You should read the following discussion and analysis of our financial condition and results of operations together with and our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K as amended for the fiscal year ended December 31, 2021 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.





Overview

MusclePharm is a scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. We offer a broad range of performance powders, capsules, tablets, gels and on-the-go ready to eat snacks that satisfy the needs of enthusiasts and professionals alike. Our portfolio of recognized brands, MusclePharm and FitMiss, is marketed and sold to over 100 countries globally.

Our offerings are clinically developed through a six-stage research process, and all of our manufactured products are rigorously vetted for banned substances by the leading quality assurance program, Informed-Choice. While we initially drove growth in the Specialty retail channel, in recent years we have expanded our focus to drive sales and retailer growth across leading e-commerce, Food Drug & Mass ("FDM"), Specialty and International channels.





                                    For the Months Ended March 31,
                          2022         % of Total        2021        % of Total
Distribution Channel
Specialty              $    3,383               26 %   $  6,795               52 %
International          $      733                6 %      3,847               29 %
FDM                    $    8,985               68 %   $  2,479               19 %
Total                  $   13,101              100 %   $ 13,121              100 %

Our consolidated financial statements are prepared using the accrual method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP") and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. We are actively managing our business to respond to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.





COVID-19

The worldwide spread of COVID-19, including the emergence of variants, has resulted, and may continue to result in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time until the COVID-19 pandemic is contained, or economic activity normalizes. With the current uncertainty in economic activity, the impact on our revenue and results of operations is likely to continue and the size and duration of the impact we are currently unable to accurately predict. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on a variety of factors, including the duration and spread of COVID-19 and its variants, and its impact on our customers, contract manufacturers, vendors, industry and employees, all of which are uncertain at this time and cannot be accurately predicted. See "Item 1.A Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business.





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Factors Affecting Our Performance

As we continue to execute our growth strategy and focus on our core products, we believe that we can, over time, continue to improve our operating margins and expense structure. In addition, we have implemented plans focused on cost containment, customer profitability, product and pricing controls that we believe will improve our gross margin and reduce our losses.

We expect that our advertising and promotion expense will continue to decrease as we focus on reducing our expenses and shifting our promotional costs, in part, from general branding and product awareness to acquiring customers and driving sales from existing customers. We expect that our discounts and allowances will continue to decrease, both overall and as a percentage of revenue, as we further reduce certain discretionary promotional activity that does not result in a commensurate increase in revenues.





Results of Operations

Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021:

The following table sets forth certain financial information from our consolidated statements of operations along with a percentage of net revenue and should be read in conjunction with the consolidated financial statements and related notes (in thousands).





                                                   For the Months Ended March 31,
                                               2022                              2021
                                     Amount        % of Revenue        Amount       % of Revenue
Revenue, net                       $    13,101               100 %   $   13,121               100 %
Cost of revenue                         11,592                88 %        9,432                72 %
Gross profit                             1,509                12 %        3,689                28 %
Operating expenses:
Selling and promotion                    1,160                 9 %        1,149                 9 %
General and administration               2,829                22 %        2,268                17 %
Total operating expenses                 3,989                30 %        3,417                26 %
Income (loss) from operations           (2,480 )             -19 %          272                 2 %
Other (expense) income:
Gain on settlements                         12                 0 %          200                 2 %
Interest expense                        (3,821 )             -29 %         (510 )              -4 %
Other (expense) income, net                (12 )               0 %          132                 1 %
Income (loss) before provision
for income taxes                        (6,301 )             -48 %           94                 1 %
Net income (loss)                  $    (6,301 )             -48 %   $       94                 1 %




Revenue, net

We derive our revenue through the sales of our various branded sports nutrition products, nutritional supplements and energy drinks. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the good. This usually occurs when finished goods are delivered to the Company's customers or when finished goods are picked up by a customer's carrier.

Net revenue reflects the transaction prices for contracts, which includes goods shipped at selling list prices reduced by discounts and sales allowances. We record discounts and sales allowances as a direct reduction of revenue for various discounts provided to our customers, consisting primarily of promotional related credits. Sales discounts are a significant part of our marketing plan to our customers as they help drive increased sales and brand awareness with end users through promotions that we support through our distributors and re-sellers.





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For the three months ended March 31, 2022, our net revenues were approximately $13.1 million compared to $13.1 million for the three months ended March 31, 2021, a decline of approximately $20,000 or 0%. Net revenue for the energy segment was up $1 million, primarily driven by volume, while net revenue for the protein products segment was down $1 million. During the three months ended March 31, 2022, the Company had three customers who individually accounted for 59%, 13% and 12% of our net revenue. During the three months ended March 31, 2021, the Company had three customers who individually accounted for 28%, 17% and 14% of our net revenue. During the 1st Quarter of 2022 the Company instituted a price increase with select customers, contributing to 7.4 % of revenue for the three months ended March 31, 2022.

Discounts and sales allowances declined to approximately 11% of gross revenue, or $1.6 million, for the three months ended March 31, 2022, compared to approximately 15% of gross revenue, or $2.4 million, for the three months ended March 31, 2021. Discounts and sales allowances fluctuate based on customer mix and changes in discretionary promotional activity. We continue to monitor our discounts and allowances, reducing where practical to continue to meet our gross margin expectation.

Cost of Revenue and Gross Profit

Cost of revenue for our products is related to the production, manufacturing, and freight-in of the related products purchased from third-party manufacturers. We primarily use contract manufacturers to drop ship products directly to our customers.

We experienced cost increases for raw materials during the three months ended March 31, 2022 primarily due to industry shortages in supply and consistent with market demand. Compared to the prior year, commodity protein costs have increased 90% negatively affecting our gross margin. We are taking steps to manage the increase and shortages by entering into agreements with additional protein brokers to diversify our protein sources, along with working with new vendors to source other component such as tubs, trays and bags.

We have focused on cost containment and improving gross margins by concentrating on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU's and negotiating improved pricing for raw materials. With recent increases in commodity prices, our gross margins have eroded and will continue to be impacted.

We are focusing on growing the energy segment which contributed to two points of margin in the three months ended March 31, 2022.





Selling and promotion

Our selling and promotion expense consists primarily of expenses related to freight-out, print and online advertising, club demonstrations, and stock-based compensation. Historically, advertising and promotions were a large part of both our growth strategy and brand awareness, in particular strategic partnerships with sports athletes and fitness enthusiasts and endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and teams. In connection with our restructuring plan, we terminated most of these contracts in a strategic shift away from such costly arrangements and moved toward digital advertising, ambassador programs and sampling promotional materials.

For the three months ended March 31, 2022, our selling and promotion expenses were approximately $1.2 million compared to $1.1 million for the three months ended March 31, 2021, an increase of $11,000 or 1%. The increase was primarily related to an increase in freight-out and stock-based compensation related to our Energy business and offset by decreases in Club Demonstrations. Freight out is up $77,000 or 11% and Stock based compensation is up $142,000 or 100%. Club demonstrations were down $222,000 or 75%. All other selling and promotion expenses represent an increase of $14,000.





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General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits, professional fees, depreciation and amortization, research and development, information technology equipment and network costs, facilities related expenses, directors' fees, legal fees, accounting and audit fees, consulting fees, stock-based compensation, investor relations costs, insurance, bad debt and other corporate expenses.

For the three months ended March 31, 2022, our general and administrative expenses were approximately $2.8 million compared $2.3 million for the three months ended March 31, 2021, or an increase of approximately $561,000 or 25%. This was due to an increase in professional fees associated with accounting fees, an increase in salaries and benefits associated with stock-based compensation and an increase in bad debt expense, offset by a reduction in office and IT expenses. Professional fees are up $213,000 or 41%, salaries and benefits are up $176,000 or 17%, and bad debt expense is up $344,000 or 3100% and office/IT expenses are down $96,000 or 39%. All other general and administrative expenses represent a decrease of $76,000.





Gain on Settlements

For the three months ended March 31, 2022 and 2021, gain on settlements was $12,000 and $200,000 respectively.





Interest Expense

For the three months ended March 31, 2022, interest expense was approximately $3.8 million compared to $0.5 million for the three months ended March 31, 2021, or an increase of $3.3 million or 645%.

Interest expense increased primarily due to the $3.2 million amortization of stock warrants associated with the issuance of the Senior Secured debt offering during the year ended December 31, 2021.





Other (Expense) Income, Net

For the three months ended March 31, 2022 and 2021, other expense was $12,000, compared to other income of $132,000 respectively.





Provision for Income Taxes

For the three months ended March 31, 2022 and 2021, tax expense was zero. Our provision for income taxes consists primarily of federal and state income taxes in the U.S. and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty, as to the realization of benefits from our deferred tax assets, including net operating loss carryforwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.

Liquidity and Capital Resources

We have incurred significant losses and experienced negative cash flows since inception. As of March 31, 2022, we had cash of $0.5 million, a decline of $0.7 million from the December 31, 2021 balance of $1.2 million. As of March 31, 2022, we had a working capital deficit of $36.3 million, a stockholders' deficit of $38.1 million and an accumulated deficit of $211.8 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon us generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We are evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, issuances of capital stock, debt borrowings, partnerships and/or collaborations.





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We have funded our operations from proceeds from the sale of equity and debt securities. We will require significant additional capital to make the investments we need to execute our longer-term business plan. Our ability to successfully raise sufficient funds through the sale of debt or equity securities when needed is subject to many risks and uncertainties and, even if it were successful, future equity issuances would result in dilution to our existing shareholders and future debt securities may contain covenants that limit our operations or ability to enter into certain transactions.

We will need to raise additional funding through strategic relationships, public or private equity or debt financings, grants or other arrangements to develop and seek regulatory approvals for our existing and new product candidates. If such funding is not available, or not available on terms acceptable to us, our current development plan and plans for expansion of our general and administrative infrastructure may be curtailed.

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