UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2017
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _____
to
MusclePharm Corporation
(Exact name of registrant as specified in its charter)
| Nevada | 77-0664193 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4500 Park Granada, Suite 202 Calabasas, CA | 91302 | |
| (Address of principal executive offices) | (Zip code) |
(800) 292-3909
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sectionSection 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 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. [ ] Yes [X] No []
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.files). [ ] Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [ | Smaller reporting company | [X] | |||
| Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] Yes [X] No [X]
Number of shares of the registrant’s common stock outstanding as of November 1, 2017: 14,650,554, excludingat May 20, 2021: 33,479,886 (excludes 875,621 shares of common stock held in treasury.
MusclePharm Corporation
Form 10-Q
TABLE OF CONTENTS
Except as otherwise indicated herein, the terms “MusclePharm,” “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Private Securities Litigation ReformExchange Act of 1995.1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, including our future profits, financing sources and our ability to satisfy our liabilities, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,”In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “estimate,“should,” “continue,“expects,” “anticipate,“plans,” “intend,“anticipates,” “expect,“believes,” and similar expressions are intended to identify forward-looking statements.“estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict and are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”)SEC on March 15, 2017, as amended on May 1, 2017.29, 2021. Moreover, we operate in a very competitive and rapidly changing environment. In particular, we have experienced a slowdown in sales from our retail customers due to the ongoing COVID-19 pandemic, and we cannot predict the ultimate impact of the COVID-19 pandemic on our business. New risks may emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Note Regarding Trademarks
We have proprietary rights to a number of registered and unregistered trademarks worldwide that we believe are important to our business, including, but not limited to: “MusclePharm” and “FitMiss”. We have, in certain cases, omitted the ®, © and ™ designations for these and other trademarks used in this Form 10-Q. Nevertheless, all rights to such trademarks are reserved. These and other trademarks referenced in this Form 10-Q are the property of their respective owners and they will assert, to the fullest extent under applicable law, their rights thereto.
| 1 |
MusclePharm Corporation
September 30, 2017 | December 31, 2016 | |
(Unaudited) | ||
| ASSETS | ||
| Current assets: | ||
| Cash | $4,878 | $4,943 |
| Accounts receivable, net of allowance for doubtful accounts of $998 and $462, respectively | 13,087 | 13,353 |
| Inventory | 6,274 | 8,568 |
| Prepaid giveaways | 132 | 205 |
| Prepaid expenses and other current assets | 1,902 | 1,725 |
| Total current assets | 26,273 | 28,794 |
| Property and equipment, net | 2,226 | 3,243 |
| Intangible assets, net | 1,397 | 1,638 |
| Other assets | 222 | 421 |
| TOTAL ASSETS | $30,118 | $34,096 |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||
| Current liabilities: | ||
| Accounts payable | $9,397 | $9,625 |
| Accrued liabilities | 8,526 | 9,051 |
| Accrued restructuring charges, current | 586 | 614 |
| Obligation under secured borrowing arrangement | 3,927 | 2,681 |
| Convertible notes with a related party, net of discount | — | 16,465 |
| Total current liabilities | 22,436 | 38,436 |
| Accrued restructuring charges, long-term | 134 | 208 |
| Other long-term liabilities | 1,081 | 332 |
| Convertible notes with a related party, net of discount | 17,925 | — |
| TOTAL LIABILITIES | 41,576 | 38,976 |
| Commitments and Contingencies (Note 9) | ||
| Stockholders' deficit: | ||
| Common stock, par value of $0.001 per share; 100,000,000 shares authorized; 15,526,175 and 14,987,230 shares issued as of September 30, 2017 and December 31, 2016, respectively; 14,650,554 and 14,111,609 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | 14 | 14 |
| Additional paid-in capital | 157,989 | 156,301 |
| Treasury stock, at cost; 875,621 shares | (10,039) | (10,039) |
| Accumulated other comprehensive loss | (2) | (162) |
| Accumulated deficit | (159,420) | (150,994) |
| TOTAL STOCKHOLDERS’ DEFICIT | (11,458) | (4,880) |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $30,118 | $34,096 |
March 31, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 592 | $ | 2,003 | ||||
| Accounts receivable, net | 6,221 | 7,488 | ||||||
| Inventory | 1,353 | 1,032 | ||||||
| Prepaid expenses and other current assets | 814 | 1,341 | ||||||
| Total current assets | 8,980 | 11,864 | ||||||
| Property and equipment, net | 13 | 13 | ||||||
| Intangible assets, net | 275 | 356 | ||||||
| Operating lease right-of-use assets | 406 | 474 | ||||||
| Other assets | 275 | 295 | ||||||
| TOTAL ASSETS | $ | 9,949 | $ | 13,002 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Obligation under secured borrowing arrangement | $ | 4,740 | $ | 7,098 | ||||
| Line of credit | 1,705 | 743 | ||||||
| Operating lease liability, current | 402 | 381 | ||||||
| Convertible note with a related party, net of discount | 2,872 | 2,872 | ||||||
| Accounts payable | 13,759 | 14,719 | ||||||
| Accrued and other liabilities | 6,028 | 6,194 | ||||||
| Total current liabilities | 29,506 | 32,007 | ||||||
| Operating lease liability, long-term | 233 | 343 | ||||||
| Other long-term liabilities | 4,535 | 5,071 | ||||||
| Total liabilities | 34,274 | 37,421 | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock, par value of $0.001 per share; 100,000,000 shares authorized, 34,261,821 and 33,980,905 shares issued as of March 31, 2021 and December 31, 2020, respectively; 33,386,200 and 33,105,284 shares outstanding as of March 31, 2021 and December 31, 2020, respectively | 32 | 32 | ||||||
| Additional paid-in capital | 178,261 | 178,261 | ||||||
| Treasury stock, at cost; 875,621 shares | (10,039 | ) | (10,039 | ) | ||||
| Accumulated deficit | (192,579 | ) | (192,673 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (24,325 | ) | (24,419 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 9,949 | $ | 13,002 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 2 |
MusclePharm Corporation
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenue, net | $24,396 | $30,694 | $76,597 | $106,473 |
Cost of revenue (1) | 16,359 | 20,497 | 54,474 | 70,377 |
| Gross profit | 8,037 | 10,197 | 22,123 | 36,096 |
| Operating expenses: | ||||
| Advertising and promotion | 1,952 | 1,905 | 6,079 | 8,878 |
| Salaries and benefits | 2,640 | 2,291 | 8,530 | 15,203 |
| Selling, general and administrative | 3,468 | 3,937 | 9,183 | 12,604 |
| Research and development | 199 | 270 | 488 | 1,664 |
| Professional fees | 1,034 | 1,315 | 2,643 | 4,445 |
| Restructuring and other charges | — | 1,667 | — | (2,579) |
| Settlement of obligation | — | — | 1,453 | — |
| Impairment of assets | — | 137 | — | 4,450 |
| Total operating expenses | 9,293 | 11,522 | 28,376 | 44,665 |
| Loss from operations | (1,256) | (1,325) | (6,253) | (8,569) |
| Gain on settlement of accounts payable | — | — | 471 | — |
| Loss on sale of subsidiary | — | — | — | (2,115) |
| Other expense, net (Note 7) | (858) | (122) | (2,526) | (1,426) |
| Loss before provision for income taxes | (2,114) | (1,447) | (8,308) | (12,110) |
| Provision for income taxes | 14 | — | 118 | 138 |
| Net loss | $(2,128) | $(1,447) | $(8,426) | $(12,248) |
| Net loss per share, basic and diluted | $(0.15) | $(0.10) | $(0.61) | $(0.88) |
| Weighted average shares used to compute net loss per share, basic and diluted | 13,875,119 | 13,978,833 | 13,819,939 | 13,886,496 |
Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue, net | $ | 13,121 | $ | 16,231 | ||||
| Cost of revenue | 9,432 | 11,422 | ||||||
| Gross profit | 3,689 | 4,809 | ||||||
| Operating expenses: | ||||||||
| Advertising and promotion | 345 | 125 | ||||||
| Salaries and benefits | 1,048 | 1,681 | ||||||
| Selling, general and administrative | 1,397 | 1,911 | ||||||
| Professional fees | 627 | 541 | ||||||
| Total operating expenses | 3,417 | 4,258 | ||||||
| Income from operations | 272 | 551 | ||||||
| Other expense: | ||||||||
| Interest and other expense, net | (178 | ) | (589 | ) | ||||
| Income (loss) before provision for income taxes | 94 | (38 | ) | |||||
| Provision for income taxes | — | 22 | ||||||
| Net income (loss) | $ | 94 | $ | (60 | ) | |||
| Net income (loss) per share, basic and diluted | $ | 0.00 | $ | (0.00 | ) | |||
| Weighted average shares used to compute net income (loss) per share, basic | 33,119,549 | 32,459,675 | ||||||
| Weighted average shares used to compute net income (loss) per share, diluted | 45,492,621 | 32,459,675 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 3 |
MusclePharm Corporation
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Net loss | $(2,128) | $(1,447) | $(8,426) | $(12,248) |
| Other comprehensive loss: | ||||
| Change in foreign currency translation adjustment | 143 | (46) | 160 | (40) |
| Comprehensive loss | $(1,985) | $(1,493) | $(8,266) | $(12,288) |
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Stock | Deficit | Deficit | |||||||||||||||||||
| Balance - December 31, 2019 | 33,000,412 | $ | 31 | $ | 177,914 | $ | (10,039 | ) | $ | (195,858 | ) | $ | (27,952 | ) | ||||||||||
| Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors | — | — | 100 | — | — | 100 | ||||||||||||||||||
| Issuance of shares of common stock related to the payment of advertising services | 101,454 | — | 47 | — | — | 47 | ||||||||||||||||||
| Net loss | — | — | — | — | (60 | ) | (60 | ) | ||||||||||||||||
| Balance - March 31, 2020 | 33,101,866 | $ | 31 | $ | 178,061 | $ | (10,039 | ) | $ | (195,918 | ) | $ | (27,865 | ) | ||||||||||
| Balance - December 31, 2020 | 33,105,284 | $ | 32 | $ | 178,261 | $ | (10,039 | ) | $ | (192,673 | ) | $ | (24,419 | ) | ||||||||||
| Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors | 280,916 | — | — | — | — | |||||||||||||||||||
| Net income | — | — | — | — | 94 | 94 | ||||||||||||||||||
| Balance - March 31, 2021 | 33,386,200 | $ | 32 | $ | 178,261 | $ | (10,039 | ) | $ | (192,579 | ) | $ | (24,325 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 4 |
MusclePharm Corporation
Accumulated | |||||||
Additional | Other | Total | |||||
Common Stock | Paid-in | Treasury | Comprehensive | Accumulated | Stockholders’ | ||
Shares | Amount | Capital | Stock | Loss | Deficit | Deficit | |
| Balance—December 31, 2016 | 14,111,609 | $14 | $156,301 | $(10,039) | $(162) | $(150,994) | $(4,880) |
| Stock-based compensation related to issuance and amortization of restricted stock awards to employees, executives and directors | 538,945 | — | 1,576 | — | — | — | 1,576 |
| Stock-based compensation related to issuance of stock options to an executive and a director | — | — | 112 | — | — | — | 112 |
| Change in foreign currency translation adjustment | — | — | — | — | 160 | — | 160 |
| Net loss | — | — | — | — | — | (8,426) | (8,426) |
| Balance—September 30, 2017 | 14,650,554 | $14 | $157,989 | $(10,039) | $(2) | $(159,420) | $(11,458) |
Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | 94 | $ | (60 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of property and equipment | 4 | 63 | ||||||
| Amortization of intangible assets | 80 | 80 | ||||||
| Bad debt expense (recovery) | (11 | ) | 11 | |||||
| Gain on disposal of property and equipment | — | (11 | ) | |||||
| Inventory provision | 86 | 12 | ||||||
| Stock-based compensation | — | 100 | ||||||
| Issuance of common stock to non-employees | — | 47 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,278 | (781 | ) | |||||
| Inventory | (406 | ) | (268 | ) | ||||
| Prepaid expenses and other current assets | 527 | (459 | ) | |||||
| Other assets | 87 | 174 | ||||||
| Accounts payable and accrued liabilities | (1,641 | ) | 1,253 | |||||
| Net cash provided by operating activities | 98 | 161 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (4 | ) | — | |||||
| Proceeds from disposal of property and equipment | — | 11 | ||||||
| Net cash (used in) provided by investing activities | (4 | ) | 11 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from line of credit | 1,061 | — | ||||||
| Payments on line of credit | (100 | ) | (393 | ) | ||||
| Proceeds from secured borrowing arrangement, net of reserves | 11,423 | 9,377 | ||||||
| Payments on secured borrowing arrangement, net of fees | (13,781 | ) | (9,993 | ) | ||||
| Repayment of finance lease obligations | — | (29 | ) | |||||
| Repayment of notes payable | (108 | ) | (48 | ) | ||||
| Net cash used in financing activities | (1,505 | ) | (1,086 | ) | ||||
| NET CHANGE IN CASH | (1,411 | ) | (914 | ) | ||||
| CASH — BEGINNING OF PERIOD | 2,003 | 1,532 | ||||||
| CASH — END OF PERIOD | $ | 592 | $ | 618 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 101 | $ | 168 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 5 |
MusclePharm Corporation
Nine Months Ended September 30, | ||
2017 | 2016 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net loss | $(8,426) | $(12,248) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation and amortization | 1,144 | 1,658 |
| Gain on settlement of accounts payable | (471) | — |
| Provision for doubtful accounts | 1,213 | 234 |
| Loss on disposal of property and equipment | 43 | 122 |
| Loss on sale of subsidiary | — | 2,115 |
| Inventory write down related to restructuring | — | 2,285 |
| Non-cash impairment charges | — | 4,380 |
| Non-cash restructuring and other charges (reversals) | — | (4,133) |
| Amortization of prepaid stock compensation | — | 938 |
| Amortization of debt discount and issuance costs | 460 | 36 |
| Stock-based compensation | 1,688 | 4,981 |
| Issuance of common stock warrants to third parties for services | — | 6 |
| Write off of prepaid financing costs | 275 | — |
| Changes in operating assets and liabilities: | ||
| Accounts receivable | (753) | 5,069 |
| Inventory | 2,351 | 59 |
| Prepaid giveaways | 74 | 243 |
| Prepaid expenses and other current assets | (175) | 1,186 |
| Other assets | (75) | (320) |
| Accounts payable and accrued liabilities | 417 | (4,908) |
| Accrued restructuring charges | (102) | (2,189) |
| Net cash used in operating activities | (2,337) | (486) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| Purchase of property and equipment | (27) | (459) |
| Proceeds from sale of subsidiary | — | 5,942 |
| Proceeds from disposal of property and equipment | — | 40 |
| Trademark registrations | — | (154) |
| Net cash (used in) provided by investing activities | (27) | 5,369 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||
| Proceeds from secured borrowing arrangement, net of reserves | 22,292 | 39,412 |
| Payments on secured borrowing arrangement, net of fees | (21,046) | (39,412) |
| Proceeds from related party loan | 1,000 | — |
| Payments on line of credit | — | (3,000) |
| Repayments of term loan | — | (2,949) |
| Repayments of other debt obligations | — | (10) |
| Repayment of capital lease and other obligations | (106) | (90) |
| Net cash provided by (used in) financing activities | 2,140 | (6,049) |
| Effect of exchange rate changes on cash | 159 | (21) |
| NET CHANGE IN CASH | (65) | (1,187) |
| CASH — BEGINNING OF PERIOD | 4,943 | 7,081 |
| CASH — END OF PERIOD | $4,878 | $5,894 |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||
| Cash paid for interest | $1,814 | $1,186 |
| Cash paid for taxes | $86 | $206 |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | ||
| Property and equipment acquired in conjunction with capital leases | $12 | $24 |
| Shares of common stock issued for BioZone disposition | $— | $640 |
| Purchase of property and equipment included in current liabilities | $— | $43 |
The accompanying notes are an integral part of these CondensedNotes to Consolidated Financial Statements
.(Unaudited)
Note 1. Description of Business
Description of Business
MusclePharm Corporation or the Company, was incorporated in Nevada in 2006. Except as otherwise indicated herein or the context requires otherwise, the terms “MusclePharm,” the “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries. The Company is a scientifically driven,scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. Thesupplements that are manufactured by the Company’s co-manufacturers. Our portfolio of recognized brands, including MusclePharm and FitMiss, is marketed and sold globally.
Although the Company has historically incurred significant losses and experienced negative cash flows since inception, we generated net income of $0.1 million for the following wholly-owned operating subsidiaries: MusclePharm Canada Enterprises Corp. (“MusclePharm Canada”), MusclePharm Ireland Limited (“MusclePharm Ireland”)period ended March 31, 2021 and MusclePharm Australia Pty Limited (“MusclePharm Australia”). A former subsidiaryhad cash of $0.6 million, a decline of $1.4 million from the December 31, 2020 balance of $2.0 million. As of March 31, 2021, the Company BioZone Laboratories, Inc. (“BioZone”), was sold on May 9, 2016.
The ability to continue as a going concern is dependent upon us generating profits in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations.
During the fourth quarter of 2019, the Company focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU’s and negotiate cost for raw materials. These steps improved gross margins in the fourth quarter of 2019 and this trend has continued through March 31, 2021.
During 2020, the Company experienced a slowdown in sales from retail customers, including our largest customer, which was partially offset by an increase in sales from our largest online customer. In addition, the Company negotiated lower cost of sold with its co-manufactures.
In 2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive. The Company plans to launch 3 new energy products in the summer of 2021.
The Company believes reductions in operating costs with continued focus on gross profit and top line sales growth will allow it to ultimately achieve sustained profitability, however, the Company can give no assurances that this will occur.
The Company’s 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. The Company is unableactively managing its business to obtain adequate capital or Mr. Drexler does not continue to extend or convert his note, it could be forced to cease operations or substantially curtail its commercial activities. These conditions, or significant unforeseen expenditures including the unfavorable settlement of its legal disputes, could raise substantial doubt asrespond to the Company’s ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include anyimpact. There were no adjustments relating torecorded in the recoverability and classification of recorded asset amounts or the amounts and classification of liabilitiesfinancial statements that might result from the outcome of these uncertainties.
| 6 |
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying Condensed Consolidated Financial Statementsunaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statementsconsolidated financial statements include the accounts of MusclePharm Corporation and its wholly-ownedwholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company’s management believes the unaudited interim Condensed Consolidated Financial Statementsconsolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of September 30, 2017,March 31, 2021, results of operations for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. The results of operations for the three and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results to be expected for the year endingended December 31, 2017.
These unaudited interim Condensed Consolidated Financial Statementsconsolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory and deferred tax assets, the assessment of useful lives, recoverability and valuation of long-lived assets, likelihood and range of possible losses on contingencies, restructuring liabilities, valuations of equity securities and intangible assets, fairpresent value of derivatives, warrants and options, going concern,lease liabilities, among others. Actual results could differ from those estimates.
Shipping and handling
The Company accounts for shipping and handling costs as fulfillment activities, which are therefore recognized when all of the following criteria are met:
For the three months ended September 30, 2017March 31, 2021 and 2016,2020, the Company incurred $0.5 million and $0.4 million, respectively, of inbound shipping and $0.4handling costs. Shipping and handling costs related to inbound purchases of raw material and finished goods are included in cost of revenue in our consolidated statements of operations.
For the three months ended March 31, 2021 and 2020, the Company incurred $0.7 million and $0.6 million, for the nine months ended September 30, 2017respectively, of shipping and 2016, respectively.
Sales discounts and returns
The Company offersexcludes from its revenue any amounts collected from customers for sales incentives through various programs, consisting primarily of advertising related credits, volume incentive rebates, and sales incentive reserves. The Company records advertising related credits with customers as a reduction to revenue as no identifiable benefit is received in exchange for credits claimed by the customer. Volume incentive rebates are provided to certain customers based on contractually agreed upon percentages once certain thresholds have been met. Sales incentive reserves are computed based on historical trending and budgeted discount percentages, which are typically based on historical discount rates with adjustments for any known changes, such as future promotions or one-time historical promotions that will not repeat for each customer. The Company records sales incentive reserves and volume rebate reserves as a reduction to revenue.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance, at times, may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date.
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Significant customers are those whichthat represent more than 10% of the Company’s revenue, net revenueor accounts receivable for each period presented. For each significant customer,
During the period ended March 31, 2021, the Company had three customers who individually accounted for 28%, 17% and 14% of our net revenue, and two customers that accounted for 32% and 21% of our accounts receivable, net as a percentage of total revenue is as follows:
Percentage of Net Revenue for the Three Months Ended September 30, | Percentage of Net Revenue for the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Customers | ||||
| Costco Wholesale Corporation | 26% | 20% | 26% | 20% |
| Amazon | 16% | * | 11% | * |
The Company uses a limited number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis overnon-affiliated suppliers for contract manufacturing of its products. During the time in whichperiod ended March 31, 2021, the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employeesCompany had three suppliers who individually accounted for services are recorded at eitherapproximately 32%, 21% and 21% of our purchases with contract manufactures and raw material providers. During the fair valueperiod ended March 31, 2020, the Company had four suppliers who individually accounted for approximately 34%, 30%, 13% and 11% of the services rendered or the fair value of the share-based payments whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
Recent Accounting Pronouncements
During August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of this new pronouncement on the Company’s Condensed Consolidated Statements of Cash Flows.
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019,2022, and interim periods within those fiscal years. The Company is in the process of evaluatingwill evaluate the impact of the pronouncement.pronouncement closer to the effective date.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company will evaluate the impact of the pronouncement closer to the effective date.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company will evaluate the impact of the pronouncement closer to the effective date.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, expected to reduce cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 in U.S. GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exceptions to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies U.S. GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The Company adopted this ASU effective January 1, 2021, with certain provisions applied retrospectively and other provisions applied prospectively. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows.
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Note 3. Fair Value of Financial Instruments
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company held no assets orCompany’s accrued and other liabilities that required re-measurement at fair value on a recurring basis.
(in thousands):
As of March 31, 2021 | As of December 31, 2020 | |||||||
| Accrued professional fees | $ | 123 | $ | 242 | ||||
| Accrued interest | 693 | 644 | ||||||
| Accrued payroll and bonus | 368 | 738 | ||||||
| Settlements – short term (Nutrablend and 4Excelsior) | 2,181 | 2,005 | ||||||
| Accrued expenses - ThermoLife | 1,364 | 1,364 | ||||||
| Accrued and other short-term liabilities | 1,299 | 1,201 | ||||||
| Accrued and other liabilities | $ | 6,028 | $ | 6,194 | ||||
Note 4. Sale of BioZone
For the three months ended June 30, 2016, the Company recorded a credit in restructuringMarch 31, 2021 and other charges of $4.8 million comprised of the release of restructuring accrual of $7.0 million, offset by the cash payment of $2.2 million related to a settlement agreement. For the nine months ended September 30, 2016, this credit was offset by additional restructuring expenses resulting in a net credit of $4.2 million.
Contract Termination Costs | Purchase Commitment of Discontinued Inventories Not Yet Received | Abandoned Lease Facilities | Total | |
| Balance as of December 31, 2016 | $308 | $175 | $339 | $822 |
| Expensed | — | — | — | — |
| Cash payments | — | — | (102) | (102) |
| Balance as of September 30, 2017 | $308 | $175 | $237 | $720 |
For the Year Ending December 31, | ||||||
| Outstanding Payments | Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | Total |
| Contract termination costs | $308 | $— | $— | $— | $— | $308 |
| Purchase commitment of discontinued inventories not yet received | 175 | — | — | — | — | 175 |
| Abandoned leased facilities | 29 | 92 | 91 | 25 | — | 237 |
| Total future payments | $512 | $92 | $91 | $25 | $— | $720 |
As of September 30, 2017 | As of December 31, 2016 | |
| Furniture, fixtures and equipment | $3,605 | $3,521 |
| Leasehold improvements | 2,505 | 2,504 |
| Manufacturing and lab equipment | 3 | 3 |
| Vehicles | 86 | 334 |
| Displays | 485 | 483 |
| Website | 462 | 462 |
| Construction in process | — | 55 |
| Property and equipment, gross | 7,146 | 7,362 |
| Less: accumulated depreciation and amortization | (4,920) | (4,119) |
| Property and equipment, net | $2,226 | $3,243 |
As of September 30, 2017 | ||||
Gross Value | AccumulatedAmortization | NetCarryingValue | Remaining Weighted-AverageUseful Lives(years) | |
| Amortized Intangible Assets | ||||
| Brand | $2,244 | $(847) | $1,397 | 4.6 |
| Total intangible assets | $2,244 | $(847) | $1,397 | |
As of December 31, 2016 | ||||
Gross Value | AccumulatedAmortization | NetCarryingValue | Remaining Weighted-AverageUseful Lives(years) | |
| Amortized Intangible Assets | ||||
| Brand | $2,244 | $(606) | $1,638 | 5.1 |
| Total intangible assets | $2,244 | $(606) | $1,638 | |
| For the Year Ending December 31, | |
| Remainder of 2017 | $80 |
| 2018 | 321 |
| 2019 | 321 |
| 2020 | 321 |
| 2021 | 321 |
| Thereafter | 33 |
| Total amortization expense | $1,397 |
For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Interest expense, related party | $ | (120 | ) | $ | (76 | ) | ||
| Interest expense, other | (227 | ) | (157 | ) | ||||
| Interest expense, secured borrowing arrangement | (163 | ) | (365 | ) | ||||
| Foreign currency transaction loss | (1 | ) | (34 | ) | ||||
| Loss on settlement obligation | — | (50 | ) | |||||
| Gain on legal settlement | 200 | — | ||||||
| Other | 133 | 93 | ||||||
| Total interest and other expense, net | $ | (178 | ) | $ | (589 | ) | ||
“Other” includes sublease income.
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For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Other expense, net: | ||||
| Interest expense, related party | $(676) | $(134) | $(1,839) | $(376) |
| Interest expense, other | (6) | (32) | (14) | (160) |
| Interest expense, secured borrowing arrangement | (172) | (9) | (397) | (636) |
| Foreign currency transaction gain | 16 | 19 | 49 | 213 |
| Other | (20) | 34 | (325) | (467) |
| Total other expense, net | $(858) | $(122) | $(2,526) | $(1,426) |
Note 8. Debt
A summary of September 30, 2017the Company’s lease portfolio as of March 31, 2021 and December 31, 2016,2020 is presented in the table below (in thousands):
| Balance Sheet Classification | March 31, 2021 | December 31, 2020 | ||||||||
| Assets | ||||||||||
| Operating | ROU assets, net | $ | 406 | $ | 474 | |||||
| Liabilities | ||||||||||
| Current liabilities: | ||||||||||
| Operating | Operating lease liability - current | $ | 402 | $ | 381 | |||||
| Non-current liabilities: | ||||||||||
| Operating | Operating lease liability - long term | 233 | 343 | |||||||
| Total lease liabilities | $ | 635 | $ | 724 | ||||||
Fixed lease costs represent the explicitly quantified lease payments prescribed by the lease agreement and are included in the measurement of the ROU asset and corresponding lease liability. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company’s lease agreements do not contain any material restrictive covenants.
The components of lease cost for operating and finance leases for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
| Income Statement Classification | Three months ended March 31, 2021 | Three months ended March 31, 2020 | ||||||||
| Operating lease cost | Selling, general and administrative | $ | 115 | $ | 243 | |||||
| Finance lease cost: | ||||||||||
| Amortization of ROU asset | Selling, general and administrative | — | 27 | |||||||
| Total finance lease cost | — | 27 | ||||||||
| Variable lease payments | Selling, general and administrative | 32 | 103 | |||||||
| Sublease income | Other income | (134 | ) | (36 | ) | |||||
| Total lease (income) cost | $ | 13 | $ | 337 | ||||||
The Company had no short-term leases as of both March 31, 2021 and 2020. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the effective date in determining the present value of future payments for those leases.
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Supplemental cash flow information related to leases was as follows:
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities (in thousands): | ||||||||
| Operating cash flows from operating leases | $ | 88 | $ | 197 | ||||
| Financing cash flows from finance leases | — | 29 | ||||||
| The weighted average remaining lease term was as follows: | ||||||||
| Operating leases (in years) | 1.4 | 2.1 | ||||||
| Finance leases (in years) | — | 0.3 | ||||||
| The weighted average discount rate was as follows: | ||||||||
| Operating leases | 18 | % | 18 | % | ||||
| Finance leases | — | 5 | % | |||||
Note 6. Debt
As of March 31, 2021, and December 31, 2020, the Company’s debt consisted of the following (in thousands):
As of September 30, 2017 | As of December 31, 2016 | |
| 2015 Convertible Note due November 8, 2017 with a related party | $— | $6,000 |
| 2016 Convertible Note due November 8, 2017 with a related party | — | 11,000 |
| 2017 Refinanced Convertible Note due December 31, 2019 with a related party | 18,000 | — |
| Obligations under secured borrowing arrangement | 3,927 | 2,681 |
| Unamortized debt discount | (75) | (535) |
| Total debt | 21,852 | 19,146 |
| Less: current portion | (3,927) | (19,146) |
| Long term debt | $17,925 | $— |
As of March 31, 2021 | As of December 31, 2020 | |||||||
| Refinanced convertible note, related party | $ | 2,872 | $ | 2,872 | ||||
| Revolving line of credit, related party | 1,705 | 743 | ||||||
| Obligations under secured borrowing arrangement | 4,740 | 7,098 | ||||||
| Notes payable | 59 | 167 | ||||||
| Paycheck Protection Program loan | 965 | 965 | ||||||
| Total debt | 10,341 | 11,845 | ||||||
| Less: current portion | (9,537 | ) | (10,880 | ) | ||||
| Long term debt | $ | 804 | $ | 965 | ||||
Related-Party Notes Payable
On July 24, 2017,November 29, 2020, the Company entered into a secured demand promissory note (the “2017 Note”), pursuant to whichrefinancing agreement with Mr. Ryan Drexler,, the Company’s Chairman of the Board of Directors and Chief Executive Officer and President, loaned the Company $1.0 million,(the “November 2020 Refinancing”), in which was payable upon demand. Proceeds from the 2017 Note were used to partially fund a settlement agreement. The 2017 Note carried interest at a rate of 15% per annum. Any interest not paid when due would be capitalized and added to the principal amount of the 2017 Note and bears interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. The Company could prepay the 2017 Note without penalty any time prior to a demand request from Mr. Drexler.
Mr. Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest into shares of the Company’s common stockCommon Stock, at a conversion price of $1.11$0.23 per share, which wasshare. At the 5 day average priceelection of the Company, one-sixth of the interest may be paid in kind (“PIK Interest”) by adding such amount to the principal amount of the note, or through the issuance of shares of the Company’s common stock prior to Mr. Drexler. The PIK Interest is convertible to common stock at the refinance closing date, at any time.
The November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and Crossroads Financial Group, LLC (“Crossroads”).
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For the three months ended March 31, 2021 and 2020, interest expense related to the related party convertible secured promissory notes was $85,000 and $76,000, respectively. During the three months ended March 31, 2021, $85,000 in interest was paid in cash to Mr. Drexler; for the three months ended March 31, 2020, no interest was paid in cash to Mr. Drexler.
Related Party Secured Revolving Promissory Note
On October 15, 2020, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Ryan Drexler. Under the terms of the Revolving Note, the Company can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12% per annum. The use of funds will be used for the purchase of whey protein and other general corporate purposes. Both the outstanding principal, if any, and all accrued interest under the Revolving Note were due on March 31, 2021, however, the Company and Mr. Drexler agreed to an extension until June 30, 2021. The Company may prepay the Revolving Note by giving Mr. Drexler one days’ advance written notice. The Revolving Note contains customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, interest will accrue atMr. Drexler is entitled to accelerate the rate of 14% per annum. In addition, following an event of default, any conversion, redemption, payment or prepayment ofentire indebtedness under the Refinanced Convertible Note will be at a premium of 105%.
As of March 31, 2021, the Third Amended and Restated Security Agreement (the “Amended Security Agreement”). Pursuant to the Restructuring Agreement, the Company agreed to pay,outstanding balance on the effective date of the Refinancing, all outstanding interest on the Prior Notes through November 8, 2017 and certain fees and expenses incurred by Mr. Drexler in connection with the Restructuring.
Secured Borrowing Arrangement
In January 2016, the Company entered into a Purchase and Sale Agreement (the “Agreement”“Purchase and Sale Agreement”) with Prestige, Capital Corporation (“Prestige”) pursuant to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the Company (“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total borrowingsborrowing of $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the assigned Accounts, less any chargeback,chargebacks (including chargebacks for any customer amounts that remain outstanding for over 90 days), disputes, or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which varies from 0.7% to 4%, based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts. In addition, the Company granted Prestige a continuing security interest in and first priority lien upon all accounts receivable, inventory, fixed assets, general intangibles, and other assets. Prestige will have no recourse against the Company if payments are not made due to the insolvency of an account debtor within 90 days of invoice date, with the exception of international and certain domestic customers. On April 10, 2019, the Company and Prestige amended the terms of the agreement. The Agreement’s term has beenagreement was extended until April 1, 2020 and automatically renews for one (1) year periods unless either party receives written notice of cancellation from the other, at minimum, thirty (30) days prior to the expiration date thereafter.
As of March 29, 2018. Prestige may cancel31, 2021, and December 31, 2020, the Agreement with 30-day notice (see Note 16).
During the three months ended September 30, 2017,March 31, 2021 and 2020, the Company soldassigned to Prestige, accounts with an aggregate face amount of approximately $13.3$11.1 million and $11.7 million, respectively, for which Prestige paid to the Company approximately $10.6$8.8 million and $9.4 million, respectively, in cash. During the three months ended September 30, 2017, $9.8March 31, 2021 and 2020, $11.2 million and $10.0 million, respectively, was subsequently repaid to Prestige, including fees and interest. During
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Paycheck Protection Program Loan
Due to economic uncertainty as a result of the nine months ended September 30, 2017,ongoing pandemic (COVID-19), on May 14, 2020, the Company sold to Prestige accounts withreceived an aggregate faceprincipal amount of approximately $27.9 million, for which Prestige paid$964,910 pursuant to the borrowing arrangement (“Note”) with Harvest Small Business Finance, LLC (“HSBF”) and agreed to pay the principal amount plus interest at a 1% fixed interest rate per year, on the unpaid principal balance. The Note includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act.
The Note is expected to mature on May 16, 2023. Payments were due by November 16, 2020 (the “Deferment Period”) and interest was accrued during the Deferment Period. However, the Flexibility Act, which was signed into law on June 5, 2020, extended the Deferment Period to the date that the forgiven amount is remitted by the United States Small Business Administration (“SBA”) to HSBF. The Company approximately $22.3 millionis in cash. During the nine months ended September 30, 2017, $21.4 million was subsequently repaid to Prestige, including fees and interest.
Note 9.7. Commitments and Contingencies
| For the Year Ending December 31, | |
| Remainder of 2017 | $219 |
| 2018 | 860 |
| 2019 | 846 |
| 2020 | 735 |
| 2021 | 481 |
| 2022 | 369 |
| Total minimum lease payments | $3,510 |
| For the Year Ending December 31, | |
| Remainder of 2017 | $37 |
| 2018 | 136 |
| 2019 | 101 |
| 2020 | 50 |
| Total minimum lease payments | 324 |
| Less amounts representing interest | (19) |
| Present value of minimum lease payments | $305 |
Settlements
Manchester City Football Group
The Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning amounts allegedly owed by the Company under a Sponsorship Agreementsponsorship agreement with CFG.CFG (the “Sponsorship Agreement”). In August 2016, CFG commenced arbitration in the United Kingdom against the Company, seeking approximately $8.3 million for the Company’s purported breach of the Sponsorship Agreement.
On July 28, 2017, the Company approved a Settlement Agreement (the “Settlement“CFG Settlement Agreement”) with CFG effective July 7, 2017. The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement, the Company has agreed to pay CFG a sum of $3 million, consistingwhich was recorded as accrued expenses in 2017. The settlement consists of a $1 million payment that was advanced by a related party on July 7, 2017, a $1 million installment paid on July 7, 2018 and a subsequent $1 million installmentsinstallment payment to be paid by July 7, 20182019. Of this amount, the Company has remitted $0.3 million.
During the three months ended March 31, 2021 and July 7, 2019, respectively.
Nutrablend Matter
On February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against MusclePharm in the United States District Court for the nine months endedEastern District of California, claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods.
On September 25, 2020, the parties successfully mediated the case to a settlement and the Company agreed to (i) pay approximately $3.1 million (“Owed Amount”) in monthly payments (“Monthly Payments”) from September 1, 2020 through June 30, 20172023 and (ii) issue monthly purchase orders (“Purchase Orders”) at minimum amounts accepted by Nutrablend.
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MusclePharm agreed to issue Purchase Orders in a combined total amount of at least (i) $1,500,000 from September 1, 2020 through November 30, 2020; (ii) $1,800,000 from December 1, 2020 through February 28, 2021; (iii) $2,100,000 from March 31, 2021 through May 31, 2021; (iv) $2,100,000 from June 1, 2021 through August 31, 2021; and (v) $1,400,000 from September 1, 2021 through October 30, 2021. Beginning on November 1, 2021, MusclePharm will be required to issue monthly Purchase Orders to Nutrablend in a minimum amount of $700,000 until the Owed Amount is paid in full to Nutrablend. In the event that MusclePharm pays the Owed Amount in full before September 1, 2021, MusclePharm is entitled to a rebate on all completed Purchase Orders. Further, once the monthly payments, and any additional payments that MusclePharm has made on the Owed Amount, reduce the outstanding balance of the Owed Amount to below $2.0 million, MusclePharm is eligible for an extension of a line of credit from Nutrablend in an amount of up to $3.0 million.
The Company determined that approximately $1.5$1.0 million representingdollars of the discountedOwed Amount was due within a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated balance sheets. The present value of the unrecorded settlementremaining Owed Amount that was due after a year was $1.2 million, and the amount and an additional $0.1 million, representing imputed interest.was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company has now concludedmade payments of $0.5 million as of March 31, 2021.
During the finalizationperiod ended March 31, 2021, the Company recorded interest expense of all its major legacy endorsement deals.
4Excelsior Matter
On March 18, 2019, Excelsior Nutrition, Inc. (“Marine MP”4Excelsior”), Arnold Schwarzenegger (“Schwarzenegger”), and Fitness Publications, Inc. (“Fitness,” and together with Marine MP and Schwarzenegger,a manufacturer of MusclePharm products, filed an action against MusclePharm in the “AS Parties”) concerning amountsSuperior Court of the State of California for the County of Los Angeles, claiming approximately $6.2 million in damages relating to allegedly owedunpaid invoices, as well as approximately $7.8 million in consequential damages. On January 27, 2020, MusclePharm filed a counterclaim against 4Excelsior seeking unidentified damages relating to, among other things, 4Excelsior’s failure to fulfill a purchase order. MusclePharm also moved to strike 4Excelsior’s consequential damages on the grounds that they are unrecoverable under the parties’ Endorsement LicensingUniform Commercial Code. The court denied that motion, and Co-Branding Agreement (the “Endorsement Agreement”). In May 2016, the Company received written notice that the AS Parties were terminating the Endorsement Licensing and Co-Branding Agreement by and amongaction proceeded to discovery.
On November 16, 2020, the Company and the AS Parties, then the Company4Excelsior entered into a stipulation of settlement that provided written notice to the AS Parties that it was terminating the Endorsement Agreement, and the AS Parties then commenced arbitration, which alleged that the Company breached the parties’ agreementwould pay to 4Excelsior a total of $4.75 million in four monthly payments of $70,000, beginning January 5, 2021, and misappropriated Schwarzenegger’s likeness. The Company filed its response and counterclaimed for breachthereafter in monthly payments of contract and breach of the implied covenant of good faith and fair dealing.
On December 17, 2016, the Company16, 2020, MusclePharm and 4Excelsior entered into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant to which the parties resolved and settled the civil action pending in the Superior Court of the State of California for the County of Los Angeles (the “Settlement Agreement”“Litigation”) with the AS Parties, effective January 4, 2017. Pursuant. The parties agreed to the Settlement Agreement,a mutual general release of claims and to resolve and settle all disputes between the parties and release all claims between them, the Company agreed to pay the AS Parties (a) $1.0 million, which payment was released to the AS Parties on January 5, 2017, and (b) $2.0 millionjointly file within six months10 business days of the effective date of the Agreement a stipulation and proposed order of dismissal, dismissing with prejudice all claims and counterclaims asserted in the Litigation. MusclePharm agreed to pay $4.75 million (the “Settlement Amount”) in four monthly payments of $70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million until the Settlement Agreement. Amount is fully paid. MusclePharm may prepay all or any portion of the Settlement Amount at any time without penalty or premium. The Agreement provides that, in the event of a Default (as defined in the Agreement) by MusclePharm, the entire outstanding balance of the Settlement Amount will become immediately due and payable, plus accrued interest at a rate of 18% per annum, commencing from the date of default.
The Company paiddetermined that approximately $1.1 million dollars of the settlementSettlement Amount was due within a year, and this amount was recorded in full“Accrued and other liabilities” in the consolidated balance sheets. The present value of the remaining Settlement Amount that was due after a year was $2.4 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $0.2 million as of September 30, 2017. TheMarch 31, 2021.
During the period ended March 31, 2021, the Company also has agreed that it will not sell any products from its Arnold Schwarzenegger product line, will donate to a charity chosen by Arnold Schwarzenegger any remaining usable product, and otherwise destroy any products currently in inventory. This inventory was written off to “Impairmentrecorded interest expense of assets”$0.1 million, in the Consolidated Statementconsolidated statements of Operations during the year ended December 31, 2016. In addition, in connection with the transaction, the 780,000 shares of Company common stock held by Marine MP were sold to a third party on January 4, 2017 in exchange for an aggregate payment by such third party of $1,677,000 to the AS Parties.operations.
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Contingencies
In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. As of September 30, 2017,March 31, 2021, the Company was involved in the following material legal proceedings described below.
ThermoLife International
In January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to MusclePharm, filed a complaint against the Companyus in Arizona state court. In its complaint, ThermoLife allegesalleged that the Companywe failed to meet minimum purchase requirements contained in the parties’ supply agreement and seeks monetary damages for the deficiency in purchase amounts.agreement. In March 2016, we filed counterclaims alleging that ThermoLife’s products were defective. Through orders issued in September and November 2019, the court dismissed MusclePharm’s counterclaims and found that the Company was liable to ThermoLife for failing to meet its minimum purchase requirements.
The court held a bench trial on the issue of damages in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against the Company in the amount of $1.6 million, comprised of $0.9 million in damages, interest in the amount of $0.3 million and attorneys’ fees and costs in the amount of $0.4 million. The Company recorded $1.6 million in accrued expenses in 2018. As of December 31, 2020, the total amount accrued, including interest, was $1.8 million. In the interim, the Company filed an answer to ThermoLife’s complaint, denying the allegations containedappeal and posted bonds in the complaint,total amount of $0.6 million in order to stay execution on the judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid by Mr. Drexler on behalf of the Company. See “Note 8. Debt” for additional information. The balance of $0.35 million was secured by a personal guaranty from Mr. Drexler, while the associated fees of $12,500 were paid by the Company. On April 27, 2021, the appellate court issued a decision largely affirming the trial court judgement, except vacating the judgement’s $0.3 million prejudgment interest award and remanding for a recalculation of prejudgment interest. On May 18, 2021, ThermoLife filed a counterclaim alleging that ThermoLife breached its express warrantymotion asking the trial court to increase MusclePharm’s appeal bond to the full amount of the judgment, or $1.8 million, which MusclePharm because ThermoLife’s products were defectiveintends to vigorously oppose.
For both the three months ended March 31, 2021 and could not be incorporated into the Company’s products. Therefore,2020, interest expense recognized by the Company believeson the awarded damages was $22,000.
The Company intends to vigorously continue pursuing its defenses, including an appeal to the Arizona Supreme Court, which it has until June 25, 2021 to file a petition for review.
White Winston Select Asset Fund Series MP-18, LLC et al., v. MusclePharm Corp., et al., (Nev. Dist. Ct.; Cal. Superior Court; Colorado Dist. Ct.; Mass. Super. Ct.)
On August 21, 2018, White Winston Select Asset Fund Series MP-18, LLC and White Winston Select Asset Fund, LLC (together “White Winston”) initiated a derivative action against MusclePharm and its directors (the “director defendants”). White Winston alleges that ThermoLife’sthe director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by MusclePharm to Mr. Drexler (the “Amended Note”) in exchange for $18.0 million in loans. White Winston alleges that this refinancing improperly diluted their economic and voting power and constituted an improper distribution in violation of Nevada law. In its complaint, is without merit. The lawsuit continues to be inWhite Winston sought the discovery phase.
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Along with its complaint, in Colorado stateWhite Winston also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction enjoining the exercise of Mr. Drexler’s conversion right under the Amended Note. On August 23, 2018, the Nevada district court againstissued an ex parte TRO. On September 14, 2018, the Companycourt let the TRO expire and Ryan Drexler, Chairman of the Board, Chief Executive Officer and President, alleging,denied White Winston’s request for a preliminary injunction, finding, among other things, that White Winston did not show a likelihood of success on the Company breachedmerits of the Employment Agreement,underlying action and failed to establish irreparable harm. Following the court’s decision, MusclePharm filed a motion seeking certain equitable reliefto recoup the legal fees and unspecified damages. The Company believes Estalella’s claims are without merit. Ascosts it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded MusclePharm $56,000 in fees and costs.
Due to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the trial, the Company has evaluatednot recorded an estimate for its potential liability.
On June 17, 2019, White Winston moved for the potential outcomeappointment of this lawsuit and recordeda temporary receiver over MusclePharm, citing Plante Moran’s resignation. The court granted White Winston’s request to hold an evidentiary hearing on the liability consistent with its policy for accruing for contingencies. The lawsuit continuesmotion, but subsequently stayed the action pending the parties’ attempts to beresolve their dispute. Although the parties have been unable to reach a resolution, the litigation has not yet resumed. On July 30, 2019, White Winston filed an action in the discovery phase with a revised trial date expected to commence in May 2018.
MusclePharm intends to seek a rehearing of the appellate court's decision.
IRS Audit
On April 6, 2016, the Internal Revenue Service (“IRS”) selected the Company’sour 2014 Federal Income Tax Return for audit. As a result of the audit, the IRS proposed certain adjustments with respect to the tax reporting of the Company’sour former executives’ 2014 restricted stock grants. Due to the Company’s current and historical loss position, the proposed adjustments would have no material impact on itsthe Company’s Federal income tax. On October 5, 2016, the IRS commenced an audit of the Company’sour employment and withholding tax liability for 2014. The IRS is contendingcontends that the Company inaccurately reported the value of the restricted stock grants and improperly failed to provide for employment taxes and federalFederal tax withholding on these grants. In addition, the IRS is proposing certain penalties associated with the Company’s filings. On April 4, 2017, the Company received a “30-day letter” from the IRS asserting back taxes and penalties of approximately $5.3 million, of which $0.4$4.4 million related to employmentwithholding taxes, specifically, income withholding and Social Security taxes, and $4.9$0.9 million related to federal tax withholding and penalties. Additionally, the IRS is assertingasserts that the Company owes information reporting penalties of approximately $2.0 million.
The Company’s counsel has submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties on the Company’s behalf, and the Company intends to pursuehas been pursuing this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.
The remaining issue in dispute in this matter involves the fair market value of restricted stock units in the Company granted to certain former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagree as to the value of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS have exchanged expert valuation reports on the fair market value of the stock and have had extensive negotiations on this issue. The parties, however, have not been able to reach an agreement with respect to the value of the stock. The IRS has also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS has asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for the amount of any tax due, and not the Company.
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The Former Officers cases were scheduled for trial in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February 4, 2020. The basis for the continuance was that the IRS and the Former Officers had made progress toward a settlement of the valuation issue involving the grants of the restricted stock. The outcome of these settlement negotiations will be relevant to the Company’s case. The Company is closely monitoring the settlement discussions between the IRS and the Former Officers. The Tax Court ordered the Former Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before February 28, 2021. The IRS and the Former Officers filed status reports with the Tax Court on February 26, 2021. After receiving the status reports, the Tax Court issued an order directing the parties to file further status reports on or before July 9, 2021. The Tax Court has not set a trial dates in the cases of the Former Officers.
Due to the uncertainty associated with determining the Company’sour liability for the asserted taxes and penalties, if any, and to the Company’sour inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the IRS appeals process, the Company is unable to providehas not recorded an estimate for its potential liability, if any, associated with these taxes.
During the
For the Year Ending December 31, | ||||
Remainder of 2017 | 2018 | 2019 | Total | |
| Outstanding Payments | ||||
| Endorsement | $32 | $11 | $— | $43 |
| Sponsorship | 52 | 144 | 55 | 251 |
| Total future payments | $84 | $155 | $55 | $294 |
On August 22, 2018, Richard Estalella filed an action against us and two other defendants in the Colorado District Court for the County of Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014 restricted stock grants. We have answered Estalella’s complaint, asserted counterclaims against Estalella for his failure to ensure that all withholding taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against two valuation firms named in the action (as well as their principals) for failing to properly value the 2014 restricted stock grants for tax purposes. Trial in the matter has been scheduled for February 7, 2022. There are no amounts accrued related to its common stock including restricted stock awards (in thousands, except share and per share data):
| Transaction Type | Quantity (Shares) | Valuation ($) | Range of Value per Share |
| Stock issued to employees, executives and directors | 538,945 | $1,045 | $1.87-2.17 |
| Total | 538,945 | $1,045 | $1.87-2.17 |
| Transaction Type | Quantity (Shares) | Valuation ($) | Range of Value per Share |
| Stock issued to employees, executives and directors | 372,154 | $914 | $1.89-2.95 |
| Stock issued related to sale of subsidiary | 200,000 | 640 | 3.20 |
| Cancellation of executive restricted stock | (433,000) | (456) | 13.00 |
| Total | 139,154 | $1,098 | $1.89-13.00 |
The Company has valued this warrant by utilizingwill continue to vigorously litigate the Black Scholes model at approximately $1.8 million with the following assumptions: contractual life of four years, risk free interest rate of 1.27%, dividend yield of 0%, and expected volatility of 118.4%.
Note 11.8. Stock-Based Compensation
Restricted Stock
There were no restricted stock awards granted to employees, executives and Board members was as follows:
Unvested Restricted Stock Awards | ||
Number of Shares | Weighted Average Grant Date Fair Value | |
| Unvested balance – December 31, 2016 | 378,425 | $3.45 |
| Granted | 538,945 | 1.94 |
| Vested | (179,680) | 2.67 |
| Cancelled | — | — |
| Unvested balance – September 30, 2017 | 737,690 | 2.53 |
As of September 30, 2017, the totalMarch 31, 2021 there was no unrecognized expense for unvested restricted stock awards, net of expected forfeitures, was $0.8 million, which is expected to be amortized over a weighted average period of 0.8 years.
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Stock Options
For the three months ended March 31, 2021 and 2020, the Company recorded no stock compensation expense related to options of $29,000 and $42,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded stock compensation expense related to options of $112,000 and $97,000, respectively.
Note 12.9. Net LossIncome (Loss) per Share
Basic net lossincome (loss) per share is computed by dividing net lossincome (loss) for the period by the weighted average number of shares of common stock outstanding during each period, excluding any unvested restricted stock shares which are included in common stock outstanding. There was no dilutive effect for the outstanding potentially dilutive securities for the three and nine months ended September 30, 2017 and 2016, respectively, as the Company reported a net loss for all periods.
The following table sets forth the computation of the Company’s basic and diluted net lossincome (loss) per share for the periods presented (in thousands, except share and per share data):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Net loss | $(2,128) | $(1,447) | $(8,426) | $(12,248) |
| Weighted average common shares used in computing net loss per share, basic and diluted | 13,875,119 | 13,978,833 | 13,819,939 | 13,886,496 |
| Net loss per share, basic and diluted | $(0.15) | $(0.10) | $(0.61) | $(0.88) |
For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income (loss) | $ | 94 | $ | (60 | ) | |||
| Weighted average common shares used in computing net income (loss) per share, basic | 33,119,549 | 32,459,675 | ||||||
| Potentially diluted securities | 12,373,071 | — | ||||||
| Weighted average common shares used in computing net income (loss) per share, diluted | 45,492,621 | 32,459,675 | ||||||
| Net income (loss) per share, basic and diluted | $ | 0.00 | $ | (0.00 | ) | |||
Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive effect of outstanding potentially dilutive securities, and the if-converted method to assess the dilutive effect of the convertible notes.
The Company reported a net loss for all periods. However, if the Company had net income for the three and nine months ended September 30, 2017, theMarch 31, 2021. The weighted average shares of 12,373,071, which represented potentially dilutive securities related to Mr. Drexler’s convertible notes outstanding in 2020, were included in the earningscomputations for the diluted net income per share computation would have been 8,852,627 and 9,048,072, respectively. If the Company had net income for the three and nine months ended September 30, 2016,March 31, 2021.
The following securities were excluded from the potentially dilutive securities included incomputations of the earningsdiluted net income (loss) per share, computation would have been 2,608,695 for both periods.
As of September 30, | ||
2017 | 2016 | |
| Stock options | 171,703 | 192,307 |
| Warrants | 1,389,378 | 100,000 |
| Unvested restricted stock | 737,690 | 336,014 |
| Convertible notes | 8,619,624 | 2,608,695 |
| Total common stock equivalents | 10,918,395 | 3,237,016 |
| As of March 31, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | 171,703 | 171,703 | ||||||
| Warrants | — | 1,289,378 | ||||||
| Unvested restricted stock | — | 541,322 | ||||||
| Convertible notes | 12,373,071 | 931,974 | ||||||
| Total common stock equivalents | 12,554,774 | 2,934,377 | ||||||
Note 13.10. Income Taxes
The Company recorded a tax provision of $0 and $22,000 for the three months ended March 31, 2021 and 2020, respectively.
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Income taxes are provided for the tax effects of transactions reported in the Condensed Consolidated Financial Statementsconsolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has establisheddetermined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as it is more likely than not that the tax benefits will not be realized as of September 30, 2017.
Note 14.11. Segments, Geographical Information
The Company’s chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company currently has a single reporting segment and operating unit structure. In addition, substantially all long-lived assets are attributable to operations in the U.S. for both periods presented.
Revenue, net by geography is based on the company addresses of the customers. The following table sets forth revenue, net by geographic area (in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenue, net: | ||||
| United States | $14,502 | $18,744 | $46,769 | $71,955 |
| International | 9,894 | 11,950 | 29,828 | 34,518 |
| Total revenue, net | $24,396 | $30,694 | $76,597 | $106,473 |
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue, net: | ||||||||
| United States | $ | 9,274 | $ | 11,847 | ||||
| International | 3,847 | 4,384 | ||||||
| Total revenue, net | $ | 13,121 | $ | 16,231 | ||||
Note 16.12. Subsequent Events
On May 12, 2021, the Company entered into an entityAgreement (the “Agreement”) with Joseph Cannata (“Cannata”), pursuant to disclose events that occur afterwhich the balance sheet date but before financial statements are issued or are availableCompany has engaged Cannata on a non-exclusive basis to be issued (“subsequent events”) as well asassist with the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions that existed at the dategrowth of the balance sheet, includingCompany’s energy beverage product line.
In connection with entry into the estimates inherent inAgreement, the process of preparing financial statements, (“recognized subsequent events”). The second type consists of events that provide evidence about conditions that did not exist at the dateCompany issued to Cannata an option to purchase 1,673,994 shares of the balance sheet but arose subsequentCompany’s common stock at a price per share of $1.12. The option has an exercise term of 10 years (subject to that date (“non-recognized subsequent events”).
In addition, the Company agreed to December 31, 2019 and accordingly such debt has been classified as a long-term liabilitymake quarterly payments to Cannata during the term of the Agreement in amounts equal to 17.5% of the accompanying condensed consolidated Balance Sheet asgross profit attributable to the applicable products, excluding products sold through certain excluded sales channels.
The Agreement continues in effect unless terminated by the mutual agreement of September 30, 2017.
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ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statementsconsolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016,2020 (the “2020 Form 10-K”), as filed with the Securities and Exchange Commission on March 15, 2017, or the 2016 Form 10-K.29, 2021. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Form 10-Q. Except as otherwise indicated herein, the terms “MusclePharm,” “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries.
Overview
MusclePharm is a scientifically driven,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 gels.on-the-go ready to eat snacks that satisfy the needs of enthusiasts and professionals alike. Our portfolio of recognized brands, including MusclePharm
Our offerings are clinically developed through a six-stage research process, that utilizesand all of our manufactured products are rigorously vetted for banned substances by the expertise of leading nutritional scientists, doctors and universities. We competequality assurance program, Informed-Choice. While we initially drove growth in the global supplements market,Specialty retail channel, in recent years we have expanded our focus to drive sales and currentlyretailer growth across leading e-commerce, Food Drug & Mass (“FDM”), and Club retail channels. Our primary distribution channels are Specialty, International and FDM.
COVID-19
Our results of operations have subsidiariesbeen affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in Dublin, Ireland, Hamilton, (Ontario) Canada,many markets and Sydney, Australia.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our core operations, we anticipate continued improvement in our operating marginsbusiness, financial condition and expense structure. We anticipate revenue and gross marginresults of operations. Management continues to strengthen as we increase focus on our core MusclePharm products and further innovate and develop new products. We are implementing two additional core elements or our growth strategy: 1) international sales expansion; and 2) diversifying our distribution channels. We see potential growth in our on-linemonitor the business dueenvironment for any significant changes that could impact the Company’s operations. The Company has taken proactive steps to the continuing migration of consumers from the traditional brick and mortar style businesses to on-line retailers. We also are evaluating increasing our spending on advertising and promotions expenses, for new product lines and changes in our online sales channels, with a shift to more effective marketing and advertising strategies as we move away from costly celebrity endorsements.
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Results of Operations (Unaudited)
Comparison of the Three Months Ended September 30, 2017March 31, 2021 to the Three Months Ended September 30, 2016
For the Three Months Ended September 30, | ||||
2017 | 2016 | $ Change | % Change | |
($ in thousands) | ||||
| Revenue, net | $24,396 | $30,694 | $(6,298) | (20.5)% |
Cost of revenue (1) | 16,359 | 20,497 | (4,138) | (20.2) |
| Gross profit | 8,037 | 10,197 | (2,160) | (21.2) |
| Operating expenses: | ||||
| Advertising and promotion | 1,952 | 1,905 | 47 | 2.5 |
| Salaries and benefits | 2,640 | 2,291 | 349 | 15.2 |
| Selling, general and administrative | 3,468 | 3,937 | (469) | (11.9) |
| Research and development | 199 | 270 | (71) | (26.3) |
| Professional fees | 1,034 | 1,315 | (281) | (21.4) |
| Restructuring and other charges | — | 1,667 | (1,667) | (100.0) |
| Impairment of assets | — | 137 | (137) | (100.0) |
| Total operating expenses | 9,293 | 11,522 | (2,229) | (19.3) |
| Loss from operations | (1,256) | (1,325) | 69 | 5.2 |
| Other expense, net | (858) | (122) | (736) | (603.3) |
| Loss before provision for income taxes | (2,114) | (1,447) | (667) | 46.1 |
| Provision for income taxes | 14 | — | 14 | 100.0 |
| Net loss | $(2,128) | $(1,447) | $(681) | 47.1% |
For the Nine Months Ended September 30, | ||||
2017 | 2016 | $ Change | % Change | |
($ in thousands) | ||||
| Revenue, net | $76,597 | $106,473 | $(29,876) | (28.1)% |
Cost of revenue (1) | 54,474 | 70,377 | (15,903) | (22.6) |
| Gross profit | 22,123 | 36,096 | (13,973) | (38.8) |
| Operating expenses: | ||||
| Advertising and promotion | 6,079 | 8,878 | (2,799) | (31.5) |
| Salaries and benefits | 8,530 | 15,203 | (6,673) | (43.9) |
| Selling, general and administrative | 9,183 | 12,604 | (3,421) | (27.1) |
| Research and development | 488 | 1,664 | (1,176) | (70.7) |
| Professional fees | 2,643 | 4,445 | (1,802) | (40.5) |
| Restructuring and other charges | — | (2,579) | 2,579 | 100.0 |
| Settlement of obligation | 1,453 | — | 1,453 | 100.0 |
| Impairment of assets | — | 4,450 | (4,450) | (100.0) |
| Total operating expenses | 28,376 | 44,665 | (16,289) | (36.5) |
| Loss from operations | (6,253) | (8,569) | 2,316 | (27.0) |
| Gain on settlement of accounts payable | 471 | — | 471 | 100.0 |
| Loss on sale of subsidiary | — | (2,115) | 2,115 | 100.0 |
| Other expense, net | (2,526) | (1,426) | (1,100) | 77.1 |
| Loss before provision for income taxes | (8,308) | (12,110) | 3,802 | 31.4 |
| Provision for income taxes | 118 | 138 | (20) | (14.5) |
| Net loss | $(8,426) | $(12,248) | $3,822 | 31.2% |
For the Three Months Ended March 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenue, net | $ | 13,121 | $ | 16,231 | $ | (3,110 | ) | (19 | )% | |||||||
| Cost of revenue | 9,432 | 11,422 | 1,990 | (17 | ) | |||||||||||
| Gross profit | 3,689 | 4,809 | (1,120 | ) | (23 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Advertising and promotion | 345 | 125 | 220 | 176 | ||||||||||||
| Salaries and benefits | 1,048 | 1,681 | (633 | ) | (38 | ) | ||||||||||
| Selling, general and administrative | 1,397 | 1,911 | (514 | ) | (27 | ) | ||||||||||
| Professional fees | 627 | 541 | 86 | 16 | ||||||||||||
| Total operating expenses | 3,417 | 4,258 | (841 | ) | (20 | ) | ||||||||||
| Income from operations | 272 | 551 | (279 | ) | (51 | ) | ||||||||||
| Other expense: | ||||||||||||||||
| Interest and other expense, net | (178 | ) | (589 | ) | 411 | (70 | ) | |||||||||
| Income (loss) before provision for income taxes | 94 | (38 | ) | 132 | (347 | ) | ||||||||||
| Provision for income taxes | — | 22 | (22 | ) | (100 | ) | ||||||||||
| Net income (loss) | $ | 94 | $ | (60 | ) | $ | 154 | (257 | )% | |||||||
The following table presents our operating results as a percentage of revenue, net for the periods presented:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue, net | 100 | % | 100 | % | ||||
| Cost of revenue | (72 | ) | (70 | ) | ||||
| Gross profit | 28 | 30 | ||||||
| Operating expenses: | ||||||||
| Advertising and promotion | 3 | 1 | ||||||
| Salaries and benefits | 8 | 10 | ||||||
| Selling, general and administrative | 11 | 12 | ||||||
| Professional fees | 5 | 3 | ||||||
| Total operating expenses | 26 | 26 | ||||||
| Income from operations | 2 | 3 | ||||||
| Other expense: | ||||||||
| Interest and other expense, net | (1 | ) | (3 | ) | ||||
| Income (loss) before provision for income taxes | 1 | — | ||||||
| Provision for income taxes | — | — | ||||||
| Net income (loss) | 1 | % | — | % | ||||
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For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenue, net | 100% | 100% | 100% | 100% |
| Cost of revenue | 67 | 67 | 71 | 66 |
| Gross profit | 33 | 33 | 29 | 34 |
| Operating expenses: | ||||
| Advertising and promotion | 8 | 6 | 8 | 12 |
| Salaries and benefits | 11 | 7 | 11 | 20 |
| Selling, general and administrative | 14 | 13 | 12 | 17 |
| Research and development | 1 | 1 | 1 | 2 |
| Professional fees | 4 | 4 | 3 | 6 |
| Restructuring and other charges | — | 5 | — | (3) |
| Settlement | — | — | 2 | — |
| Impairment of assets | — | — | — | 6 |
| Total operating expenses | 38 | 37 | 37 | 58 |
| Loss from operations | (5) | (3) | (8) | (10) |
| Gain on settlement of accounts payable | — | — | 1 | — |
| Loss on sale of subsidiary | — | — | — | (3) |
| Other expense, net | (4) | — | (3) | (2) |
| Loss before provision for income taxes | (9) | (5) | (11) | (16) |
| Provision for income taxes | — | — | — | — |
| Net loss | (9)% | (5)% | (11) % | (16)% |
Revenue, net
We derive our revenue through the sales of our various branded nutritional supplements. Revenue is recognized when persuasive evidencecontrol of a promised good is transferred to a customer in an arrangement exists, delivery has occurred,amount that reflects the priceconsideration that the Company expects to be entitled to in exchange for that good. This usually occurs when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier.
The MusclePharm brands are marketed across major global retail distribution channels. Below is fixed or determinable, and collection is reasonably assureda table of revenue, net by our major distribution channel (in thousands):
| For the Three Months Ended March 31, | ||||||||||||||||
| 2021 | % of Total | 2020 | % of Total | |||||||||||||
| Distribution Channel | ||||||||||||||||
| Specialty | $ | 6,795 | 52 | % | $ | 8,036 | 50 | % | ||||||||
| International | 3,847 | 29 | % | 4,384 | 27 | % | ||||||||||
| FDM | 2,479 | 19 | % | 3,811 | 23 | % | ||||||||||
| Total | $ | 13,121 | 100 | % | $ | 16,231 | 100 | % | ||||||||
Revenue, net reflects the transaction prices for contracts, which typically occurs upon shipment or delivery of the products.includes products shipped at selling list prices reduced by variable consideration. We record sales incentives as a direct reduction of revenue for various discounts provided to our customers consisting primarily of volume incentive rebates and advertisingpromotional related credits. We accrue for sales discounts over the period they are earned. Sales discounts are a significant part of our marketing plan to our customers as they help drive increased sales and brand awareness with end users through promotions that we support through our distributors and re-sellers.
Revenue, net revenue decreased 20.5%$3.1 million, or 19%, to $24.4$13.1 million and 28.1% to $76.6 million, respectively, compared to the three and nine months ended September 30, 2016 when net revenues were $30.7 million and $106.5 million, respectively. Net revenue for the three and nine months ended September 30, 2017 decreased due to the termination of the Arnold Schwarzenegger product-line licensing agreement, the sale of our BioZone subsidiary, and certain other products being discontinued. For the three months ended September 30, 2016, revenue from our BioZone subsidiary was $2.4 million. For the nine months ended September 30, 2016, revenue from our BioZone subsidiary, from the Arnold Schwarzenegger product line and from discontinued products were $3.8March 31, 2021, compared to $16.2 million $3.8 million and $2.2 million, respectively. Lower sales also were reported for the three and nine months ended September 30, 2017March 31, 2020. Revenue, net for severalthe three months ended March 31, 2021 decreased primarily due to an industry wide supply shortages on components, which delayed production of our traditional brick and mortar retail partners. For the three and nine months ended September 30, 2017 discountsproducts.
Discounts and sales allowances decreased to 8%15% of gross revenue, or $2.1$2.4 million, and 15.8%for the three months ended March 31, 2021, from 20% of gross revenue, or $13.8$4.0 million respectively, comparedfor the same period in 2020. The reduction in discounts as a percent of gross revenue was due to changes in customer mix and discretionary promotional activity.
During the three and nine months ended September 30, 2016 when discountsMarch 31, 2021 and allowances were 26.8%, or $10.1 million, and 20.8%, or $27.9 million, respectively. The changes in discounts and allowances were primarily related to discounts and allowances on existing products with key customers. The decreases are the result of changes in the way the Company promotes its products and a general change in the way we are structuring sales arrangements with our existing customers.
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Cost of Revenue and Gross Margin
Cost of revenue for MusclePharm products is directly related to the production, manufacturing, and freight-in of the related products purchased from third party contract manufacturers. We mainly ship customer orders from our distribution center in Spring Hill, Tennessee. This facility is operated with our equipment and employees, and we own the related inventory. We also use U.S. contract manufacturers to drop ship products directly to our customers. In addition, we began tocustomers, as well as ship products directly to our European customersproduct from our contract manufacturerwarehouse in Europe duringTennessee where we own the quarter ended June 30, 2017.
Our gross profit fluctuates due to several factors, including sales incentives, new product introductions and upgrades to existing product lines, changes in customer and product mixes, the mix of product demand, shipment volumes, our product costs, pricing, and inventory write-downs. Our cost of revenue for the three and nine months ended September 30, 2017 increased due to higher costs related to our protein products which we were unable to pass on to our customers. Cost of revenue is expected to return to a historical base over timeMarch 31, 2021 decreased from the same period in 2020 primarily as a percentageresult of revenue due primarily to anticipated inflationary cost increases being partially offset by our focus on supply chain efficiency and negotiating better pricing with our manufacturers and launch of our higher margin organic product line.
Costs of revenue decreased 20.2%17% to $16.4$9.4 million and 22.6% to $54.5 million, respectively,for the three months ended March 31, 2021, compared to $11.4 million for the same period in 2020. This decrease was due to lower sales volume. Gross profit for the three and nine months ended September 30, 2016, when costs of revenues were $20.5March 31, 2021 decreased 1% to $3.7 million, and $70.3 million, respectively. Accordingly, gross profit for three and six months decreased 21.2% to $8.0 million and 38.8% to $22.1 million, respectively, compared to $4.8 million for the same period in 2020. Gross profit was 28% of revenue, net for the three and nine months ended September 30, 2016, when gross profit was $10.2 million and $36.1 million, respectively. Gross profit percentage has been positively impacted by a decreaseMarch 31, 2021 compared to discounts and allowances.30% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage is the inflationary cost increase in our protein productswas higher commodity and to a lesser extent, the loss on selling some discontinued products.
Operating Expenses
Advertising and Promotion
Our advertising and promotion expense consists primarily of digital, print and media advertising, athletic endorsements and sponsorships, promotional giveaways, trade show events and various partnering activities with our trading partners. Prior to our restructuring during the third quarter of 2015,Historically, advertising and promotions were a large part of both our growth strategy and brand awareness. We builtawareness, in particular strategic partnerships with sports athletes and fitness enthusiasts through endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and sports teams. In connection with our restructuring plan, we have terminated the majority of these contracts in a strategic shift away from such costly arrangements and moved toward more cost-effective brand partnerships as well as grass-roots marketingprograms, including digital advertising, ambassador programs and advertising efforts. We are evaluating our advertising and promotion expenses as we continue to leverage existing brand recognition and move towards lower cost advertising outlets including social media and trade advertising.
Advertising and promotion expense increased 2.5%176% to $2.0$0.3 million and decreased 31.5% to $6.1 million, respectively,for the three months ended March 31, 2021, or 3% of revenue, net compared to three and nine months ended September 30, 2016, when advertising and promotion expense were $1.9$0.1 million, and $8.9 million, respectively.or 1% of revenue, net for the same period in 2020. Advertising and promotion expense for the three and nine months ended September 30, 2017 and 2016 includedprimarily include expenses related to club demonstrations, print and online advertising, trade shows and strategic partnerships with athletes and sports teams. The expense associated with these partnershipsincrease for the three2021 is related to increased demonstrations and nine months ended September 30, 2017 comparedsampling due to the three and nine months ended September 30, 2016 increased by $0.7 million and decreased by $1.2 million, respectively, as we renegotiated or terminatedlaunch of a number of contracts as partnew flavor with one of our restructuring activities. The remaining decreases were attributable to various advertising and promotional efforts.
Salaries and Benefits
Salaries and benefits consist primarily of salaries, bonuses, benefits, and stock-based compensation. Personnel costs are a significant component of our operating expenses.
Salaries and benefits have decreased through the quarter ended September 30, 2017 due38% to headcount reductions, limited headcount additions, a reduction in restricted stock awards, and a reduction in amortization$1.0 million, or 8% of existing stock-based grants. We do not expect further reductions during the remainder of the calendar year. We are in the process of moving our headquarters from Colorado to California. Because of the transition, management is evaluating staffingrevenue, net for the new office. In the interim, management anticipates a transition period and we may incur higher costs as staff is transitioned to the new headquarters.
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Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of depreciation and amortization, research and development, information technology equipment and network costs, facilities related expenses, director’s fees, which include both cash and stock-based compensation, insurance, rental expenses related to equipment leases, supplies, legal settlement costs, and other corporate expenses.
Selling, general and administrative expenses decreased 11.9%27% to $3.5$1.4 million, and 27.1% to $9.2 million, respectively,or 11% of revenue, net for three months ended March 31, 2021, compared to the three and nine months ended September 30, 2016, when selling, general and administrative expenses were $3.9$1.9 million, and $12.6 million, respectively. The decreases duringor 12% of revenue, net for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 wereMarch 31, 2020 primarily due to lower office expenses and other miscellaneous cost savings of $0.4 million, lower freight expense of $0.4 million, a decrease in rent expense of $0.1 million, lower depreciation and amortization of $0.1 million, and a decrease of $0.2 million related to information technology. The decreases were partially offset by an increase in the provision for bad debts of $0.8 million. The decreases during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 were primarily due to lower office expenses and other miscellaneous cost savings of $1.7 million, lower freight expense of $1.2 million, a decrease in rent expense of $0.5 million, lower depreciation and amortization of $0.5 million, and a decrease of $0.6 million related to information technology. The decreases were partially offset by an increase in the provision for bad debts of $1.1 million.
Professional Fees
Professional fees consist primarily of legal fees, accounting and audit fees, consulting fees, which includes both cash and stock-based compensation, and investor relations costs. We expect our professional
Professional fees increased 16% to decrease slightly as we continue to rationalize our professional service providers and focus on key initiatives. Also, as our ongoing legal matters are reduced, we expect to see a further decline in legal costs$0.6 million, or 5% of revenue, net for specific settlement activities. We intend to continue to invest in strengthening our governance, internal controls and process improvements which may require some support from third-party service providers.
Interest and other expense, net
For the three months ended September 30, 2016 was primarily due to lower legal fees of $0.3 million due to reduced litigation. The decrease during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to lower accounting fees of $0.6 million due to performing services in-houseMarch 31, 2021 and legal fees of $1.2 million due to reduced litigation.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Other expense, net: | ||||
| Interest expense, related party | $(676) | $(134) | $(1,839) | $(376) |
| Interest expense, other | (6) | (32) | (14) | (160) |
| Interest expense, secured borrowing arrangement | (172) | (9) | (397) | (636) |
| Foreign currency transaction gain | 16 | 19 | 49 | 213 |
| Other | (20) | 34 | (325) | (467) |
| Total other expense, net | $(858) | $(122) | $(2,526) | $(1,426) |
For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Interest expense, related party | $ | (120 | ) | $ | (76 | ) | ||
| Interest expense, other | (227 | ) | (157 | ) | ||||
| Interest expense, secured borrowing arrangement | (163 | ) | (365 | ) | ||||
| Foreign currency transaction loss | (1 | ) | (34 | ) | ||||
| Loss on settlement obligation | — | (50 | ) | |||||
| Gain on legal settlement | 200 | — | ||||||
| Other | 133 | 93 | ||||||
| Total interest and other expense, net | $ | (178 | ) | $ | (589 | ) | ||
“Other” includes sublease income.
Net interest and other expense for the three and nine months ended September 30, 2017 increased 603.3%March 31, 2021 decreased 70%, or $0.7 million and 77.1%, or $1.1$0.4 million, compared to the three months and nine months ended September 30, 2016, respectively.same period in 2020. The increases in other expense, net wasdecrease is primarily related to reduced interest expense with a related party due to the increase in borrowing from the related party.
Provision for Income Taxes
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 carry-forwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.
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Liquidity and Capital Resources
The Company has incurred significant losses and experienced negative cash flows since inception. As of March 31, 2021, the inceptionCompany had cash of MusclePharm, other than cash from product sales, our primary source$0.6 million, a decline of cash has been$1.4 million from the saleDecember 31, 2020 balance of equity, issuance$2.0 million. As of convertible secured promissory notesMarch 31, 2021, we had a working capital deficit of $20.5 million, a stockholders’ deficit of $24.3 million and other short-term debt as discussed below. Management believes the restructuring plan completed during 2016, the continued reduction in ongoing operating costsan accumulated deficit of $192.6 million resulting from recurring losses from operations. As a result of our history of losses and expense controls, andfinancial condition, there is substantial doubt about our recently implemented growth strategy, will enable us to ultimately be profitable. We believe that we have reduced our operating expenses sufficiently so that our ongoing source of revenue will be sufficient to cover our expenses for the next twelve months, which we believe will allow usability to continue as a going concern. WeFor financial information concerning more recent periods, see our reports for such periods filed with the SEC.
The ability to continue as a going concern is dependent upon us generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations.
During the fourth quarter of 2019, the Company focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU’s and negotiate cost for raw materials. These steps improved gross margins in the fourth quarter of 2019 and this trend has continued through March 31, 2021.
During 2020, the Company experienced a slowdown in sales from retail customers, including our largest customer, which was partially offset an increase in sale from our largest online customer. In addition, the Company negotiated lower cost of sold with its co-manufactures.
In 2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive. The Company plans to launch 3 new energy products in the summer of 2021.
The Company believes reductions in operating costs with continued focus on gross profit will allow it to ultimately achieve sustained profitability, however, the Company can give no assurances that this will occur.
Management believes reductions in operating costs and continued focus on gross profit will allow us to ultimately achieve profitability, however, the Company can give no assurances that this will occur. To manage cash flow, we are able to obtain, if any, will be sufficient to meet our future needs, or that any suchhave entered into numerous financing will be obtainable on acceptable terms or at all.
Our net consolidated cash flows are as follows (in thousands):
For the Nine Months Ended September 30, | ||
2017 | 2016 | |
| Consolidated Statements of Cash Flows Data: | ||
| Net cash used in operating activities | $(2,337) | $(486) |
| Net cash provided by (used in) investing activities | (27) | 5,369 |
| Net cash provided by (used in) financing activities | 2,140 | (6,049) |
| Effect of exchange rate changes on cash | 159 | (21) |
| Net change in cash | $(65) | $(1,187) |
For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Consolidated Statements of Cash Flows Data: | ||||||||
| Net cash provided by operating activities | $ | 98 | $ | 161 | ||||
| Net cash (used in) provided by investing activities | (4 | ) | 11 | |||||
| Net cash used in financing activities | (1,505 | ) | (1,086 | ) | ||||
| Net change in cash | $ | (1,411 | ) | $ | (914 | ) | ||
Operating Activities
Our cash used inprovided by operating activities is driven primarily by sales of our products and vendor provided credit. Our primary uses of cash from operating activities have been for inventory purchases, advertising and promotion expenses, personnel-related expenditures, manufacturing costs, professional fees, costs related to our facilities, and legal fees. Our cash flows fromprovided by operating activities will continue to be affected principally by the results of operations and the extent to which we increase spending on personnel expenditures, sales and marketing activities, and our working capital requirements.
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Our operating cash flowsinflows decreased by $64,000 for the nineperiod ended March 31, 2021 to $0.1 million compared to $0.2 million for 2020.
During the three months ended September 30, 2017March 31, 2021, the change in net operating assets and liabilities was $1.8primarily the result of an increase in inventory of $0.4 million lower compared toand an increase in accounts payable and other liabilities of $1.6 million, offset by a decrease in accounts receivable of $1.3 million and prepaid and other assets of $0.6 million.
During the same period in 2016. The variancethree months ended March 31, 2020, the net cash provided by operating activities of $0.2 million primarily relates to net loss of $60,000, adjusted for non-cashnoncash charges, which resulted in a use of cash of $4.1 million for the nine months ended September 30, 2017, compared to a source of cash of $0.4$0.2 million, for the same period in 2016. This decrease was partially offset by theand a net change in net operating assets and liabilities, which resulted in a source of cash of $1.7 million for the nine months ended September 30, 2017 compared to a use of cash of $0.9 million for$81,000. Included in the same periodchange in 2016. During the nine months ended September 30, 2017, a decrease in inventory resulted in a $2.4 million cash flow from working capital. This increase in cash flow from working capitalnet operating assets and liabilities was offset by an increase in our inventory balance of $0.3 million and an increase in accounts receivable balance a net increase in our prepaid accounts, and decreases in our accounts payable and accrued liability accounts in the amounts of $0.8 $0.2, and $0.1, respectively.million.
Investing Activities
During the ninethree months ended September 30, 2016, the decrease in liabilities related to the restructuring accrual and accounts payable and accrued liabilities resulted in a $4.9 million and a $2.2 million decrease in working capital, respectively. These decreases were offset by a reduction in our accounts receivable balance, which provided a source of working capital.
Financing Activities
Cash provided by investingused in financing activities for the three months ended March 31, 2021 was $5.4$1.5 million, as compared to $1.1 million for the ninethree months ended September 30, 2016, primarily due to the cash proceeds from sale of BioZone of $5.9 million, offset by cash purchases of property and equipment of $0.4 million.
used inIndebtedness Agreements financing activities was $6.0 million for the nine months ended September 30, 2016, primarily due
For information regarding our indebtedness agreements, see “Note 6. Debt” to the repayment on our line of credit of $3.0 million and repayment of a term loan of $2.9 million.
Payments Due by Period | |||||
1 Year | 2 to 3 Years | 4 to 5 Years | Thereafter | Total | |
(in thousands) | |||||
Operating lease obligations(1) | $861 | $1,645 | $1,004 | $— | $3,510 |
| Capital lease obligations | 134 | 191 | — | — | 325 |
| Secured borrowing arrangement | 3,927 | — | — | — | 3,927 |
Convertible notes with a related party(2) | — | 18,000 | — | — | 18,000 |
| Restructuring liability | 586 | 134 | — | — | 720 |
| Settlement obligation | 1,000 | 1,000 | — | — | 1,000 |
Other contractual obligations(3) | 2,718 | 2,577 | — | — | 5,736 |
| Total | $9,226 | $23,547 | $1,004 | $— | $33,777 |
Contingencies
For information regarding contingencies, see “Note 7. Commitments and Contingencies” to the Notes to Consolidated Financial Statements (unaudited) contained herein.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2017.March 31, 2021.
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in accordance with U.S. GAAP, this Form 10-Q discloses Adjusted EBITDA, which is net loss adjusted for items such as stock-based compensation, gain or loss on disposal of property and equipment, gain on settlements, interest and other expense, net, depreciation of property and equipment, amortization of intangible assets, provision for doubtful accounts and taxes.
Management uses Adjusted EBITDA as a supplement to U.S. GAAP measures to further evaluate period-to-period operating performance, as well as the Company’s ability to meet future working capital requirements. The exclusion of non-cash charges, including stock-based compensation and depreciation and amortization, is useful in measuring the Company’s cash available for operations and performance of the Company. Management believes these non-U.S. GAAP measures will provide investors with important additional perspectives in evaluating the Company’s ongoing business performance.
The U.S. GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net income (loss). Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP and has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net loss and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
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Set forth below are reconciliations of our reported U.S. GAAP net income (loss) to Adjusted EBITDA (in thousands):
| For the Three Months ended | For the Three Months ended | |||||||
| March 31, 2021 | March 31, 2020 | |||||||
| Net income (loss) | $ | 94 | (60 | ) | ||||
| Non-GAAP adjustments: | ||||||||
| Stock-based compensation | — | 100 | ||||||
| Gain on disposal of property and equipment | — | (11 | ) | |||||
| Gain on settlements | (200 | ) | — | |||||
| Interest and other expense, net | 512 | 539 | ||||||
| Depreciation and amortization of property and equipment | 3 | 63 | ||||||
| Amortization of intangible assets | 80 | 80 | ||||||
| Provision for doubtful accounts | (11 | ) | 11 | |||||
| Provision for income taxes | — | 22 | ||||||
| Adjusted EBITDA | $ | 478 | $ | 744 | ||||
Critical Accounting Policies and Estimates
The preparation of the accompanying Condensed Consolidated Financial Statementsconsolidated financial statements and related disclosures in conformity with U.S. GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in these Condensed Consolidated Financial Statementsconsolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Our critical accounting estimates are detailed in Part I, Item 7 of the 2016our Annual Report on Form 10-K describefor the significant accounting policies and methods used in the preparation of our Condensed Consolidated Financial Statements. year ended December 31, 2020.
There have been no material changes to our critical accounting policies and estimates since the 2016 Form 10-K.estimates.
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Three Months Ended | Three Months Ended | ||||||||
Nine Months Ended Sept. 30, 2017 | Sept. 30, 2017 | June 30, 2017 | Mar. 31, 2017 | Year Ended Dec. 31, 2016 | Dec. 31, 2016 | Sept. 30, 2016 | June 30, 2016 | Mar. 31, 2016 | |
| Net loss | $(8,426) | $(2,128) | $(3,149) | $(3,149) | $(3,477) | $8,771 | $(1,447) | $(4,196) | $(6,605) |
| Stock-based compensation | 1,688 | 540 | 541 | 607 | 5,304 | 323 | (116) | 427 | 4,670 |
| Restructuring and asset impairment charges | — | — | — | — | 3,186 | (970) | 1,920 | — | 2,236 |
| Gain on settlement of accounts payable | (471) | — | (22) | (449) | (9,927) | (9,927) | — | — | — |
| Loss on sale of subsidiary | — | — | — | — | 2,115 | — | — | 2,115 | — |
| Amortization of prepaid sponsorship fees | 295 | 40 | 110 | 145 | 1,235 | 180 | 211 | 146 | 698 |
| Other expense, net | 2,526 | 858 | 690 | 978 | 2,313 | 887 | 122 | 592 | 712 |
| Amortization of prepaid stock compensation | — | —— | — | — | 938 | — | — | 235 | 703 |
| Depreciation and amortization of property and equipment | 908 | 278 | 290 | 340 | 1,551 | 389 | 346 | 389 | 427 |
| Amortization of intangible assets | 240 | 80 | 80 | 80 | 576 | 80 | 80 | 196 | 220 |
| (Recovery) provision for doubtful accounts | 1,213 | 989 | 144 | 80 | 386 | 152 | 225 | 43 | (34) |
| Issuance of common stock warrants to third parties for services | — | — | — | — | 6 | — | — | 3 | 3 |
| Settlement of obligations | 1,453 | — | 1,453 | — | — | — | — | — | — |
| Provision for income taxes | 118 | 14 | 76 | 28 | 318 | 180 | — | 7 | 131 |
| Adjusted EBITDA | $(456) | $671 | $213 | $(1,340) | $4,524 | $65 | $1,341 | $(43) | $3,161 |
The Company qualifies as a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and is not required to provide the information required by this Item.
Item 4. Controls and Procedures
i) Background
In February 2019, management was made aware, as part of the year-end sales cut-off testing procedures performed during the Company’s 2018 annual audit, by its then independent auditors, Plante & Moran, PLLC, that sales transactions may have been recognized as revenue prematurely which could have a material impact on revenue recognition for the year ended December 31, 2018. Upon such notification, management reviewed the Company’s revenue recognition reporting system, practices and underlying documents supporting the appropriateness of revenue under the Company’s previously established accounting policies for each quarterly period in the year ended December 31, 2018. In addition to the 2018 year-end period, management initially concluded that a potential material misstatement in revenue recognition was isolated to the previously issued quarterly financial statements for the three and nine months ended September 30, 2018.
Audit Committee Investigation
In March 2019, following management’s presentation of their initial assessment of the revenue recognition issue, the Audit Committee of the Board of Directors engaged independent legal counsel and a forensic accountant to conduct an investigation and to work with management to determine the potential impact on accounting for revenues. The investigation included the review of management’s initial assessment, interviews with key personnel, correspondence, and document review, among other procedures. In April 2019, as a result of the findings of the Audit Committee’s investigation to date, the Company determined that certain of its employees had engaged in deliberate inappropriate conduct, which resulted in revenue being intentionally recorded in periods prior to the criteria for revenue recognition under U.S. GAAP being satisfied. Further, the investigation discovered that revenue had been prematurely recorded in prior periods as well as the periods initially identified by management.
The investigation revealed that certain customer orders had been invoiced, triggering revenue recognition, prior to the actual shipment leaving the Company’s control. Such orders from customers had been marked as fulfilled in the Company’s enterprise reporting platform (“ERP”), thereby triggering the generation of an invoice and the recognition of revenue, in advance of shipments from both the Company’s distribution center in Tennessee and for orders that were drop-shipped directly to key customers from certain contract manufacturers. In addition, it was discovered during the investigation that certain orders had been moved to third-party locations at the respective cut-off periods and not actually shipped to the end customer until after the cut-off period resulting in the premature issuance of invoices to customers and recognition of revenue.
As a result of the Audit Committee’s investigation, certain employees were terminated, and others received written reprimands related to their conduct as a result of their behavior. In connection with the improprieties identified during the investigation resulting in the restatement of previously reported financial statements, the Company identified control deficiencies in its internal control over financial reporting that constitute material weaknesses.
The investigatory adjustments are further described in Note 16, “Changes and Correction of Errors in Previously Reported Consolidated Financial Statements” located in Item 8 of the 2019 Form 10-K.
Other Adjustments Resulting from Reconsidering Previously Issued Financial Statements
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As a result of issues identified during the Audit Committee investigation, management reconsidered the Company’s previously issued consolidated financial statements and as a result, additional corrections to the Company’s previously issued consolidated financial statements for each of the quarterly reporting periods ended September 30, 2018 and for the year ended December 31, 2017 were identified. These errors, for each period presented below, were primarily due to the following:
| ● | Improper classification of trade promotions, payable to the Company’s customers, as operating expenses instead of a reduction in revenue; |
| ● | Improper cut-off related to sales transactions recorded prior to transfer of control to customers in 2018 and risk of loss transferred to the customer in 2017; |
| ● | Corrections of estimates of the expected value of customer payments, in the form of credits, issued to customers; |
| ● | Untimely recording of the change in the estimated useful life of leasehold improvements and an asset retirement obligation related to a modification to the lease of the Company’s former headquarters; |
| ● | Incorrect treatment of debt discounts related to the related-party convertible note; and |
| ● | Other period-end expense cut off. |
Other adjustments include, but are not limited to the following; purchase price variances, accrual for legal fees, payroll tax adjustment on restricted stock, rebate receivable and recognizing revenue on a net versus gross basis. Accumulated deficit has been adjusted to reflect changes to net loss, for each period restated.
(ii) Evaluation of Disclosure Controlsdisclosure controls and Procedures
The principal executive officer and our principal financial officer hashave evaluated the effectiveness of ourCompany’s disclosure controls and procedures (as definedas of March 31, 2021. Based on this evaluation, they concluded that because of the material weaknesses in Rulesour internal control over financial reporting discussed below, the disclosure controls and procedures were not effective as required under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange(the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO has concluded that as of September 30, 2017, our disclosure.
Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assuranceensure that the information we are required to disclosebe disclosed by the Company in the reports that we fileit files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms ofand to ensure that information required to be disclosed by the Securities andCompany in the reports that it files or submits under the Exchange Commission (“SEC”), and that such informationAct is accumulated and communicated to ourthe Company’s management, including our CEO,its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(iii) Management’s report on internal control over financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Internal Control
In designing and evaluating our internal controls and procedures, our management recognized that internal controls and procedures, no matter how well conceived and operated, can provide only a reasonable, not absolute, assurance that the objectives of the internal controls and procedures are met. In addition, any evaluation of the effectiveness of internal controls over financial reporting in future periods is subject to risk that those internal controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission’s 2013 Internal Control-Integrated Framework. Based on its assessment, as well as factors identified during the Audit Committee investigation and subsequent audit process, management has concluded that the Company’s internal control over financial reporting as of December 31, 2020 was not effective due to the existence of the material weaknesses in internal control over financial reporting described below.
(iv) Material Weaknesses Identified in connection with the Audit Committee Investigation.
Based on the principal findings of the investigation conducted by the Audit Committee, management has concluded that it did not maintain an appropriate control environment, inclusive of structure and responsibility including proper segregation of duties, and risk assessment and monitoring activities which led to revenue recognition and tonal concerns and which constituted the following material weaknesses:
| A. | Pressure to achieve sales targets gave rise to the premature and/or inappropriate recognition of revenues, typically occurring at or near the end of financial reporting periods; |
| B. | The Company’s internal controls failed and/or were not adequate to ensure that there was effective testing of period end sales cutoff, including a proper review and comparison of invoice dates and related proof of delivery; and |
| C. | Inadequate segregation of duties, allowing for an improper alignment of sales and operations under common leadership. |
(v) Material Weaknesses Resulting from Reconsidering Previously Issued Financial Statements.
As described above, management reconsidered the Company’s previously issued financial statements resulting in corrections to our unaudited consolidated financial statements for each of the quarterly periods ended September 30, 2018 and our audited consolidated financial statements as of and for the year ended December 31, 2017, which are contained in Note 16, “Changes and Correction of Errors in Previously Reported Consolidated Financial Statements” located in Item 8 of the 2019 Annual Report on Form 10-K filed with the SEC on August 25, 2020.
We have identified the following material weaknesses in connection with these issues:
CONTROL ENVIRONMENT AND CONTROL ACTIVITIES
| ● | Management did not maintain an effective control environment, including ensuring that required accounting methodologies, policies, and technical accounting personnel were in place. This control deficiency led to a series of corrections related to the years 2018 and 2017 and resulted in a restatement to the respective previously issued financial statements. |
| ● | The Company did not properly classify payments to customers, primarily for promotional activity, as a reduction in the transaction price with its customers, instead treating such payments as an advertising and promotions activity, a component of operating expense. |
| ● | The Company reported certain sales transactions prior to transfer of control of goods, inconsistent with customer sales agreements and the Company’s customary practices. |
| ● | The Company did not properly estimate the expected value of customer payments, in the form of credits, at each quarter period end in 2018. In addition, the Company understated its accrual for customers’ credits for the year ended December 31, 2017. |
| ● | The Company did not adjust the estimated useful life of its leasehold improvements nor an asset retirement obligation in the proper period for its former headquarters. |
THE COMPANY DOES NOT MAINTAIN ADEQUATE INTERNAL CONTROL DOCUMENTATION AND TESTING PROCEDURES
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| ● | The Company lacks the proper internal control documentation and testing, and therefore internal controls were not consistently performed. Management has concluded that the foregoing was attributable to several factors including the lack of finance leadership, not retaining a third-party professional Sarbanes-Oxley (“SOX”) testing consultant, and significant management turnover. Therefore, management has not documented and enforced an appropriate level of review and controls, including properly documented entity level, information technology general controls including appropriate user access controls, and business process controls. |
Remediation
Our remedial actions to date and remediation plans to be undertaken in response to the findings of the Audit Committee’s investigation and the material weaknesses on internal control over financial reporting and our conclusions reached in evaluating the effectiveness of our disclosure controls and procedures and internal controls over financial reporting as of March 31, 2021, are described below.
| ● | Terminations and reprimands |
The Company terminated certain employees directly responsible in the deliberate inappropriate conduct and other employees received written reprimands as a result of their behavior.
| ● | Implementation of enhanced quarterly sales cut-off procedures |
The Company has implemented internal controls and procedures to conduct enhanced revenue recognition cutoff testing on a quarterly basis.
| ● | Mandatory training for the sales and operations department. |
The Company has commenced a series of compliance outreach and training for its sales and operations departments relating to potential improper customer transactions identified by the internal investigation. These trainings will also include a review of the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) and the Employee Complaints & Whistleblower Policy (the “Whistleblower Policy”).
| ● | Company-wide training about compliance matters, including with respect to employee complaints and concerns and enhancement of the customer contracting process. |
The Company is implementing Company-wide training sessions. These sessions will focus on a number of areas related to sensitivity training/tonal concerns, including increased promotion and training around the Code of Conduct and the Whistleblower Policy. The Company will design and implement a more formalized compliance program with the goal of sustaining a culture of compliance.
| ● | Consider appropriate employment actions relating to certain employees |
The Company implemented a senior leadership reorganization to strengthen the MusclePharm leadership team and set the company up for long term profitable growth. During 2021, the Company hired an experienced President and Chief Financial Officer with a Fortune 500 c-suite background and an experienced VP, Controller with public company reporting expertise and experience remediating material weaknesses. In addition, the Company promoted from within an SVP of sales along with hiring an experienced VP of Supply Chain.
| ● | Establishment of a disclosure committee |
The Company has implemented a disclosure committee to assist the Chief Executive Officer and Chief Financial Officer in preparing the disclosures required under the Securities Exchange Committee (SEC) rules and to help ensure that the Company’s disclosure controls and procedures are properly implemented.
| ● | Enhancing the internal compliance and legal functions, and authorizing management to retain the appropriate individual or individuals. |
As part of the senior leadership reorganization referred to above, the Company engaged an outside firm which is in the process of revamping our internal control documentation and testing. In addition, the Company will continue to review the qualifications of our internal financial organization to ensure our personnel have the appropriate technical and SOX related expertise.
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The Company has enhanced its Whistleblower Policy by including our Audit Committee Chair in the investigation, documentation, and resolution process.
We are committed to continuing to improve our internal control processes related to these matters and will continue to review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, identified in management’s evaluation pursuantwe may take additional measures to Rules 13a-15(d)address deficiencies or 15d-15(d)modify certain of the Exchange Actremediation measures described above.
We expect that our remediation efforts, including design and implementation, will continue through fiscal year 2021, with the goal to fully remediate all remaining material weaknesses by year-end. In particular, as noted above, the Company has implemented enhanced controls regarding sales cut-off, as well as customer discounts. In addition, the Company’s inventory balance has decreased significantly, and the Company’s inventory is maintained and controlled by third-part manufacturers, or the Company’s warehouse which is now operated by a third-party logistics provider.
Due to the considerable time and effort management of the Company undertook in order to bring its delinquent filings current, which was completed on November 24, 2020, and despite ongoing remediation efforts through the first quarter of 2021, the Company was not able to complete a majority of its remediation efforts during the thirdperiod ended March 31, 2021.
Other than the ongoing remediation efforts described above, there have been no changes during the quarter of 2017ended March 31, 2021 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.
Notwithstanding the material weaknesses described in this Item 9A, our management has concluded that the consolidated financial statements and related financial information included in this Form 10-Q presents fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP. Management’s position is based on a number of factors, including, but not limited to:
| ● | The completion of the Audit Committee’s investigation and the substantial resources expended (including the use of external consultants) and the resulting adjustments we made to our previously issued financial statements, including the restatement of our 2017 audited financial statements and our unaudited quarterly financial statements for the periods ended September 30, 2018, June 30, 2018 and March 31, 2018; |
| ● | The reconsideration of significant accounting policies and accounting practices previously employed by the Company, resulting in other adjustments to previously issued consolidated financial statements. |
Based on the actions described above, we have updated, and in some cases corrected, our accounting policies and have applied those to our consolidated financial statements for all periods presented.
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For information regarding legal proceedings, see Note 7 to the information set forth under the heading “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, see Note 9, Commitments and Contingencies,Notes to our Condensed Consolidated Financial Statements in(unaudited) contained herein, which is incorporated by reference into this Quarterly Report on Form 10-Q.
The information to the Risk Factors as disclosed in our 2016 Form 10-Kbe reported under this Item is not required for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 15, 2017.
None.
None.
None.
Item 5. Other Information.Information
None
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Incorporated by Reference | ||||||||||
Exhibit No. | Description | Form | SEC File Number | Exhibit | Filing Date | |||||
| Certification of the Chief | ||||||||||
| Certification of the Chief | ||||||||||
| Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||||
| 32.2*** | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||
| 101** | The following materials from MusclePharm Corporation’s quarterly report on Form 10-Q for the | |||||||||
| ** | Filed herewith |
| *** | Furnished herewith |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MUSCLEPHARM CORPORATION | |||
| Date: | By: | /s/ Sabina Rizvi | |
| Name: | Sabina Rizvi | ||
| Title: | Chief (Principal Financial | ||
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