggregate of 2,425,000 shares of common
stock. The surrendered shares were immediately re-issued to various
individuals who had provided services to the Company during its development,
and to certain athletes as a component to their endorsement agreements with
the Company. Absent market data, the fair value of the shares was determined
to be $0.54 per share based on conversion terms of convertible debt issuances
and considering other issuances of common stock including the private
placement as discussed in subsequent events below. As a result, for the six
months ended June 30, 2010, the Company recorded expenses of $1,039,500 with
$54,000 recorded in advertising and promotion expense and $985,500 recorded
in professional fees in the accompanying consolidated statement of
operations. In addition, $270,000 was recorded to services prepaid with
common stock as part of an unearned endorsement agreement. The endorsement
agreement begins on June 1, 2010 and expires on May 31, 2011, and as such
will be earned ratably over the term of the agreement. For the six months
ended June 30, 2010, the company recorded $22,500 of advertising and
promotion expense related to this endorsement agreement.
Also during the six months ended June 30, 2010, the Company issued 1,302,000
shares of common stock for services. As a result, for the six months ended
June 30, 2010, the Company recorded expenses of $833,040 with $822,640
recorded in advertising and promotion expense and $10,400 recorded in
professional fees in the accompanying consolidated statement of operations.
The advertising and promotion expense of $822,640 included $510,640 related
to endorsement agreements and $312,000 relates to stock issued to the
manufacturer and a customer to build relationships. In addition, $577,073
was recorded to services prepaid with common stock as part of unearned
endorsement agreements. Advertising and promotion expense will be recognized
ratably over the terms of the endorsement agreements. For the six months
ended June 30, 2010, the company recorded $115,037 of advertising and
promotion expense related to these endorsement agreements.
On May 5, 2010, the Company issued 30,000 shares of the Company's common
stock as consideration for an extension of the maturity date of the
uncollateralized promissory notes. The common stock was valued at the price
on the date of issuance which was $34,500.
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). As of June 30, 2010, the
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Company sold 90,000 shares under the 1,000,000 share private placement and
227,423 shares under the 300,000 share private placement for net proceeds of
$117,848 (net of offering costs of $6,750). On June 30, 2010, the Company's
Board of Directors increased the number of shares under the 300,000 share
private placement to 1,000,000 shares.
On April 16, 2010 the Company's board of directors authorized the sale of up
to 2,000,000 units at $.50 per unit. Each unit consists of one share of the
Company's common stock, and one and one-half stock purchase warrants. Each
warrant is exercisable into one share of restricted common stock at an
exercise price of $1.50 per share, and expires five years after issuance. As
of June 30, 2010, the Company has sold 450,000 units in connection with this
offering for total gross proceeds of $225,000 (less offering costs of
$25,750), which was allocated to the common stock and warrants based on their
relative fair values.
The holder of the Company's Series A Convertible Preferred Stock is helping
to facilitate this offering by selling free trading shares of the Company's
common stock, which it owns by conversions of the preferred stock as
discussed above, to the investors in the same amount and at the same price as
the Company is selling the units. Related to this offering, the holder of
the preferred stock had received gross proceeds of $225,000 from the sale of
450,000 shares of common stock.
Warrants
As discussed above, during the six months ended June 30, 2010, the company
issued common stock purchase warrants to acquire 675,000 shares of common
stock at $1.5 per share. The warrants were valued using the Black-Scholes
method. Under the Black-Scholes method using an expected life of 2.5 years,
volatility of 74.8% and a risk-free interest rate of 1.0% to 1.2%, the
Company determined the warrants had a fair value of $.44 as of the date of
the issuances. The relative fair value of the warrants of approximately
$72,457 was recorded as additional paid in capital.
A summary of warrant activity for the six months ended June 30, 2010 is as
follows:
Warrants
outstanding Weighted Average
and exercisable Exercise Price
--------------- ----------------
Warrants outstanding, January 1, 2010 - $ -
Warrants issued 675,000 1.50
Warrants expired/forfeited - -
------- -----
Warrants outstanding, June 30, 2010 675,000 $1.50
======= =====
NOTE 7 - STOCK BASED COMPENSATION
On February 1, 2010 the Company's board of directors and shareholders
approved the 2010 Stock Incentive Plan ("2010 Plan"). The 2010 Plan allows
the Company to grant incentive stock options, non-qualified stock options,
restricted stock awards, restricted stock units and stock appreciation rights
to key employees and directors of the Company or its subsidiaries,
consultants, advisors and service providers. Any stock option granted in the
form of an incentive stock option will be intended to comply with the
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requirements of Section 422 of the Internal Revenue Code of 1986, as amended.
Only stock options granted to employees qualify for incentive stock option
treatment. No incentive stock option shall be granted after February 1, 2020,
which is 10 years from the date the 2010 Plan was initially adopted. A stock
option may be exercised in whole or in installments, which may be cumulative.
Shares of common stock purchased upon the exercise of a stock option must be
paid for in full at the time of the exercise in cash or such other
consideration determined by the compensation committee. Payment may include
tendering shares of common stock or surrendering of a stock award, or a
combination of methods.
The 2010 Plan will be administered by the compensation committee. The
compensation committee has full and exclusive power within the limitations
set forth in the 2010 Plan to make all decisions and determinations regarding
the selection of participants and the granting of awards; establishing the
terms and conditions relating to each award; adopting rules, regulations and
guidelines; and interpreting the 2010 Plan. The Compensation Committee will
determine the appropriate mix of stock options and stock awards to be granted
to best achieve the objectives of the Plan. The 2010 Plan may be amended by
the Board or the compensation committee, without the approval of
stockholders, but no such amendments may increase the number of shares
issuable under the 2010 Plan or adversely affect any outstanding awards
without the consent of the holders thereof. The total number of shares that
may be issued shall not exceed 5,000,000, subject to adjustment in the event
of certain recapitalizations, reorganizations and similar transactions.
Stock options
On April 2, 2010 the Company's board of directors authorized the issuance of
a total of 2,767,500 stock purchase options. The grant consisted of 2,250,000
of non-qualified stock options and 517,500 incentive stock options. All the
stock options were issued to current employees, are exercisable at $.50 per
share, vest immediately, and expire on April 2, 2015. The fair value of each
option grant during the six months ended June 30, 2010 was estimated on the
grant date using the Black-Scholes option-pricing model with an expected life
of 2.5 years, volatility of 74.8% and a risk-free interest rate of 1.4%. The
weighted average fair value of the options granted in the six months ended
June 30, 2010 was $0.23. At June 30, 2010, all of the 2,767,500 stock
options were exercisable.
A summary of stock option activity for the six months ended June 30, 2010 is
as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Options outstanding, February 1, 2010 - $ -
Options granted 2,767,500 0.50
Options exercised - -
Options expired/forfeited - -
--------- -----
Options outstanding, June 30, 2010 2,767,500 $0.50
========= =====
For the six months ended June 30, 2010, compensation expense of $630,990 was
recorded related to the stock options.
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NOTE 8 - COMMITMENTS AND CONTINGENCIES
As a component of the Company's overall marketing strategy, it has entered
into various sponsorship and endorsement agreements with professional
athletes, fitness trainers, and other high profile individuals. These
agreements generally provide for payments to the athletes and trainers based
on pre-determined events in which the athlete or trainer agree to provide
exposure of the Company and its products through media exposure and coverage
of specific athletic events. Some agreements are not contingent upon the
completion of pre-determined events, and as such are expensed ratably over
the period of the agreement. During the six months ended June 30, 2010, the
Company recorded expenses of $1,001,443 related to these agreements which are
included in advertising and promotion expense in the accompanying
consolidated statements of operations. At June 30, 2010 the Company
estimates future obligations under its existing sponsorship and endorsement
agreements is approximately $1,130,500 assuming all contingencies contained
in the agreements occur, of which there can be no assurance. This estimate
does not include amounts for reimbursements for travel and expenses that are
included in certain of the agreements.
At June 30, 2010 the Company has accrued a liability of approximately
$171,339 representing delinquent payroll taxes. The Company plans to resolve
this liability with the appropriate agencies, but no resolution of these
matters has occurred as of the date of this report. A contingency exists
with respect to this matter, the ultimate resolution of which can not
presently be determined.
In the second quarter of 2010, the Company has executed an addendum to the
office lease agreement to provide additional office space and extend the
lease an additional three months through September 30, 2010 at a monthly rate
of $5,738. The office lease is personally guaranteed by an initial member.
In April 2010, the Company entered into a factoring agreement (the
"Agreement") with FT Trade Financial Corp ("FT Trade"). Under the Agreement
the Company sells its accounts receivables to FT Trade who in return advances
cash of approximately 85% of the total amount of the accounts receivable
factored. FT Trade retains 15% of the outstanding factored accounts
receivable as a reserve, which it holds until the customer pays the factored
invoice to FT Trade. The Company pays fees for this service to FT Trade. For
the three months ended June 30, 2010, the Company has recognized a loss on
the sale of accounts receivable of $5,196 and paid fees of $5,963 related to
the sale of approximately $266,880 of accounts receivables.
NOTE 9 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date which the
financial statements were available to be issued. In addition to events as
described elsewhere in this report, the following subsequent events are
noted.
In July 2010, 6,340 shares of convertible preferred stock were converted into
1,268,000 shares of the Company's common stock.
In July 2010, the Company sold 209,287 shares under the 300,000 share private
placement for proceeds of $73,250.
Subsequent to June 30, 2010, the Company issued 1,217,000 shares of common
stock for services valued at $1,260,350.
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Subsequent to June 30, 2010 the Company has entered into various sponsorship,
endorsements and advertising agreements. The Company estimates future
obligations under these agreements is approximately $1,090,000, assuming all
contingencies contained in the agreements occur, of which there can be no
assurance. This estimate does not include amounts for reimbursements for
travel and expenses that are included in certain of the agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical facts are
forward-looking statements such as statements relating to future operating
results, existing and expected competition, financing and refinancing sources
and availability and plans for future development or expansion activities and
capital expenditures. Such forward-looking statements involve a number of
risks and uncertainties that may significantly affect our liquidity and
results in the future and, accordingly, actual results may differ materially
from those expressed in any forward-looking statements. Such risks and
uncertainties include, but are not limited to, those related to effects of
competition, leverage and debt service financing and refinancing efforts, and
general economic conditions. The following discussion and analysis should be
read in conjunction with the financial statements and notes thereto included
elsewhere in this report.
Acquisition
On February 18, 2010, in accordance with a Securities Exchange Agreement
dated February 1, 2010, Tone in Twenty, a Nevada Corporation, acquired all
the outstanding equity and voting interests of Muscle Pharm, LLC
("MusclePharm"), a Colorado limited liability corporation formed on April 22,
2008), for an aggregate of 26,000,000 shares of our common stock. In
addition, pursuant to the terms and conditions of the Securities Exchange
Agreement ("share exchange"), MusclePharm paid $25,000 to the former
president of Tone in Twenty for his 366,662 shares of common stock, and these
shares were cancelled. Upon closing of the transaction, MusclePharm became a
wholly owned subsidiary of Tone in Twenty. Also concurrent with the closing
of the acquisition, the Tone in Twenty's President and Director issued his
resignation. The board of directors was reconstituted to consist of the two
original founders and initial members of MusclePharm. Following the share
exchange and related transactions, a total of 26,070,838 shares of Tone in
Twenty's common stock was issued and outstanding, with MusclePharm members
owning approximately 99.7% of the outstanding common stock. The share
exchange is being accounted for as a "reverse acquisition," as the members of
MusclePharm owned a majority of the outstanding shares of Tone in Twenty
common stock immediately following the share exchange and now control the
board of directors. Tone in Twenty was deemed to be the legal acquirer in
the reverse acquisition, while MusclePharm was deemed to be the accounting
acquirer. Also, as a result of the completion of the reverse acquisition,
Tone in Twenty amended its articles of incorporation to change its name to
MusclePharm Corporation (the "Company"), and also changed its fiscal year
from August 31 to December 31. Upon completion of the share exchange, the
operations of Tone in Twenty ceased.
The consolidated financial statements are presented as a continuation of the
financial statements of MusclePharm. As such, for all disclosures
referencing shares authorized, issued, outstanding, per share amounts and
other disclosures related to equity, amounts have been retroactively adjusted
to reflect the legal capital of the legal acquirer (Tone in Twenty).
-18-
Overview
We are a sports nutrition company. We currently manufacture and market eight
branded sports nutrition products, designed to meet the nutritional needs of
athletes of all experience levels. Our products, Assault[TM], Battle
Fuel[TM], Bullet Proof[R], Combat Powder[R], Energel Shot[TM], MuscleGel[TM],
Recon[R], and Shred Matrix[TM], are comprised of safe, naturally occurring
food supplement ingredients, including amino acids, herbs and proteins. Each
of our high-performance nutritional supplements was designed to safely and
naturally enhance the effects of exercise, repair muscles, and to nourish the
body to optimize overall health and fitness of the active individual.
All of the products we sell are sold under the MusclePharm brand, and are
designed and marketed to target athletes, body builders and health minded
individuals seeking a high degree of physical fitness. Our products fall into
the general definition of vitamins, minerals, herbs and dietary supplements
and are regulated by the U.S. Food and Drug Administration (FDA). Each
product undergoes the scrutiny of our 6-Stage Research and Testing Protocol,
involving our vast resources of scientific, clinical and real-world
expertise, to ensure the highest level of efficacy and quality possible.
Our Medical Advisory Team includes two of the leading sports nutrition
clinician/researchers in the world, who contribute directly to the
formulation and development and testing of all products. Our Chief Medical
Director and Formulator is Dr. Eric Serrano, MD; and our Chief Medical
Researcher is Dr. Jeffrey Stout, Ph.D., researcher and professor of exercise
physiology at the University of Oklahoma.
MusclePharm products are currently available through several distribution
channels throughout the U.S. and 120 countries worldwide. The larger
distribution channels include over 1000 GNC locations, over 400 Vitamin
Shoppes, the largest international sports nutrition distributors Sportika and
several independent sports nutrition retail outlets and fitness centers. Our
products are also available on over 100 Internet sites.
Our marketing strategy entails the branding of MusclePharm as the "must-have"
nutritional supplement line for serious, high performance athletes.
Endorsements have been completed with several Mixed Martial Arts fighters,
Rashad Evans and Lyoto Machida, bodybuilding, fitness professionals, and
current NFL notables, Joey Porter and Chris Johnson. Additionally,
endorsement agreements are currently being negotiated with several other
athletes of high-visibility and notoriety. We believe that top-level
athletes from all sports are viewed as leaders and role models to many
people. The objective of our athlete endorsement program is to build
consumer awareness and confidence in the MusclePharm brand to help drive
consumer demand for our products in retail outlets and health clubs.
At Musclepharm, we believe we are a look at the future where science meets
sports nutrition. From the laboratory to the playing field, our products are
held to the most rigorous standards, because the expectations of our
customers are high. Our products contain no banned substances, are 100%
hardcore, and proven effective. MusclePharm is currently in the approval
process for NSF certification, which will allow us to sell our products to
professional and college sports teams nationwide. Our manufacturing facility
is GMP compliant and EU certified and our processes stand up to the most
stringent industry standards. We firmly believe in our mission: to improve
our customer's lives, increase their ability to excel, utilize cutting-edge
science to develop the best nutritional supplements on the market, and to
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provide a safe option for athletes of all levels seeking to be the best
athlete they can be. We are MusclePharm, The Athlete's Company[TM].
Liquidity and Capital Resources
Our primary source of operating cash has been through the sale of equity and
through the issuance of convertible secured promissory notes and other short
term debt as discussed below.
At June 30, 2010, the Company had overdrawn bank accounts of $47,482 and a
working capital deficit of $3,526,390, compared to overdrawn bank accounts of
$17,841 and a working capital deficit of $1,223,074 at December 31, 2009.
The working capital decrease of $2,303,316 is primarily attributed to the
operating loss incurred for the six months ended June 30, 2010.
Cash used in operating activities was $1.6 million for the six months ended
June 30, 2010, as compared to cash used in operating activities of $0.6
million for the six months ended June 30, 2009. The increase in cash used in
operating activities for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009 was primarily the result of the net operating
loss for the current six month period.
Cash used in investing activities was $6,884 for the six months ended June
30, 2010, and represents purchases of various office furniture and equipment.
No purchases of furniture and equipment were made during the six months ended
June 30, 2009. We also maintain a website http://www.musclepharm.com),
designed for customers and investors. Future investments in equipment and
other fixed assets, as well as further development of our Internet presence
will largely depend on available capital resources.
Cash flows provided by financing activities were $1.6 million for the six
months ended June 30, 2010, as compared to cash flows provided by financing
activities of $0.6 million for the six months ended June 30, 2009.
In February 2010, we issued two Original Issue Discount Secured Promissory
Notes (the "OID Notes") to two accredited investors. The first OID Note was
issued on February 18, 2010 with a face value of $125,000 and maturity date
of May 18, 2010. The second Note was issued on February 26, 2010 with a face
value of $62,500 and a maturity of May 26, 2010. The OID Notes are secured
by all the Company's accounts receivable. The total proceeds from the
issuance of the OID Notes were $150,000. The discount of $37,500 was
amortized to interest expense over the life of the OID Notes. For the six
months ended June 30, 2010, $37,500 of the discount was amortized and is
included in interest expense in the accompanying consolidated statement of
operations. At June 30, 2010, we are in discussion with the OID Notes'
holders to extend the maturity dates.
During 2009 and the six months ended June 30, 2010, the Company sold
convertible secured promissory notes ("convertible notes") in the amount of
$1,258,000 (including $356,000 sold during the six months ended June 30,
2010),to various investors. All the convertible notes accrue interest at 8%
per annum and are convertible to common stock by the note holder under terms
designed to provide the holder with a dollar amount of common stock equal to
a designated percentage of the note amount plus any accrued interest, ranging
from 120% to 350%. All the Notes are collateralized by all the assets of the
Company and have maturity dates ranging from March 2010 to January 2011.
Convertible notes totaling $527,500 have matured as of June 2010 and are
currently in default. As of the date of this report, none of the note
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holders have presented demands for payment or conversion notices to the
Company.
During the six months ended June 30, 2010, convertible notes totaling
$253,500, together with $5,488 of accrued interest, and $91,789 of un-
accreted discounts on the convertible notes converted, were converted to
649,500 shares of the Company's common stock.
We have two unsecured notes payable with an investor in the aggregate of
$520,000. These notes bear interest at the rate of 8% per year and require no
periodic principal or interest payments. The notes mature on March 31, 2011
and June 29, 2010 at which times all unpaid principal and interest is due.
At June 30, 2010, the Company had two short term uncollateralized promissory
notes in the amount of $30,000. The uncollateralized promissory notes accrue
interest at 10% per annum require no periodic payments, and matured on March
2, 2010. On May 5, 2010, the Company issued 30,000 shares of common stock as
consideration for an extension of the maturity date of these notes to
September 2, 2010.
On April 16, 2010 the Company's board of directors authorized the sale of up
to 2,000,000 units at $.50 per unit. Each unit consists of one share of the
Company's common stock, and one and one-half stock purchase warrants. Each
warrant is exercisable into one share of restricted common stock at an
exercise price of $1.50 per share, and expires five years after issuance. As
of June 30, 2010, the Company has sold 450,000 units in connection with this
offering for total gross proceeds of $225,000 (less offering costs of
$25,750).
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,0000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). As of June 30, 2010, the
Company sold 90,000 shares under the 1,000,000 share private placement and
227,423 shares under the 300,000 share private placement for net proceeds of
$117,848 (net of offering costs of $6,750). On June 30, 2010, the Company's
Board of Directors increased the number of shares under the 300,000 share
private placement to 1,000,000 shares.
Results of Operations
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Revenues from the sale of products, net were $0.5 million for the three
months ended June 30, 2010 as compared to revenue from the sale of product
were $0.2 million for the three months ended June 30, 2009. Sales activities
during the three months ended June 30, 2010 were limited due to a change in
manufacturers over a seven week period for the powders and capsules. Sales
for the gels were limited due to capital constraints.
Cost of sales for the three months ended June 30, 2010 were $0.4 million or
77% of revenue as compared to $0.2 million or 65% of revenue for the three
months ended June 30, 2009. The cost of goods sold as percent of revenue
increase is due to the fluctuating costs with no corresponding increase to
the prices to customers to remain competitive in the market place. We expect
our gross margins on product sales to improve as the change of manufacturers
continues to be completed and we begin to realize savings offered by them for
quantity discounts, although there can be no assurance that will occur.
-21-
Operating Expenses for the three months ended June 30, 2010 were $3.0 million
as compared to $0.3 for the three months ended June 30, 2009. The $2.7
million increase is largely due to the increase in adverting of approximately
$1.6 million and salaries and benefits of approximately $0.9 million. For the
three months ended June 30, 2010, $0.6 million was included in salaries and
benefits for stock based compensation expense related to the stock options
issued. Also, included in the advertising and promotion was the value of
stock issued for services of $0.8 million.
Operating Loss for the three months ended June 30, 2010 was $2.9 million as
compared to $0.2 million for the three months ended June 30, 2009.
Interest expense of $0.3 million for the three months ended June 30, 2010 as
compared to $3,212 for the three months ended June 30, 2009. The increase in
interest expense primarily represents amortization of the debt discounts of
$0.3 million and interest on the original issue discount notes of $34,500.
Net Loss for the three months ended June 30, 2010 was $3.2 million or loss
per share of $.11 as compared to the net loss of $0.2 million loss per share
of $.01 for the three months ended June 30, 2009.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Revenues from the sale of products, net were $1.7 million for the six months
ended June 30, 2010 as compared to revenue from the sale of product were $0.4
million for the six months ended June 30, 2009. Sales activities during the
six months ended June 30, 2010 were limited due to a change in manufacturers
over a seven week period for the powders and capsules. Sales for the gels
were limited due to capital constraints.
Cost of sales for the six months ended June 30, 2010 were $1.2 million or 69%
of revenue as compared to $0.3 million or 65% of revenue for the six months
ended June 30, 2009. The cost of goods sold as percent of revenue increase
is due to the fluctuating costs with no corresponding increase to the prices
to customers to remain competitive in the market place. We expect our gross
margins on product sales to improve as the change of manufacturers continues
to be completed and we begin to realize savings offered by them for quantity
discounts, although there can be no assurance that will occur.
Operating Expenses for the six months ended June 30, 2010 were $5.7 million
as compared to $0.6 for the six months ended June 30, 2009. The $5.1 million
increase is largely due to the increase in adverting and promotion of
approximately $2.7 million, professional fees of approximately $1.2 million
and salaries and benefits of approximately $1.1 million. For the six months
ended June 30, 2010, $0.6 million was included in salaries and benefits for
stock based compensation expense related to the stock options issued. Also,
included in the advertising and promotion was the value of stock issued for
services of $1.9 million.
Operating Loss for the six months ended June 30, 2010 was $5.1 million as
compared to $0.4 million for the six months ended June 30, 2009.
Interest expense of $0.7 million for the six months ended June 30, 2010 as
compared to $3,939 for the six months ended June 30, 2009. The increase in
interest expense primarily represents amortization of debt discounts of $0.6
million and interest on the original issue discount notes of $34,500.
-22-
Net Loss for the six months ended June 30, 2010 was $5.8 million or loss per
share of $.21 as compared to the net loss of $0.4 million or loss per share
of $.02 for the six months ended June 30, 2009.
Inflation did not have a material impact on the Company's operations for the
period. Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ materially from those estimates. The Company's
significant estimates made in connection with the preparation of the
accompanying financial statements include allowance for doubtful accounts,
value of long lived assets and the valuation of stock options and warrants.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) promulgated under the Exchange Act). Disclosure controls and procedures
are designed to provide reasonable assurance that the information required to
be disclosed by the Company in reports that it files under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and to ensure that information
required to be disclosed by the Company is accumulated and communicated to
the Company's management as appropriate to allow timely decisions regarding
required disclosure. Based on their evaluation of our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report
on Form 10-Q, the Certifying Officers have concluded that due to certain
design deficiencies, the Company's disclosure controls and procedures are not
effective. The Company is currently reviewing those deficiencies and
formulating plans for remediation. Notwithstanding our conclusions, the
Certifying Officers do not believe that these deficiencies have resulted in
deficient financial reporting because the chief financial officer is aware of
his responsibilities under the SEC's reporting requirements and personally
certifies financial reports.
-23-
(b) Changes in Internal Control over Financial Reporting
On February 18, 2010 in accordance with a Securities Exchange Agreement
("share exchange") dated February 1, 2010, the Company completed a reverse
acquisition as discussed in more detail elsewhere in this report. As a
result of the reverse acquisition, all previous management and accounting
systems of the legal acquirer (Tone in Twenty) were replaced by the
management and accounting systems of the accounting acquirer (Muscle Pharm,
LLC). In addition to the Certifying Officers' conclusion that our disclosure
controls and procedures are not effective, management has identified the
following material weaknesses in the design of the Company's internal
controls over financial reporting. First, the Company has installed
accounting software that does not prevent erroneous or unauthorized changes
to previous reporting periods and does not provide an adequate audit trail of
entries made in the accounting software. Second, due to insufficient numbers
of personnel, certain duties including cash management and accounts
receivable have not been appropriately segregated. These material weaknesses
were first identified by our chief financial officer after the share exchange
and as a result of us becoming a public reporting company, we are discussing
a remediation plan for these control deficiencies and will implement such a
plan when resources allow.
(c) Limitations of any Internal Control Design
Our certifying officers do not expect that our disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute assurance that the objectives of the system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented if there exists in an
individual a desire to do so. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In May 2010, the Company entered into Subscription Agreements with accredited
investors in connection with the two private issuance and sales of 1,000,0000
shares of the Company's common stock at $.50 per share (the "1,000,000 share
private placement") and 300,000 shares of the Company's common stock at $.35
per share (the "300,000 share private placement"). As of June 30, 2010, the
Company sold 90,000 shares under the 1,000,000 share private placement and
227,423 shares under the 300,000 share private placement for net proceeds of
$117,848. On June 30, 2010, the Company's Board of Directors increased the
number of shares under the 300,000 share private placement to 1,000,000
shares. These shares were sold without registration under the Securities Act
of 1933, as amended (the "Act"), or state securities laws, in reliance on the
exemptions provided by Section 4(2) of the Act and Regulation D promulgated
thereunder. Because the common stock has not been registered, such shares
may not be sold, transferred, assigned or otherwise dispose of by the
investors absent registration or an applicable exemption from registration
requirements, such as the exemption afforded by Rule 144 under the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) or Rule 15d-14(a) - Filed herewith electronically
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) or Rule 15d-14(a) - Filed herewith electronically
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MUSCLEPHARM CORPORATION
Date: August 16, 2010 By:/s/ Brad J. Pyatt
Brad J. Pyatt, Chief Executive Officer
By:/s/ Larry Meer
Larry Meer, Chief Financial Officer
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