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 March 31, 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)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On May 14, 2010, there were
29,384,038 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
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated financial statements (unaudited):
Balance sheets ............................................ 3
Statements of operations .................................. 4
Statements of cash flows .................................. 5
Statements of changes in stockholders' deficit............. 6
Notes to unaudited consolidated financial statements ...... 7-19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 26
Item 4. Controls and Procedures .................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 27
Item 1A. Risk Factors................................................ 27
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 27
Item 3. Defaults Upon Senior Securities ............................ 27
Item 4. Submission of Matters to a Vote of Security Holders ........ 27
Item 5. Other Information .......................................... 27
Item 6. Exhibits ................................................... 28
Signatures ................................................. 29
2
MUSCLEPHARM CORPORATION
Consolidated Balance Sheets
December 31,
March 31, 2010 2009
-------------- ------------
(unaudited)
ASSETS
Cash $ - $ -
Accounts receivable, net of allowance of
$2,710 and $821 on March 31, 2010 and
December 31, 2008, respectively 434,893 111,476
Inventory 58,056 4,245
Deposits on product - 32,115
Prepaid expenses and other current assets 63,966 76,686
----------- -----------
Total Current Assets 556,915 224,522
Fixed Assets, net of accumulated
depreciation of $7,119 and $5,008 on
March 31, 2010 and December 31, 2009,
respectively (Note 2) 31,349 32,810
Website, net of accumulated amortization
of $5,413 and $4,457 on March 31, 2010
and December 31, 2009, respectively
(Note 2) 6,049 7,005
Security Deposits 4,933 2,665
----------- -----------
Total Assets $ 599,246 $ 267,002
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 1,316,045 $ 765,534
Accrued liabilities 305,485 103,519
Overdrawn bank accounts 41,734 17,841
Customer deposits 196,516 15,018
Due to related parties (Note 4) 46,205 85,820
Notes payable (Notes 4 and 5) 195,000 30,000
Original issue discount notes payable (Note 5) 165,972 -
Convertible notes payable, net of discount
of $458,396 and $467,636 on March 31, 2010
and December 31, 2009, respectively (Note 6) 642,604 429,864
----------- -----------
Total Current Liabilities 2,909,561 1,447,596
----------- -----------
Commitments and contingencies (Notes 1,
2, 3, 4, 5, 6, 7, 8, 9 and 10)
Stockholders' deficit: (Note 1)
Series A convertible preferred stock, $.001
par value, 833,333 shares authorized,
76,667 shares issued and outstanding at
March 31, 2010 77 -
Common stock, $.001 par value, 195,000,000
shares authorized, 27,850,288 and 26,000,000
shares issued and outstanding at March 31,
2010 and December 31, 2009, respectively 27,850 26,000
Additional paid in capital 2,847,576 1,099,508
Services prepaid with common stock (270,000) -
Accumulated deficit (4,915,818) (2,306,102)
----------- -----------
Total stockholders' deficit (2,310,315) (1,180,594)
----------- -----------
Total Liabilities and Stockholders' deficit $ 599,246 $ 267,002
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
MUSCLEPHARM CORPORATION
Consolidated Statements of Operations
Three months ended March 31,
2010 2009
----------- -----------
(unaudited)
Sales of product, net of $61,867 and
$112,314 allowances and discounts for
March 31, 2010 and 2009, respectively $ 1,258,588 $ 184,483
Cost of sales (873,632) (211,806)
----------- -----------
Gross margin (loss) 384,956 (27,323)
Operating Expenses:
Advertising and promotion 1,195,696 64,072
Bad debt 1,890 3,090
Service charges and fees 9,882 2,811
Salaries and labor 226,139 26,803
Depreciation and amortization 3,065 1,626
Insurance 22,690 3,951
Information technology 28,629 6,769
Travel, meetings and entertainment 28,720 24,338
Occupancy, telephone and utilities 30,302 4,956
Office and warehouse supplies 4,307 4,225
Professional fees 1,084,583 6,393
Other 709 -
----------- -----------
Total Operating Expenses 2,636,612 149,034
----------- -----------
Operating (Loss) (2,251,656) (176,357)
Interest (expense) (358,060) (727)
----------- -----------
Net (Loss) $(2,609,716) $ (177,084)
=========== ===========
Basic and diluted loss per share $ (0.10) $ (0.01)
=========== ===========
Weighted average shares outstanding,
basic and diluted 26,113,000 25,829,710
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
MUSCLEPHARM CORPORATION
Consolidated Statements of Cash Flows
Three months ended March 31,
2010 2009
----------- -----------
(unaudited)
Operating Activities
Net Loss $(2,609,716) $ (177,084)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 3,067 1,626
Bad debt 1,889 3,090
Common stock issued for services 1,039,500 -
Accretion of discount on convertible notes
payable 318,161 -
Accretion of discount on original issue
discount notes payable 15,972 -
Cash provided by (used in) changes in
operating assets and liabilities:
(Increase) in accounts receivable (325,306) (36,446)
Decrease (Increase) in inventory (53,811) 8,459
Decrease in deposits 32,115 45,815
Decrease (Increase) in prepaid expenses 12,720 4,410
(Increase) in security deposits paid (2,268) -
Increase in accounts payable and accrued
liabilities 756,658 84,368
Increase (decrease) in overdrawn bank
accounts 23,893 (3,854)
Increase in customer deposits 181,498 3,099
Increase (decrease) in amounts due to
related parties (14,615) 41,937
----------- -----------
Net cash (used in) operating activities (620,243) (24,580)
----------- -----------
Investing Activities
Purchases of fixed assets and website (650) -
----------- -----------
Net cash (used in) investing activities (650) -
----------- -----------
Financing Activities
Proceeds from issuance of original issue
discount notes payable 150,000 -
Proceeds from issuance of short term notes
payable 140,000 30,000
Proceeds from issuance of convertible notes
payable 356,000 -
Capital contributions - 5,000
Recapitalization resulting from merger (25,107) -
----------- -----------
Net cash provided by financing activities 620,893 35,000
----------- -----------
Net increase in cash - 10,420
Beginning cash - 32
----------- -----------
Ending cash $ - $ 10,452
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 754 $ 477
=========== ===========
Cash paid for income tax $ - $ -
=========== ===========
Supplemental Schedule of Non-cash Financing
and Investing Activities:
Allocation of beneficial conversion features
on convertible notes payable to additional
paid in capital $ 366,000 $ -
=========== ===========
Conversions of convertible debt and accrued
interest $ 99,603 $ -
=========== ===========
Conversion of preferred stock $ 6 $ -
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
MUSCLEPHARM CORPORATION
Consolidated Statement of Changes in Stockholders' Deficit
Services
Prepaid
Additional with
Preferred Stock Common Stock Paid-in Common Accumulated
Shares Amount Shares Par Value Capital Stock Deficit Total
------ ------ ---------- --------- ---------- ----------- ------------ -----------
Balance, December 31, 2008 - $ - 25,828,950 $ 25,829 $ 448,671 $ - $ (392,629) $ 81,871
Sales of common stock
(Note 7) - - 171,050 171 87,329 - - 87,500
Capital contribution (Note 7) - - - - 16,508 - - 16,508
Allocation of beneficial
conversion features on
convertible notes payable
(Note 6) - - - - 547,000 - - 547,000
Net loss for the year ended
December 31, 2009 - - - - - - (1,913,473) (1,913,473)
------ ------ ---------- --------- ---------- --------- ----------- -----------
Balance, December 31, 2009 - $ - 26,000,000 $ 26,000 $1,099,508 $ - $(2,306,102) $(1,180,594)
Recapitalization resulting
from merger (Note 1) 83,333 83 70,838 71 (25,262) - - (25,108)
Surrender of common stock
for re-distribution
(Note 7) - - (2,425,000) (2,425) 2,425 - - -
Common stock re-issued for
services (Note 7) - - 2,425,000 2,425 1,307,075 (270,000) - 1,039,500
Allocation of beneficial
conversion features on
convertible notes payable
(Note 6) - - - - 366,000 - - 366,000
Conversions of convertible
notes payable (Note 6) - - 446,250 446 99,157 - - 99,603
Conversion of preferred
stock (Note 7) (6,666) (6) 1,333,200 1,333 (1,327) - - -
Net loss for the three
months ended March 31,
2010 - - - - - - (2,609,716) (2,609,716)
------ ------ ---------- --------- ---------- --------- ----------- -----------
Balance, March 31, 2010
(Unaudited) 76,667 $ 77 27,850,288 $ 27,850 $2,847,576 $(270,000) $(4,915,818) $(2,310,315)
====== ===== ========== ========= ========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
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MUSCLEPHARM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010 and 2009
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
On February 18, 2010, in accordance with a Securities Exchange Agreement
dated February 1, 2010, the Company (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 the Company for his 366,662 shares of the Company's common
stock, and these shares were cancelled. Upon closing of the transaction,
MusclePharm became a wholly owned subsidiary of the Company. Also concurrent
with the closing of the acquisition, the Company'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
the Company's common stock was issued and outstanding, with MusclePharm
members owning approximately 99.7% of our 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 Company's board of directors. The Company 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, the Company amended its articles of incorporation to change its
name to MusclePharm Corporation, and also changed its fiscal year from August
31st to December 31st. 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).
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].
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
generally accepted accounting principles in the United States of America and
have been consistently applied in the preparation of the financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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
7
amounts of revenues and expenses during the reported period. Actual results
could differ materially from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, 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.
As of March 31, 2010 and December 31, 2009, the Company had $41,734 and
$17,841, respectively, overdrawn in its bank accounts. These amounts are
shown as a current liability on the balance sheet.
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 and from customers primarily located in the
United States.
For the three months ended March 31, 2010, the Company had made sales to 16
customers. Three of these customers represent approximately 79% of the
Company's gross sales during the period.
At March 31, 2010 the Company was using one vendor to manufacture the
Company's entire 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
may not be collectible. Allowances, if any, for uncollectible accounts
receivable are determined based upon information available and historical
experience. As of March 31, 2010 the allowance for accounts receivable was
$2,710 compared to an allowance for accounts receivable of $821 as of
December 31, 2009.
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.
8
DEPOSITS
As of March 31, 2010 and December 31, 2009 the Company had a balance of $-0-
and $32,115, respectively, as deposits on products to be manufactured.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated useful life of each type of asset. Maintenance and repairs are
charged to expense as incurred; improvements and betterments are capitalized.
Upon retirement or disposition, the related costs and accumulated
depreciation are removed from the accounts, and any resulting gains or losses
are credited or charged to income. Depreciation totaled $2,111 and $671 for
the three months ended March 31, 2010 and 2009, respectively.
Below is a summary of property and equipment:
Estimated March 31, December 31,
Asset Type Useful Life 2010 2009
---------- ----------- --------- ------------
Displays 5 $ 32,057 $ 32,057
Furniture and equipment 5 6,411 5,761
-------- --------
Subtotal 38,468 37,818
Less accumulated depreciation (7,119) (5,008)
-------- --------
Net $ 31,349 $ 32,810
======== ========
WEBSITE DEVELOPMENT COSTS
Website development costs representing capitalized costs of design,
configuration, coding, installation, and testing of the Company's website are
capitalized until initial implementation. Upon implementation, the Company
began amortizing the cost over its estimated useful life of three years using
the straight-line method. Accumulated amortization at March 31, 2010 and 2009
were $5,413 and $1,592, respectively. Amortization expense for the both
periods ended March 31, 2010 and 2009 were $955. Ongoing website post-
implementation costs of operation, including training and application
maintenance, are charged to expense as incurred.
LONG-LIVED ASSETS
The Company's primary long-lived assets are property and equipment and
website development. 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 March 31, 2010.
FAIR VALUE DETERMINATION
Financial instruments consist of cash, accounts, 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.
9
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.
COMPREHENSIVE INCOME
Financial Accounting Standards Board ("FASB") Accounting Standards
Codification (the "ASC") Topic 220, "Comprehensive Income," provides guidance
for reporting and display of comprehensive income, its components and
accumulated balances. For the three months ended March 31, 2010 and 2009,
there were no differences between reported net income and comprehensive
income.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Financial Accounting Standards Board ("FASB") Accounting Standards
Codification (the "ASC") Topic 815, "Derivatives and Hedging," provides
guidance for disclosure of derivative instruments and hedging activities.
During the periods covered by the financial statements the Company did not
have any derivative financial instruments and did not participate in hedging
activities.
STOCK BASED COMPENSATION
Financial Accounting Standards Board ("FASB") Accounting Standards
Codification (the "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.
ADVERTISING
The Company expenses the cost of advertising when incurred. Advertising
expenses are included with advertising and promotions in the accompanying
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.
During 2009 and 2010, 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,
sample expense and discounts provided. During the three months ended March
31, 2010, the Company recognized gross sales of $1,320,455, but also granted
discounts and allowances of $61,687, for net sales of $1,258,588. During the
three months ended March 31, 2009, the Company recognized gross sales of
$296,797, but also granted discounts and allowances of $112,314, for net
sales of $184,483.
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
10
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, a Nevada corporation which
had a fiscal year ending August 31st. MusclePharm is deemed to be the
accounting acquirer in the merger, while Tone in Twenty is deemed the legal
acquirer. As such, the Company subsequently changed the fiscal year of the
combined entity to December 31st. 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 net 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
purchase warrants or other financial instruments considered to be common
stock equivalents.
At both March 31, 2010 and 2009 the Company had no outstanding stock options,
stock purchase warrants or other financial instruments considered to be
common stock equivalents. As such, basic and diluted earnings per share are
equal.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB's Accounting Standards Codification is effective for all interim and
annual financial statements issued after September 15, 2009. The ASC is now
the single official source of authoritative, nongovernmental generally
accepted accounting principles (GAAP) in the United States. The historical
GAAP hierarchy was eliminated and the ASC became the only level of
authoritative GAAP, other than guidance issued by the Securities and Exchange
Commission. Our accounting policies were not affected by the conversion to
ASC. However, we have conformed references to specific accounting standards
in these notes to our consolidated financial statements to the appropriate
section of ASC.
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
11
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.
There were various other accounting standards and interpretations issued
during 2010 and 2009, none of which are expected to have a material impact on
the Company's consolidated financial position, operations, or cash flows.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America,
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 for the three months ended March 31, 2010 and the year
ended December 31, 2009 of $2,609,716 and $1,913,473, respectively, 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 - DUE TO RELATED PARTIES
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 March 31, 2010 and December 31, 2009, the Company owed $8,556 and $27,929,
respectively on these aforementioned credit cards. The balance owed at March
31, 2010 represents an amount owed to the Company's President. The Company
does not plan to use such credit in the future.
During the year ended December 31, 2009 an investor paid various legal and
accounting fees and other administrative expenses on behalf of the company
totaling $32,891. The advances from the investor are uncollateralized, bear
no interest and are due on demand. As of March 31, 2010 no payments have
been made on this advance.
In December 2009 a company controlled by an investor advanced the Company
$25,000 for working capital. And during the three months ended March 31,
2010 this investor advanced the Company an additional $140,000 for working
capital. On March 31, 2010 the non-interest bearing, due on demand advances
were converted to a note payable in the amount of $165,000. The note bears
interest at the rate of 8% per year, requires no periodic principal or
12
interest payments, and matures on March 31, 2011 at which time all unpaid
principal and interest is due.
NOTE 5 - ORIGINAL ISSUE DISCOUNT NOTES AND NOTES PAYABLE
In February 2010 the Company issued two Original Issue Discount Secured
Promissory Notes ("Note") to two accredited investors as defined in
Regulation D under the Securities Act of 1933, as amended. The first 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 Notes are secured
by all the Company's accounts receivable. The total proceeds from the
issuance of the Notes were $150,000. The discount of $37,500 is being
amortized to interest expense over the life of the Notes. For the three
months ended March 31, 2010, total of $15,972 of the discount was amortized
and is included in interest expense in the accompanying statement of
operations.
As discussed in Note 4 above, in December 2009 a company controlled by an
investor advanced the Company $25,000 for working capital. And during the
three months ended March 31, 2010 this investor advanced the Company an
additional $140,000 for working capital. On March 31, 2010 the non-interest
bearing, due on demand advances were converted to a note payable in the
amount of $165,000. The note bears interest at the rate of 8% per year,
requires no periodic principal or interest payments, and matures on March 31,
2011 at which time all unpaid principal and interest is due.
At March 31, 2010, the Company had $30,000 in short term working capital
loans represented by two uncollateralized promissory notes issued in March
2009. The notes require no periodic payments, and accrue interest at 10% per
annum. The notes matured on March 2, 2010. The Company had been in
discussions with the note holders to acquire extensions of the maturity date,
and on April 22, 2010 the Company's board of directors authorized the
issuance of a total of 30,000 shares of common stock as consideration for an
extension of the maturity date of the notes to September 2, 2010. The shares
were subsequently issued and accepted by the note holders.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
During the three months ended March 31, 2010 and the year ended December 31,
2009 the Company sold to various investors a total of $1,258,500 of
convertible secured promissory notes, of which $5,000 was subsequently repaid
to one note holder in December 2009. All the notes accrue interest at 8% per
annum. At March 31, 2010 the total interest accrued on the notes, net of
amounts previously converted, was $32,962. The notes 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 these terms are considered beneficial conversion
features, and as such a total of $913,000 representing the intrinsic value of
the beneficial conversion features has been allocated to members' equity and
is reflected as a discount to the amount of the note amounts which is being
accreted to interest expense over the term of the notes. For the three
months ended March 31, 2010 a total of $318,161 was accreted and is included
in interest expense in the accompanying financial statements. No discount
accretion was incurred for the three months ended March 31, 2009. All the
Notes are collateralized by all the assets of Muscle Pharm, LLC.
During the three months ended March 31, 2010, convertible notes totaling
$152,500, together with $4,182 of accrued interest, and $57,079 of un-
accreted discounts on the notes converted, were converted to 446,250 shares
of the Company's common stock.
13
The following table summarizes the Company's convertible notes payable at
March 31, 2010:
Six convertible secured promissory notes maturing
in March 2010, interest accruing at 8%, convertible
at the rate of 120% $ 370,000
Three convertible secured promissory notes maturing
in May 2010, interest accruing at 8%, convertible at
the rate of 150% 15,000
Convertible secured promissory note maturing in
June 2010, interest accruing at 8%, convertible at
the rate of 120% 40,000
Two convertible secured promissory notes maturing
in June 2010, interest accruing at 8%, convertible
at the rate of 150% 12,500
Two convertible secured promissory notes maturing
in June 2010, interest accruing at 8%, convertible
at the rate of 200% 107,500
Six convertible secured promissory notes maturing
in July 2010, interest accruing at 8%, convertible
at the rate of 200% 95,000
Fifteen convertible secured promissory notes maturing
in August 2010, interest accruing at 8%, convertible
at the rate of 200% 128,500
Convertible secured promissory note maturing in
August 2010, interest accruing at 8%, convertible at
the rate of 300% 10,000
Convertible secured promissory note maturing in
September 2010, interest accruing at 8%, convertible
at the rate of 200% 2,500
Two convertible secured promissory notes maturing in
December 2010, interest accruing at 8%, convertible
at the rate of 200% 225,000
Convertible secured promissory notes maturing in
January 2011, interest accruing at 8%, convertible
at the rate of 200% 95,000
-----------
Total convertible secured promissory notes 1,101,000
Less discount (458,396)
-----------
Total convertible secured promissory notes, net
of discount $ 642,604
-----------
Six convertible notes totaling $370,000 matured in March 2010 and are
currently in default. As of the date of this report, none of these note
holders have presented demands for payment or conversion notices to the
Company.
14
NOTE 7 - STOCKHOLDERS' DEFICIT
MUSCLEPHARM FOUNDERS AND INITIAL INVESTORS
There were two initial founders of the Company, 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 the year ended December 31, 2009 one of the initial
members forgave $16,508 of amounts previously advanced to the Company, which
was recorded as a capital contribution at December 31, 2009.
During 2008 and 2009, the Company 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 completed on February 18, 2010,
which is discussed further elsewhere in this report. Upon completion of the
share exchange, the original founders of MusclePharm received 23,377,782
shares of the Company's common stock, with the other equity investors
receiving a total of 2,622,218 shares of the Company'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
The Company has authorized a total of 833,333 shares of Series A Convertible
Preferred Stock ("Series A"), par value $.001, of which 76,667 shares are
issued and outstanding at March 31, 2010. The shares 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
Series A 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. At March 31,
2010, the 76,667 outstanding shares of the Series A Convertible Preferred
Stock were convertible into 15,333,400 shares of common stock (without giving
effect to the aforementioned limitation on conversion).
On March 16, 2010 the Company filed a Post Effective Amendment to the S-1
Registration Statement listing Bishop Equity Partners LLC as the owner of the
Series A, and the Post Effective Amendment was declared effective on March
30, 2010. During the three months ended March 31, 2010, 6,666 shares of
Series A were converted into 1,333,200 shares of common stock.
COMMON STOCK
The Company has authorized 195,000,000 shares of $.001 par value common
stock.
Immediately prior to the share exchange completed on February 18, 2010 as
discussed in Note 1, the Company had 437,500 shares issued and outstanding.
Concurrent with the share exchange, the Company purchased a total of 366,662
shares of the outstanding common stock owned by a prior executive of the
Company 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
15
after the completion of the share exchange, the Company had 26,070,838 shares
issued and outstanding.
During the quarter ended March 31, 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 such, a total of
$1,039,500 was charged to operations and included in the Statement of
Operations for the three months ended March 31, 2010 as $54,000 to
Advertising and promotion expense and $985,500 to Professional fees. An
additional $270,000 was allocated to Services prepaid with common stock as
part of an unearned endorsement agreement. The endorsement agreement begins
on June 1, 2010 and expires automatically on May 31, 2011, and as such will
be earned ratably over the term of the agreement and will be charged to
operations evenly over the term of the agreement at the rate of $22,500 per
month.
Giving effect to the conversions of certain convertible notes and preferred
stock, both as discussed above, an additional 1,779,450 shares were issued
during the three months ended March 31, 2010 resulting in a total of
27,850,288 shares issued and outstanding at March 31, 2010.
2010 STOCK INCENTIVE PLAN
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
requirements of Section 422 of the Internal Revenue Code of 1986, as amended.
Only 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 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 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 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 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 Five Million (5,000,000), subject to adjustment in
the event of certain recapitalizations, reorganizations and similar
transactions.
16
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.
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 earned ratably over the
period of the agreement. During the three months ended March 31, 2010
Company paid $625,214 in sponsorships and related fees. For the year ended
December 31, 2009 the Company paid $571,232 in sponsorships and related fees.
These payments are included in the Statements of Operations in advertising
and promotion expense. At March 31, 2010 the Company estimates future
obligations under its existing sponsorship and endorsement agreements is
approximately $646,000, 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.
Subsequent to March 31, 2010, the Company entered into additional sponsorship
and endorsement agreements. The Company estimates future obligations under
these agreements is approximately $545,000. This estimate does not include
amounts for reimbursements for travel and expenses that are included in
certain of the agreements.
At March 31, 2010 the Company has accrued a liability of approximately
$106,000 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 April 2009, the Company signed a 13 month lease for warehouse space, which
is personally guaranteed by a director. The base rate is $818 per month. In
September 2009, a six month office lease was signed at a base rate of $1,458
month. The Company has executed an addendum to the office lease agreement to
provide additional office space and extend the lease an additional six months
through June 2010 at a monthly rate of $3,950. The office lease is also
personally guaranteed by an initial member.
NOTE 9 - RELATED PARTY TRANSACTIONS
There were two initial members of the Company when it was formed as a limited
liability company on April 22, 2008. Mr. Brad Pyatt, received an initial 60%
interest in exchange for his contribution of formulations for potential
products, contacts with GNC Canada and other potential customers, as well as
contacts with professional athletes. Mr. Cory Gregory received a 40%
membership interest in exchange for his contacts including potential
distributors, professional athletes and potential investors. Neither of the
two initial members contributed any cash and no accounting value was placed
on their respective contributions. Upon completion of the share exchange on
February 18, 2010, Mr. Pyatt assumed the position of President and Chief
Executive Officer, and Mr. Gregory assumed the position of Executive Vice
17
President. Both executives were also appointed to the board of directors
effective with the completion of the share exchange.
Immediately after the completion of the share exchange, Mr. Pyatt and Mr.
Gregory controlled approximately 90% of the issued and outstanding common
stock. Since the completion to the share exchange, Mr. Pyatt has assumed the
title of Chief Executive Officer, and Mr. Gregory has assumed the title of
President.
Neither executive has an employment agreement with the Company. For the year
ended December 31, 2009 payments totaling approximately $152,000 were paid to
the two executives. The payments were made as compensation for management
services provided to the Company and are included in salaries and labor in
the accompanying Statements of Operations. During the three months ended
March 31, 2010, the Company initiated base salaries for these two executives
in the annual amounts of approximately $200,000 for Mr. Pyatt, and $60,000
for Mr. Gregory.
For the year ended December 31, 2009, approximately $38,000 was paid to two
initial members' wives also for various administrative services. No such
payments were made during the three months ended March 31, 2010, and the
Company has no plans to utilize these resources in the future.
During the year ended December 31, 2009, a company controlled by the
Company's President purchased $2,603 of the Company's products. As of
December 31, 2009, the customer owed a balance of $950 which was subsequently
collected in January 2010. For the three months ended March 31, 2010 his
company purchased $1,500 of the Company's products, all of which was
collected in March 2010.
NOTE 10 - 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.
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 May 17, 2010, the Company has sold 375,000 units in connection with this
offering for total gross proceeds of $187,500. The holder of the Company's
Series A Convertible Preferred Stock has agreed to help 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 in Note 7, to the
investors in the same amount and at the same price as the Company is selling
the units. For example, if an investor desires to purchase 50,000 units of
common stock and warrants for $25,000, he will essentially be purchasing from
the Company 50,000 restricted shares of common stock, together with warrants
to purchase an additional 75,000 shares of common stock at a price of $1.50
per share. The investor would also purchase from the holder of the preferred
stock, 50,000 free trading shares of the Company's common stock at a price of
$.50 per share. Relative to this offering, the holder of the preferred stock
had received gross proceeds of $187,500 from the sale of 375,000 shares of
common stock. The holder has also loaned to the Company a total of $140,000
of its proceeds from this offering on a short term basis. The holder loaned
these funds voluntarily, and there was no agreement requiring it to loan the
money, and there are no commitments that the holder of the preferred stock
will make any future loans to the Company if it is successful in selling more
shares of its common stock in this offering.
18
Subsequent to March 31, 2010 convertible notes payable with value of $11,042,
net of discount of $6,458, were converted to 28,750 shares of the Company's
common stock.
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.
Subsequent to March 31, 2010 the Company has entered into various sponsorship
and endorsement agreements. The Company estimates future obligations under
these agreements is approximately $544,000, 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, and is in addition to the
future commitments disclosed in Note 8.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, the Company (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 the Company for his 366,662 shares of the Company's common
stock, and these shares were cancelled. Upon closing of the transaction,
MusclePharm became a wholly owned subsidiary of the Company. Also concurrent
with the closing of the acquisition, the Company'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
the Company's common stock was issued and outstanding, with MusclePharm
members owning approximately 99.7% of our 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 Company's board of directors. The Company was deemed to be the legal
acquirer in the reverse acquisition, while MusclePharm was deemed to be the
19
accounting acquirer. Also, as a result of the completion of the reverse
acquisition, the Company amended its articles of incorporation to change its
name to MusclePharm Corporation, and also changed its fiscal year from August
31st to December 31st. 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).
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. including over 1000 GNC locations, over 400
Vitamin Shoppes, and several independent sports nutrition retail outlets and
fitness centers. Our products are also available on over 100 Internet sites
and in approximately 20 foreign countries through international distributors.
We are also in negotiations with one of the largest international sports
nutrition distributors Sportika, which would extend our reach to
approximately 120 countries worldwide.
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,
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.
20
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
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 March 31, 2010, the Company had overdrawn bank accounts of $(41,734) and a
working capital deficit of $(2,352,646), 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 $(1,129,572) is primarily attributed
to the operating loss incurred during the three months ended March 31, 2010.
Cash used in operating activities was $(620,243) for the three months ended
March 31, 2010, as compared to cash used in operating activities of $(24,580)
for the three months ended March 31, 2009. The increase in cash used in
operating activities for the three months ended March 31, 2010 compared to
the three months ended March 31, 2009 was primarily the result of the net
operating loss for the current three month period.
Because of our limited availability of credit we have depended from time to
time on cash advances and credit lines from various related parties including
the two original founders and their family members, and other equity holders.
As of March 31, 2010 all amounts previously advanced from family members had
been repaid. During the year ended December 31, 2009 an investor paid
various legal and accounting fees and other administrative expenses on behalf
of the company totaling $32,891. Also during the year ended December 31,
2009 a shareholder advanced the Company $4,758 to pay for certain operating
expenses, and the Company's President also advanced the Company $8,556 for
various purchases made on his personal credit card on behalf of the Company.
All advances are uncollateralized, bear no interest and are due on demand.
As of March 31, 2010 no payments have been made on these advances. These
advances are reflected in the increases in amounts due to related parties.
In December 2009 a company controlled by an investor advanced the Company
$25,000 for working capital, and during the three months ended March 31, 2010
this investor advanced the Company an additional $140,000 for working
capital. On March 31, 2010 the non-interest bearing, due on demand advances
were converted to a note payable in the amount of $165,000. The note bears
interest at the rate of 8% per year, requires no periodic principal or
interest payments, and matures on March 31, 2011 at which time all unpaid
principal and interest is due.
Cash used in investing activities was $(650) for the three months ended March
31, 2010, and represents purchases of various office furniture and equipment.
No purchases of furniture and equipment were made during the three months
ended March 31, 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.
21
Cash flows provided by financing activities were $620,893 for the three
months ended March 31, 2010, as compared to cash flows provided by financing
activities of $35,000 for the three months ended March 31, 2009.
In February 2010 we issued two Original Issue Discount Secured Promissory
Notes ("Note") to two accredited investors as defined in Regulation D under
the Securities Act of 1933, as amended. The first 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 Notes are secured by all the
Company's accounts receivable. The total proceeds from the issuance of the
Notes were $150,000. The discount of $37,500 is being amortized to interest
expense over the life of the Notes. For the three months ended March 31,
2010, total of $15,972 of the discount was amortized and is included in
interest expense in the accompanying statement of operations.
As discussed above, in December 2009 a company controlled by an investor
advanced the Company $25,000 for working capital, and during the three months
ended March 31, 2010 this investor advanced the Company an additional
$140,000 for working capital. On March 31, 2010 the non-interest bearing,
due on demand advances were converted to a note payable in the amount of
$165,000.
During the three months ended March 31, 2010 and the year ended December 31,
2009 the Company sold to various investors a total of $1,258,500 (including
$356,000 sold during the three months ended March 31, 2010), of convertible
secured promissory notes, of which $5,000 was subsequently repaid to one note
holder in December 2009. All the notes accrue interest at 8% per annum. The
notes 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 these terms are considered
beneficial conversion features, and as such a total of $913,000 representing
the intrinsic value of the beneficial conversion features has been allocated
to members' equity and is reflected as a discount to the amount of the note
amounts which is being accreted to interest expense over the term of the
notes. All the Notes are collateralized by all the assets of Muscle Pharm,
and have maturity dates ranging from March 2010, to January 2011. Six of the
convertible notes totaling $370,000 matured in March 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.
During the three months ended March 31, 2010, convertible notes totaling
$152,500, together with $4,182 of accrued interest, and $57,079 of un-
accreted discounts on the notes converted, were converted to 446,250 shares
of the Company's common stock.
In March 2009, we received $30,000 in short term working capital loans from
non-affiliated third parties evidenced by two uncollateralized promissory
notes each in the amount of $15,000. The notes require no periodic payments,
accrue interest at 10% per annum, and matured in March 2010. We had been in
discussions with the note holders to acquire extensions of the maturity date,
and on April 22, 2010 the Company's board of directors authorized the
issuance of a total of 30,000 shares of common stock as consideration for an
extension of the maturity date of the notes to September 2, 2010. The shares
were subsequently issued and accepted by the note holders.
During the quarter ended March 31, 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,
22
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 the average conversion price of all
outstanding convertible debt. Of the total common stock shares distributed,
500,000 shares were provided to a BMX athlete and television personality
under an endorsement agreement to provide general endorsement services
beginning on June 1, 2010 and terminating on May 31, 2011. As such the
shares are considered unearned, and therefore the $270,000 value of the
shares are included on the balance sheet as "Services prepaid with common
stock" which will be amortized over the term of the agreement beginning in
June 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 common stock at an exercise price of
$1.50 per share, and expires five years after issuance. As of the date of
this report, the Company has sold 375,000 units in connection with this
offering for total proceeds of $187,500.
Results of Operations - Three Months Ended March 31, 2010 Compared to Three
Months Ended March 31, 2009
We recognized a net loss of $(2,609,716) ($(0.10) per share), for the three
months ended March 31, 2010, compared to a net loss of $(177,084) ($(0.01)
per share), for the three months ended March 31, 2009. The increase in our
net loss is primarily attributable to various advertising and promotion
expenses we have incurred as we develop our procurement and distribution
channels, as well as certain professional expenses incurred as discussed
below.
Revenues and Cost of sales
Sales of product net of sales allowances and discounts of $(61,867) were
$1,258,588 for the three months ended March 31, 2010. Sales of product net
of sales allowances and discounts of $(112,314) were $184,483 for the three
months ended March 31, 2009. Selling activities during the three months
ended March 31, 2009 were limited due to capital constraints and to a lesser
degree due to our efforts in developing our product procurement, distribution
and marketing strategies. We are continuing to develop our distribution
channels, and provided adequate capital resources are available we expect our
market share to continue to expand.
Cost of sales for the three months ended March 31, 2010 were $873,632, as
compared to $211,806 for the three months ended March 31, 2009. Cost of
sales for both periods include various marketing and distribution costs
including costs of samples provided to current and prospective customers,
although to a much lesser degree for the current period. For the three
months ended March 31, 2010, a total of approximately $43,000 (3.4% of net
sales) of samples were distributed, as compared to approximately $92,000
(49.9% of net sales) for the three months ended March 31, 2009. We expect
our gross margins on product sales to improve as the markets for our products
become more fully developed, although there can be no assurance that will
occur.
Operating Expenses
Advertising and promotions: Includes all expenses associated with our
marketing efforts, including costs for direct media advertising, trade shows,
development of apparel lines, and all other promotional efforts including
payments to professional athletes and trainers with whom we have sponsorship
and endorsement agreements. For the three months ended March 31, 2010 we
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incurred total advertising and promotions expenses of $1,195,696, which
primarily includes $334,099 in print advertising and $679,214 in endorsement
and sponsorship expenses. For the three months ended March 31, 2009 our
total advertising and promotion expenses totaled $64,072, which primarily
included $12,203 in print advertising and $30,636 in endorsement and
sponsorship payments. We expect to continue to utilize print advertising and
endorsement and sponsorships as our primary source of product exposure to the
marketplace, although we expect these costs as a percentage of net revenues
to significantly decline as the markets for our products become more fully
developed.
During the quarter ended March 31, 2010 the Company's two founders and
executive officers surrendered and 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. The fair value of the common stock was determined to be $0.54
per share. As a result, for the three months ended March 31, 2010, $54,000
was charged to Advertising and promotions for 100,000 shares granted to two
professional athletes as a bonus for their sponsorship and endorsement
services during the development of our business.
Bad debt: Includes amounts of customer accounts that have been deemed
uncollectible based on our periodic review of customer accounts. For the
three months ended March 31, 2010 we charged $1,890 for accounts considered
uncollectible, as compared to $3,090 for the three months ended March 31,
2009. Where customers are considered viable entities, we intend to pursue
collection of all accounts regardless of their age or amount.
Service charges and fees: Includes all charges by financial institutions for
fees related to banking and credit services, as well as charges associated
with our accounts receivable factoring arrangements. During both the three
months ended March 31, 2010 and 2009 we have experienced fees associated with
overdraft charges and other fees due to insufficient operating cash balances.
Total service charges and fees were $9,882 and $2,811 for the three months
ended March 31, 2010 and 2009, respectively.
Salaries and labor: Includes all expenses associated with our employee
compensation, including payments made to our two founders for compensation
for services performed during the build up of the business. For the three
months ended March 31, 2010 we have incurred a total of $226,139 in salaries
and labor charges, as compared to $26,803 for the three months ended March
31, 2009. We do not have employment agreements with any of our employees or
management personnel.
Depreciation and amortization: Includes depreciation on our fixed assets and
amortization on our website. For the three months ended March 31, 2010 we
charged total depreciation and amortization of $3,065, which included $2,110
of depreciation on displays, furniture and equipment, and $955 of
amortization on our website. For the three months ended March 31, 2009 we
charged total depreciation and amortization of $1,626, which included $671 of
depreciation on displays, furniture and equipment, and $955 of amortization
on our website.
Insurance: Includes costs of our business insurance plans. Total insurance
charges were $22,690 and $3,951 for the three months ended March 31, 2010 and
2009, respectively.
Information technology: Includes costs associated with maintenance of our
office computer systems and costs associated with the hosting and maintenance
of our website. Total information technology charges were $28,629 and $6,769
for the three months ended March 31, 2010 and 2009, respectively.
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Travel, meetings and entertainment: Includes all costs associated with travel
to meetings, shows and conventions, as well as travel associated with product
procurement and customer development. Total travel charges were $28,720 and
$24,338 for the three months ended March 31, 2010 and 2009, respectively.
Occupancy, telephone and utilities: Includes all costs associated with our
business offices and our warehouse operations, as well as the associated
telephone and utilities costs. Total occupancy and related charges were
$30,302 and $4,956 for the three months ended March 31, 2010 and 2009,
respectively.
Office and warehouse supplies: Includes all general supplies costs associated
with the operations of our business offices and warehouse. Total supplies
charges were $4,307 and $4,225 for the three months ended March 31, 2010 and
2009, respectively.
Professional fees: Includes charges for professional legal and accounting
fees associated with our business organization and financial reporting, as
well as charges associated with management consulting and financial advisory
services resulting from our efforts to raise sufficient capital to develop
and operate our business. Total professional fees were $1,084,583 and $6,393
for the three months ended March 31, 2010 and 2009, respectively.
During the quarter ended March 31, 2010 the Company's two founders and
executive officers surrendered and 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. The fair value of the common stock was determined to be $0.54
per share. As a result, for the three months ended March 31, 2010, $985,500
was charged to Professional fees which included $13,500 to our previous
internal accountant, and $972,000 for management consulting and financial
advisory services performed by an initial investor.
Other: Generally includes any operating costs not attributable to any of the
above categories. Total other charges were $709 and $-0- for the three
months ended March 31, 2010 and 2009, respectively.
As a result of the above, operating expenses totaled $2,636,612 for the three
months ended March 31, 2010 resulting in an operating loss of $(2,251,656).
For the three months ended March 31, 2009 total operating expenses were
$149,034 resulting in an operating loss of $(176,357).
Interest expense: Interest expense of $358,060 for the three months ended
March 31, 2010 represents interest in the amount of $22,423, and amortization
of the discount resulting from the beneficial conversion features on our
convertible promissory notes in the amount of $318,161, interest on the
original issue discount notes in the amount of $15,972, and interest accrued
and paid on other certain short term obligations amounting to $1,504.
Interest expense for the three months ended March 31, 2009 of $727 resulted
from short term borrowings.
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.
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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 accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates included
herein relate to the recoverability of assets including customer accounts,
the value of long-lived assets and liabilities, share based compensation, and
the long-term viability of the business. Actual results may differ from
estimates.
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.
(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
26
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 regarding 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.
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.
None.
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
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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: May 21, 2010 By:/s/ Brad J. Pyatt
Brad J. Pyatt, Chief Executive Officer
By:/s/ Todd Huss
Todd Huss, Chief Financial Officer
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