UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ | 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
______ toCommission File Number: file number: 000-53166
MusclePharm Corporation
(Exact name of registrant as specified in its charter)
Nevada | 77-0664193 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3753 Howard Hughes Parkway Suite 200-849 Las Vegas, NV | 89169 | |
(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 | ☒ | ||
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 [ ] ☒ No [X]
Number of shares of the registrant’s common stock outstanding as ofat November 1, 2017: 14,650,554, excluding15, 2021: (excludes 875,621 shares of common stock held in treasury.
MusclePharm Corporation
Form 10-Q
TABLE OF CONTENTS
Forward-Looking Statements
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.
2 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
MusclePharm Corporation
(In thousands, except share and per share data)
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 |
September 30, 2021 | December 31, 2020 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 384 | $ | 2,003 | ||||
Accounts receivable, net of allowances of $207 and $3,407 at September 30, 2021 and December 31, 2020, respectively | 7,332 | 7,488 | ||||||
Inventory, net | 1,589 | 1,032 | ||||||
Prepaid expenses and other current assets | 1,538 | 1,341 | ||||||
Total current assets | 10,843 | 11,864 | ||||||
Property and equipment, net | 7 | 13 | ||||||
Intangible assets, net | 115 | 356 | ||||||
Operating lease right-of-use assets | 271 | 474 | ||||||
Other assets | 75 | 295 | ||||||
TOTAL ASSETS | $ | 11,311 | $ | 13,002 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Obligation under secured borrowing arrangement | $ | 6,090 | $ | 7,098 | ||||
Line of credit | - | 743 | ||||||
Operating lease liability, current | 446 | 381 | ||||||
Convertible notes with a related party, net of discount | 5,329 | 2,872 | ||||||
Accounts payable | 18,770 | 14,719 | ||||||
Accrued and other liabilities | 6,928 | 6,194 | ||||||
Total current liabilities | 37,563 | 32,007 | ||||||
Operating lease liability, long-term | - | 343 | ||||||
Other long-term liabilities | 3,561 | 5,071 | ||||||
Total liabilities | 41,124 | 37,421 | ||||||
Commitments and contingencies (Note 9) | - | |||||||
Stockholders’ deficit: | �� | |||||||
Common stock, par value of $ | per share; shares authorized, and shares issued as of September 30, 2021 and December 31, 2020, respectively; and shares outstanding as of September 30, 2021 and December 31, 2020, respectively32 | 32 | ||||||
Additional paid-in capital | 178,955 | 178,261 | ||||||
Treasury stock, at cost; | shares(10,039 | ) | (10,039 | ) | ||||
Accumulated deficit | (198,761 | ) | (192,673 | ) | ||||
TOTAL STOCKHOLDERS’ DEFICIT | (29,813 | ) | (24,419 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 11,311 | $ | 13,002 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3 |
MusclePharm Corporation
Consolidated Statements of Operations
(In thousands, except share and per share data)
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 |
2021 | 2020 | 2021 | 2020 | |||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue, net | $ | 11,971 | $ | 16,085 | $ | 40,000 | $ | 49,309 | ||||||||
Cost of revenue | 11,942 | 11,073 | 34,102 | 34,504 | ||||||||||||
Gross profit | 29 | 5,012 | 5,898 | 14,805 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administration | 2,453 | 3,586 | 7,609 | 11,001 | ||||||||||||
Selling and promotion | 1,012 | 623 | 3,195 | 2,100 | ||||||||||||
Impairment of intangible assets | - | 167 | - | 167 | ||||||||||||
Total operating expenses | 3,465 | 4,376 | 10,804 | 13,268 | ||||||||||||
Income (loss) from operations | (3,436 | ) | 636 | (4,906 | ) | 1,537 | ||||||||||
Other (expense) income: | ||||||||||||||||
Loss on settlement obligation | - | - | - | (87 | ) | |||||||||||
Interest and other income (expense), net | (465 | ) | (456 | ) | (1,144 | ) | (1,539 | ) | ||||||||
Gain on settlement of payables | - | 518 | - | 518 | ||||||||||||
Income (loss) before provision for income taxes | (3,901 | ) | 698 | (6,050 | ) | 429 | ||||||||||
Provision for income taxes | 32 | 20 | 40 | 64 | ||||||||||||
Net income (loss) | $ | (3,933 | ) | $ | 678 | $ | (6,090 | ) | $ | 365 | ||||||
Net income (loss) per share, basic | $ | (0.12 | ) | $ | 0.02 | $ | (0.18 | ) | $ | 0.01 | ||||||
Net income (loss) per share, diluted | $ | (0.12 | ) | $ | 0.01 | $ | (0.18 | ) | $ | 0.01 | ||||||
Weighted average shares used to compute net income (loss) per share, basic | 33,386,200 | 33,008,189 | 33,134,933 | 32,746,147 | ||||||||||||
Weighted average shares used to compute net income (loss) per share, diluted | 33,386,200 | 49,097,595 | 33,134,933 | 48,835,553 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4 |
MusclePharm Corporation
Consolidated StatementStatements of Comprehensive Loss
(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 | $ | 32 | $ | 177,914 | $ | (10,039 | ) | $ | (195,858 | ) | $ | (27,952 | ) | ||||||||
Stock-based compensation | - | - | 100 | - | - | 100 | ||||||||||||||||
Issuance of shares of common stock related to the payment of advertising services | 101,454 | - | 47 | - | - | 47 | ||||||||||||||||
Stock-based compensation, shares | ||||||||||||||||||||||
Accumulated other comprehensive loss | ||||||||||||||||||||||
Net Income (loss) | - | - | - | - | (60 | ) | (60 | ) | ||||||||||||||
Balance - March 31, 2020 | 33,101,866 | $ | 32 | $ | 178,061 | $ | (10,039 | ) | $ | (195,918 | ) | $ | (27,865 | ) | ||||||||
Stock-based compensation | - | - | 79 | - | - | 79 | ||||||||||||||||
Issuance of shares of common stock related to the payment of advertising services | 28,173 | - | 69 | - | - | 69 | ||||||||||||||||
Net loss | - | - | - | - | (253 | ) | (253 | ) | ||||||||||||||
Balance – June 30, 2020 | 33,130,039 | 32 | 178,209 | (10,039 | ) | (196,171 | ) | (27,970 | ) | |||||||||||||
Stock-based compensation | - | - | 27 | - | - | 27 | ||||||||||||||||
Net Income | - | - | - | - | 678 | 678 | ||||||||||||||||
Balance – September 30, 2020 | 33,130,039 | $ | 32 | $ | 178,236 | $ | (10,039 | ) | $ | (195,493 | ) | $ | (27,265 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5 |
MusclePharm Corporation
Consolidated StatementStatements of Changes in Stockholders’ Deficit
(In thousands, except share data)
(Unaudited)
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) |
Additional | Total | |||||||||||||||||||||
Common Stock | Paid-in | Treasury | Accumulated | Stockholders’ | ||||||||||||||||||
Shares | Amount | Capital | Stock | Deficit | Deficit | |||||||||||||||||
Balance - December 31, 2020 | 33,105,284 | $ | 32 | $178,261 | $ | (10,039 | ) | $ | (192,673 | ) | $ | (24,419 | ) | |||||||||
Stock-based compensation | 280,916 | - | - | - | - | - | ||||||||||||||||
Net income | - | - | - | - | 94 | 94 | ||||||||||||||||
Balance - March 31, 2021 | 33,386,200 | $ | 32 | $ | 178,261 | $ | (10,039 | ) | $ | (192,579 | ) | $ | (24,325 | ) | ||||||||
Stock-based compensation | - | - | 308 | - | - | 308 | ||||||||||||||||
Net loss | - | - | - | - | (2,251 | ) | (2,251 | ) | ||||||||||||||
Balance - June 30, 2021 | 33,386,200 | $ | 32 | $178,569 | $ | (10,039 | ) | $ | (194,828 | ) | $ | (26,266 | ) | |||||||||
Balance | 33,386,200 | $ | 32 | $178,569 | $ | (10,039 | ) | $ | (194,828 | ) | $ | (26,266 | ) | |||||||||
Stock-based compensation | - | - | 386 | - | - | 386 | ||||||||||||||||
Net loss | - | - | - | - | (3,933 | ) | (3,933 | ) | ||||||||||||||
Net income (loss) | - | - | - | - | (3,933 | ) | (3,933 | ) | ||||||||||||||
Balance – September 30, 2021 | 33,386,200 | $ | 32 | $178,955 | $ | (10,039 | ) | $ | (198,761 | ) | $ | (29,813 | ) | |||||||||
Balance | 33,386,200 | $ | 32 | $178,955 | $ | (10,039 | ) | $ | (198,761 | ) | $ | (29,813 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6 |
MusclePharm Corporation
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
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 |
2021 | 2020 | |||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Income (loss) | $ | (6,090 | ) | $ | 365 | |||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization of property and equipment | 9 | 130 | ||||||
Amortization of intangible assets | 240 | 240 | ||||||
Bad debt expense | 326 | 174 | ||||||
Gain on disposal of property and equipment | - | (176 | ) | |||||
Gain on settlement of payables | - | (518 | ) | |||||
Inventory loss provision | 1 | (115 | ) | |||||
Stock-based compensation | 694 | 206 | ||||||
Issuance of common stock to non-employees | - | 116 | ||||||
Impairment of operating lease right-of-use assets | - | 167 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (169 | ) | (572 | ) | ||||
Inventory | (557 | ) | 3,347 | |||||
Prepaid expenses and other current assets | (197 | ) | 36 | |||||
ROU and other assets | 423 | 429 | ||||||
Accounts payable and accrued liabilities | 2,854 | (1,259 | ) | |||||
Net cash (used in) provided by operating activities | (2,466 | ) | 2,570 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (3 | ) | (4 | ) | ||||
Proceeds from disposal of property and equipment | - | 220 | ||||||
Net cash (used in) provided by investing activities | (3 | ) | 216 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment to line of credit | (528 | ) | (2,452 | ) | ||||
Proceeds from line of credit | 2,192 | - | ||||||
Proceeds from secured borrowing arrangement, net of reserves | 38,247 | 32,762 | ||||||
Payments to secured borrowing arrangement, net of fees | (39,255 | ) | (34,289 | ) | ||||
Proceeds from shareholder’s loan | 49 | - | ||||||
Proceeds from issuance of Paycheck Protection Program Loan | - | 965 | ||||||
Repayment of finance lease obligations | - | (54 | ) | |||||
Proceeds of notes payable | 145 | - | ||||||
Repayment of notes payables | - | (165 | ) | |||||
Net cash (used in) provided by financing activities | 850 | (3,233 | ) | |||||
NET CHANGE IN CASH | (1,619 | ) | (447 | ) | ||||
CASH — BEGINNING OF PERIOD | 2,003 | 1,532 | ||||||
CASH — END OF PERIOD | $ | 384 | $ | 1,085 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for Interest | $ | 1,153 | $ | 522 |
The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.
7 |
MusclePharm Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
Description of Business
MusclePharm Corporation, together with its subsidiaries (the “Company” or the Company, was incorporated in Nevada in 2006. Except as otherwise indicated herein, the terms “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries. The Company“MusclePharm”) is a scientifically driven,scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. supplements that are manufactured by the Company’s co-manufacturers. Our portfolio of recognized brands, including MusclePharm and FitMiss, is marketed and sold globally.
The Company has the following wholly-owned operating subsidiaries: MusclePharm Canada Enterprises Corp. (“MusclePharm Canada”), MusclePharm Ireland Limited (“MusclePharm Ireland”)historically incurred significant losses and MusclePharm Australia Pty Limited (“MusclePharm Australia”). A former subsidiaryexperienced negative cash flows since inception. As of September 30, 2021, the Company BioZone Laboratories, Inc. (“BioZone”), was sold on May 9, 2016.
The Company’s ability to continue as a going concern is dependent upon it generating profits in the future and/or obtaining the necessary financing to meet its obligations and raise capital for specific strategic initiatives will also be dependent on obtaining adequate capitalrepay liabilities arising from normal business operations when they come due. The Company is evaluating different strategies to obtain financing to fund its operations to cover expenses and focus on achieving a level of revenue adequate to support its current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations.
The Company has been 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 pricing for raw materials. In addition, the Company has worked to negotiate lower production costs with its co-manufacturers. Although these steps improved gross margins through the first quarter of 2021, with the recent increases in commodity prices, primarily protein, the Company’s gross margins have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2020.
In 2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive. The Company launched three flavors of MP Combat Energy in September for domestic distribution and three additional flavors for international distribution. The Company believes with the launch of its new energy products, reductions in operating losses untilcosts and continued focus on gross profit and top line sales growth will allow it becomes profitable. Theto ultimately achieve sustained profitability. However, the Company can give no assurances that any additional capital that it is ablethis will occur, especially with the cost to obtain, if any, willlaunch new energy products along with the recent increase in the cost of protein, which may have a material impact on the Company’s profitability. Additionally, the Company’s profitability may be sufficientmaterially impacted by the ability of our third-party manufacturers to meet its needs, or that any such financing will be obtainable on acceptable terms or at all.
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 contributes to 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.
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 business, financial condition and results of operations. Management continues to monitor the business environment for any significant changes that could impact the Company’s operations. The Company has taken proactive steps to manage costs and discretionary spending, such as remote working and reducing facility related expense.
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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 Corporationthe Company 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, 2017,2021, results of operations for the three and nine months ended September 30, 20172021 and 2016,2020, and cash flows for the nine months ended September 30, 20172021 and 2016.2020. The results of operations for the three and nine months ended September 30, 20172021 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, 2017 and 2016, respectively, and $0.4 million and $0.6 million for the nine months ended September 30, 20172021, the Company incurred $0.4 million and 2016, respectively.
For the three and nine months ended September 30, 2021, the Company incurred $0.7 million and $2.3 million, respectively, of shipping and handling costs related to shipments to our customers. For the three and nine months ended September 30, 2020, the Company incurred $0.6 million and $1.7 million, respectively, of shipping and handling costs related to shipments to our customers. Shipping and handling costs related to shipments to our customers is included in “Selling, general and administrative” expense in our consolidated statements of operations.
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.
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During the nine months ended September 30, 20172021, and 2016,2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $13.8 $6.3 million and $27.9 $11.7 million, respectively, which accounted for 16% 13.5% and 21% 19.1% of gross revenue in each period, respectively.
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 Company maintains its cash balance at times may exceed federallycredit-worthy financial institutions that are insured limits.by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. There was an aggregate uninsured cash balance of $0.1 million as of September 30, 2021. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date.
Significant customers are those whichthat represent more than 10% of the Company’s revenue, net revenueor accounts receivable for each period presented.
For each significantthe three months ended September 30, 2021, the Company had one customer revenue 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% | * |
For the three months ended September 30, 2020, the Company had two customers who individually accounted for 46% and restricted stock awards, are recorded at estimated fair value on10% of net revenue. For the applicable award’s grant date, based on estimatednine months ended September 30, 2020, the Company had three customers who individually accounted for 37%, 19% and 13% of net revenue. Three customers accounted for 37%, 20% and 11% of accounts receivable, net as of September 30, 2020.
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. For the time in whichthree months ended September 30, 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 , and of its purchases with contract manufacturers and raw material providers. For the fair value nine months ended September 30, 2021, the Company had three suppliers who individually accounted for approximately , and of its purchases with contract manufacturers and raw material providers. Three vendors accounted for 26%, 19%, 10% of accounts payable as of September 30, 2021.
For the services rendered orthree months ended September 30, 2020, the fair value Company had two suppliers who individually accounted for approximately and of its purchases with contract manufacturers and raw material providers. For the share-based payments whichever is more readily determinable. The fair value nine months ended September 30, 2020, the Company had three suppliers who individually accounted for approximately , and 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
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”), which10 |
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 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 pronouncement.
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 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 is currently evaluating the impact this ASU may have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was 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 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period financial statement presentations, including classification of certain labilities and operating expenses. These changes in presentation did not have a material impact on the Company’s financial condition or results of operations. The Company has updated its Consolidated Statements of Operations to be presented by function, which did not change total operating expenses or gross margins.
Note 3. Fair ValueInventory
Inventory consisted solely of Financial Instrumentsfinished goods and raw materials used to manufacture our products by one of our co-manufacturers (in thousands):
Schedule of Inventory
As of September 30, 2021 | As of December 31, 2020 | |||||||
Raw materials | $ | 754 | $ | 332 | ||||
Finished goods, net | 835 | 700 | ||||||
Inventory, net | $ | 1,589 | $ | 1,032 |
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Note 4. Accrued and the convertible notes with a related party approximate carrying value because the debt carries market rates of interest available to the Company. The Company’s remaining financial instruments consisted primarily of accounts receivable, accounts payable, accrued liabilities and accrued restructuring charges, all of which are short-term in nature with fair values approximating carrying value. Other Liabilities
As of September 30, 20172021 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.
Schedule of Accrued and Other Liabilities
As of September 30, 2021 | As of December 31, 2020 | |||||||
Accrued professional fees | $ | 216 | $ | 242 | ||||
Accrued interest | 756 | 644 | ||||||
Accrued payroll and bonus | 578 | 738 | ||||||
Settlements – short-term (Nutrablend and 4Excelsior) | 2,230 | 2,005 | ||||||
Accrued expenses - ThermoLife | 1,364 | 1,364 | ||||||
Accrued and other short-term liabilities | 1,784 | 1,201 | ||||||
Accrued and other liabilities | $ | 6,928 | $ | 6,194 |
Note 5. Restructuring
For the three and nine months ended September 30, 2016, the Company recorded restructuring charges in “Cost of revenue” of $0.1 million2021 and $2.3 million, respectively, related to the write-down of inventory identified for discontinued products in the restructuring plan.
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 |
Schedule of Interest and Other Expense, Net
2021 | 2020 | 2021 | 2020 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2021 | �� | 2020 | 2021 | 2020 | ||||||||||||
Interest expense, related party | $ | (161 | ) | $ | (76 | ) | $ | (429 | ) | $ | (228 | ) | ||||
Interest expense, other | (235 | ) | (249 | ) | (693 | ) | (581 | ) | ||||||||
Interest expense, secured borrowing arrangement | (287 | ) | (312 | ) | (710 | ) | (1,060 | ) | ||||||||
Foreign currency transaction loss | (10 | ) | (2 | ) | 22 | (20 | ) | |||||||||
Other income | 228 | 183 | 666 | 350 | ||||||||||||
Total interest and other expense, net | $ | (465 | ) | $ | (456 | ) | $ | (1,144 | ) | $ | (1,539 | ) |
Note 6. Leases
A summary of the Company’s lease portfolio as of September 30, 2021 and December 31, 2020 is presented in the table below (in thousands):
Schedule of Supplemental Balance Sheet Information
Balance Sheet Classification | September 30, 2021 | December 31, 2020 | ||||||||
Assets | ||||||||||
Operating | ROU assets, net | $ | 271 | $ | 474 | |||||
Liabilities | ||||||||||
Current liabilities: | ||||||||||
Operating | Operating lease liability - current | $ | 446 | $ | 381 | |||||
Non-current liabilities: | ||||||||||
Operating | Operating lease liability - long term | - | 343 | |||||||
Total lease liabilities | $ | 446 | $ | 724 |
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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) |
Supplemental cash flow information related to leases was as follows:
Schedule of Supplemental Cash Flow Information
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
Cash paid for amounts included in the measurement of lease liabilities (in thousands): | ||||||||
Operating cash flows from operating leases | $ | 277 | $ | 506 | ||||
Operating cash flows from finance leases | - | 1 | ||||||
Financing cash flows from finance leases | - | 54 | ||||||
The weighted average remaining lease term was as follows: | ||||||||
Operating leases (in years) | 1.0 | 1.8 | ||||||
Finance leases (in years) | - | - | ||||||
The weighted average discount rate was as follows: | ||||||||
Operating leases | 18 | % | 18 | % | ||||
Finance leases | - | 5 | % |
Note 8. Debt
As of September 30, 20172021, and December 31, 2016,2020, the Company’s debtother long-term liabilities consisted of the following (in thousands):
Schedule of Other Long-Term Liabilities
As of September 30, 2021 | As of December 31, 2020 | |||||||
Settlements – long-term (Nutrablend and 4Excelsior) | 2,741 | 3,906 | ||||||
Paycheck Protection Program loan | 820 | 965 | ||||||
Other | - | 200 | ||||||
Other long-term liabilities | $ | 3,561 | $ | 5,071 |
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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 | $— |
Note 8. Debt
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 “November 2020 Refinancing”), in which the Company $1.0 issued to Mr. Drexler a convertible secured promissory note (the “November 2020 Convertible Note”) in the original principal amount of $2,871,967 , which amended and restated a convertible secured promissory note dated as of August 21, 2020. The $2,871,967 million which was payable upon demand. Proceeds from the 2017November 2020 Convertible Note were used to partially fund a settlement agreement. The 2017 Note carriedbears interest at athe rate of 15% 12% per annum. Unless earlier converted or repaid, all outstanding principal and any accrued but unpaid interest under the November 2020 Convertible Note was due and payable on July 1, 2021; however, the Company and Mr. Drexler agreed to an extension until July 14, 2022. Any interest not paid when due wouldshall be capitalized and added to the principal amount of the 2017November 2020 Convertible Note and bearsbear 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
Mr. Drexler may, at any time, priorand from time to a demand request from Mr. Drexler.
The November 2020 Convertible Note duringcontains customary restrictions on the applicable notice period.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 Company recordedrestrictions are also subject to certain additional qualifications and carveouts, as set forth in the 2016November 2020 Convertible Note. The November 2020 Convertible Note as a liability inis subordinated to the balance sheet and also recorded a beneficial conversion feature of $601,000 as a debt discount upon issuance ofsecured borrowing arrangement the Company entered into with Prestige Capital Corporation (“Prestige”).
The convertible note which was amortized over the term of the debt using the effective interest method. The beneficial conversion feature was calculated based on the difference between the fair value of common stock on the transaction date and the effective conversion price of the convertible note. Asbalance as of September 30, 20172021 and December 31, 2016, the 20162020 was $2,871,967.
Related-Party Secured Revolving Promissory Note/Related-Party Convertible Note had an outstanding principal balance of $11.0 million and a carrying value of $10.9 million and $10.5 million, respectively.
On October 15, 2020, the Company entered into a convertible secured revolving promissory note agreement (the “2015 Convertible“Revolving Note”) with Mr. Drexler, pursuant to which he loanedRyan Drexler. Under the terms of the Revolving Note, the Company $6.0can borrow up to $3.0 million. Proceeds fromThe Revolving Note bears interest at the 2015 Convertible Noterate of 12% per annum. The funds were used to fund working capital requirements. The 2015 Convertible Note was secured by all assetsfor the purchase of whey protein and properties of the Company and its subsidiaries, whether tangible or intangible. The 2015 Convertible Note originally carried an interest at a rate of 8% per annum, or 10% in the event of default.other general corporate purposes. Both the outstanding principal, if any, and theall accrued interest under the 2015 ConvertibleRevolving Note were originally due in January 2017, unless converted earlier. The due date of the 2015 Convertible Note was extended to November 8, 2017 and the interest rate raised to 10% per annum, or 12% in the event of default. Mr. Drexler could convert the outstanding principal and accrued interest into 2,608,695 shares of common stock for $2.30 per share at any time. The Company could prepay the convertible note at the aggregate principal amount therein plus accrued interest by giving the holder between 15 and 60 day-notice, depending upon the specific circumstances, provided that Mr. Drexler could convert the 2015 Convertible Note during the applicable notice period. The Company recorded the 2015 Convertible Note as a liability in the balance sheet and also recorded a beneficial conversion feature of $52,000 as a debt discount upon issuance of the 2015 Convertible Note, which was amortized over the original term of the debt using the effective interest method. The beneficial conversion feature was calculated based on the difference between the fair value of common stock on the transaction date and the effective conversion price of the convertible note. As of September 30, 2017 and DecemberMarch 31, 2016, the convertible note had an outstanding principal balance and carrying value of $6.0 million. In connection with the Company entering into the 2015 Convertible Note with Mr. Drexler, the Company granted Mr. Drexler the right to designate two directors to the Board.2021;
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On November 3, 2017, subsequent to the end of the quarter, the Company entered into a refinancing transaction (the “Refinancing”) with Mr. Drexler. As part of the Refinancing,August 13, 2021, the Company issued to Mr.Ryan Drexler an amended and restated(the “Holder”) a convertible secured promissory note (the “Refinanced“August 2021 Convertible Note”) in the original principal amount of $18,000,000, which amends $2,457,549 and restates (i) 2015 Convertible Note, (ii)cancelled the 2016 Convertible Note, and (iii) the 2017 Note, and together with the 2015 Convertible Note and the 2016 Convertible Note, collectively, the “Prior Notes”).
The RefinancedAugust 2021 Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each calendar quarter. At the Company’s option (as determined by its independent directors), the Company may repay up to one sixth of any interest payment by either adding such amount to the principal amount of the noteAugust 2021 Convertible Note or by converting such interest amount into an equivalent amount of the Company’s common stock. stock, $ par value per share (the “Common Stock”). Any interest not paid when due shall be capitalized and added to the principal amount of the RefinancedAugust 2021 Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.
The Holder 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 per share, which wasequal to the 5 day averageclosing price of the Company’s common stock prior to the refinance closing date, at any time.
The RefinancedAugust 2021 Convertible 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, at the option of the Holder and upon written notice to the Company, or automatically under certain circumstances, all outstanding principal and accrued interest will accrue at the rate of 14% per annum. In addition, following an event of default, any conversion, redemption, payment or prepayment of the Refinanced Convertible Note will be at a premium of 105%.
The convertible note balance as of the Refinancing, the CompanySeptember 30, 2021 was $2,457,549 and Mr. Drexler entered into a restructuring agreement (the “Restructuring Agreement”) pursuant to which the parties agreed to enter into the Refinanced Convertible Note December 31, 2020 was 0.
The revolver balance of September 30, 2021 was 0and to amend and restate the security agreement pursuant to which the Prior Notes were secured by all of the assets and properties of the Company and its subsidiaries whether tangible or intangible, by entering into the Third Amended and Restated Security Agreement (the “Amended Security Agreement”). Pursuant to the Restructuring Agreement, the Company agreed to pay, 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.
For the three months ended September 30, 20172021 and 2016,2020, interest expense related to the total related party convertible secured promissory notesdebt was $0.7$0.2 million and $0.1$0.1 million respectively.
For the nine months ended September 30, 20172021 and 2016,2020, interest expense related to the total related party convertible secured promissory notesdebt was $1.8$0.4 million and $0.4$0.2 million, respectively. During the nine months ended September 30, 2017 and 2016, $1.8 million and $0.4 million, respectively, in interest was paid in cash to Mr. Drexler.
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$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’sagreement 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.
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On June 14, 2021 , Prestige advanced the Company $1 million with a six-month term, has been15% interest rate and 2% accommodation fee.
On July 26, 2021, Prestige advanced the Company $1 million with a six month term and a 15% interest rate. In addition, there was an accommodation fee equal to 1% of the amount advanced plus stock options.
As of September 30, 2021, and December 31, 2020, the Company had outstanding borrowings under the secured borrowing arrangement (including the 2 advances) of approximately $6.1 million and $7.1 million, respectively.
On Oct 12th, the June 14th and July 26th Prestige $2 million advance was extended to March 29, 2018. Prestige may cancel the Agreement with 30-day notice (see Note 16).
During the three months ended September 30, 2017,2021 and 2020, the Company soldassigned to Prestige, accounts with an aggregate face amount of approximately $13.3$15 million and $14.6 million, respectively, for which Prestige paid to the Company approximately $10.6$12 million and $11.6 million, respectively, in cash. During the three months ended September 30, 2017, $9.82021 and 2020, $11.2 million and $11.6 million, respectively, was subsequently repaid to Prestige, including fees and interest.
During the nine months ended September 30, 2017,2021 and 2020, the Company soldassigned to Prestige, accounts with an aggregate face amount of approximately $27.9$47.8 million and $41 million, respectively, for which Prestige paid to the Company approximately $22.3$38.2 million and $32.8 million, respectively, in cash. During the nine months ended September 30, 2017, $21.42021 and 2020, $39.3 million and $34.3 million, respectively, was subsequently repaid to Prestige, including fees and interest.
Paycheck Protection Program Loan
Due to economic uncertainty as a result of the three months endedongoing pandemic (COVID-19), on May 14, 2020, the Company received an aggregate principal amount of $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, 2025. 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 is in the process of filling out the forgiveness application form. As of September 30, 2016,2021, the Company had no new transactions with Prestige. Duringowed approximately $1.0 million (principal plus accrued interest), which $0.1 million is classified as “short-term” and the nine months ended September 30, 2016,remaining amount is recorded within “Other long-term liabilities.”
On October 25th, 2021, the Company sold to Prestige accountsreceived a letter from HSBF notifying the Company that its SBA PPP loan has been forgiven in full by HSBF. The Company has $965K loan liability and $13K in accrued interest that will be eliminated from the general ledger in October.
Change Capital Holdings I, LLC Merchant and Purchase Agreement
On August 31, 2021 the company entered into a merchant receivables and purchase securities agreement with an aggregate face amountChange Capital Holdings I, LLC (“Change Capital”). The company received funding of approximately $49.3$1 million for which Prestigepurchase of protein and other components. The agreement term is 1 year but can be paid back at any time.
On October 12th, 2021 the company repaid the outstanding balance to the Company approximately $39.5 million in cash. During the three and nine months ended September 30, 2016, $8.7 million and $40.0 million was subsequently repaid to Prestige, including fees and interest. The proceeds from the initial assignment to Prestige under this secured borrowing arrangement were primarily utilized to pay off the balance of the existing line of credit and term loan with ANB Bank.
Note 9. 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$8.3 million for the Company’s purported breach of the Sponsorship Agreement.
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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$3 million, consistingwhich was recorded as accrued expenses in 2017. The settlement consists of a $1$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$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 September 30, 2021 and July 7, 2019, respectively.
Nutrablend Matter
On February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against the Company in the United States District Court for the Eastern District of California, claiming approximately $1.5$3.1 million representingin allegedly unpaid invoices. These invoices relate to the discountedthird 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 (the “Nutrablend Agreement”) 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, 2023 and (ii) issue monthly purchase orders (“Purchase Orders”) at minimum amounts accepted by Nutrablend.
The Company 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, the Company 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 the Company pays the Owed Amount in full before September 1, 2021, it’s entitled to a rebate on all completed Purchase Orders. Further, once the monthly payments, and any additional payments that the Company has made on the Owed Amount, reduce the outstanding balance of the Owed Amount to below $2.0 million, the Company is eligible for an extension of a line of credit from Nutrablend in an amount of up to $3.0 million.
On July 7, 2021, the Company commenced an action against Nutrablend in the Central District of California, seeking (i) a declaration that the Nutrablend Agreement purchase order provisions have been terminated due to Nutrablend’s failure to provide the Company with reasonable assurances of its ability to fulfill its purchase orders; (ii) a declaration that approximately $2.0 million in purchase orders that the Company placed in July and August 2020 were intended to and do count towards the minimums set forth in the Nutrablend Agreement; and (iii) damages based on Nutrablend’s failure to fulfill purchase orders. The case is ongoing.
As of September 30, 2021, the Company determined that approximately $1.1 million dollars of the Owed 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 $0.7 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $1.0 million as of September 30, 2021.
During the three and an additional $0.1 nine months ended September 30, 2021, the Company recorded interest of $0.1 million and $0.2 million, respectively. This charge, representing imputed interest. The Company has now concludedinterest, is included in “Interest and other expense, net” in the finalizationCompany’s consolidated statements of all its major legacy endorsement deals.
On September 23, 2021, the Company received written noticeentered into an Amendment to a Settlement Agreement that was originally entered into on September 25, 2020. Pursuant to the AS Parties were terminatingAmended Agreement, the Endorsement LicensingCompany is no longer obligated to issue Purchase Orders to Nutrablend as stated in the Settlement Agreement, which, as stated in the Form 8-K dated September 25, 2020, consisted 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 1, 2021 through May 31, 2021; (iv) $2,100,000 from June 1, 2021 through August 31, 2021; and Co-Branding(v) $1,400,000 from September 1, 2021 through October 30, 2021. The Monthly Payments provision of the Settlement Agreement by and amongremains unchanged.
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4Excelsior Matter
On March 18, 2019, Excelsior Nutrition, Inc. (“4Excelsior”), a manufacturer of MusclePharm products, filed an action against the Company in the Superior Court of the State of California for the County of Los Angeles, claiming approximately $6.2 million in damages relating to allegedly unpaid invoices, as well as approximately $7.8 million in consequential damages.
On December 16, 2020, the Company and the AS Parties, then the Company 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’ agreement and misappropriated Schwarzenegger’s likeness. The Company filed its response and counterclaimed for breach of contract and breach of the implied covenant of good faith and fair dealing.
The Company determined that approximately $1.1 million dollars of the Settlement 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 remaining Settlement Amount that was due after a year was $2.0 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $0.8 million as of September 30, 2017. The2021.
During the three and nine months ended September 30, 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,recorded interest expense of $0.1 million and otherwise destroy any products currently in inventory. This inventory was written off to “Impairment of assets”$0.3 million, respectively, 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.
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, 2017,2021, 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,the Company, filed a complaint against the Company in Arizona state court. In its complaint, ThermoLife allegesalleged that the Company failed to meet minimum purchase requirements contained in the parties’ supply agreementagreement. The court held a bench trial on the issue of damages in October 2019, and seeks monetaryon 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 September 30, 2021, the total amount accrued, including interest, was $1.9 million. The Company has filed an appeal and posted bonds in the 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 deficiency in purchase amounts. In March 2016,associated annual fee of $12,500 has been 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 motion asking the trial court to increase the Company’s appeal bond to the full amount of the judgment, or $1.9 million, which the Court denied on June 2, 2021.
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For both the three months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was $67,025 and for both the nine months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was $66,000.
The Company intends to vigorously continue pursuing its defenses. On June 25, 2021, the Company filed an answer to ThermoLife’s complaint, denying the allegations containeda petition for review in the complaint, and filed a counterclaim allegingArizona Supreme Court requesting that the Court accept review of the appeal affirming the judgment against the Company. ThermoLife breached its express warranty to MusclePharm because ThermoLife’s products were defective and couldopposed the petition for review on July 26, 2021. The Arizona Supreme Court has not be incorporated intoyet ruled on the Company’s products. Therefore, the Company believes that ThermoLife’s complaint is without merit. The lawsuit continues to be in the discovery phase.
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”) to terminate his employment as the Company’s President. Although Estalella sought to terminate his employment with the Company for “Good Reason,” as defined in Estalella’s employment agreement with the Company (the “Employment Agreement”), the Company advised Estalella that it deemed his resignation to be without Good Reason.
Along with its complaint, White Winston also filed a motion for a temporary restraining order (“TRO”) and President, alleging,preliminary injunction enjoining the exercise of Mr. Drexler’s conversion right under the Amended Note. On August 23, 2018, the Nevada district court issued an ex parte TRO. On September 14, 2018, the court let the TRO expire and 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 merits of the underlying action and failed to establish irreparable harm. Following the court’s decision, the Company breachedfiled a motion seeking to recoup the Employment Agreement,legal fees and seeking certain equitable reliefcosts it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded the Company $56,000 in fees and unspecified damages. The Company believes Estalella’s claims are without merit. Ascosts.
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 the liability consistent with its policy for accruing for contingencies.Company, citing Plante Moran’s resignation. The lawsuit continuescourt granted White Winston’s request to behold an evidentiary hearing on the motion, but subsequently stayed the action pending the parties’ attempts to resolve 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 withSuperior Court of the State of California in and for the County of Los Angeles, seeking access to the Company’s books and records and requesting the appointment of an independent auditor for the company. On February 25, 2021, the court ordered the Company to produce certain documents, denied White Winston’s request for an auditor, and ordered the Company to pay a revised trial date expected$1,500 penalty. On July 20, 2021 the California court awarded White Winston $92,942 in attorneys’ fees and cost relating to commence in May 2018.
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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 contendingcontended 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 proposingproposed 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$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 assertingasserted that the Company owes information reporting penalties of approximately $2.0$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 pursuepursued this matter vigorously through the IRS appeal process. DueAn 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 involved the fair market value of restricted stock units the Company granted to certain former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagreed as to the uncertainty associated with determiningvalue of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS exchanged expert valuation reports on the fair market value of the stock and had extensive negotiations on this issue. The IRS also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS 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 liability forcase, are pending before the asserted taxesUnited 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 penalties, if any, andRevenue Agents assigned to the Company’s inabilitycase are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the IRS appeals process,that it is the Company is unable to provide an estimateFormer Officers who are directly and principally liable for its potential liability, if any, associated with these taxes.
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 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.
On June 29, 2021, an IRS Appeals Officer confirmed that the tax matter had exceeded the applicable statute of limitations and was deemed closed from any further assessment by the IRS.
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 this matter.
The Company believes this noticeengaged in mediation with all parties to beEstalella’s lawsuit on November 2, 2021. Following mediation, on November 3, 2021, the Company approved a clerical error as this this entity was dissolved priorglobal settlement with the parties to the period the IRS is claiming this assessments relates to.Mr. Estalella’s lawsuit. The Company isparties are currently in the process of resolving this matter withnegotiating, finalizing, and executing the IRS.
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 | $294 |
Transaction Type | Quantity (Shares) | Valuation ($) | 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 |
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Restricted Stock
For the three and nine months ended September 30, 2017 and 2016 consist primarily2021, the Company recorded $ million of stock-based compensation expense related to restricted stock awards. The activity of 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 |
For the three and nine months ended September 30, 2017, respectively.2020, the Company recorded $ and $ million, respectively, of stock-based compensation expense related to restricted stock.
Transaction Equity Bonus
On April 5, 2021, with the appointment of the Company’s President and Chief Financial Officer, the Company granted an award where upon the occurrence of a sale of the Company, the President and Chief Financial Officer will receive 2% of the fully diluted equity of the Company. The totalgrant will vest upon the one-year anniversary and if a sale transaction has not occurred by the two-year anniversary, then the President and Chief Financial Officer shall have the option to convert the transaction equity bonus into common shares. The fair value of restricted stock awards granted to employees and the Board was $0.3this grant is approximately $ million, and $0.5 million forwhich is being expensed on a straight-line basis over one-year.
For the three months ended September 30, 2016, respectively, and $1.0 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, the total 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.
For the three and benefits” in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016. All amounts due Mr. Pyatt were paid as2020, the Company recorded expense related to transaction awards.
Stock Options
On May 12, 2021, the Company entered into an Agreement (the “Agreement”) with Joseph Cannata (“Cannata”), pursuant to which the Company has engaged Cannata on a non-exclusive basis to assist with the growth of March 31, 2017.
In connection with entry into the Agreement, the Company may grant optionsissued to Cannata an option to purchase shares of the Company’s common stock at a price per share of $ . The option has an exercise term of years (subject to potential acceleration upon a sale of the Company) and will vest in two equal tranches upon the achievement of certain employees and directors pursuantnet revenue milestones related to the 2015 Plan. UnderCompany’s energy beverage products with the 2015 Plan, all stock options are granted with an exercise price equaldetermination in the second quarter of 2021 that it is probable the performance criteria related to or greater than the grants will be achieved. The estimated fair market value of this grant is $ million and was determined by using the Black-Scholes valuation model with a shareterm of years; annual volatility rate of ; discount rate of ; and for dividend rate. The fair value of performance-based restricted stock awards is recognized over the derived requisite vesting period beginning in the period in which they are deemed probable to vest.
On July 26, 2021, the Company entered into a Modification Agreement (the “Modification”) with Prestige Capital Finance, LLC (“Prestige”), providing a second over-advance from the purchase and sale agreement dated January 2016. The over-advance provided $1 million of funding to the Company, to be repaid within the earlier of six months from the date of the agreement, or when the Company arranges additional funding. In connection with the Modification, the Company will grant options to Prestige to purchase stockstock.
On August 12, 2021, the Company entered into an Agreement (the “Agreement”) with T.J. Dillashaw (“Dillashaw”), pursuant to which the Company has engaged Dillashaw on a non-exclusive basis to promote the date of grant. Vesting is generally determined byCompany’s energy beverage product line. In connection with entry into the Compensation CommitteeAgreement, the Company will issue to Dillashaw an option to purchase shares of the Board within limits set forth inCompany’s common stock.
On September 1, 2021, the 2015 Plan. NoCompany will provide a stock option willgrant to an employee to be exercisable more than tenvested after two years after the date it is granted.
For the three months ended September 30, 2017 and 2016, the Company recorded stock compensation expense related to options of $29,000 and $42,000, respectively. For the nine months ended September 30, 2017 and 2016,2021, the Company recorded stockapproximately $million and $of stock-based compensation expense related to options of $112,000stock options.
For the three and $97,000, respectively.nine months ended September 30, 2020, the Company recorded expense related to stock options.
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Basic net loss per share is computed by dividing net 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.
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) |
Schedule of Basic and Diluted Net Income (loss) Per Share
2021 | 2020 | 2021 | 2020 | |||||||||||||
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net Income (loss) | $ | (3,933 | ) | $ | 678 | $ | (6,090 | ) | $ | 365 | ||||||
Weighted average common shares used in computing net loss per share, basic | 33,386,200 | 33,008,189 | 33,134,933 | 32,746,147 | ||||||||||||
Potentially dilutive securities | 0 | 16,089,406 | 0 | 16,089,406 | ||||||||||||
Weighted average common shares used in computing net loss per share, diluted | 33,386,200 | 49,097,595 | 33,134,933 | 48,835,553 | ||||||||||||
Net Income (loss) per share, basic | $ | (0.12 | ) | $ | 0.02 | $ | (0.18 | ) | $ | 0.01 | ||||||
Net Income (loss) per share, diluted | $ | (0.12 | ) | $ | 0.01 | $ | (0.18 | ) | $ | 0.01 |
Diluted net incomeloss per share is computed by dividing net incomeloss 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.
There was no dilutive effect for the outstanding awards for the three and nine months ended September 30, 2017 and 2016, respectively, as2021 the Company reported a net loss for all periods.three and nine periods presented. However, if the Company had net income for the three and nine months ended September 30, 2017,2021, the potentially dilutive securities included in the earnings per share computation would have been 8,852,627 .
Schedule of Outstanding Potentially Dilutive Securities
As of September 30, | ||||||||
2021 | 2020 | |||||||
Stock options | 1,673,994 | 171,703 | ||||||
Warrants | — | 1,289,378 | ||||||
Unvested restricted stock | — | — | ||||||
Convertible notes | 16,154,795 | — | ||||||
Total common stock equivalents | 17,828,789 | 1,461,081 |
Note 12. Income Taxes
The Company recorded a tax provision of $32,000 and 9,048,072, respectively. If the Company had net income$20,000 for the three months ended September 30, 2021, and 2020, respectively, and $40,000 and $64,000 for the nine months ended September 30, 2016, the potentially dilutive securities included in the earnings 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 |
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, 2017.2021.
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Note 14. 13. 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 |
Schedule of Revenue, Net by Geographic Area
2021 | 2020 | 2021 | 2020 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue, net: | ||||||||||||||||
United States | $ | 9,541 | $ | 10,072 | $ | 28,719 | $ | 35,433 | ||||||||
International | 2,430 | 6,013 | 11,281 | 13,876 | ||||||||||||
Total revenue, net | $ | 11,971 | $ | 16,085 | $ | 40,000 | $ | 49,309 |
The Company had purchased split dollar life insurance policies on certain key executives. These policies provideMusclePharm brands are marketed across major global retail distribution channels. Below is a splittable of 50%revenue, net by our major distribution channel (in thousands):
Schedule of the death benefit proceeds to the Company and 50% to the officer’s designated beneficiaries. None of these key executives are currently employedRevenue, Net by the Company, and all policies were terminated or transferred to the former employees as of December 31, 2016.
For the Three Months Ended September 30, | ||||||||||||||||
2021 | % of Total | 2020 | % of Total | |||||||||||||
Distribution Channel | ||||||||||||||||
Specialty | $ | 4,211 | 35 | % | $ | 4,770 | 30 | % | ||||||||
International | 2,430 | 20 | % | 6,013 | 37 | % | ||||||||||
FDM | 5,330 | 45 | % | 5,302 | 33 | % | ||||||||||
Total | $ | 11,971 | 100 | % | $ | 16,085 | 100 | % |
For the Nine Months Ended September 30, | ||||||||||||||||
2021 | % of Total | 2020 | % of Total | |||||||||||||
Distribution Channel | ||||||||||||||||
Specialty | $ | 14,324 | 36 | % | $ | 21,739 | 44 | % | ||||||||
International | 11,281 | 28 | % | 13,876 | 28 | % | ||||||||||
FDM | 14,395 | 36 | % | 13,694 | 28 | % | ||||||||||
Total | $ | 40,000 | 100 | % | $ | 49,309 | 100 | % |
Note 16. 14. Subsequent Events
1. | Private Placement |
On October 13, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors as purchasers. Pursuant to the Securities Purchase Agreement, the Company sold, and the Investors purchased, $7,050,000 million in principal amount of senior notes and warrants. The Company received net proceeds of $6,202,763.
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The Senior Notes were issued with an entityoriginal issue discount of 14%, bear 0 interest and mature after 6 months, on April 13, 2022. To secure its obligations thereunder and under the Securities Purchase Agreement, the Company has granted a security interest over substantially all of its assets to disclose events that occur after the balance sheet date but before financial statements are issued or are availablecollateral agent for the benefit of the Investors, pursuant to be issued (“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. a pledge and security agreement.
The first type consists of events or transactions that provide additional evidence about conditions that existed at thematurity date of the balance sheet, including the estimates inherent in 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 date of the balance sheet but arose subsequent to that date (“non-recognized subsequent events”).
The Warrants are exercisable for five (5) years to purchase 17,355,700 shares of the Company’s common stock, par value $ per share, at an exercise price of $0.78, subject to adjustment under certain circumstances described in the Warrants.
In addition, each of the directors and officers of the Company entered into lock-up agreements, which prohibit sales of the Common Stock until after April 11, 2022, subject to certain exceptions.
2. | Entry into a Material Definitive Agreement. |
On October 28, 2021, the Company entered into an Agreement with Jason May, pursuant to which the Company has engaged May on a non-exclusive basis to assist with the growth of the Company’s energy beverage product line.
In connection with entry into the Agreement, the Company “Borrower”) entered intoissued to May an option to purchase shares of the Company’s common stock at a Loanprice per share of $ . The option has an exercise term of years (subject to potential acceleration upon a sale of the Company) and Security Agreement (“Security Agreement”) with Crossroads Financial Group, LLC (“Lender”). Pursuantwill vest in two equal tranches upon the achievement of certain net revenue milestones related to the Security Agreement, Borrower may borrow upCompany’s energy beverage products.
In addition, the Company agreed to 70% of its Inventory Cost or upmake quarterly payments to 75% of Net Orderly Liquidation Value (each as defined inMay during the Security Agreement), up to a maximum amount of $3.0 million at an interest rate of 1.5% per month, subject to a minimum monthly fee of $22,500. The initial term of the Security Agreement is six monthsin amounts equal to 17.5% of the gross 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 the parties, upon the sale of the Company and upon other specified termination events.
3. | SBA PPP Loan |
On October 25th, 2021, the Company received a letter from HSBF notifying the Company that its SBA PPP loan has been forgiven in full by HSBF. The Company has $965K loan liability and $13K in accrued interest that will be eliminated from the general ledger in October.
4. | Change Capital I, LLC |
On October 12th, 2021 the company repaid the outstanding balance for Change Capital I, LLC.
5. | Secured Borrowing Arrangement |
On October 12th, 2021 the June 14th and July 26th Prestige $2 million advance was extended to the maturity date of execution,the $7.0 million senior secured note offering.
6. | Former Executive Lawsuit |
On November 3, 2021, the Company approved a global settlement agreement with the parties to Mr. Estalella’s lawsuit. This settlement agreement, upon finalization by the parties and such initial term is extended automatically in six month increments, unless earlier terminated pursuantdismissal of the litigation by the Court, will constitute a full and final settlement of Mr. Estalella’s claims against all parties to the termslitigation, including the Company, as well as of the Security Agreement. The Security Agreement contains customary events of default, including, among others,Company’s claims against the failure to make payments on amounts owed when due, default under any other material agreement or the departure of Mr. Drexler. The Security Agreement also contains customary restrictions on the ability of Borrower to, among other things, grant liens, incur debt and transfer assets. Under the Security Agreement, Borrower has agreed to grant Lender a security interest in all Borrower’s present and future accounts, chattel paper, goods (including inventory and equipment), instruments, investment property, documents, general intangibles, intangibles, letter of credit rights, commercial tort claims, deposit accounts, supporting obligations, documents, records and the proceeds thereof.
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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, 20172021 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 Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Revenue, net | $ | 11,971 | $ | 16,085 | $ | (4,114 | ) | (26 | )% | |||||||
Cost of revenue | 11,942 | 11,073 | 869 | 8 | ||||||||||||
Gross profit | 29 | 5,012 | (4,983 | ) | (99 | ) | ||||||||||
Operating expenses: | ||||||||||||||||
General and administration | 2,453 | 3,586 | (1,133 | ) | (32 | ) | ||||||||||
Selling and promotion | 1,012 | 623 | 389 | 62 | ||||||||||||
Impairment of intangible assets | - | 167 | (167 | ) | (100 | ) | ||||||||||
Total operating expenses | 3,465 | 4,376 | (911 | ) | (21 | ) | ||||||||||
Income (loss) from operations | (3,436 | ) | 636 | (4,072 | ) | (640 | ) | |||||||||
Other (expense) income: | ||||||||||||||||
Interest and other income (expense), net | (465 | ) | (456 | ) | (9 | ) | 2 | |||||||||
Gain on settlement of payables | - | 518 | (518 | ) | (100 | ) | ||||||||||
Income (loss) before provision for income taxes | (3,901 | ) | 698 | (4,599 | ) | (659 | ) | |||||||||
Provision for income taxes | 32 | 20 | 12 | 60 | ||||||||||||
Net income (loss) | $ | (3,933 | ) | $ | 678 | (4,611 | ) | (680 | )% |
Comparison of the Nine months endedMonths Ended September 30, 20172021 to the Nine Months Ended September 30, 2016
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 Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Revenue, net | $ | 40,000 | $ | 49,309 | $ | (9,309 | ) | (19 | )% | |||||||
Cost of revenue | 34,102 | 34,504 | (402 | ) | (1 | ) | ||||||||||
Gross profit | 5,898 | 14,805 | (8,907 | ) | (60 | ) | ||||||||||
Operating expenses: | ||||||||||||||||
General and administration | 7,609 | 11,001 | (3,392 | ) | (31 | ) | ||||||||||
Selling and promotion | 3,195 | 2,100 | 1,095 | 52 | ||||||||||||
Impairment of intangible assets | - | 167 | (167 | ) | (100 | ) | ||||||||||
Total operating expenses | 10,804 | 13,268 | (2,464 | ) | (19 | ) | ||||||||||
Income (loss) from operations | (4,906 | ) | 1,537 | (6,443 | ) | (419 | ) | |||||||||
Other (expense) income: | ||||||||||||||||
Loss on settlement obligation | - | (87 | ) | 87 | (100 | ) | ||||||||||
Interest and other income (expense), net | (1,144 | ) | (1,539 | ) | 395 | (26 | ) | |||||||||
Gain on settlement of payables | - | 518 | (518 | ) | (100 | ) | ||||||||||
Income (loss) before provision for income taxes | (6,050 | ) | 429 | (6,479 | ) | (1,510 | ) | |||||||||
Provision for income taxes | 40 | 64 | (24 | ) | (38 | ) | ||||||||||
Net income (loss) | $ | (6,090 | ) | $ | 365 | (6,455 | ) | (1,768 | )% |
The following table presents our operating results as a percentage of revenue, net for the periods presented:
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)% |
For the Three Months | For the Nine Months Ended | |||||||||||||||
Ended September 30, | September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue, net | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenue | 100 | 69 | 85 | 70 | ||||||||||||
Gross profit | 0 | 31 | 15 | 30 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administration | 20 | 22 | 19 | 22 | ||||||||||||
Selling and promotion | 8 | 4 | 8 | 4 | ||||||||||||
Impairment of intangible assets | - | 1 | (0 | ) | - | |||||||||||
Total operating expenses | 29 | 27 | 27 | 27 | ||||||||||||
Income (loss) from operations | (29 | ) | 4 | (12 | ) | 3 | ||||||||||
Other (expense) income: | - | - | - | - | ||||||||||||
Loss on settlement obligation | - | - | - | - | ||||||||||||
Interest and other income (expense), net | (4 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||
Gain on settlement of payables | - | 3 | - | 1 | ||||||||||||
Income (loss) before provision for income taxes | (33 | ) | 4 | (15 | ) | 1 | ||||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net income (loss) | (33 | )% | 4 | % | (15 | )% | 1 | % |
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.
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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 distribution channel (in thousands):
For the Three Months Ended September 30, | ||||||||||||||||
2021 | % of Total | 2020 | % of Total | |||||||||||||
Distribution Channel | ||||||||||||||||
Specialty | $ | 4,211 | 35 | % | $ | 4,770 | 30 | % | ||||||||
International | 2,430 | 20 | % | 6,014 | 37 | % | ||||||||||
FDM | 5,330 | 45 | % | 5,302 | 33 | % | ||||||||||
Total | $ | 11,971 | 100 | % | $ | 16,085 | 100 | % |
For the Nine Months Ended September 30, | ||||||||||||||||
2021 | % of Total | 2020 | % of Total | |||||||||||||
Distribution Channel | ||||||||||||||||
Specialty | $ | 14,324 | 36 | % | $ | 21,739 | 44 | % | ||||||||
International | 11,281 | 28 | % | 13,876 | 28 | % | ||||||||||
FDM | 14,395 | 36 | % | 13,694 | 28 | % | ||||||||||
Total | $ | 40,000 | 100 | % | $ | 49,309 | 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%$4.1 million, or 26%, to $24.4$11.9 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, 2016,2021, compared to $16.1 million for the three months ended September 30, 2020. Revenue, net for the three months ended September 30, 2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. The company did not take any material price increase in the three months ended September 30th, 2021 which would impact revenue.
Discounts and sales allowances decreased to 13.9% of gross revenue, or $1.9 million, for the three months ended September 30, 2021, from 20% of gross revenue, or $4.1 million for 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 months ended September 30, 2021 and 2020, our BioZone subsidiary was $2.4 million. Forlargest customer accounted for approximately 50% and 46% of our revenue, net, respectively.
Revenue, net decreased $9.3 million, or 19%, to $40.0 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 $3.82021, compared to $49.3 million $3.8 million and $2.2 million, respectively. Lower sales also were reported for the three and nine months ended September 30, 20172020. Revenue, net for several of our traditional brick and mortar retail partners. For the three and nine months ended September 30, 2017 discounts2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. The company did not take any material price increase in the nine months ended September 30th, 2021, which would impact revenue
Discounts and sales allowances decreased to 8%14% of gross revenue, or $2.1$6.3 million, and 15.8% of gross revenue, or $13.8 million, respectively, compared tofor the three and nine months ended September 30, 2016 when2021, from 19% of gross revenue, or $11.7 million for the same period in 2020. The reduction in discounts and allowances were 26.8%, or $10.1 million, and 20.8%, or $27.9 million, respectively. Theas a percent of gross revenue was due to changes in discountscustomer mix and allowances were primarily related to discounts and allowances on existing products with key customers. The decreases arediscretionary promotional activity.
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During 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.
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 alsoprimarily use U.S. contract manufacturers to drop ship products directly to our customers. In addition, we began to ship products directly to our European customers from our contract manufacturer in Europe during the quarter ended June 30, 2017.
Our gross profit fluctuates primarily 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. Ourpricing.
The Company experienced cost of revenueincreases for its raw materials for the three and nine months ended September 30, 2017 increased2021, primarily due to higherindustry shortages in supply and consistent market demand. Compared to quarter three of 2020, commodity protein costs relatedhave increased 145% in quarter three of 2021, negatively affecting Company gross margin. The Company is taking steps to ourmanage the increase and shortages by entering into agreements with additional protein brokers to diversify its protein sources, along with working with new vendors to source other components such as scoops and bags. In addition, the Company is increasing prices to customers on select products which we werein the fourth quarter.
For the remainder of 2021, given the current market, the Company expects continued pressure on protein prices but is unable to pass onforecast future protein prices. Any additional increases in protein prices, to our customers. Costthe extent not offset by the steps described above, will negatively impact the Company’s gross margins, liquidity and ability to use capital resources for other business purposes.
Costs of revenue is expected to return to a historical base over time as a percentageincreased 8%, despite the decrease in sales volume 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 compareddecreased 1% to 37%$34.1 million for the same period in 2016. For the nine months ended September 30, 2017, our operating expenses were 37% of revenue2021, compared to 41% of revenue$34.5 million for the same period in 2016. The2020. This decrease in operating expenses during this period was primarily due to lower sales volume along with increased commodity costs, specifically protein, prices of which have 140% year over year, along with increased freight costs. Gross profit for the nine months ended September 30, 2021 decreased 60% to $5.9 million, compared to $14.8 million for the same period in 2020. Gross profit was 15% of revenue, net for the nine months ended September 30, 2021 compared to 30% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage were higher commodity prices, specifically for protein and freight costs. During the second quarter of 2021, the Company met with one of its largest customers to review and finalize their discretionary promotional activity, generating significant reductions in advertisingto estimates for the remainder of 2021. These reductions will decrease the annual spend on discretionary promotional activity for this customer by 41% compared to 2020 spend, which so far has improved the gross profit by 2% by September 30, 2021.
Operating Expenses
Selling and promotion expense and salaries and benefits expense, as discussed below.
Our advertisingselling and promotion expense consists primarily of digital,expenses related to freight-out, club demonstrations, print and mediaonline advertising, athletic endorsementstrade shows and sponsorships, promotional giveaways, trade show eventsstrategic partnerships with athletes and various partnering activities with our trading partners. Prior to our restructuring during the third quarter of 2015,sports teams. 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 advertisingsampling/promotional materials.
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Selling and promotion expenses as we continueexpense increased 62% to leverage existing brand recognition and move towards lower cost advertising outlets including social media and trade advertising.
Selling and promotion expense increased 2.5%52% to $2.0$3.2 million and decreased 31.5% to $6.1 million, respectively, compared to three and nine months ended September 30, 2016, when advertising and promotion expense were $1.9 million and $8.9 million, respectively. Advertising and promotion expense for the three and nine months ended September 30, 2017 and 2016 included expenses related to strategic partnerships with athletes and sports teams. The expense associated with these partnerships for the three and nine months ended September 30, 2017 compared 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 terminated a number of contracts as part of our restructuring activities. The remaining decreases were attributable to various advertising and promotional efforts.
General and Administrative
Our selling, general and administrative expenses consist primarily of salaries and benefits, professional fees, depreciation and amortization, research and development, information technology equipment and network costs, facilities related expenses, 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.
General and administrative expenses decreased 32% to $2.5 million, for three months ended September 30, 2021, or 20% of revenue, net compared to $3.6 million, or 22% of revenue, net for the same period in 2020 primarily due to a decrease slightlyin salaries and benefits, reduction in headcount as we continuehave focused on reducing operating costs and reduction in board member compensation and office expenses associated with closure of headquarters and warehouses.
General and administrative expenses decreased 31% to rationalize our professional service providers$7.6 million, for the 9 months ended September 30, 2021 or 19% of revenue, net compared to $11.0 million, or 22% of revenue, net for the same period in 2020 primarily due to a reduction a reduction in headcount as we have focused on reducing operating costs and focus on key initiatives. Also, as our ongoing legal matters are reduced, we expectin board member compensation and office expenses associated with closure of headquarters and warehouses.
During the second quarter of 2021, a customer filed bankruptcy without giving prior indication or notice. The event accounted for approximately $133,000 of bad debt expense, elevating bad debt expense to see a further decline in legal costs87% for specific settlement activities. We intend to continue to invest in strengthening our governance, internal controlsthe first nine months of 2021 over the first 9 months of 2020.
Interest and process improvements which may require some support from third-party service providers.
For the three and nine months ended September 30, 2017, professional fees expenses decreased 21.4% to $1.0 million2021 and 40.5% to $2.6 million, respectively, compared to three2020, “Interest and nine months ended September 30, 2016, when professional fees expenses were $1.3 million and $4.4 million, respectively. The decrease during the three months ended September 30, 2017 compared to 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-house 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 | For the | |||||||||||||||
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Interest expense, related party | $ | (161 | ) | $ | (76 | ) | $ | (429 | ) | $ | (228 | ) | ||||
Interest expense, other | (235 | ) | (249 | ) | (693 | ) | (581 | ) | ||||||||
Interest expense, secured borrowing arrangement | (287 | ) | (312 | ) | (710 | ) | (1,060 | ) | ||||||||
Foreign currency transaction loss | (10 | ) | (2 | ) | 22 | (20 | ) | |||||||||
Other income | 228 | 183 | 666 | 350 | ||||||||||||
Total interest and other expense, net | $ | (465 | ) | $ | (456 | ) | $ | (1,144 | ) | $ | (1,539 | ) |
Net interest and other expense for the three months ended September 30, 2021 increased 2%, or $0.01 million, compared to the same period in 2020. The decrease is primarily related to reduced interest expense for secured borrowing arrangements and interest expense other, partially offset by an increase in interest expense for related party and other debt. The increase in related party interest is due to the increase in the related party convertible note.
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Net interest and other expense for the nine months ended September 30, 2017 increased 603.3%2021 decreased 26%, 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 relateddue to reduced interest expense with afor secured borrowing arrangements, and interest expense other, partially offset by an increase in interest expense for related party. The increase in related party interest is 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.
Liquidity and Capital Resources
The Company has incurred significant losses and experienced negative cash flows since inception. As of September 30, 2021, the inceptionCompany had cash of MusclePharm, other than cash from product sales, our primary source$0.4 million, a decline of cash has been$1.6 million from the saleDecember 31, 2020 balance of equity, issuance$2.0 million. As of convertible secured promissory notesSeptember 30, 2021, we had a working capital deficit of $26.7 million, a stockholders’ deficit of $29.8 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 $199 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 pricing for raw materials. These steps improved gross margins in the fourth quarter of 2019 and this trend has continued through September 30, 2021. However, with the recent increases in commodity prices, the company’s gross margins have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2020.
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 launched three flavors of MP Combat energy in September for domestic distribution and three additional flavors for international distribution.
The Company believes with the launch of its new energy products, reductions in operating costs and 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.
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 ablehave entered into numerous financing arrangements outlined in “Note 8. Debt” to obtain, if any, will be sufficientthe Notes to meet our future needs, or that any such financing will be obtainable on acceptable terms or at all.
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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 Nine Months | ||||||||
Ended September 30, | ||||||||
2021 | 2020 | |||||||
Consolidated Statements of Cash Flows Data: | ||||||||
Net cash (used in) provided by operating activities | $ | (2,466 | ) | $ | 2,570 | |||
Net cash (used in) provided by investing activities | (3 | ) | 216 | |||||
Net cash used in financing activities | 850 | (3,233 | ) | |||||
Net change in cash | $ | (1,619 | ) | $ | (447 | ) |
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.
Cash used in operating activities for the period ended September 30, 2021 was $2.5 million compared to cash flowsprovided by operations of $2.6 million for 2020.
During the nine months ended September 30, 2021, the primary change in net operating assets and liabilities was primarily the result of a net loss of $6.1 million, partially offset by non-cash items of amortization, bad debt expense and stock-based compensation, along with increases in accounts payable and other liabilities.
During the nine months ended September 30, 2020, the net cash provided by operating activities of $2.6 million primarily relates to net income of $0.4 million and a decrease in inventory.
Investing Activities
During the nine months ended September 30, 2021, cash used was for the purchase of computer equipment. During the nine months ended September 30, 2020, we received proceeds from the disposal of property and equipment.
Financing Activities
Cash generated in financing activities for the nine months ended September 30, 20172021 was $1.8$0.8 million lower compared to the same periodprimarily from net proceeds from line of credit.
Cash used in 2016. The variance primarily relates to net loss adjusted for non-cash charges, which resulted in a use of cash of $4.1 millionfinancing activities for the nine months ended September 30, 2017, compared to a source of cash of $0.4 million for the same period in 2016. This decrease2020 was partially offset by the 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 the same period in 2016.$3.2 million. During the nine months ended September 30, 2017, a decrease2020 cash used in inventory resulted in a $2.4 million cash flow from working capital. This increase in cash flow from working capital was offset by an increase in our 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.
Indebtedness Agreements
For information regarding our indebtedness agreements, see “Note 8. 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 9. Commitments and Contingencies” to the Notes to Consolidated Financial Statements (unaudited) contained herein.
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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2017.
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in accordance with U.S. GAAP, this Quarterly Report on 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) loss on settlements, interest expense, depreciation of property and equipment, amortization of intangible assets and provision for income 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. 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 income (loss) and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Set forth below are reconciliations of our reported U.S. GAAP net loss to Adjusted EBITDA (in thousands):
For the | For the | For the | ||||||||||||||
Three Months ended | For the Three Months | Nine Months ended | Nine Months ended | |||||||||||||
30-Sep-21 | 30-Sep-20 | 30-Sep-21 | 30-Sep-20 | |||||||||||||
Net Income (Loss) | $ | (3,933 | ) | $ | 678 | $ | (6,090 | ) | $ | 365 | ||||||
Non-GAAP adjustments: | ||||||||||||||||
Stock-based compensation | 386 | 27 | 694 | 206 | ||||||||||||
Gain on disposal of property and equipment | - | (165 | ) | - | (176 | ) | ||||||||||
(Gain) loss on settlements | (94 | ) | (518 | ) | (265 | ) | (518 | ) | ||||||||
Interest expense | 683 | 632 | 1,800 | 1,715 | ||||||||||||
Depreciation of property and equipment | 3 | 24 | 9 | 130 | ||||||||||||
Amortization of intangible assets | 80 | 80 | 240 | 240 | ||||||||||||
Impairment of operating lease right of use asset | - | 167 | - | 167 | ||||||||||||
Provision for income taxes | 32 | 20 | 39 | 64 | ||||||||||||
Adjusted EBITDA | $ | (2,843 | ) | $ | 945 | $ | (3,573 | ) | $ | 2,193 |
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, sinceexcept for the 2016 Form 10-K.following:
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Stock-based compensation
Determining the appropriate fair value model and amortizationcalculating the fair value of propertystock-based awards requires estimates and equipment, amortization of intangible assets, provision for doubtful accounts, amortization of prepaid stock compensation, amortization of prepaid sponsorship fees,judgments. Our stock-based compensation issuanceis a “critical accounting estimate” because changes in the assumptions used to develop estimates of commonfair value or the requisite service period could materially affect key financial measures, including income (loss) from operations and net income (loss).
We use the Black-Scholes valuation model to calculate the fair value of performance-based stock warrants, otheroptions. The value is recognized as expense net, lossover the derived requisite service period beginning in the period in which they are deemed probable to vest. Vesting probability is assessed based upon certain factors and requires significant judgment.
The expected term of options granted is estimated based on salea number of subsidiary, gain on settlements, restructuring,factors, including the vesting and asset impairment charges. Management believes that this non-GAAP measures provides investors with important additional perspectives into our ongoing business performance.
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 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.
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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 Annual Report on Form 10-K.
Other Adjustments Resulting from Reconsidering Previously Issued Financial Statements
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 September 30, 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. |
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THE COMPANY DOES NOT MAINTAIN ADEQUATE INTERNAL CONTROL DOCUMENTATION AND TESTING PROCEDURES
● | 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 September 30, 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 cut-off procedures |
The Company has implemented internal controls and procedures to conduct enhanced revenue recognition cut-off testing on a quarterly basis.
The Company also improved cut-off in regard to the Company’s inventory as inventory is currently maintained and controlled either by third-part manufacturers, or in a Company warehouse operated by a third-party logistics provider. This allows the Company to use inventory counts provided by independent third parties.
● | 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 Company’s 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. In addition, the Company hired an experienced Vice President of Sales.
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● | Establishment of a disclosure committee |
The Company is currently implementing a disclosure committee, which it expects to put in place during the third quarter of 2021, to assist the Chief Executive Officer and Chief Financial Officer in preparing the disclosures required by U.S. GAAP and U.S. Securities and Exchange Committee (SEC) rules and to help ensure that the Company’s disclosure controls and procedures are properly implemented.
● | Enhancing the internal compliance function, and authorizing management to retain the appropriate individual or individuals. |
As part of the senior leadership reorganization referred to above, the Company is evaluating outside firms to assist in the process of revamping its 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.
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 Act duringremediation measures described above.
We expect that our remediation efforts, including design and implementation, will continue through fiscal year 2021. In particular, as noted above, the Company has implemented enhanced controls regarding sales cut-off, as well as customer discounts.
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, along with turnover within the finance department and despite ongoing remediation efforts through the third quarter of 20172021, the Company was not able to complete a majority of its remediation efforts during the period ended September 30, 2021.
Other than the ongoing remediation efforts described above, there have been no changes during the quarter ended September 30, 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 4, our management has concluded that the consolidated financial statements and related financial information included in this Quarterly Report on EffectivenessForm 10-Q presents fairly, in all material respects, our financial position, results of Controlsoperations and Procedures
● | 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 evaluating the disclosure controlsin some cases corrected, our accounting policies and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is requiredhave applied those to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For information set forth under the heading “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally,regarding legal proceedings, see Note 9 Commitments and Contingencies, to our Condensedthe Notes to Consolidated Financial Statements in(unaudited) contained herein, which is incorporated by reference into this Quarterly Report on Form 10-Q.part II, Item 1.
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Item 1A. Risk Factors
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any repurchases of our common stock during the third quarter of 2021.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information.
None
Item 6. Exhibit Index
Incorporated by Reference | ||||||||||
Exhibit No. | Description | Form | SEC File Number | Exhibit | Filing Date | |||||
Amendment to Settlement Agreement, Dated September 23, 2021 between the Company and NBF Holdings Canada Inc. | ||||||||||
31.1** | Certification of the Chief Executive Officer | |||||||||
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||||
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||||
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 |
+ | Pursuant to 17 C.F.R §§230.406 and 230.83, the confidential portions of this exhibit have been omitted and are marked accordingly |
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SIGNATURES
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: November | By: | /s/ | Sabina Rizvi |
Name: | Sabina Rizvi | ||
Title: | Chief (Principal Financial |
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