The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(December 31, 2013 and 2012)
Note 1: Nature of Operations and Basis of Presentation
Nature of Operations
MusclePharm Corporation is a scientifically driven, performance lifestyle Company that develops,
manufactures, markets and distributes branded nutritional supplements. We were incorporated in Nevada in 2006. As used
in this report, the terms the “Company”, “we”, “our”, “MusclePharm”, or “MP”
refer to MusclePharm Corporation and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise
.
Our principal executive offices are located in Denver, Colorado.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and the rules and regulations of the United States Securities and Exchange Act of 1934.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements
include the accounts of MusclePharm Corporation and its wholly-owned subsidiary MusclePharm Canada Enterprises Corp (“MusclePharm
Canada”). MusclePharm Canada began operations in April 2012. All intercompany accounts and transactions between MusclePharm
Corporation and MusclePharm Canada have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate,
could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly
from estimates.
Risks and Uncertainties
The Company operates in an industry that
is subject to rapid change and intense competition. The Company’s operations will be subject to significant risk and uncertainties
including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Management’s Plans with Respect
to Liquidity and Capital Resources
The Company’s management believes
that with increased sales expansion and the opening of the Franklin, Tennessee distribution center, there will be opportunities
to increase sales; however, the Company may need to continue to raise capital in order execute the business plan, which includes
buying more inventory and broadening the sales platform. There can be no assurance that such capital will be available.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. At December
31, 2013 and 2012, the Company had no cash equivalents.
The Company minimizes its credit risk
associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times
may exceed federally insured limits. At December 31, 2013, we had two bank accounts that exceeded the federally insured
limit. At December 31, 2012, there were no balances that exceeded the federally insured limit.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Restricted Cash
The Company segregates cash that is restricted
in its use based on contractual provisions from unrestricted cash and cash equivalent balances. See Note 8(A) for further discussion
on our December 31, 2013 restricted cash balance.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represents trade obligations
from customers that are subject to normal trade collection terms. Prior to July 1, the accounts receivable were sent directly
to the Company’s third party manufacturer and netted with any outstanding liabilities to the manufacturer. Subsequent
to July 1, the Company took over the receipt and processing of accounts receivable. The Company periodically evaluates the
collectability of its accounts receivable and considers the need to establish an allowance for doubtful accounts based upon historical
collection experience and specific customer information. Accordingly, the actual amounts could vary from the recorded allowances.
There is also a review of customer discounts at the period end and an accrual made for discounts earned but not yet utilized by
period end.
Management performs ongoing evaluations
of the Company’s customers’ financial condition and generally does not require collateral. Some international customers
are required to pay for their orders in advance of shipment. Management reviews accounts receivable quarterly and reduces the
carrying amount by a valuation allowance that reflects management’s best estimate of amounts that may not be collectible.
Allowances, if any, for uncollectible accounts receivable are determined based upon information available and historical experience.
Bad debt expense recognized as a result of our valuation allowance is classified under General and administrative expense in the
Consolidated Statement of Operations.
The Company does not charge interest on
past due receivables. Receivables are determined to be past due based on the payment terms of the original invoices. The Company’s
finance department contacts customers with past due balances to request payment.
Accounts receivable consisted of the following
at December 31, 2013 and 2012:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable
|
|
$
|
14,830,487
|
|
|
$
|
4,416,193
|
|
Less: allowance for discounts
|
|
|
(1,060,000
|
)
|
|
|
(1,088,720
|
)
|
Less: allowance for doubtful accounts
|
|
|
(29,307
|
)
|
|
|
(25,129
|
)
|
Accounts receivable – net
|
|
$
|
13,741,180
|
|
|
$
|
3,302,344
|
|
At December 31, 2013 and 2012, the Company
had the following concentrations of accounts receivable with customers:
Customer
|
|
2013
|
|
|
2012
|
|
A
|
|
|
24
|
%
|
|
|
0
|
%
|
B
|
|
|
16
|
%
|
|
|
6
|
%
|
Bodybuilding.com
|
|
|
14
|
%
|
|
|
20
|
%
|
D
|
|
|
5
|
%
|
|
|
24
|
%
|
Inventory
Inventory is valued at the lower of cost
or market value. Product-related inventory is maintained using the First-In First-Out method. To estimate any necessary obsolescence
or lower-of-cost-or-market adjustments, various assumptions are made in regard to excess or slow-moving inventories, non-conforming
inventories, expiration dates, current and future product demand, production planning and market conditions.
Prepaid Giveaways
Prepaid giveaways represent non-inventory
sample items which are given away to aid in promotion of the brand.
Prepaid Sponsorship and Endorsement
Fees
Prepaid sponsorship and endorsement fees
represent fees paid in connection with Company sponsorships of certain events and trade shows as well as prepaid athlete endorsement
fees, which are expensed over the period the fees are earned. A significant amount of the Company’s promotional expenses
results from payments under endorsement and sponsorship contracts. Accounting treatment for endorsement and sponsorship
payments is based upon specific contract provisions. Generally, endorsement payments are expensed straight-line over the
term of the contract after giving recognition to periodic performance compliance provisions of the contract. Prepayments
made under the contracts are included in either current or long-term prepaid expenses depending on the period for which the prepayment
applies.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Prepaid Stock Compensation
Prepaid stock compensation represents
amounts paid with stock for future contractual benefits to be received. The Company amortizes these contractual benefits over
the life of the contracts using the straight-line method.
Property and Equipment
Property and equipment are stated at cost
and depreciated to their estimated residual value over their estimated useful lives. When assets are retired or otherwise disposed
of, the assets and related accumulated depreciation are relieved from the accounts and the resulting gains or losses are included
in the Statements of Operations. Repairs and maintenance costs are expensed as incurred. Depreciation is provided using the straight-line
method for all property and equipment.
Deferred Equity Costs
Costs associated with equity offerings
are initially classified as deferred equity costs until moneys are received from the sale of equity shares. Upon receipt of funds,
the Company nets any deferred equity costs against the gross proceeds recorded as equity.
Other Current Assets
Other current assets are primarily made
up of several items of prepaid expenses including legal retainers, print advertising, insurance, and service contracts requiring
up-front payments.
Website Development Costs
Costs incurred in the planning stage of
a website are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated useful
life of the asset.
Long-Lived Assets
We review our long-lived assets, such
as property, plant and equipment and intangible assets for impairment when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. We use an estimate of future undiscounted net cash flows of the related assets
or groups of assets over their remaining lives in measuring whether the assets are recoverable. An impairment loss is calculated
by determining the difference between the carrying values and the fair values of these assets. We did not consider any of our
long-lived assets to be impaired during the years ended December 31, 2013 or 2012.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price which represents the amount that would be received on the sale of an asset or paid
to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be
based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value
measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs,
used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure
fair value:
|
·
|
Level
1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
·
|
Level
2: Inputs reflect quoted prices for identical assets or liabilities in markets that are
not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the assets or liabilities; or inputs
that are derived principally from or corroborated by observable market data by correlation
or other means.
|
|
·
|
Level
3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation
techniques used to determine fair value. These assumptions are required to be consistent
with market participant assumptions that are reasonably available.
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
The determination of where assets and
liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31,
2013 and 2012, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs
(Level 2); and significant unobservable inputs (Level 3):
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Debt securities – FUSE convertible notes (Level 2)
|
|
$
|
259,715
|
|
|
$
|
-
|
|
Derivative instruments – FUSE warrants (Level 2)
|
|
|
119,248
|
|
|
|
-
|
|
|
|
|
378,963
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities - Series D shares (Level 2)
|
|
$
|
1,147,330
|
|
|
$
|
-
|
|
The Company’s remaining financial
instruments consisted primarily of accounts receivable, accounts payable and accrued liabilities, and debt. The Company’s
debt approximates fair value based upon current borrowing rates available to the Company for debt with similar maturities. The
carrying amounts of the Company’s financial instruments generally approximated their fair values as of December 31, 2013
and 2012, respectively, due to the short-term nature of these instruments.
Debt Securities
The Company classifies its investment securities as either
held-to-maturity, available-for-sale or trading. The Company’s debt securities are classified as trading securities and
are carried at fair value with changes recognized through net income. See Note 5 for further discussion of the Company’s
debt securities.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities
consists of the Company’s trade payables as well as amounts estimated by management for future liability payments that relate
to the current accounting period. Management reviews these estimates periodically to determine their reasonableness and fair presentation.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
and related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is
amortized to interest expense over the life of the debt.
Debt
The Company defines short term debt as
any debt payment due less than one year from the date of the financial statements. Long term debt is defined as any debt payment
due more than one year from the date of the financial statements. Refer to Note 8 for further disclosure of debt liabilities.
Derivatives
Fair value accounting requires bifurcation
of embedded derivative instruments such as conversion features in equity instruments and warrants granted, and measurement of
their fair value. In determining the appropriate fair value, the Company uses Black-Scholes or lattice option-valuation models.
In assessing the convertible equity instruments, management determines if the convertible equity instrument is conventional convertible
equity and further if the beneficial conversion feature requires separate measurement.
Once derivative instruments are determined,
they are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded
in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative
instruments such as warrants, are also valued using a Black-Scholes or lattice option-pricing model. Once a derivative
liability ceases to exist any remaining fair value is reclassified to additional paid-in capital if redeemed or through earnings
if forfeited or expired.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs,
and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized
over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized
amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the
Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount and
additional paid-in capital at an amount not to exceed gross proceeds raised, reducing the face amount of the debt, and is amortized
to interest expense over the life of the debt.
Share-Based Payments
Generally, all forms of share-based payments,
including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. Share-based compensation
awards issued to non- employees for services rendered are recorded at either the fair value of the services rendered or the fair
value of the share-based payment, whichever is more readily determinable.
Revenue Recognition
The Company records revenue when all of
the following have occurred: (1) persuasive evidence of an arrangement exists, (2) product has been shipped or delivered, (3)
the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Depending on individual customer agreements,
sales are recognized either upon shipment of products to customers or upon delivery. For all of our Canadian sales, which represent
3% of total sales, recognition occurs upon shipment.
The Company has determined that advertising
related credits that were granted to customers fell within the guidance of ASC No. 605-50-55 (“
Revenue Recognition”
– Customer Payments and Incentives)
. The guidance indicates that, absent evidence of benefit to the vendor, appropriate
treatment requires netting these types of payments against revenues and not expensing as advertising expense.
The Company records sales allowances and
discounts as a direct reduction of sales. The Company grants volume incentive rebates to certain customers based on contractually
agreed upon percentages once certain thresholds have been met. These volume incentive rebates are recorded as a direct reduction
to sales.
Sales for the years ended December 31,
2013 and 2012 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Gross Sales
|
|
$
|
128,319,128
|
|
|
$
|
77,768,138
|
|
|
|
|
|
|
|
|
|
|
Discounts
|
|
|
(17,441,537
|
)
|
|
|
(10,712,923
|
)
|
|
|
|
|
|
|
|
|
|
Sales – Net
|
|
$
|
110,877,591
|
|
|
$
|
67,055,215
|
|
The Company has an informal 7-day right
of return for products. There were nominal returns under the Company’s informal right of return policy for the years ended
December 31, 2013 and 2012.
Significant Customers
For the years ended December 31, 2013
and 2012, the Company had the following concentrations of revenues with customers:
|
|
Years Ended December 31,
|
|
Customer
|
|
2013
|
|
|
2012
|
|
Bodybuilding.com
|
|
|
27
|
%
|
|
|
33
|
%
|
B
|
|
|
11
|
%
|
|
|
8
|
%
|
C
|
|
|
7
|
%
|
|
|
12
|
%
|
A loss of any one of these customers could
have a material adverse impact on the Company.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Discounts and Sales Allowances
We offer various discounts and sales allowances
for volume rebate programs, product promotions, early payment remittances, and other discounts and allowances. We accrue for sales
discounts and allowances over the period they are earned. Because of the inherent uncertainty surrounding volume rebate programs
and product promotions that are based on sales thresholds, actual results could generate liabilities greater or less than the
recorded amounts. Sales discounts and allowances for the year ended December 31, 2013, and 2012 were $17.4 million and $10.7 million,
respectively.
Cost of Sales
Cost of sales represents costs directly related to the production,
manufacturing and freight of the Company’s products.
Significant Vendors
The Company uses four non-affiliated principal
manufacturers for the components of our products. We have an agreement in place with our primary manufacturer, which is in place
to support our growth and ensure consistency in production and quality. During 2013, our primary manufacturer accounted for approximately
67% of our product purchases and the next largest manufacturer accounted for 32% of product purchases. In 2012, our primary manufacturer
accounted for 100% of our product purchases.
Shipping and Handling
Prior to March 1, 2013, MusclePharm used
a manufacturer from Tennessee to ship directly to our customers. After that date, MusclePharm took control of the shipping
and began shipping products from a 152,000 square foot distribution center in Franklin, Tennessee.
Prior to July 1, 2013, our products were
transported from our manufacturer to the MusclePharm distribution center, but title did not pass from the manufacturer until loaded
on the truck for shipment to the customer. As a result, MusclePharm did not take title to our products.
On July 1, 2013, the Company terminated
a distribution agreement dated November 17, 2010 with one of our key product manufacturers in which the manufacturer received
and fulfilled customer sales orders for a majority of our products. In connection with the termination of the agreement,
the Company took control of customer order fulfillment through our Franklin, Tennessee warehouse. The facility is operated
with the Company’s equipment and employees, and all inventory is owned by the Company. Shipments to customers from our distribution
center are recorded as a component of cost of sales.
The Company also uses a manufacturer in
New York to manufacture one of the Company’s products. These orders are typically large and heavy and are drop shipped
directly to our customers at the time of order. Costs associated with these shipments are recorded in cost of sales.
For Canadian sales, the product is shipped
from our Canadian warehouse to our customers. Costs associated with the shipments are recorded in cost of sales.
Advertising
Advertising and promotion expenses include
digital and print advertising, trade show events, athletic endorsements and sponsorships, and promotional giveaways. Advertising
expenses are recognized in the month that the advertising appears while costs associated with trade show events are expensed when
the event occurs. For major trade shows, the expenses are recognized over the period in which we recognize revenue associated
with sales generated at the trade show. Costs related to promotional giveaways are expensed when the product is either given out
at a promotional event or shipped to the customer.
A significant amount of the Company’s
promotional expenses results from payments under endorsement and sponsorship contracts. Accounting treatment for endorsement
and sponsorship payments is based upon specific contract provisions. Generally, endorsement payments are expensed straight-line
over the term of the contract after giving recognition to periodic performance compliance provisions of the contract. Prepayments
made under the contracts are included in either current or long-term prepaid expenses depending on the period for which the prepayment
applies.
Some of the contracts provide for contingent
payments to endorsers or athletes based upon specific achievement in their sports (e.g. winning a championship). The Company
records expense for these payments when the endorser achieves the specific achievement.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Advertising expense for the years ended
December 31, 2013 and 2012, are as follows:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
15,534,646
|
|
|
$
|
8,430,401
|
|
Income Taxes
Income taxes are accounted for using the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases,
operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. Beginning with the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
, (included in FASB ASC Subtopic 740-10,
Income Taxes — Overall)
, the Company
recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement
are reflected in the period in which the change in judgment occurs.
The Company records interest and penalties related to unrecognized
tax benefits in income tax expense. There were no interest or penalties related to unrecognized tax benefits for the years ended
December 31, 2013 and 2012. The Company did incur interest and penalties related to payroll taxes of $28,830 and $4,391, respectively
for the years ended December 31, 2013 and 2012.
Earnings (Loss) Per Share
Net earnings (loss) per share is computed
by dividing net income (loss) less preferred dividends for the period by the weighted average number of common stock outstanding
during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the
period by the weighted average number of common stock, common stock equivalents and potentially dilutive securities outstanding
during each period.
Since the Company reflected a net loss
for the years ended December 31, 2013 and 2012, respectively, the effect of considering any common stock equivalents, if exercisable,
would have been anti-dilutive. A separate computation of diluted loss per share is not presented.
Net loss per share in for the years ended
December 3, 2013 and 2012 was $(2.46) and $(13.00), respectively.
The Company has the following common stock
equivalents as of December 31, 2013 and 2012, respectively:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Stock options (exercise price – $425/share)
|
|
|
472
|
|
|
|
1,847
|
|
Warrants (exercise price – $12.75 - $1,275/share)
|
|
|
263,089
|
|
|
|
89
|
|
Total common stock equivalents
|
|
|
263,561
|
|
|
|
1,936
|
|
In the above table, some of the outstanding
instruments from 2013 and 2012 contain ratchet provisions that would cause variability in the exercise price at the balance sheet
date. As a result, common stock equivalents could change.
Foreign Currency
MusclePharm began operations in Canada in April 2012. The Canadian Dollar was determined to be the functional
currency as the majority of the transactions related to the day to day operations of the business are exchanged in Canadian Dollars.
At the end of the period, the financial results of the Canadian operation are translated into the U.S. Dollar, which is the reporting
currency, and added to the U.S. operations for consolidated company financial results. The revenue and expense items are translated
using the average rate for the period and the assets and liabilities at the end of period rate. Transactions that have completed
the accounting cycle and resulted in a gain or loss related to translation are recorded in realized gain or loss due to foreign
currency translation under other income and expense on the income statement. Transactions that have not completed their accounting
cycle but appear to have gain or loss due to the translation process are recorded as unrealized gain or loss due to translation
and held in the equity section on the balance sheet until such date the accounting cycle of the transaction is complete and the
actual realized gain or loss is recognized.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Reclassification
The Company has reclassified certain prior
period amounts to conform to the current period presentation. These reclassifications were for presentation purposes and had no
effect on the financial position, results of operations, or cash flows for the periods presented.
Recent Accounting Pronouncements
In January 2013, the FASB issued ASU 2013-01,
which clarifies the scope of the offsetting disclosure requirements in ASU 2011-11. Under ASU 2013-01, the disclosure requirements
would apply to derivative instruments accounted for in accordance with ASC 815, including bifurcated embedded derivatives, repurchase
agreements and reverse purchase agreements, and securities borrowing and securities lending arrangements that are either offset
on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for
fiscal years beginning on or after January 1, 2013 and interim periods within those years. This pronouncement has been implemented
in the Company’s financial statements for the year ended December 31, 2013 without impact.
In March 2013, the FASB issued ASU 2013-05, which indicates
that the entire amount of a cumulative translation adjustment (CTA) related to an entity’s investment in a foreign entity
should be released when one of the following occur:
|
·
|
Sale
of a subsidiary or group of net assets within a foreign entity and the sale represents
the substantially complete liquidation of the investment in the foreign entity.
|
|
·
|
Loss
of a controlling financial interest in an investment in a foreign entity
|
|
·
|
Step
acquisition for a foreign entity
|
The ASU does not change the requirement
to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment
in a foreign entity. ASU 2013-5 is effective for fiscal years (and interim periods within those fiscal years) beginning on or
after December 15, 2013. This pronouncement has been implemented in the Company’s financial statements for the year ended
December 31, 2013 without impact.
In February 2013, the FASB issued ASU 2013-02, which requires
entities to disclose the following additional information about items reclassified out of accumulated other comprehensive income
(AOCI):
|
·
|
Balance
by component (ie. Unrealized gains or losses on available-for-sale securities or foreign
currency items, with separate presentation of (1) reclassification adjustments and (2)
current period OCI. Both before-tax and net-of-tax presentation of the information are
acceptable as long as an entity presents the income tax benefit or expense attributed
to each component of OCI and reclassification adjustments in either the financial statements
or the notes to the financial statements.
|
|
·
|
Significant
items reclassified out of AOCI by component either on the face of the income statement
or as a separate footnote to the financial statements.
|
ASU 2013-02 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2012. The pronouncement has been implemented in the Company’s
financial statements for the year ended December 31, 2013 without impact.
Note 3: Property and Equipment
Property and equipment consisted of the
following at December 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
|
Estimated
Useful Life
|
Furniture, fixtures and equipment
|
|
$
|
1,849,462
|
|
|
$
|
1,323,998
|
|
|
From 36 to 60 months
|
Leasehold improvements
|
|
|
619,159
|
|
|
|
563,204
|
|
|
From 20 to 66 months
|
Vehicles
|
|
|
442,300
|
|
|
|
100,584
|
|
|
5 years
|
Displays
|
|
|
33,683
|
|
|
|
32,057
|
|
|
5 years
|
Website
|
|
|
11,462
|
|
|
|
11,462
|
|
|
3 years
|
Construction in Process
|
|
|
1,018,509
|
|
|
|
-
|
|
|
|
Total
|
|
|
3,974,575
|
|
|
|
2,031,305
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,360,991
|
)
|
|
|
(674,941
|
)
|
|
|
|
|
$
|
2,613,584
|
|
|
$
|
1,356,364
|
|
|
|
We recorded depreciation expense of $708,978 and $475,320 for
the years ended December 31, 2013 and 2012, respectively.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Note 4: Inventory
On July 1, 2013, the Company terminated
a Distribution Agreement dated November 17, 2010 with one of our key product manufacturers in which the manufacturer received
and fulfilled customer sales orders for a majority of our products as more fully discussed in the “Shipping and Handling”
section of Note 2 above. In connection with the termination of the agreement, the Company purchased an aggregate $4,664,421
of product inventory, and took over control of customer order fulfillment through our Franklin, Tennessee warehouse.
Inventory consisted of the following at
December 31, 2013 and 2012:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Product Inventory
|
|
|
15,772,368
|
|
|
|
257,975
|
|
The Company reserves for obsolete and
slow moving inventory based on the age of the product as determined by the expiration date. Products within one year of
their expiration dates are considered for reserve purposes. Historically, we have had minimal returns, and any damaged packaging
is sent back to the manufacturer for replacement. The Company recorded a reserve for obsolete and slow moving inventory
of $229,148 as of December 31, 2013.
Note 5: Debt Securities
Biozone Convertible Note
On August 26, 2013, the Company purchased,
for an aggregate $2,000,000, a secured convertible promissory note from Biozone Pharmaceuticals, Inc. (“Biozone”)
(OTC:BZNE) that matures one year from the date of issuance, and certain derivative instruments (Note 6), the value of which was
recorded as a discount to the note to be accreted over the note’s term. In addition, a change of control put option
was identified but is not recorded as a derivative because the value was determined to be deminimus. The promissory note bears
interest at a rate of 10% per annum, is convertible at any time prior to the maturity date into 10,000,000 shares of Biozone common
stock at the conversion rate of $0.20 per share, and contains certain put and call features. The Company’s ability
to convert into Biozone Common Stock is restricted by a beneficial ownership limitation of 4.99% of the number of the common stock
outstanding after giving effect to the issuance of common stock issuable upon conversion. This conversion limit can be changed
by the Company upon at least 60 days’ notice.
The Company classified this note as a
Level 2 available-for-sale security and engaged an independent third party firm to value the note and its embedded conversion
features each reporting period. Changes in the reported value of the note were included as a component of other comprehensive
income until the note was settled. The note had a fair value on the purchase date of $1,955,462, and was purchased at a
$44,538 premium. The premium was netted against a discount of $1,248,292 attributable to the derivative instrument to be
accreted as interest income over the stated maturity of the note.
On October 24, 2013, the Company converted
principal in the amount of $1,000,000 into 5,000,000 shares of Biozone’s common stock and was repaid the remaining principal
of $1,000,000 and accrued interest of $32,877 to satisfy the remaining debt. All remaining amounts related to the note discount
have been recognized in interest income and the changes in fair value have been recorded in net income. All amounts carried in
other comprehensive income related to this note have been reclassified to net income upon its retirement. The Company recognized
a total loss on this debt security upon conversion of $13,900.
Fuse Convertible Note
On November 7, 2013, the Company purchased,
for an aggregate $200,000, a senior secured convertible promissory note from Fuse Science Inc. (“Fuse”) (OTC:DROP)
that matures 90 days from the date of issuance, and certain derivative instruments (Note 6), the value of which was recorded as
a discount to the note to be accreted over the note’s term. The promissory note bears interest at a rate of 10% per
annum and is convertible at any time prior to the maturity date into 3,076,923 shares of Fuse common stock at the conversion
rate of $0.065 per share. The Company’s ability to convert into Fuse common stock is restricted by a beneficial ownership
limitation of 9.99% of the number of the common stock outstanding after giving effect to the issuance of common stock issuable
upon conversion.
The Company has classified this note as
a Level 2 trading security and has used a Black Scholes valuation model to determine the value of the conversion option and detachable
derivative instrument. Changes in the reported value of the note will be included as a component of net income. Values
of $1,910 and $142,707 attributable to the conversion option and derivative instruments, respectively, have been recorded as a
discount to be accreted as interest income over the stated maturity of the note. As of December 31, 2013, the portion of
the discount not yet accreted was $9,974.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
On December 11, 2013, the Company amended
the Fuse note and funded an additional $75,000 under the original terms of the note. A value of $31,867 attributable to the purchased
derivative instruments has been recorded as a discount to be accreted as interest income over the stated maturity of the note.
As of December 31, 2013, the portion of the discount not yet accreted was $5,311.
The following table summarizes the Company’s
marketable securities activity for the year ended December 31, 2013:
|
|
Biozone
Note
|
|
|
Fuse Note
|
|
|
Total
|
|
FV of debt security on purchase date
|
|
$
|
1,955,462
|
|
|
$
|
275,000
|
|
|
$
|
2,230,462
|
|
Premium on purchase date
|
|
|
44,538
|
|
|
|
-
|
|
|
|
44,538
|
|
Discount for value of derivative instrument and conversion option
|
|
|
(1,248,292
|
)
|
|
|
(176,484
|
)
|
|
|
(1,424,776
|
)
|
Accretion of net discount
|
|
|
1,248,292
|
|
|
|
161,199
|
|
|
|
1,409,491
|
|
Conversion of principal
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Repayments received
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Balance – December 31, 2013
|
|
$
|
-
|
|
|
$
|
259,715
|
|
|
$
|
259,715
|
|
See Note 17(B) for subsequent event related to the Fuse Note.
Note 6: Derivative Instruments
Biozone Warrants
In conjunction with the purchase of the
Biozone convertible promissory note discussed in Note 5, the Company received a callable warrant to purchase up to 10,000,000
shares of Biozone at an exercise price of $0.40 per share with an expiration date of 10 years from the date of issuance. The
initial value of the warrant was $1,248,292 and was recorded as a discount against the note. The Company’s ability
to exercise the warrant is limited by a beneficial ownership limitation of 4.99% of the number of the common shares outstanding
in Biozone after giving effect to the exercise of the warrant.
The Company classified the warrant as
a Level 2 fair value measurement, and engaged an independent third party firm to value the warrant using a binomial lattice pricing
model where the option value is calculated using a backward induction process. This model considers price volatility, time,
and dilutive effect of exercising. The pricing model assumes a volatility of 70% at the dates of purchase and period end.
On November 25, 2013, the Company entered
into a sale agreement with several accredited investors to sell the Biozone warrants for an aggregate purchase price of $1,250,000.
Fuse Warrants
In conjunction with the purchase of the
Fuse convertible promissory note as amended and discussed in Note 5, the Company received callable warrants to purchase up to
9,165,750 shares of Fuse at an exercise price of $0.065 per share with expiration dates of 5 years from the date of issuance. The
initial value of the warrants was $174,574 and was recorded as a discount against the note.
The Company has classified the warrant
as a Level 2 fair value measurement, and used a Black Scholes model to value the warrant. This model considers price volatility,
time and risk.
The following table summarizes the Company’s
derivative asset activity for the year ended December 31, 2013:
Balance – December 31, 2012
|
|
$
|
-
|
|
Fair value of warrants on purchase date
|
|
|
1,422,866
|
|
Sales
|
|
|
(1,250,000
|
)
|
Realized gain (loss)
|
|
|
1,708
|
|
Unrealized gain (loss)
|
|
|
(55,326
|
)
|
Balance – December 31, 2013
|
|
$
|
119,248
|
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Note 7: Marketable Securities
The following table summarizes the Company’s
marketable security activity for the year ended December 31, 2013:
Balance – December 31, 2012
|
|
$
|
-
|
|
Debt Conversions
|
|
|
1,000,000
|
|
Sales
|
|
|
(1,500,000
|
)
|
Realized gain (loss)
|
|
|
500,000
|
|
Unrealized gain (loss)
|
|
|
-
|
|
Balance – December 31, 2013
|
|
$
|
-
|
|
Marketable securities represent the 5,000,000
shares of Biozone common stock that was received upon conversion of the debt security as discussed in Note 5 above. The 5,000,000
shares of Biozone common stock was sold for total proceeds of $1,500,000 and a realized gain of $500,000.
Note 8: Debt
At December 31, 2013 and 2012, debt consists of the following:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
Auto loan - secured
|
|
|
2,902
|
|
|
|
15,380
|
|
Unsecured debt
|
|
|
59,600
|
|
|
|
4,452,183
|
|
Total debt
|
|
|
2,562,502
|
|
|
|
4,467,563
|
|
Less: current portion
|
|
|
(2,562,502
|
)
|
|
|
(4,463,040
|
)
|
Long term debt
|
|
$
|
-
|
|
|
$
|
4,523
|
|
Debt in default of $59,600 and $64,600
at December 31, 2013 and 2012, respectively, is included as a component of short-term debt. Debt in default is related to certain
convertible notes issues in 2012 and prior where the notes were never converted to common stock or principle repaid. The Company
is in the process of contacting the note holders and negotiating settlement of the notes.
Convertible Debt – Secured – Derivative Liabilities
During the year December 31, 2013, the
Company issued no convertible debt. During the year ended December 31, 2012 the Company issued convertible debt totaling $519,950.
The convertible debt includes the following terms:
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
Principal Raised
|
|
Interest Rate
|
|
|
|
|
8%
- 10%
|
|
Default interest rate
|
|
|
|
|
0%
- 20%
|
|
Maturity
|
|
|
|
|
January
3, 2012 to October 11, 2014
|
|
|
|
|
|
|
|
|
Conversion terms 1
|
|
62% of lowest trade price for the last 7 trading days
|
|
|
100,000
|
|
Conversion terms 2
|
|
65% of the lowest trade price in the 30 trading days previous to
the conversion
|
|
|
19,950
|
|
Conversion terms 3
|
|
35% multiplied by the average of the lowest
three (3) trading prices (as defined below) for the common stock during the ten (10) trading day period ending on the latest
complete trading day prior to the conversion date.
|
|
|
400,000
|
|
|
|
|
|
$
|
519,950
|
|
The debt holders are entitled, at their
option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at the conversion
prices and terms discussed above. The Company classifies embedded conversion features in these notes as a derivative liability
due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required
to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 9 regarding accounting for
derivative liabilities.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
During the year ended December 31, 2012,
the Company converted debt and accrued interest, totaling $1,420,422 into 290,961 shares of common stock. The resulting loss on
conversion of $351,021 is included in the $4,447,732 loss on settlement of accounts payable and debt as shown in the Consolidated
Statement of Operations.
During the year ended December 31, 2012,
$14,000 of convertible notes matured without conversion. These notes became demand loans and were reclassified as unsecured debt.
Derivative liabilities associated with these notes were eliminated given the expiration of the embedded conversion option.
|
(A)
|
Revolving Line of Credit
|
On December 24, 2013, the Company entered
into a revolving line of credit with U.S. Bank, N.A. in the amount of $2,500,000. The line of credit matures on September 15,
2014 and accrues interest at prime plus 2%, which is payable monthly. The interest rate at December 31, 2013 was 5.25%. The note
is secured by a $2,500,000 savings account held at U.S. Bank, N.A. and is shown as restricted cash.
Unsecured debt consisted of the following activity and terms:
|
|
Principal
|
|
|
Interest Rate
|
|
Maturity
|
|
Balance – December 31, 2011
|
|
|
2,380,315
|
|
|
|
|
|
|
|
Borrowings during the year ended December 31, 2012
|
|
|
5,304,000
|
|
|
15% - 110 %
|
|
|
January
13, 2012 – October 1, 2013
|
|
Conversion of debt into 44,208 shares of common stock with a valuation of
$469,683 ($8.08 - $13.60/share)
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
Repayments
|
|
|
(3,318,374
|
)
|
|
|
|
|
|
|
Convertible debt added upon expiration of option
|
|
|
14,000
|
|
|
|
|
|
|
|
Balance adjustments
|
|
|
117
|
|
|
|
|
|
|
|
Interest and accrued interest (Included in total repayment)
|
|
|
31,896
|
|
|
|
|
|
|
|
Loss on repayment (Included in total repayment)
|
|
|
190,229
|
|
|
|
|
|
|
|
Balance – December 31, 2012
|
|
|
4,452,183
|
|
|
|
|
|
|
|
Repayments
|
|
|
(4,392,583
|
)
|
|
|
|
|
|
|
Balance – December 31, 2013
|
|
$
|
59,600
|
|
|
|
|
|
|
|
Vehicle loan account consisted of the following activity and
terms:
|
|
Principal
|
|
|
Interest Rate
|
|
|
Maturity
|
|
Balance - December 31, 2011
|
|
$
|
26,236
|
|
|
|
6.99
|
%
|
|
|
28
payments of $1,008
|
|
Repayments
|
|
|
(10,856
|
)
|
|
|
|
|
|
|
|
|
Balance – December 31, 2012
|
|
|
15,380
|
|
|
|
6.99
|
%
|
|
|
16 payments
of $1,008
|
|
Repayments
|
|
|
(12,478
|
)
|
|
|
|
|
|
|
|
|
Balance – December 31, 2013
|
|
$
|
2,902
|
|
|
|
|
|
|
|
4 payments
of $1,008
|
|
During the years ended December 31, 2013
and 2012, the Company paid debt issue costs totaling $7,500 and $662,209, respectively.
For the year ended December 31, 2012,
the Company issued 22,633 warrants as cost associated with a debt raise. The initial derivative liability value of $427,759 was
recorded as debt issue costs and derivative liability.
The following is a summary of the Company’s
debt issue costs for the years ended December 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Debt issuance costs
|
|
$
|
335,433
|
|
|
$
|
851,923
|
|
US Bank Line of Credit
|
|
|
7,500
|
|
|
|
-
|
|
Accumulated amortization of debt issuance costs
|
|
|
(335,433
|
)
|
|
|
(516,490
|
)
|
Debt issuance costs – net
|
|
$
|
7,500
|
|
|
$
|
335,433
|
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
During the years ended December 31, 2013 and 2012, the Company
amortized $335,433 and $394,964, respectively in debt issuance costs. The US Bank Line of Credit debt issuance costs of $7,500
will be amortized to interest expense over the term of the credit line, and is included in Other current assets in our Consolidated
Balance Sheets.
During the year ended December 31, 2013, the Company had no
debt discounts. During the year ended December 31, 2012, the Company recorded debt discounts totaling $3,554,673, respectively.
The debt discounts recorded in 2012 pertain to convertible
debt and warrants that contain embedded conversion options that are required to be bifurcated and reported at fair value.
The Company amortized $6,122,006 to interest
expense in the year ended December 31, 2012 as follows:
Debt discount – December 31, 2011
|
|
|
2,567,333
|
|
Additional debt discount – year ended December 31, 2012
|
|
|
3,554,673
|
|
Amortization of debt discount – year ended December 31, 2012
|
|
|
(6,122,006
|
)
|
Debt discount – December 31, 2012
|
|
$
|
-
|
|
Note 9: Derivative Liabilities
The Company identified conversion features
embedded within convertible debt, warrants and Series D Preferred Stock issued during the years ended December 31, 2013 and 2012
(see Notes 5, 6 and 8). The Company has determined that the features associated with the embedded conversion option should be
accounted for at fair value as a derivative liability as the Company could not determine if a sufficient number of shares would
be available to settle all transactions.
The fair value of the conversion feature
is summarized as follows:
Derivative liability - December 31, 2011
|
|
|
7,061,238
|
|
Fair value at the commitment date for debt instruments
|
|
|
1,096,808
|
|
Fair value at the commitment date for warrants issued
|
|
|
7,526,671
|
|
Fair value mark to market adjustment for debt instruments
|
|
|
(1,579,663
|
)
|
Fair value mark to market adjustment for warrants
|
|
|
(4,345,916
|
)
|
Fair value mark to market adjustment for Series C Preferred Stock issued
|
|
|
(59
|
)
|
Reclassification to additional paid-in capital for financial instruments conversions and maturities
|
|
|
(4,124,387
|
)
|
Warrant settlements
|
|
|
(5,634,692
|
)
|
Derivative liability - December 31, 2012
|
|
|
-
|
|
Fair value at the commitment date for equity instruments
|
|
|
8,175,459
|
|
Fair value at the commitment date for warrants issued
|
|
|
96,913
|
|
Fair value mark to market adjustment for equity instruments
|
|
|
4,795,512
|
|
Fair value mark to market adjustment for warrants
|
|
|
58,452
|
|
Conversion instruments exercised or settled
|
|
|
(11,979,006
|
)
|
Derivative liability – December 31, 2013
|
|
$
|
1,147,330
|
|
The Company recorded the debt discount
to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the
gross proceeds of the note. The Company recorded a derivative expense of $96,913 and $4,409,214 for the years ended December 31,
2013 and 2012, respectively.
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2013:
|
|
Commitment Date
|
|
|
Re-measurement Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
120
|
%
|
|
|
47
|
%
|
Expected term:
|
|
|
1
year
|
|
|
|
1
year
|
|
Risk free interest rate
|
|
|
0.14
|
%
|
|
|
0.13
|
%
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
The fair value at the commitment and re-measurement dates for
the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2012:
|
|
Commitment Date
|
|
|
Re-measurement Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
N/A
|
|
Expected volatility
|
|
|
228% -251
|
%
|
|
|
N/A
|
|
Expected term:
|
|
|
6 months
– 4 years
|
|
|
|
N/A
|
|
Risk free interest rate
|
|
|
0.09% -
0.72
|
%
|
|
|
N/A
|
|
Note 10: Restricted Stock Units
In November 2012, the Company granted
129,413 restricted stock units through restricted stock unit agreements to certain executives. Each restricted stock unit represents
a contingent right to receive one share of the Company’s common stock upon vesting. The value of this award at the grant
date was $449,900 and will be amortized over the vesting periods such that each tranche of restricted stock units will be fully
amortized at the date of vesting. The restricted stock units vest in one tranche of 43,137 on January 1, 2013 and two tranches
of 43,138 shares on January 1, 2014 and December 1, 2014. As of December 31, 2013, 43,137 restricted stock units have vested and
the unamortized portion of this award is $149,967.
In June 2013, the Company approved a restricted
stock award to certain key employees, officers and directors for 1,550,000 cumulative shares. The awarded shares were issued upon
the award’s approval with ownership rights to be conveyed upon vesting. The value of this award at the grant date was $17,065,500.
Of these shares, the Company estimates that 1,500,200 shares will fully vest for a total value of $16,517,202. This amount will
be amortized over the vesting periods such that each tranche’s estimated shares of restricted stock will be fully amortized
at the dates of vesting. The Company will periodically review this estimate for reasonableness and make adjustments as appropriate.
The award vests in two tranches with 17% vesting December 31, 2013 and the remaining 83% vesting December 31, 2015 with the exception
of certain executives under employment agreements that terminate prior to December 31, 2015. These awards will be amortized over
the remaining term of their employment agreements. As of December 31, 2013, 263,500 shares have vested and the unamortized portion
of this award is $13,616,067.
In December 2013, the Company granted
the independent members of the Board of Directors a restricted stock grant of 19,364 shares as part of the annual director’s
compensation plan. The awarded shares were issued upon the award’s approval with ownership rights to be conveyed upon vesting.
The value of this award at the grant date was $152,000, and will be amortized over the vesting periods. The restricted stock award
will vest in three equal tranches on July 1, 2014, July 1, 2015, and July 1, 2016. As of December 2013, no shares have vested
and the unamortized portion of the awards was $126,660.
Total compensation expense for these awards
recognized during the year ended December 31, 2013 was $3,075,272 and is included in operating expenses.
Note 11: Income Taxes
Income taxes are provided for the tax
effects of transactions reported in the 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.
At December 31, 2013, the Company has
a net operating loss carry-forward of approximately $36,194,000 available to offset future taxable income. The Company has estimated
state loss carry-forwards of approximately $8,011,000. Utilization of future net operating losses may be limited due to potential
ownership changes under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These net operating
loss carry-forwards have expiration dates starting in 2030 through 2033.
Income taxes have not been provided on
undistributed earnings of certain foreign subsidiaries in an aggregate amount of $523,000 as of December 31, 2013 as the Company
considers such earnings to be permanently reinvested outside the United States. The additional U.S. income tax that would arise
on repatriation of the remaining undistributed earnings could be offset, in part, by foreign tax credits on such repatriation.
However, it is impractical to estimate the amount of net income and withholding tax that might be payable.
The valuation allowance at December 31,
2013 was approximately $12,721,000. The net change in valuation allowance during the year ended December 31, 2013 was a decrease
of approximately $937,000. 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 determined that enough
uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation
allowance as of December 31, 2013.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
The effects of temporary differences that gave rise to significant
portions of deferred tax assets at December 31, 2013 and 2012, are approximately as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Net operating loss carry forward
|
|
$
|
12,682,000
|
|
|
$
|
8,871,000
|
|
Amortization of debt discount and debt issue costs
|
|
|
-
|
|
|
|
3,732,000
|
|
Uniform capitalization
|
|
|
164,000
|
|
|
|
-
|
|
Stock options and warrants
|
|
|
(625,000
|
)
|
|
|
971,000
|
|
Depreciation
|
|
|
161,000
|
|
|
|
74,000
|
|
Bad debt
|
|
|
115,000
|
|
|
|
9,000
|
|
Inventory reserve
|
|
|
85,000
|
|
|
|
-
|
|
Accrued liabilities
|
|
|
81,000
|
|
|
|
-
|
|
General business credits
|
|
|
39,000
|
|
|
|
-
|
|
Other
|
|
|
19,000
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(12,721,000
|
)
|
|
|
(13,657,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company incurred income tax expense
of $115,483, and none, respectively for the years ended December 31, 2013 and 2012. Of the total tax provision, $105,483 is attributed
to taxes for foreign operations.
The income tax provision includes the
following:
|
|
December 31, 2013
|
|
Current income tax expense:
|
|
|
|
|
Federal
|
|
$
|
-
|
|
State
|
|
|
10,000
|
|
Foreign
|
|
|
105,483
|
|
|
|
|
115,483
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
Federal
|
|
|
(199,971
|
)
|
State
|
|
|
1,136,549
|
|
Change in valuation allowance
|
|
|
(936,578
|
)
|
|
|
|
-
|
|
|
|
|
|
|
Provision for (Benefit from) income taxes, net
|
|
$
|
115,483
|
|
The income tax provision differs from
those computed using the statutory federal tax rate of 34% due to the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Federal tax benefit at statutory rate
|
|
$
|
(5,984,836
|
)
|
|
$
|
(6,492,978
|
)
|
State tax benefit – net of federal tax effect
|
|
|
756,722
|
|
|
|
(418,869
|
)
|
Foreign income taxes at other than 34%
|
|
|
(29,854
|
)
|
|
|
-
|
|
Derivative expense
|
|
|
32,950
|
|
|
|
1,499,133
|
|
Change in fair value of derivative liability
|
|
|
1,650,348
|
|
|
|
(2,005,989
|
)
|
Loss on settlement of accounts payable
|
|
|
-
|
|
|
|
1,495,124
|
|
Non-deductible stock compensation
|
|
|
1,363,267
|
|
|
|
791,109
|
|
Other non-deductible expenses
|
|
|
10,428
|
|
|
|
45,105
|
|
Tax deficiency on stock based compensation
|
|
|
679,295
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
176,308
|
|
|
|
-
|
|
Excess compensation – IRC 162(m)
|
|
|
251,550
|
|
|
|
|
|
Deferred tax adjustment – prior year adjustments
|
|
|
2,145,883
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(936,578
|
)
|
|
|
5,087,365
|
|
Income tax expense
|
|
$
|
115,483
|
|
|
$
|
-
|
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
As a result of the assessment of FASB
ASC 740-10), the Company has no unrecognized tax benefits. By statute, tax years ended in 2010-2012 are open to examination by
the major taxing jurisdictions to which the Company is subject.
During the year ended December 31, 2013,
net income before income taxes for our Canadian subsidiary was approximately $398,000 and net loss before income taxes for U.S.
operations was approximately $18,000,000.
Note 12: Stockholders’ Equity
The Company has four separate series of
authorized preferred stock:
On November 26, 2012, the Company (i)
effected a 1-for-850 reverse stock split of our common stock, including a proportionate reduction in the number of authorized
shares of our common stock from 2.36 billion shares to 2.8 million shares of common stock, and (ii) amended our articles of incorporation
to increase the number of authorized shares of common stock (post reverse stock split) from 2,941,177 to 100 million effective
November 27, 2012. All share and per share amounts in this document for 2012 have been changed to give effect to the reverse
stock split.
|
(A)
|
Series
A Convertible Preferred Stock
|
The shares of Series A have the following
provisions:
|
·
|
No
rights to dividends,
|
|
·
|
Convertible
into 200 shares of common stock.
|
|
(B)
|
Series
B Preferred Stock (Related Parties)
|
In August 2011,
the Company issued an aggregate of 51 shares of Series B Preferred Stock to two of its officers. The Company accounted for the
share issuance at par value as there was no future economic value that could be associated with the issuance. In September
2013, the outstanding 51 shares of Series B Preferred Stock were returned to the Company and retired. Pursuant to the certificate
of designation, these shares were added back to general preferred stock pool upon their surrender and are not available for reissuance
as Series B Preferred Stock without a new designation.
The shares of Series B had the following
provisions:
|
·
|
Voting
rights entitling the holders to an aggregate 51% voting control;
|
|
·
|
Initially
no rights to dividends;
|
|
·
|
Stated
value of $0.001 per share;
|
|
·
|
Liquidation
rights entitle the receipt of net assets on a pro-rata basis; and
|
|
(C)
|
Series
C Convertible Preferred Stock
|
In October 2011, the Company issued 190
shares of Series C Convertible Preferred Stock had a fair value of $190,000. Of the total shares issued, 100 shares were issued
for $100,000 ($1,000 /share). The remaining 90 shares were issued for services rendered having a fair value of $90,000 ($1,000
/share), based upon the stated value per share. In March 2012, all 190 shares were converted into 22,353 common shares at a conversion
price of $0.0085 per share and a loss of $614,984.
The shares of Series C have the following
provisions:
|
·
|
Stated
Value - $1,000 per share;
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
|
·
|
Liquidation
rights entitle an amount equal to the stated value, plus any accrued and unpaid dividends;
|
|
·
|
As
long as any Series C, convertible preferred stock is outstanding, the Company is prohibited
from executing various corporate actions without the majority consent of the holders
of Series C Convertible Preferred Stock authorization; and
|
|
·
|
Convertible
at the higher of (a) $8.50 or (b) such price that is a 50% discount to market using the
average of the low 2 closing bid prices, 5 days preceding conversion.
|
Due to the existence of an option to convert
at a variable amount, the Company treated this series of preferred stock as a derivative liability due to the potential for settlement
in a variable quantity of shares. Additionally, the Company computed the fair value of the derivative liability at the commitment
date and remeasurement date, which was $293 and $175, respectively, using the Black-Scholes valuation model. This transaction
is analogous to a dividend with a direct charge to retained earnings.
(D) Series D Convertible Preferred Stock
In January 2013, the Board of Directors
authorized 1,600,000 shares of Series D convertible preferred stock. Between January 16, 2013 and February 4, 2013, the Company
entered into separate subscription agreements with certain investors in connection with the offering, pursuant to which the Company
sold an aggregate of 1,500,000 shares of Preferred Stock for aggregate gross proceeds of approximately $12 million. Pursuant to
the Certificate of Designation of the Series D Convertible Preferred Stock filed with the Nevada Secretary of State on January
11, 2013 (the “Certificate of Designation”), each share of Preferred Stock is convertible into two shares of common
stock, subject to adjustment as set forth in the Certificate of Designation. During 2013, 1,368,500 shares of Series D convertible
preferred stock were converted on a one for two basis into 2,737,000 shares of common stock.
The shares of Series D have the following
provisions:
|
·
|
Voting rights based on number of common
shares of conversion option;
|
|
·
|
Initially no rights to dividends;
|
|
·
|
Liquidation rights entitle the receipt
of net assets on a pro-rata basis; and
|
|
·
|
Convertible into 2 shares of common
stock, subject to adjustment.
|
(E) Common Stock
During the year ended December 31, 2013,
the Company issued the following common stock:
Transaction Type
|
|
Quantity
(#)
|
|
|
Valuation
($)
|
|
|
Range of Value
per Share
($)
|
|
Conversion of series D preferred stock to common stock
|
|
|
2,737,000
|
|
|
|
11,823,833
|
|
|
|
2.80 – 7.54
|
|
Cash and warrants
|
|
|
1,191,332
|
|
|
|
10,559,332
|
|
|
|
8.26 – 10.50
|
|
Executive/board of director compensation
|
|
|
284,164
|
|
|
|
2,642,004
|
|
|
|
3.48 – 11.01
|
|
Employee stock compensation
|
|
|
51,000
|
|
|
|
561,510
|
|
|
|
11.01
|
|
Stock issued for services and to settle liabilities
|
|
|
2,217,511
|
|
|
|
20,213,475
|
|
|
|
4.02 – 12.99
|
|
Total
|
|
|
6,481,007
|
|
|
|
45,800,154
|
|
|
|
2.80 – 12.99
|
|
During the year ended December 31, 2012,
the Company issued the following common stock:
Transaction Type
|
|
Quantity
|
|
|
Valuation
($)
|
|
|
Loss on
Settlement
($)
|
|
|
Range of Value
per
Share
($)
|
|
Conversion of convertible debt
|
|
|
246,753
|
|
|
|
950,739
|
|
|
|
61,124
|
|
|
|
2.98
- 8.08
|
|
Conversion of unsecured/secured debt
|
|
|
44,208
|
|
|
|
469,683
|
|
|
|
289,897
|
|
|
|
8.08
- 13.60
|
|
Forbearance of agreement terms
|
|
|
95,528
|
|
|
|
1,240,032
|
|
|
|
-
|
|
|
|
7.14
- 27.54
|
|
Cash and warrants
|
|
|
199,422
|
|
|
|
1,660,760
|
|
|
|
-
|
|
|
|
7.59
- 8.50
|
|
Executive compensation
(1)
|
|
|
431,034
|
|
|
|
4,686,514
|
|
|
|
-
|
|
|
|
8.93
- 17.71
|
|
Stock issued for future services
|
|
|
113,740
|
|
|
|
1,107,719
|
|
|
|
-
|
|
|
|
4.75
- 21.25
|
|
Conversion of series C preferred stock to common stock
|
|
|
22,353
|
|
|
|
614,984
|
|
|
|
614,984
|
|
|
|
27.51
|
|
Warrant conversions/settlements
|
|
|
853,082
|
|
|
|
7,295,768
|
|
|
|
1,505,906
|
|
|
|
5.44
- 15.73
|
|
Stock issued in lieu of interest
|
|
|
58,945
|
|
|
|
334,099
|
|
|
|
-
|
|
|
|
5.50
– 10.62
|
|
Additional shares due to roundup provision of certificates upon reverse
split
|
|
|
561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
2,065,626
|
|
|
|
18,360,298
|
|
|
|
2,471,911
|
|
|
|
0.00
– 27.54
|
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
|
(1)
|
Represents common stock issued for prior year 2011 accrued compensation
of $4,667,764 settled in 2012 and directors awards.
|
The fair value of all stock issuances
above is based upon the quoted closing trading price on the date of issuance, except for stock and warrants issued for cash, which
is based on the cash received.
On February 1, 2010, the Company's Board
of Directors and shareholders approved the 2010 Stock Incentive Plan ("2010 Plan"). The 2010 Plan allows the Company
to grant incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units and stock appreciation
rights to key employees, directors, consultants, advisors and service providers of the Company or its subsidiaries. Any stock
option granted in the form of an incentive stock option will be intended to comply with the requirements of Section 422 of the
Code. Only stock options granted to employees qualify for incentive stock option treatment. No incentive stock option shall be
granted after February 1, 2020, which is 10 years from the date the 2010 Plan was initially adopted. A stock option may be exercised
in whole or in installments, which may be cumulative. Shares of common stock purchased upon the exercise of a stock option must
be paid for in full at the time of the exercise in cash or such other consideration determined by the compensation committee.
Payment may include tendering shares of common stock or surrendering of a stock award, or a combination of methods.
The 2010 Plan is administered by the Compensation
Committee. The Compensation Committee has full and exclusive power within the limitations set forth in the 2010 Plan to make all
decisions and determinations regarding the selection of participants and the granting of awards; establishing the terms and conditions
relating to each award; adopting rules, regulations and guidelines; and interpreting the 2010 Plan. The Compensation Committee
will determine the appropriate mix of stock options and stock awards to be granted to best achieve the objectives of the 2010
Plan. The 2010 Plan may be amended by the Board of Directors or the compensation committee, without the approval of stockholders,
but no such amendments may increase the number of shares issuable under the 2010 Plan or adversely affect any outstanding awards
without the consent of the holders thereof. The total number of shares that may be issued shall not exceed 5,883, subject to adjustment
in the event of certain recapitalizations, reorganizations and similar transactions.
On April 2, 2010, the Company issued 3,260
stock options, having a fair value of $630,990, which was expensed immediately since all stock options vested immediately. These
stock options expire on April 2, 2015.
The Company applied fair value accounting
for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model.
The following is a summary of the Company’s stock option
activity:
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
Balance – December 31, 2011
|
|
|
1,906
|
|
|
$
|
425.00
|
|
|
|
3.25
years
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(59
|
)
|
|
$
|
425.00
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2012
|
|
|
1,847
|
|
|
$
|
425.00
|
|
|
|
2.25
years
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(1,375
|
)
|
|
$
|
425.00
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2013 – outstanding
|
|
|
472
|
|
|
$
|
425.00
|
|
|
|
1.25
years
|
|
|
|
-
|
|
Balance – December 31, 2013 – exercisable
|
|
|
472
|
|
|
$
|
425.00
|
|
|
|
1.25
years
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options held by related parties – 2013
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options held by related parties – 2013
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options held by related parties – 2012
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options held by related parties – 2012
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
All warrants issued during years ended
December 31, 2013 and 2012 were accounted for as derivative liabilities. See Note 9.
During the year ended December 31, 2013,
the Company entered into convertible equity agreements. As part of these agreements, the Company issued warrants to convert 1,500,000
shares of Series D preferred stock into 3,000,000 shares of common stock. Additionally, the Company issued warrants to purchase
40,000 shares of common stock in conjunction with a consulting agreement.
During the year ended December 31, 2012,
the Company entered into convertible note and unsecured note agreements. As part of these agreements, the Company issued warrants
to purchase 500,721 shares of common stock. Each warrant vests six months after issuance and expire July 13, 2014 – October
16, 2014, with exercise prices ranging from $10.20 - $12.75. All warrants contain anti-dilution rights, and are treated as derivative
liabilities. All warrants issued during the year ended December 31, 2012, were converted in 2012.
A summary of warrant activity for the
Company for the years ended December 31, 2013 and 2013 is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
Balance at December 31, 2011
|
|
|
333,340
|
|
|
|
20.33
|
|
Granted
|
|
|
500,721
|
|
|
|
10.20
|
|
Exercised
|
|
|
(37,648
|
)
|
|
|
7.57
|
|
Converted
|
|
|
(796,324
|
)
|
|
|
10.20
|
|
Balance at December 31, 2012
|
|
|
89
|
|
|
|
1,275.00
|
|
Granted
|
|
|
3,040,000
|
|
|
|
4.09
|
|
Exercised/settled
|
|
|
(2,777,000
|
)
|
|
|
4.09
|
|
Balance at December 31, 2013
|
|
|
263,089
|
|
|
|
4.43
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
Intrinsic Value
|
|
$
|
|
|
4
- 1,275
|
|
|
|
263,089
|
|
|
|
1.00
|
|
|
$
|
4.43
|
|
|
263,089
|
|
$
|
4.43
|
|
|
$
|
1,015,533
|
|
During the year ended December 31, 2013,
the Company repurchased 138,825 shares of its common stock for the total sum of $1,193,783 or an average of $8.60 per share. Of
this amount, $1,037,320 or $7.47 per share was considered repurchase of securities and $156,463 was recorded as a loss on settlement
and is included in Gain on settlement of accounts payable in the Consolidated Statement of Operations. Included in the repurchase
of securities was 120,000 shares, or $934,000, of common stock repurchased by the Company as part of a stock repurchase plan described
more fully in Note 12(J). During the year ended December 31, 2012, the Company repurchased 31,096 shares of its common stock for
the total sum of $460,978 or an average of $14.82 per share.
The Company records the value of its common
stock held in treasury at cost. The Company has not cancelled these shares, and they remain available for re-issuance.
On July 12, 2012, the Company entered
into consulting agreements with two outside consulting firms to provide services related to the capital restructuring of the Company.
These agreements were subsequently amended in March of 2013 and again in April of the same year. During 2013, the Company recognized
expenses related to the GRQ and Melechdavid agreements of $7,015,077 which are classified under Professional fees in the Consolidated
Statement of Operations. The Company’s obligations under the GRQ and Melechdavid agreements were completely satisfied
as of July 12, 2013 and the agreements have not been renewed or extended.
|
(J)
|
Stock
Repurchase Plan
|
On December 10, 2013, the Board of Directors
approved a one year, $5 million stock repurchase plan allowing for the repurchase of up to $5,000,000 of MusclePharm common stock
over a one year period. During December 2013, the Company repurchased 120,000 shares of MusclePharm common stock with an aggregate
price of approximately $934,000. These shares are accounted for using the cost method and are included as a component of Treasury
Stock in our Consolidated Balance Sheets.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
Note 13: Commitments, Contingencies and Other Matters
The Company accounts for leases as operating
or capital based on the criteria set forth in ASC 840-10-25-1. The Company has various non-cancelable operating leases with terms
expiring through 2017.
Future minimum annual lease payments for
the above leases are approximately as follows:
Years Ended December 31,
|
|
|
|
2014
|
|
$
|
623,114
|
|
2015
|
|
|
439,033
|
|
2016
|
|
|
121,322
|
|
2017
|
|
|
19,965
|
|
Total minimum lease payments
|
|
$
|
1,203,434
|
|
Rent expense for the years ended December 31, 2013 and 2012,
was $607,774 and $337,584, respectively.
The Company accounts for leases as operating
or capital based on the criteria set forth in ASC 840-10-25-1. As of December 31, 2013, the Company had $84,151 in leased assets
classified as Furniture, Fixtures, and Equipment under Property and equipment in the Consolidated Balance Sheets. The accumulated
depreciation on leased assets as of December 31, 2013 was $1,750. Short term capital lease liabilities are included as a component
of current liabilities, and the long-term portion is included as a component of long term liabilities in our Consolidated Balance
Sheets.
In August 2013, the Company entered into
a lease agreement for the lease of certain equipment to be used by the Company. The agreement stipulates 36 monthly payments of
$410.24 and provides for an automatic transfer of ownership at lease end. The interest rate implicit in this lease is 9.5%.
In November 2013, the Company entered
into a lease agreement for the lease of certain equipment to be used by the Company. The agreement stipulates 36 monthly payments
of $414.64 and provides for an automatic transfer of ownership at lease end. The interest rate implicit in this lease is 5.25%.
In December 2013, the Company entered
into four lease agreements for the lease of certain equipment to be used by the Company. The agreements stipulate 36 monthly payments
of $490.53 and provide for an automatic transfer of ownership at lease end. The interest rate implicit in these leases is 5.25%.
As of December 31,
2013 and December 31, 2012, the Company had an outstanding balance on capital leases of $81,292, and $0, respectively. Future
minimum lease payments are as follows:
Years Ending December 31,
2014
|
|
$
|
33,480
|
|
2015
|
|
|
33,480
|
|
2016
|
|
|
28,631
|
|
Total minimum lease payments
|
|
|
95,591
|
|
Less amounts representing interest
|
|
|
(14,299
|
)
|
Present value of minimum lease payments
|
|
$
|
81,292
|
|
From time to time, the Company is or may
become involved in various legal proceedings that arise in the ordinary course of business or otherwise. Legal proceedings are
subject to inherent uncertainties as to timing, outcomes, costs, expenses and time expenditures by the Company’s management
and others on behalf of the Company. Although there can be no assurance, based on information currently available the Company’s
management believes that the outcome of legal proceedings that are pending or threatened against the Company will not have a material
effect on the Company’s financial condition. However, the outcome of any of these matters is neither probable nor reasonably
estimable.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
As of December 31, 2013, the Company was not a party to any
material litigation. During 2013, we settled several immaterial lawsuits including the following case:
|
·
|
William
Bossung and Bishop Equity Partners LLC v. MusclePharm Corporation
, Clark
County, Nevada District Court. Date instituted: December 8, 2011. Plaintiff alleges that
additional monetary payments are due under a settlement for outstanding warrants. The
Company reached a settlement with William Bossung and Bishop Equity Partners LLC effective
September 30, 2013 for shares of fully vested restricted shares of MusclePharm Common
Stock. The settlement is included in General and administrative expense in the Consolidated
Statement of Operations.
|
As a manufacturer of nutritional supplements
and other consumer products that are ingested by consumers, the Company may be subject to various product liability claims. Although
we have not had any material claims to date, it is possible that current and future product liability claims could have a material
adverse effect on our business or financial condition, results of operations or cash flows. The Company currently maintains product
liability insurance with a deductible/retention of
$10,000 per claim with an aggregate cap on retained loss of $5,000,000.
At December 31, 2013, the Company had not recorded any accruals for product liabilities.
|
(E)
|
Sponsorship
and Endorsement Contract Liabilities
|
The Company has various non-cancelable
endorsement and sponsorship agreements with terms expiring through 2017. The total value of outstanding payments as of December
31, 2013 was $16,286,916. The total outstanding payments are as follows:
Outstanding Payments
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Total
|
|
Endorsement
|
|
$
|
2,031,250
|
|
|
$
|
2,385,833
|
|
|
$
|
833,333
|
|
|
$
|
-
|
|
|
$
|
5,250,416
|
|
Sponsorship
|
|
|
4,745,000
|
|
|
|
4,832,500
|
|
|
|
1,125,000
|
|
|
|
100,000
|
|
|
|
10,802,500
|
|
Service
|
|
|
174,000
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234,000
|
|
Total
|
|
$
|
6,950,250
|
|
|
$
|
7,278,333
|
|
|
$
|
1,958,333
|
|
|
$
|
100,000
|
|
|
$
|
16,286,916
|
|
See Note 16 of Notes to Consolidated Financial
Statements for more detail regarding endorsement contracts.
In July 2013 the Company received a formal
order of investigation of the Company from the Denver Regional Office of the Securities and Exchange Commission. As a result of
that formal order, the Company is conducting a review of its internal controls, disclosures of related party transactions, settlements
of claims including share issuance, executive compensation, and disclosure of perquisites for the periods of 2010 and 2011. There
can be no assurance that these are the only subject matters of concern, what the nature or amounts in question will be, or that
these are the only periods under review.
Note 14: Related Party Transactions
Ryan DeLuca, the Chief Executive Officer of one of our major customers, Bodybuilding.com, is the brother
of Jeremy DeLuca, MusclePharm’s President of Sales and Marketing. We did maintain a business relationship with Bobybuilding.com
prior to hiring Mr. DeLuca. We do not offer preferential pricing of our products to Bodybuilding.com based on these relationships.
Sales of products to Bodybuilding.com were $33,977,368 and $25,060,518
for the years ended December 31, 2013 and 2012, respectively. Bodybuilding.com owed the Company approximately $2 million
and $827,000 in trade receivables as of December 31, 2013 and 2012, respectively.
We lease our office and warehouse facility
in Hamilton, Ontario, Canada from 2017275 Ontario Inc., which is a company owned by Renzo Passaretti, VP and General Manager of
MusclePharm Canada Enterprises Inc., our wholly owned Canadian subsidiary. In 2013 and 2012, we paid rent of $75,035 and $59,303,
respectively. The lease expires March 31, 2014.
As discussed in Notes 5 and 6, on August
26, 2013, we entered into a Securities Purchase Agreement with BioZone Pharmaceuticals, Inc. (“Biozone”) pursuant
to which we bought (i) $2,000,000 of a 10% secured convertible promissory notes and (ii) a warrant to purchase 10,000,000 shares
of the Seller’s common stock, at an exercise price of $0.40 per share, for an aggregate purchase price of $2,000,000. Dr.
Philip Frost, a significant investor in the Company and a member of its scientific advisory board, is the Chairman and CEO of
OPKO Health, Inc. (“OPKO”), and is the trustee of Frost Gamma Investments Trust (“Frost Gamma”). Each
of Dr. Frost, OPKO, and Frost Gamma were significant shareholders in Biozone.
MusclePharm
Corporation and Subsidiary
Notes
to Consolidated Financial Statements
(December
31, 2013 and 2012)
On October 16, 2013, the Company entered
into an Office Lease Agreement with Frost Real Estate Holdings, LLC, a Florida limited liability company owned by Dr. Phillip
Frost. Pursuant to the Lease, the Company rents 1,437 square feet of office space for an initial term of three years, with an
option to renew the lease for an additional three year term. Total lease commitments under the initial term of the lease are $142,923.
As of December 31, 2013, we owed Frost Real Estate Holding, LLC, $13,289 under the terms of the lease.
Subsequent to year end, the Company purchased
split dollar life insurance policies on certain key executives. These policies provide a split of 50% of the death benefit proceeds
to the Company and 50% to the officer’s designated beneficiaries.
On February 15, 2012, Mr. Drew
Ciccarelli filed a Schedule 13G with the Securities and Exchange Commission which indicated Mr. Ciccarelli owned
approximately 9.94% of the Company’s common stock at that time. Prior to such date, the Company entered into a
Sportswear License Agreement with MusclePharm Sportswear LLC, of which Mr. Ciccarelli was the principle owner, pursuant to
which the Company received $250,000 in fees. In November 2013, that agreement was terminated.
Subsequent to February 15, 2012, the Company entered in a Mutual Rescission and Release Agreement with
Mr. Ciccarelli pursuant to which certain purchases of the Company’s common stock previously made by Mr. Ciccarelli were rescinded.
Also subsequent to February 15, 2012, the Company entered into a Warrant Conversion Agreement with Mr. Ciccarelli pursuant to which
certain outstanding warrants to purchase shares of the Company’s common stock then owned by Mr. Ciccarelli were converted
into shares of the Company’s common stock.
Note 15: Defined Contribution Plan
The Company has a 401(k) defined contribution
plan, in which all eligible employees may participate. The 401(k) plan is a contributory plan. Matching contributions are based
upon the amount of the employees’ contributions. Beginning January 1, 2012, the Company may make an additional discretionary
401(k) plan matching contribution to eligible employees. During years ended December 31, 2013 and 2012, the Company’s matching
contributions were $61,063 and $42,800, respectively.
Note 16: Endorsement Agreement
On July 26, 2013, the Company entered
into an Endorsement Licensing and Co-Branding Agreement by and among, the Company, Arnold Schwarzenegger, Marine MP, LLC, and
Fitness Publications, Inc. Under the terms of the Agreement, Mr. Arnold Schwarzenegger will co-develop a special Arnold Schwarzenegger
product line and will be co-marketed under Mr. Schwarzenegger’s name and likeness.
In connection with this agreement, the
Company also issued Marine MP, LLC fully vested restricted shares of common stock. As of December 31, 2013, the amount of unamortized
stock compensation expense related to this agreement was $7,300,800. The current and non-current portions of this unamortized
stock compensation are included as a component of Prepaid Stock Compensation in the Consolidated Balance Sheet.
Note 17: Subsequent Events
(A) Biozone
On January 2, 2014, the Company closed
the transactions contemplated in the Asset Purchase Agreement (the “APA”) dated November 12, 2013 with BioZone Pharmaceuticals,
Inc. (“BioZone”) and its subsidiaries, BioZone Laboratories, Inc., and Bakers Cummins Corporation (collectively, the
“Seller”). At closing, the Company acquired substantially all of the operating assets of BioZone, including all
assets associated with QuSomes, HyperSorb and EquaSomes drug delivery technologies and the name “Biozone”, “Biozone
Laboratories” and similar names and domain names (and excluding certain assets including cash on hand). The closing was
subject to certain conditions precedent including delivery of a fairness opinion to the Company by its financial advisor, which
MSLP has obtained.
The base purchase price under the APA
was 1.2 million shares of the Company’s common stock, par value $0.001 per share, of which 600,000 shares were placed into
escrow for a period of 9 months to cover indemnification obligations and which shares are also subject to repurchase from the
escrow for $10.00 per share in cash during the 9 month escrow period. The remaining 600,000 non-escrowed shares were issued to
Biozone upon closing and are subject to a lockup agreement which permit private sales (subject to the lockup and certain leak
out provisions).
|
(B)
|
Fuse Note Extension of Maturity Date
|
On January 3, 2014, the Company extended the maturity of its
convertible note, as more fully described in Notes 5 and 6, with Fuse Sciences. The convertible note has a face amount of $275,000
and a maturity date of January 3, 2019.
|
(C)
|
Director Stock Issuance
|
On March 17, 2014, the Company granted
the independent members of the Board of Directors a restricted stock grant of 48,856 shares as part of the annual director’s
compensation plan. The awarded shares were issued upon the award’s approval with ownership rights to be conveyed upon vesting.
The value of this award at the grant date was $320,007, and will be amortized over the vesting periods. The restricted stock award
will vest in three equal tranches on March 17, 2014, March 17, 2015, and March 17, 2016.