UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORMForm 10-Q
 
☒ 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017March 31, 2019 or
 
OR
☐ 
[ ] 
TRANSITION REPORT PURSUANT TO SECTIONTransition Report Pursuant to Section 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OFor 15(d) of the Securities Exchange Act of 1934
For the transition period fromto                     
 
Commission 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.)
  
4400 Vanowen St.
Burbank, CA
 91505
(Address of principal executive offices) (Zip code)
 
(303) 396-6100(800) 292-3909
(Registrant’s telephone number, including area code)
 
4721 Ironton Street, Building A
Denver, Colorado 80238Securities registered pursuant to Section 12(b) of the Act:
 
(Former name, former address and former fiscal year, if changed since last report)
Title of each classTrading 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[ ]  (Do not check if a smaller reporting company)X]Smaller reporting company[X]
  Emerging growth company[ ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] Yes [X] No [X]
 
Number of shares of the registrant’s common stock outstanding as of November 1, 2017: 14,650,554, excludingat August 18, 2020:33,101,866(excludes 875,621 shares of common stock held in treasury.treasury).
 


 
 
MusclePharm Corporation
Form 10-Q
 
TABLE OF CONTENTS
 
  
Page
Note About Forward-Looking Statements
         1
  
PART I – FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
 2
   
 Condensed
Consolidated Balance Sheets as of September 30, 2017March 31, 2019 (unaudited) and December 31, 20162018
         2
   
 Condensed
Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)
         3
   
 Condensed
Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)
         4
   
 Condensed
Consolidated StatementStatements of Changes in Stockholders’ Deficit for the ninethree months ended September 30, 2017March 31, 2019 and 2018 (unaudited)
         5
   
 Condensed
Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)
         6
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
         7
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
         2733
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
         42
   
Item 4.
Controls and Procedures
         42
  
PART II – OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
         4347
   
Item 1A.
Risk Factors
         4449
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
         4449
   
Item 3.
Defaults Upon Senior Securities.
         4449
   
Item 4.
Mine Safety Disclosures
         4449
   
Item 5.
Other Information
         4449
   
Item 6.
Exhibits
         4549
   
 
Signatures
         4650
 

 
 
Forward-LookingAbout this Report
This Form 10-Q relates to the Company’s (as defined below) quarterly period ended March 31, 2019. As previously indicated by the Company, it has been delinquent in its filings with the Securities and Exchange Commission (the “SEC”) and is making this filing after its due date. Simultaneously with making this filing, the Company also is filing its Form 10-K for the fiscal year ended December 31, 2019 and its delinquent filings on Form 10-Q for the quarterly periods ended June 30, 2019 and September 30, 2019. Because this Form 10-Q pertains to the quarterly period ended March 31, 2019, it does not include financial information for more recent periods. Accordingly, please refer to our filings for more recent periods for financial information relating to those periods. The information in this Form 10-Q is expressly qualified by our Form 10-K and Form 10-Qs relating to subsequent periods.
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 the Private Securities Litigation Reform Act of 1995.statements. 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,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. 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 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, 2019,filed with the Securities and Exchange Commission (the “SEC”)SEC on March 15, 2017, as amended on May 1, 2017.August 24, 2020. 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.
 

 
PARTPART I—FINANCIAL INFORMATION
ItemItem 1. Financial Statements
MusclePharm Corporation
Condensed Consolidated BCalanceonsolidated Balance Sheets
(In thousands, except share and per share data)
 
 
September 30,
2017
 
 
December 31,
2016
 
 
March 31,
2019
 
 
December 31,
2018
 
 
(Unaudited)
 
 
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
 $4,878 
 $4,943 
 $613 
 $2,317 
Accounts receivable, net of allowance for doubtful accounts of $998 and $462, respectively
  13,087 
  13,353 
Accounts receivable, net
  5,548 
  6,273 
Inventory
  6,274 
  8,568 
  9,819 
  13,661 
Prepaid giveaways
  132 
  205 
Prepaid expenses and other current assets
  1,902 
  1,725 
  827 
  576 
Total current assets
  26,273 
  28,794 
  16,807 
  22,827 
Property and equipment, net
  2,226 
  3,243 
  433 
  513 
Intangible assets, net
  1,397 
  1,638 
  917 
  997 
Operating lease right-of-use assets
  1,742 
  — 
Other assets
  222 
  421 
  274 
  264 
TOTAL ASSETS
 $30,118 
 $34,096 
 $20,173 
 $24,601 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
Current liabilities:
    
    
Obligation under secured borrowing arrangement
 $3,443 
 $1,285 
Line of credit
  2,500 
  1,500 
Operating lease liability, current
  765 
  — 
Convertible note with a related party, net of discount
  17,955 
  17,940 
Accounts payable
 $9,397 
 $9,625 
  19,932 
  24,797 
Accrued liabilities
  8,526 
  9,051 
Accrued and other liabilities
  6,600 
  6,543 
Accrued restructuring charges, current
  586 
  614 
  — 
  493 
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 
  51,195 
  52,558 
Accrued restructuring charges, long-term
  134 
  208 
  — 
  30 
Operating lease liability, long-term
  1,150 
  — 
Other long-term liabilities
  1,081 
  332 
  188 
  208 
Convertible notes with a related party, net of discount
  17,925 
  — 
TOTAL LIABILITIES
  41,576 
  38,976 
Commitments and Contingencies (Note 9)
    
Total liabilities
  52,533 
  52,796 
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 
Common stock, par value of $0.001 per share; 100,000,000 shares authorized, 16,526,401 and 16,190,288 shares issued as of March 31, 2019 and December 31, 2018, respectively; and 15,650,780 and 15,314,667 shares outstanding as of March 31, 2019 and December 31, 2018, respectively
  15 
Additional paid-in capital
  157,989 
  156,301 
  159,105 
  158,944 
Treasury stock, at cost; 875,621 shares
  (10,039)
  (10,039)
Accumulated other comprehensive loss
  (2)
  (162)
  (5)
  (238)
Accumulated deficit
  (159,420)
  (150,994)
  (181,436)
  (176,877)
TOTAL STOCKHOLDERS’ DEFICIT
  (11,458)
  (4,880)
  (32,360)
  (28,195)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $30,118 
 $34,096 
 $20,173 
 $24,601 
    
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed ConsolidatedConsolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Revenue, net
 $24,396 
 $30,694 
 $76,597 
 $106,473 
Cost of revenue (1)
  16,359 
  20,497 
  54,474 
  70,377 
Gross profit
  8,037 
  10,197 
  22,123 
  36,096 
Operating expenses:
    
    
    
    
Advertising and promotion
  1,952 
  1,905 
  6,079 
  8,878 
Salaries and benefits
  2,640 
  2,291 
  8,530 
  15,203 
Selling, general and administrative
  3,468 
  3,937 
  9,183 
  12,604 
Research and development
  199 
  270 
  488 
  1,664 
Professional fees
  1,034 
  1,315 
  2,643 
  4,445 
Restructuring and other charges
  — 
  1,667 
  — 
  (2,579)
Settlement of obligation
  — 
  — 
  1,453 
  — 
Impairment of assets
  — 
  137 
  — 
  4,450 
Total operating expenses
  9,293 
  11,522 
  28,376 
  44,665 
Loss from operations
  (1,256)
  (1,325)
  (6,253)
  (8,569)
Gain on settlement of accounts payable
  — 
  — 
  471 
  — 
Loss on sale of subsidiary
  — 
  — 
  — 
  (2,115)
Other expense, net (Note 7)
  (858)
  (122)
  (2,526)
  (1,426)
Loss before provision for income taxes
  (2,114)
  (1,447)
  (8,308)
  (12,110)
Provision for income taxes
  14 
  — 
  118 
  138 
Net loss
 $(2,128)
 $(1,447)
 $(8,426)
 $(12,248)
 
    
    
    
    
Net loss per share, basic and diluted
 $(0.15)
 $(0.10)
 $(0.61)
 $(0.88)
 
    
    
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  13,875,119 
  13,978,833 
  13,819,939 
  13,886,496 
(1)
Cost of revenue for the three and nine months ended September 30, 2016 included restructuring charges of $0.1 million and $2.3 million, respectively, related to write-down of inventory for discontinued products.
 
 
Three Months Ended
March 31,
 
 
 
2019
 
 
2018
(as restated)
 
Revenue, net
 $18,775 
 $24,187 
Cost of revenue
  15,855 
  19,165 
Gross profit
  2,920 
  5,022 
Operating expenses:
    
    
Advertising and promotion
  751 
  814 
Salaries and benefits
  1,880 
  2,154 
Selling, general and administrative
  2,642 
  2,487 
Research and development
  247 
  212 
Professional fees
  726 
  720 
Total operating expenses
  6,246 
  6,387 
Loss from operations
  (3,326)
  (1,365)
Other (expense) income:
    
    
     Loss on settlement obligations
  (4)
  — 
     Interest and other expense, net
  (1,165)
  (1,077)
Loss before provision for income taxes
  (4,495)
  (2,442)
Provision for income taxes
  10 
  69 
Net loss
 $(4,505)
 $(2,511)
 
    
    
Net loss per share, basic and diluted
 $(0.30)
 $(0.17)
 
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  15,183,402 
  14,957,217 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed Consolidated StatementConsolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
 
Nine Months
Ended September 30,
 
 
Three Months Ended
March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 (as restated)
 
Net loss
 $(2,128)
 $(1,447)
 $(8,426)
 $(12,248)
 $(4,505)
 $(2,511)
Other comprehensive loss:
    
    
Change in foreign currency translation adjustment
  143 
  (46)
  160 
  (40)
  179 
  8 
Comprehensive loss
 $(1,985)
 $(1,493)
 $(8,266)
 $(12,288)
 $(4,326)
 $(2,503)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed Consolidated StatementConsolidated Statements 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)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Treasury Stock
 
 
Accumulated Other Comprehensive Loss
 
 
Accumulated Deficit
 
 
Total Stockholders’ Deficit
 
Balance—December 31, 2017 (as restated)
  14,983,554 
 $14 
 $158,396 
 $(10,039)
 $(150)
 $(165,069)
 $(16,848)
Adjustment due to adoption of ASC 606 (Note 2)
    
    
    
    
    
  (1,053)
  (1,053)
Balance—December 31, 2017 (as restated)
  14,983,554 
 $14 
 $158,396 
 $(10,039)
 $(150)
 $(166,122)
 $(17,901)
Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors
  — 
  — 
  121 
  — 
  — 
  — 
  121 
Stock-based compensation for issuance of stock options to an executive and a director
  — 
  — 
  16 
  — 
  — 
  — 
  16 
Issuance of shares of common stock related to the payment of interest on a related party note
  81,113 
  — 
  53 
  — 
  — 
  — 
  53 
Change in foreign currency translation adjustment
  — 
  — 
  — 
  — 
  8 
  — 
  8 
Net loss
  — 
  — 
  — 
  — 
  — 
  (2,511)
  (2,511)
Balance—March 31, 2018 (as restated)
  15,064,667 
 $14 
 $158,586 
 $(10,039)
 $(142)
 $(168,633)
 $(20,214)
Balance—December 31, 2018
  15,314,667 
 $15 
 $158,944 
 $(10,039)
 $(238)
 $(176,877)
 $(28,195)
Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors
  — 
  — 
  65 
  — 
  — 
  — 
  65 
Issuance of shares of Common Stock related to the payment of advertising services
  336,113 
  — 
  96 
    
    
    
  96 
Change in foreign currency translation adjustment
  — 
  — 
  — 
  — 
  233 
  (54)
  179 
Net loss
  — 
  — 
  — 
  — 
  — 
  (4,505)
  (4,505)
Balance—March 31, 2019
  15,650,780 
 $15 
 $159,105 
 $(10,039)
 $(5)
 $(181,436)
 $(32,360)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed ConsolidatedConsolidated Statements of Cash Flows
(Unaudited, in thousands)
 
 
Nine Months Ended
September 30,
 
 
Three Months Ended
March 31,
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 (as restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(8,426)
 $(12,248)
 $(4,505)
 $(2,511)
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 
Depreciation and amortization of property and equipment
  116 
  151 
Amortization of intangible assets
  80 
Bad debt expense
  167 
  164 
Loss on disposal of property and equipment
  43 
  122 
  5 
  — 
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 
Amortization of debt discount
  15 
Inventory provision
  177 
  35 
Stock-based compensation
  1,688 
  4,981 
  64 
  137 
Issuance of common stock warrants to third parties for services
  — 
  6 
Write off of prepaid financing costs
  275 
  — 
Issuance of common stock to non-employees
  97 
  — 
Write off of cumulative translation adjustments
  175 
  — 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (753)
  5,069 
  557 
  (877)
Inventory
  2,351 
  59 
  3,665 
  (663)
Prepaid giveaways
  74 
  243 
Prepaid expenses and other current assets
  (175)
  1,186 
  (250)
  (93)
Other assets
  (75)
  (320)
  179 
  (14)
Accounts payable and accrued liabilities
  417 
  (4,908)
  (5,169)
  3,389 
Accrued restructuring charges
  (102)
  (2,189)
  (200)
  (45)
Net cash used in operating activities
  (2,337)
  (486)
  (4,827)
  (232)
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Purchase of property and equipment
  (27)
  (459)
  (13)
  (14)
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 
Net cash used in investing activities
  (13)
  (14)
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Proceeds from line of credit
  1,000 
  — 
Payments on line of credit
  — 
  (1,000)
Proceeds from secured borrowing arrangement, net of reserves
  22,292 
  39,412 
  8,495 
  13,494 
Payments on secured borrowing arrangement, net of fees
  (21,046)
  (39,412)
  (6,338)
  (13,332)
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)
Repayment of finance lease obligations
  (26)
  (34)
Net cash provided by (used in) financing activities
  2,140 
  (6,049)
  3,131 
  (872)
Effect of exchange rate changes on cash
  159 
  (21)
  5 
  4 
NET CHANGE IN CASH
  (65)
  (1,187)
  (1,704)
  (1,114)
CASH — BEGINNING OF PERIOD
  4,943 
  7,081 
  2,317 
  6,228 
CASH — END OF PERIOD
 $4,878 
 $5,894 
 $613 
 $5,114 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
Cash paid for interest
 $1,814 
 $1,186 
 $440 
 $614 
Cash paid for taxes
 $86 
 $206 
 $— 
 $68 
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 
Property and equipment acquired in conjunction with finance leases
 $29 
 $— 
Operating lease right-of-use assets and lease obligations (ASC 842)
 $2,117 
 $— 
Interest paid through issuance of shares of common stock
 $— 
 $53 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.Statements.
 

 
MusclePharm Corporation
NotesNotes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1. Description of Business
 
Description of Business
 
MusclePharm Corporation or the Company, was incorporated in Nevada in 2006. Except as otherwise indicated herein or the context requires otherwise, the terms “MusclePharm,” the “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries. The Company is a scientifically driven,scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. Our portfolio of recognized brands, including MusclePharm®and FitMiss®, is marketed and sold in more than 100 countries globally.The Company hasis headquartered in Burbank, California and, as of March 31, 2019, had the following wholly-owned operating subsidiaries: MusclePharm Canada Enterprises Corp. (“MusclePharm Canada”), MusclePharm Ireland Limited (“MusclePharm Ireland”) and MusclePharm Australia Pty Limited (“MusclePharm Australia”). A former subsidiaryLimited.
The Company has incurred significant losses and experienced negative cash flows since inception. As of March 31, 2019, the Company BioZone Laboratories, Inc. (“BioZone”), was sold on May 9, 2016.
Management’s Plans with Respect to Liquidityhad cash of $0.6 million, a decline of $1.7 million from the December 31, 2018 balance of $2.3 million. As of March 31, 2019, we had a working capital deficit of $34.4 million, a stockholders’ deficit of $32.4 million and Capital Resources
Management believes the restructuring plan completed during 2016, the continued goal in reducing ongoing operating costsan accumulated deficit of $181.4 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 the Company to ultimately be profitable. Management believes it has reduced its operating expenses sufficiently so that its ongoing source of revenue will be sufficient to cover expenses for the next twelve months, which management believes will allow the Companyability to continue as a going concern. For financial information concerning more recent periods, see our reports for such periods filed with the Securities and Exchange Commission.
The ability to continue as a going concern is dependent upon us generating profits in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations.
In response to the Company’s continued losses, in 2018, management implemented the following plans to improve the Company’s operating costs:
1)
reduced our workforce;
2)
renegotiated or terminated a number of contracts with endorsers in a strategic shift away from such arrangements and toward more cost-effective marketing and advertising efforts; and
3)
discontinued a number of stock keeping units (“SKUs”) and wrote down inventory to net realizable value, or to zero in cases where the product was discontinued.
Despite these measures, during 2019, the Company continued to incur substantial losses.
In order to improve the Company’s operating results, management has continued to focus on its 2018 initiatives. In addition, during the fourth quarter of 2019, management implemented the following measures to improve gross margin:
1)
reduced or eliminated sales to low or negative margin customers;
2)
reduced product discounts and promotional activity;
3)
implemented a more aggressive SKU reduction; and
4)
formed a pricing committee to review all orders to better align gross margin expectations with product availability.
As a result of these measures, as well as a reduction in protein prices, the Company realized increased gross margins in the fourth quarter of 2019, a trend which continued through the first and second quarters of 2020. Beginning in April 2020, the Company began to experience a slowdown, which has continued to date, in sales from its retail customers, including its largest customer. This decline has been partially offset by a growth in sales to our largest online customer, although there can be no assurances that such growth will continue, or that the Company will have the financial resources to produce the additional quantities required by this customer. Management believes reductions in operating costs, and continued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the Company’s customers, will allow us to ultimately achieve profitability, however, the Company can give no assurances that this will occur.
As of September 30, 2017, the Company had a stockholders’ deficit of $11.5 million and recurring losses from operations. To manage cash flow, in January 2016, the Company has entered into a secured borrowing arrangement, pursuant to which it has the ability to borrow up to $10.0 million subject to sufficient amounts of accounts receivable to secure the loan. This arrangement was extended on October 25, 2016, March 22, 2017, and then again on September 15, 2017 each time for anmultiple financing arrangements. See additional six months with similar terms. Under this arrangement, during the nine months ended September 30, 2017, the Company received $22.4 millioninformation in cash and subsequently repaid $22.5 million, including fees and interest, on or prior to September 30, 2017.
As of September 30, 2017, the Company had approximately $4.9 million in cash and a $3.8 million in working capital.
The accompanying Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2017 were prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. 
The Company’s ability to meet its total liabilities of $41.6 million as of September 30, 2017, and to continue as a going concern, is partially dependent on meeting our operating plans, and partially dependent on our Chairman of the Board, Chief Executive Officer and President, Ryan Drexler, either converting or extending the maturity of his note prior to or upon its maturity. As discussed below, subsequent to the end of the quarter, we entered into a refinancing transaction with Mr. Drexler to restructure all of the existing notes, which are now due on December 31, 2019.
Mr. Drexler has verbally both stated his intent and ability to put more capital into the business if necessary. However, Mr. Drexler is under no obligation to the Company to do so, and we can give no assurances that Mr. Drexler will be willing or able to do so at a future date and/or that he will not demand payment of his refinanced convertible note on December 31, 2019.
The Company’s ability to continue as a going concern and raise capital for specific strategic initiatives will also be dependent on obtaining adequate capital to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms or at all.“Note 8. Debt.”
 

 
IfOur 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 Company is unableongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. We are actively managing our 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 any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.impact.
 
Note 2. Summary of Significant Accounting Policies
 
Basis of Presentation and Principles of Consolidation
 
The accompanying Condensed Consolidated Financial Statements have been prepared using the accrual method of accounting in accordance with generally accepted accounting principles in the United States (“GAAP”)and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The unaudited Condensed Consolidated Financial Statements include the accounts of MusclePharm Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Unaudited Interim Financial Information
 
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. The Company’s management believes the unaudited interim Condensed Consolidated Financial Statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of September 30, 2017,March 31, 2019, results of operations for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, and cash flows for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018. The results of operations for the three and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results to be expected for the year endingended December 31, 2017.2019.
 
These unaudited interim Condensed Consolidated 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, 2016.2019, filed with the SEC on August 24, 2020.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with 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, fair value of derivatives, warrants and options, going concern,present value of lease liabilities, among others. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company adopted ASC 606, “Revenue from Contracts with Customers,” effective January 1, 2018. With the adoption of the new standard, revenue is recognized when allcontrol of the following criteria are met:promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
●a.
Persuasive evidenceNature of an arrangement exists. Evidence of an arrangement consists of an order from the Company’s distributors, resellers or customers.Goods and Services
●
Delivery has occurred. Delivery is deemed to have occurred when titleThe Company sells a variety of protein products through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, specialty stores and riskwebsites and other e-commerce channels, all of loss has transferred, typically upon shipment ofwhich sell our products to customers.consumers.
●b.
The fee is fixed or determinable. The Company assesses whether the fee is fixed or determinable based on the terms associated with the transaction.
●
Collection is reasonably assured. The Company assesses collectability based on credit analysis and payment history.When Performance Obligations are Satisfied
 

 
The Company’s standard termsFor performance obligations related to the shipping and conditionsinvoicing of sale allow for product returns or replacements in certain cases. Estimates of expected future product returns are recognizedproducts, control transfers at the point in time upon which finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier, depending on shipping terms. Once a product has been delivered or picked up by the customer, the customer is able to direct the use of, sale based on analysesand obtain substantially all of historical return trends bythe remaining benefits from, the asset. The Company considers control to have transferred upon delivery or customer type. Upon recognition,receipt because the Company reduces revenue and cost of revenue forhas an enforceable right to payment at that time, the estimated return. Return rates can fluctuate over time, but are sufficiently predictable with established customerscustomer has legal title to allowthe asset, the Company to estimate expected future product returns,has transferred physical possession of the asset, and an accrual isthe customer has significant risk and rewards of ownership of the asset.
c.
Variable Consideration
The Company conducts extensive promotional activities, primarily through the use of off-list discounts, slotting, coupons, cooperative advertising, periodic price reduction arrangements, and end-aisle and other in-store displays.  The costs of such activities are netted against sales and are recorded for future expected returns when the related revenuesale takes place.  The reserves for sales returns and consumer and trade promotion liabilities are established based on the Company’s best estimate of the amounts necessary to settle future and existing obligations for products sold as of the balance sheet date. To determine the appropriate timing of recognition of consideration payable to a customer, all consideration payable to our customers is recognized. Product returns incurred from established customers were $0.2 millionreflected in the transaction price at inception and $0.1 millionreassessed routinely.
d.
Practical Expedients
The Company expenses incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place, since the amortization period of the commissions paid for the sale of products is less than a year. These costs are recorded in “Selling, general and administrative” expenses in the accompanying consolidated statements of operations.
The Company accounts for shipping and handling costs as fulfillment activities which are therefore recognized upon shipment of the goods. Shipping and handling costs related to inbound purchases of raw material and finished goods are included in cost of revenues in our consolidated statements of operations. For the three months ended September 30, 2017March 31, 2019 and 2016, respectively,2018, the Company incurred $0.3 million and $0.4 million, respectively, of inbound shipping and $0.6 million forhandling costs. Shipping and handling costs related to shipments to our customers is included in “Selling, general and administrative” expense in our consolidated statements of operations. For both the ninethree months ended September 30, 2017March 31, 2019 and 2016, respectively.2018, the Company incurred $1.0 million, of shipping and handling costs related to shipments to our customers.
 
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.
(and similar) taxes. During the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company recorded discounts, and to a lesser degree, sales returns, totaling $2.1$7.6 million and $10.8$7.9 million, respectively, which accounted for 8%29% and 26%25% of gross revenue in each period, respectively. During
The Company adopted ASC 606 using the nine months ended September 30, 2017modified retrospective method and 2016, the Company recorded discounts and sales returns, totaling $13.8 million and $27.9 million, respectively, which accountedcumulative effect of this change in accounting method for 16% and 21%the expected value of gross revenuecustomer credits related to certain contracts in each period, respectively.place, as defined by ASC 606, is presented below:
 
 
Balance at
December 31, 2017
 
 
Adjustment
 
 
Balance at
January 1, 2018
 
Accounts receivable, net
 $11,105 
 $(1,053)
 $10,052 
Accumulated deficit
 $(165,069)
 $(1,053)
 $(166,122) 
 
Concentrations
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date.
 

Significant customers are those whichthat represent more than 10% of the Company’s net revenue or accounts receivable for each period presented. For each significant customer, revenue as a percentage of totalnet revenue isand accounts receivable are as follows:
 
 
Percentage of Net Revenue
for the Three Months Ended
September 30,
 
 
Percentage of Net Revenue
for the Nine Months Ended
September 30,
 
 
Percentage of Net Revenue for the
Three Months Ended March 31,
 
 
Percentage of Net Accounts Receivable
 as of
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018 (as restated)
 
 
March 31, 2019
 
 
December 31, 2018
 
Customers
 
 
 
 
 
 
Costco Wholesale Corporation
  26%
  20%
  26%
  20%
Costco
  26%
  38%
  10%
  16%
Amazon
  16%
  *
 
  11%
  *
 
  12%
  * 
  19%
  22%
iHerb
  14%
  * 
 
* Represents less than 10% of net revenue.revenue or net accounts receivable.
The Company uses a limited number of non-affiliated suppliers for contract manufacturing of its products.
The Company had the following concentration of purchases with contract manufacturers:
 
 
For the three months
Ended March 31,
 
Vendor
 
2019
 
 
2018
(as restated)
 
Nutra Blend
  20%
  25%
S.K. Laboratories
  40%
  22%
4Excelsior
  * 
  18%
Bakery Barn
  * 
  14%
Prinova
  10%
  17%
* Represents less than 10% of purchases.
 
Share-Based Payments and Stock-Based Compensation
 
Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable award’sawards’ grant date, based on the estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value ofon the services rendered or the fair value of the share-based payments whichever is more readily determinable.grant date. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.

 
The fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by the Company’s assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the awards. Due to the Company’s limited experience with the expected term of options, the simplified method was utilized in determining the expected option term as prescribed in Staff Accounting Bulletin No. 110.
The Company recognizes stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
 
Recent Accounting Pronouncements
 
During August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of this new pronouncement on the Company’s Condensed Consolidated Statements of Cash Flows.
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers(“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605,Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35,Revenue Recognition- Construction-Type and Production-Type Contracts. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. The Company plans to adopt this guidance under the modified retrospective approach. The Company is in the process of evaluating the impact of the pronouncement and has a plan to complete the evaluation and implement the pronouncement by January 1, 2018.
In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)(“ASU 2016-08”) which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing(“ASU 2016-10”) which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients(“ASU 2016-12”) which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. ASU 2016-12 is effective during the same period as ASU 2014-09. Based on our preliminary assessment, we do not expect the new standard to have a material impact on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU No. 2016-09,Compensation – Stock Compensation (Topic 718)(“ASU 2016-09”). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance did not have a significant impact on the Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (“(“ASU 2016-02”). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminatesaccounting. The new lease standards also provide practical expedients for an entity's ongoing accounting. In July 2018, the current real estate-specific provisionsFASB issued ASU No. 2018-11, Leases (842), Targeted Improvements (“ASU 2018-11”), which provides an additional transition election to not restate comparative periods for all entities. The guidance also modifies the classification criteria andeffects of applying the accounting for sales-type and direct financing leases for lessors.new standard. This transition election permits entities to apply ASU 2016-02 ison the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit. These ASU's are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. 2018.
The Company is currently evaluatingadopted the impactASUs, as of January 1, 2019, using the modified retrospective transition method prescribed by ASU 2018-11. Under this transition method, financial results reported in periods prior to the first quarter of 2019 are unchanged. As a result of the adoption of ASU 2016-02.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): SimplifyingASUs, the MeasurementCompany recorded a right-of-use (“ROU”) asset and liability of Inventory (“ASU 2015-11”), which simplifies$2.1 million. Also as a result of the subsequent measurementadoption, the Company reclassified $0.2 million of inventory by requiring inventory to be measured atliabilities on its consolidated balance sheets as of January 1, 2019 against the lower of cost or net realizable value. Net realizable value is the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.operating lease ROU asset. The adoption of this guidancethese ASUs did not result in a cumulative-effect adjustment to the opening balance of accumulated deficit. In addition, the Company elected the package of practical expedients permitted by the transition guidance. The adoption of these ASU’s did not have a significantan impact on our Condensed Consolidated Financial Statements.the Company’s consolidated statements of operations or cash flows.

 
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
 
On September 20, 2018, FASB issued Accounting Standards Update No. 2018-07, “Compensation - Stock Compensation” (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees. This ASU expands the scope of ASC Topic 718, “Compensation - Stock Compensation”, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU 2018-07 supersedes ASC Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees”. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The new standard has been adopted by the Company. The Company has evaluated the impact of ASU 2018-07 on its consolidated financial statements and it did not have a material impact.
In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740):Simplifying the Accounting for Income Taxes, expected to reduce cost and complexity related to the accounting for income taxes.  The ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exceptions to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.  The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies 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 is evaluating the impact of the pronouncement.
Note 3. Fair Value of Financial Instruments
 
Management believes the fair values of the Company’s debt obligations under the secured borrowing arrangement and the convertible notes with a related party approximate carrying value because the debt carriesdebts carry 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. As of September 30, 2017March 31, 2019, and December 31, 2016,2018, the Company held no assets or liabilities that required re-measurement at fair value on a recurring basis.
 
Note 4. Sale of BioZone
In May 2016, the Company completed the sale of its wholly-owned subsidiary, BioZone, for gross proceeds of $9.8 million, including cash of $5.9 million, a $2.0 million credit for future inventory deliveries reflected as a prepaid asset in the Condensed Consolidated Balance Sheets and $1.5 million which is subject to an earn-out based on the financial performance of BioZone for the twelve months following the closing of the transaction. In addition, the Company agreed to pay down $350,000 of BioZone’s accounts payables, which was deducted from the purchase price. As part of the transaction, the Company also agreed to transfer to the buyer 200,000 shares of its common stock with a market value on the date of issuance of $640,000, for consideration of $50,000. The Company recorded a loss of $2.1 million related to the sale of BioZone for the nine months ended September 30, 2016. The potential earn-out was not achieved in May 2017.

Purchase Commitment
 
Upon the completion of the sale of a former subsidiary, BioZone Laboratories Inc. (“Biozone”), on May 9, 2016, the Company entered into a manufacturing and supply agreement whereby the Company is requiredagreed to minimum purchase a minimum of approximately $2.5 millionrequirements of products per year from BioZone annually for an initial term of three years. Ifover a three-year period. The Company fell below the minimum order quantities of specific products are not met, a $3.0 million minimum purchase of other products must be met in order to waive the shortfall, which is at 25% of the realized shortfall. Due to the timing of achieving the minimum purchase quantities, we are below these targets. Asrequirements, and as a result, we havethe Company reserved ana total amount of $0.7 million to cover the estimated purchase commitment shortfall during the year ended December 31, 2018, which remained unchanged during the three and nine months ended September 30, 2017.March 31, 2019.
 
The following table summarizesIn July 2019, the componentsCompany settled this matter through the payment of $0.6 million and the issuance of 150,000 shares of the loss fromCompany’s common stock, which was valued at $60,000 on the sale of BioZone (in thousands):
Cash proceeds from sale
$settlement date.5,942
Consideration for common stock transferred
50
Prepaid inventory
2,000
Fair market value of the common stock transferred
(640)
Assets sold:
Accounts receivable, net
(923)
Inventory, net
(1,761)
Fixed assets, net
(2,003)
Intangible assets, net
(5,657)
All other assets
(41)
Liabilities transferred
1,197
Transaction and other costs
(279)
Loss on sale of subsidiary
$(2,115)
 
Note 5.4. Restructuring
 
As part of an effort to better focus and align the Company’s resources toward profitable growth, on August 24, 2015, the Board authorized the Company to undertake steps to commence a restructuring of the business and operations, which concluded during the third quarter of 2016. The Company closed certain facilities, reduced headcount, discontinued products and renegotiated certain contracts. For the three months ended June 30, 2016,
As of December 31, 2018, the Company recordedhad a credit in restructuringbalance of $0.4 million, representing contract termination costs, and other charges$0.1 million representing abandoned lease facilities. As of $4.8March 31, 2019, the Company made payments to settle $0.2 million comprised of the releaseoutstanding contract termination costs, while the remaining balance of restructuring accrual of $7.0$0.2 million offset by the cash payment of $2.2 million related to a settlement agreement. For the nine months ended September 30, 2016, this credit was offset by additional restructuring expenses resulting in a net credit of $4.2 million.
For the three and nine months ended September 30, 2016, the Company recorded restructuring charges in “Cost of revenue” of $0.1 million and $2.3 million, respectively, related to the write-down of inventory identified for discontinued productspaid in the restructuring plan.
The following table illustrates the provisionsecond quarter of 2019. As a result of the adoption of the new lease standards, the restructuring charges andliability for the accrued restructuring charges balance as of September 30, 2017 (in thousands):
 
 
 
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 
company’s abandoned lease facilities was used to reduce the ROU asset, in accordance with the new standards. See additional information in “Note 6. Leases.”
 

The total future payments under the restructuring plan as of September 30, 2017 are as follows (in thousands):
 
 
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 
Note 6.5. Balance Sheet Components
 
Inventory
 
Inventory consisted solely of finished goods and raw materials, used to manufacture our products at one of our co-manufacturers as of September 30, 2017March 31, 2019 and December 31, 2016.2018.
 
The Company records charges for obsolete and slow movingslow-moving inventory based on the age of the product as determined by the expiration date and when conditions indicate by specific identification.or otherwise determined to be obsolete. Products within one year of their expiration dates are considered for write-off purposes. Historically, the Company has had minimal returns with established customers. Other than write-off of inventory during restructuring activities, the Company incurred insignificant inventory write-offs during each of the three and nine months ended September 30, 2017March 31, 2019 and 2016. 2018.
Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.
 
As disclosed further in Note 5, the Company executed a restructuring plan starting in August 2015 and wrote off inventory related to discontinued products. For the three and nine months ended September 30, 2016, discontinued inventory of $0.1 million and $2.3 million, respectively, was written off and included as a component of “Cost of revenue” in the accompanying Condensed Consolidated Statements of Operations. Additionally, $0.4 million of inventory related to the Arnold Schwarzenegger product line was considered impaired, and included as a component of “Impairment of assets” in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016.
Property and Equipment
 
Property and equipment consisted of the following as of September 30, 2017March 31, 2019 and December 31, 20162018 (in thousands):
 
 
As of
September 30,
 2017
 
 
As of
December 31,
2016
 
 
As of
March 31, 2019
 
 
As of
December 31, 2018
 
Furniture, fixtures and equipment
 $3,605 
 $3,521 
Furniture, fixtures, and equipment
 $2,585 
 $3,511 
Leasehold improvements
  2,505 
  2,504 
  236 
Manufacturing and lab equipment
  3 
Vehicles
  86 
  334 
  39 
Displays
  485 
  483 
  453 
Website
  462 
  497 
Construction in process
  — 
  55 
Property and equipment, gross
  7,146 
  7,362 
  3,810 
  4,736 
Less: accumulated depreciation and amortization
  (4,920)
  (4,119)
  (3,377)
  (4,223) 
Property and equipment, net
 $2,226 
 $3,243 
 $433 
 $513 
 
Depreciation and amortization expense related to property and equipment was $0.3$0.1 million and $0.2 million for each of the three months ended September 30, 2017March 31, 2019 and 2016 and $0.8 million and $1.2 million for the nine months ended September 30, 2017 and 2016,2018, respectively, which is included in “Selling, general, and administrative” expense in the accompanying Condensed Consolidated Statementsconsolidated statements of Operations.

operations.
 
Intangible Assets
 
Intangible assets consisted of the following (in thousands):
 
 
As of September 30, 2017
 
 
As of March 31, 2019
 
 
Gross Value
 
 
AccumulatedAmortization
 
 
NetCarryingValue
 
 
Remaining Weighted-AverageUseful Lives(years)
 
 
Gross Value
 
 
Accumulated Amortization
 
 
Net Carrying Value
 
 
Remaining Weighted-Average Useful Lives (years)
 
Amortized Intangible Assets
 
 
 
 
 
 
Brand
 $2,244 
 $(847)
 $1,397 
  4.6 
Brand (apparel rights)
 $2,244 
 $(1,327)
 $917 
  2.9 
Total intangible assets
 $2,244 
 $(847)
 $1,397 
    
 $2,244 
 $(1,327)
 $917 
    
 
 
As of December 31, 2016
 
 
As of December 31, 2018
 
 
Gross Value
 
 
AccumulatedAmortization
 
 
NetCarryingValue
 
 
Remaining Weighted-AverageUseful Lives(years)
 
 
Gross Value
 
 
Accumulated Amortization
 
 
Net Carrying Value
 
 
Remaining Weighted-Average Useful Lives (years)
 
Amortized Intangible Assets
 
 
 
 
 
 
Brand
 $2,244 
 $(606)
 $1,638 
  5.1 
Brand (apparel rights)
 $2,244 
 $(1,247)
 $997 
  3.1 
Total intangible assets
 $2,244 
 $(606)
 $1,638 
    
 $2,244 
 $(1,247)
 $997 
    
 
For the three months ended September 30, 2017 and 2016, intangible asset
Intangible assets amortization expense was $0.1 million and $0.1 million, respectively, and for each of the ninethree months ended September 30, 2017March 31, 2019 and 2016 intangible asset amortization was $0.2 million and $0.5 million,2018, respectively, which is included in the “Selling, general, and administrative” expense in the accompanying Condensed Consolidated Statementsconsolidated statements of Operations. Additionally, $1.2 million of trademarks with a net carrying value of $0.8 million related to the Arnold Schwarzenegger product line were considered impaired, and included as a component of “Impairment of assets” in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016.
operations. As of September 30, 2017,March 31, 2019, the estimated future amortization expense of intangible assets is as follows (in thousands):
 
For the Year Ending December 31,
 
 
 
 
 
 
Remainder of 2017
 $80 
2018
  321 
2019
  321 
Remainder of 2019
 $240 
2020
  321 
  320 
2021
  321 
  320 
Thereafter
  33 
2022
  37 
Total amortization expense
 $1,397 
 $917 
Note 6. Leases
The Company has operating leases for warehouse facilities and office spaces across the U.S. The remaining lease terms for these leases range from 1 to 4 years. The Company also leases manufacturing and warehouse equipment under finance lease arrangements, which expire at various dates through July 2020. The Company does not intend to extend the lease terms expiring in 2020.
In adopting the new lease standards (“ASC 842”), the Company has elected the “package of practical expedients,” which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, as the latter is not applicable to the Company. In addition, the Company elected not to apply ASC 842 to arrangements with lease terms of 12 month or less.
The Company determines if a contract contains a lease when the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Upon identification and commencement of a lease, we establish a ROU asset and a lease liability. ROU assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. At adoption, the Company reduced the ROU asset through a derecognition of the restructuring liability for its abandoned lease facilities. Subsequent to adoption, the Company no longer recognized lease expense on a straight-line basis, as the impact of the derecognition resulted in a front-loading of the lease expenses.
Supplemental balance sheet information related to leases was as follows (in thousands):
Balance Sheet Classification
March 31, 2019
Assets
OperatingROU assets, net
$1,742
FinanceProperty and equipment, net
148
Total Assets
1,890
Liabilities
Current liabilities:
OperatingOperating lease liability - current
$765
FinanceCurrent accrued liability
122
Total current liabilities
887
Non-current liabilities:
OperatingOperating lease liability - long term
1,150
FinanceOther long term liabilities
26
Total non-current liabilities
1,176
Total lease liabilities
$2,063
 

 
The Company has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. Fixed lease costs represent the explicitly quantified lease payments prescribed by the lease agreement and are included in the measurement of the ROU asset and corresponding lease liability. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company's lease agreements do not contain any material restrictive covenants.
The components of lease cost for operating and finance leases for the three months ended March 31, 2019 were as follows (in thousands):
Income Statement Classification
Three months ended March 31, 2019
Operating lease costSelling, general and administrative
$249
Finance lease cost:
Amortization of ROU assetSelling, general and administrative
27
Interest on lease liabilitiesSelling, general and administrative
2
Total finance lease cost
29
Variable lease paymentsSelling, general and administrative
64
Sublease incomeOther income
(99)
Total lease cost
$243
The Company had no short-term leases as of March 31, 2019. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the effective date in determining the present value of future payments for those leases.
Supplemental cash flow information related to leases was as follows:
Three months ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
Operating cash flows from operating leases
$202
Operating cash flows from finance leases
2
Financing cash flows from finance leases
26
The weighted average remaining lease term was as follows:
Operating leases (in years)
2.7
Finance leases (in years)
1.2
The weighted average discount rate was as follows:
Operating leases
18%
Finance leases
5%

The maturities of lease liabilities at March 31, 2019 were as follows (in thousands):
 
 
Operating
 
 
Finance
 
 
 
 
 
 
 
 
Remaining nine months of the year ending 2019
 $793 
 $98 
2020
  808 
  55 
2021
  481 
  — 
2022
  369 
  — 
Thereafter
  — 
  — 
Total future undiscounted lease payments
  2,451 
  153 
Less amounts representing interest
  (536)
  (5)
Present value of lease liabilities
 $1,915 
 $148 
Note 7. Other Expense,Interest and other expense, net
 
For the three and nine months ended September 30, 2017March 31, 2019 and 2016, “Other2018, “Interest and other expense, net” consisted of the following (in thousands):
 
 
For the
Three Months
Ended September 30,
 
 
For the
Nine Months
Ended September 30,
 
 
For the Three Months
Ended March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 (as restated)
 
Other expense, net:
 
 
 
 
 
 
Interest expense, related party
 $(676)
 $(134)
 $(1,839)
 $(376)
 $(532)
 $(541)
Interest expense, related party debt discount
  (15)
Interest expense, other
  (6)
  (32)
  (14)
  (160)
  (293)
  (67)
Interest expense, secured borrowing arrangement
  (172)
  (9)
  (397)
  (636)
  (225)
  (346)
Foreign currency transaction gain
  16 
  19 
  49 
  213 
Foreign currency transaction loss
  (200)
  (113)
Other
  (20)
  34 
  (325)
  (467)
  100 
  5 
Total other expense, net
 $(858)
 $(122)
 $(2,526)
 $(1,426)
Total interest and other expense, net
 $(1,165)
 $(1,077)
“Other” for 2019 includes sublease income and interest income.

 
Note 8. Debt
 
As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company’s debt consisted of the following (in thousands):
 
As of
September 30,
2017
 
 
As of
December 31,
2016
 
 
As of
March 31, 2019
 
 
As of
December 31,2018
 
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 
  — 
Refinanced convertible note, related party
 $18,000 
Obligations under secured borrowing arrangement
  3,927 
  2,681 
  3,443 
  1,285 
Unamortized debt discount
  (75)
  (535)
Line of credit – inventory financing
  2,500 
  1,500 
Unamortized debt discount, related party
  (45)
  (60)
Total debt
  21,852 
  19,146 
  23,898 
  20,725 
Less: current portion
  (3,927)
  (19,146)
  (23,898)
  (20,725)
Long term debt
 $17,925 
 $— 
 $— 
 
Related-Party Notes PayableRefinanced Convertible Note
 
On July 24,November 3, 2017, the Company entered into a secured demand promissory note (the “2017 Note”), pursuant to whichthe refinancing with Mr. Ryan Drexler,, the Company’s Chairman of the Board of Directors, Chief Executive Officer and President loaned the Company $1.0 million, which was payable upon demand. Proceeds from the 2017 Note were used to partially fund a settlement agreement. The 2017 Note carried interest at a rate of 15% per annum. Any interest not paid when due would be capitalized and added to the principal amount of the 2017 Note and bears interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. The Company could prepay the 2017 Note without penalty any time prior to a demand request from Mr. Drexler.
In November 2016, the Company entered into a convertible secured promissory note agreement (the “2016 Convertible Note”) with Mr. Drexler pursuant to which Mr. Drexler loaned the Company $11.0 million. Proceeds from the 2016 Convertible Note were used to fund the settlement of litigation. The 2016 Convertible Note was secured by all assets and properties of the Company and its subsidiaries, whether tangible or intangible. The 2016 Convertible Note carried interest at a rate of 10% per annum, or 12% if there is an event of default. Both the principal and the interest under the 2016 Convertible Note were due on November 8, 2017, unless converted earlier. Mr. Drexler could convert the outstanding principal and accrued interest into 6,010,929 shares of the Company’s common stock for $1.83 per share at any time. The Company could prepay the 2016 Convertible Note at the aggregate principal amount therein, plus accrued interest, by giving Mr. Drexler between 15 and 60 day-notice depending upon the specific circumstances, provided that Mr. Drexler could convert the 2016 Convertible Note during the applicable notice period. The Company recorded the 2016 Convertible Note as a liability in the balance sheet and also recorded a beneficial conversion feature of $601,000 as a debt discount upon issuance of 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. As of September 30, 2017 and December 31, 2016, the 2016 Convertible Note had an outstanding principal balance of $11.0 million and a carrying value of $10.9 million and $10.5 million, respectively.

In December 2015, the Company entered into a convertible secured promissory note agreement (the “2015 Convertible Note”) with Mr. Drexler, pursuant to which he loaned the Company $6.0 million. Proceeds from the 2015 Convertible Note were used to fund working capital requirements. The 2015 Convertible Note was secured by all assets 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. Both the principal and the interest under the 2015 Convertible 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 December 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.
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, the Company issued to Mr. Drexler an amended and restated convertible secured promissory note (the “Refinanced Convertible Note”) in the original principal amount of $18,000,000, which amendsamended and restatesrestated (i) a convertible secured promissory note dated as of December 7, 2015, amended as of January 14, 2017, in the original principal amount of $6,000,000 with an interest rate of 8% prior to the amendment and 10% following the amendment (the “2015 Convertible Note,Note”), (ii) a convertible secured promissory note dated as of November 8, 2016, in the 2016original principal amount of $11,000,000 with an interest rate of 10% (the “2016 Convertible Note,Note”) , and (iii) a secured demand promissory note dated as of July 27, 2017, in the 2017 Note,original principal amount of $1,000,000 with an interest rate of 15% (the “2017 Note”, and together with the 2015 Convertible Note and the 2016 Convertible Note, collectively, the “Prior Notes”). The due date of the 2015 Convertible Note and the 2016 Convertible Note was November 8, 2017. The 2017 Note was due on demand.
 
The $18.0 million Refinanced Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each quarter. At the Company’s option (as determined by its independent directors), the Company may repay up to one sixthone-sixth of any interest payment by either adding such amount to the principal amount of the note or by converting such interest amount into an equivalent amount of the Company’s common stock. Any interest not paid when due shall be capitalized and added to the principal amount of the Refinanced Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.
Both the principal and any capitalized and unpaidthe interest under the Refinanced Convertible Note are due on December 31, 2019, unless converted earlier. Mr. Drexler may convert the outstanding principal and accrued interest into shares of the Company’s common stock at a conversion price of $1.11 per share which was the 5 day average price of the Company’s common stock prior to the refinance closing date, at any time.
The Company may prepay the Refinanced Convertible Note by giving Mr. Drexler between 15 and 60 days’ notice depending upon the specific circumstances, subject to Mr. Drexler’s conversion right.
The Refinanced 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, 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 Refinanced Convertible Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the Refinanced Convertible Note. The Refinanced Convertible Note is subordinated to certain other indebtedness of the Company.
 

As part of the Refinancing, the Company and Mr. Drexler entered into a restructuring agreement (the “Restructuring Agreement”) pursuant to which the parties agreed to enter into the Refinanced Convertible Note and to amend and restate the security agreement pursuant toresulting in a Third Amended and Restated Security Agreement (the “Amended Security Agreement”) in 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”).intangible. 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.
 
In connection with
On September 16, 2019, Mr. Ryan Drexler, the Company’s entry intoChief Executive Officer, President and Chairman of the Board of Directors of MusclePharm Corporation, a LoanNevada corporation (the “Company”), delivered a notice to the Company and Security Agreement with Crossroads Financial Group, LLC (“Crossroads”)its independent directors of his election to convert, effective as of September 16, 2019 (the “Crossroads Loan Agreement”“Notice Date”), $18,000,000 of the amount outstanding under that certain Amended and Restated Convertible Secured Promissory Note, dated as of November 8, 2017 (the “Note”), issued by the Company to Mr. Drexler, agreed to enter into a subordination agreement with Crossroads (the “Subordination Agreement”), pursuant to which the paymentshares of the Company’s obligationscommon stock, par value $0.001 per share (the “Common Stock”), at a conversion price of $1.11 per share, pursuant to the terms and conditions of the Note (the “Partial Conversion”). As of the Notice Date, the total amount outstanding under the Prior Notes were subordinatedNote (including principal and accrued and unpaid interest) was equal to $19,262,910. Pursuant to the Company’s obligations to Crossroads. As partterms of the Refinancing, Crossroads waived certain provisionsNote, the Company instructed the transfer agent for its shares to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its Common Stock in respect of the Crossroads Loan Agreement that would have been triggered by the Company’s entry into of the Refinanced Convertible Note. In addition, Mr. Drexler and Crossroads entered into an amendment to the Subordination Agreement that replaced the obligations under the Prior Notes with the obligations under the Refinanced Convertible Note (see Note 16).Partial Conversion.
 
The outstanding principal and the interest, due on December 31, 2019, were refinanced under a new agreement on July 1, 2020. See additional information in “Note 16. Subsequent Events.”
For the three months ended September 30, 2017March 31, 2019 and 2016,2018, interest expense,including the amortization of debt discount, related to the related party convertible secured promissory notes was $0.7$0.5 million and $0.1 million, respectively. For the nine months ended September 30, 2017 and 2016, interest expense related to the related party convertible secured promissory notes was $1.8 million and $0.4$0.6 million, respectively. During the ninethree months ended September 30, 2017March 31, 2019 and 2016, $1.82018, $0.4 million and $0.4$0.3 million, respectively, in interest was paid in cash to Mr. Drexler.
Related-Party Revolving Note
On October 4, 2019, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Mr. Drexler. Under the terms of the Revolving Note, the Company can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12% annually. The use of funds will be solely for the purchase of whey protein to be used in the manufacturing of MusclePharm products. The Company may prepay the Revolving Note by giving Mr. Drexler one days’ written notice.
The Revolving Note contains customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, Mr. Drexler is entitled to accelerate the entire indebtedness under the Revolving Note. The Revolving Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts. The Revolving Note is subordinated to certain other indebtedness of the Company held by Crossroads.
In connection with the Revolving Note, the Company and Mr. Drexler entered into a security agreement datedOctober 4, 2019 pursuant to which the Revolving Note is secured by all of the assets and properties of the Company and its subsidiaries whether tangible or intangible. As of December 31, 2019, the outstanding balance on the revolving note was $1.2 million. Both the outstanding principal and all accrued interest, which became due on March 31, 2020, were refinanced under a new agreement on July 1, 2020. The revolving note is included in “Line of credit” in the consolidated balance sheets. See additional information in “Note 16. Subsequent Events.”
Related-Party Note Payable
The Company entered into a collateral receipt and security agreement with Mr. Drexler, dated December 27, 2019 pursuant to which Mr. Drexler agreed to post bond relating to the judgment ruled on the ThermoLife case, pending the appeal. The amount paid by Mr. Drexler on behalf of the Company, including fees, was $0.25 million. The amount, which was outstanding as of December 31, 2019, was refinanced under a new agreement on July 1, 2020. The note payable is included in “Convertible note with a related party, net of discount” in the consolidated balance sheets. See additional information in “Note 16. Subsequent Events.”
Line of Credit - Inventory Financing
On October 6, 2017, the Company entered into a Loan and Security Agreement (“Security Agreement”) with Crossroads Financial Group, LLC (“Crossroads”). Pursuant to the Security Agreement, the Company may borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly Liquidation Value (each as defined in 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. Subsequent to the end of 2017, the maximum amount was increased to $4.0 million. The term of the Security Agreement automatically extends in one-year increments, unless earlier terminated pursuant to the terms of the Security Agreement. The Security Agreement contains customary events of default, including, among others, 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 the Company to, among other things, grant liens, incur debt, and transfer assets. Under the Security Agreement, the Company agreed to grant Crossroads a security interest in all of the Company’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. As of March 31, 2019, and December 31, 2018, we owed Crossroads $2.5 million and $1.5 million, respectively.

On April 1, 2019, the Company and Crossroads amended the terms of the agreement. The agreement was extended until March 31, 2020, the rate was modified to 1.33% per month, and increased the amount the Company can borrow from $3.0 million to $4.0 million.
On February 26, 2020, the Company and Crossroads amended the terms of the agreement. The agreement was extended until April 1, 2021 and the amount the Company can borrow was decreased from $4.0 million to $3.0 million.
 
Secured Borrowing Arrangement
 
In January 2016, the Company entered into a Purchase and Sale Agreement (the “Agreement”“Purchase and Sale Agreement”) with Prestige Capital Corporation (“Prestige”) pursuant to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the Company (“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total borrowingsborrowing of $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the assigned Accounts, less any chargeback,chargebacks (including chargebacks for any customer amounts that remain outstanding for over 90 days), disputes, or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which varies from 0.7% to 4%, based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts. In addition, the Company granted Prestige a continuing security interest in and 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. The Purchase and Sale Agreement’s term has beenwas extended to April 1, 2020 at which point the term now renews automatically for successive one-year periods unless either party receives written notice of cancellation from the other, at minimum, thirty days prior to the expiration date. As of March 29, 2018. Prestige may cancel31, 2019, and December 31, 2018, the Agreement with 30-day notice (see Note 16).Company had outstanding borrowings of approximately $3.4 million and $1.3 million, respectively.
 
During the three months ended September 30, 2017,March 31, 2019 and 2018, the Company soldassigned to Prestige, accounts with an aggregate face amount of approximately $13.3$10.6 million and $16.9 million, respectively, for which Prestige paid to the Company approximately $10.6$8.5 million and $13.5 million, respectively, in cash. During the three months ended September 30, 2017, $9.8March 31, 2019 and 2018, $6.3 million was subsequently repaid to Prestige, including fees and interest. During the nine months ended September 30, 2017, the Company sold to Prestige accounts with an aggregate face amount of approximately $27.9$13.3 million, for which Prestige paid to the Company approximately $22.3 million in cash. During the nine months ended September 30, 2017, $21.4 millionrespectively, was subsequently repaid to Prestige, including fees and interest.
 
During the three months ended September 30, 2016, the Company had no new transactions with Prestige. During the nine months ended September 30, 2016, the Company sold to Prestige accounts with an aggregate face amount of approximately $49.3 million, for which Prestige paid 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
 
Operating Leases
 
The Company leases office and warehouse facilities under operating leases, which expire at various dates through 2022. The amounts reflected in the table below are for the aggregate future minimum lease payments under non-cancelable facility operating leases for properties that have not been abandoned as part of the restructuring plan. See Note 5 for additional details regarding the restructured leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. During the three months ended September 30, 2017 and 2016, rent expense was $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2017 and 2016, rent expense was $0.3 million and $0.8 million, respectively.
As of September 30, 2017, future minimum lease payments are as follows (in thousands):
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 
Capital Leases
In December 2014, the Company entered into a capital lease agreement providing for approximately $1.8 million in credit to lease up to 50 vehicles as part of a fleet lease program. As of September 30, 2017, the Company was leasing two vehicles under the capital lease which were included in “Property and equipment, net” in the Condensed Consolidated Balance Sheets. The original cost of leased assets was $86,000 and the associated accumulated depreciation was $41,000. The Company also leases manufacturing and warehouse equipment under capitalfinance leases, which expire at various dates through FebruaryJuly 2020. Several of such leases were reclassifiedThe Company does not intend to extend the restructuring liability during 2016, and related assets were written off to restructuring expense for the year ended December 31, 2016.
As of September 30, 2017 and December 31, 2016, short-term capital lease liabilities of $135,000 and $173,000, respectively, are included as a component of current accrued liabilities, and the long-term capital lease liabilities of $171,000 and $332,000, respectively, are included as a component of long-term liabilitiesterms expiring in the Condensed Consolidated Balance Sheets.
As of September 30, 2017, the Company’s future minimum lease payments under capital lease agreements, are as follows (in thousands):
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 

2020. See additional information in “Note 6. Leases.”
 
Purchase Commitment
 
Upon the completion of the sale of a former subsidiary, BioZone, on May 9, 2016, the Company entered into a manufacturing and supply agreement whereby the Company is requiredagreed to minimum purchase a minimum of approximately $2.5 millionrequirements of products per year from BioZone annually for an initial term of three years. Ifover a three-year period. The Company fell below the minimum order quantities of specific products are not met, a $3.0 million minimum purchase of other products must be met in order to waive the shortfall, which is at 25% of the realized shortfall. Due to the timing of achieving the minimum purchase quantities, we are below these targets. Asrequirements, and as a result, we havethe Company reserved ana total amount of $0.7 million to cover the estimated purchase commitment shortfall during the year ended December 31, 2018, which remained unchanged during the three and nine months ended September 30, 2017.March 31, 2019.
In July 2019, the Company settled this matter through the payment of $0.6 million and the issuance of 150,000 shares of the Company’s common stock, which was valued at $60,000 on the settlement date.

 
Settlements
Bakery Barn
In May 2017, Bakery Barn, a supplier of our protein bars, filed a lawsuit in the Western District of Pennsylvania alleging that the Company had failed to pay $1,406,078.59 owing for finished product manufactured by Bakery Barn, as well as packaging materials purchased by Bakery Barn to manufacture the Company’s protein bars. The Company filed an answer and counterclaims against Bakery Barn, alleging that Bakery Barn had breached the Manufacturing Agreement and the Quality Agreement by supplying the Company with stale, hardened, moldy or otherwise unsaleable protein bars, and that Bakery Barn’s breaches have caused the Company, at a minimum, several hundred thousand dollars in damages. On October 27, 2017, the parties settled their dispute and entered into a settlement agreement, pursuant to which the Company agreed to pay Bakery Barn $350,000 on October 28, 2017, and an additional $352,416 by November 26, 2017. The parties also agreed that Bakery Barn would resume producing products for the Company under substantially the same terms embodied in the oral Manufacturing Agreement, until such time that the Manufacturing Agreement can be reduced to writing.
The Company recorded a credit in its Statement of Operations for the three and nine months ended September 30, 2017 for approximately $391,000.
 
Manchester City Football Group
 
The Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning amounts allegedly owed by the Company under a Sponsorship Agreementsponsorship agreement with CFG.CFG (the “Sponsorship Agreement”). In August 2016, CFG commenced arbitration in the United Kingdom against the Company, seeking approximately $8.3 million for the Company’s purported breach of the Sponsorship Agreement.
 
On July 28, 2017, the Company approved a Settlement Agreement (the “Settlement“CFG Settlement Agreement”) with CFG effective July 7, 2017. The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement, the Company has agreed to pay CFG a sum of $3 million, consistingwhich was recorded as accrued expenses in 2017. The settlement consists of a $1 million payment that was advanced by a related party on July 7, 2017, a $1 million installment paid on July 7, 2018 and a subsequent $1 million installmentsinstallment payment to be paid by July 7, 2018 and July 7, 2019, respectively.2019. Of this amount, the Company has remitted $0.3 million.
 
TheDuring the three months ended March 31, 2019 and 2018, the Company recorded a charge in its Statement of Operations for the nine months ended September 30, 2017 for approximately $1.5 million, representing the discounted value of the unrecorded settlement amount$29,000 and an additional $0.1 million,$61,000, 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.operations.
 
Arnold SchwarzeneggerFormer Executive Lawsuit
 
The Company was engaged in a dispute with Marine MP, LLCMr. Richard Estalella (“Marine MP”), Arnold Schwarzenegger (“Schwarzenegger”), and Fitness Publications, Inc. (“Fitness,” and together with Marine MP and Schwarzenegger, the “AS Parties”Estalella”) concerning amounts allegedly owed by the Company under an employment agreement with Estalella. Estalella was seeking certain equitable relief and unspecified damages. On May 7, 2018, the Court vacated the trial in contemplation of the parties’ Endorsement Licensing and Co-Branding Agreement (the “Endorsement Agreement”). In May 2016, the Company received written notice that the AS Parties were terminating the Endorsement Licensing and Co-Branding Agreement by and among 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 breachsettlement of contract and breach of the implied covenant of good faith and fair dealing.this matter.
 
On December 17, 2016,June 19, 2018, the Company entered intoapproved a settlement agreement (the “Estalella Settlement Agreement”) with Estalella, concerning amounts allegedly owed by the Company under an employment agreement with Estalella (the “Employment Litigation”). The Estalella Settlement Agreement (the “Settlement Agreement”) withrepresents a full and final settlement of the AS Parties, effective January 4, 2017. Pursuant toEmployment Litigation. Under the Settlement Agreement, and to resolve and settle all disputes betweenterms of the parties and release all claims between them,agreement, the Company agreed to pay the AS Parties (a) $1.0Estalella a sum of $0.93 million whichconsisting of a $0.33 million initial payment that was releasedmade in July 2018, and subsequent payments of $0.15 million installments to the AS Parties on January 5, 2017,be paid within 90, 180, 270 and (b) $2.0 million within six months360 days of the effective dateinitial payment, respectively. As of March 31, 2019, the Settlement Agreement. The Companyoutstanding payment of $0.15 million was recorded in accrued expenses, and was subsequently paid the settlement in full as of September 30, 2017. The Company also has agreed that it will not sell any products from its Arnold Schwarzenegger product line, will donate to a charity chosen by Arnold Schwarzenegger any remaining usable product, and otherwise destroy any products currently in inventory. This inventory was written off to “Impairment of assets” in the Consolidated Statementsecond quarter of Operations during2019.
Manziel Matter
On July 15, 2014, JMAN2 General LP (“JMAN2”), Jonathan Manziel and MusclePharm entered into an endorsement agreement, pursuant to which the year ended December 31, 2016. In addition, in connection with the transaction, the 780,000 sharesEndorser would provide certain endorsements of Company common stock held by Marine MP were sold to a third party on January 4, 2017MusclePharm’s businesses, products and services in exchange for payments to JMAN2 by MusclePharm. On April 17, 2018, JMAN2 commenced an aggregate payment by such third partyaction against MusclePharm in the District Court, City and County of $1,677,000 toDenver, Colorado and on July 19, 2018 filed an amended complaint against MusclePharm, in which JMAN2 asserted various claims against MusclePharm concerning their rights and obligations under the AS Parties.Endorsement Agreement.
On April 10, 2019, a settlement agreement was reached for an amount of $0.1 million, which had been recorded as an accrued expense as of December 31, 2018. Of this amount, $70,000 was paid in 2019, while the balance was paid in the first quarter of 2020.
United World Wrestling Arbitration
In November 2017, United World Wrestling (“UWW”), an amateur wrestling governing body, initiated arbitration against the Company before the Court of Arbitration for Sport in Lausanne, Switzerland (“CAS”), alleging that the Company owed it $0.6 million, comprised of a $0.4 million sponsorship fee plus accrued interest, under the terms of a 2015 sponsorship agreement. In September 2018, the CAS issued an order and decision in UWW’s favor for $0.4 million, plus interest at 12% per annum, as well as attorney’s fees in the amount of 5,000 Swiss Francs. On January 25, 2019, the two parties reached a settlement agreement for $0.4 million, which had been recorded as an accrued expense as of December 2018. As of March 31, 2019, $0.2 million was paid, and the outstanding balance of $0.2 million was paid in the second quarter of 2019.
 

 
Durnford Matter
On July 28, 2015, Plaintiff, Tucker Durnford, filed a First Amended Class Action Complaint which alleged that the Company’s (now discontinued) Arnold Iron Mass product violates consumer protection laws by misleading consumers about the amount and sources of protein in the product. On February 10, 2016, the court granted our motion to dismiss the complaint on federal preemption grounds. On October 12, 2018, the Ninth Circuit reversed the dismissal. On October 8, 2019, the parties successfully mediated the case to a settlement of $0.15 million, which had been recorded as an accrued expense as of December 31, 2018. Of the settlement amount, $0.1 million was paid during the fourth quarter of 2019 and the balance was paid during the first quarter of 2020.
Contingencies
 
In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. As of September 30, 2017,March 31, 2019, the Company was involved in the following material legal proceedings described below.
 
Supplier ComplaintThermoLife International
 
In January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to MusclePharm, 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 agreement and seeks monetary damages for the deficiency in purchase amounts.agreement. In March 2016, the Company filed an answer to ThermoLife’s complaint, denying the allegations contained in the complaint, and filed a counterclaimcounterclaims alleging that ThermoLife breached its express warranty to MusclePharm because ThermoLife’s products were defectivedefective. Through orders issued in September and could not be incorporated intoNovember 2018, the Company’s products. Therefore,court dismissed MusclePharm’s counterclaims and found that the Company believes that ThermoLife’s complaint is without merit. The lawsuit continueswas liable to be in the discovery phase.ThermoLife for failing to meet its minimum purchase requirements.
 
Former Executive Lawsuit
InThe court held a bench trial on the issue of damages in October 2019, and on December 2015,4, 2019, the Company accepted notice by Mr. Richard Estalella (“Estalella”) to terminate his employment as the Company’s President. Although Estalella sought to terminate his employment with the Company for “Good Reason,” as definedcourt entered judgment 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.
In February 2016, Estalella filed a complaint in Colorado state courtfavor 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 Ryanattorneys’ fees and costs in the amount of $0.4 million. The Company recorded $1.6 million in accrued expenses as of December 31, 2018. In the interim, the Company filed an appeal, which is in the process of being briefed, and has 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 Chairmanon behalf of the Board, Chief Executive OfficerCompany on December 31, 2019. See “Note 8. Debt” for additional information. Subsequent to December 31, 2019, the balance of $0.35 million was secured by a personal guaranty from Mr. Drexler, while the associated fees of $12,500 was paid by the Company.
The Company intends to continuously vigorously pursuing its defenses, including on appeal.
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 President, alleging,White Winston Select Asset Fund, LLC (together “White Winston”) initiated a derivative action against MusclePharm and its directors (collectively the “director defendants”). White Winston alleges that the director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by MusclePharm to Drexler (the “Amended Note”), in exchange for $18.0 million in loans. White Winston alleges that this refinancing improperly diluted their economic and voting power and constituted an improper distribution in violation of Nevada law. In its complaint, White Winston sought the appointment of a receiver over MusclePharm, a permanent injunction against the exercise of Drexler’s conversion right under the Amended Note, and other unspecified monetary damages. On September 13, 2018, White Winston filed an amended complaint, which added a former MusclePharm executive, as a plaintiff (together with White Winston, the “White Winston Plaintiffs”). On December 9, 2019, the White Winston Plaintiffs filed a Second Amended Complaint, in which they added allegations relating to the resignation of MusclePharm’s auditor, Plante & Moran PLLC (“Plante Moran”). MusclePharm has moved to dismiss the Second Amended Complaint. That motion has not yet been fully briefed.
Along with its complaint, the White Winston Plaintiffs also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction enjoining the exercise of 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 the White Winston Plaintiffs’ request for a preliminary injunction, finding, among other things, that the Company breachedWhite Winston Plaintiffs did not show a likelihood of success on the Employment Agreement,merits of the underlying action and failed to establish irreparable harm. Following the court’s decision, MusclePharm filed a motion seeking certain equitable reliefto recoup the legal fees and unspecified damages.costs it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded MusclePharm $56,000 in fees and costs. The Company believes Estalella’s claims are without merit. AsWhite Winston Plaintiffs have appealed that award.
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 evaluated thenot recorded an estimate for its potential outcome of this lawsuit and recorded the liability consistent with its policy for accruing for contingencies. The lawsuit continues to be in the discovery phase with a revised trial date expected to commence in May 2018.liability.
 
Insurance Carrier Lawsuit
 
On June 17, 2019, the White Winston Plaintiffs moved for the appointment of a temporary receiver over MusclePharm, citing Plante Moran’s resignation. The Company is engaged in litigation withcourt granted the White Winston Plaintiffs’ request to hold an insurance carrier, Liberty Insurance Underwriters, Inc. (“Liberty”), arising out of Liberty’s denial of coverage. In 2014,evidentiary hearing on the Company sought coverage under an insurance policy with Libertymotion, but the date for claims against directors and officersthat hearing was not set as of the Company arising out ofdate hereof. On July 30, 2019, the White Winston Plaintiffs filed an investigation by the Securities and Exchange Commission. Liberty denied coverage, and, on February 12, 2015, the Company filed a complaintaction in the DistrictSuperior Court Cityof the State of California in and for the County of Denver, Colorado against Liberty claiming wrongfulLos Angeles, seeking access to MusclePharm’s books and unreasonable denial of coveragerecords. MusclePharm has answered the petition, asserting as a defense that the request does not have a proper purpose. A trial on the petition has been set for the cost and expenses incurred in connection with the SEC investigation and related matters. Liberty removed the complaint to the United States District Court for the District of Colorado, which in August 2016 granted Liberty’s motion for summary judgment, denying coverage and dismissing the Company’s claims with prejudice, and denied the Company’s motion for summary judgment. The Company filed an appeal in November 2016. The Company filed its opening brief on February 1, 2017 and Liberty filed its response brief on April 7, 2017. the 10th Circuit affirmed the lower court's grant of summary judgment in favor of Liberty. 25, 2021.
The Company intends to seek a rehearing of the appellate court's decision.

vigorously defend these actions.
 
IRS Audit
 
On April 6, 2016, the Internal Revenue Service (“IRS”) selected the Company’sour 2014 Federal Income Tax Return for audit. As a result of the audit, the IRS proposed certain adjustments with respect to the tax reporting of the Company’sour former executives’ 2014 restricted stock grants. Due to the Company’s current and historical loss position, the proposed adjustments would have no material impact on itsthe Company’s Federal income tax. On October 5, 2016, the IRS commenced an audit of the Company’sour employment and withholding tax liability for 2014. The IRS is contendingcontends that the Company inaccurately reported the value of the restricted stock grants and improperly failed to provide for employment taxes and federalFederal tax withholding on these grants. In addition, the IRS is proposing certain penalties associated with the Company’s filings. On April 4, 2017, the Company received a “30-day letter” from the IRS asserting back taxes and penalties of approximately $5.3 million, of which $0.4$4.4 million related to employmentwithholding taxes, specifically, income withholding and Social Security taxes, and $4.9$0.9 million related to federal tax withholding and penalties. Additionally, the IRS is assertingasserts that the Company owes information reporting penalties of approximately $2.0 million.
The Company’s counsel has submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties on the Company’s behalf, and the Company intends to pursuehas been pursuing this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2.0 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.
The remaining issue in dispute in this matter involves the fair market value of restricted stock units in the Company granted to certain former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagree as to the value of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS have exchanged expert valuation reports on the fair market value of the stock and have had extensive negotiations on this issue. The parties, however, have not been able to reach an agreement with respect to the value of the stock. The IRS has also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS has asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for the amount of any tax due, and not the Company.
The Former Officers cases were scheduled for trial in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February 4, 2020. The basis for the continuance was that the IRS and the Former Officers had made progress toward a settlement of the valuation issue involving the grants of the restricted stock. The outcome of these settlement negotiations will be relevant to the Company’s case. The Company is closely monitoring the settlement discussions between the IRS and the Former Officers. The Tax Court has ordered the Former Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before October 22, 2020.
Due to the uncertainty associated with determining the Company’sour liability for the asserted taxes and penalties, if any, and to the Company’sour inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the IRS appeals process, the Company is unable to providehas not recorded an estimate for its potential liability, if any, associated with these taxes.
 
IRS Notice
On September 11, 2017,August 22, 2018, Richard Estalella filed an action against the IRS sent a notice of assessment to MusclePharm, LLC indicating payroll taxes, penalties Company and interesttwo other defendants in the amountColorado District Court for the County of approximately $344,000.Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014 restricted stock grants. The Company believes this noticehas answered Estalella’s complaint, asserted counterclaims against Estalella for his failure to beensure that all withholding taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against a clerical error as this this entity was dissolved priorvaluation firm named in the action for failing to properly value the period the IRS is claiming this assessments relates to.2014 restricted stock grants for tax purposes. The Company is inwaiting on the process of resolving this matter withnext steps from the IRS.
Sponsorshipcourt and Endorsement Contract Liabilities
The Company has various non-cancelable endorsement and sponsorship agreements with terms expiring through 2019. The total value of future contractual payments as of September 30, 2017 are as follows (in thousands):
 
 
 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 
will continue to vigorously litigate the matter.
 

 
4Excelsior Matter
On March 18, 2019, 4Excelsior, a manufacturer of MusclePharm products, filed an action against MusclePharm 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 January 27, 2020, MusclePharm filed a counterclaim against 4Excelsior seeking unidentified damages relating to, among other things, 4Excelsior’s failure to fulfill a purchase order.  MusclePharm also moved to strike 4Excelsior’s consequential damages on the grounds that they are unrecoverable under the Uniform Commercial Code.  The court denied that motion, and the action has proceeded to discovery. The Company recognized a liability of $5.0 million (past due invoices plus interest) as of March 31, 2019. Trial has not yet been set, although a Trial Setting Conference has been set for September 21, 2020. 
The Company intends to vigorously defend this action.
Nutrablend Matter
On February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against MusclePharm in the United States District Court for the Eastern District of California, claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods. Trial has been set for November 17, 2020. The Company intends to vigorously defend this action.
Note 10. Stockholders’ Deficit
 
Common Stock
 
DuringThe fair value of all stock issuances is based upon the ninequoted closing trading price on the date of issuance. Common stock outstanding as of March 31, 2019 and December 31, 2018 includes shares legally outstanding even if subject to future vesting. For the three months ended September 30, 2017,March 31, 2019, the Company had the following transactions related to its common stock including restricted stock awards (in thousands, except share and per share data):
 
Transaction Type
 
Quantity (Shares)
 
 
Valuation
($)
 
 
Range of
Value per Share
 
 
Quantity (Shares)
 
 
 
Valuation
 
 
Range of
Value per Share
 
Stock issued to employees, executives and directors
  538,945 
 $1,045 
 $1.87-2.17 
Stock issued for advertising services
  336,113 
 $303 
 $0.90 
Total
  538,945 
 $1,045 
 $1.87-2.17 
  336,113 
 $303 
 $0.90 
 
DuringFor the ninethree months ended September 30, 2016,March 31, 2018, the Company issuedhad the following transactions related to its common stock including restricted stock awards as follows (in thousands, except share and per share data):
 
Transaction Type
 
Quantity
(Shares)
 
 
Valuation
($)
 
 
Range of
Value per Share
 
Stock issued to employees, executives and directors
  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 
Transaction Type
 
Quantity (Shares)
 
 
 
Valuation
 
 
Range of
Value per Share
 
Stock issued to related party for interest
  81,113 
 $53 
 $0.65 
Total
  81,113 
 $53 
 $0.65 
The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.
Common stock outstanding as of September 30, 2017 and December 31, 2016 includes shares legally outstanding even if subject to future vesting.
 
Warrants
 
In November 2016,For the three months ended March 31, 2019 and 2018, the Company issued a warrant to purchase 1,289,378 shares, equal to approximately 7.5%did not issue any warrants. As of both March 31, 2019 and 2018, the Company’s fully diluted equityCompany had outstanding warrants of its common stock to the parent company of Capstone Nutrition, the Company’s former product manufacturer, pursuant to a settlement agreement, which under certain circumstances is subject to adjustment. The exercise price of this warrant was $1.83 per share, with a contractual term of four years. The Company has valued this warrant by utilizing the Black Scholes model at approximately $1.8 million with the following assumptions: contractual life of four years, risk free interest rate of 1.27%, dividend yield of 0%, and expected volatility of 118.4%.1,389,378 shares.
 
In July 2014, the Company issued a warrant to purchase 100,000 shares of its common stock related to an endorsement agreement. The exercise price of this warrant was $11.90 per share, with a contractual term of five years. This warrant fully vested during 2016. The Company used the Black-Scholes model to determine the estimated fair value of the warrants, with the following assumptions: contractual life of five years, risk free interest rate of 1.7%, dividend yield of 0%, and expected volatility of 55%.
 
Treasury Stock
 
DuringFor the ninethree months ended September 30, 2017March 31, 2019 and the year ended December 31, 2016,2018, the Company did not repurchase any shares of its common stock and held 875,621 shares in treasury as of September 30, 2017both March 31, 2019 and December 31, 2016.2018.
 

Note 11. Stock-Based Compensation
 
Restricted Stock
 
The Company’s stock-based compensation for the three and nine months ended September 30, 2017March 31, 2019 and 2016 consist2018 consisted primarily of restricted stock awards. The activity of restricted stock awards granted to employees, executives and Board members during the three months ended March 31, 2019 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 
 
 
Unvested Restricted Stock Awards
 
 
 
Number of
Shares
 
 
Weighted Average
Grant Date Fair
Value
 
Unvested balance – December 31, 2018
  197,500 
 $1.05 
Granted
  — 
  — 
Vested
  (62,500)
  1.00 
Unvested balance – March 31, 2019
  135,000 
  1.07 
 
The Company issued 168,783 and 538,945 shares of restricted stock to its Board members for the three and nine months ended September 30, 2017, respectively. The total fair value ofThere were no restricted stock awards granted to employees and the Board was $0.3 million and $0.5 million forduring 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,March 31, 2018 or 2019, respectively. As of September 30, 2017,March 31, 2019, the total unrecognized expense for unvested restricted stock awards, net of expected forfeitures, was $0.8 million,$63,000, which is expected to be amortized over a weighted average period of 0.80.2 years.
Restricted Stock Awards Issued to Ryan Drexler, Chairman of the Board, Chief Executive Officer and President
In January 2017, the Company issued Mr. Ryan Drexler 350,000 shares of restricted stock pursuant to an Amended and Restated Executive Employment Agreement dated November 18, 2016 (“Employment Agreement”) with a grant date value of $0.7 million based upon the closing price of the Company’s common stock on the date of issuance. These shares of restricted stock vest in full upon the first anniversary of the grant date.
Accelerated Vesting of Restricted Stock Awards Related to Termination of Employment Agreement with Brad Pyatt, Former Chief Executive Officer
In March 2016, Brad Pyatt, the Company’s former Chief Executive Officer, terminated his employment with the Company. Pursuant to the terms of the separation agreement with the Company, in exchange for a release of claims, the Company agreed to pay severance in the amount of $1.1 million, payable over a 12-month period, a lump sum of $250,000 paid during March 2017 and reimbursement of COBRA premiums, which the Company recorded in the six months ended September 30, 2016. In addition, the remaining unvested restricted stock awards held by Brad Pyatt of 500,000 shares vested in full upon his termination in accordance with the original grant terms. In connection with the accelerated vesting of these restricted stock awards, the Company recognized stock compensation expense of $3.9 million, which is included in “Salaries 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 as of March 31, 2017.
 
Stock Options
 
The Company may grant options to purchase shares of the Company’s common stock to certain employees and directors pursuant to the 2015 Plan.Incentive Compensation Plan (the “2015 Plan”). Under the 2015 Plan, all stock options are granted with an exercise price equal to or greater than the fair market value of a share of the Company’s common stock on the date of grant. Vesting is generally determined by the Compensation Committee of the Board within limits set forth inplan administrator under the 2015 Plan. No stock option willmay be exercisable more than ten years after the date it is granted.
 

Stock Options Summary Table
 
In February 2016,The following table describes the Company issuedtotal options to purchase 137,362 sharesoutstanding, granted, exercised, expired and forfeited as of its common stock to Mr. Drexler,and during the Company’s Chairman of the Board, Chief Executive Officer, and President, and 54,945 to Michael Doron, the former Lead Director of the Board. Upon resignationthree months ended March 31, 2019. Shares obtained from the Boardexercise of Directors, Mr. Doron forfeited 20,604 of theour options issued. These stock options have an exercise price of $1.89 per share, a contractual term of 10 years and a grant date fair value of $1.72 per share, or $0.3 million, which is amortized on a straight-line basis over the vesting period of two years. The Company determined the fair value of the stock options using the Black-Scholes model.  The table below sets forth the assumptions used in valuing such options.are subject to various trading restrictions.
 
For the Six Months Ended 
June 30, 2016
Expected term of options6.5 years
Expected volatility131.0%
Risk-free interest rate1.71%
Expected dividend yield0.0%
 
 
Options Pursuant to the 2015 Plan
 
 
Weighted Average Exercise Price Per Share
 
 
Weighted Average Fair Value of Options
 
 
Weighted Average Remaining Contractual Life (Years)
 
 
Aggregate Intrinsic Value
 
Issued and outstanding as of December 31, 2018
  171,703 
 $1.89 
 $1.72 
  7.17 
  — 
Granted
  — 
  — 
  — 
  — 
  — 
Exercised
  — 
  — 
  — 
  — 
  — 
Forfeited
  — 
  — 
  — 
  — 
  — 
Issued and outstanding as of March 31, 2019
  171,703 
 $1.89 
 $1.72 
  6.92 
  — 
Exercisable as of March 31, 2019
  171,703 
 $1.89 
 $1.72 
  6.92 
  — 
 
For the three months ended September 30, 2017 and 2016,March 31, 2019, the Company recorded no stock compensation expense related to options. For the three months ended March 31, 2018, the Company recorded stock compensation expense of $16,000 related to options of $29,000 and $42,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded stock compensation expense related to options of $112,000 and $97,000, respectively.options.
 

Note 12. Net Loss per Share
 
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.period. There was no dilutive effect for the outstanding potentially dilutive securities for either the three and nine months ended September 30, 2017 and 2016, respectively,March 31, 2019 or 2018, as the Company reported a net loss for allboth periods.
 
The following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented (in thousands, except share and per share data):
 
 
For the Three Months
Ended September 30,
 
 
For the Nine Months
Ended September 30,
 
 
For the Three Months
Ended March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 
Net loss
 $(2,128)
 $(1,447)
 $(8,426)
 $(12,248)
 $(4,505)
 $(2,511)
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 
  15,183,402 
  14,957,217 
Net loss per share, basic and diluted
 $(0.15)
 $(0.10)
 $(0.61)
 $(0.88)
 $(0.30)
 $(0.17)
 
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, 2017March 31, 2019 and 2016, respectively,2018, as the Company reported a net loss for allboth periods. However, if the Company had net income for the three and nine months ended September 30, 2017,March 31, 2019, the potentially dilutive securities included in the earnings per share computation would have been 8,852,627 and 9,048,072, respectively.17,912,297. If the Company had net income for the three and nine months ended September 30, 2016,March 31, 2018, the potentially dilutive securities included in the earnings per share computation would have been 2,608,695 for both periods.

17,881,141.
 
Total outstanding potentially dilutive securities were comprised of the following:
 
 
As of September 30,
 
 
As of March 31,
 
 
2017
 
 
2016
 
 
2019
 
 
2018
(as restated)
 
Stock options
  171,703 
  192,307 
  171,703 
Warrants
  1,389,378 
  100,000 
  1,389,378 
Unvested restricted stock
  737,690 
  336,014 
  135,000 
  103,844 
Convertible notes
  8,619,624 
  2,608,695 
  16,216,216 
Total common stock equivalents
  10,918,395 
  3,237,016 
  17,912,297 
  17,881,141 
 
Note 13. Income Taxes
The Company recorded a tax provision of $10,000 and $69,000 for the three months ended March 31, 2019 and 2018, respectively.
 
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 established a full valuation allowance as it is more likely than not that the tax benefits will not be realized as of September 30, 2017.March 31, 2019.
 
Note 14. 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,
 
 
For the Three Months Ended March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
(as restated)
 
Revenue, net:
 
 
 
 
 
 
United States
 $14,502 
 $18,744 
 $46,769 
 $71,955 
 $12,987 
 $13,700 
International
  9,894 
  11,950 
  29,828 
  34,518 
  5,788 
  10,487 
Total revenue, net
 $24,396 
 $30,694 
 $76,597 
 $106,473 
 $18,775 
 $24,187 
 
Note 15. Key Executive Life InsuranceChanges and Correction of Errors in Previously Reported Consolidated Financial Statements
Background on the Restatement
In February 2019, the Company 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, the Company reviewed its 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, the Company 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 the Company to determine the potential impact on accounting for revenues. The investigation included the review of the Company’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 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 Companyinvestigation revealed that certain customer orders had purchased split dollar life insurance policies on certain key executives. These policies provide a split of 50% of the death benefit proceedsbeen invoiced, triggering revenue recognition, prior to the Companyactual 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 50%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 officer’s designated beneficiaries. Noneend customer until after the cut-off period resulting in the premature issuance of these key executives are currently employed by the Company,invoices to customers and all policies were terminated or transferred to the former employees asrecognition of December 31, 2016.revenue.
 

 
As a result of the Audit Committee’s investigation, certain employees were terminated, and others received written reprimands related to their conduct as it relates to 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.
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 revenues;
●
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.
Restatement Adjustments
Several restatement adjustments were made to the Company’s previously filed consolidated financial statements in order to reflect revenue recognition in the appropriate periods as discussed above. Accordingly, for the subject sales transactions, revenue and accounts receivable balances were reduced by an equivalent amount in the period that the sale was originally recorded as revenue, and revenue was increased in the subsequent period in which the criteria for revenue recognition were met. Further, for the subject sales transactions, cost of revenue was reduced, and inventory was increased, in the period that the sale was originally recorded as revenue, and cost of revenue was increased, and inventory was reduced, in the period the sale was ultimately recorded as revenue.
In addition, (i) revenue and operating expenses were reduced by an equivalent amount relating to the reclassification of customer payments, which were originally recorded on a gross versus net basis; (ii) revenue was increased or decreased each period, as appropriate, relating to revised estimates of the expected value of credits issued to customers, (iii) 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 and (iv) other adjustments as referred to above.
March 31, 2018 Restatements (Unaudited)
As of and for the three months ended March 31, 2018, the Company recorded the following restatement adjustments and charges (in thousands):
Impact on consolidated statements of operations for the three months ended March 31, 2018 (in thousands) - increase (decrease):
●
Revenue, net:
Reversal of December 31, 2017 accrual for credits – $1,281
Sales cutoff – $545
Correction of estimate of expected value of customer credits – ($1,572)
Reclassification of payments to customers – ($2,584)
Recognizing revenue on a net versus gross basis– ($30)

●
Cost of revenue:
Sales cutoff – $776
              Reversal of December 31, 2017 purchase price variance - $154
       Recognizing revenue on a net versus gross basis– ($30)
       Accrual for rebate receivable – ($170)
Reclassification of advertising expenses directly related to product sales - $107
●
Advertising and promotion:
Reversal of December 31, 2017 accrual for credits - ($90)
Reclassification of payments to customers – ($2,582)
Sales cutoff - $3
Reclassification of advertising expenses directly related to product sales and commissions – ($178)
●
Selling, general and administrative:
Reversal of December 31, 2017 accrual for credits – ($72)
Depreciation adjustment for facility relocation – ($56)
Reclassification of payments to customers – ($2)
Reclassification of advertising expenses representing commissions - $71
●
Professional fees: reversal of December 2017 legal over accrual – $148
●
Interest and other expense, net: adjusted debt discount amortization – ($233)
●
Net loss – $206
Impact on consolidated balance sheets - increase (decrease):
●
Accounts receivable, net of allowance for doubtful accounts:
Sales cutoff – ($3,556)
Correction of estimate of expected value of customer credits – ($1,573)
ASC 606 modified retrospective transition – ($1,053)
●
Inventory: Sales cutoff – ($2,364)
●
Property and equipment, net:
Depreciation adjustment for facility relocation – ($856)
●
Prepaid expenses and other current assets: accrual for rebate receivable – $170
●
Accounts payable: Sales cutoff – $320
●
Accrued liabilities: Payroll tax adjustment on restricted stock – ($230)
●
Convertible note with a related party, net of discount: debt discount adjustment net of amortization – $979
●
Additional paid-in capital: debt discount adjustment – ($1,212)
●
Accumulated Deficit – $4,361

The unaudited restated consolidated balance sheets as of March 31, 2018 is presented below (in thousands, except per share data):
 
 
March 31, 2018
 
 
 
As Previously Reported
 
 
Restatement
Adjustments
 
 
Restated
(Unaudited)
 
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
 $5,114 
 $— 
 $5,114 
Accounts receivable, net of allowance for doubtful accounts of $1,518 as of March 31, 2018
  16,925 
  (6,182)
  10,743 
Inventory
  7,738 
  2,364 
  10,102 
Prepaid giveaways
  111 
  — 
  111 
Prepaid expenses and other current assets
  895 
  170 
  1,065 
Total current assets
  30,783 
  (3,648)
  27,135 
Property and equipment, net
  1,632 
  (856)
  776 
Intangible assets, net
  1,237 
  — 
  1,237 
Other assets
  239 
  — 
  239 
TOTAL ASSETS
 $33,891 
 $(4,504)
 $29,387 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
    
Current liabilities:
    
    
    
Obligation under secured borrowing arrangement
 $5,547 
 $— 
 $5,547 
Line of credit
  2,000 
  — 
  2,000 
Accounts payable
  14,897 
  320 
  15,217 
Accrued liabilities
  7,441 
  (230)
  7,211 
Accrued restructuring charges, current
  560 
  — 
  560 
Total current liabilities
  30,445 
  90 
  30,535 
Convertible note with a related party, net of discount
  16,917 
  979 
  17,896 
Accrued restructuring charges, long-term
  110 
  — 
  110 
Other long-term liabilities
  1,060 
  — 
  1,060 
Total liabilities
  48,532 
  1,069 
  49,601 
Commitments and contingencies (Note 9)
    
    
    
Stockholders' deficit:
    
    
    
Common stock, par value of $0.001 per share, 100,000,000 shares authorized; 15,940,288 shares issued as of March 31, 2018; 15,064,667 shares outstanding as of March 31, 2018
  14 
  — 
  14 
Additional paid-in capital
  159,798 
  (1,212)
  158,586 
Treasury stock, at cost; 875,621 shares
  (10,039) 
  — 
  (10,039) 
Accumulated other comprehensive loss
  (142)
  — 
  (142) 
Accumulated deficit
  (164,272) 
  (4,361)
  (168,633) 
TOTAL STOCKHOLDERS’ DEFICIT
  (14,641) 
  (5,573)
  (20,214) 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $33,891 
 $(4,504)
 $29,387 

The unaudited restated quarterly consolidated statements of operations for the three months ended March 31, 2018 is presented below (in thousands, except per share data):
 
 
Three Months Ended March 31, 2018
 
 
 
As Previously Reported
 
 
Restatement Adjustments
 
 
Restated (Unaudited)
 
Revenue, net
 $26,547 
 $(2,360)
 $24,187 
Cost of revenue
  18,328 
  837 
  19,165 
Gross profit
  8,219 
  (3,197)
  5,022 
Operating expenses:
    
    
    
Advertising and promotion
  3,661 
  (2,847)
  814 
Salaries and benefits
  2,154 
  — 
  2,154 
Selling, general and administrative
  2,546 
  (59)
  2,487 
Research and development
  212 
  — 
  212 
Professional fees
  572 
  148 
  720 
Total operating expenses
  9,145 
  (2,758)
  6,387 
Loss from operations
  (926)
  (439)
  (1,365)
Other (expense) income:
    
    
    
         Interest and other expense, net
  (1,310)
  233 
  (1,077)
Loss before provision for income taxes
  (2,236)
  (206)
  (2,442)
Provision for income taxes
  69 
  — 
  69 
Net loss
 $(2,305)
 $(206)
 $(2,511)
 
    
    
    
Net loss per share, basic and diluted
 $(0.16)
 $(0.01)
 $(0.17)
 
    
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  14,615,677 
  341,540 
  14,957,217 

The unaudited restated consolidated statements of cash flows for the three months ended March 31, 2018 is presented below (in thousands):
 
 
Three Months Ended March 31, 2018
 
 
 
As Previously Reported
 
 
Restatement Adjustments
 
 
Restated (Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net loss
 $(2,305)
 $(206)
 $(2,511)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
    
Depreciation and amortization
  287 
  (56)
  231 
Bad debt expense
  164 
  — 
  164 
Amortization of debt discount
  248 
  (233)
  15 
Inventory provision
  — 
  35 
  35 
Stock-based compensation
  137 
  — 
  137 
Changes in operating assets and liabilities:
    
  — 
    
Accounts receivable
  (443)
  (434)
  (877)
Inventory
  (1,255)
  592 
  (663)
Prepaid giveaways
  (23 
  — 
  (23)
Prepaid expenses and other current assets
  100 
  (170)
  (70)
Other assets
  (14)
  — 
  (14)
Accounts payable and accrued liabilities
  2,917 
  472 
  3,389 
Accrued restructuring charges
  (45)
  — 
  (45)
Net cash used in operating activities
  (232)
  — 
  (232)
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
    
Purchase of property and equipment
  (14)
  — 
  (14)
Net cash used in investing activities
  (14)
  — 
  (14)
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
    
Payments on line of credit
  (1,000)
  — 
  (1,000)
Proceeds from secured borrowing arrangement, net of reserves
  13,494 
  — 
  13,494 
Payments on secured borrowing arrangement, net of fees
  (13,332)
  — 
  (13,332)
Repayment of capital lease obligations
  (34)
  — 
  (34)
Net cash used in financing activities
  (872)
  — 
  (872)
Effect of exchange rate changes on cash
  4 
  — 
  4 
NET CHANGE IN CASH
  (1,114)
  — 
  (1,114)
CASH — BEGINNING OF PERIOD
  6,228 
    
  6,228 
CASH — END OF PERIOD
 $5,114 
 $  
 $5,114 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
    
Cash paid for interest
 $614 
 $  
 $614 
Cash paid for taxes
 $68 
 $  
 $68 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    
    
    
Property and equipment acquired in conjunction with capital leases
 $— 
 $  
 $— 
Purchase of property and equipment included in current liabilities
 $13 
 $  
 $13 
Interest paid through issuance of shares of common stock
 $53 
 $  
 $53 

Note 16. Subsequent Events
 
GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available 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. The first type consists of events or transactions that provide additional evidence about conditions that existed at the 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”).
 
Recognized Subsequent Events
 
Refinancing Transaction with Ryan DrexlerThermoLife International
 
As describedIn January 2016, ThermoLife, a supplier of nitrates to MusclePharm, filed a complaint against us in Note 8,Arizona state court. ThermoLife alleged that we failed to meet minimum purchase requirements contained in the related party Prior Notesparties’ supply agreement. In March 2016, we filed counterclaims alleging that ThermoLife’s products were refinanceddefective. Through orders issued in September and November 2018, the court dismissed MusclePharm’s counterclaims and found that the Company was liable to ThermoLife for failing to meet its minimum purchase requirements.
The court held a bench trial on November 3, 2017 whereby, among other things, the maturity dateissue of damages in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against the Company in the amount of $1.6 million, comprised of $0.9 million in damages, interest in the amount of $0.3 million and attorneys’ fees and costs in the amount of $0.4 million. The Company recorded $1.6 million in accrued expenses as of December 31, 2018. In the interim, the Company filed an appeal, which is in the process of being briefed, and has 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 extendedpaid by Mr. Drexler on behalf of the Company on December 31, 2019. See “Note 8. Debt” for additional information. Subsequent to December 31, 2019, the balance of $0.35 million was secured by a personal guaranty from Mr. Drexler, while the associated fees of $12,500 was paid by the Company.
The Company intends to continue to vigorously pursue its defenses on appeal.
Manziel Matter
On July 15, 2014, JMAN2 General LP (“JMAN2”), Jonathan Manziel (“Endorser”) and accordingly such debt has been classified as a long-term liabilityMusclePharm entered into an endorsement agreement, in which the Endorser would provide certain endorsements of MusclePharm’s businesses, products and services in exchange for payments to JMAN2 by MusclePharm. On April 17, 2018, JMAN2 commenced an action against MusclePharm in the accompanying condensed consolidated Balance SheetDistrict Court, City and County of Denver, Colorado and on July 19, 2018 filed an amended complaint against MusclePharm, in which JMAN2 asserted various claims against MusclePharm concerning their rights and obligations under the Endorsement Agreement. On April 10, 2019, a settlement agreement was reached for an amount of $0.1 million, which had been recorded as an accrued expense as of September 30, 2017.December 31, 2018. Of this amount, $70,000 was paid in 2019, while the balance was paid in the first quarter of 2020.
Durnford Matter
On July 28, 2015, Plaintiff, Tucker Durnford, filed a First Amended Class Action Complaint which alleged that the Company’s (now discontinued) Arnold Iron Mass product violates consumer protection laws by misleading consumers about the amount and sources of protein in the product. On February 10, 2016, the court granted our motion to dismiss the complaint on federal preemption grounds. On October 12, 2018, the Ninth Circuit reversed the dismissal. On October 8, 2019, the parties successfully mediated the case to a settlement of $0.15 million, which had been recorded as an accrued expense as of December 31, 2018. Of the settlement amount, $0.1 million was paid during the fourth quarter of 2019 and the balance was paid during the first quarter of 2020.

 
Unrecognized Subsequent Events
 
Inventory FinancingCARES Act
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Among the changes to the U.S. federal income tax, the CARES Act restored net operating loss carryback rules that were eliminated by 2017 Tax Cuts and Jobs Act, modified the limit on the deduction for net interest expense and accelerated the timeframe for refunds of AMT credits. Based on an analysis of the impact of the CARES Act, the Company has not identified any overall material effect on the 2018 and 2019 tax liabilities.
HSBF Note
Due to economic uncertainty as a result of the ongoing 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. No payments are due on the Note until November 16, 2020 (the “Deferment Period”). However, interest will continue to accrue during the Deferment Period. The Note will mature on May 16, 2022. The Note includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act. The Company has not determined the amount of forgiveness in connection with the loan, partly due to the ongoing routine changes in the method of calculating the amount.
Related-Party Refinanced Convertible Note
 
On October 6, 2017,July 1, 2020, the Company entered into the refinancing with Mr. Ryan Drexler, the Company’s Chairman of the Board of Directors, Chief Executive Officer and its affiliate (together withPresident (the “Refinancing”). As part of the Refinancing, the Company “Borrower”issued to Mr. Drexler an amended and restated convertible secured promissory note (the “Refinanced Convertible Note”) entered intoin the original principal amount of $2,735,199, which amended and restated (i) a Loanconvertible secured promissory note dated as of November 8, 2017, $1,134,483 of which was outstanding as of July 1, 2020 (ii) a collateral receipt and Security Agreement (“Security Agreement”)security agreement with Crossroads Financial Group, LLC (“Lender”). PursuantMr. Drexler dated as of December 27, 2019, $252,500 of which was outstanding as of July 1, 2020, and (iii) a secured revolving promissory note dated as of October 4, 2019, $1,348,216 of which was outstanding as of July 1, 2020.
The $2.7 million Refinanced Convertible Note bears interest at the rate of 12% per annum. Unless earlier converted or repaid, all outstanding principal and any accrued but unpaid interest under the Refinanced Convertible Note shall be due and payable on November 30, 2020.
Any interest not paid when due shall be capitalized and added to the Security Agreement, Borrower may borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly Liquidation Value (each as defined in the Security Agreement), up to a maximumprincipal amount of $3.0 millionthe Refinanced Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. Mr. Drexler may convert the outstanding principal and accrued interest into shares of the Company’s common stock at an interest ratea conversion price equal to or greater than (i) the closing price per share of 1.5% per month,the common stock on the last business day immediately preceding November 30, 2020 or (ii) $0.17. The Company may prepay the Refinanced Convertible Note by giving Mr. Drexler between 15 and 60 days’ notice depending upon the specific circumstances, subject to a minimum monthly fee of $22,500.Mr. Drexler’s conversion right. The initial term of the Security Agreement is six months from the date of execution, and such initial term is extended automatically in six month increments, unless earlier terminated pursuant to the terms of the Security Agreement. The Security Agreement contains customary events of default, including, among others, the failure to make payments on amounts owed when due, default under any other material agreement or the departure of Mr. Drexler. The Security AgreementRefinanced Convertible Note also contains customary restrictions on the ability of Borrowerthe Company to, among other things, grant liens or incur debtindebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and transfer assets. Undercarveouts, as set forth in the Security Agreement, Borrower has agreedRefinanced Convertible Note. The Refinanced Convertible Note is subordinated to grant Lender a security interestcertain other indebtedness of the Company.
There are no other events subsequent to March 31, 2019 that have not been described 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.accompanying footnotes.
 

ITEM
ITEM 2. MANAGEMENT'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 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, 2016,2019 (the “2019 Form 10-K”), as filed with the Securities and Exchange Commission on March 15, 2017, or the 2016 Form 10-K.August 24, 2020. 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
 
We areMusclePharm Corporation is a scientifically driven, performance lifestyle company that develops, manufactures, markets, and distributes branded nutritional supplements.products. We offer a broad range of performance powders, bars, capsules, tablets and gels.on-the-go ready to eat protein snacks. Our portfolio of recognized brands, including MusclePharm®, and FitMiss®, and our the newly launched Natural Series, are marketed and sold in more than 120100 countries and availableglobally. Our corporate headquarters are located in over 50,000 retail outlets globally. These clinically-developed, scientifically-driven nutritional supplementsBurbank, CA.
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 currently have subsidiaries in Dublin, Ireland, Hamilton, (Ontario) Canada,retailer growth across leading e-commerce, Food Drug & Mass, and Sydney, Australia.Club retail channels, including Amazon, Costco, Kroger, Walgreens, 7-Eleven, and many others.
 
OutlookCOVID-19
 
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. As we continue to execute our growth strategyCOVID-19 infections have been reported throughout the United States, certain federal, state and focus on our core operations, we anticipate continued improvement in our operating margins and expense structure. We anticipate revenue and gross margin 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 local governmental authorities have issued stay-at-home orders, proclamations and/or our growth strategy: 1) international sales expansion; and 2) diversifying our distribution channels. We see potential growth in our on-line business due todirectives aimed at minimizing the continuing migrationspread 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 toinfection. Additionally, more effective marketing and advertising strategies as we move away from costly celebrity endorsements.
During the second quarter of 2017, we launched our MusclePharm Natural Series, a line of plant-based, vegan, gluten-free, soy-free, non-GMO, premium products targeting individuals seeking an organic alternative to traditional nutritional products and supplements. The Natural Series line complements our existing range of premium-quality products and represents a new retail category for us.
Also during the second quarter of 2017, we began local contract manufacturingrestrictive proclamations and/or directives may be issued in the European Union, in connection with our expansion in Europe. With local manufacturing, we are able to avoid costly tariffs and be able to price our products more competitively. We have identified the United Kingdom (“U.K.”), an untapped market, as our initial focus. We recently appointed a U.K. sales director, who will spearhead our European expansion. Growing our e-commerce business will be an ongoing objective as we remain cognizant of challenges faced by traditional brick and mortar stores.
Additionally, as one of the only sports nutrition companies with a scientific institute that tests ingredients and develops research in-house, as well as partners with prestigious universities and research institutions, we reevaluate our products on an ongoing basis to ensure that we are using the best ingredients currently available. After extensive research, we reformulated our Re-Con product line to include Groplex(™) and VitaCherry(™) Sport. We anticipate the launch of our Natural Series and the relaunch of our popular Re-Con product line to further invigorate the MusclePharm brand.

Management’s Plans with Respect to Liquidity and Capital Resources
Management believes the restructuring plan completed during 2016, the continued reduction in ongoing operating costs and expense controls, and the aforementioned growth strategy, will enable us to ultimately be profitable. We have reduced our operating expenses sufficiently so that our ongoing source of revenue will be sufficient to cover these expenses for the next twelve months, which we believe will allow us to continue as a going concern. We can give no assurances that this will occur.
As of September 30, 2017, we had a stockholders’ deficit of $11.5 million and recurring losses from operations. To manage cash flow, in January 2016, we entered into a secured borrowing arrangement, pursuant to which we have the ability to borrow up to $10.0 million subject to sufficient amounts of accounts receivable to secure the loan. This arrangement was extended to March 29, 2018 for an additional six months with similar terms. Under this arrangement, during the nine months ended September 30, 2017, we received $22.4 million in cash and subsequently repaid $22.5 million, including fees and interest, on or prior to September 30, 2017.
As of September 30, 2017, we had approximately $4.9 million in cash and $3.8 million in working capital.future.
 
The accompanying Condensed Consolidated Financial Statements asultimate impact of and for the nine months ended September 30, 2017, were preparedCOVID-19 pandemic on the basisCompany’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 going concern, which contemplates, among other things, the realizationmaterial impact on our business, financial condition and results of assets and satisfaction of liabilitiesoperations.
While we expect our revenue for 2020 to be down compared to 2019, there are multiple factors contributing to this decline. While revenue for April 2020 was lower due to COVID-19, as evidenced by a decline in the ordinary course of business. Accordingly, they do not give effectCompany’s FDM sales, sales in other months were in line with the Company���s expectations. Management continues to adjustments that would be necessary should we be required to liquidate our assets. 
Our ability to meet our total liabilities of $41.6 million as of September 30, 2017, and to continue as a going concern, is partially dependent on meeting our operating plans, and was partially dependent on our Chairman of the Board, Chief Executive Officer and President, Ryan Drexler, either converting or extending the maturity of his notes prior to or upon its maturity. Subsequent to the end of the quarter, we entered into a refinancing transaction with Mr. Drexler. Both the principal and any capitalized and unpaid interest under the Refinanced Convertible Note are due on December 31, 2019, unless converted earlier.
Our ability to continue as a going concern in the future and raise capital for specific strategic initiatives will also be dependent on obtaining adequate capital to fund operating losses until we become profitable. We can give no assurances that any additional capital that we are able to obtain, if any, will be sufficient to meet our future needs, or that any such financing will be obtainable on acceptable terms or at all.
Mr. Drexler has verbally both stated his intent and ability to put more capital intomonitor the business if necessary. However, Mr. Drexler is under no obligationenvironment for any significant changes that could impact the Company’s operations. The Company has taken proactive steps to us to do so,manage costs and we can give no assurances that Mr. Drexler will be willing or able to do so at a future date and/or that he will not demand payment of his Refinanced Convertible Note on December 31, 2019.
If in the future, we are unable to obtain adequate capital, we could be forced to cease operations or substantially curtail our commercial activities. These conditions, or significant unforeseen expenditures including the unfavorable settlement of our legal disputes, could raise substantial doubtdiscretionary spending, such as to our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverabilityremote working and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.reducing facility related expense.
 

 
Results of Operations (Unaudited)
 
Comparison of the Three Months Ended September 30, 2017March 31, 2019 to the Three Months Ended September 30, 2016March 31, 2018
 
 
 
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%
(1)
Cost of revenue for the three months ended September 30, 2016 included restructuring charges of $0.1 million, related to write-downs of inventory for discontinued products.

Comparison of the Nine months ended September 30, 2017 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%
(1)
Cost of revenue for the nine months ended September 30, 2016 included restructuring charges of $2.3 million, related to write-downs of inventory for discontinued products.

  
 
For the Three Months Ended
March 31,
 
 
 
 
 
 
 
 ($ in thousands)
 
2019
 
 
2018
(as restated)
 
 
$ Change
 
 
% Change
 
Revenue, net
 $18,775 
 $24,187 
 $(5,412)
  (22)%
Cost of revenue
  15,855 
  19,165 
  (3,310)
  (17)
Gross profit
  2,920 
  5,022 
  (2,102)
  (42)
Operating expenses:
    
    
    
    
Advertising and promotion
  751 
  814 
  (63)
  (8)
Salaries and benefits
  1,880 
  2,154 
  (274)
  (13)
Selling, general and administrative
  2,642 
  2,487 
  155 
  6 
Research and development
  247 
  212 
  35 
  17 
Professional fees
  726 
  720 
  6 
  1 
Total operating expenses
  6,246 
  6,387 
  (141)
  (2)
Loss from operations
  (3,326)
  (1,365)
  1,961 
  144 
Other (expense) income:
    
    
    
    
Loss on settlement of obligations
  (4)
  — 
  (4)
  (100)
    Interest and other expense, net
  (1,165)
  (1,077)
  88 
  8 
Loss before provision for income taxes
  (4,495)
  (2,442)
  2,053 
  84 
Provision for income taxes
  10 
  69 
  (59)
  (86)
Net loss
 $(4,505)
 $(2,511)
 $1,994 
  79%
 
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,
 
 
For the Three Months
Ended March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 (as restated)
 
Revenue, net
  100%
  100%
Cost of revenue
  67 
  71 
  66 
  84 
  79 
Gross profit
  33 
  29 
  34 
  16 
  21 
Operating expenses:
    
    
Advertising and promotion
  8 
  6 
  8 
  12 
  4 
  3 
Salaries and benefits
  11 
  7 
  11 
  20 
  10 
  9 
Selling, general and administrative
  14 
  13 
  12 
  17 
  14 
  10 
Research and development
  1 
  2 
  1 
Professional fees
  4 
  3 
  6 
  4 
  3 
Restructuring and other charges
  — 
  5 
  — 
  (3)
Settlement
  — 
  2 
  — 
Impairment of assets
  — 
  6 
Total operating expenses
  38 
  37 
  58 
  33 
  26 
Loss from operations
  (5)
  (3)
  (8)
  (10)
  (17)
  (5)
Gain on settlement of accounts payable
  — 
  1 
  — 
Loss on sale of subsidiary
  — 
  (3)
Other expense, net
  (4)
  — 
  (3)
  (2)
Other income (expense):
    
Loss on Settlement obligation
  — 
Interest and other expense, net
  (6)
  (4)
Loss before provision for income taxes
  (9)
  (5)
  (11)
  (16)
  (23)
  (9)
Provision for income taxes
  — 
  — 
Net loss
  (9)%
  (5)%
  (11) %
  (16)%
  (23)%
  (9)%
    

 
Revenue, net
 
We derive our revenue through the sales of our various branded nutritional supplements. Revenue is recognized when persuasive evidencecontrol of a promised good is transferred to a customer in an arrangement exists, delivery has occurred,amount that reflects the priceconsideration that the Company expects to be entitled to in exchange for that good.  This usually occurs when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier. The MusclePharm brands are marketed across major global retail distribution channels – Specialty, International, and Food, Drug, and Mass (“FDM”). Below is fixed or determinable, and collection is reasonably assureda table of net revenue by our major distribution channel:
 
 
For the Three Months Ended March 31,
 
 
 
2019
 
 
% of Total
 
 
2018
(as restated)
 
 
% of Total
 
Distribution Channel
 
 
 
 
 
 
 
 
 
 
 
 
Specialty
 $9,044 
  48%
 $6,528 
  27%
International
  5,788 
  31%
  10,487 
  43%
FDM
  3,943 
  21%
  7,172 
  30%
Total
 $18,775 
  100%
 $24,187 
  100%
Net revenue 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.
 
ForNet revenue decreased $5.4 million, or 22%, to $18.8 million for the three and nine months ended September 30, 2017, net revenue decreased 20.5% to $24.4 million and 28.1% to $76.6 million, respectively,March 31, 2019, compared to $24.2 million for the three and nine months ended September 30, 2016 when net revenues were $30.7 million and $106.5 million, respectively.March 31, 2018. Net revenue for the three and nine months ended September 30, 2017March 31, 2019 decreased primarily due to the terminationdecline in our international sales of the Arnold Schwarzenegger product-line licensing agreement, the sale$4.7 million, and a decrease in domestic sales of our BioZone subsidiary,$0.7 million. Discounts and certain other products being discontinued. Forsales allowances increased to 29% of gross revenue, or $7.6 million, for the three months ended September 30, 2016, revenueMarch 31, 2019 from our BioZone subsidiary was $2.4 million. For the nine months ended September 30, 2016, revenue from our BioZone subsidiary, from the Arnold Schwarzenegger product line and from discontinued products were $3.8 million, $3.8 million and $2.2 million, respectively. Lower sales also were reported for the three and nine months ended September 30, 2017 for several of our traditional brick and mortar retail partners. For the three and nine months ended September 30, 2017 discounts and sales allowances decreased to 8%25% of gross revenue, or $2.1$7.9 million and 15.8% of gross revenue, or $13.8 million, respectively, compared tofor the three and nine months ended September 30, 2016 when discounts and allowances were 26.8%, or $10.1 million, and 20.8%, or $27.9 million, respectively.same period in 2018. The changesincrease in discounts and allowances were primarily relatedas a percentage of sales increased due to discountsa decline in gross sales. The Company significantly increased expenditures on partnerships advertising, online impressions and allowances on existing productsclick advertising with keyits online customs, while reducing end-aisle and front of the store promotions with its retail customers. The decreases are the result of changes in the wayDespite these measures, gross revenues declined as the Company promotesdid not realize a significant increase in its products and a general change in the way we are structuring sales arrangements with our existing customers.online revenues.
 
During both the three and nine months ended September 30, 2017,March 31, 2019 and 2018, our largest customer, Costco Wholesale Corporation (both domestic and foreign), or Costco, accounted for approximately 26% and 38% of our net revenue. Duringrevenue, respectively. The decrease in Costco revenue was due to a reduction in promotional sales during the three and nine months ended September 30, 2017, Amazon accounted for approximately 16% and 11% of our net revenues, respectively.

During bothMarch 31, 2019, compared to the three and nine months ended September 30, 2016,March 31, 2018, resulting in a decrease in our largest customer, Costco accounted for more approximately 20% of our netFDM revenue.
 
Cost of Revenue and Gross Margin
 
Cost of revenue for MusclePharm products is directly related to the production, manufacturing, and freight-in of the related products purchased from third party contract manufacturers. We mainly ship customer orders from our distribution center in Spring Hill, Tennessee. This facility is operated with our equipment and employees, and we own the related inventory. We also use U.S. contract manufacturers to drop ship products directly to our customers. In addition, we began 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 due to several factors, including sales incentives, new product introductions and upgrades to existing product lines, changes in customer and product mixes, the mix of product demand, shipment volumes, our product costs, pricing, and inventory write-downs. Our cost of revenue for the three and nine months ended September 30, 2017 increased due to higher costs related to our protein products which we were unable to pass on to our customers. Cost of revenue is expected to return to a historical base over timeMarch 31, 2019 decreased from the same period in 2018 primarily as a percentageresult of revenue due primarily to anticipated inflationary cost increases being partially offset by our focus on supply chain efficiency and negotiating better pricing with our manufacturers and launch of our higher margin organic product line.lower revenues.
 
For the three and nine months ended September 30, 2017, costsCosts of revenue decreased 20.2%17% to $16.4$15.9 million and 22.6% to $54.5 million, respectively,for the three months ended March 31, 2019, compared to $19.2 million for the same period in 2018. Gross profit for the three and nine months ended September 30, 2016, when costs of revenues were $20.5March 31, 2019 decreased 42% to $2.9 million, and $70.3 million, respectively. Accordingly, gross profit for three and six months decreased 21.2% to $8.0 million and 38.8% to $22.1 million, respectively, compared to $5.0 million for the same period in 2018. Gross profit margin was 16% for the three and nine months ended September 30, 2016, when gross profit was $10.2 million and $36.1 million, respectively. Gross profit percentage has been positively impacted by a decreaseMarch 31, 2019 compared to discounts and allowances.21% for the same period in 2018. Negatively impacting thethis gross profit percentage is the inflationary costwas an increase in our protein products and, tothe aforementioned promotional discounts without a lesser extent, the loss on selling some discontinued products.commensurate increase in gross revenues.

 
Operating Expenses
 
Operating expenses for the each of the three and nine months ended September 30, 2017March 31, 2019 and 2018 were $9.3$6.2 million and $28.4$6.4 million, respectively, comparedrespectively. Our operating expenses increased from 26% of net revenue to $11.5 million and $44.7 million, for the three and nine months ended September 30, 2016.33%, due to a decline in revenues. We have been focused on instituting new strategies focusing on new advertising and promotions, while at the same time reducing other operating expenses. For the three months ended September 30, 2017 our operating expenses were 38% of revenue compared to 37% for the same period in 2016. For the nine months ended September 30, 2017, our operating expenses were 37% of revenue compared to 41% of revenue for the same period in 2016. The decrease in operating expenses during this period was primarily due to significant reductions in advertising and promotion expense and salaries and benefits expense, as discussed below.
 
Advertising and Promotion
 
Our advertising and promotion expense consists primarily of digital, print and media advertising, athletic endorsements and sponsorships, promotional giveaways, trade show events and various partnering activities with our trading partners. Prior to our restructuring during the third quarter of 2015,Historically, advertising and promotions were a large part of both our growth strategy and brand awareness. We builtawareness, in particular strategic partnerships with sports athletes and fitness enthusiasts through endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and sports teams. In connection with our restructuring plan, we have terminated the majority of these contracts in a strategic shift away from such costly arrangements, and moved toward more cost-effective brand partnerships as well as grass-roots marketing and advertising efforts. We are evaluatingexpect our advertising and promotion expenses to remain relatively constant in future periods as we continue to leverage existing brand recognition and move towards lower cost advertising outlets including social media and trade advertising.
 
For the three and nine months ended September 30, 2017, advertisingAdvertising and promotion expense increased 2.5%decreased 8% to $2.0$0.8 million and decreased 31.5% to $6.1 million, respectively,for the three months ended March 31, 2019, or 4% of net revenue, compared to three and nine months ended September 30, 2016, when advertising and promotion expense were $1.9$0.8 million, and $8.9 million, respectively.or 3% of net revenue, for the same period in 2018. Advertising and promotion expense for the three and nine months ended September 30, 2017March 31, 2019 included expenses primarily related to giveaways, tradeshows, athlete endorsements and 2016international marketing support. Advertising and promotion expense for the three months ended March 31, 2018 primarily included expenses related to trade shows and 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.

 
Salaries and Benefits
 
Salaries and benefits consist primarily of salaries, bonuses, benefits, and stock-based compensation. Personnel costs are a significant component of our operating expenses.
Salaries and benefits have decreased through the quarter ended September 30, 2017 due13% to headcount reductions, limited headcount additions, a reduction in restricted stock awards, and a reduction in amortization$1.9 million, or 10% of existing stock-based grants. We do not expect further reductions during the remainder of the calendar year. We are in the process of moving our headquarters from Colorado to California. Because of the transition, management is evaluating staffingnet revenue, for the new office. In the interim, management anticipates a transition period and we may incur higher costs as staff is transitioned to the new headquarters.
For the three and nine months ended September 30, 2017, salaries and benefits expense increased 15.2% to $2.6 million and decreased 43.9% to $8.5 million, respectively, compared to the three and nine months ended September 30, 2016, when salaries and benefits expenses were $2.3 million and $15.2 million, respectively. For the three and nine months ended September 30, 2017, stock-based compensation expense increased $0.7 million and decreased $3.3 million, respectively. For the three and nine months ended September 30, 2017, other compensation expense decreased by $0.3 million and $3.4 million compared to the three and nine months ended September 30, 2016, respectively, which was related to the reduction in headcount. The decrease in the nine months ended September 30, 2017 to September 30, 2016 is in part due to severance costs associated with the separation of our former CEO recorded during the three months ended March 31, 2016.2019 compared to $2.2 million, or 9% of net revenue, for the same period in 2018 primarily due to reductions in stock based compensations, headcount and headcount related costs.
 
Selling, General and Administrative
 
Our selling, general and administrative expenses consist primarily of depreciation and amortization, 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.
 
For the three and nine months ended September 30, 2017, selling,Selling, general and administrative expenses decreased 11.9%increased slightly to $3.5$2.6 million, and 27.1% to $9.2 million, respectively,or 14% of net revenue for three months ended March 31, 2019, compared to the three and nine months ended September 30, 2016, when selling, general and administrative expenses were $3.9$2.5 million, and $12.6 million, respectively. The decreases duringor 10% of net revenue, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 wereMarch 31, 2018 primarily due to lower office expenses and other miscellaneous cost savingshigher freight costs of $0.4 million, lower freight expense of $0.4 million, a decrease in rent expense of $0.1 million, lower depreciation and amortization of $0.1 million, and a decrease of $0.2 million related to information technology. The decreases were partially offset by an increase in the provision for bad debts of $0.8 million. The decreases during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 were primarily due to lower office expenses and other miscellaneous cost savings of $1.7 million, lower freight expense of $1.2 million, a decrease in rent expense of $0.5 million, lower depreciation and amortization of $0.5 million, and a decrease of $0.6 million related to information technology. The decreases were partially offset by an increase in the provision for bad debts of $1.1 million.
 
Research and Development
 
Research and development expenses consist primarily of R&D personnel salaries, bonuses, benefits, and stock-based compensation, product quality control, which includes third-party testing, and research fees related to the development of new products. We expense research and development costs as incurred.
 
For the three and nine months ended September 30, 2017, researchResearch and development expenses decreased 26.3%increased 17% to $0.2$0.25 million, and 70.7% to $0.5 million, respectively,or 1% of net revenue, for three months ended March 31, 2019 compared to three and nine months ended September 30, 2016, when research and development expenses were $0.3$0.21 million, and $1.7 million, respectively. The decreases wereor also 1% of net revenue, for the same period in 2018 primarily due to the sale of BioZone and a reduction in salaries and benefits and researchincreased quality control testing fees.
 

 
Professional Fees
 
Professional fees consist primarily of legal fees, accounting and audit fees, consulting fees, which includes both cash and stock-based compensation, and investor relations costs. We expect our professional fees to decrease slightly as we continue to rationalize our professional service providers and focus on key initiatives. Also, as our ongoing legal matters are reduced, we expect to see a further decline in legal costs for specific settlement activities. We intend to continue to invest in strengthening our governance, internal controls, and process improvements which may require some support from third-party service providers.
 
For the three and nine months ended September 30, 2017, professionalProfessional fees expenses decreased 21.4%increased 1% to $1.0$0.73 million, and 40.5% to $2.6 million, respectively, compared to three and nine months ended September 30, 2016, when professional fees expenses were $1.3 million and $4.4 million, respectively. The decrease duringor 4% of net revenue, for the three months ended September 30, 2017March 31, 2019, compared to $0.72 million, or 3% of net revenue, for the three months ended September 30, 2016 wassame period in 2018 primarily due to lowerhigher legal fees as a result 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-houseincreased litigation and legal fees of $1.2 million due to reduced litigation.
Restructuring and Other Charges
For the three and nine months ended September 30, 2016, we recorded a net charge in “Restructuring and other charges” of $1.7 million and a net credit in “Restructuring and other charges” of $2.6 million, respectively, which primarilycosts related to the favorable settlementCompany’s restatement of a certain endorsement agreement.financial results.
 
Settlement of Obligation
For the nine months ended September 30, 2017, we recorded an additional $1.5 millionInterest and other expense, in settlement with CFG. The amount recorded represents the discounted value of the unrecorded settlement liability with the CFG.
Impairment of Assets
During the nine months ended September 30, 2016, we determined that certain prepaid manufacturing costs and our investment in a warrant to purchase Capstone’s parent company, which totaled $2.4 million, were impaired due to Capstone’s sale of their primary powder manufacturing facility in June 2016, the termination of our manufacturing relationship with them and the ongoing litigation. See additional information in Note 5 to the Condensed Consolidated Financial Statements. Additionally, during the nine months ended September 30, 2016, $2.1 million of intangible assets, prepaid assets and inventory related to the Arnold Schwarzenegger product line was written off. Per the agreement to terminate the product line, no further use of his likeness or sales of the inventory were allowed and therefore, we disposed of all the remaining product in inventory.

Other Expense, net
 
For the three and nine months ended September 30, 2017March 31, 2019 and 2016, “Other2018, “Interest and other expense, net” consisted of the following (in thousands):
 
 
For the
Three Months
Ended September 30,
 
 
For the
Nine Months
Ended September 30,
 
 
For the Three Months
Ended March 31,
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
2019
 
 
2018
 (as restated)
 
Other expense, net:
 
 
 
 
 
 
Interest expense, related party
 $(676)
 $(134)
 $(1,839)
 $(376)
 $(532)
 $(541)
Interest expense, related party debt discount
  (15)
Interest expense, other
  (6)
  (32)
  (14)
  (160)
  (293)
  (67)
Interest expense, secured borrowing arrangement
  (172)
  (9)
  (397)
  (636)
  (225)
  (346)
Foreign currency transaction gain
  16 
  19 
  49 
  213 
Foreign currency transaction loss
  (200)
  (113)
Other
  (20)
  34 
  (325)
  (467)
  100 
  5 
Total other expense, net
 $(858)
 $(122)
 $(2,526)
 $(1,426)
Total interest and other expense, net
 $(1,165)
 $(1,077)
 
Net interest and other expense for the three and nine months ended September 30, 2017March 31, 2019 increased 603.3%8%, or $0.7 million and 77.1%, or $1.1$0.1 million, compared to the three months and nine months ended September 30, 2016, respectively.same period in 2018. The increases in other expense, net wasincrease is primarily related to increased other interest expense with a related party due to interest accruals on unpaid vendor invoices, partially offset by reduced factoring fees on the increase insecured borrowing from the related party.arrangement.
 
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
 
SinceThe Company has incurred significant losses and experienced negative cash flows since inception. As of March 31, 2019, the inceptionCompany had cash of MusclePharm, other than cash from product sales, our primary source$0.6 million, a decline of cash has been$1.7 million from the saleDecember 31, 2018 balance of equity, issuance$2.3 million. As of convertible secured promissory notesMarch 31, 2019, we had a working capital deficit of $34.4 million, a stockholders’ deficit of $32.4 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 $181.4 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 Securities and Exchange Commission.

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.
In response to the Company’s continued losses, management implemented plans to improve the Company’s operating costs, beginning in 2018. Specifically, management:
1)
reduced our workforce;
2)
renegotiated or terminated a number of contracts with endorsers in a strategic shift away from such arrangements and toward more cost-effective marketing and advertising efforts; and
3)
discontinued a number of stock keeping units (“SKUs”) and wrote down inventory to net realizable value, or to zero in cases where the product was discontinued.
Despite these measures, during 2019, the Company continued to incur substantial losses.
In order to improve the Company’s operating results, management continued to focus on its 2018 initiatives. In addition, during the fourth quarter of 2019, management implemented the following measures to improve gross margin:
1)
reduced or eliminated sales to low or negative margin customers;
2)
reduced product discounts and promotional activity;
3)
implemented a more aggressive SKU reduction; and
4)
formed a pricing committee to review all orders to better align gross margin expectations with product availability.
As a result of these measures, as well as a reduction in protein prices, the Company realized increased gross margins in the fourth quarter of 2019, a trend which continues into mid-2020. Management believes reductions in operating costs, and continued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the Company’s customers, will allow us to ultimately achieve profitability, however, the Company can give no assurances that this will occur.
As of September 30, 2017, we had a stockholders’ deficit of $11.5 million and recurring losses from operations. To manage cash flow, in January 2016, we have entered into a secured borrowing arrangement, pursuant to which we have the ability to borrow up to $10.0 million subject to sufficient amounts of accounts receivable to secure the loan. This arrangement was extended on September 2017 for an additional six months with similar terms. Under this arrangement, during the nine months ended September 30, 2017, we received $22.4 million in cash and subsequently repaid $22.5 million, including fees and interest, on or prior to September 30, 2017.
As of September 30, 2017, we had approximately $4.9 million in cash and $3.8 million in working capital.
Our ability to meet our total liabilities of $41.6 million as of September 30, 2017, and to continue as a going concern, is partially dependent on meeting our operating plans, and partially dependent on our Chairman of the Board, Chief Executive Officer and President, Ryan Drexler, either converting or extending the maturity of his Note prior to or upon their maturity. Subsequent to the end of the quarter, we entered into a refinancing transaction with Mr. Drexler. Both the principal and capitalized and unpaid interest under the Refinanced Convertible Note are due on December 31, 2019, unless converted earlier.

Our ability to continue as a going concern in the future and raise capital for specific strategic initiatives will also be dependent on obtaining adequate capital to fund operating losses until we become profitable. We can give no assurances that any additional capital that we are able to obtain, if any, will be sufficient to meet our future needs, or that any suchnumerous financing will be obtainable on acceptable terms or at all.
The accompanying Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2017 were prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate our assets. The accompanying Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.arrangements outlined below.
 
Our net consolidated cash flows are as follows (in thousands):
 
 
For the Nine Months
Ended September 30,
 
 
For the Three Months
Ended March 31,
 
 
2017
 
 
2016
 
 
2019
 
 
2018
(as restated)
 
Consolidated Statements of Cash Flows Data:
 
 
 
 
 
 
Net cash used in operating activities
 $(2,337)
 $(486)
 $(4,827)
 $(232)
Net cash provided by (used in) investing activities
  (27)
  5,369 
Net cash provided by (used in) financing activities
  2,140 
  (6,049)
Net cash used in investing activities
  (13)
  (14)
Net cash used in financing activities
  3,131 
  (872)
Effect of exchange rate changes on cash
  159 
  (21)
  5 
  4 
Net change in cash
 $(65)
 $(1,187)
 $(1,704)
 $(1,114)

 
Operating Activities
 
Our cash used in 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 from 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.
 
Our operating cash flowsoutflows were $4.6 million higher for the ninethree months ended September 30, 2017 was $1.8 million lowerMarch 31, 2019 compared to the same period in 2016.2018. The variance primarily relates to an increased net loss of $4.5 million adjusted for non-cash charges, which resulted in a use of cash of $4.1$3.6 million for the ninethree months ended September 30, 2017,March 31, 2019, compared to a sourceuse of cash of $0.4$1.9 million for the same period in 2016.2018. This decrease was partially offset by thevariance also included a net change in net operating assets and liabilities, which resulted in a use of cash of $1.2 million for the three months ended March 31, 2019 compared to 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. During2018. The decrease in net operating assets and liabilities is primarily the nine months ended September 30, 2017,result of a decrease in account receivable of $0.6 million due to lower revenue, paydown of our accounts payable and accrued labilities of $5.2 million relating to payments in connection with legal settlements and past due vendor balances, partially offset by a decrease in our inventory resulted inbalance of $3.7 million, which provided a $2.4 millionsource of cash flow. During the three months ended March 31, 2018, cash flow from working capital. Thisnet operating assets and liabilities included an increase in inventory and accounts receivable balances, resulting in a combined $1.5 million cash flowoutflow from working capital, was offset in part 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. During the nine months ended September 30, 2016, the decrease in liabilities related to the restructuring accrual and accounts payable and accrued liabilities resulted in a $4.9 million and a $2.2 million decrease in working capital, respectively. These decreases were offset by a reduction in our accounts receivable balance, which provided a source of working capital.capital of $3.4 million.
 
Investing Activities
 
During the ninethree months ended September 30, 2017,March 31, 2019, we used $27,000$13,000 for the purchase of property and equipment. Cash provided by investing activities was $5.4 million During the three months ended March 31, 2018, we used $14,000 for the nine months ended September 30, 2016, primarily due to the cash proceeds from salepurchase of BioZone of $5.9 million, offset by cash purchases of property and equipment of $0.4 million.

equipment.
 
Financing Activities
 
Cashprovided byfinancing activities for the three months ended March 31, 2019 was $2.1$3.1 million as compared to cash used in financing activities of $0.9 million for the ninethree months ended September 30, 2017, compared to $6.0 million used during the nine months ended September 30, 2016. Cash provided during the nine months ended September 30, 2017 included $1.0 million promissory Note due upon demand from Mr. Drexler and $1.3 million, net from the secured borrowing arrangement.March 31, 2018. Cash provided from the secured borrowing arrangement for the nine months ended September 30, 2016in both periods was offset by repayments of outstanding debt. Cashused in financing activities was $6.0 million for the nine months ended September 30, 2016, primarily due to the repayment on our line of credit of $3.0 million and repayment of a term loan of $2.9 million.
 
Indebtedness Agreements
 
Related-Party Notes PayableRefinanced Convertible Note
 
On July 24,November 3, 2017, wethe Company entered into a secured demand promissory note (the “2017 Note”), pursuant to whichthe refinancing with Mr. Ryan Drexler, ourthe Company’s Chairman of the Board of Directors, Chief Executive Officer and President loaned the Company $1.0 million, which was payable upon demand. Proceeds from the 2017 Note were used to partially fund a settlement agreement. The 2017 Note carried interest at a rate of 15% per annum. Any interest not paid when due would be capitalized and added to the principal amount of the 2017 Note and bears interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. We could prepay the 2017 Note without penalty any time prior to a demand request from Mr. Drexler.
In November 2016, we entered into a convertible secured promissory note agreement (the “2016 Convertible Note”) with Mr. Drexler pursuant to which Mr. Drexler loaned us $11.0 million. Proceeds from the 2016 Convertible Note were used to fund a settlement of litigation. The 2016 Convertible Note was secured by all assets and properties of us and our subsidiaries, whether tangible or intangible. The 2016 Convertible Note carried interest at a rate of 10% per annum, or 12% if there is an event of default. Both the principal and the interest under the 2016 Convertible Note were due on November 8, 2017, unless converted earlier. Mr. Drexler could convert the outstanding principal and accrued interest into 6,010,929 shares of our common stock for $1.83 per share at any time. We could prepay the 2016 Convertible Note at the aggregate principal amount therein, plus accrued interest, by giving Mr. Drexler between 15 and 60 day-notice depending upon the specific circumstances, provided that Mr. Drexler could convert the 2016 Convertible Note during the applicable notice period. We recorded the 2016 Convertible Note as a liability in the balance sheet and also recorded a beneficial conversion feature of $601,000 as a debt discount upon issuance of 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. As of September 30, 2017 and December 31, 2016, the 2016 Convertible Note had an outstanding principal balance of $11.0 million and a carrying value of $10.9 million and $10.5 million, respectively.
In December 2015, we entered into a convertible secured promissory note agreement (the “2015 Convertible Note”) with Mr. Drexler, pursuant to which he loaned the Company $6.0 million. Proceeds from the 2015 Convertible Note were used to fund working capital requirements. The 2015 Convertible Note was secured by all assets 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. Both the principal and the interest under the 2015 Convertible 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. We 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 December 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.

On November 3, 2017, subsequent to the end of the quarter, we entered into a refinancing transaction (the “Refinancing”) with Mr. Drexler.. As part of the Refinancing, wethe Company issued to Mr. Drexler an amended and restated convertible secured promissory note (the “Refinanced Convertible Note”) in the original principal amount of $18,000,000, which amendsamended and restatesrestated (i) a convertible secured promissory note dated as of December 7, 2015, amended as of January 14, 2017, in the original principal amount of $6,000,000 with an interest rate of 8% prior to the amendment and 10% following the amendment (the “2015 Convertible Note,Note”), (ii) a convertible secured promissory note dated as of November 8, 2016, in the 2016original principal amount of $11,000,000 with an interest rate of 10% (the “2016 Convertible Note,Note”) , and (iii) a secured demand promissory note dated as of July 27, 2017, in the 2017 Note,original principal amount of $1,000,000 with an interest rate of 15% (the “2017 Note”, and together with the 2015 Convertible Note and the 2016 Convertible Note, collectively, the “Prior Notes”). The due date of the 2015 Convertible Note and the 2016 Convertible Note was November 8, 2017. The 2017 Note was due on demand.
 
The $18.0 million Refinanced Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each quarter. At ourthe Company’s option (as determined by its independent directors), wethe Company may repay up to one sixthone-sixth of any interest payment by either adding such amount to the principal amount of the note or by converting such interest amount into an equivalent amount of ourthe Company’s common stock. Any interest not paid when due shall be capitalized and added to the principal amount of the Refinanced Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.
Both the principal and any capitalized and unpaidthe interest under the Refinanced Convertible Note are due on December 31, 2019, unless converted earlier. Mr. Drexler may convert the outstanding principal and accrued interest into shares of ourthe Company’s common stock at a conversion price of $1.11 per share which was the 5 day average price of the our common stock prior to the refinance closing date, at any time.
We The Company may prepay the Refinanced Convertible Note by giving Mr. Drexler between 15 and 60 days’ notice depending upon the specific circumstances, subject to Mr. Drexler’s conversion right.
The Refinanced Convertible Note contains customary events of default, including, among others, the failure by usthe Company to make a payment of principal or interest when due. Following an event of default, 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 Refinanced Convertible Note also contains customary restrictions on the ability of usthe Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the Refinanced Convertible Note. The Refinanced Convertible Note is subordinated to certain other indebtedness of us.the Company.

 
As part of the Refinancing, the Company and Mr. Drexler entered into a restructuring agreement (the “Restructuring Agreement”) pursuant to which the parties agreed to enter into the Refinanced Convertible Note and to amend and restate the security agreement pursuant toresulting in a Third Amended and Restated Security Agreement (the “Amended Security Agreement”) in which the Prior Notes were secured by all of the assets and properties of usthe Company and ourits subsidiaries whether tangible or intangible, by entering into the Third Amended and Restated Security Agreement (the “Amended Security Agreement”).intangible. Pursuant to the Restructuring Agreement, wethe 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.
 
In connection with our entry intoOn September 16, 2019, Mr. Ryan Drexler, the Chief Executive Officer, President and Chairman of the Board of Directors of MusclePharm Corporation, a LoanNevada corporation (the “Company”), delivered a notice to the Company and Security Agreement with Crossroads Financial Group, LLC (“Crossroads”)its independent directors of his election to convert, effective as of September 16, 2019 (the “Crossroads Loan Agreement”“Notice Date”), $18,000,000 of the amount outstanding under that certain Amended and Restated Convertible Secured Promissory Note, dated as of November 8, 2017 (the “Note”), issued by the Company to Mr. Drexler, agreed to enter into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a subordination agreement with Crossroads (the “Subordination Agreement”),conversion price of $1.11 per share, pursuant to which the paymentterms and conditions of our obligationsthe Note (the “Partial Conversion”). As of the Notice Date, the total amount outstanding under the Prior Notes were subordinatedNote (including principal and accrued and unpaid interest) was equal to our obligations$19,262,910. Pursuant to Crossroads. As partthe terms of the Refinancing, Crossroads waived certain provisionsNote, the Company instructed the transfer agent for its shares to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its Common Stock in respect of the Crossroads Loan Agreement that would have been triggered by our entry into ofPartial Conversion.
The outstanding principal and the Refinanced Convertible Note. In addition, Mr. Drexler and Crossroads entered into an amendment to the Subordination Agreement that replaced the obligationsinterest, due on December 31, 2019, were refinanced under the Prior Notes with the obligations under the Refinanced Convertible Note.a new agreement on July 1, 2020. See additional information in “Note 16. Subsequent Events.”
 
For the three monthsyear ended September 30, 2017December 31, 2019 and 2016,2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $0.7$1.7 million and $0.1 million, respectively. For the nine months ended September 30, 2017 and 2016, interest expense related to the related party convertible secured promissory notes was $1.8 million and $0.4$2.2 million, respectively. During the nine monthsyear ended September 30, 2017December 31, 2019 and 2016, $1.82018, $0.8 million and $0.4$1.9 million, respectively, in interest was paid in cash to Mr. Drexler.
 
For the three months ended March 31, 2019 and 2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $0.5 million and $0.6 million, respectively. During the three months ended March 31, 2019 and 2018, $0.4 million and $0.3 million, respectively, in interest was paid in cash to Mr. Drexler.
Related-Party Revolving Note
On October 4, 2019, we entered into a secured revolving promissory note (the “Revolving Note”) with Mr. Drexler. Under the terms of the Revolving Note, we can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12% annually. The use of funds will be solely for the purchase of whey protein to be used in the manufacturing of MusclePharm products. The Company may prepay the Revolving Note by giving Mr. Drexler one days’ written notice.
The Revolving Note contains customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, Mr. Drexler is entitled to accelerate the entire indebtedness under the Revolving Note. The Revolving Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts. The Revolving Note is subordinated to certain other indebtedness of the Company held by Crossroads.
In connection with the Revolving Note, the Company and Mr. Drexler entered into a security agreement datedOctober 4, 2019 pursuant to which the Revolving Note is secured by all of the assets and properties of the Company and its subsidiaries whether tangible or intangible. As of December 31, 2019, the outstanding balance on the revolving note was $1.2 million. Both the outstanding principal and all accrued interest, which became due on March 31, 2020, were refinanced under a new agreement on July 1, 2020. . The revolving note is included in “Line of credit” in the consolidated balance sheets. See additional information in “Note 16. Subsequent Events.”

Related-Party Note Payable
The Company entered into a collateral receipt and security agreement with Mr. Drexler, dated December 27, 2019 pursuant to which Mr. Drexler agreed to post bond relating to the judgment ruled on the ThermoLife case, pending the appeal. The amount paid by Mr. Drexler on behalf of the Company, including fees, was $0.25 million. The amount, which was outstanding as of December 31, 2019, was refinanced under a new agreement on July 1, 2020. The note payable is included in “Convertible note with a related party, net of discount” in the consolidated balance sheets. See additional information in “Note 16. Subsequent Events.”
Line of Credit - Inventory Financing
On October 6, 2017, the Company entered into a Security Agreement with Crossroads. Pursuant to the Security Agreement, the Company may borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly Liquidation Value (each as defined in 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. Subsequent to the end of 2017, the maximum amount was increased to $4.0 million. The term is extended automatically in one-year increments, unless earlier terminated pursuant to the terms of the Security Agreement. The Security Agreement contains customary events of default, including, among others, 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 the Company to, among other things, grant liens, incur debt and transfer assets.
Under the Security Agreement, the Company agreed to grant Crossroads a security interest in all our 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. As of March 31, 2019, and December 31, 2018, we owed Crossroads $2.5 million and $1.5 million, respectively.
On April 1, 2019, the Company and Crossroads amended the terms of the agreement. The agreement was extended until March 31, 2020, the rate was modified to 1.33% per month, and increased the amount the Company can borrow from $3.0 million to $4.0 million.
On February 26, 2020, the Company and Crossroads amended the terms of the agreement. The agreement was extended until April 1, 2021 and the amount the Company can borrow was decreased from $4.0 million to $3.0 million.
 
Secured Borrowing Arrangement
 
In January 2016, the Companywe entered into athe Purchase and Sale Agreement (the “Agreement”) with Prestige Capital Corporation (“Prestige”) pursuant to which the Companywe agreed to sell and assign, and Prestige agreed to buy and accept, certain accounts receivable owed to the Companyus (“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Companyus 80% of the net face amount of the assigned Accounts, up to a maximum total borrowingborrowings of $10.0$12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Companyus 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 Companyus 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 Companywe granted Prestige a continuing security interest in and 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. The Purchase and Sale Agreement’s term has been extended to April 1, 2020, which renews automatically for successive one-year periods unless either party receives written notice of cancellation from the other, at minimum, thirty-days prior to the expiration date. As of March 29, 2018. Prestige may cancel the Agreement with 30-day notice.31, 2019 and December 31, 2018, we had approximately $3.4 million and $1.3 million of outstanding borrowings.
 
During the ninethree months ended September 30, 2017,March 31, 2019 and 2018, the Company soldassigned to Prestige, accounts with an aggregate face amount of approximately $27.9$10.6 million and $16.9 million, respectively, for which Prestige paid to the Companyus approximately $22.3$8.5 million and $13.5 million, respectively, in cash. During the ninethree months ended September 30, 2017, $21.4March 31, 2019 and 2018, $6.5 million and $13.3 million was subsequently repaid to Prestige, respectively, including fees and interest.
 
Contractual ObligationsOn April 10, 2019, the Company and Prestige amended the terms of the agreement. The agreement was extended until April 1, 2020. Thereafter the agreement shall renew itself automatically 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. The new agreement also modified certain rates and allows for increased borrowing on foreign borrowings.
 
Our principal commitments consist of obligations under operating leases for office and warehouse facilities, capital leases for manufacturing and warehouse equipment, debt, restructuring liability and non-cancelable endorsement and sponsorship agreements. The following table summarizes our commitments to settle contractual obligations in cash as of September 30, 2017:
 
 
 
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 
HSBF Note
 
(1)
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. No payments are due on the Note until November 16, 2020 (the “Deferment Period”). However, interest will continue to accrue during the Deferment Period. The amountsNote will mature on May 16, 2022. The Note includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act. The Company has not determined the amount of forgiveness in connection with the loan, partly due to the ongoing routine changes in the table above excluded operating lease expenses which were abandoned in conjunction with our restructuring plans and is included withinmethod of calculating the caption Restructuring liability in the accompanying Condensed Consolidated Balance Sheets.
(2)
See “Indebtedness Agreements” above. Amount includes interest and debt discounts.
(3)
Other contractual obligations consist of non-cancelable endorsement and sponsorship agreements and the minimum purchase requirement with BioZone. See Note 9 to the accompanying Condensed Consolidated Financial Statements for further information.
amount.
 
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of September 30, 2017.

March 31, 2019.
 
Critical Accounting Policies and Estimates
 
The preparation of the accompanying Condensed Consolidated Financial Statementsconsolidated financial statements and related disclosures in conformity with 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 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.
 
Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the10-Q; Notes to Consolidated Financial Statements in Part II, Item 8 of the 20162019 Form 10-K,10-K; and “Critical Accounting Policies and Estimates” in Part I, Item 7 of the 20162019 Form 10-K describe the significant accounting policies and methods used in the preparation of our Condensed Consolidated Financial Statements.
There have been no material changes to our critical accounting policies and estimates since the 20162019 Form 10-K.
 
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in accordance with U.S. Generally Accepted Accounting Principles, (“GAAP”), this Form 10-Q discloses Adjusted EBITDA, which is net loss adjusted for income taxes, depreciation and amortization of property and equipment, amortization of intangible assets, provision for doubtful accounts, amortization of prepaid stock compensation, amortization of prepaid sponsorship fees, stock-based compensation, issuance of common stock warrants, other expense, net, loss on sale of subsidiary, gain on settlements, restructuring, and asset impairment charges. Management believes that this non-GAAP measures provides investors with important additional perspectives into our ongoing business performance.
The GAAP measure most directly comparable to Adjusted EBITDA is net loss. The non–GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net loss. Adjusted EBITDA is not a presentation made in accordance with 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 GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net loss and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Set forth below are reconciliations of our reported GAAP net loss to Adjusted EBITDA (in thousands):
 
 
 
 
 
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 

ItemItem 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.
 
ItemItem 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Proceduresi)    Background.
 
OurPrior to filing this Form 10-Q, we have neither issued audited financial statements, nor filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q, since our Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. As disclosed in our Current Report on Form 8-K filed on March 14, 2019, our Quarterly Report on Form 10-Q as of and for the three and nine months ended September 30, 2018 should no longer be relied upon.
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 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 participationimproprieties identified during the investigation resulting in the restatement of our Chief Executive Officer (“CEO”) who is ourpreviously reported financial statements, the Company identified control deficiencies in its internal control over financial reporting that constitute material weaknesses.
The investigatory adjustments are further described in Note 16, “Changes and Correction of Errors in Previously Reported Consolidated Financial Statements” located in Item 8 of the 2019 Form 10-K.
Other Adjustments Resulting from Reconsidering Previously Issued Financial Statements
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; and
●
Incorrect treatment of debt discounts related to the related-party convertible note.
●
Other period-end expenses cutoff.
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 controls and procedures.
The principal executive officer and our principal financial officer hashave evaluated the effectiveness of ourCompany’s disclosure controls and procedures (as definedas of March 31, 2019. 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 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 disclosureAct.
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.
 
Changes in Internal Control
 
There (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 Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process affected by the Company’s management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP.
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.
The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2018. 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, 2018 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 no changesnot 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 Form 10-K.
We have identified the following material weaknesses in connection with these issues:
CONTROL ENVIRONMENT AND CONTROL ACTIVITIES
●
Management did not maintain an effective control environment, including ensuring that required accounting methodologies, policies, and technical accounting personnel were in place. This control deficiency led to a series of corrections related to the years 2018 and 2017 and resulted in a restatement to the respective previously issued financial statements.
●
The Company did not properly classify payments to customers, primarily for promotional activity, as a reduction in the transaction price with its customers, instead treating such payments as an advertising and promotions activity, a component of operating expense.
●
The Company reported certain sales transactions prior to transfer of control of goods, inconsistent with customer sales agreements and the Company’s customary practices.
●
The Company did not properly estimate the expected value of customer payments, in the form of credits, at each quarter period end in 2018. In addition, the Company understated its accrual for customers credits for the year ended December 31, 2017.
●
The Company did not adjust the estimated useful life of its leasehold improvements nor an asset retirement obligation in the proper period for its former headquarters.

THE COMPANY DOES NOT MAINTAIN ADEQUATE INTERNAL CONTROL DOCUMENATION 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 December 31, 2019, are described below.
●
Terminations and reprimands
The Company terminated certain employees directly responsible in the deliberate inappropriate conduct and other employees received written reprimands as a result of their behavior.
●
Implementation of enhanced quarterly sales cut-off procedures
The Company has implemented internal controls and procedures to conduct enhanced revenue recognition cutoff testing on a quarterly basis.
●
Mandatory training for the sales and operations department.
The Company has commenced a series of compliance outreach and training for its sales and operations departments relating to potential improper customer transactions identified by the internal investigation. These trainings will also include a review of the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) and the Employee Complaints & Whistleblower Policy (the “Whistleblower Policy”).
●
Company-wide training about compliance matters, including with respect to employee complaints and concerns and enhancement of the customer contracting process.
The Company has commenced 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 pursuant to which, among other things, the Company retained an experienced Chief Financial Officer with public company reporting expertise, hired a controller with fifteen years of assurance experience as a member of two Big 4 multinational accounting firms, as well as engaging third-party accounting personnel with the requisite skill set to strengthen the financial reporting structure and internal control over financial reporting. The Company is conducting a search for an industry knowledgeable operating officer to work closely with the Company’s Chief Executive Officer and Chief Financial Officer.
●
Establishment of a disclosure committee
The Company has implemented a disclosure committee to assist the Chief Executive Officer and Chief Financial Officer in preparing the disclosures required under the Securities Exchange Committee (SEC) rules and to help ensure that the Company’s disclosure controls and procedures are properly implemented. 
●
Enhancing the internal compliance and legal functions, and authorizing management to retain the appropriate individual or individuals.
As part of the senior leadership reorganization referred to above, the Company engaged an outside firm which is in the process of revamping our internal control documentation and testing. In addition, the Company will continue to review the qualifications of our internal financial organization to ensure our personnel have the appropriate technical and SOX related expertise.

The Company has enhanced its Whistleblower Policy by including our Audit Committee Chair in the investigation, documentation, and resolution process.
We are committed to continuing to improve our internal control processes related to these matters and will continue to review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, identified in management’s evaluation pursuantwe may take additional measures to Rules 13a-15(d)address deficiencies or 15d-15(d)modify certain of the Exchange Actremediation measures described above. We expect that our remediation efforts, including design and implementation, will continue through fiscal year 2020, with the goal to fully remediate all remaining material weaknesses by year-end.
Other than the ongoing remediation efforts described above, there have been no changes during the third quarter of 2017ended March 31, 2019 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.
 
LimitationsNotwithstanding the material weaknesses described in this Item 9A, our management has concluded that the consolidated financial statements and related financial information included in this Form 10-Q presents fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Management’s position is based on Effectivenessa number of Controls and Proceduresfactors, including, but not limited to:
 
In designing
●
The completion of the Audit Committee’s investigation and evaluating the disclosure controlssubstantial resources expended (including the use of external consultants) and procedures, management recognizes that any controlsthe resulting adjustments we made to our previously issued financial statements, including the restatement of our 2017 audited financial statements and procedures, no matter how well designedour unaudited quarterly financial statements for the periods ended September 30, 2018, June 30, 2018 and operated, can provide only reasonable assuranceMarch 31, 2018;
●
The reconsideration of achievingsignificant accounting policies and accounting practices previously employed by the desired control objectives. In addition,Company, resulting in other adjustments to previously issued consolidated financial statements; and
●
Based on the design of disclosure controlsactions described above, we have updated, and procedures must reflect the fact that there are resource constraintsin some cases corrected, our accounting policies and that management is requiredhave applied those to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.our consolidated financial statements for all periods presented.
 

 
PARTPART II—OTHER INFORMATION
 
ItemItem 1. Legal Proceedings
 
Contingencies
ExceptIn the normal course of business or otherwise, we may become involved in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the updates set forth below,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 have been nois 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 March 31, 2019, we were involved in the following material changes tolegal proceedings described below. These are not the information set forth under the heading “Legal Proceedings”only legal proceedings in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, see Note 9, Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
In addition,which we are currentlyinvolved. We are involved in various claims andadditional legal actions that ariseproceedings in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business financial condition or results of operations. However, a significant increase in the number of these claims, unanticipated damages owed under successful claims and multiple significant unrelated judgments against the Company could have a material adverse effect on our business, financial condition or results of operations.otherwise.
 
Bakery BarnThermoLife International
 
In May 2017, Bakery Barn,January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of our protein bars,nitrates to MusclePharm, filed a lawsuitcomplaint against us in Arizona state court. ThermoLife alleged that we failed to meet minimum purchase requirements contained in the Western District of Pennsylvaniaparties’ supply agreement. In March 2016, we filed counterclaims alleging that we had failed to pay $1,406,078.59 owing for finished product manufactured by Bakery Barn, as well as packaging materials purchased by Bakery Barn to manufacture our protein bars. We filed an answerThermoLife’s products were defective. Through orders issued in September and November 2018, the court dismissed MusclePharm’s counterclaims against Bakery Barn, alleging that Bakery Barn had breached the Manufacturing Agreement and the Quality Agreement by supplying us with stale, hardened, moldy or otherwise unsaleable protein bars, and that Bakery Barn’s breaches have caused us, at a minimum, several hundred thousand dollars in damages. On October 27, 2017, the parties settled their dispute and entered into a settlement agreement, pursuant to which we agreed to pay Bakery Barn $350,000 on October 28, 2017, and an additional $352,416 by November 26, 2017. The parties also agreed that Bakery Barn would resume producing products for us under substantially the same terms embodied in the oral Manufacturing Agreement, until such timefound that the Manufacturing Agreement can be reducedCompany was liable to writing.
Insurance Carrier LawsuitThermoLife for failing to meet its minimum purchase requirements.
 
We are engagedThe court held a bench trial on the issue of damages in litigation with an insurance carrier, Liberty Insurance Underwriters, Inc. (“Liberty”), arising out of Liberty’s denial of coverage. In 2014, We sought coverage under an insurance policy with Liberty for claims against our directors and officers arising out of an investigation by the Securities and Exchange Commission. Liberty denied coverage,October 2019, and on February 12, 2015, we filed a complaint inDecember 4, 2019, the District Court, City and County of Denver, Colorado against Liberty claiming wrongful and unreasonable denial of coverage for the cost and expenses incurred in connection with the SEC investigation and related matters. Liberty removed the complaint to the United States District Court for the District of Colorado, which in August 2016 granted Liberty’s motion for summary judgment, denying coverage and dismissing our claims with prejudice, and denied us motion for summary judgment. We filed an appeal in November 2016. We filed our opening brief on February 1, 2017 and Liberty filed its response brief on April 7, 2017. We filed our reply brief on May 5, 2017. The case moved to the 10thCircuit Court of Appeals. In October 2017 the 10thCircuit Court affirmed the lower court’s grant of summarycourt entered judgment in favor of Liberty. We intendThermoLife 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 as of December 31, 2018. In the interim, the Company filed an appeal, which is in the process of being briefed, and has posted bonds in the total amount of $0.6 million in order to seek a rehearingstay 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 appellate court’s decision.Company on December 31, 2019. See “Note 8. Debt” for additional information. Subsequent to December 31, 2019, the balance of $0.35 million was secured by a personal guaranty from Mr. Drexler, while the associated fees of $12,500 was paid by the Company.
 
Manchester City Football GroupThe Company intends to continue to vigorously pursue its defenses on appeal.
 
We were engagedWhite Winston Select Asset Fund Series MP-18, LLC et al., v MusclePharm Corp., et al., (Nev. Dist. Ct.; Cal. Superior Court; Colorado Dist. Ct.; Mass. Super. Ct.)
On August 21, 2018, White Winston Select Asset Fund Series MP-18, LLC and White Winston Select Asset Fund, LLC (together “White Winston”) initiated a derivative action against MusclePharm and its directors (collectively the “director defendants”). White Winston alleges that the director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by MusclePharm to Drexler (the “Amended Note”), in exchange for $18.0 million in loans. White Winston alleges that this refinancing improperly diluted their economic and voting power and constituted an improper distribution in violation of Nevada law. In its complaint, White Winston sought the appointment of a disputereceiver over MusclePharm, a permanent injunction against the exercise of Drexler’s conversion right under the Amended Note, and other unspecified monetary damages. On September 13, 2018, White Winston filed an amended complaint, which added a former MusclePharm executive, as a plaintiff (together with City Football Group LimitedWhite Winston, the “White Winston Plaintiffs”). On December 9, 2019, the White Winston Plaintiffs filed a Second Amended Complaint, in which they added allegations relating to the resignation of MusclePharm’s auditor, Plante & Moran PLLC (“CFG”Plante Moran”),. MusclePharm has moved to dismiss the ownerSecond Amended Complaint. That motion has not yet been fully briefed.
Along with its complaint, the White Winston Plaintiffs also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction enjoining the exercise of Manchester City Football Group, concerning amounts allegedly owed byDrexler’s conversion right under the us underAmended 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 the White Winston Plaintiffs’ request for a Sponsorship Agreementpreliminary injunction, finding, among other things, that the White Winston Plaintiffs 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, MusclePharm filed a motion seeking to recoup the legal fees and costs it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded MusclePharm $56,000 in fees and costs. The White Winston Plaintiffs have appealed that award.
Due to the uncertainty associated with CFG. In August 2016, CFG commenced arbitrationdetermining 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 not recorded an estimate for its potential liability.
On June 17, 2019, the White Winston Plaintiffs moved for the appointment of a temporary receiver over MusclePharm, citing Plante Moran’s resignation. The court granted the White Winston Plaintiffs’ request to hold an evidentiary hearing on the motion, but the date for that hearing was not set as of the date hereof.

On July 30, 2019, the White Winston Plaintiffs filed an action in the United Kingdom against us, seeking approximately $8.3 million for our purported breachSuperior Court of the Agreement. On July 28, 2017, we approvedState of California in and for the County of Los Angeles, seeking access to MusclePharm’s books and records. MusclePharm has answered the petition, asserting as a Settlement Agreement (“Settlement Agreement”) with CFG effective July 7, 2017. defense that the request does not have a proper purpose. A trial on the petition has been set for February 25, 2021.
The Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement, we agreedCompany intends to pay CFG a sum of $3 million, consisting of a $1 million payment that was advanced by a related party on July 7, 2017, and subsequent $1 million installments to be paid by July 7, 2018 and July 7, 2019, respectively.vigorously defend these actions.
 
IRS Audit
 
On April 6, 2016, the Internal Revenue Service (“IRS”) selected our 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 our former executives’ 2014 restricted stock grants. Due to our current and historical loss position, the proposed adjustments would have no material impact on our Federal income tax. On October 5, 2016, the IRS commenced an audit of our employment and withholding tax liability for 2014. The IRS is contendingcontends that we inaccurately reported the value of the restricted stock grants and improperly failed to provide for employment taxes and federalFederal tax withholding on these grants. In addition, the IRS is proposing certain penalties associated with our filings. On April 4, 2017, we received a “30-day letter” from the IRS asserting back taxes and penalties of approximately $5.3 million, of which $0.4$4.4 million related to employmentwithholding taxes, specifically, income withholding and Social Security taxes, and $4.9$0.9 million related to federal tax withholding and penalties. Additionally, the IRS is assertingasserts that we owe information reporting penalties of approximately $2.0 million. Our
The Company’s counsel has submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties on our behalf, and we intend to pursuehave been pursuing this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado on July 31, 2019. At the Conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2.0 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.
The remaining issue in dispute in this matter involves the fair market value of restricted stock units in the Company granted to certain of its former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagree as to the value of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS have exchanged expert valuation reports on the fair market value of the stock and have had extensive negotiations on this issue. The parties, however, have not been able to reach an agreement with respect to the value of the stock. The IRS has also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS has asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for the amount of any tax due, and not the Company.
The Former Officers cases were scheduled for trial in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February 4, 2020. The basis for the continuance was that the IRS and the Former Officers had made progress toward a settlement of the valuation issue involving the grants of the restricted stock. The outcome of these settlement negotiations will be relevant to the Company’s case. The Company is closely monitoring the settlement discussions between the IRS and the Former Officers. The Tax Court has ordered the Former Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before October 22, 2020.
Due to the uncertainty associated with determining our liability for the asserted taxes and penalties, if any, and to our inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the IRS appeals process, we are unable to providehave not recorded an estimate for its potential liability, if any, associated with these taxes. 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 a valuation firm named in the action for failing to properly value the 2014 restricted stock grants for tax purposes. The Company is waiting on next steps from the court and will continue to vigorously litigate the matter.
 

 
Item4Excelsior Matter
On March 18, 2019, 4Excelsior, a manufacturer of MusclePharm products, filed an action against MusclePharm 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 January 27, 2020, MusclePharm filed a counterclaim against 4Excelsior seeking unidentified damages relating to, among other things, 4Excelsior’s failure to fulfill a purchase order.  MusclePharm also moved to strike 4Excelsior’s consequential damages on the grounds that they are unrecoverable under the Uniform Commercial Code.  The court denied that motion, and the action has proceeded to discovery. The Company recognized a liability of $5.0 million (past due invoices plus interest) as of March 31, 2019. Trial has not yet been set, although a Trial Setting Conference has been set for September 21, 2020. 
The Company intends to vigorously defend this action.
Nutrablend Matter
On February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against MusclePharm in the United States District Court for the Eastern District of California, claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods. Trial has been set for November 17, 2020.
The Company intends to vigorously defend this action.
Item 1A. Risk Factors
 
There have been no material changesThe 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.smaller reporting companies.
 
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
ItemItem 3. Defaults Upon Senior Securities.Securities
 
None.
 
ItemItem 4. Mine Safety Disclosures
 
None.
 
ItemItem 5. Other Information.Information
 

None
 
ItemItem 6. Exhibit Index
 
Incorporated by Reference
ExhibitNo.
Description
Form
SEC File 
Number
Exhibit
Filing Date
    Incorporated by Reference
Exhibit No. Description Form 
SEC File 
Number
ExhibitFiling Date
31.1**
 Certification of the Chief Executive Officer -pursuantpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
           
31.2**
 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
           
32.1***
 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
           
32.2***
 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
           
101** The following materials from MusclePharm Corporation’s quarterly report on Form 10-Q for the ninethree months ended September 30, 2017March 31, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated StatementsStatement of Changes in Stockholders’ Equity (Deficit);Deficit; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) related notes to these financial statements. 
           
 
* Indicates management contract or compensatory plan or arrangement.
** Filed herewith
***
**Filed herewith
***Furnished herewith
 

SIGNATURESSIGNATURES
 
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 14, 2017August 24, 2020
By:  
/s/Allen Sciarillo  Ryan Drexler
 
  
Name:
Ryan Drexler Allen Sciarillo 
  Title:  
Title: Chief ExecutiveFinancial Officer President and Chairman 
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 
 
 
 
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