UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORMForm 10-Q
 

☒ 
[X] 
QUARTERLY REPORT PURSUANT TO SECTIONQuarterly 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 quarterly period ended: SeptemberJune 30, 20182019 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 
Nevada77-0664193
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
  
4400 Vanowen St.
Burbank, CA
91505
 
91505
(Address of principal executive offices)(Zip code)
(800) 292-3909
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each 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 every Interactive Data File required to be submitted 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 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-acceleratedAccelerated filer[ ]
Non-accelerated filer [X]Smaller reporting company[X]
    
Smaller reportingEmerging growth 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 at November 1, 2018: 15,314,667, excludingAugust 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 
   
 Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20182019 (unaudited) and December 31, 20172018         2
   
 Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 (unaudited)         3
   
 Condensed Consolidated Statements of Comprehensive Loss for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 (unaudited)         4
   
 Condensed Consolidated StatementStatements of Changes in Stockholders’ Deficit for the ninethree and six months ended SeptemberJune 30, 2019 and 2018 (unaudited)         5
   
 Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 (unaudited)         67
   
 Notes to Condensed Consolidated Financial Statements (unaudited)         78
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations         2437
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk         3950
   
Item 4.Controls and Procedures         3950
  
PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings         4055
   
Item 1A.Risk Factors         4158
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds         4158
   
Item 3.Defaults Upon Senior SecuritiesSecurities.         4258
   
Item 4.Mine Safety Disclosures         4258
   
Item 5.Other Information         4258
   
Item 6.Exhibits         4259
   
 Signatures         4360
 
 
 
About this Report
This Form 10-Q relates to the Company’s (as defined below) quarterly period ended June 30, 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 March 31, 2019 and September 30, 2019. Because this Form 10-Q pertains to the quarterly period ended June 30, 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 “Company, “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 April 2, 2018.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.
 

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
MusclePharm Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
 
September 30,
2018
 
 
December 31,
2017
 
 
June 30,
2019
 
 
December 31,
2018
 
 
(Unaudited)
 
 
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
 $1,749 
 $6,228 
 $1,097 
 $2,317 
Accounts receivable, net of allowance for doubtful accounts of $1,556 and $1,363, respectively
  16,235 
  16,668 
Accounts receivable, net
  7,194 
  6,273 
Inventory
  7,324 
  6,484 
  8,524 
  13,661 
Prepaid expenses and other current assets
  1,120 
  1,082 
  697 
  576 
Total current assets
  26,428 
  30,462 
  17,512 
  22,827 
Property and equipment, net
  576 
  1,822 
  355 
  513 
Intangible assets, net
  1,077 
  1,317 
  836 
  997 
Operating lease right-of-use assets
  1,553 
  — 
Other assets
  267 
  225 
  285 
  264 
TOTAL ASSETS
 $28,348 
 $33,826 
 $20,541 
 $24,601 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
Current liabilities:
    
    
Accounts payable
 $20,672 
 $11,742 
Accrued liabilities
  5,238 
  7,761 
Accrued restructuring charges, current
  463 
  595 
Obligation under secured borrowing arrangement
  594 
  5,385 
 $3,958 
 $1,285 
Line of credit
  1,500 
  3,000 
  3,000 
  1,500 
Operating lease liability, current
  785 
  — 
Convertible note with a related party, net of discount
  17,970 
  17,940 
Accounts payable
  24,391 
  24,797 
Accrued and other liabilities
  7,149 
  6,543 
Accrued restructuring charges, current
  — 
  493 
Total current liabilities
  28,467 
  28,483 
  57,253 
  52,558 
Convertible note with a related party, net of discount
  17,226 
  16,669 
Accrued restructuring charges, long-term
  58 
  120 
  — 
  30 
Operating lease liability, long-term
  951 
  — 
Other long-term liabilities
  74 
  1,088 
  170 
  208 
Total liabilities
  45,825 
  46,360 
  58,374 
  52,796 
Commitments and contingencies (Note 8)
    
Commitments and contingencies (Note 9)
    
Stockholders' deficit:
    
    
Common stock, par value of $0.001 per share; 100,000,000 shares authorized 16,190,288 and 15,526,175 shares issued as of September 30, 2018 and December 31, 2017, respectively; 15,314,667 and 14,650,554 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
  15 
  14 
Common stock, par value of $0.001 per share; 100,000,000 shares authorized, 16,679,548 and 16,190,288 shares issued as of June 30, 2019 and December 31, 2018, respectively; 15,803,927 and 15,314,667 shares outstanding as of June 30, 2019 and December 31, 2018, respectively.
  15 
Additional paid-in capital
  160,038 
  159,608 
  159,512 
  158,944 
Treasury stock, at cost; 875,621 shares
  (10,039)
  (10,039)
Accumulated other comprehensive loss
  (169)
  (150)
  (1)
  (238)
Accumulated deficit
  (167,322)
  (161,967)
  (187,320)
  (176,877)
TOTAL STOCKHOLDERS’ DEFICIT
  (17,477)
  (12,534)
  (37,833)
  (28,195)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $28,348 
 $33,826 
 $20,541 
 $24,601 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018
(as restated)
 
 
2019
 
 
2018
(as restated)
 
Revenue, net
 $27,388 
 $24,396 
 $81,039 
 $76,597 
 $22,299 
 $21,827 
 $41,074 
 $46,014 
Cost of revenue
  18,595 
  16,359 
  55,875 
  54,474 
  20,573 
  17,117 
  36,428 
  36,282 
Gross profit
  8,793 
  8,037 
  25,164 
  22,123 
  1,726 
  4,710 
  4,646 
  9,732 
Operating expenses:
    
    
Advertising and promotion
  3,589 
  1,952 
  12,241 
  6,079 
  809 
  879 
  1,560 
  1,693 
Salaries and benefits
  1,856 
  2,640 
  6,305 
  8,530 
  1,894 
  2,295 
  3,774 
  4,449 
Selling, general and administrative
  2,975 
  3,468 
  8,175 
  9,183 
  2,427 
  2,670 
  5,069 
  5,157 
Research and development
  185 
  199 
  605 
  488 
  215 
  208 
  462 
  420 
Professional fees
  436 
  1,034 
  1,634 
  2,643 
  1,215 
  626 
  1,941 
  1,346 
Impairment of assets
  743 
  — 
  743 
  — 
Settlement of obligation
  — 
  (2,747)
  1,453 
Total operating expenses
  9,784 
  9,293 
  26,956 
  28,376 
  6,560 
  6,678 
  12,806 
  13,065 
Loss from operations
  (991)
  (1,256)
  (1,792)
  (6,253)
  (4,834)
  (1,968)
  (8,160)
  (3,333)
Gain on settlement of accounts payable
  — 
  471 
Interest and other expense, net (Note 6)
  (990)
  (858)
  (3,463)
  (2,526)
Loss before income taxes
  (1,981)
  (2,114)
  (5,255)
  (8,308)
Income taxes/(benefit)
  (3)
  14 
  100 
  118 
Other (expense) income:
    
(Loss) gain on settlement obligation
  (105)
  2,747 
  (109)
  2,747 
Interest and other expense, net
  (919)
  (1,025)
  (2,084)
  (2,102)
Loss before provision for income taxes
  (5,858)
  (246)
  (10,353)
  (2,688)
Provision for income taxes
  26 
  34 
  36 
  103 
Net loss
 $(1,978)
 $(2,128)
 $(5,355)
 $(8,426)
 $(5,884)
 $(280)
 $(10,389)
 $(2,791)
    
    
Net loss per share, basic and diluted
 $(0.13)
 $(0.15)
 $(0.36)
 $(0.61)
 $(0.38)
 $(0.02)
 $(0.68)
 $(0.19)
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  15,029,312 
  13,875,119 
  14,783,699 
  13,819,939 
  15,584,249 
  14,998,531 
  15,384,932 
  14,977,988 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 


MusclePharm Corporation
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
 
Three Months
Ended September 30,
 
 
Nine Months
Ended September 30,
 
 
Three Months Ended June 30,
 
 
Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018
(as restated)
 
 
2019
 
 
2018
(as restated)
 
Net loss
 $(1,978)
 $(2,128)
 $(5,355)
 $(8,426)
 $(5,884)
 $(280)
 $(10,389)
 $(2,791)
Other comprehensive loss:
    
    
Change in foreign currency translation adjustment
  (4)
  143 
  (19)
  160 
  4 
  (23)
  183 
  (15)
Comprehensive loss
 $(1,982)
 $(1,985)
 $(5,374)
 $(8,266)
 $(5,880)
 $(303)
 $10,206)
 $(2,806)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 


MusclePharm Corporation
Condensed Consolidated StatementStatements of Changes in Stockholders’ Deficit
(In thousands, except share data)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Paid-in
 
 
Treasury
 
 
Comprehensive
 
 
Accumulated
 
 
Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Stock
 
 
Loss
 
 
Deficit
 
 
Deficit
 
Balance—December 31, 2017
  14,650,554 
 $14 
 $159,608 
 $(10,039)
 $(150)
 $(161,967)
 $(12,534)
Stock-based compensation related to issuance and amortization of restricted stock awards to employees, executives and directors
  250,000 
  1 
  361 
  — 
  — 
  — 
  362 
Stock-based compensation related to 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 
Issuance of shares of common stock related to the settlement of litigation (see Note 8)
  333,000 
  — 
  — 
  — 
  — 
  — 
  — 
Change in foreign currency translation adjustment
  — 
  — 
  — 
  — 
  (19)
  — 
  (19)
Net loss
  — 
  — 
  — 
  — 
  — 
  (5,355)
  (5,355)
Balance—September 30, 2018
  15,314,667 
 $15 
 $160,038 
 $(10,039)
 $(169)
 $(167,322)
 $(17,477)
 
 
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)
Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors
  — 
  1 
  120 
  — 
  — 
  — 
  121 
Change in foreign currency translation adjustment
  — 
  — 
  — 
  — 
  (23)
  — 
  (23)
Net loss
  — 
  — 
  — 
  — 
  — 
  (280)
  (280)
Balance—June 30, 2018
(as restated)
  15,064,667 
 $15 
 $158,706 
 $(10,039)
 $(165)
 $(168,913)
 $(20,396)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

 
MusclePharm Corporation
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Deficit
(Unaudited, in thousands)In thousands, except share data)
(Unaudited)
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(5,355)
 $(8,426)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
    
    
Depreciation and amortization
  822 
  1,144 
Gain on settlement of accounts payable
  — 
  (471)
Settlement of obligation
  (2,747)
  — 
Bad debt expense
  822 
  1,213 
Impairment of assets
  743 
  — 
Loss on disposal of property and equipment
  — 
  43 
Amortization of debt discount
  557 
  460 
Stock-based compensation
  377 
  1,688 
Write off of prepaid financing costs
  — 
  275 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (454)
  (753)
Inventory
  (755)
  2,351 
Prepaid expenses and other current assets
  (114)
  (101)
Other assets
  (44)
  (75)
Accounts payable and accrued liabilities
  8,365 
  417 
Accrued restructuring charges
  (194)
  (102)
Net cash provided by/(used in) operating activities
  2,023 
  (2,337)
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Purchase of property and equipment
  (86)
  (27)
Net cash used in investing activities
 $(86)
 $(27)
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Payments on line of credit
  (1,500)
  — 
Proceeds from secured borrowing arrangement, net of reserves
  31,677 
  22,292 
Payments on secured borrowing arrangement, net of fees
  (36,469)
  (21,046)
Proceeds from related party loan
  — 
  1,000 
Repayment of capital lease obligations
  (101)
  (106)
Net cash (used)/provided by financing activities
  (6,393)
  2,140 
Effect of exchange rate changes on cash
  (23)
  159 
NET CHANGE IN CASH
  (4,479)
  (65)
CASH — BEGINNING OF PERIOD
  6,228 
  4,943 
CASH — END OF PERIOD
 $1,749 
 $4,878 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
Cash paid for interest
 $2,727 
 $1,848 
Cash paid for taxes
 $173 
 $86 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    
    
Property and equipment acquired in conjunction with capital leases
 $— 
 $12 
Purchase of property and equipment included in current liabilities
 $12 
 $— 
Interest paid through issuance of shares of common stock
 $53 
 $— 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Accumulated Other
 
 
Total
 
 
 
 
 
 
Common Stock
 
 
Paid-in
 
 
Treasury
 
 
Comprehensive
 
 
Accumulated
 
 
Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Stock
 
 
Loss
 
 
Deficit
 
 
Deficit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 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)
Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors
  — 
  — 
  63 
  — 
  — 
  — 
  63 
Issuance of shares of common stock related to the payment of advertising services
  153,147 
  — 
  344 
  — 
  — 
  — 
  344 
Change in foreign currency translation adjustment
  — 
  — 
  — 
  — 
  4 
  — 
  4 
Net loss
  — 
  — 
  — 
  — 
  — 
  (5,884)
  (5,884)
Balance—June 30, 2019
  15,803,927 
 $15 
 $159,512 
 $(10,039)
 $(1)
 $(187,320)
 $(37,833)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

MusclePharm Corporation
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
(as restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(10,389)
 $(2,791)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization of property and equipment
  194 
  286 
Amortization of intangible assets
  160 
  160 
Bad debt expense
  273 
  414 
Loss on disposal of property and equipment
  5 
  — 
Amortization of debt discount
  30 
  30 
Inventory provision
  373 
  36 
Stock-based compensation
  127 
  257 
Issuance of common stock to non-employees
  440 
  — 
Write off of cumulative translation adjustments
  175 
  — 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (1,195)
  979 
Inventory
  4,764 
  (2,156)
Prepaid expenses and other current assets
  (119)
  (402)
Other assets
  357 
  (15)
Accounts payable and accrued liabilities
  (527)
  3,234 
Accrued restructuring charges
  — 
  (71)
Net cash used in operating activities
  (5,332)
  (39)
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Purchase of property and equipment
  (13)
  (73)
Net cash used in investing activities
 $(13)
 $(73)
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Proceeds from line of credit
  1,500 
  — 
Payments on line of credit
  — 
  (1,000)
Proceeds from secured borrowing arrangement, net of reserves
  19,364 
  23,785 
Payments on secured borrowing arrangement, net of fees
  (16,691)
  (26,383)
Repayment of finance lease obligations
  (57)
  (69)
Net cash provided by (used in) financing activities
  4,116 
  (3,667)
Effect of exchange rate changes on cash
  9 
  (7)
NET CHANGE IN CASH
  (1,220)
  (3,786)
CASH — BEGINNING OF PERIOD
  2,317 
  6,228 
CASH — END OF PERIOD
 $1,097 
 $2,442 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
Cash paid for interest
 $562 
 $1,936 
Cash paid for taxes
 $41 
 $69 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    
    
Property and equipment acquired in conjunction with finance leases
 $29 
 $— 
Purchase of property and equipment included in current liabilities
 $— 
 $4 
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 Consolidated Financial Statements.


MusclePharm Corporation
Notes 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 is headquartered in Burbank, California and, as of SeptemberJune 30, 20182019, had the following wholly-owned operating subsidiaries: MusclePharm Canada Enterprises Corp., MusclePharm Ireland Limited and MusclePharm Australia Pty Limited. A former subsidiary
The Company has incurred significant losses and experienced negative cash flows since inception. As of June 30, 2019, the Company BioZone Laboratories, Inc. (“BioZone”) was sold on May 9, 2016.had cash of $1.1 million, a decline of $1.2 million from the December 31, 2018 balance of $2.3 million. As of June 30, 2019, we had a working capital deficit of $39.7 million, a stockholders’ deficit of $37.8 million and an accumulated deficit of $187.3 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern. For financial information concerning more recent periods, see our reports for such periods filed with the Securities and Exchange Commission.
 
Management’s Plans with RespectThe ability to Liquiditycontinue as a going concern is dependent upon us generating profits in the future and/or obtaining the necessary financing to meet our obligations and Capital Resourcesrepay 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 that its previously announced restructuring plan, the continued reductionreductions in ongoing operating costs, and expensecontinued focus on gross margin, primarily pricing controls and growth strategy,a reduction in product discounts and promotional activity with the Company’s customers, will enableallow us to ultimately achieve profitability. Management believes thatprofitability, however, the Company has sufficiently reduced its operating expenses, and the Company’s ongoing sources of revenue together with our access to capital will be sufficient to cover these expenses for the foreseeable future. The Company can give no assurances that this will occur.
As of September 30, 2018, the Company had a stockholders’ deficit of $17.5 million and recurring losses from operations. To manage cash flow, the Company has entered into a secured borrowing arrangement, pursuant to which the Company has the ability to borrow up to $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The secured borrowing arrangement’s term has been extended to November 30, 2018 which renews automatically for successive four-month periods unless either party receives written notice of cancellation from the other, at minimum, thirty days prior to the expiration date. In October 2017, the Company also entered into a loan and security agreement to borrow against the Company’s inventory up to a maximum of $3.0 million for an initial six-month term which automatically extends for successive six-month renewal terms. As of September 30, 2018, the Company owed $1.5 million under this loan and security agreement.
On November 3, 2017, the Company entered into a refinancing transaction (the “Refinancing”) with Mr. Ryan Drexler, the Company’s Chairman of the Board, Chief Executive Officer and President, to restructure all of the $18.0 millionmultiple financing arrangements. See additional information in notes payable to him, which are now due on December 31, 2019. Accordingly, such debt is classified as a long-term liability at September 30, 2018.
As of September 30, 2018, the Company had approximately $1.7 million in cash and a $2.0 million working capital deficit.
The accompanying Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2018 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 could be necessary should we be required to liquidate our assets.
The Company’s ability to continue as a going concern and raise capital for specific strategic initiatives could also depend 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.
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 the Company 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.“Note 8. Debt.”
 

 
Our capital resources asresults of September 30, 2018, available borrowing capacityoperations are affected by economic conditions, including macroeconomic conditions and current operating plans are expectedlevels of business confidence. There continues to be sufficientsignificant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. We are actively managing our business to fund our planned operations for at least twelve months fromrespond to the date of filing this report.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 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 SeptemberJune 30, 2018,2019, results of operations for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, and cash flows for the ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. The results of operations for the three and ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of the results to be expected for the year endingended December 31, 2018.2019.
 
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, 2017,2019, filed with the SEC on April 2, 2018.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, present value of lease liabilities, among others. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company has adopted ASC 606. Prior to the adoption of ASC 606, the Company's revenue recognition policy was to recognize revenue when persuasive evidence of an arrangement existed, delivery had occurred, the fee was fixed or determinable and collection was reasonably assured.
The Company’s standard terms and conditions of sale allowed for product returns or replacements in certain cases. Estimates of expected future product returns were recognized at the time of sale based on analyses of historical return trends by customer type. Upon recognition, the Company reduced revenue and cost of revenue for the estimated return. Return rates could fluctuate over time, but were sufficiently predictable“Revenue from Contracts with established customers to allow the Company to estimate expected future product returns, and an accrual was recorded for future expected returns when the related revenue was recognized.
The Company also offered sales incentives through various programs, consisting primarily of volume incentive rebates and sales incentive reserves. Volume incentive rebates were provided to certain customers based on contractually agreed upon percentages once certain thresholds had been met. Sales incentive reserves were computed based on historical trending and budgeted discount percentages, which were typically based on historical discount rates with adjustments for any known changes, such as future promotions or one-time historical promotions that would not repeat for each customer. The Company recorded sales incentive reserves and volume rebate reserves as a reduction to revenue.

Customers,” effective January 1, 2018. With the adoption of ASC 606, effective January 1, 2018 the Company reviewed its previousnew standard, revenue recognition policy as described above and under ASC 606 the Company determined that there were no material changes resulting from the adoption. Revenue would beis recognized when control of the 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. This is consistent with
a.Nature of Goods and Services
The 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 websites and other e-commerce channels, all of which sell our products to consumers.


b.When Performance Obligations are Satisfied
For performance obligations related to the revenue recognition policy previously usedshipping and invoicing of products, 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 Company.customer, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company also reviewedconsiders control to have transferred upon delivery or customer receipt because the Company has an enforceable right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the 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 when the related sale 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 andof recognition of consideration payable to a customer, all consideration payable to our customers is reflected in the transaction price at inception and reassessed 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” expense in the accompanying consolidated statements of operations.
The Company accounts receivable withinfor shipping and handling costs as fulfillment activities which are therefore recognized upon shipment of the different distribution channels for whichgoods. 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 six months ended June 30, 2019 and 2018, the Company generates revenue.incurred $0.6 million and $1.1 million, respectively, of inbound shipping and handling 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 six months ended June 30, 2019 and 2018, the Company incurred $2.1 million, of shipping and handling costs related to shipments to our customers.
 
The Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes. During the threesix months ended SeptemberJune 30, 20182019 and 2017, the Company recorded discounts and sales returns, totaling $6.4 million and $2.1 million, respectively, which accounted for 19% and 8% of gross revenue in each period, respectively. During the nine months ended September 30, 2018, and 2017, the Company recorded discounts, and to a lesser degree, sales returns, totaling $16.5$15.5 million and $13.8$15.8 million, respectively, which accounted for 17%27% and 16%26% of gross revenue in each period, respectively.
The Company adopted ASC 606 using the modified retrospective method and the cumulative effect of this change in accounting method for the expected value of customer credits related to certain contracts in 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 that 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
 
   
 
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 Accounts Receivable
as of
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
Percentage of Net Accounts Receivable as of
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
September 30, 2018
 
 
December 31, 2017
 
 
2019
 
 
2018 (as restated)
 
 
2019
 
 
2018 (as restated)
 
 
June 30, 2019
 
 
December 31, 2018
 
Customers
 
 
 
 
 
 
Costco Wholesale Corporation
  38%
  26%
  25%
  26%
  36%
  21%
Costco
  39%
  22%
  33%
  30%
  14%
  16%
Amazon
  15%
  16%
  15%
  11%
  12%
  14%
  12%
  13%
  12%
  * 
  21%
  22%
iHerb
  18%
  * 
  12%
  * 
  15%
  12%
  15%
  * 
  19%
  * 
    
 
● 
Denotes that customer represented* Represents less than 10% of net revenue or net accounts receivablereceivable.
The Company uses a limited number of non-affiliated suppliers for contract manufacturing of its products.
The Company had the respective period.following concentration of purchases with contract manufacturers:

 
 
For the Three Months Ended
June 30,
 
 
For the Six Months Ended
June 30,
 
 
 
2019
 
 
2018
(as restated)
 
 
2019
 
 
2018
(as restated)
 
Vendor
 
 
 
 
 
 
 
 
 
 
 
 
Nutra Blend
  35%
  * 
  28%
  17%
S.K. Laboratories
  43%
  26%
  41%
  24%
4Excelsior
  * 
  30%
  * 
  24%
Bakery Barn
  * 
  14%
  * 
  14%
Prinova
  * 
  16%
  * 
  16%
* 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
 
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 accountingaccounting. The new lease standards also provide practical expedients for an entity's ongoing accounting. In July 2018, the FASB issued ASU No. 2018-11, Leases (842), Targeted Improvements (“ASU 2018-11”), which provides an additional transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to apply ASU 2016-02 on the adoption date and eliminatesrecognize 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.

The Company adopted the ASUs, 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 the ASUs, the Company recorded a right-of-use (“ROU”) asset and liability of $2.1 million. Also as a result of the adoption, the Company reclassified $0.2 million of liabilities on its consolidated balance sheets as of January 1, 2019 against the operating lease ROU asset. The adoption of these 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 an impact on 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 real estate-specific provisions for all entities. The guidance also modifiesconditions, 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 classification criteria andASU amends the accounting for sales-typecredit losses on available-for-sale debt securities and direct financing leasespurchased financial assets with credit deterioration. ASU 2016-13 is effective for lessors. 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 2016-022018-07”). 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, andincluding interim periods within thosethat fiscal years, with early adoption permitted.year. The new standard has been adopted by the Company. The Company continues to make progress with its preparation for the adoption and implementation of this new accounting standard, including assessing the completeness of our lease arrangements, evaluating practical expedients and accounting policy elections, and implementing a tracking system to meet the reporting requirements of this standard. We are still assessinghas evaluated the impact to ourof ASU 2018-07 on its consolidated financial statements as well as planningand it did not have a material impact.
In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740):Simplifying the Accounting for adoptionIncome Taxes, expected to reduce cost and implementationcomplexity 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 this standard, which includes applying practical expedients providedincome 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 standards updatetax basis of goodwill; separate financial statements of legal entities that allow, among other things, for contracts that commenced priorare not subject to tax; and enacted changes in tax laws in interim periods.  The Company is evaluating the adoption to not be reassessed. We also anticipate to elect a policy not to recognize rightimpact of use assets and lease liabilities related to short-term leases.the pronouncement.
 
Note 3. Fair Value of Financial Instruments
 
Management believes the fair values of the Company’s debt obligations under the secured borrowing arrangements and the convertible note with Mr. Drexler 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 SeptemberJune 30, 20182019, and December 31, 2017,2018, the Company held no assets or liabilities that required re-measurement at fair value on a recurring basis.
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 agreed to minimum purchase requirements of products from BioZone over a three-year period. The Company fell below the requirements, and as a result, the Company reserved a total amount of $0.7 million an amount to cover the estimated purchase commitment shortfall during the year ended December 31, 2018, which remained unchanged during the six months ended June 30, 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.

 
Note 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 following table illustratesAs of December 31, 2018, the provisionCompany had a balance of $0.4 million, representing contract termination costs and $0.1 million representing abandoned lease facilities. As of June 30, 2019, the Company had made payments to settle all the outstanding contract termination costs. 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, 2018 (in thousands):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.”
 
 
 
 
Contract Termination Costs
 
 
Purchase Commitment of Discontinued Inventories Not Yet Received
 
 
 
Abandoned Lease Facilities
 
 
 
Total
 
Balance as of December 31, 2017
 $308 
 $175 
 $232 
 $715 
Expensed
  — 
  — 
  310 
  310 
Cash payments
  — 
  — 
  (396)
  (396)
Change in valuation
  67 
  (175)
  — 
  (108)
Balance as of September 30, 2018
  375 
  — 
  146 
  521 

The total future payments under the restructuring plan as of September 30, 2018 are as follows (in thousands):
 
 
For the Years Ending December 31,
 
Outstanding Payments
 
2018
 
 
2019
 
 
2020
 
 
Total
 
Contract termination costs
 $375 
 $— 
 $— 
 $375 
Abandoned leased facilities
  22 
  92 
  32 
  146 
Total future payments
 $397 
 $92 
 $32 
 $521 
Note 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 SeptemberJune 30, 20182019 and December 31, 2017.2018.
 
The Company records charges for obsolete and slow-moving inventory based on the age of the product as determined by the expiration date 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 ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.
 
Property and Equipment
 
Property and equipment consisted of the following as of SeptemberJune 30, 20182019 and December 31, 20172018 (in thousands):
 
 
As of
September 30, 2018
 
 
As of
December 31, 2017
 
 
As of
June 30,
2019
 
 
As of
December 31,
2018
 
Furniture, fixtures and equipment
 $3,641 
 $3,597 
Furniture, fixtures, and equipment
 $2,586 
 $3,511 
Leasehold improvements
  236 
  2,044 
  236 
Manufacturing and lab equipment
  3 
Vehicles
  39 
  86 
  39 
Displays
  453 
  485 
  453 
Website
  462 
  497 
  497 
Property and equipment, gross
  4,834 
  6,677 
  3,811 
  4,736 
Less: accumulated depreciation and amortization
  (4,258)
  (4,855)
  (3,456)
  (4,223)
Property and equipment, net
 $576 
 $1,822 
 $355 
 $513 
 
Depreciation and amortization expense related to property and equipment was $77,000 and $0.1 million for the three months ended June 30, 2019 and 2018, respectively. Depreciation and amortization expense was $0.2 million and $0.3 million for the threesix months ended SeptemberJune 30, 2019 and 2018, respectively. Depreciation and 2017, respectively, and $0.6 million and $0.8 million for the nine months ended September 30, 2018 and 2017, respectively, whichamortization expense is included in “Selling, general, and administrative” expense in the accompanying Condensed Consolidated Statementsconsolidated statements of Operations.operations.
 
During the three months ended September 30, 2018, the Company subleased the former headquarters in Denver, CO. As a result, the Company determined that the leasehold improvements had become fully impaired. The Company recorded an impairment charge of $0.7 million during the period.
 

 
Intangible Assets
 
Intangible assets consisted of the following (in thousands):
 
As of September 30, 2018
 
 
As of June 30, 2019
 
 
Gross Value
 
 
Accumulated Amortization
 
 
Net Carrying Value
 
 
Remaining Weighted-Average Useful Lives (years)
 
 
Gross Value
 
 
Accumulated
Amortization
 
 
Net
Carrying
Value
 
 
Remaining Weighted-
Average Useful Lives
(years)
 
Amortized Intangible Assets
 
 
 
 
   
 
Brand (apparel rights)
 $2,244 
 $(1,167)
 $1,077 
  3.4 
 $2,244 
 $(1,408)
 $836 
  2.6 
Total intangible assets
 $2,244 
 $(1,167)
 $1,077 
    
 $2,244 
 $(1,408)
 $836 
    
 
 
As of December 31, 2017
 
 
As of December 31, 2018
 
 
Gross Value
 
 
Accumulated Amortization
 
 
Net Carrying Value
 
 
Remaining Weighted-Average Useful Lives (years)
 
 
Gross Value
 
 
Accumulated
Amortization
 
 
Net
Carrying
Value
 
 
Remaining Weighted-
Average Useful Lives
(years)
 
Amortized Intangible Assets
 
 
 
 
   
 
Brand (apparel rights)
 $2,244 
 $(927)
 $1,317 
  4.1 
 $2,244 
 $(1,247)
 $997 
  3.1 
Total intangible assets
 $2,244 
 $(927)
 $1,317 
    
 $2,244 
 $(1,247)
 $997 
    
 
Intangible assets amortization expense was $0.1 million for each of the three months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively, andrespectively. Intangible assets amortization expense was $0.2 million for each of the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively, whichrespectively. Intangible assets amortization expense is included in “Selling, general, and administrative” expense in the accompanying Condensed Consolidated Statementsconsolidated statements of Operations.operations.
 
As of SeptemberJune 30, 2018,2019, the estimated future amortization expense of intangible assets is as follows (in thousands):
 
For the Year Ending December 31,
 
 
 
 
 
 
Remainder of 2018
 $81 
2019
  321 
Remainder of 2019
 $160 
2020
  321 
  320 
2021
  321 
  320 
2022
  33 
  36 
Total amortization expense
 $1,077 
 $836 
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
June 30, 2019
Assets
OperatingROU assets, net
$1,553
FinanceProperty and equipment, net
117
Total Assets
1,670
Liabilities
Current liabilities:
OperatingOperating lease liability - current
$785
FinanceCurrent accrued liability
115
Total current liabilities
900
Non-current liabilities:
OperatingOperating lease liability - long term
951
FinanceOther long term liabilities
2
Total non-current liabilities
953
Total lease liabilities
$1,853
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 and six months ended June 30, 2019 were as follows (in thousands):
 
  
Income Statement Classification
 
Three months ended
June 30, 2019
 
 
Six months ended
June 30, 2019
 
Operating lease costSelling, general and administrative
 $272 
 $521 
 
    
    
Finance lease cost: 
    
    
Amortization of ROU assetSelling, general and administrative
  31 
  58 
Interest on lease liabilitiesSelling, general and administrative
  2 
  3 
Total finance lease cost 
  33 
  61 
 
    
    
Variable lease paymentsSelling, general and administrative
  50 
  114 
Sublease incomeOther income
  (90)
  (189)
 
    
    
Total lease cost 
 $265 
 $507 
The Company had no short-term leases as of June 30, 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:
Six months ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
Operating cash flows from operating leases
$382
Operating cash flows from finance leases
3
Financing cash flows from finance leases
57
The weighted average remaining lease term was as follows:
Operating leases (in years)
2.5
Finance leases (in years)
1.0
The weighted average discount rate was as follows:
Operating leases
18%
Finance leases
5%
The maturities of lease liabilities at June 30, 2019 were as follows (in thousands):
 
 
Operating
 
 
Finance
 
 
 
 
 
 
  
 
Remaining six months of the year ending 2019
 $530 
 $65 
2020
  808 
  55 
2021
  481 
  — 
2022
  369 
  — 
Thereafter
  — 
  — 
Total future undiscounted lease payments
  2,188 
  120 
Less amounts representing interest
  (452)
  (3)
Present value of lease liabilities
 $1,736 
 $117 
Note 6.7. Interest and Other Expense,other expense, net
 
For the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, “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 June 30,
 
 
For the
Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
 
2019
 
 
2018 (as restated)
 
Interest and other expense, net:
 
 
 
 
 
 
Interest expense, related party
 $(559)
 $(523)
 $(1,652)
 $(1,379)
 $(538)
 $(553)
 $(1,070)
 $(1,094)
Interest expense, related party debt discount
  (155)
  (153)
  (557)
  (460)
  (15)
  (30)
Interest expense, other
  (28)
  (6)
  (160)
  (14)
  (164)
  (65)
  (457)
  (132)
Interest expense, secured borrowing arrangement
  (251)
  (172)
  (906)
  (397)
  (280)
  (309)
  (505)
  (655)
Foreign currency transaction (loss) gain
  (4)
  16 
  (197)
  49 
Foreign currency transaction loss
  (13)
  (80)
  (213)
  (193)
Other
  7 
  (20)
  9 
  (325)
  91 
  (3)
  191 
  2 
Total interest and other expense, net
 $(990)
 $(858)
 $(3,463)
 $(2,526)
 $(919)
 $(1,025)
 $(2,084)
 $(2,102)
“Other” for 2019 includes sublease income and interest income.

 
Note 7.8. Debt
 
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the Company’s debt consisted of the following (in thousands):
 
 
As of
September 30, 2018
 
 
As of
December 31, 2017
 
 
As of June
30, 2019
 
 
As of December
31,2018
 
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
  594 
  5,385 
  3,958 
  1,285 
Secured line of credit
  1,500 
  3,000 
Unamortized debt discount with a related party
  (774)
  (1,331)
Line of credit – inventory financing
  3,000 
  1,500 
Unamortized debt discount, related party
  (30)
  (60)
Total debt
  19,320 
  25,054 
  24,928 
  20,725 
Less: current portion
  (2,094)
  (8,385)
  (24,928)
  (20,725)
Long term debt
 $17,226 
 $16,669 
 $— 
 
Related-Party Notes PayableRefinanced Convertible Note
 
On November 3, 2017, the Company entered into the Refinancingrefinancing with Mr. Ryan Drexler, the Company’s Chairman of the Board of Directors, Chief Executive Officer and President.President (the “Refinancing”). 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, and 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”), (ii) a convertible secured promissory note dated as of November 8, 2016, in the original principal amount of $11,000,000 with an interest rate of 10% (the “2016 Convertible Note”) , and (iii) a secured demand promissory note dated as of July 27, 2017, in the 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-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 the 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 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 refinancing,Chief Executive Officer, President and Chairman of the Board of Directors of MusclePharm Corporation, a Nevada corporation (the “Company”), delivered a notice to the Company recorded a debt discountand its independent directors of $1.2 million. The debt discount is equalhis election to the change in the fair value of the conversion option between the Refinanced Convertible Note and the Prior Notes. The fair value of the conversion option was determined using a Monte Carlo simulation and the model of stock price behavior known as GBM which simulates a future period as a random step from a previous period. Significant assumptions were: expected stock price premium of 40%, expected trading days of 252 days, and volatility of 60%.
In addition, the Refinanced Convertible Note contains two embedded derivatives for default interest and an event of default put. Due to the unlikely event of default, the embedded derivatives have a de minimis valueconvert, effective as of September 30, 2018.16, 2019 (the “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, into shares of the Company’s common 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 Note (including principal and accrued and unpaid interest) was equal to $19,262,910. Pursuant to the terms of the Note, 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 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 each of the three months ended SeptemberJune 30, 20182019 and 2017,2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $0.7$0.6 million. During the three months ended June 30, 2019, no interest was paid in cash to Mr. Drexler. During the three months ended June 30, 2018, $0.5 million respectively. in interest was paid in cash to Mr. Drexler. 
For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $2.2$1.1 million and $1.8$1.2 million, respectively. During the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, $1.4$0.4 million and $1.8$0.9 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 Financial Group, LLC (“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 (“Borrower”) entered into a Loan and Security Agreement (“Security Agreement”) with Crossroads Financial Group, LLC (“Crossroads”).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 initial term of the Security Agreement was six months from the date of execution, and such initial term is extended automatically extends in six-monthone-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 has 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 SeptemberJune 30, 2019, and December 31, 2018, we owed Crossroads $3.0 million and $1.5 million, respectively.
On April 1, 2019, the Company owed $1.5and 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 under thisamended 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 “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 was extended to November 30, 2018April 1, 2020 at which point the term now renews automatically for successive four-monthone-year periods unless either party receives written notice of cancellation from the other, at minimum, thirty days prior to the expiration date. At SeptemberAs of June 30, 2019, and December 31, 2018, we the Company had approximately $0.6 million of outstanding borrowings under the Purchaseof approximately $4.4 million and Sale Agreement.$1.3 million, respectively.
 
During the three months ended SeptemberJune 30, 2019 and 2018, the Company assigned to Prestige, accounts with an aggregate face amount of approximately $9.9$13.6 million and $12.9 million, respectively, for which Prestige paid to the Company approximately $7.9$10.9 million and $10.3 million, respectively, in cash. During the three months ended SeptemberJune 30, 2019 and 2018, $10.7$10.4 million and $13.1 million, respectively, was repaid to Prestige, including fees and interest.
During the ninesix months ended SeptemberJune 30, 2019 and 2018, the Company assigned to Prestige accounts with an aggregate face amount of approximately $39.6$24.2 million and $29.7 million, respectively, for which Prestige paid to the Company approximately $31.7$19.4 million and $23.8 million, respectively, in cash. During the ninesix months ended SeptemberJune 30, 2019 and 2018, $37.1$16.7 million and $26.4 million, respectively, was repaid to Prestige, including fees and interest.
 
During the three months ended September 30, 2017, the Company sold to Prestige accounts with an aggregate face amount of approximately $13.3 million, for which Prestige paid to the Company approximately $10.6 million in cash. During the three months ended September 30, 2017, $9.8 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 million, for which Prestige paid to the Company approximately $22.3 million in cash. During the nine months ended September 30, 2017, $21.4 million was subsequently repaid to Prestige, including fees and interest.
 
Note 8.9. 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 4 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, 2018 and 2017, rent expense was $0.2 million and $0.1 million, respectively. During the nine months ended September 30, 2018 and 2017, rent expense was $0.7 million and $0.3 million, respectively.

As of September 30, 2018, future minimum lease payments are as follows (in thousands):
For the Year Ending December 31,
 
 
 
Remainder of 2018
 $217 
2019
  674 
2020
  649 
2021
  481 
2022
  369 
Thereafter
  — 
Total minimum lease payments
 $2,390 
The Company has subleased its Denver office space and anticipates receiving approximately $330,000 in sublease payments. These sublease payments are not reflected in the above table.
Capital Leases
As of September 30, 2018, the Company was leasing one vehicle under a fleet leasing agreement which are included in “Property and equipment, net” in the accompanying Consolidated Balance Sheets. The original cost of leased assets was $39,000 and the associated accumulated depreciation was $25,000 as of September 30, 2018. The Company also leases manufacturing and warehouse equipment under capitalfinance leases, which expire at various dates through FebruaryJuly 2020.
As of September 30, 2018 and December 31, 2017, short-term capital The Company does not intend to extend the lease liabilities of $97,000 and $126,000, respectively, were included as a component of current accrued liabilities, and the long-term capital lease liabilities of $74,000 and $146,000, respectively, were included as a component of long-term liabilitiesterms expiring in the accompanying Condensed Consolidated Balance Sheets.
As of September 30, 2018, the Company’s future minimum lease payments under capital lease agreements, are as follows (in thousands):
For the Year Ending December 31,
 
 
 
Remainder of 2018
 $27 
2019
  101 
2020
  50 
Total minimum lease payments
  178 
Less amounts representing interest
  (7)
Present value of minimum lease payments
 $171 
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 have provided forthe Company reserved a total amount of $0.7 million to cover the estimated purchase commitment shortfall adjustment induring the three and nineyear ended December 31, 2018, which remained unchanged during the six months ended SeptemberJune 30, 2018.

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
 
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 agreement with 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 “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, wethe Company 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 installment payment to be paid by July 7, 2019. The 2019 payment is accrued in current liabilities.Of this amount, the Company has remitted $0.3 million.
 
The Company recorded a charge in its Statement of Operations for the year ended December 31, 2017 for approximately $1.5 million, representing the discounted value of the unrecorded settlement amount. During the three and nine months ended SeptemberJune 30, 2019 and 2018, the Company recorded a charge of $30,000$29,000 and $148,000,$60,000, respectively, and during the six months ended June 30, 2019 and 2018, the Company recorded a charge of $58,000 and $121,000, respectively. This charge, representing imputed interest.interest, is included in “Interest and other expense, net” in the Company’s consolidated statements of operations.
 
Former Executive Lawsuit
 
The Company was engaged in a dispute with Mr. Richard Estalella (“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’ settlement of this matter.
 
On June 19, 2018, the Company approved 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 represents a full and final settlement of the Employment Litigation. Under the terms of the agreement, the Company has agreed to pay Estalella a sum of $925,000,$0.93 million consisting of a $325,000$0.33 million initial payment that was made in July 2018, and subsequent payments of $150,000$0.15 million installments to be paid within 90, 180, 270 and 360 days of the initial payment, respectively. TheAs of June 30, 2019, all outstanding payments arehad been fully paid.

Manziel Matter
On July 15, 2014, JMAN2 General LP (“JMAN2”), Jonathan Manziel and MusclePharm entered into an endorsement agreement, pursuant to 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 District 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 December 31, 2018. Of this amount, $70,000 was paid in current liabilities. Additionally, Estalella retained ownership2019, while the balance was paid in the first quarter of 350,000 shares of restricted stock that were in dispute, of which only 17,000 have been reflected in our total shares outstanding. As such2020.
United World Wrestling Arbitration
In November 2017, United World Wrestling (“UWW”), an amateur wrestling governing body, initiated arbitration against the Company has increasedbefore the totalCourt 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 share outstanding by 333,000 shares5,000 Swiss Francs. On January 25, 2019, the two parties reached a settlement agreement for the period ended September$0.4 million, which had been recorded as an accrued expense as of December 31, 2018. As of June 30, 2018.2019, all amounts owed to UWW had been paid.
 
The Company recordedDurnford 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 recovery in its Statement of Operations for$0.15 million, which had been recorded as an accrued expense as of December 31, 2018. Of the nine months ended September 30, 2018 for approximately $2.7settlement amount, $0.1 million representingwas paid during the reversalfourth quarter of accrued payroll the Company previously recorded for compensation related to the Estalella employment agreement.
Insurance Carrier Lawsuit
The Company was engaged in litigation with an insurance carrier, Liberty Insurance Underwriters, Inc. (“Liberty”), arising out of Liberty’s denial of coverage. In 2014, the Company 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 (“SEC”). Liberty disputed the extent to which those expenses are covered under its policy,2019 and the Company commenced a coverage action against Liberty for those expenses inbalance was paid during the United States District Court for the Southern Districtfirst quarter of New York. This matter was settled on September 21, 2018.2020.
 
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 SeptemberJune 30, 2018,2019, the Company was involved in the following material legal proceedings described below.

 
ThermoLife International
 
In January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to MusclePharm, filed a complaint against the 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 denying the allegations contained in the complaint and a counterclaimcounterclaims alleging that ThermoLife’s products were defective. OnThrough orders issued in September 26,and November 2018, the Court granted summary judgment to ThermoLife oncourt dismissed MusclePharm’s claims. On November 1, 2018,counterclaims and found that the Court granted partial summary judgment for ThermoLife on its own breach of contract claim, finding that MusclePharm isCompany was liable to ThermoLife for failing to meet its minimum purchase requirements. MusclePharm intends to seek reconsideration of the Court’s ruling.
 
United World Wrestling Arbitration
 
In November 2017, United World Wrestling (“UWW”), an amateur wrestling governing body, initiated arbitrationThe court held a bench trial on the issue of damages in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against MusclePharm before the Court of Arbitration for Sport in Lausanne, Switzerland (“CAS”), alleging that MusclePharm owed it $663,750, comprised of a $425,000 sponsorship fee plus accrued interest, under the terms of a 2015 sponsorship agreement. In September 2018, the sole arbitrator issued an order and decision in UWW’s favor for $425,000, plus interest at 12% per annum, as well as attorney’s feesCompany in the amount of 5,000 Swiss Francs.$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 ongoing discussions with UWWthe process of being briefed, and has posted bonds in the total amount of $0.6 million in order to resolvestay execution on the matter.judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid 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 vigorously pursue its defenses on appeal.
 
White Winston LawsuitSelect 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.)
 
InOn 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 all of its directors in(collectively the First Judicial District Court of the State of Nevada.“director defendants”). White Winston alleges that MusclePharm’s directorsthe director defendants breached their fiduciary duties when they approvedby improperly approving the November 2017 refinancing of Drexler’s $18three promissory notes issued by MusclePharm to Drexler (the “Amended Note”), in exchange for $18.0 million Refinanced Convertible Note (discussed further below).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,complaint, White Winston sought the appointment of a receiver over MusclePharm, a permanent injunction against the exercise of Mr. Drexler’s conversion rights,right under the appointment of a receiver,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 temporary restraining order prohibiting Drexler from exercising his conversion rights; on TRO. On September 14, 2018, the court let the TRO expire and denied the White Winston’sWinston Plaintiffs’ request for a preliminary injunction, and permittedfinding, among other things, that the temporary restraining order to dissolve. White Winston has appealedPlaintiffs 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. Indecision, MusclePharm filed a motion seeking to recoup the meantime,legal fees and costs it incurred in responding to the action remains pendingpreliminary 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 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, court, where 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 dismisshold an evidentiary hearing on the Amended Complaint.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 Superior Court of the State 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 defense that the request does not have a proper purpose. A trial on the petition has been set for February 25, 2021.
The Company intends to 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 ishas been pursuing this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.
The remaining issue in dispute in this matter involves the fair market value of restricted stock units in the Company granted to certain former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagree as to the value of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS have exchanged expert valuation reports on the fair market value of the stock and have had extensive negotiations on this issue. The parties, however, have not been able to reach an agreement with respect to the value of the stock. The IRS has also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS has asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal income taxes based on the fair market value of the stock.
The Former Officers’ cases, unlike the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for the amount of any tax due, and not the Company. 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 has not recorded an estimate for its potential liability, if any, associated with these taxes.

 
On August 22, 2018, Richard Estalella filed an action against the Company 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 Company’s 2014 restricted stock grants. The Company has 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 the next steps from the court and will continue to vigorously litigate the matter.
 
Durnford4Excelsior Matter
 
On July 28, 2015, Plaintiff, Tucker Durnford,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 First Amended Class Action Complaint which allegedcounterclaim 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 MusclePharm’s Arnold Iron Mass product violates consumer protection laws by misleading consumers aboutthey are unrecoverable under the amountUniform Commercial Code.  The court denied that motion, and sourcesthe action has proceeded to discovery. The Company recognized a liability of protein in the product. The product$5.1 million (past due invoices plus interest) as of June 30, 2019. Trial has not yet been set, although a Trial Setting Conference has been discontinued. The last shipments were in March of 2016.set for September 21, 2020. 
 
Plaintiff’s counsel alleged that results of laboratory testing demonstrate the actual total protein content per serving to be approximately 19.4 grams, once the free-form amino acids are excluded from the calculation. Plaintiff’s counsel attached to the First Amended Class Action Complaint what purport to be test results supporting that allegation.
 
We moved to dismiss the First Amended Class Action Complaint, arguing that plaintiff’s claims are preempted by the Federal Food, Drug, and Cosmetic Act and its implementing regulations. The Court granted MusclePharm’s motion to dismiss the case on December 18, 2015. Plaintiff was given leave to file an amended complaint, but instead chose to appeal the order granting MusclePharm’s motion to dismiss. On December 31, 2015, plaintiff’s counsel made a settlement demand, in an amount of $100,000, which demand was rejected. On February 10, 2016, the court entered judgment and dismissed the case with prejudice. Plaintiff appealed to the Ninth Circuit Court of Appeals, which heard arguments on November 15, 2017.
On October 12, 2018, the Ninth Circuit issued its opinion reversing the dismissal and remanding the case to the Northern District of California. The Ninth Circuit found that plaintiff’s misbranding theory premised on alleged “nitogen-spiking” or “protein-spiking” was preempted by federal law, but that plaintiff could attempt to prove his allegation that the protein in the product does not come entirely from hydrolyzed beef and lacoterferrin, and his allegation that the label misleads consumers into believing that that protein does come entirely from hydrolyzed beef and lacoterferrin. The Company intends to vigorously defend this action and is awaiting next steps from the District court.action.
 
SponsorshipNutrablend 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 Endorsement Contract Liabilitiesfourth 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 has various non-cancelable endorsement and sponsorship agreements with terms expiring through 2019. The total value of future contractual payments as of September 30, 2018 are as follows (in thousands):intends to vigorously defend this action.
 
 
 
For the Years Ending December 31,
 
 
 
Remainder of 2018
 
 
2019
 
 
Total
 
Outstanding Payments
 
 
 
 
 
 
 
 
 
Endorsement
 $102 
 $140 
 $242 
Sponsorship
  31 
  55 
  86 
Total future payments
 $133 
 $195 
 $328 

Note 9.10. Stockholders’ Deficit
 
Common Stock
 
The fair value of all stock issuances is based upon the quoted closing trading price on the date of issuance. Common stock outstanding as of June 30, 2019 and December 31, 2018 includes shares legally outstanding even if subject to future vesting. For the ninesix months ended SeptemberJune 30, 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
 
Stock issued for advertising services
  489,260 
 $440 
 $0.90 
Total
  489,260 
 $440 
 $0.90 
For the six months ended June 30, 2018, 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
 
Stock issued to related party for interest
  81,133 
 $53 
 $0.65 
Total
  81,133 
 $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, 2018 and December 31, 2017 includes shares legally outstanding even if subject to future vesting.
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 
 
Warrants
 
In November 2016,For the six months ended June 30, 2019 and 2018, the Company issued a warrant to purchase 1,289,378did not issue any warrants. As of both June 30, 2019 and 2018, the Company had outstanding warrants of 1,389,378 shares.
Treasury Stock
For the six months ended June 30, 2019 and 2018, the Company did not repurchase any shares of its common stock to the parent companyand held 875,621 shares in treasury as of Capstone related to the settlement of a dispute between the Companyboth June 30, 2019 and Capstone. The exercise price of this warrant is $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%.2018.
 
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 is $11.90 per share, with a contractual term of five years.
 
Note 10.11. Stock-Based Compensation

Restricted Stock
 
The Company’s stock-based compensation for the three and six months ended SeptemberJune 30, 2019 and 2018 and 2017 consistconsisted primarily of restricted stock awards. The activity of restricted stock awards granted to employees, executives and Board members during the six months ended June 30, 2019 was as follows:
 
 
 
Unvested Restricted Stock Awards
 
 
 
Number of
Shares
 
 
Weighted Average
Grant Date Fair
Value
 
Unvested balance – December 31, 2017
  487,267 
 $2.32 
Granted
  250,000 
  1.00 
Vested
  (460,267)
  1.94 
Cancelled
  — 
  — 
Unvested balance – September 30, 2018
  277,000 
  1.77 
 
 
Unvested Restricted Stock Awards
 
 
 
Number of
Shares
 
 
Weighted Average
Grant Date Fair
Value
 
Unvested balance – December 31, 2018
  197,500 
 $1.05 
Granted
  — 
  — 
Vested
  (135,000)
  1.07 
Unvested balance – June 30, 2019
  62,500 
  1.00 
 
The Company issued 250,000 shares of restricted stock to its Board members for each of the three and nine months ended September 30, 2018. 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 for each ofduring the three and six months ended SeptemberJune 30, 20182019 and 2017, respectively, and $0.3 million and $1.0 million for the nine months ended September 30, 2018, and 2017, respectively. As of SeptemberJune 30, 2018, the total2019, there was no unrecognized expense for unvested restricted stock awards, net of expected forfeitures, was $0.3 million, which is expected to be amortized over a weighted average period of 0.7 years.

Restricted Stock Awards Issued to Ryan Drexler, Chairman of the Board, Chief Executive Officer and President
In January 2017, the Company issued Mr. Drexler 350,000 shares of restricted stock pursuant to an Amended and Restated Executive Employment Agreement dated November 18, 2016 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 vested in full upon the first anniversary of the grant date.
Accelerated Vesting of Restricted Stock Awards Related to Terminations of Employment
In March 2017, Brent Baker, the Company’s former Executive Vice President of International Business, terminated employment with the Company. In connection with his termination of employment in March 2017, 10,000 shares of restricted stock held by Mr. Baker vested in full upon his termination of employment 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 $42,902, which is included in “Salaries and Benefits” in the accompanying Consolidated Statements of Operations for the nine months ended September 30, 2017.awards.
 
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 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.
 
In February 2016,Stock Options Summary Table
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 options to purchase 54,945 shares of its common stock to Michael Doron, the former Lead Director of the Board. Upon resignationsix months ended June 30, 2019. Shares obtained from the Boardexercise of Directors in June 2017, Mr. Doron forfeited 20,604 of theour options issued. These stock options were granted with 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 in the aggregate, 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 Year Ended 
December 31, 2016
Expected term of options6.5 years
Expected volatility-range used118.4%-131.0%
Expected volatility-weighted average125.7%
Risk-free interest rate-range used1.27%-1.71%
 
 
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 June 30, 2019
  171,703 
 $1.89 
 $1.72 
  6.67 
  — 
Exercisable as of June 30, 2019
  171,703 
 $1.89 
 $1.72 
  6.67 
  — 
 
For the three and six months ended SeptemberJune 30, 2017,2019, the Company recorded no stock compensation expense related to options. For the three months ended June 30, 2018, the Company recorded no stock compensation expense related to options. For the six months ended June 30, 2018, the Company recorded stock compensation expense of $16,000 related to options of $29,000. The Company did not record stock compensation expense related to options for the three months ended September 30, 2018. For the nine months ended September 30, 2018 and 2017, the Company recorded stock compensation expense related to options of $16,000 and $112,000, respectively.options.
 

Note 11.12. 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. There was no dilutive effect for the outstanding potentially dilutive securities for the three or nineand six months ended SeptemberJune 30, 20182019 or the three and 2017, respectively,six months ended June 30 2018, as the Company reported a net loss for bothall 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 June 30,
 
 
For the Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
 
2019
 
 
2018 (as restated)
 
Net loss
 $(1,978)
 $(2,128)
 $(5,355)
 $(8,426)
 $(5,884)
 $(280)
 $(10,389)
 $(2,791)
Weighted average common shares used in computing net loss per share, basic and diluted
  15,029,312 
  13,875,119 
  14,783,699 
  13,819,939 
  15,584,249 
  14,998,531 
  15,384,932 
  14,977,988 
Net loss per share, basic and diluted
 $(0.13)
 $(0.15)
 $(0.36)
 $(0.61)
 $(0.38)
 $(0.02)
 $(0.68)
 $(0.19)
 
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 ninesix months ended SeptemberJune 30, 20182019 and 2017, respectively,2018, as the Company reported a net loss for allboth periods. However, if the Company had net income for the three and six months ended June 30, 2019, the potentially dilutive securities included in the earnings per share computation would have been 17,839,797. If the Company had net income for the three and six months ended June 30, 2018, the potentially dilutive securities included in the earnings per share computation would have been 17,837,718.
 
Total outstanding potentially dilutive securities were comprised of the following:
 
 
As of September 30,
 
 
As of June 30,
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
Stock options
  171,703 
  171,703 
Warrants
  1,389,378 
  1,389,378 
Unvested restricted stock
  277,000 
  737,690 
  62,500 
  60,421 
Convertible notes
  16,216,216 
  8,619,624 
  16,216,216 
Total common stock equivalents
  18,054,297 
  10,918,395 
  17,839,797 
  17,837,718 
 
Note 12.13. Income Taxes
 
The Company recorded a reversaltax provision of tax expense of $3,000$26,000 and a tax expense of $14,000$34,000 for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and a tax expense of $100,000$36,000 and $118,000$103,000 for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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 June 30, 2019.
Utilization of net operating losses and R&D credits may be limited due to potential owenership changes under Section 382 of the IRS Code. The Company s currently undergoing a review of its net operating losses in connection with the conversion of Mr. Drexler's convertible note in September 30, 2018.2019. It is anticipated that the ulitization of the net operating losses carry-forwards may be limited as a result of the conversion. These pre-2018 net operating loss carry-forwards and dederal R&D credits have expiration dates starting in 2025 through 2037.
  

 
Note 13.14. 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 Companycompany 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 June 30,
 
 
For the Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
 
2019
 
 
2018 (as restated)
 
Revenue, net:
 
 
 
 
 
 
United States
 $20,841 
 $14,502 
 $53,543 
 $46,769 
 $16,179 
 $12,690 
 $29,166 
 $26,389 
International
  6,547 
  9,894 
  27,496 
  29,828 
  6,120 
  9,137 
  11,908 
  19,625 
Total revenue, net
 $27,388 
 $24,396 
 $81,039 
 $76,597 
 $22,299 
 $21,827 
 $41,074 
 $46,014 
 
Note 15. Changes 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 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 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 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.
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.

June 30, 2018 Restatements (Unaudited)
As of and for the three and six months ended June 30, 2018, the Company recorded the following restatement adjustments and charges (in thousands):
The unaudited restated consolidated balance sheets as of June 30, 2018 is presented below (in thousands, except per share data):
Impact on consolidated statements of operations for the three months ended June 30, 2018 - increase (decrease):
● 
Revenue, net:
Sales cutoff – ($2,283)
Correction of estimate of expected value of customer credits – $818
Reclassification of payments to customers – ($3,799)
Recognizing revenue on a net versus gross basis– ($13)
● 
Cost of revenue:
Sales cutoff – ($1,884)
Accrual for rebate receivable – ($180)
Recognizing revenue on a net versus gross basis– ($13)
Reclassification of advertising expenses directly related to product sales - $242
● 
Advertising and promotion:
Reclassification of payments to customers – ($3,794)
Reclassification of advertising expenses directly related to product sales and commissions – ($318)
● 
Selling, general and administrative:
Depreciation expense for facility relocation – ($56)
Reclassification of payments to customers – ($5)
Reclassification of advertising expenses representing commissions - $77
● 
Interest and other expense, net: adjusted debt discount amortization – ($140)
● 
Net Loss – ($794)
Impact on consolidated statements of operations for the six months ended June 30, 2018 - increase (decrease):
● 
Revenue, net:
Reversal of December 31, 2017 accrual for credits – $1,281
Sales cutoff – ($1,738)
Correction of estimate of expected value of customer credits – ($754)
Reclassification of payments to customers – ($6,383)
Recognizing revenue on a net versus gross basis– ($43)
● 
Cost of revenue:
Reversal of December 31, 2017 purchase price variance - $154
Sales cutoff – ($1,108)
Accrual for rebate receivable – ($350)
Recognizing revenue on a net versus gross basis– ($43)
Reclassification of advertising expenses directly related to product sales - $349
● 
Advertising and promotion:
Reversal of December 31, 2017 accrual for credits - ($90)
Reclassification of payments to customers – ($6,376)
Sales cutoff – $3
Reclassification of advertising expenses directly related to product sales and commissions – ($496)
● 
Selling, general and administrative:
Reversal of December 31, 2017 accrual for credits – ($72)
Depreciation adjustment for facility relocation – ($112)
Reclassification of payments to customers – ($7)
Reclassification of advertising expenses representing commissions - $148

● 
Professional fees: reversal of December 2017 legal over accrual – $148
● 
Interest and other expense, net: adjusted debt discount amortization – ($371)
● 
Net Loss – ($586)
Impact on consolidated balance sheets - increase (decrease):
● 
Accounts receivable, net of allowance for doubtful accounts:
Sales cutoff – ($5,853)
Correction of estimate of expected value of customer credits – ($760)
ASC 606 modified retrospective transition – ($1,053)
● 
Inventory: sales cutoff – $3,942
● 
Property and equipment, net: depreciation adjustment for facility relocation – ($800)
● 
Prepaid expenses and other assets: accrual for rebate receivable – $346
● 
Accounts payable: sales cutoff – ($5)
● 
Accrued liabilities: payroll tax adjustment on restricted stock – ($231)
● 
Convertible note with a related party, net of discount: debt discount adjustment net of amortization – $839
● 
Additional paid-in capital: debt discount adjustment – ($1,212)
● 
Accumulated Deficit – $3,569

The unaudited restated consolidated balance sheets as of June 30, 2018 is presented below (in thousands, except per share data):
 
 
June 30, 2018
 
 
 
As Previously Reported
 
 
 Restatement Adjustments    
 
 
Restated (Unaudited)
 
ASSETS
 
 
 
 
      
 
 
 
 
Current assets:
 
 
 
 
      
 
 
 
 
Cash
 $2,442 
 $— 
 $2,442 
Accounts receivable, net of allowance for doubtful accounts of $1,556 as of June 30, 2018
  16,278 
  (7,666)
  8,612 
Inventory
  7,651 
  3,942 
  11,593 
Prepaid expenses and other current assets
  1,140 
  346 
  1,486 
Total current assets
  27,511 
  (3,378)
  24,133 
Property and equipment, net
  1,491 
  (800)
  691 
Intangible assets, net
  1,157 
  — 
  1,157 
Other assets
  238 
  — 
  238 
TOTAL ASSETS
 $30,397 
 $(4,178)
 $26,219 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
    
Current liabilities:
    
    
    
Obligation under secured borrowing arrangement
 $2,787 
 $— 
 $2,787 
Line of credit
  2,000 
  — 
  2,000 
Accounts payable
  16,562 
  (5)
  16,557 
Accrued liabilities
  5,700 
  (231)
  5,469 
Accrued restructuring charges, current
  564 
  — 
  564 
Total current liabilities
  27,613 
  (236)
  27,377 
Convertible note with a related party, net of discount
  17,071 
  839 
  17,910 
Accrued restructuring charges, long-term
  80 
  — 
  80 
Other long-term liabilities
  1,248 
  — 
  1,248 
Total liabilities
  46,012 
  603 
  46,615 
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 June 30, 2018; 15,064,667 shares outstanding as of June 30, 2018
  15 
  — 
  15 
Additional paid-in capital
  159,918 
  (1,212)
  158,706 
Treasury stock, at cost; 875,621 shares
  (10,039)
  — 
  (10,039) 
Accumulated other comprehensive loss
  (165)
  — 
  (165)
Accumulated deficit
  (165,344)
  (3,569)
  (168,913)
TOTAL STOCKHOLDERS’ DEFICIT
  (15,615)
  (4,781)
  (20,396)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $30,397 
 $(4,178)
 $26,219 

The unaudited restated quarterly consolidated statements of operations for the three months ended June 30, 2018 is presented below (in thousands, except per share data):
 
 
Three Months Ended June 30, 2018
 
 
 
As Previously Reported
 
 
Restatement Adjustments
 
 
Restated (Unaudited)
 
Revenue, net
 $27,104 
 $(5,277)
 $21,827 
Cost of revenue
  18,952 
  (1,835)
  17,117 
Gross profit
  8,152 
  (3,442)
  4,710 
Operating expenses:
    
    
    
Advertising and promotion
  4,991 
  (4,112)
  879 
Salaries and benefits
  2,295 
  — 
  2,295 
Selling, general and administrative
  2,654 
  16 
  2,670 
Research and development
  208 
  — 
  208 
Professional fees
  626 
  — 
  626 
Total operating expenses
  10,774 
  (4,096)
  6,678 
Loss from operations
  (2,622)
  654 
  (1,968)
Other (expense) income: 
    
    
    
Gain on settlement of obligation
  2,747 
  — 
  2,747 
Interest and other expense, net
  (1,165)
  140 
  (1,025)
Loss before provision for income taxes
  (1,040)
  794 
  (246)
Provision for income taxes
  34 
  — 
  34 
Net loss
 $(1,074)
 $794 
 $(280)
 
    
    
    
Net loss per share, basic and diluted
 $(0.07)
 $0.05 
 $(0.02)
 
    
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  14,701,473 
  297,058 
  14,998,531 

The unaudited restated consolidated statements of operations for the six months ended June 30, 2018 is presented below (in thousands, except per share data):
 
 
Six Months Ended June 30, 2018
 
 
 
As Previously Reported
 
 
Restatement
Adjustments
 
 
Restated
(Unaudited)
 
Revenue, net
 $53,651 
 $(7,637)
 $46,014 
Cost of revenue
  37,280 
  (998)
  36,282 
Gross profit
  16,371 
  (6,639)
  9,732 
Operating expenses:
    
    
    
Advertising and promotion
  8,652 
  (6,959)
  1,693 
Salaries and benefits
  4,449 
  — 
  4,449 
Selling, general and administrative
  5,200 
  (43)
  5,157 
Research and development
  420 
  — 
  420 
Professional fees
  1,198 
  148 
  1,346 
Total operating expenses
  19,919 
  (6,854)
  13,065 
Loss from operations
  (3,548)
  215 
  (3,333)
Other (expense) income:
    
    
    
         Gain on settlement of obligation
  2,747 
  — 
  2,747 
         Interest and other expense, net
  (2,473)
  371 
  (2,102)
Loss before provision for income taxes
  (3,274)
  586 
  (2,688)
Provision for income taxes
  103 
  — 
  103 
Net loss
 $(3,377)
 $586 
 $(2,791)
 
    
    
    
Net loss per share, basic and diluted
 $(0.23)
 $0.04 
 $(0.19)
 
    
    
    
Weighted average shares used to compute net loss per share, basic and diluted
  14,658,812 
  319,176 
  14,977,988 

The unaudited restated consolidated statements of cash flows for the six months ended June 30, 2018 is presented below (in thousands):
 
 
   Six Months Ended June 30, 2018       
 
 
 
As Previously Reported  
 
 
 Restatement Adjustments  
 
 
 Restated (Unaudited)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
 
    
 
 
    
 
Net loss
 $(3,377)
 $586 
 $(2,791)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
    
Depreciation and amortization
  558 
  (112)
  446 
Settlement of obligation
  (2,747)
  2,747 
  — 
Bad debt expense
  414 
  — 
  414 
Amortization of debt discount
  403 
  (373)
  30 
Inventory provision
  — 
  36 
  36 
Stock-based compensation
  257 
  — 
  257 
Changes in operating assets and liabilities:
    
    
    
Accounts receivable
  (71)
  1,050 
  979 
Inventory
  (1,169)
  (987)
  (2,156)
Prepaid expenses and other current assets
  (56)
  (346)
  (402)
Other assets
  (15)
  — 
  (15)
Accounts payable and accrued liabilities
  5,835 
  (2,601)
  3,234 
Accrued restructuring charges
  (71)
  — 
  (71)
Net cash used in operating activities
  (39)
  — 
  (39)
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
    
Purchase of property and equipment
  (73)
  — 
  (73)
Net cash used in investing activities
  (73)
  — 
  (73)
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
    
Payments on line of credit
  (1,000)
  — 
  (1,000)
Proceeds from secured borrowing arrangement, net of reserves
  23,785 
  — 
  23,785 
Payments on secured borrowing arrangement, net of fees
  (26,383)
  — 
  (26,383)
Repayment of capital lease obligations
  (69)
  — 
  (69)
Net cash used in financing activities
  (3,667)
  — 
  (3,667)
Effect of exchange rate changes on cash
  (7)
  — 
  (7)
NET CHANGE IN CASH
  (3,786)
  — 
  (3,786)
CASH — BEGINNING OF PERIOD
  6,228 
  — 
  6,228 
CASH — END OF PERIOD
 $2,442 
 $— 
 $2,442 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
    
Cash paid for interest
 $1,936 
 $— 
 $1,936 
Cash paid for taxes
 $69 
 $— 
 $69 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    
    
    
Property and equipment acquired in conjunction with capital leases
 $— 
 $— 
 $— 
Purchase of property and equipment included in current liabilities
 $4 
 $— 
 $4 
Interest paid through issuance of shares of common stock
 $53 
 $— 
 $53 

Note 14.16. 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
 
None.ThermoLife International
In January 2016, ThermoLife, a supplier of nitrates to MusclePharm, filed a complaint against us in Arizona state court. ThermoLife alleged that we failed to meet minimum purchase requirements contained in the parties’ supply agreement. In March 2016, we filed counterclaims alleging that ThermoLife’s products were defective. 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 the issue of damages in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against the Company in the amount of $1.6 million, comprised of $0.9 million in damages, interest in the amount of $0.3 million and attorneys’ fees and costs in the amount of $0.4 million. The Company recorded $1.6 million in accrued expenses 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 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 vigorously pursue its defenses on appeal.
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
 
Effective October 1,CARES 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 EKS&H LLLP (“EKS&H”), the independent registered public accounting firm for MusclePharm Corporation (the “Company”), combined with Plante & Moran PLLC (“Plante Moran”). Asand 2019 tax liabilities.


HSBF Note
Due to economic uncertainty as a result of this transaction,the ongoing pandemic (COVID-19), on OctoberMay 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 July 1, 2018, EKS&H resigned as2020, the independent registered public accounting firm forCompany entered into the Company. Concurrentrefinancing with such resignation,Mr. Ryan Drexler, the Company’s audit committee approvedChairman of the engagementBoard of Plante MoranDirectors, Chief Executive Officer and President (the “Refinancing”). 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 $2,735,199, which amended and restated (i) a convertible 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 with Mr. 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 new independent registered public accounting firm forrate of 12% per annum. Unless earlier converted or repaid, all outstanding principal and any accrued but unpaid interest under the Company. For additional information seeRefinanced Convertible Note shall be due and payable on November 30, 2020.
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. Mr. Drexler may convert the outstanding principal and accrued interest into shares of the Company’s Current Reportcommon stock at a conversion price equal to or greater than (i) the closing price per share of the common stock on Form 8-K filed with the SEClast 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 Mr. Drexler’s conversion right. The Refinanced Convertible Note also contains customary restrictions on October 4, 2018.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.
There are no other events subsequent to June 30, 2019 that have not been described in the accompanying footnotes.
 

 
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, 2017,2019 (the “2019 Form 10-K”), as filed with the Securities and Exchange Commission on April 2, 2018, or the 2017 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-drivenscientifically driven, performance lifestyle company that develops, manufactures, markets, and distributes branded sports nutrition products and nutritional supplements.products. We offer a broad range of performance powders, bars, capsules, tablets and capsules, which seekon-the-go ready to help athletes of all types achieve a heightened level of performance and satisfaction.eat protein snacks. Our portfolio consists of sports nutrition staples, such as protein powdersrecognized brands, including MusclePharm® and bars, and preworkout powders, as well as well-known supplements like creatine, BCAA, fish oil, a multi-vitamin and more. These products fall under globally-recognized brands, MusclePharm® and FitMiss®FitMiss®, which are marketed and sold in more than 100 countries globally. Our corporate headquarters isare located in Burbank, CA.
 
Our productsofferings are clinically-developedclinically developed through a six-stage research process, and all of our manufactured products are rigorously vetted for banned substances by the leading quality assurance program, Informed-Choice. While we initially drove growth in the Specialty retail channel, in recent years we have expanded our focus to drive sales and retailer growth across leading e-commerce, Food Drug & Mass, and Club retail channels, including Amazon, Costco, iHerb, Kroger, Walgreens, 7-Eleven, and 7-Eleven. Our sales in the e-commerce space grew approximately 250% in 2017 compared to 2016 and we have continued to see growth in 2018. Additionally, BodyBuilding.com named our Combat Crunch Bar as Protein Bar of the Year in each of 2015, 2016 and 2017.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. 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. We are actively managing our business to respond to the impact.
 
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 both continued improvement in our operating margins and expense structure, as well as topline sales advancement. The terminationlocal governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the Arnold Schwarzenegger product-line licensing agreement, discontinuance of unprofitable SKUs and product families, as well asinfection. Additionally, more restrictive proclamations and/or directives may be issued in the migration to new product suppliers have impacted revenue growth for the short-term. However, we anticipate revenues and growth margin to strengthen as we increase focus on our core MusclePharm products. In addition, the sale of our wholly-owned subsidiary, BioZone, in May 2016, enabled us to further narrow our focus on core products, and further innovate and develop new products. We also anticipate improved results from advertising and promotions expenses as we focus on effective marketing and advertising strategies, having moved away from costly celebrity endorsements.
Management’s Plans with Respect to Liquidity and Capital Resources
Management believes the restructuring plan, the continued reduction in ongoing operating costs and expense controls, and the aforementioned growth strategy, will enable us to ultimately achieve profitability. We have reduced our operating expenses sufficiently and believe that our ongoing sources of revenue together with our access to capital will be sufficient to cover these expenses for the foreseeable future.
 

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations.
 
As of September 30, 2018,While we hadexpect 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 stockholders’ deficit of $17.5 million and recurring losses from operations. To manage cash flow, we entered into a secured borrowing arrangement, pursuant to which we have the ability to borrow up to $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The Agreement’s term has been extended to November 30, 2018, at which point the term now renews automatically for successive four-month periods unless either party receives written notice of cancellation from the other, at a minimum thirty days prior to the expiration date. In October 2017, we also entered into a loan and security agreement to borrow against our inventory up to a maximum of $3.0 million for an initial six-month term which was automatically extended for six additional months. As of September 30, 2018, we owed $1.5 million on this credit line.
On November 3, 2017, we entered into a refinancing transaction with Mr. Ryan Drexler, our Chairman of the Board, Chief Executive Officer and President, to restructure all of the $18.0 million in notes payable to him, which are now due on December 31, 2019. Accordingly, such debt is classified as a long-term liability at September 30, 2018.
As of September 30, 2018, we had approximately $1.7 million in cash and a $2.0 million working capital deficit.
Our Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2018 were prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilitiesdecline 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 adjustmentsmonitor the business environment for any significant changes that could be necessary should we be requiredimpact the Company’s operations. The Company has taken proactive steps to liquidate our assets.
Our ability to continuemanage costs and discretionary spending, such as a going concernremote working and raise capital for specific strategic initiatives could also depend on obtaining adequate capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet our needs, or that any such financing will be obtainable on acceptable terms.
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 us 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.
We believe that our capital resources as of September 30, 2018, available borrowing capacity and current operating plans will be sufficient to fund our planned operations for at least twelve months from the date of filing this report.reducing facility related expense.
 

 
Results of Operations
 
Comparison of the Three Months Ended SeptemberJune 30, 20182019 to the Three Months Ended SeptemberJune 30, 20172018
 
 
For the Three
Months Ended
September 30,
 
 
 
 
($ in thousands)
 
For the Three
Months Ended
June 30,
 
 
 
 
 
    
 
 
2018
 
 
2017
 
 
$ Change
 
 
% Change
 
 
2019
 
 
2018 (as restated)
 
 
$ Change
 
 
   % Change  
 
 
($ in thousands)
 
 
 
 
 
 
 
 
  
 
 
     
 
Revenue, net
 $27,388 
 $24,396 
 $2,992 
  12.3%
 $22,299 
 $21,827 
 $472 
  2 
Cost of revenue
  18,595 
  16,359 
  2,236 
  13.7 
  20,573 
  17,117 
  3,456 
  20 
Gross profit
  8,793 
  8,037 
  756 
  9.4 
  1,726 
  4,710 
  (2,984)
  (63)
Operating expenses:
    
    
    
Advertising and promotion
  3,589 
  1,952 
  1,637 
  83.9 
  809 
  879 
  (70)
  (8)
Salaries and benefits
  1,856 
  2,640 
  (784)
  (29.7)
  1,894 
  2,295 
  (401)
  (17)
Selling, general and administrative
  2,975 
  3,468 
  (493)
  (14.2)
  2,427 
  2,670 
  (243)
  (9)
Research and development
  185 
  199 
  (14)
  (7.0)
  215 
  208 
  7 
  3 
Professional fees
  436 
  1,034 
  (598)
  (57.8)
  1,215 
  626 
  589 
  94 
Impairment of assets
  743 
  — 
  743 
  — 
Total operating expenses
  9,784 
  9,293 
  491 
  5.3 
  6,560 
  6,678 
  (118)
  (2)
Loss from operations
  (991)
  (1,256)
  265 
  (21.1)
  (4,834)
  (1,968)
  2,866 
  146 
Other income (expense):
    
    
(Loss) gain on settlement of obligation
  (105)
  2,747 
  (2,852)
  (104)
Interest and other expense, net
  (990)
  (858)
  (132)
  15.4 
  (919)
  (1,025)
  (106)
  (10)
Loss before income taxes
  (1,981)
  (2,114)
  133 
  (6.3)
Income taxes
  (3)
  14 
  (17)
  (121.4)
Loss before provision for income taxes
  (5,858)
  (246)
  5,613 
  2282 
Provision for income taxes
  26 
  34 
  (8)
  (24)
Net loss
 $(1,978)
 $(2,128)
 $150 
  (7.0)%
 $(5,884)
 $(280)
 $5,604 
  2002 
 

 
Comparison of the NineSix Months Ended SeptemberJune 30, 20182019 to the NineSix Months Ended SeptemberJune 30, 20172018
 
 
For the Nine
Months Ended
September 30,
 
 
 
 
 
For the Six
Months Ended
June 30,
 
 
 
 
 
2018
 
 
2017
 
 
$ Change
 
 
% Change
 
($ in thousands)
 
2019
 
 
2018 (as restated)
 
 
$ Change
 
 
% Change
 
 
($ in thousands)
 
 
 
 
 

 
 
 
 
Revenue, net
 $81,039 
 $76,597 
 $4,442 
  5.8%
 $41,074 
 $46,014 
 $(4,940)
  (11)
Cost of revenue
  55,875 
  54,474 
  1,401 
  2.6 
  36,428 
  36,282 
  146 
  — 
Gross profit
  25,164 
  22,123 
  3,041 
  13.7 
  4,646 
  9,732 
  (5,086)
  (52)
Operating expenses:
    
    
Advertising and promotion
  12,241 
  6,079 
  6,162 
  101.4 
  1,560 
  1,693 
  (133)
  (8)
Salaries and benefits
  6,305 
  8,530 
  (2,225)
  (26.1)
  3,774 
  4,449 
  (675)
  (15)
Selling, general and administrative
  8,175 
  9,183 
  (1,008)
  (11.0)
  5,069 
  5,157 
  (88)
  (2)
Research and development
  605 
  488 
  117 
  24.0 
  462 
  420 
  42 
  10 
Professional fees
  1,634 
  2,643 
  (1,009)
  (38.2)
  1,941 
  1,346 
  595 
  44 
Impairment of assets
  743 
    
  743 
  100.0 
Settlement of obligation
  (2,747)
  1,453 
  (4,200)
  (289.1)
Total operating expenses
  26,956 
  28,376 
  (1,420)
  (5.0)
  12,806 
  13,065 
  (259)
  (2)
Loss from operations
  (1,792)
  (6,253)
  4,461 
  (71.3)
  (8,160)
  (3,333)
  4,827 
  145 
Gain on settlement of accounts payable
  — 
  471 
  (471)
  (100.0)
Other (expense) income:
    
(Loss) gain on settlement of obligation
  (109)
  2,747 
  (2,856)
  (104)
Interest and other expense, net
  (3,463)
  (2,526)
  (937)
  37.1 
  (2,084)
  (2,102)
  (18)
  (1)
Loss before income taxes
  (5,255)
  (8,308)
  3,053 
  (36.7)
Income taxes
  100 
  118 
  (18)
  (15.3)
Loss before provision for income taxes
  (10,353)
  (2,688)
  7,665 
  285 
Provision for income taxes
  36 
  103 
  (67)
  (65)
Net loss
 $(5,355)
 $(8,426)
 $3,071 
  (36.4)%
 $(10,389)
 $(2,791)
 $7,598 
  272 
 

 
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 June 30,
 
 
For the Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
 
  2019
 
 
2018 (as restated)
 
Revenue, net
  100%
  100%
Cost of revenue
  68 
  67 
  69 
  71 
  92 
  78 
  89 
  79 
Gross profit
  32 
  33 
  31 
  29 
  8 
  22 
  11 
  21 
Operating expenses:
    
    
Advertising and promotion
  13 
  8 
  15 
  8 
  4 
Salaries and benefits
  7 
  11 
  8 
  11 
  8 
  11 
  9 
  10 
Selling, general and administrative
  11 
  14 
  10 
  12 
  11 
  12 
  11 
Research and development
  1 
  1 
Professional fees
  1 
  4 
  2 
  3 
  5 
  3 
  5 
  3 
Impairment of assets
  3 
  — 
  1 
  — 
Settlement
  — 
  (4)
  2 
Total operating expenses
  36 
  38 
  33 
  37 
  29 
  31 
  29 
Loss from operations
  (4)
  (2)
  (8)
  (21)
  (9)
  (20)
  (8)
Gain on settlement of accounts payable
  — 
  1 
Other income (expense):
    
Gain on settlement of obligation
  — 
  13 
  — 
  6 
Interest and other expense, net
  (3)
  (4)
  (3)
  (4)
  (5)
Loss before income taxes
  (7)
  (8)
  (6)
  (11)
Income taxes
  — 
Loss before provision for income taxes
  (25)
  (1)
  (25)
  (7)
Provision for income taxes
  — 
Net loss
  (7)%
  (8)%
  (6)%
  (11)%
  (25)%
  (1)%
  (25)%
  (7)%
    
 
Revenue, net
 
Specialty WebsiteWe derive our revenue through the sales of our various branded nutritional supplements. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration 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. We record sales incentives as a direct reduction of revenue for various discounts provided to our customers consisting primarily of volume incentive rebates and advertising 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.
 
We generate specialty revenues from the saleThe MusclePharm brands are marketed across major global retail distribution channels – Specialty, International, and Food, Drug, and Mass (“FDM”). Below is a table of nutritional supplements to customers in the United States throughnet revenue by our website. For sales made through our website, we recognize revenue upon shipment to the customer as that is when the customer obtains control of the promised good. We require cash or credit card payment at the point of sale or when the order is placed on our website. Accounts receivable from Specialty Website Sales represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, we have determined that no allowance for doubtful accounts is necessary.major distribution channel:
 
Wholesale (Specialty, International and FDM)
For our distribution sales, we recognize revenue at the point of sale. We generate wholesale revenues primarily from the sale of nutritional supplements to retailers and distributors in the United States and Canada. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer. We recognize revenue upon shipment to the customer as that is when the customer obtains control of the promised goods. We typically extend credit terms to our wholesale customers based on their creditworthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when the Company’s right to the consideration becomes unconditional. Accounts receivable from our wholesale customers are typically due within 30 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and the Company’s assessment of its customers’ creditworthiness.
 
 
For the Three Months Ended June 30,
 
 
 
2019
 
 
% of Total
 
 
2018 (as restated)
 
 
% of Total
 
Distribution Channel
 
 
 
 
 
 
 
 
 
 
 
 
Specialty
 $9,215 
  41%
 $9,578 
  44%
International
  6,120 
  28%
  9,137 
  42%
FDM
  6,964 
  31%
  3,112 
  14%
Total
 $22,299 
  100%
 $21,827 
  100%
 

 
 
 
For the Six Months Ended June 30,
 
 
 
2019
 
 
% of Total
 
 
2018 (as restated)
 
 
% of Total
 
Distribution Channel
 
 
 
 
 
 
 
 
 
 
 
 
Specialty
 $18,259 
  44%
 $16,106 
  35%
International
  11,908 
  29%
  19,625 
  43%
FDM
  10,907 
  27%
  10,283 
  22%
Total
 $41,074 
  100%
 $46,014 
  100%
For the three and six months ended June 30, 2019, the reductions in sales from international customers related primarily to a general shift to domestic and online marketing.
For the three months ended June 30, 2019, the increase in FDM is due to an increase in Costco Wholesale Corporation’s (“Costco”) domestic sales, the result of an additional promotional event in 2019 as compared to 2018.
For the six months ended June 30, 2019, the increase in Specialtyis due to increased promotional activity with iHerb and Amazon, resulting in higher revenues.
Net revenues reflectrevenue reflects the transaction prices for contracts, which includeincludes 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 promotional 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 increased $0.5 million, or 2%, to $22.3 million for the three and nine months ended SeptemberJune 30, 2018, net revenue increased 12.3% to $27.4 million and 5.8% to $81.0 million, respectively,2019, compared to $21.8 million for the three and nine months ended SeptemberJune 30, 2017 when net revenues were $24.4 million and $76.6 million, respectively.2018. Net revenue for the three months ended SeptemberJune 30, 20182019 increased due to growth in our domestic sales of $6.4$3.5 million, which was offset by reduced international sales of $3.0 million. Discounts and sales allowances decreased slightly to 26% of gross revenue, or $7.9 million, for the three months ended June 30, 2019 from 27% of gross revenue, or $8.0 million for the same period in 2018. Discounts and sales allowance will fluctuate based on customer mix and changes in discretionary promotional activity.
During the three months ended June 30, 2019 and 2018, our largest customer, Costco, accounted for approximately 39% and 22% of our net revenue, respectively. The increase in Costco revenue is due to additional promotional activity during the three months ended June 30, 2019 compared to 2018.
Net revenue decreased $4.9 million, or 11%, to $41.1 million for the six months ended June 30, 2019, compared to $46.0 million for the six months ended June 30, 2018. Net revenue for the six months ended June 30, 2019 decreased due to reduction in our international sales of $7.7 million, which was partially offset by reduced international sales of $3.4 million. Net revenue for the nine months ended September 30, 2018 increased due to growth in our domestic sales of $6.7 million, which was partially offset by reduced international sales of $2.3$2.8 million. For the three months ended September 30, 2018 discountsDiscounts and sales allowances increased slightly to 19%27% of gross revenue, or $6.4$15.5 million, compared tofor the threesix months ended SeptemberJune 30, 2017 when discounts and allowances were 8%, or $2.1 million. For the nine months ended September 30, 2018 discounts and sales allowances increased to 17%2019 from 26% of gross revenues,revenue, or $16.5$15.8 million compared tofor the nine months ended September 30, 2017 when discounts and allowances were 16% or $13.8 million. The changessame period in discounts and allowances is primarily relate to discounts and allowances on existing products with key customers.
During the three and nine months ended September 30, 2018, our largest customer, Costco Wholesale Corporation, or Costco, accounted for approximately 38% and 25% of our net revenue, respectively. During each of the three and nine months ended September 30, 2018, Amazon accounted for approximately 15% of our net revenue, respectively. During the three and nine months ended September 30, 2018, iHerb accounted for approximately 18% and 12% of our net revenues, respectively.
During both the three and nine months ended September 30, 2017, our largest customer, Costco Wholesale Corporation, or Costco, accounted for approximately 26% of our net revenue. During the three and nine months ended September 30, 2017, Amazon accounted for approximately 16% and 11% of our net revenues, respectively.2018.
 
Cost of Revenue and Gross Margin
 
Cost of revenue for ourMusclePharm 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 contract manufacturers to drop ship products directly to our customers.
 

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
Costs of revenue increased 20% to $20.6 million for the three and nine months ended SeptemberJune 30, 2018 increased from2019, compared to $17.1 million for the same periodsperiod in 2017 primarily as a result of increased sales.
For the three and nine months ended September 30, 2018, costs of revenue increased 13.7% to $19.0 million and 2.6% to $55.9 million, respectively, compared to the three and nine months ended September 30, 2017, when costs of revenues were $16.4 million and $54.5 million, respectively.2018. Accordingly, gross profit for the three and nine months increased 9.4%ended June 30, 2019 decreased $3.0 million to $8.8$1.7 million and 13.7% to $25.2 million, respectively, compared to $4.7 million for the same period in 2018. Gross profit margin was 8% for the three and nine months ended SeptemberJune 30, 2017, when2019 compared to 22% for the same period in 2018. Our gross margin decreased for the three months ended June 30, 2019, compared to same period in 2018 due to an increase in protein prices.
Costs of revenue increased less than 1% to $36.4 million for the six months ended June 30, 2019, compared to $36.3 million for the same period in 2018. Accordingly, gross profit for the six months ended June 30, 2019 decreased $5.1 million to $4.6 million compared to $9.7 million for the same period in 2018. Gross profit margin was $8.0 million and $22.1 million, respectively. Positively impacting this11% for the six months ended June 30, 2019 compared to 21% for the same period in 2018. Our gross profit percentage is our abilitymargin decreased for the six months ended June 30, 2019, compared to offset our inflationary costthe same period in 2018 due to an increase in our protein products that negativelyprices. The increase in protein prices primarily impacted our costs in 2017.the last three months of the period ended June 30, 2019.
 
Operating Expenses
 
Operating expenses for the each of the three and nine months ended SeptemberJune 30, 2019 and 2018 were $9.8$6.6 million and $27.0$6.7 million, respectively, comparedrespectively. Our operating expenses decreased to $9.3 million and $28.4 million29% of net revenue for the three and nine months ended September 30, 2017, respectively. For the three months ended SeptemberJune 30, 2018, our operating expenses overall were 36% of net revenue2019, compared to 38%31% for the same period in 2017. For the nine months ended September 30, 2018, our operating expenses overall were 33% of net revenue compared to 37% for the same period in 2017.2018. We have been focused on institutinginstituted new strategies focusing on new advertising and promotions, while at the same time reducing other operating expenses.expenses in response to continued losses.
 

Operating expenses for the six months ended June 30, 2019 and 2018 were $12.8 million and $13.1 million, respectively. Our operating expenses have increased to 31% of net revenue for the six months ended June 30, 2019, compared to 29% for the same period in 2018, due to lower revenues.
 
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 which began 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 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 ROI drivencost-effective brand partnerships as well as grass-roots marketing and advertising efforts thatefforts. We expect our advertising and promotion expenses to remain relatively constant in future periods as we continue to leverage existing brand recognition and more effectivemove towards lower cost advertising outlets including social media and trade advertising.
 
For the three and nine months ended September 30, 2018, advertising and promotion expense increased 83.9% to $3.6 million and 101.4% to $12.2 million, respectively, compared to the three and nine months ended September 30, 2017, when advertising and promotion expense were $2.0 million and $6.1 million, respectively. Advertising and promotion expense for the three and nine months ended September 30, 2018 and 2017 included expenses relateddecreased 8% to strategic partnerships, advertising, and store support. The increase in spending$0.8 million for the three months ended SeptemberJune 30, 2019, or 3.6% of net revenue, compared to $0.9 million, or 4.0% of net revenue, for the same period in 2018, primarily included increasesas we focused on reducing our expenses and shifting our promotional costs, in part, from general branding and product awareness to strategic partnership advertisingacquiring customers and driving sales from existing customers.
Advertising and promotion expense decreased 8% to $1.6 million for the six months ended June 30, 2019, or 3.8% of $1.1net revenue, compared to $1.7 million, and store supportor 3.7% of $0.4 million. Thenet revenue, for the same period in 2018, as we focused on reducing our expenses. This decrease was partially offset by an increase in spending for the nine months ended September 30, 2018 primarily included increases to strategic partnershipmagazine and online advertising of $3.0 million, store support of $2.3 million, and print advertising of $0.2 million.through a single publisher.
 
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.
 
For the three and nine months ended SeptemberJune 30, 2018,2019, salaries and benefits expense decreased 29.7%17% to $1.9 million and 26.1% to $6.3 million, respectively, compared to $2.3 million for the three and nine months ended SeptemberJune 30, 2017, when salaries and benefits expenses were $2.6 million and $8.5 million, respectively.2018. For the three and nine months ended SeptemberJune 30, 2018,2019, stock-based compensation expense decreased $0.3 million$57,000, and $0.9 million, respectively. bonus expense decreased $260,000 as we eliminated most discretionary bonuses due to our continued losses.

For the ninesix months ended SeptemberJune 30, 2018, other2019, salaries and benefits expense decreased 15% to $3.8 million, compared to $4.4 million for the six months ended June 30, 2018. For the six months ended June 30, 2019, stock-based compensation expense decreased by $1.3 million compared$114,000, bonus expense decreased $300,000, and salaries and related personnel costs decreased due to the nine months ended September 30, 2017, which was related to the reductiona slight decrease in headcount.
 
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, 2018, selling,Selling, general and administrative expenses decreased 14.2%9% to $3.0$2.4 million, and 11.0% to $8.2 million, respectively,or 11% of net revenue, for the three months ended June 30, 2019 compared to $2.7 million, or 12% of net revenue, for the threesame period in 2018 primarily due to lower bad debts, travel expenses and nine months ended September 30, 2017, when selling,depreciation, with a combined reduction of $0.3 million.
Selling, general and administrative expenses were $3.5decreased 2% to $5.1 million, and $9.2 million, respectively. The decreases duringor 12% of net revenue, for the threesix months ended SeptemberJune 30, 20182019 compared to $5.2 million, or 11% of net revenue, for the three months ended September 30, 2017 weresame period in 2018 primarily due to lower depreciationbad debt provision of $0.1 million, lower bad debt of $0.6 million, and lower board costs of $0.1 million. These reductions were partially offset by increased freight expense of $0.3. The decreases during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 were primarily due to lower office expenses and other miscellaneous cost savings of $0.4 million, lower board costs of $0.4 million, lower insurance expense of $0.1 million, lower bad debt expense of $0.4 million, lower depreciation and amortization of $0.3 million, and a decrease of $0.2 million related to information technology.

These reductions were partially offset by increases due to higher freight expense of $0.5 million, and higher rent expense of $0.3 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 SeptemberJune 30, 2019 and 2018, research and development expenses decreased 7.0% towere flat at $0.2 million and increased 24.0% to $0.6 million, respectively, compared to three and ninerespectively.
For the six months ended SeptemberJune 30, 2017, when2019, research and development expenses were $0.2 million andincreased 10% to $0.5 million, respectively. primarilycompared to $0.4 million for the six months ended June 30, 2018 due to increased quality control testing fees.an increase in headcount.
 
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
For the three months ended June 30, 2019, professional fees increased 94% to $1.2 million, compared to $0.6 million for the three months ended June 30, 2018. The significant increase is primarily due to higher legal fees as a result of increased litigation and costs related to the Company’s restatement of financial results.
For the six months ended June 30, 2019, professional fees increased 44% to $1.9 million, compared to $1.3 million for the six months ended June 30,2018. The significant increase is primarily due to higher legal fees as a result of increased litigation and costs related to the Company’s restatement of financial results. After 2019, 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, 2018, professional fees expenses decreased 57.8% to $0.4 million and 38.2% to $1.6 million, respectively, compared to the three and nine months ended September 30, 2017, when professional fees expenses were $1.0 million and $2.6 million, respectively. The decrease during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to lower accounting fees of $0.1 million, reduced consulting fees of $0.1 million, reduced legal fees of $0.3 million due to reduced litigation, and $0.1 million due to reduced regulatory related fees. The decrease during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to lower accounting fees of $0.2 million, lower legal fees of $0.7 million due to reduced litigation, and reduced consulting and regulatory related fees of $0.1 million.
Impairment of assets
During the three months ended September 30, 2018, we subleased our former headquarters in Denver, CO. As a result, we determined that the leasehold improvements had become fully impaired. We recorded an impairment charge of $0.7 million during the period.
 

 
Interest and other Expense,expense, net
 
For the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, “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 June 30,
 
 
For the
Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
 
2019
 
 
2018 (as restated)
 
Interest and other expense, net:
 
 
 
 
 
 
Interest expense, related party
 $(559)
 $(523)
 $(1,652)
 $(1,379)
 $(538)
 $(553)
 $(1,070)
 $(1,094)
Interest expense, related party debt discount
  (155)
  (153)
  (557)
  (460)
  (15)
  (30)
Interest expense, other
  (28)
  (6)
  (160)
  (14)
  (164)
  (65)
  (457)
  (132)
Interest expense, secured borrowing arrangements
  (251)
  (172)
  (906)
  (397)
Foreign currency transaction (loss) gain
  (4)
  16 
  (197)
  49 
Interest expense, secured borrowing arrangement
  (280)
  (309)
  (505)
  (655)
Foreign currency transaction loss
  (13)
  (80)
  (213)
  (193)
Other
  7 
  (20)
  9 
  (325)
  91 
  (3)
  191 
  2 
Total interest and other expense, net
 $(990)
 $(858)
 $(3,463)
 $(2,526)
 $(919)
 $(1,025)
 $(2,084)
 $(2,102)
 
Net interest and other expense for the three and nine months ended SeptemberJune 30, 2018 increased 15.4%2019 decreased 10%, or $0.1 million and 37.1%, or $0.9 million, compared tofrom the same periodsperiod in 2017,2018. For the three months ended June 30, 2019 the change was primarily relateddue to increased other interest, partially offset by the fluctuation in the foreign currency transaction loss and the change in other expense, with a related party and increased interest on secured borrowings.which includes sublease income.
 
Net interest and other expense for the six months ended June 30, 2019 decreased 1%, staying flat at $2.1 million for both periods.
Provision for Income Taxes
 
IncomeProvision for income taxes consists primarily of federal and state income taxes in the U.S. and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.
 
Liquidity and Capital Resources
 
The Company has incurred significant losses and experienced negative cash flows since inception. As of June 30, 2019, the Company had cash of $1.1 million, a decline of $1.2 million from the December 31, 2018 balance of $2.3 million. As of June 30, 2019, we had a working capital deficit of $39.7 million, a stockholder’s’ deficit of $37.8 million and an accumulated deficit of $187.3 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern. 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 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 continued through the first and second quarters of 2020. Management believes the restructuring plan, the continued reductionreductions in ongoing operating costs, and expensecontinued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the aforementioned growth strategy,Company’s customers, will enableallow us to ultimately achieve profitability. We have reduced our operating expenses sufficiently and believe that our ongoing sources of revenue together with our access to capital will be sufficient to cover these expenses forprofitability, however, the foreseeable future, however, weCompany can give no assurances that this will occur.
 
As of September 30, 2018, we had a stockholders’ deficit of $17.5 million and recurring losses from operations. To manage cash flow, we have entered into a secured borrowing arrangement, pursuant to which we have the ability to borrow up to $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The agreement’s term has been extended to November 30, 2018, which renews automatically for successive four-month periods unless either party receives written notice of cancellation from the other, at a minimum thirty days prior to the expiration date. In October 2017, we also entered into a loan and security agreement to borrow against our inventory up to a maximum of $3.0 million for an initial six-month term which automatically extends for six additional months. As of September 30, 2018, we owed $1.5 million on this credit line.
On November 3, 2017, we entered into a refinancing transaction with Mr. Ryan Drexler, our Chairman of the Board, Chief Executive Officer and President, to restructure all of the $18.0 million in notes payable to him, which are now due on December 31, 2019. Accordingly, such debt is classified as a long-term liability at September 30, 2018.
As of September 30, 2018, we had approximately $1.7 million in cash and a $2.0 million working capital deficit.

Our Condensed Consolidated Financial Statements as of and for the three months ended September 30, 2018 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 could be necessary should we be required to liquidate our assets.
Our ability to continue as a going concern and raise capital for specific strategic initiatives could also depend on obtaining adequate capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet our needs, or that any suchnumerous financing will be obtainable on acceptable terms.
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 us 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.
We believe that our capital resources as of September 30, 2018, available borrowing capacity and current operating plans will be sufficient to fund our planned operations for at least twelve months from the date of filing this report.arrangements outlined below.
 
Our net consolidated cash flows are as follows (in thousands):
 
 
For the Nine Months
Ended September 30,
 
 
For the Six Months
Ended June 30,
 
 
2018
 
 
2017
 
 
2019
 
 
2018 (as restated)
 
Consolidated Statements of Cash Flows Data:
 
 
 
 
 
 
Net cash provided by/(used in) operating activities
 $2,023 
 $(2,337)
Net cash used in operating activities
 $(5,332)
 $(39)
Net cash used in investing activities
  (86)
  (27)
  (13)
  (73)
Net cash (used in)/provided by financing activities
  (6,393)
  2,140 
Net cash provided by (used in) financing activities
  4,116 
  (3,667)
Effect of exchange rate changes on cash
  (23)
  159 
  9 
  (7)
Net change in cash
 $(4,479)
 $(65)
 $(1,220)
 $(3,786)
 
Operating Activities
 
Our cash provided by/used in operating activities is driven primarily by sales of our products and vendor provided credit as a result of improved payment terms with vendors offset in 2018 by an increase in accounts payable.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 $4.4$5.3 million higher for the ninesix months ended SeptemberJune 30, 20182019 compared to the same period in 2017.2018. The variance primarily relates to net loss of $10.4 million adjusted for non-cash charges, which resulted in a use of cash of $4.8$8.6 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to a use of cash of $4.1$1.6 million for the same period in 2017.2018. This increasevariance also included a net change in net operating assets and liabilities, which resulted in a source of cash of $6.8$3.3 million for the ninesix months ended SeptemberJune 30, 20182019 compared to a source of cash of $1.7$1.6 million for the same period in 2017. During2018. The increase in net operating assets and liabilities is primarily the nine months ended September 30, 2018,result of a decrease in our inventory balance of $4.8 million, which provided a source of cash, offset by an increase in accounts payablereceivable of $1.2 million. During the six months ended June 30, 2018, our net operating assets and accrued liabilities resultedincluded an increase in inventory, resulting in a $8.4$2.2 million cash flow from working capital. This increase wasoutflow, offset in part by an increase in our accounts receivable,payable and accrued liabilities, which provided a source of cash of $3.2 million, primarily due to an increase in inventory, prepaid and other,our past due accounts payable, and a decrease in accrued restructuring, in the amounts of $0.5 million, $0.8 million, $0.1 million, and $0.2 million, respectively. During the nine months ended September 30, 2017, a decrease in inventory and an increase in accounts payable and accrued liabilities, in the amounts of $2.4 million and $0.4 million, respectively, resulted in cash flow from working capital. This increase in cash flow from working capital was offset by an increase in our accounts receivable balance, a net increase in our prepaid accounts, and decreases in accrued restructuring, inof $1.0 million, the amountsresult of $0.8 million, $0.2 million, and $0.1 million, respectively.increased collections.
 

 
Investing Activities
 
During the ninesix months ended SeptemberJune 30, 2019, we used $13,000 for the purchase of equipment. During the six months ended June 30, 2018, and 2017, we used $86,000 and $27,000, respectively,$73,000 for the purchase of equipment.
 
Financing Activities
 
Cash usedinfinancing activities was $6.4 million for the nine months ended September 30, 2018, compared to cash provided by financing activities of $2.1 provided duringwas $4.1 million and cash used in financing activities was $3.7 million for the ninesix months ended SeptemberJune 30, 2017.2019 and 2018, respectively. Cash provided from the secured borrowing arrangement in both periods was offset by repayments of outstanding debt.
 
Indebtedness Agreements
 
Related-Party Notes PayableRefinanced Convertible Note
 
On November 3, 2017, wethe Company entered into the “Refinancing”refinancing with Mr. Ryan Drexler, ourthe Company’s Chairman of the Board of Directors, Chief Executive Officer and President.President (the “Refinancing”). As part of the Refinancing, wethe Company issued to Mr. Drexler the Refinancedan amended and restated convertible secured promissory note (the “Refinanced Convertible NoteNote”) in the original principal amount of $18,000,000, which amendsamended and restatesrestated (i) the 2015 Convertible Notea convertible secured promissory note dated as of December 7, 2015, and 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”), (ii) the 2016 Convertible Notea convertible secured promissory note dated as of November 8, 2016, in the original principal amount of $11,000,000 with an interest rate of 10% (the “2016 Convertible Note”) , and (iii) the 2017 Notea secured demand promissory note dated as of July 27, 2017, in the 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.
2017 Refinanced Convertible Note
 
The $18$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 the 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 at any time. WeThe 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 the Company.
 
As part of the Refinancing, wethe Company and Mr. Drexler entered into the Restructuring Agreementa 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 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 withOn September 16, 2019, Mr. Ryan Drexler, the refinancing, we recordedChief Executive Officer, President and Chairman of the Board of Directors of MusclePharm Corporation, a debt discount of $1.2 million. The debt discount is equalNevada corporation (the “Company”), delivered a notice to the change in the fair valueCompany and its independent directors of the conversion option between the Refinanced Convertible Note and the Prior Notes. The fair value of the conversion option was determined using a Monte Carlo simulation and the model of stock price behavior known as GBM which simulates a future period as a random step from a previous period.
In addition, the Refinanced Convertible Note contains two embedded derivatives for default interest and an event of default put. Duehis election to the unlikely event of default, the embedded derivatives have a de minimis valueconvert, effective as of September 30, 2018.16, 2019 (the “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, into shares of the Company’s common 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 Note (including principal and accrued and unpaid interest) was equal to $19,262,910. Pursuant to the terms of the Note, 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 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 nine monthsyear ended September 30,December 31, 2019 and 2018, and 2017, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $2.2$1.7 million and $1.8$2.2 million, respectively. During the nine monthsyear ended September 30,December 31, 2019 and 2018, and 2017, $1.4$0.8 million and $1.8$1.9 million, respectively, in interest was paid in cash to Mr. Drexler.
 
For both the three months ended June 30, 2019 and 2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $0.6 million. During the three months ended June 30, 2019, no interest was paid in cash to Mr. Drexler. During the three months ended June 30, 2018, $0.5 million in interest was paid in cash to Mr. Drexler. 
For the six months ended June 30, 2019 and 2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $1.1 million and $1.2 million, respectively. During the six months ended June 30, 2019 and 2018, $0.4 million and $0.9 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 dated
October 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, Borrowerthe 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 initial term of the Security Agreement was six months from the date of execution, and such initial term is extended automatically extends in six-monthone-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 Borrowerthe Company to, among other things, grant liens, incur debt and transfer assets. Under the Security Agreement, Borrower hasthe Company agreed to grant Crossroads a security interest in all ourof 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 SeptemberJune 30, 2019, and December 31, 2018, we owed Crossroads $3.0 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 Crossroads.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, wethe Company entered into thea Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Prestige Capital Corporation (“Prestige”) pursuant to which wethe Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to usthe Company (“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay usthe 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 usthe 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 usthe 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, wethe 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 November 30, 2018,April 1, 2020 at which point the term now renews automatically for successive four-monthone-year periods unless either party receives written notice of cancellation from the other, at minimum, thirty-daysthirty days prior to the expiration date. At SeptemberAs of June 30, 2019, and December 31, 2018, we the Company had approximately $0.6$4.4 million and $1.3 million of outstanding borrowings.
On 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.

 
During the three months ended SeptemberJune 30, 2019 and 2018, wethe Company assigned to Prestige accounts with an aggregate face amount of approximately $9.9$13.6 million and $12.9 million, respectively, for which Prestige paid usto the Company approximately $7.9$10.9 million and $10.3 million, respectively, in cash. During the three months ended SeptemberJune 30, 2019 and 2018, $10.7$10.4 million weand $13.1 million was repaid to Prestige, respectively, including fees and interest.
During the ninesix months ended SeptemberJune 30, 2019 and 2018, wethe Company assigned to Prestige accounts with an aggregate face amount of approximately $39.6$24.2 million and $29.7 million, respectively, for which Prestige paid usto the Company approximately $31.7$19.4 million and $23.8 million, respectively, in cash. During the ninesix months ended SeptemberJune 30, 2019 and 2018, $37.1$16.7 million weand $26.4 million was repaid to Prestige, respectively, including fees and interest.
 

HSBF Note
 
DuringOn May 14, 2020, the three months ended September 30, 2017, we assigned to Prestige accounts withCompany received an aggregate faceprincipal amount of approximately $13.3 million, for which Prestige paid us approximately $10.6 million$964,910 pursuant to the borrowing arrangement with 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. However, interest will continue to accrue during the Deferment Period. The Note will mature on May 16, 2022. The Note includes forgiveness provisions in cash. Duringaccordance with the three months ended September 30, 2017, $9.8 million we subsequently repaid to Prestige, including fees and interest. Duringrequirements of the nine months ended September 30, 2017, we sold to Prestige accounts with an aggregate facePaycheck Protection Program, Section 1106 of the CARES Act. The Company has not determined the amount of approximately $27.9 million, for which Prestige paid us approximately $22.3 millionforgiveness in cash. Duringconnection with the nine months ended September 30, 2017, $21.4 million we repaidloan, partly due to Prestige, including fees and interest.
Contractual Obligations
Our principal commitments consistthe ongoing routine changes in the method 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, 2018:
 
 
Payments Due by Period
 
 
 
1 Year
 
 
2 to 3 Years
 
 
Thereafter
 
 
Total
 
 
 
(in thousands)
 
Operating lease obligations(1)
 $723 
 $1,178 
 $489 
 $— 
 $2,390 
Capital lease obligations
  102 
  76 
  — 
  — 
  178 
Secured borrowing arrangements
  2,094 
  — 
  — 
  — 
  2,094 
Convertible notes with a related party(2)
  2,719 
  18,540 
  — 
  — 
  21,259 
Restructuring liability
  463 
  58 
  — 
  — 
  521 
Settlement agreements
  1,600 
  — 
  — 
  — 
  1,600 
Other contractual obligations(3)
  963 
  161 
  — 
  — 
  1,124 
Total
 $8,664 
 $20,013 
 $489 
 $— 
 $29,166 
(1)
The amounts in the table above excluded operating lease expenses which were abandoned in conjunction with our restructuring plans and is included within the caption Restructuring liability.
(2)See “Indebtedness Agreement” above. Amount includes interest.
(3)Other contractual obligations consist of non-cancelable endorsement and sponsorship agreements and the minimum purchase requirement with BioZone. See Note 8 to the accompanying Condensed Consolidated Financial Statements for further information.
calculating the amount.
 
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of SeptemberJune 30, 2018.2019.
 
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 20172019 Form 10-K,10-K; and “Critical Accounting Policies and Estimates” in Part I, Item 7 of the 20172019 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 20172019 Form 10-K, other than the adoption of the new revenue recognition standards as of January 1, 2018.10-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 stock-based compensation, restructuring and asset impairment charges, gain/(loss) on settlement of accounts payable, loss on sale of subsidiary, amortization of prepaid sponsorship fees, other expense, net, amortization of prepaid stock compensation, depreciation and amortization of property and equipment, amortization of intangible assets, (recovery)/provision for doubtful accounts, issuance of common stock warrants, settlement related, including legal and income taxes. In addition, we provide Adjusted EBITDA excluding one-time events, which excludes charges related to executive severance, discontinued business/product lines, unusual credits against revenue and unusual spikes in whey protein costs. Management believes that these non-GAAP measures provide 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 and Adjusted EBITDA excluding one-time events should not be considered as an alternative to net loss. Adjusted EBITDA and Adjusted EBITDA excluding one-time events 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 and Adjusted EBITDA excluding one-time events excludes some, but not all, items that affect net loss and is defined differently by different companies, our definition of Adjusted EBITDA and Adjusted EBITDA excluding one-time events 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 September 30, 2018
 
 
Sept. 30, 2018
 
 
June 30, 2018
 
 
Mar. 31, 2018
 
 
Year Ended Dec. 31, 2017
 
 
Dec. 31, 2017
 
 
Sept. 30, 2017
 
 
June 30, 2017
 
 
Mar. 31, 2017
 
Net loss
 $(5,355)
 $(1,978)
 $(1,074)
 $(2,303)
 $(10,973)
 $(2,547)
 $(2,128)
 $(3,149)
 $(3,149)
 
    
 
 
 
    
    
    
    
    
    
    
Non-GAAP adjustments:
    
 
 
 
    
    
    
    
    
    
    
Stock-based compensation
  377 
  120 
  120 
  137 
  2,096 
  408 
  540 
  541 
  607 
Restructuring and asset impairment charges
  — 
  — 
  — 
  — 
  180 
  180 
  — 
  — 
  — 
Gain on settlement of accounts payable
  — 
  — 
  — 
  — 
  (430)
  41 
  — 
  (22)
  (449)
Amortization of prepaid sponsorship fees
  384 
  168 
  125 
  91 
  461 
  86 
  120 
  110 
  145 
Interest and other expense, net
  3,463 
  990 
  1,165 
  1,308 
  4,072 
  1,546 
  858 
  690 
  978 
Depreciation and amortization of property and equipment
  582 
  184 
  191 
  207 
  1,139 
  230 
  279 
  290 
  340 
Impairment of assets
  743 
  743 
  — 
  — 
  — 
  — 
  — 
  — 
  — 
Amortization of intangible assets
  240 
  80 
  80 
  80 
  320 
  80 
  80 
  80 
  80 
Provision for doubtful accounts
  822 
  408 
  250 
  164 
  1,524 
  310 
  990 
  144 
  80 
Settlement, including legal
  1,162 
  266 
  564 
  332 
  3,643 
  866 
  532 
  1,942 
  303 
Income taxes
  100 
  (3)
  34 
  69 
  142 
  24 
  14 
  76 
  28 
Adjusted EBITDA
 $2,518 
 $978 
 $1,455 
 $85 
 $2,174 
 $1,224 
 $1,285 
 $702 
 $(1,037)
 
    
 
 
 
    
    
    
    
    
    
    
One-time events:
    
 
 
 
    
    
    
    
    
    
    
Executive Severance
  (2,685 
  — 
  (2,740)
  55 
  831 
  109 
  66 
  134 
  522 
Discontinued business/product lines
  — 
  — 
  — 
  — 
  272 
  — 
  — 
  132 
  140 
Unusual credits against revenue
  — 
  — 
  — 
  — 
  1,141 
  — 
  — 
  — 
  1,141 
Whey protein costs
  — 
  — 
  — 
  — 
  1,322 
  — 
  — 
  296 
  1,026 
Total one-time adjustments
  (2,685)
  — 
  (2,740)
  55 
  3,566 
  109 
  66 
  562 
  2,829 
Adjusted EBITDA excluding one-time events
 $(167)
 $978 
 $(1,285)
 $140 
 $5,740 
 $1,333 
 $1,351 
 $1,264 
 $1,792 

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
The Company qualifies as a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K, and is not required to provide the information required by this Item.
 
Item 4. Controls and Procedures
 
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;
● 
Incorrect treatment of debt discounts related to the related-party convertible note; and

● 
Other period-end expense 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 principal financial officer have evaluated the effectiveness of ourCompany’s disclosure controls and procedures (as definedas of June 30, 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(the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO has concluded that as of September 30, 2018, our disclosure. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assuranceensure that the information we are required to disclosebe disclosed by the Company in the reports that we fileit files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms ofand to ensure that information required to be disclosed by the Securities andCompany in the reports that it files or submits under the Exchange Commission (“SEC”), and that such informationAct is accumulated and communicated to ourthe Company’s management, including our CEO,its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes
(iii)Management's report on internal control over fiancial reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Internal ControlExchange 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.
 
ThereIn 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 not adequate to ensure that there was effective testing of period end sales cutoff, including a proper review and comparison of invoice dates and related proof of delivery; and
C.Inadequate segregation of duties, allowing for an improper alignment of sales and operations under common leadership.
(v)Material Weaknesses Resulting from Reconsidering Previously Issued Financial Statements.
As described above, management reconsidered the Company’s previously issued financial statements resulting in corrections to our unaudited consolidated financial statements for each of the quarterly periods ended September 30, 2018 and our audited consolidated financial statements as of and for the year ended December 31, 2017, which are contained in Note 16, “Changes and Correction of Errors in Previously Reported Consolidated Financial Statements” located in Item 8 of the 2019 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 no changes 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 2018ended June 30, 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.
 

 
PART II—OTHER INFORMATION
 
Item 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 June 30, 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, 2017. Additionally, see Note 8, 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 us could have a material adverse effect on our business, financial condition or results of operations.otherwise.
 
Supplier ComplaintThermoLife International
 
In January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to MusclePharm, filed a complaint against the Companyus in Arizona state court. In its complaint, ThermoLife allegesalleged that the Companywe failed to meet minimum purchase requirements contained in the parties’ supply agreement and seeks monetary damages for the deficiency in purchase amounts.agreement. In March 2016, the Companywe filed an answer denying the allegations contained in the complaint and a counterclaimcounterclaims alleging that ThermoLife’s products were defective. OnThrough orders issued in September 26,and November 2018, the Court granted summary judgment to ThermoLife oncourt dismissed MusclePharm’s claims. On November 1, 2018,counterclaims and found that the Court granted partial summary judgment for ThermoLife on its own breach of contract claim, finding that MusclePharm isCompany was liable to ThermoLife for failing to meet its minimum purchase requirements. MusclePharm intends to seek reconsideration of the Court’s ruling.
 
Former Executive Lawsuit
We were engagedThe court held a bench trial on the issue of damages in a dispute with Mr. Richard Estalella (“Estalella”) concerning amounts allegedly owed by us 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’ settlement of this matter.
On September 19, 2018, we approved a settlement agreement (the “Estalella Settlement Agreement”) with Estalella, concerning amounts allegedly owed by us under an employment agreement with Estalella. The Estalella Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement, we agreed to pay Estalella a sum of $925,000, consisting of a $325,000 payment that was paid in July 2018, and subsequent payments of $150,000 installments to be paid by October 2018, January 2019, April 2019, and Julyon December 4, 2019, respectively. The payments are accruedthe court entered judgment in current liabilities. Additionally, Estalella retained ownershipfavor of 350,000 shares of restricted stock that were in dispute.
Insurance Carrier Lawsuit
We were engaged 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 claimsThermoLife and against our directors and officers arising out of an investigation by the Securities and Exchange Commission (“SEC”). Liberty disputed the extent to which those expenses are covered under its policy, and we commenced a coverage action against Liberty for those expenses in the United States District Court for the Southern District of New York. This matter was settled on September 21, 2018.
Manchester City Football Group
We were engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning amounts allegedly owed by us under a Sponsorship Agreement with CFG (the “Sponsorship Agreement”). In August 2016, CFG commenced arbitration in the United Kingdom against us, seeking approximately $8.3 million for our purported breach of the Sponsorship Agreement.

On July 28, 2017, we approved a Settlement Agreement (the “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, we agreed 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, a $1 million installment paid on July 7, 2018 and a subsequent $1 million installment payment to be paid by July 7, 2019.
United World Wrestling Arbitration
In November 2017, United World Wrestling (“UWW”), an amateur wrestling governing body, initiated arbitration against MusclePharm before the Court of Arbitration for Sport in Lausanne, Switzerland (“CAS”), alleging that MusclePharm owed it $663,750, comprised of a $425,000 sponsorship fee plus accrued interest, under the terms of a 2015 sponsorship agreement. In September 2018, the sole arbitrator issued an order and decision in UWW’s favor for $425,000, plus interest at 12% per annum, as well as attorney’s feesCompany in the amount of 5,000 Swiss Francs.$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 ongoing discussions with UWWthe process of being briefed, and has posted bonds in the total amount of $0.6 million in order to resolvestay execution on the matter.judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid 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 vigorously pursue its defenses on appeal.
 
White Winston LawsuitSelect 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.)
 
InOn 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 all of its directors in(collectively the First Judicial District Court of the State of Nevada.“director defendants”). White Winston alleges that MusclePharm’s directorsthe director defendants breached their fiduciary duties when they approvedby improperly approving the November 2017 refinancing of Drexler’s $18three promissory notes issued by MusclePharm to Drexler, in exchange for $18.0 million Refinanced Convertible Note (discussed further below).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,complaint, White Winston sought the appointment of a receiver over MusclePharm, a permanent injunction against the exercise of Mr. Drexler’s conversion rights,right under the appointment of a receiver,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 temporary restraining order prohibiting Drexler from exercising his conversion rights; on TRO. On September 14, 2018, the court let the TRO expire and denied the White Winston’sWinston Plaintiffs’ request for a preliminary injunction, and permittedfinding, among other things, that the temporary restraining order to dissolve. White Winston has appealedPlaintiffs 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. Indecision, MusclePharm filed a motion seeking to recoup the meantime,legal fees and costs it incurred in responding to the action remains pendingpreliminary 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 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, court, where the Company has moved to dismiss the Amended Complaint.not recorded an estimate for its potential liability.


 
DurnfordOn 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 Superior Court of the State 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 defense that the request does not have a proper purpose. A trial on the petition has been set for February 25, 2021.
The Company intends to 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 contends that we inaccurately reported the value of the restricted stock grants and improperly failed to provide for employment taxes and Federal 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 $4.4 million related to withholding taxes, specifically, income withholding and Social Security taxes, and $0.9 million related to penalties. Additionally, the IRS asserts that we owe 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 our behalf, and we have 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 Corporation 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 Corporation’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.
The remaining issue in dispute in this matter involves the fair market value of restricted stock units in the Corporation granted to certain former officers (the “Former Officers”) of the Corporation 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 have 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.
4Excelsior Matter
 
On July 28, 2015, Plaintiff, Tucker Durnford,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 First Amended Class Action Complaint which allegedcounterclaim 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 MusclePharm’s Arnold Iron Mass product violates consumer protection laws by misleading consumers aboutthey are unrecoverable under the amountUniform Commercial Code.  The court denied that motion, and sourcesthe action has proceeded to discovery. The Company recognized a liability of protein in the product. The product$5.1 million (past due invoices plus interest) as of June 30, 2019. Trial has not yet been set, although a Trial Setting Conference has been discontinued. The last shipments were in March of 2016.set for September 21, 2020. 
 
Plaintiff’s counsel alleged that results of laboratory testing demonstrate the actual total protein content per serving to be approximately 19.4 grams, once the free-form amino acids are excluded from the calculation. Plaintiff’s counsel attached to the First Amended Class Action Complaint what purport to be test results supporting that allegation.
We moved to dismiss the First Amended Class Action Complaint, arguing that plaintiff’s claims are preempted by the Federal Food, Drug, and Cosmetic Act and its implementing regulations. The Court granted MusclePharm’s motion to dismiss the case on December 18, 2015. Plaintiff was given leave to file an amended complaint, but instead chose to appeal the order granting MusclePharm’s motion to dismiss. On December 31, 2015, plaintiff’s counsel made a settlement demand, in an amount of $100,000, which demand was rejected. On February 10, 2016, the court entered judgment and dismissed the case with prejudice. Plaintiff appealed to the Ninth Circuit Court of Appeals, which heard arguments on November 15, 2017.
On October 12, 2018, the Ninth Circuit issued its opinion reversing the dismissal and remanding the case to the Northern District of California. The Ninth Circuit found that plaintiff’s misbranding theory premised on alleged “nitogen-spiking” or “protein-spiking” was preempted by federal law, but that plaintiff could attempt to prove his allegation that the protein in the product does not come entirely from hydrolyzed beef and lacoterferrin, and his allegation that the label misleads consumers into believing that that protein does come entirely from hydrolyzed beef and lacoterferrin. The Company intends to vigorously defend this action and is awaiting next steps from the District court.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 2017 Form 10-Kbe reported under this Item is not required for the year ended December 31, 2017 filed with the Securities and Exchange Commission on April 2, 2018.smaller reporting companies.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 

Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures
 
None.
 
Item 5. Other Information.
None.

 
Item 6. Exhibit Index
 
Incorporated by Reference
Exhibit No.
ExhibitNo.		DescriptionForm
Description
Form
SEC File 
Number
Exhibit
Filing Date
           
31.1
31.1*** Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
           
31.231.2***
 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
           
32.132.1****
 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
           
32.232.2****
 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 three and nine monthsquarter ended SeptemberJune 30, 20182019 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 StatementStatements of Changes in Stockholders’ 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
***Furnished herewith
 
** Filed herewith
*** Furnished herewith


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
    
  MUSCLEPHARM CORPORATION
    
Date: November 13, 2018August 24, 2020 By:
/s/ Ryan DrexlerAllen Sciarillo
  Name:Ryan DrexlerAllen Sciarillo
  Title:Chief ExecutiveFinancial Officer President and Chairman
   (Principal Executive Officer)
(Interim Principal Financial Officer)
   (Interim Principal Accounting Officer)
 
 
 
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