Notes to Consolidated
Financial Statements
(Unaudited)
Cash and Cash Equivalents
The Company considers all highly liquid
instruments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.
At June 30, 2014 and December 31, 2013, respectively, 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 cash balance at times may exceed
federally insured limits, and at June 30, 2014 we had one bank account that exceeded the federally insured limit, and at December
31, 2013 we had two bank accounts that exceeded the federally insured limit.
Accounts Receivable and Allowance for
Doubtful Accounts
Accounts receivable represents trade obligations
from customers that are subject to normal trade collection terms. The Company’s finance department monitors the status of
customer receivables and takes actions to collect past due balances as necessary. 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 the aging of accounts receivable, changes
in customer credit worthiness, general market and economic conditions, and historical experience. Bad debt expense recognized
as a result of our valuation allowance is classified under Selling, 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.
Inventory
Inventory is valued at the lower of cost
or market value. The cost of product inventory for MusclePharm and MusclePharm Canada is computed using actual cost on a First-In
First-Out basis, and the cost of inventory for Biozone is computed using an average cost basis. Adjustments to reduce the cost
of inventory to its net realizable value are made, if required, and estimates are made for obsolescence, excess or slow-moving
inventories, non-conforming inventories, and expired inventory.
Prepaid Giveaways
Prepaid giveaways represent non-inventory
samples, which are given away to aid in promotion of the brand and products.
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 and sponsorship 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 performance 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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
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 six months ended June 30, 2014 or 2013.
Intangible Assets
Definite-lived intangible assets are amortized
over their related useful lives, using a straight-line basis consistent with the underlying expected future cash flows related
to the specific intangible asset. Intangible assets are reviewed for impairment whenever events or changes in circumstances exist
that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted
net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement
of the amount of impairment, if any, is based upon the difference between the asset's carrying value and estimated fair value.
Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.
See Note 15 for further disclosure of intangible assets.
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 6 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.
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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
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.
|
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 Company’s financial instruments
consisted primarily of accounts receivable, accounts payable, accrued liabilities, and notes payable. The Company’s notes
payable approximate 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 June 30, 2014 and
December 31, 2013, respectively, due to the short-term nature of these instruments.
Stock-Based Compensation
Generally, all forms of stock-based compensation,
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 stock-based compensation, whichever is more readily determinable.
Revenue Recognition
The Company derives revenue primarily
from sale of products. 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 Canadian sales, which represent 3%
of total sales, recognition occurs upon shipment.
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.
The Company has determined that customer
advertising related credits are accounted for based on the guidance of ASC No. 605-50-55 (“
Revenue Recognition”
– Customer Payments and Incentives)
, which 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.
Advertising and Promotion
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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
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 and six months ended June 30, 2014 and 2013.
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 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 month and the assets and
liabilities at the month end of 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 recorded as Accumulated other comprehensive income (loss)
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.
Note 3: Composition of Certain Financial
Statement Captions
Accounts Receivable
Accounts receivable, net of allowance
consisted of the following at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Accounts receivable
|
|
$
|
19,849,929
|
|
|
$
|
14,830,487
|
|
Less: allowance for discounts
|
|
|
(511,066
|
)
|
|
|
(1,060,000
|
)
|
Less: allowance for doubtful accounts
|
|
|
(141,319
|
)
|
|
|
(29,307
|
)
|
Accounts receivable – net
|
|
$
|
19,197,544
|
|
|
$
|
13,741,180
|
|
Inventory
Inventory, net consisted of the following
at June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Raw materials inventory
|
|
$
|
970,538
|
|
|
$
|
-
|
|
Work in process inventory
|
|
|
170,843
|
|
|
|
-
|
|
Finished goods inventory
|
|
|
18,756,934
|
|
|
|
16,001,515
|
|
Inventory reserve
|
|
|
(128,959
|
)
|
|
|
(229,147
|
)
|
Total inventory - net
|
|
$
|
19,769,356
|
|
|
$
|
15,772,368
|
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Finished goods inventory purchased from
third party manufacturers as of June 30, 2014 and December 31, 2013 was $18,693,505 and $16,001,515, respectively. Any damaged
packaging is returned to the manufacturer for replacement.
Prepaid Expenses
Prepaid expenses consisted of the following
at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Prepaid advertising and promotion
|
|
$
|
700,707
|
|
|
$
|
760,740
|
|
Prepaid inventory
|
|
|
385,679
|
|
|
|
-
|
|
Prepaid insurance
|
|
|
263,632
|
|
|
|
280,878
|
|
Prepaid professional services
|
|
|
226,120
|
|
|
|
74,730
|
|
Prepaid director fees
|
|
|
116,000
|
|
|
|
-
|
|
Prepaid research & development fees
|
|
|
84,221
|
|
|
|
22,500
|
|
Prepaid license fees
|
|
|
77,141
|
|
|
|
90,623
|
|
Prepaid software license fees
|
|
|
40,743
|
|
|
|
86,205
|
|
Prepaid support agreements
|
|
|
36,697
|
|
|
|
3,499
|
|
Prepaid – other
|
|
|
58,657
|
|
|
|
16,043
|
|
|
|
$
|
1,989,597
|
|
|
$
|
1,335,218
|
|
Other Current Assets
Other current assets consisted of the
following at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Vendor rebate receivable
|
|
$
|
119,467
|
|
|
$
|
-
|
|
Other receivable from Cocrystal Pharma, Inc.
|
|
|
209,396
|
|
|
|
-
|
|
Other current assets
|
|
|
4,377
|
|
|
|
40,805
|
|
|
|
$
|
333,240
|
|
|
$
|
40,805
|
|
Property and Equipment
Property and equipment consisted of the
following at June 30, 2014 and December 31, 2013:
|
|
As of June 30, 2014
|
|
|
As of December 31, 2013
|
|
|
Estimated Useful Life
|
Furniture, fixtures and equipment
|
|
$
|
3,173,284
|
|
|
$
|
1,849,462
|
|
|
From 3 to 5 years
|
Leasehold improvements
|
|
|
2,189,963
|
|
|
|
619,159
|
|
|
From 20 to 182 months
|
Manufacturing and lab equipment
|
|
|
1,231,251
|
|
|
|
-
|
|
|
From 2 to 20 years
|
Vehicles
|
|
|
444,065
|
|
|
|
442,300
|
|
|
From 2 to 5 years
|
Displays
|
|
|
33,683
|
|
|
|
33,683
|
|
|
5 years
|
Website
|
|
|
15,975
|
|
|
|
11,462
|
|
|
3 years
|
Construction in process
|
|
|
1,128,588
|
|
|
|
1,018,509
|
|
|
|
Total
|
|
|
8,216,809
|
|
|
|
3,974,575
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,995,548
|
)
|
|
|
(1,360,991
|
)
|
|
|
|
|
$
|
6,221,261
|
|
|
$
|
2,613,584
|
|
|
|
Other Assets
Other assets consisted of the following
at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Security deposit
|
|
$
|
108,394
|
|
|
$
|
85,419
|
|
Long-term portion of prepaid assets
|
|
|
71,238
|
|
|
|
58,810
|
|
|
|
$
|
179,632
|
|
|
$
|
144,229
|
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Accrued Liabilities
Accrued liabilities consisted of the following
at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Accrued payables
|
|
$
|
2,606,779
|
|
|
$
|
487,415
|
|
Employee compensation and benefits
|
|
|
1,717,265
|
|
|
|
1,137,681
|
|
Capital leases
|
|
|
77,327
|
|
|
|
26,653
|
|
Customer deposits
|
|
|
67,747
|
|
|
|
265,652
|
|
Accrued taxes
|
|
|
25,832
|
|
|
|
71,771
|
|
Other
|
|
|
32,135
|
|
|
|
63,929
|
|
|
|
$
|
4,527,085
|
|
|
$
|
2,053,101
|
|
Other Long-Term Liabilities
Other long-term liabilities consisted
of the following at June 30, 2014 and December 31, 2013:
|
|
As of
June 30, 2014
|
|
|
As of
December 31,
2013
|
|
Customer deposit
|
|
$
|
250,000
|
|
|
$
|
-
|
|
Long-term portion of capital lease liability
|
|
|
116,378
|
|
|
|
54,639
|
|
|
|
$
|
366,378
|
|
|
$
|
54,639
|
|
Sales and Discounts
Sales for the three and six months ended
June 30, 2014 and 2013 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Sales
|
|
$
|
51,828,561
|
|
|
$
|
28,515,483
|
|
|
$
|
108,533,847
|
|
|
$
|
53,439,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts and returns
|
|
|
(5,088,574
|
)
|
|
|
(3,035,424
|
)
|
|
|
(11,584,406
|
)
|
|
|
(5,398,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales - Net
|
|
$
|
46,739,987
|
|
|
$
|
25,480,059
|
|
|
$
|
96,949,441
|
|
|
$
|
48,041,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts as a percent of gross sales
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
10
|
%
|
The Company has an informal seven day
right of return for products. There were nominal returns for the three and six months ended June 30, 2014 and 2013.
The Company offers various discounts and
sales allowances for volume rebate programs, product promotions, early payment remittances, and other discounts and allowances.
The Company accounts 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 amounts estimated and recorded.
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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
The Company mainly ships 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 utilizes 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.
The Company ships Canadian customer orders
from our Canadian warehouse and records freight in cost of sales.
The Company ships Biozone products from
our manufacturing facility in Pittsburg, California and records freight in cost of sales.
Note 4: Concentrations
Accounts Receivable
At June 30, 2014 and December 31, 2013, the Company had the
following concentrations of accounts receivable with significant customers:
Customer
|
|
As of June 30, 2014
|
|
|
As of December 31, 2013
|
|
A
|
|
|
10
|
%
|
|
|
16
|
%
|
B
|
|
|
10
|
%
|
|
|
*
|
%
|
C
|
|
|
*
|
%
|
|
|
24
|
%
|
Bodybuilding.com
|
|
|
*
|
%
|
|
|
14
|
%
|
*
Less than 10% of total accounts receivable
Revenue
The Company had the following concentrations
of revenues with significant customers:
|
|
Three Months Ended June 30,
|
|
Customer
|
|
2014
|
|
|
2013
|
|
Bodybuilding.com
|
|
|
15
|
%
|
|
|
25
|
%
|
B
|
|
|
10
|
%
|
|
|
*
|
%
|
C
|
|
|
*
|
%
|
|
|
11
|
%
|
|
|
Six Months Ended June 30,
|
|
Customer
|
|
2014
|
|
|
2013
|
|
Bodybuilding.com
|
|
|
15
|
%
|
|
|
29
|
%
|
B
|
|
|
10
|
%
|
|
|
11
|
%
|
C
|
|
|
*
|
%
|
|
|
*
|
%
|
*
Less than 10% of gross sales
Vendors
The Company uses four non-affiliated principal
manufacturers for the components of our products. We have a manufacturing agreement in place with our primary manufacturer to
support our growth and ensure consistency in production and quality. The agreement ensures products are manufactured to the Company’s
specifications and the manufacturer will bear the costs of any recalled product due to defective manufacturing. The Company had
the following concentration of purchases from product vendors:
|
|
Three Months Ended June 30,
|
|
Vendor
|
|
2014
|
|
|
2013
|
|
A
|
|
|
47
|
%
|
|
|
70
|
%
|
B
|
|
|
50
|
%
|
|
|
30
|
%
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
|
|
Six Months Ended June 30,
|
|
Vendor
|
|
2014
|
|
|
2013
|
|
A
|
|
|
50
|
%
|
|
|
82
|
%
|
B
|
|
|
47
|
%
|
|
|
18
|
%
|
Note 5: Financial Instruments
The following table is a summary of financial
assets and liabilities:
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2013
|
|
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
|
|
On April 2, 2014, the Company entered
into a security purchase agreement and sold the Fuse convertible note and warrants for an aggregate purchase price of $215,000.
Also on April 2, 2014 the remaining outstanding
shares of Series D preferred stock were converted into common shares thereby eliminating the remaining derivative liability for
the embedded conversion option as of that date.
Note 6: Debt
Debt consists of the following:
|
|
As of June 30, 2014
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
45,600
|
|
|
$
|
59,600
|
|
Revolving line of credit
|
|
|
-
|
|
|
|
2,500,000
|
|
Auto loan - secured
|
|
|
-
|
|
|
|
2,902
|
|
Total debt
|
|
|
45,600
|
|
|
|
2,562,502
|
|
Less: current portion
|
|
|
(45,600
|
)
|
|
|
(2,562,502
|
)
|
Long term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes Payable
Notes payable consisted of the following activity and terms:
Balance – December 31, 2013
|
|
$
|
59,600
|
|
Principal repayments
|
|
|
(14,000
|
)
|
Balance – June 30, 2014
|
|
$
|
45,600
|
|
Debt in default of $45,600 and $59,600
at June 30, 2014 and December 31, 2013, respectively, is included as a component of short-term debt. Debt in default is related
to certain convertible notes issued 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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
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 note is secured by a $2,500,000 savings account held at U.S.
Bank, N.A. and disclosed as restricted cash in the Consolidated Balance Sheets as of December 31, 2013. On May 12, 2014, the Company
repaid the outstanding balance of the line of credit with the restricted cash balance that was securing the debt, and terminated
the line of credit agreement. The line of credit will not be available for further borrowing.
Vehicle Loan
Vehicle loan account consisted of the following activity and
terms:
|
|
|
|
Balance - December 31, 2013
|
|
$
|
2,902
|
|
Principal repayments
|
|
|
(2,902
|
)
|
Balance – June 30, 2014
|
|
$
|
-
|
|
As of December 31, 2013, the interest
rate associated with this loan was 6.99%. The three final monthly payments of $1,008 per were paid in first quarter 2014.
Note 7: Derivative Liabilities
The Company identified conversion features
embedded within Series D Preferred Stock issued in January 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
|
|
|
(373,944
|
)
|
Conversion instruments exercise
|
|
|
(773,386
|
)
|
Derivative liability – June 30, 2014
|
|
$
|
-
|
|
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 six months ended June 30, 2014 and 2013, respectively.
On April 2, 2014, the remaining outstanding
shares of Series D preferred stock were converted into common shares thereby eliminating the remaining derivative liability for
the embedded conversion option as of that date. Of the derivative liability that was eliminated, $773,254 was reclassified to
Additional paid-in capital in our Consolidated Balance Sheets.
Note 8: Restricted Stock Units
In November 2012, the Company granted 129,413
restricted stock units 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 as follows: 43,137 on January 1, 2013, 43,138 shares on January 1, 2014, and 43,138 shares on December 1, 2014.
As of June 30, 2014, 86,275 restricted stock units have vested and the unamortized portion of this award is $75,600.
In June 2013, the Company approved a restricted
stock award to certain key employees, officers and directors for 1,550,000 shares. The shares were issued upon the award’s
approval with ownership rights 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 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 June 30, 2014, 263,500 shares have vested and the unamortized
portion of this award is $9,412,449.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
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 June 30, 2014, no shares have vested
and the unamortized portion of the awards was $101,328.
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 June 30 2014, 16,284 shares have vested and the unamortized portion of the awards is $160,438.
On May 6, 2014, the Company granted restricted
stock awards to certain employees under the June 2013 employee stock grant plan and who joined the Company after the initial employee
stock awards in June 2013. The awarded shares were issued upon the award’s approval with ownership rights to be conveyed
upon vesting. The value of this award on the grant date was $1,137,600, and will amortized over the vesting periods. The restricted
award will vest in five equal tranches on December 31, 2014, 2015, 2016, 2017, and 2018.
Total compensation expense for these awards
recognized during the three months ended June 30, 2014 and 2013 was $2,117,332, and $37,389, respectively. For the six months
ended June 30, 2014 and 2013 the total compensation expense for these awards was $4,519,767 and $74,367, respectively, and is
included in Operating expenses.
Note 9: Stockholders’ Equity
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 $12 million. Pursuant to
the Certificate of Designation of the Series D Convertible Preferred Stock filed with the Nevada Secretary of State on January
11, 2013 (the “Certificate of Designation”), each share of Preferred Stock is convertible into two shares of common
stock, subject to adjustment as set forth in the Certificate of Designation. On April 2, 2014, the remaining 131,500 shares of
outstanding Series D convertible preferred stock were converted to 263,000 shares of common stock.
Common Stock
During the six months ended June 30, 2014,
the Company issued the following common stock:
Transaction Type
|
|
Quantity
(#)
|
|
|
Valuation
($)
|
|
|
Range of Value
per
Share
($)
|
|
Conversion of Series D preferred stock to common stock
|
|
|
263,000
|
|
|
|
773,517
|
|
|
|
2.94
|
|
Executive/Board of Director compensation
|
|
|
60,422
|
|
|
|
265,325
|
|
|
|
3.48
– 8.70
|
|
Stock issued for Biozone acquisition
|
|
|
1,200,000
|
|
|
|
9,840,000
|
|
|
|
8.20
|
|
Total
|
|
|
1,523,422
|
|
|
|
10,878,842
|
|
|
|
2.94
– 8.70
|
|
The fair value of all stock issuances
above is based upon either the quoted closing trading price on the date of issuance or the value of derivative instrument at the
date of conversion. See Note 14 for further details of the Biozone acquisition.
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.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
The Company uses the “treasury stock”
method to determine whether there is a dilutive effect of outstanding option and warrant contracts. For the three and six months
ended June 30, 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 and six months ended June 30, 2013.
The Company has the following common stock
equivalents as of June 30, 2014 and 2013, respectively:
|
|
As of June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Stock options (exercise price – $425/share)
|
|
|
472
|
|
|
|
670
|
|
Warrants (exercise price – $4 /share)
|
|
|
-
|
|
|
|
330,000
|
|
Warrants (exercise price - $1,275/share)
|
|
|
89
|
|
|
|
89
|
|
Employee and director unvested RSUs
|
|
|
1,501,573
|
|
|
|
86,275
|
|
Total common stock equivalents
|
|
|
1,502,134
|
|
|
|
417,034
|
|
The following is a reconciliation of the
number of shares used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2014
and 2013, respectively:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net income (loss)
|
|
$
|
408,328
|
|
|
$
|
(2,421,808
|
)
|
|
$
|
3,144,562
|
|
|
$
|
(9,783,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
10,610,022
|
|
|
|
7,226,849
|
|
|
|
10,459,522
|
|
|
|
5,686,323
|
|
Incremental shares from the assumed exercise of dilutive agreements
|
|
|
1,454,100
|
|
|
|
-
|
|
|
|
1,404,360
|
|
|
|
-
|
|
Diluted common shares outstanding
|
|
|
12,064,122
|
|
|
|
7,226,849
|
|
|
|
11,863,882
|
|
|
|
5,686,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per shares - basic
|
|
$
|
0.04
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.30
|
|
|
$
|
(1.72
|
)
|
Earnings (loss) per shares - diluted
|
|
$
|
0.03
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.27
|
|
|
$
|
(1.72
|
)
|
Stock Options
There was no stock option activity for the three or six months
ended June 30, 2014. For the three and six months ended June 30, 2013, the Company had forfeitures of 1,177 options.
Stock Warrants
A summary of warrant activity for the Company for the six months
ended June 30, 2014 is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise
Price
|
|
Outstanding – December 31, 2013
|
|
|
263,089
|
|
|
$
|
4.43
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(263,000
|
)
|
|
|
4.00
|
|
Balance as June 30, 2014
|
|
|
89
|
|
|
$
|
1,275
|
|
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
|
|
$
|
1,275
|
|
|
|
89
|
|
|
|
1.04
|
|
|
$
|
1,275
|
|
|
|
89
|
|
|
$
|
1,275
|
|
|
|
-
|
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Note 10: Commitments, Contingencies and Other Matters
Operating Leases
The Company leases office and warehouse
facilities under operating leases which expire at various dates through 2029. The amounts reflected in the table below are for
the aggregate future minimum lease payments under non-cancelable facility operating leases. Under lease agreements that contain
escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the six months
ended June 30, 2014 and 2013 amounted to $632,882 and $298,887, respectively.
As of June 30, 2014, future minimum lease payments are as follows:
Years Ending December 31,
|
|
|
|
|
2014 (remaining 6 months)
|
|
$
|
618,426
|
|
2015
|
|
|
1,087,030
|
|
2016
|
|
|
884,061
|
|
2017
|
|
|
841,118
|
|
2018
|
|
|
838,246
|
|
Thereafter
|
|
|
3,519,391
|
|
Total minimum lease payments
|
|
$
|
7,788,272
|
|
Capital Leases
The Company leases manufacturing and warehouse
equipment under capital leases which expire at various dates through 2017. As of June 30, 2014, the Company had $233,426 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 June 30, 2014 was $14,075. Short term capital
lease liabilities of $77,327 are included as a component of current liabilities, and the long-term capital lease liabilities of
$116,378 are included as a component of long term liabilities in our Consolidated Balance Sheets.
As of June 30, 2014
and December 31, 2013, the Company had an outstanding balance on capital leases of $193,705 and $81,292, respectively. The
amounts reflected in the table below are for the aggregate future minimum lease payments under equipment lease agreements.
As of June 30, 2014, future minimum lease payments are as follows:
Years Ending December 31,
2014 (remaining 6 months)
|
|
$
|
45,661
|
|
2015
|
|
|
91,321
|
|
2016
|
|
|
79,472
|
|
2017
|
|
|
5,898
|
|
Total minimum lease payments
|
|
|
222,352
|
|
Less amounts representing interest
|
|
|
(28,647
|
)
|
Present value of minimum lease payments
|
|
$
|
193,705
|
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Contingencies
For all legal proceedings, at each reporting
period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable
under the provisions of the authoritative guidance that addresses accounting for contingencies.
The Company and its subsidiaries are involved
in litigation matters and claims in the normal course of business. In the past, the Company and its subsidiaries have litigated
these matters. The Company expects it or its subsidiaries will be involved in legal proceedings in the future. These existing
and any future legal actions may harm the Company’s business. Litigation could severely disrupt or shut down the business
operations or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations
with them and cause the Company to lose revenues. The cost associated with legal proceedings are typically high, relatively unpredictable
and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely
affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined
in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal and financial resources from
the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could subject the Company
to significant liabilities, lost revenue, negatively impact the Company’s stock price or its business and consolidated financial
position, results of operations or cash flows.
Additionally, 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 $20,000,000. At June 30, 2014 the Company had not recorded any accruals for product liability claims.
See Part II, Item I of Form 10Q for further
discussion of legal proceedings that the Company is party to.
Sponsorship and Endorsement Contract
Liabilities
The Company has various non-cancelable
endorsement and sponsorship agreements with terms expiring through 2018. The total value of outstanding payments as of June 30,
2014 was $37,102,417. The total outstanding payments are as follows:
Outstanding Payments
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Total
|
|
Endorsement
|
|
$
|
3,730,750
|
|
|
$
|
8,280,834
|
|
|
$
|
6,490,833
|
|
|
$
|
6,600,000
|
|
|
$
|
3,500,000
|
|
|
$
|
28,602,417
|
|
Sponsorship
|
|
|
2,357,500
|
|
|
|
4,905,000
|
|
|
|
1,137,500
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
8,500,000
|
|
Total
|
|
$
|
6,088,250
|
|
|
$
|
13,185,834
|
|
|
$
|
7,628,333
|
|
|
$
|
6,700,000
|
|
|
$
|
3,500,000
|
|
|
$
|
37,102,417
|
|
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. As of June 30, 2014 and the date of this report, there have been no changes in
the status of the investigation. See Note 16.
Note 11: 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 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 six months ended June 30, 2014 and 2013 the Company’s matching contribution was $148,745
and $28,530, respectively.
Note 12: Related Party Transactions
Ryan DeLuca, the Chief Executive Officer
of Bodybuilding.com, is the brother of Jeremy DeLuca, MusclePharm’s EVP, MusclePharm Brand and Global Business Development.
The Company maintained a business relationship with Bodybuilding.com prior to hiring Mr. DeLuca. The Company does not offer preferential
pricing of our products to Bodybuilding.com based on these relationships. Sales of products to Bodybuilding.com were $7,276,542
and $6,933,056, respectively, for the three months ended June 30, 2014 and 2013; and $15,499,998 and $14,953,845 for the
six months ended June 30, 2014 and 2013, respectively. Bodybuilding.com owed the Company approximately $1,720,719 and $2,051,265
in trade receivables as of June 30, 2014 and December 31, 2013, respectively. The Company purchased marketing services from Bodybuilding.com
during the three and six months ended June 30, 2014 in the amount of $338,877 and $688,885, respectively.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
The Company leases 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 and six months ended June 30, 2014
we paid rent of $22,951 and $41,015, respectively, and for the three and six months ended June 30, 2013, we paid rent of $19,211
and $38,713, 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 and six months ended June
30, 2014, we paid rent of $15,438 and $26,828, respectively.
During the six months ended June 30, 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 13: 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 June 30, 2014 and December 31, 2013, the
amount of unamortized stock compensation expense related to this agreement was $5,889,000 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 14: Biozone Acquisition
On January 2, 2014, the Company completed
its acquisition of BioZone Pharmaceuticals, Inc. (“BioZone”) for $9,840,000 in MusclePharm common stock.
The base purchase price under the asset
purchase agreement 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 was $9,840,000 in common stock based on the stock price as of January 2, 2014. As of June 30, 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.
The Biozone acquisition is considered an
acquisition of a business and was accounted for in accordance with accounting guidance for business combinations. The acquired
assets and liabilities have been recognized at their estimated fair value, and the purchase price has been allocated to the tangible
and intangible assets acquired and liabilities assumed. 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. Based upon the fair
values acquired, the purchase price allocation is as follows:
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Purchase Price Allocation
|
|
|
|
|
Net Tangible Assets
|
|
|
|
|
Property & equipment
|
|
$
|
1,859,066
|
|
Receivables
|
|
|
806,212
|
|
Inventory
|
|
|
840,999
|
|
Other assets
|
|
|
577,453
|
|
Factoring payable
|
|
|
(795,031
|
)
|
Trade payables
|
|
|
(327,038
|
)
|
Equipment leases
|
|
|
(122,766
|
)
|
Employee compensation liability
|
|
|
(78,134
|
)
|
Other liabilities
|
|
|
(76,423
|
)
|
Total net tangible assets acquired
|
|
|
2,684,338
|
|
|
|
|
|
|
Identified Intangible Assets
|
|
|
|
|
Patents
|
|
$
|
5,869,874
|
|
Trademarks
|
|
|
656,160
|
|
Customer lists
|
|
|
629,607
|
|
Domain name
|
|
|
21
|
|
Total identified intangible assets acquired
|
|
|
7,155,662
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,840,000
|
|
Receivables
The Company 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 the Company determined that none of the receivables were
uncollectible.
Receivables
|
|
Estimated Fair
Value
|
|
|
Contractual
Value
|
|
Trade receivables
|
|
$
|
806,212
|
|
|
$
|
807,294
|
|
Factoring receivable
|
|
|
150,702
|
|
|
|
151,016
|
|
Asset sale receivable
|
|
|
399,814
|
|
|
|
400,000
|
|
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 six months ended June 30, 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 for the three and six months ended June 30, 2013 is as follows:
Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
BioZone
|
|
|
Before Pro
|
|
|
|
|
|
MusclePharm
|
|
|
|
MusclePharm
|
|
|
Pharmaceuticals
|
|
|
Forma
|
|
|
Pro Forma
|
|
|
Corp.
|
|
|
|
Corp.
|
|
|
Inc.
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
Sales - net
|
|
$
|
25,480,059
|
|
|
$
|
1,801,600
|
|
|
$
|
27,281,659
|
|
|
$
|
-
|
|
|
$
|
27,281,659
|
|
Net loss
|
|
|
(2,421,808
|
)
|
|
|
(708,484
|
)
|
|
|
(3,130,292
|
)
|
|
|
(119,093
|
)(a)
|
|
|
(3,249,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.34
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(0.45
|
)
|
Weighted average number of common shares used in per share calculations – basic and diluted
|
|
|
7,226,849
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,226,849
|
|
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
BioZone
|
|
|
Before Pro
|
|
|
|
|
|
MusclePharm
|
|
|
|
MusclePharm
|
|
|
Pharmaceuticals
|
|
|
Forma
|
|
|
Pro Forma
|
|
|
Corp.
|
|
|
|
Corp.
|
|
|
Inc.
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
Sales - net
|
|
$
|
48,041,226
|
|
|
$
|
3,677,131
|
|
|
$
|
51,718,357
|
|
|
$
|
-
|
|
|
$
|
51,718,357
|
|
Net loss
|
|
|
(9,783,789
|
)
|
|
|
(1,820,351
|
)
|
|
|
(11,604,140
|
)
|
|
|
(247,400
|
)(a)
|
|
|
(11,851,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(1.72
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(2.08
|
)
|
Weighted average number of common shares used in per share calculations – basic and diluted
|
|
|
5,686,323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,686,323
|
|
|
(a)
|
Pro forma adjustment to eliminate historical seller depreciation expense and record depreciation and amortization expense resulting
from the assets acquired.
|
The above unaudited pro forma results include
adjustments for depreciation of property and equipment and amortization of acquired intangible assets. 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 15: Intangible Assets
Intangible assets consist of the following:
|
|
As of June 30, 2014
|
|
|
Weighted
average
|
|
|
|
Gross Assets
|
|
|
Accumulated
Amortization
|
|
|
Net Assets
|
|
|
amortization
period (years)
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
5,922,374
|
|
|
$
|
(456,547
|
)
|
|
$
|
5,465,827
|
|
|
|
8.25
|
|
Trademarks
|
|
|
691,160
|
|
|
|
(69,281
|
)
|
|
|
621,879
|
|
|
|
7.02
|
|
Customer relationships
|
|
|
629,607
|
|
|
|
(52,467
|
)
|
|
|
577,140
|
|
|
|
5.51
|
|
|
|
|
7,243,141
|
|
|
|
(578,295
|
)
|
|
|
6,664,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain name
|
|
|
67,686
|
|
|
|
-
|
|
|
|
67,686
|
|
|
|
-
|
|
|
|
|
67,686
|
|
|
|
-
|
|
|
|
67,686
|
|
|
|
|
|
Total intangible assets
|
|
$
|
7,310,827
|
|
|
$
|
(578,295
|
)
|
|
$
|
6,732,532
|
|
|
|
|
|
Amortization expense for the three months
ended June 30, 2014 and 2013 was $293,113 and zero, respectively, and for the six months ended June 30, 2014 and 2013 was $578,295
and zero, respectively. Amortization expense is included in Operating expenses in the Consolidated Statement of Operations.
MusclePharm Corporation
Notes to Consolidated
Financial Statements
(Unaudited)
As of June 30, 2014, the estimated future
amortization expense of intangible assets is as follows:
2014 (remaining 6 months)
|
|
$
|
550,097
|
|
2015
|
|
|
1,106,314
|
|
2016
|
|
|
999,955
|
|
2017
|
|
|
926,090
|
|
2018
|
|
|
902,187
|
|
Thereafter
|
|
|
2,180,203
|
|
Total amortization expense
|
|
$
|
6,664,846
|
|
Note 16: Insurance Recovery
During the quarter ended June 30, 2014,
the Company received confirmation from its insurance carrier that legal fees and expenses incurred by the Company in the course
of complying with SEC subpoenas and information requests as part of the ongoing SEC investigation as more fully described in Note
10 would be eligible for reimbursement under existing insurance policies. Upon receiving this confirmation, the Company determined
it was probable, as defined in ASC 450, that certain legal fees and expenses incurred by the Company would be recoverable under
these insurance policies and recorded a receivable of $1,342,843 consisting of fees and expenses incurred from January 1, 2014
through June 30, 2014. Of this receivable, $358,671 related to expenses previously recognized in first quarter 2014 as a component
of Professional fees in the Consolidated Statements of Operations. For the three and six months ended June 30, 2014, professional
fees would have been $1,292,517 and $2,077,090 without giving effect to the insurance recovery receivable.
Note 17: Subsequent Events
Tiger Woods Endorsement Agreement
Effective July 1, 2014, the Company entered
into an Endorsement Agreement (the “Agreement”) with ETW Corp. Under the terms of the Agreement, Tiger Woods will endorse
certain of the Company’s products and use a golf bag during all professional golf play which prominently displays the MusclePharm
name and logo.
In conjunction with this agreement, on
July 3, 2014 (“Issuance Date”), the Company issued 446,853 shares of the Company’s restricted common stock to
ETW Corp with an aggregate market value of $5,000,000.
Jonathan Manziel Endorsement Agreement
Effective July
15, 2014, the Company entered into an Endorsement Agreement (the “Manziel Agreement”) with JMAN2 General III, LP for
the services of Jonathan Manziel. Under the terms of the Manziel Agreement, Mr. Manziel will be available to use, evaluate, promote,
and advertise MusclePharm products.
In conjunction
with the Manziel Agreement, the Company issued to JMAN2 General III, LP warrants to purchase 100,000 shares of MusclePharm common
stock at an exercise price of $11.90 per share. These warrants vest ratably over a period of 24 months beginning August 15, 2014.