Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 unaudited interim 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 U.S. Securities and Exchange Commission (“SEC”), as amended
for interim financial information.
The financial information as of December
31, 2013 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013. The unaudited interim consolidated financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with Management’s
Discussion and Analysis of Financial Condition and Results of Operations, for the years ended December 31, 2013 and 2012.
Certain information or footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules
and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s
opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary
for a fair financial statement presentation. The interim results for the three months ended March 31, 2014 are not necessarily
indicative of results for the full fiscal year.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of MusclePharm Corporation and its wholly-owned subsidiaries MusclePharm Canada Enterprises Corp (“MusclePharm
Canada”) and Biozone Laboratories, Inc. (“Biozone”). MusclePharm Canada began operations in April 2012, and Biozone
began operations in January 2014. All intercompany accounts and transactions 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.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 March
31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, we had two bank accounts that exceeded the federally insured
limit.
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 March 31, 2014 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. 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 March 31, 2014 and December 31, 2013:
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accounts receivable
|
|
$
|
20,274,972
|
|
|
$
|
14,830,487
|
|
Less: allowance for discounts
|
|
|
(535,621
|
)
|
|
|
(1,060,000
|
)
|
Less: allowance for doubtful accounts
|
|
|
(105,277
|
)
|
|
|
(29,307
|
)
|
Accounts receivable – net
|
|
$
|
19,634,074
|
|
|
$
|
13,741,180
|
|
At March 31, 2014 and December 31, 2013,
the Company had the following concentrations of accounts receivable with customers:
Customer
|
|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
A
|
|
|
22
|
%
|
|
|
16
|
%
|
Bodybuilding.com (related party – See Note 14)
|
|
|
8
|
%
|
|
|
14
|
%
|
C
|
|
|
6
|
%
|
|
|
24
|
%
|
Inventory
Inventory is valued at the lower of cost
or market value. Product-related inventory for MusclePharm and MusclePharm Canada is maintained using the First-In First-Out method,
and inventory for Biozone is maintained using the average cost 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.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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.
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.
Prepaid Expenses
Prepaid expenses consist of various payments
that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include legal retainers,
print advertising, insurance and service contracts requiring up-front payments.
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. We review our property and equipment 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 estimated fair values of these assets. We did not consider any of our property and equipment to be
impaired during the three months ended March 31, 2014 or 2013.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 6 for further discussion of the Company’s
debt securities.
Accrued Liabilities
Accrued liabilities consist of 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.
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.
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
2% 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.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
Sales for the three months ended March
31, 2014 and 2013 are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Gross Sales
|
|
$
|
56,705,286
|
|
|
$
|
24,924,036
|
|
|
|
|
|
|
|
|
|
|
Discounts
|
|
|
(6,495,832
|
)
|
|
|
(2,362,869
|
)
|
|
|
|
|
|
|
|
|
|
Sales – Net
|
|
$
|
50,209,454
|
|
|
$
|
22,561,167
|
|
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 three months
ended March 31, 2014 and 2013.
Significant Customers
For the three months ended March 31, 2014
and 2013, the Company had the following concentrations of revenues with customers:
|
|
Three Months Ended March 31,
|
|
Customer
|
|
2014
|
|
|
2013
|
|
Bodybuilding.com (related party – See Note 14)
|
|
|
15
|
%
|
|
|
33
|
%
|
B
|
|
|
14
|
%
|
|
|
11
|
%
|
A loss of either of these customers could
have a material adverse impact on the Company.
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 three months ended March 31, 2014 and 2013 were $6.5 million, or 11% of gross sales,
and $2.4 million of 9% of gross sales, respectively.
Cost of Sales
Cost of sales for MusclePharm and MusclePharm Canada
represent costs directly related to the production, manufacturing and freight of the Company’s products purchased from
third party manufacturers. For products produced by Biozone, cost of sales consists of costs for raw material, direct labor,
freight expenses, and other supply and equipment rental expenses used to manufacture 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 the three months ended March 31, 2014, our primary
manufacturer accounted for approximately 54% of our product purchases and the next largest manufacturer accounted for 44% of product
purchases. For the three months ended March 31, 2013, our primary manufacturer accounted for 97% of our product purchases.
Shipping and Handling
We ship customer orders from our distribution
center in Franklin, Tennessee. 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.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 within the
calendar year 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.
Advertising expense for the three months
ended March 31, 2014 and 2013, are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
$
|
6,328,487
|
|
|
$
|
2,317,377
|
|
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 three months ended March 31, 2014 and 2013.
Earnings (Loss) Per Share
Basic net earnings (loss) per share is
computed by dividing net income (loss) 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) for the period by the weighted average number 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 option and warrant contracts. For the three months ended
March 31, 2013 the Company reflected net loss and a dilutive net loss, and the effect of considering any common stock equivalents
would have been anti-dilutive for the period. Therefore, separate computation of diluted earnings (loss) per share is not presented
for the three months ended March 31, 2013.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
The Company has the following common stock
equivalents as of March 31, 2014 and 2013, respectively:
|
|
As of March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Stock options (exercise price – $425/share)
|
|
|
472
|
|
|
|
670
|
|
Warrants (exercise price – $4 - $1,275/share)
|
|
|
263,089
|
|
|
|
687,839
|
|
Employee and director unvested shares
|
|
|
1,381,573
|
|
|
|
86,275
|
|
Total common stock equivalents
|
|
|
1,645,134
|
|
|
|
774,784
|
|
The following is a reconciliation of the
number of shares used in the calculation of basic and diluted earnings per share for the three months ended March 31, 2014 and
2013, respectively:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net income (loss)
|
|
$
|
2,736,234
|
|
|
$
|
(7,361,981
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
10,307,350
|
|
|
|
4,128,679
|
|
Incremental shares from the assumed exercise of dilutive agreements
|
|
|
1,644,573
|
|
|
|
-
|
|
Diluted common shares outstanding
|
|
|
11,951,923
|
|
|
|
4,128,679
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per shares - basic
|
|
$
|
0.27
|
|
|
$
|
(1.78
|
)
|
Earnings (loss) per shares - diluted
|
|
$
|
0.23
|
|
|
$
|
(1.78
|
)
|
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.
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 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. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
Note 3: Property and Equipment
Property and equipment consisted of the
following at March 31, 2014 and December 31, 2013:
|
|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
|
Estimated Useful Life
|
Leasehold improvements
|
|
$
|
3,205,922
|
|
|
$
|
619,159
|
|
|
From 20 to 182 months
|
Furniture, fixtures and equipment
|
|
|
2,059,778
|
|
|
|
1,849,462
|
|
|
From 3 to 5 years
|
Manufacturing and lab equipment
|
|
|
1,183,168
|
|
|
|
-
|
|
|
From 2 to 20 years
|
Vehicles
|
|
|
444,065
|
|
|
|
442,300
|
|
|
From 2 to 5 years
|
Displays
|
|
|
33,683
|
|
|
|
33,683
|
|
|
5 years
|
Website
|
|
|
11,462
|
|
|
|
11,462
|
|
|
3 years
|
Construction in process
|
|
|
190,373
|
|
|
|
1,018,509
|
|
|
|
Total
|
|
|
7,128,451
|
|
|
|
3,974,575
|
|
|
|
Less: Accumulated depreciation
|
|
|
(1,665,164
|
)
|
|
|
(1,360,991
|
)
|
|
|
|
|
$
|
5,463,287
|
|
|
$
|
2,613,584
|
|
|
|
Note 4: Inventory
Inventory consisted of the following at
March 31, 2014 and December 31, 2013:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Raw materials inventory
|
|
$
|
661,026
|
|
|
$
|
-
|
|
Work in process inventory
|
|
|
16,411
|
|
|
|
-
|
|
Finished goods inventory
|
|
|
16,077,964
|
|
|
|
16,001,515
|
|
Inventory reserve
|
|
|
(101,261
|
)
|
|
|
(229,147
|
)
|
Total inventory - net
|
|
$
|
16,654,140
|
|
|
$
|
15,772,368
|
|
Included in the table above is $16,039,948
of finished goods inventory that has been purchased from third party manufacturers. 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
$101,261 and $229,147 as of March 31, 2014 and December 31, 2013.
Note 5: 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 Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 March 31, 2014 and
December 31, 2013, 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 March 31,
|
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Assets
|
|
|
|
|
|
|
|
|
Debt securities – FUSE convertible notes (Level 2)
|
|
$
|
215,000
|
|
|
$
|
259,715
|
|
Derivative instruments – FUSE warrants (Level 2)
|
|
|
-
|
|
|
|
119,248
|
|
|
|
|
215,000
|
|
|
|
378,963
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities - Series D shares (Level 2)
|
|
$
|
663,096
|
|
|
$
|
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 March 31, 2014 and
December 31, 2013, respectively, due to the short-term nature of these instruments.
Note 6: Debt Securities
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 7), 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. On December 11, 2013, the Company amended the Fuse note and funded an additional $75,000 under the original terms
of the note.
On January 3, 2014, the Company renewed
the combined $275,000 senior secured convertible promissory note from Fuse with a new maturity date of January 3, 2019 and convertible
into 13,750,000 shares at a conversion rate $0.02 per share.
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 $206,855 and $174,574 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 March 31, 2014, the entire discount
has been accreted to interest income. See Note 18 for subsequent events related to the Fuse convertible note.
The following table summarizes the Company’s
debt securities activity for the three months ended March 31, 2014:
|
|
Fuse Note
|
|
Balance – December 31, 2013
|
|
$
|
259,715
|
|
Redemption of note
|
|
|
(275,000
|
)
|
Renewal of note
|
|
|
275,000
|
|
Discount for value of conversion option
|
|
|
(206,855
|
)
|
Accretion of net discount
|
|
|
222,140
|
|
Unrealized loss on debt security
|
|
|
(60,000
|
)
|
Balance – March 31, 2014
|
|
$
|
215,000
|
|
Note 7: Derivative Instruments
In conjunction with the purchase of the
Fuse convertible promissory note as amended and discussed in Note 6, 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. Upon renewal of the convertible note as discussed
in Note 6, the Company recognized the conversion option of the convertible note as a derivative instrument with an initial value
of $206,855, which was recorded as a discount against the note.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
The Company has classified the warrant
and conversion option as a Level 2 fair value measurement, and used a Black-Scholes model to value the warrant and conversion
option. This model considers price volatility, time and risk.
The following table summarizes the Company’s derivative
asset activity for the three months ended March 31, 2014:
Balance – December 31, 2013
|
|
$
|
119,248
|
|
Fair value of conversion option at renewal
|
|
|
206,855
|
|
Unrealized loss
|
|
|
(326,103
|
)
|
Balance – March 31, 2014
|
|
$
|
-
|
|
See Note 18 for subsequent events related to the Fuse warrants.
Note 8: Debt
At March 31, 2014 and December 31, 2013, debt consists of the
following:
|
|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Auto loan - secured
|
|
|
-
|
|
|
|
2,902
|
|
Unsecured debt
|
|
|
59,600
|
|
|
|
59,600
|
|
Total debt
|
|
|
2,559,600
|
|
|
|
2,562,502
|
|
Less: current portion
|
|
|
(2,559,600
|
)
|
|
|
(2,562,502
|
)
|
Long term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
Debt in default of $59,600 and $59,600 at March 31, 2014 and
December 31, 2013, 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 principal repaid. The Company is in the
process of contacting the note holders and negotiating settlement of the notes.
|
(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 March 31, 2014 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 in the Consolidated Balance Sheets.
Unsecured debt consisted of the following activity and terms:
Balance - December 31, 2013
|
|
$
|
59,600
|
|
Repayments
|
|
|
-
|
|
Balance – March 31, 2014
|
|
$
|
59,600
|
|
Vehicle loan account consisted of the following activity and
terms:
|
|
|
|
|
Interest Rate
|
|
|
Maturity
|
Balance - December 31, 2013
|
|
$
|
2,902
|
|
|
|
6.99
|
%
|
|
3 payments of $1,008
|
Repayments
|
|
|
(2,902
|
)
|
|
|
|
|
|
|
Balance – March 31, 2014
|
|
$
|
-
|
|
|
|
|
|
|
|
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
Note 9: Derivative Liabilities
The Company identified conversion features
embedded within Series D Preferred Stock issued in 2013. 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, 2013
|
|
|
1,147,330
|
|
Fair value mark to market adjustment for equity instruments
|
|
|
(484,234
|
)
|
Derivative liability – March 31, 2014
|
|
$
|
663,096
|
|
The Company recorded the day one value of
derivative contracts associated with the Series D preferred stock issuance against gross proceeds raised, and expensed immediately
the remaining value of the derivative as it exceeded the gross proceeds of the offering. The Company recorded a derivative expense
of $0 and $96,913 for the three months ended March 31, 2014 and 2013, respectively.
The fair values at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as of March 31, 2014:
|
|
Commitment Date
|
|
|
Re-measurement Date
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
120
|
%
|
|
|
40
|
%
|
Expected term:
|
|
|
1 year
|
|
|
|
1 year
|
|
Risk free interest rate
|
|
|
0.14
|
%
|
|
|
0.13
|
%
|
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 March 31, 2014, 86,275 restricted stock units have vested and
the unamortized portion of this award is $112,989.
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 March 31, 2014, 263,500 shares have vested and the unamortized portion
of this award is $11,342,915.
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 March 31, 2014, no shares have vested
and the unamortized portion of the awards was $113,998.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 service period, which is January 1 – December 31, 2014. The restricted stock award will vest
in three equal tranches on March 17, 2014, March 17, 2015, and March 17, 2016. As of March 31, 2014, 16,284 shares have vested
and the unamortized portion of the awards is $240,000.
Total compensation expense for these awards
recognized during the three months ended March 31, 2014 was $2,402,435 and is included in operating expenses.
Note 11: Stockholders’ Equity
(A) 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 $12 million. Pursuant to
the Certificate of Designation of the Series D Convertible Preferred Stock filed with the Nevada Secretary of State on January
11, 2013 (the “Certificate of Designation”), each share of Preferred Stock is convertible into two shares of common
stock, subject to adjustment as set forth in the Certificate of Designation. During the three months ended March 31, 2014,
no shares of Series D convertible preferred stock were converted into common stock. See Note 18 for subsequent events related to
Series D stock conversion.
The shares of Series D have the following
provisions:
|
·
|
Voting rights based on number of common shares of conversion option;
|
|
·
|
Initially no rights to dividends;
|
|
·
|
Liquidation rights entitle the receipt of net assets on a pro-rata basis; and
|
|
·
|
Convertible into 2 shares of common stock, subject to adjustment.
|
(B) Common Stock
During the three months ended March 31,
2014, the Company issued the following common stock:
Transaction Type
|
|
Quantity
(#)
|
|
|
Valuation
($)
|
|
|
Range of Value
per Share
($)
|
|
Executive/board of director compensation
|
|
|
60,422
|
|
|
|
265,325
|
|
|
|
3.48 – 8.70
|
|
Stock issued for Biozone asset purchase
|
|
|
1,200,000
|
|
|
|
9,840,000
|
|
|
|
8.20
|
|
Total
|
|
|
1,260,422
|
|
|
|
10,105,325
|
|
|
|
3.48 – 8.70
|
|
The fair value of all stock issuances above
is based upon the quoted closing trading price on the date of issuance. See Note 16 for further details of the Biozone asset purchase.
(C) Stock Options
There was no stock
option activity for the three months ended March 31, 2014.
(D) Stock Warrants
A summary of warrant activity for the Company
for the three months ended March 31, 2014 is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
Balance at December 31, 2013
|
|
|
263,089
|
|
|
|
4.43
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Converted
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2014
|
|
|
263,089
|
|
|
|
4.43
|
|
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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
|
|
|
$
|
518,295
|
|
See Note 18 for subsequent events related to conversion of Series
D warrants.
(E) 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 the three month period ended March 31, 2014, no shares were repurchased under this plan.
Note 12: Commitments, Contingencies and Other Matters
(A) Operating Lease
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 2029.
Future minimum annual lease payments for
the above leases are approximately as follows:
Years Ending December 31,
|
|
|
|
|
2014 (9 months)
|
|
$
|
967,816
|
|
2015
|
|
|
868,844
|
|
2016
|
|
|
355,916
|
|
2017
|
|
|
291,528
|
|
2018
|
|
|
291,528
|
|
Thereafter
|
|
|
3,206,808
|
|
Total minimum lease payments
|
|
$
|
5,982,440
|
|
Rent expense for the three months ended March 31, 2014 and 2013,
was $297,497 and $151,219, respectively.
(B) Capital Leases
The Company accounts for leases as operating or capital based on the criteria set forth in ASC 840-10-25-1.
As of March 31, 2014, the Company had $206,917 in leased assets classified as Furniture, fixtures, and equipment and Manufacturing
and lab equipment under Property and equipment in the Consolidated Balance Sheets. The accumulated depreciation on leased assets
as of March 31, 2014 was $6,068. Short term capital lease liabilities of $68,094 are included as a component of current liabilities,
and the long-term capital lease liabilities of $118,277 are included as a component of long term liabilities in our Consolidated
Balance Sheets. Included in our capital lease liabilities as of March 31, 2014 are leases acquired during the Biozone acquisition
of $112,705.
As of March 31, 2014
and December 31, 2013, the Company had an outstanding balance on capital leases of $186,371 and $81,292, respectively. Future
minimum lease payments are as follows:
Years Ending December 31,
|
|
|
|
|
2014 (9 months)
|
|
$
|
60,650
|
|
2015
|
|
|
80,867
|
|
2016
|
|
|
69,017
|
|
2017
|
|
|
4,155
|
|
Total minimum lease payments
|
|
|
214,689
|
|
Less amounts representing interest
|
|
|
(28,318
|
)
|
Present value of minimum lease payments
|
|
$
|
186,371
|
|
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
(C) Legal Matters
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.
As of and for the three months ended March 31, 2014, the
Company was not a party to any material litigation, and there were no lawsuits settled during the period.
On March 27, 2014, Plaintiff 580 Garcia Properties, LLC, filed a lawsuit for unlawful detainer in California
Superior Court in Contra Costa County, Case No. PS14-0407, against Defendants Biozone Laboratories, Inc., a California corporation,
and Biozone Pharmaceuticals, Inc., a Nevada corporation (together, “Biozone”), represented by Paul Sievers of Manly,
Stewart & Finaldi, and also against Defendants MusclePharm Corporation (“MPC”) and Biozone Laboratories, Inc.,
a Nevada corporation (“BLI-NV”), represented by King Parret & Droste LLP. The lawsuit seeks judicial determination
of lease termination based on the landlords’ refusal to consent to lease assignment as well as incidental damages for alleged
rental value even though rent payments are current, and attorney’s fees. On March 21, 2014 the Company received an eviction
notice for our Biozone facility at 580 Garcia Avenue, Pittsburg, CA. The Company believes that this legal action is without merit
and intends to defend this cause of action. However, if this matter is adversely determined against us, the Company is unable to
quantify the amount of damages it would incur, including without limitation, moving expenses. The Company is entitled to indemnification
from Biozone pursuant to the Asset Purchase Agreement, dated November 12, 2013, by and among MusclePharm Corporation, a Nevada
corporation, Biozone Laboratories, Inc., a Nevada corporation, Biozone Pharmaceuticals, Inc., a Nevada corporation, Biozone Laboratories,
Inc., a California corporation, Baker Cummins Corp. a Nevada corporation, and an indemnity agreement executed by Biozone in favor
of the Company. The Company is entitled to bring indemnity claims against Biozone for this cause of action as well as other potential
claims on or before the date which is nine months from January 2, 2014.
(D) Product Liability
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 March 31, 2014, 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 March 31,
2014 was $14,536,916. The total outstanding payments are as follows:
Outstanding Payments
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Total
|
|
Endorsement
|
|
$
|
1,461,000
|
|
|
$
|
2,455,833
|
|
|
$
|
853,333
|
|
|
$
|
-
|
|
|
$
|
4,770,166
|
|
Sponsorship
|
|
|
3,521,250
|
|
|
|
4,832,500
|
|
|
|
1,125,000
|
|
|
|
100,000
|
|
|
|
9,578,750
|
|
Service
|
|
|
128,000
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
188,000
|
|
Total
|
|
$
|
5,110,250
|
|
|
$
|
7,348,333
|
|
|
$
|
1,978,333
|
|
|
$
|
100,000
|
|
|
$
|
14,536,916
|
|
(F) SEC Investigation
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, 2011, and 2012.
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 13: Defined Contribution Plan
The Company established a 401(k) Plan (the
“401(k) Plan”) for eligible employees of the Company. Generally, all employees of the Company who are at least twenty-one
years of age and who have completed six months of entry service are eligible to participate in the 401(k) Plan. The 401(k) Plan
is a defined contribution plan that provides that participants may make voluntary salary deferral contributions, on a pretax basis,
of up to $17,500 for 2014 (subject to make-up contributions) in the form of voluntary payroll deductions. The Company may make
discretionary contributions. During the three months ended March 31, 2014 and 2013, the Company’s matching contribution were
$55,534 and $12,791, respectively.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
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 maintained a business relationship with Bodybuilding.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 $8,223,456 and $8,019,335
for the three months ended March 31, 2014 and 2013, respectively. Bodybuilding.com owed the Company approximately $1,684,995
and $2,051,265 in trade receivables as of March 31, 2014 and December 31, 2013, respectively. The Company purchased marketing services
from Bodybuilding.com during the three months ended March 31, 2014 in the amount of $349,998.
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 Corp, our wholly owned Canadian subsidiary. For the three months ended March 31, 2014 and 2013,
we paid rent of $18,064 and $19,502, respectively. The lease expires March 31, 2016.
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, one of our significant shareholders. 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. For the three months ended March 31, 2014, we paid rent of $22,781.
During the three months ended March 31,
2014, 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.
Note 15: 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 March 31, 2014 and December 31, 2013, the amount of unamortized stock compensation expense related to this
agreement was $6,598,800 and $7,300,800, respectively. The shares are being amortized over the original three year term of the
agreement. The current and non-current portions of this unamortized stock compensation are included as a component of Prepaid Stock
Compensation in the Consolidated Balance Sheets.
Note 16: Biozone Acquisition
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 Baker 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 base purchase price under the APA was 1.2 million shares of the Company’s common stock of which
600,000 shares were placed into escrow for a period of nine 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 nine-month escrow period. The remaining 600,000
non-escrowed shares were issued to Biozone upon closing and are subject to a lockup agreement which permits private sales (subject
to the lockup and certain leak out provisions).
The total consideration
paid by MSLP was $9,840,000 in common stock based on the stock price as of January 2, 2014. As of March 31, 2014 and the date of
this report, the Company is still evaluating the extent to which there will be adjustments against the purchase price of the Biozone
assets and liabilities as a result of certain claims that the Company may assert against Biozone pursuant to the indemnification
provision under the APA and the 580 Garcia Lease indemnity agreement.
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
All assets acquired from BioZone are now
held in BioZone Laboratories, Inc., a wholly owned subsidiary of MusclePharm Corporation. Biozone is a developer, manufacturer,
and marketer of over-the-counter drugs and preparations, cosmetics, and nutritional supplements.
|
(A)
|
Assets and Liabilities Acquired
|
The Biozone acquisition is considered the acquisition of a business and was accounted for under the purchase
method of accounting. The acquired assets and liabilities have been recognized at their estimated fair value.
MusclePharm
contracted a third party valuation firm to determine the fair value at the date of purchase of all identifiable tangible and intangible
assets purchased in the acquisition.
The following reflects the allocation
of the consideration to the net tangible and identifiable intangible assets of the Seller, based upon their estimated fair
values:
Assets and Liabilities at Fair Value
|
|
|
|
|
Assets
|
|
|
|
|
Intangible assets
|
|
|
|
|
Patents
|
|
$
|
5,869,874
|
|
Trademarks
|
|
|
656,160
|
|
Customer Lists
|
|
|
629,607
|
|
Domain Name
|
|
|
21
|
|
Total intangible assets
|
|
|
7,155,662
|
|
Property & equipment
|
|
|
1,859,066
|
|
Receivables
|
|
|
806,212
|
|
Inventory
|
|
|
840,999
|
|
Other assets
|
|
|
577,453
|
|
Total assets acquired
|
|
|
11,239,392
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Factoring payable
|
|
|
795,031
|
|
Trade payables
|
|
|
327,038
|
|
Equipment leases
|
|
|
122,766
|
|
Employee vacation liability
|
|
|
78,134
|
|
Other
|
|
|
76,423
|
|
Total liabilities assumed
|
|
|
1,399,392
|
|
|
|
|
|
|
Total stock consideration
|
|
$
|
9,840,000
|
|
We acquired various receivables as
part of the asset acquisition of Biozone. The table below reflects the estimated fair value and the contractual value of the
receivables as of the transaction date. As of the date of the acquisition we did not determine that any of the receivables
would ultimately become uncollectible.
Receivables
|
|
Estimated Fair
Value
|
|
|
Contractual
Value
|
|
Trade receivables
|
|
$
|
806,212
|
|
|
$
|
807,240
|
|
Factoring receivable
|
|
|
150,702
|
|
|
|
151,016
|
|
Asset sale receivable
|
|
|
399,814
|
|
|
|
400,000
|
|
|
(C)
|
Unaudited Pro Forma
Income Statement
|
The accompanying consolidated
statements of operations include the results of the Biozone Acquisition from the acquisition date of January 2, 2014.
The Company has determined that there were no significant transactions during the one day which is not presented in the
accompanying consolidated statement of operations for the three months ended March 31, 2014 and has therefore not presented
the pro forma effects of the acquisition for this period. The unaudited pro forma effects of the acquisition on the results
of operations as if the acquisition had been completed on January 1, 2013 is as follows:
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
Three months ended March 31,
|
|
2013
|
|
Total net revenues
|
|
$
|
24,436,698
|
|
Net loss
|
|
|
(8,602,097
|
)
|
Net loss per common share:
|
|
|
|
|
Basic and Diluted
|
|
$
|
(2.08
|
)
|
The above unaudited pro forma results include
adjustments for amortization of acquired intangibles, interest expense and income tax expense. The unaudited pro forma
information as presented above is for informational purposes only and is not necessarily indicative of results of operations
that would have been achieved if the acquisition had taken place at the date identified.
Note 17: Intangible Assets
Intangible assets are as follows as of March 31, 2014, which
also includes intangible assets acquired in the Biozone acquisition as more fully described in Note 16 above:
|
|
As of March 31, 2014
|
|
|
|
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
|
Weighted
average
amortization
period (years)
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
5,922,374
|
|
|
$
|
(220,482
|
)
|
|
$
|
5,701,892
|
|
|
|
8.74
|
|
Trademarks
|
|
|
691,160
|
|
|
|
(38,467
|
)
|
|
|
652,693
|
|
|
|
7.36
|
|
Customer relationships
|
|
|
629,607
|
|
|
|
(26,234
|
)
|
|
|
603,373
|
|
|
|
6.00
|
|
|
|
|
7,243,141
|
|
|
|
(285,183
|
)
|
|
|
6,957,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
67,686
|
|
|
|
-
|
|
|
|
67,686
|
|
|
|
-
|
|
|
|
|
67,686
|
|
|
|
-
|
|
|
|
67,686
|
|
|
|
|
|
Total intangible assets
|
|
$
|
7,310,827
|
|
|
$
|
(285,183
|
)
|
|
$
|
7,025,644
|
|
|
|
|
|
Estimated amortization expense for intangible
assets as of March 31, 2014 is as follows:
2014 (9 months)
|
|
$
|
830,703
|
|
2015
|
|
|
1,104,106
|
|
2016
|
|
|
1,001,226
|
|
2017
|
|
|
932,310
|
|
2018
|
|
|
910,413
|
|
Thereafter
|
|
|
2,179,200
|
|
Total amortization expense
|
|
$
|
6,957,958
|
|
MusclePharm Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
(March 31, 2014)
(Unaudited)
Intangible amortization expense for the
three months ended March 31, 2014 was $285,183 and is included in operating expenses in the Consolidated Statement of Operations.
With
the exception of domain names, intangibles are amortized over the estimated useful lives of the assets of 2 to 18 years.
We
review 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 estimated fair values of these assets. We did not consider any of our
intangible assets to be impaired during the three months ended March 31, 2014.
Note 18: Subsequent Events
On April 2, 2014, the remaining 131,500
outstanding shares of our Series D Convertible Preferred Stock held by Dr. Philip Frost were converted into 263,000 shares of the
Company’s common stock.
On April 2, 2014, the Company entered into
a security purchase agreement to sell the Fuse convertible note and warrants as more fully described in Notes 6 and 7 for an aggregate
purchase price of $215,000.
On April 8, 2014, Mr. L. Gary Davis submitted
his resignation as the Company’s Chief Financial Officer, effective April 15, 2014, and as an employee of the Company entirely,
effective December 31, 2014. Mr. Davis’ resignation was for personal reasons and not as a result of any disagreements between
him and the Company with respect to the Company’s operations, policies or practices. Mr. Davis will continue to be employed
by the Company in a special projects role until December 31, 2014; however, beginning on April 15, 2014 he will no longer be a
named executive officer, including for purposes of the Securities Exchange Act of 1934, as amended.
On April 10, 2014, Donald W. Prosser resigned
from his position serving as a member of the Company’s Board of Directors, effective April 16, 2014. Mr. Prosser’s
resignation from the Board of Directors was not as a result of any disagreements between him and the Company with respect to the
Company’s operations, policies or practices. Also on April 10, 2014, Mr. Prosser was appointed to serve as the Company’s
Chief Financial Officer and Principal Accounting Officer, effective April 16, 2014.
Also on April 10, 2014, Bradley Pyatt resigned his position
serving as President of the Company, effective April 16, 2014, but will continue to serve as the Company’s Chief Executive
Officer and Chairman of its Board of Directors. Concurrently, Richard Estalella was appointed to serve as the Company’s President,
effective April 16, 2014.