UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
Amendment
No. 1
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year
ended December 31, 2012
Commission File Number – 000-53166
MusclePharm Corporation
(Exact name of registrant as specified
in its charter)
Nevada |
77-0664193 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
4721 Ironton Street, Building A |
|
Denver, Colorado |
80239 |
(Address of principal executive offices) |
(Zip code) |
(303) 396-6100
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(g)
of the Act:
|
Title of each class |
|
|
Common Stock, Par Value $0.001 Per Share |
|
Indicated by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files) Yes x
No ¨
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¨
Indicated by check mark whether the registrant is a large accelerated
file, an accelerated file, a non-accelerated filer, or a smaller reporting company. (Check one):
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
Non-accelerated filer |
¨ |
Smaller reporting company |
x |
Indicated by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Aggregate market value of the voting common stock held by non-affiliates
of the registrant at June 30, 2012: $14,931,500
Number of shares of the registrant’s common stock outstanding
at March 29, 2013: 6,776,647
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Explanatory Note
MusclePharm Corporation (the “Company”,
“we” or “us”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend our
Annual Report on Form 10-K for the year ended December 31, 2012, originally filed with the Securities and Exchange Commission (the
“SEC”) on April 1, 2013 (the “Original Filing”) to include revised information required by Item 11 of Part
III of Form 10-K, in particular the “Other Compensation” column which is a part of the “Summary Compensation
Table for 2012” section and include revised information required by Item 13 of Part III of Form 10-K, in particular the “Other
Agreements” section.
As previously disclosed in the Company’s
Current Report on Form 8-K filed on September 30, 2013 following requests for information received by the Company from the Denver
Regional Office of the SEC (the “Staff”), the Company undertook to review, under the guidance of the Audit Committee,
its disclosures related to compensation, benefits and perquisites in several of its prior Annual Reports on Form 10-K. The
Company has provided information to the Staff in response to its inquiries. In the process of reviewing its records and preparing
such submissions, the Company has determined to revise its previously filed compensation disclosure for the Fiscal Years ended
December 31, 2010, 2011, 2012 and 2013 ("Fiscal Years 2010 - 2013"). The Company determined that it improperly
excluded certain items that should have been reported in the Summary Compensation Tables under Item 402(b) of Regulation S-K in
the Company’s Annual Reports for the Fiscal Years ended December 31, 2010 – 2013. The Company is filing this
amendment to Form 10-K for the year ended 2012 (which adjusts information in the Summary Compensation Tables in Item 3 as disclosed
for the Fiscal Years 2010-2013) to revise certain non-financial statement disclosures in the Summary Compensation Tables for Fiscal
Years 2010 –2013. This amendment does not include a restatement of the audited financial statements of the Company.
In accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, Part III, Item 11 and Item 13 of the Original Filing
are hereby amended and restated in their entirety. This Amendment No. 1 does not amend or otherwise update any other information
in the Original Filing. Accordingly, this Amendment should be read in conjunction with the Original Filing, and with our filings
with the SEC subsequent to the Original Filing.
MusclePharm Corporation
Form 10-K/A
For the Year Ended December 31, 2012
TABLE OF CONTENTS
Forward-Looking Statements
Certain statements contained in this report
on Form 10-K/A are not statements of historical fact and constitute forward-looking statements within the meaning of the various
provisions of the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), including, without limitation, the statements specifically identified as forward-looking
statements within this report. Many of these statements contain risk factors as well. In addition, certain statements in our future
filings with the SEC, in press releases, and in oral and written statements made by or with our approval which are not statements
of historical fact constitute forward-looking statements within the meaning of the Securities Act and the Exchange Act. Examples
of forward-looking statements, include, but are not limited to: (i) projections of capital expenditures, revenues, income or loss,
earnings or loss per share, capital structure, and other financial items, (ii) statements of our plans and objectives or our management
or board of directors including those relating to planned development of future products, (iii) statements of future economic performance
and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,”
“expects,” “intends,” “targeted,” “may,” “will” and similar expressions
are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Important factors
that could cause actual results to differ materially from the forward looking statements include, but are not limited to:
| · | significant competition in our industry; |
| · | unfavorable publicity or consumer perception of our products; |
| · | increases in the cost of borrowings and limitations on availability of additional debt or equity capital; |
| · | incurrence of material product liability and product recall costs; |
| · | loss or retirement of directors or key members of management; |
| · | costs of compliance and our failure to comply with new and existing governmental regulations including, but not limited to,
tax regulations; |
| · | costs of litigation and the failure to successfully defend lawsuits and other claims against us; |
| · | economic, political and other risks associated with our international operations; |
| · | failure to keep pace with the demands of our customers for new products and services; |
| · | disruptions in our manufacturing system or losses of manufacturing certifications; |
| · | disruptions in our distribution network; |
| · | lack of long-term experience with human consumption of ingredients in some of our products; |
| · | failure to adequately protect or enforce our intellectual property rights against competitors; |
| · | changes in raw material costs and pricing of our products; |
| · | failure to successfully execute our growth strategy, including any delays in our planned future growth; |
| · | damage or interruption to our information systems; |
| · | impact of current economic conditions on our business; |
| · | natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and geo-political events; and |
| · | failure to maintain effective internal controls. |
Consequently, forward-looking statements
should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements.
We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically
decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to
reflect the occurrences of unanticipated events.
PART I
Item 1. Business
General
MusclePharm Corporation, a Nevada corporation
(“MusclePharm”, the “Company”, “we”, “us”, or “our”) was incorporated
in the state of Nevada on August 4, 2006, under the name “Tone in Twenty” for the purpose of engaging in the business
of providing personal fitness training using isometric techniques. On February 18, 2010, Tone in Twenty acquired all of the issued
and outstanding equity and voting interests of Muscle Pharm, LLC, a Colorado limited liability company, in exchange for 30,589
shares of its common stock. As a result of this transaction, Muscle Pharm, LLC became a wholly owned subsidiary of Tone in Twenty,
and Tone in Twenty changed its name to “MusclePharm Corporation.” Our principal executive offices are located at 4721
Ironton Street, Building A, Denver, Colorado 80239 and our telephone number is (303) 396-6100.
We develop, market and sell athlete-focused,
high quality nutritional supplements primarily to specialty resellers. Our products have been formulated to enhance active fitness
regimens, including muscle building, weight loss and maintaining general fitness. Our nutritional supplements are available for
purchase in over 10,500 U.S. retail outlets, including Dick’s Sporting Goods, GNC, Vitamin Shoppe and Vitamin World. We also
sell our products to over 100 online channels, including bodybuilding.com, amazon.com, gnc.com and vitacost.com. Internationally,
our nutritional supplements are sold in approximately 90 countries, and we expect that international sales will be a significant
portion of our sales for the foreseeable future.
We started formulating our nutritional
supplements in 2008 for consumption by active individuals, high performance athletes and fitness enthusiasts. We launched our sales
and marketing programs in late 2008 through our internal sales executives and staff targeting specialty retail distributors.
We supply our nutritional supplements to
elite athletes on teams in the National Football League, Major League Baseball and the National Basketball Association, as well
as Ultimate Fighting Championship fighters. While these endorsers and professional sports teams use our products, no endorsement
by any of them as to the merits of our securities should be inferred.
Our products were created through our six-stage
process using the expertise of distinguished nutritional scientists we have retained and they are typically field tested using
a pool of several elite athletes on various teams in the National Football League, Major League Baseball and National Basketball
Association, as well as Ultimate Fighting Championship fighters. We do not directly manufacturer or ship our products to most of
our customers. Rather, we outsource our manufacturing to non-affiliated third parties who fulfill our orders and ship products
directly to our customers.
We have recently experienced significant
growth in our product sales. Our net sales for the years ended December 31, 2012 and 2011 were $67.1 million and $17.2 million,
respectively. Additionally, during the second quarter of 2012, we commenced operations in Ontario, Canada, through our subsidiary
Canada MusclePharm Enterprises Corp.
At the 2012 Bodybuilding.com Supplement
Awards, we received three Awards of Excellence; we received (i) the “Brand of the Year” award, (ii) the “Packaging
of the Year” award, and (iii) the “Pre-Workout Supplement of the Year” award for AssaultTM.
Our headquarters in Denver, Colorado has
a state-of-the-art over 30,300 square feet athletic facility with a medical and clinical testing department, complete with equipment
for measuring and conducting athletic clinical studies and supporting athletes. Our medical and clinical professionals consist
of several nationally recognized medical doctors and nutritional experts who oversee our product research, formulation, efficacy
analysis and testing.
Recent Developments
Reverse Stock Split and Increase in Number of Authorized
Shares of Common Stock
On November 26, 2012, we (i) effected a
1-for-850 reverse stock split of our common stock, including a proportionate reduction in the number of authorized shares of our
common stock from 2.36 billion shares to 2.8 million shares of common stock, and (ii) amended our articles of incorporation to
increase the number of authorized shares of common stock (post reverse stock split) from 2,941,177 to 100 million effective November
27, 2012. All share and per share amounts in this document have been changed to give effect to the reverse stock split.
Conversion of Warrants into Common Stock
In late September 2012, we issued 512,675
shares of our common stock to several accredited investors pursuant to conversions of warrants to purchase an aggregate of 723,747
shares of our common stock. As a result of these warrant conversions and other extinguishments of derivative liabilities during
the quarter ended September 30, 2012, our stockholders’ deficit decreased from $11,013,113 at June 30, 2012 to $7,297,593
at September 30, 2012 and our derivative liabilities decreased from $7,908,960 at June 30, 2012 to $24,889 at September 30, 2012.
On December 5, 2012, we converted a warrant exercisable for 4,902 shares of common stock into 3,677 shares of our common stock.
Thereafter, our derivative liability was reduced to approximately $300 as of December 5, 2012.
Registered Direct Offerings
On February 4, 2013, we completed the final
closing of our registered direct offering of an aggregate of 1,500,000 shares of our Series D Convertible Preferred Stock, at a
public offering price of $8.00 per share pursuant to an offering registered with the SEC. Each share of Series D Convertible Preferred
Stock is convertible into two shares of common stock, subject to adjustment. Our net proceeds from the offering were approximately
$10.8 million after placement agent discounts, and other offering expenses of $1.2 million. Net proceeds from this offering were
used to reduce indebtedness and for other corporate purposes.
As of the date of this report, 1,176,125 Series D shares have
been converted into 2,352,250 shares of the Company’s common stock and 323,875 shares of Series D preferred stock remain
outstanding.
Private Placement of Common Stock
On March 26, 2013, the Company entered
into subscription agreements with non-affiliated accredited investors for the issuance of 705,882 shares of common stock pursuant
to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $8.50 per share.
The gross proceeds to the Company of $6.0 million were reduced by commissions and issuance costs of $115,000.
An unaudited pro-forma balance sheet showing the effect of these
capital raises is shown below:
| |
December 31, 2012 | | |
Total Adjustment (unaudited) | | |
Pro Forma (unaudited) | |
Assets | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | |
Cash | |
$ | - | | |
$ | 6,296,669 | | |
$ | 6,296,669 | |
Current assets | |
| 4,949,881 | | |
| - | | |
| 4,949,881 | |
Non-current assets | |
| 1,816,846 | | |
| - | | |
| 1,816,846 | |
Total assets | |
$ | 6,766,727 | | |
$ | 6,296,669 | | |
$ | 13,063,396 | |
Liabilities and Stockholders’ Deficit | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | |
Current liabilities | |
$ | 16,520,456 | | |
$ | (8,238,165 | ) | |
$ | 8,282,291 | |
Non-current liabilities | |
| 4,523 | | |
| - | | |
| 4,523 | |
Total Liabilities | |
$ | 16,524,979 | | |
$ | (8,238,165 | ) | |
$ | 8,286,814 | |
Stockholders’ Deficit: | |
| | | |
| | | |
| | |
Series A, Convertible Preferred Stock | |
| - | | |
| - | | |
| - | |
Series B, Preferred Stock | |
| - | | |
| - | | |
| - | |
Series C, Convertible Preferred Stock | |
| - | | |
| - | | |
| - | |
Series D, Convertible Preferred Stock | |
| - | | |
| 324 | | |
| 324 | |
Common Stock | |
| 2,778 | | |
| 2,972 | | |
| 5,750 | |
Treasury Stock, at cost | |
| (460,978 | ) | |
| - | | |
| (460,978 | ) |
Additional paid-in capital | |
| 54,817,341 | | |
| 16,698,755 | | |
| 71,516,096 | |
Accumulated deficit | |
| (64,109,476 | ) | |
| (2,167,217 | ) | |
| (66,276,693 | ) |
Accumulated other comprehensive income | |
| (7,917 | ) | |
| - | | |
| (7,917 | ) |
Total Stockholders’ Deficit | |
| (9,758,252 | ) | |
| 14,534,834 | | |
| 4,776,582 | |
Total Liabilities and Stockholders’ Deficit | |
$ | 6,766,727 | | |
$ | 6,296,669 | | |
$ | 13,063,396 | |
Our Growth Strategy
Our primary growth strategy is to:
| · | increase our product distribution and sales through increased market penetrations both domestically and internationally; |
| · | increase our margins by focusing on streamlining our operations and seeking operating efficiencies in all areas of our operations; |
| · | continue to conduct additional testing of the safety and efficacy of our products and formulate new products; and |
| · | increase awareness of our products by increasing our marketing and branding opportunities through endorsements, sponsorships
and brand extensions. |
Our Core Marketing Strategy
Our core marketing strategy is to brand
MusclePharm as the “must have” fitness brand for workout enthusiasts and elite athletes. We seek to be known as The
Athletes Company®, run by athletes who create their products for other athletes, both professional and otherwise.
We believe that our marketing mix of endorsers, sponsorships and providing sample products for our retail resellers to use is an
optimal strategy to increase sales.
Sponsorships and Promotions
Since 2011, we have been the official supplement
provider and sponsor of the Ultimate Fighting Championship, or UFC. Our sponsorship includes prominent logo placement on the fighting
mat, and our branding can be seen on FOX Television Stations, FX Networks, FUEL TV and Pay-Per-View television worldwide. The UFC
fighters we sponsor feature our brand on their uniforms and we also extensively advertise at the UFC events.
We are also currently engaged in various
in-store promotions, including point-of-purchase stands, aisle displays in retail outlets, as well as sample demonstrations in
Dick’s Sporting Goods, GNC, Vitamin World and Vitamin Shoppe.
In 2011, we launched an advanced website
in seeking to tap into the social networking world and to further our brand and consumer awareness. The information in our website
is not part of this report. We have included our website address as a factual reference and do not intend it to be an active link
to our website. Also, we currently have over 617,000 fans combined between our company and executive officer Facebook and Twitter
accounts.
Industry Overview
We operate within the large and growing
U.S. nutritional supplements industry. According to Nutrition Business Journal’s 2012 Supplement Business Report, our industry
generated over $30 billion in sales in 2011 and $28.1 billion in 2010, and is projected to grow at an average annual rate of approximately
6.0% through 2020.
According to Nutrition Business Journal,
sports nutrition products represented approximately 12% of the total sales in the U.S. nutritional supplements industry in 2011,
and the category is expected to grow at a 9.1% compound annual growth rate (or CAGR) from 2012 to 2020, representing the fastest
growing product category in the nutritional supplements industry.
We believe there are several key demographic,
healthcare and lifestyle trends driving the continued growth of our industry. These trends include:
| · | Increasing awareness of nutritional supplements across major age and lifestyle segments of the
U.S. population. We believe that awareness of the benefits of nutritional supplements is growing among active, younger populations,
providing the foundation for our future consumer base. In addition, the average age of the U.S. population is increasing and data
from the United States Census Bureau indicates that the number of Americans age 65 or older is expected to increase by approximately
36% from 2010 to 2020. We believe that these consumers are likely to increasingly use nutritional supplements and generally have
higher levels of disposable income to pursue healthier lifestyles. |
| · | Increased focus on fitness and healthy living. We believe that consumers are trying to lead more
active lifestyles and become increasingly focused on healthy living, nutritional and supplemental. According to the Nutrition Business
Journal’s 2012 Supplement Business Report, 20% of the U.S. adult population (or 47 million people) were regular or heavy
users of vitamins in 2011. We believe that growth in our industry will continue to be driven by consumers who increasingly embrace
health and wellness as an important part of their lifestyles. |
Participants in our industry include specialty
retailers, supermarkets, drugstores, mass merchants, multi-level marketing organizations, online retailers, mail-order companies
and a variety of other small participants. The nutritional supplements sold through these channels are divided into four major
product categories: vitamins, minerals and health supplements; sports nutrition products; diet products; and other wellness products.
Most supermarkets, drugstores and mass merchants have narrow nutrition supplement product offerings limited primarily to simple
vitamins and herbs, with less knowledgeable sales associates than specialty retailers.
Our Products
We currently offer 28 athlete-focused,
high quality nutritional supplement products. None of our products are formulated to contain substances that have been the subject
of publicized health concerns by the medical community such as ephedra, androstene, androstenedione, aspartame, steroids or human
growth hormones. Our products are comprised of vitamins, minerals, herbs and herbal extracts, carbohydrates, proteins and amino
acids tested by our recognized scientists, and intended to be safe and effective for the overall health of athletes. Moreover,
our nutritional supplements are intended to enhance the effects of workouts, support muscle recovery and strength, and nourish
the human body for optimal physical fitness. The following is a brief description of our current products:
Product Name |
|
Description and/or Intended Benefits |
Amino 1TM |
|
Hydration sports recovery drink with amino acids, coconut water powder and electrolytes |
Armor-V Advanced Multi Nutrient Complex® |
|
Advanced multi-vitamin complex; multiple vitamins and minerals along with immune system support |
AssaultTM |
|
Fuel pre-workout power for long-lasting energy to enhance focus and build lean muscle mass |
Battle Fuel XTTM |
|
Herbal formula to enhance athletic performance and support testosterone production |
BCAA |
|
Promote muscle development and maintenance through several amino acid complexes |
Bizzy Diet® StackTM |
|
Combination of products to support fat loss and lean muscle tissue |
MusclePharm BulletProof Nighttime Recovery Matrix® |
|
Promote deep sleep; optimize recovery; and support growth hormone/testosterone output |
Carnitine Core TM |
|
Promote energy for muscle gain and fat loss |
Casein |
|
Slow digesting protein with added digestive enzymes and pro-biotic blend |
CLA CoreTM |
|
Support body composition and aid in weight loss |
Combat Powder® |
|
High protein supplement; enhance digestion of nutrients and maximize response to intense training |
Creatine |
|
Promote strength, power and endurance |
MusclePharm Energel® |
|
Increased “Energy On The Go®” for workouts and daily activities |
Fish Oil |
|
Blend of nutritional oils |
GetSwole® StackTM |
|
Combination of products to support lean muscle mass |
Glutamine |
|
Assist in recovery time, enhance muscle growth |
Hybrid N.O.TM |
|
Increase muscle fullness and vascularity |
Live Shredded® StackTM |
|
Combination of products to support lean muscle mass maintenance |
MusclePharm Musclegel® |
|
Protein and nutrition supplement, contains several different proteins |
Re-Con® |
|
Promote post-workout growth and repair; replenish nutrients |
MusclePharm Shred Matrix® |
|
Multi-level weight-loss system; increase metabolism, decrease body fat, appetite balance and weight management |
Z-Core PMTM |
|
Mineral support formula to support natural testosterone levels, deep sleep and healthy libido function |
FitMiss BurnTM |
|
Support appetite balance, increased energy and healthy metabolism for women |
FitMiss CleanseTM |
|
Support healthy body composition and weight management for women |
FitMiss DelightTM |
|
Protein nutrition shake for women |
FitMiss ToneTM |
|
Support body composition and aids in weight loss for women |
FitMiss IgniteTM |
|
Pre-workout energy booster for women |
FitMiss Balance |
|
Multivitamin and mineral product for women |
MusclePharm Apparel
We granted an exclusive indefinite license
to market, manufacture, design and sell our existing apparel line. The licensee paid an initial fee of $250,000 in June, 2011 and
will pay us a 10% net royalty based on the licensee’s net income at the end of each fiscal year. As of December 31, 2012,
we had not earned any royalty revenue under this licensing arrangement.
Quality in Our Products
In seeking quality in our products, we require that before a
product is brought to market, all:
| · | supplements are supported with publicly available scientific research and references; |
| · | our manufacturers carry applicable manufacturing licenses; |
| · | ingredients are combined so that their effectiveness is not impaired; |
| · | ingredients are in dosage levels that fall within tolerable upper intake levels established for
healthy people by the Institute of Medicine of the National Academies; |
| · | products do not contain any substances banned by major sporting organizations such as the World
Anti-Doping Agent, or WADA, NFL or MLB, or adulterated ingredients such as ephedra, androstenedione, aspartame, steroids or human
growth hormones; |
| · | formulations have a minimum two-year shelf life; and |
| · | tablets, capsules and soft gels are designed to readily dissolve in the body to facilitate absorption. |
Future Products
New products are derived from a number
of sources, including our management, trade publications, scientific and health journals, consultants and distributors. Prior to
introducing new products, we investigate product formulations as they relate to regulatory compliance and other issues.
Research and Development
Each of our products is the end result
of a six stage process involving recognized nutrition scientists, doctors and professional athletes. Our expenses for research
and development for the years ended December 31, 2012 and 2011, were approximately $0.2 million and $0.1 million, respectively.
Management Information, Internet and
Telecommunication Systems
The ability to efficiently manage distribution,
compensation, inventory control, and communication functions through the use of sophisticated and dependable information processing
systems is critical to our success.
We continue to invest in applications and
integrations to improve and optimize business processes and to increase performance company wide.
Product Returns
We provide an informal seven day right
of return for our products. Historically, product returns as a percentage of our net sales have been nominal.
Trademarks and Patents
We regard our trademarks and other proprietary
rights as valuable assets and believe that protecting our key trademarks is crucial to our business strategy of building strong
brand name recognition. These trademarks are crucial elements of our business, and have significant value in the marketing of our
products.
Our policy is to pursue registrations for
all of the trademarks associated with our products. Federally registered trademarks have a perpetual life, provided that they are
maintained and renewed on a timely basis and used correctly as trademarks, subject to the rights of third parties to attempt to
cancel a trademark if priority is claimed or there is confusion of usage. We rely on common law trademark rights to protect our
unregistered trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark
by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not
be as extensive as the protection available to us in the United States.
Although we seek to ensure that we do not
infringe on the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual
property infringement claims against us.
We have obtained U.S. registration on trademarks
for eight of our products with USPTO applications pending on several of our newest products. We have abandoned or not pursued efforts
to register marks identifying other items in our product line for various reasons including the inability of some names to qualify
for registration. We also received federal trademark registration for 14 names or expressions that we use or intend to use to distinguish
ourselves from others, with several USPTO applications pending. All trademark registrations are protected for an initial period
of five years and then are renewable after five years if still in use and every 10 years thereafter.
We have filed for a provisional patent
to protect technology used in certain of our products, including MusclePharm Musclegel® and Re-Con®. The patent was filed
in the United States as a Patent Cooperation Treaty (PCT) application to secure patent protection worldwide. An International Search
Report (ISR)/Written Opinion was issued in October 2012, and was published at the International Bureau on February 28, 2013.
We also have filed for protection of various
marks throughout the world and are committed to a significant long-term strategy to build and protect the MusclePharm brand globally.
The “MusclePharm” mark is pending registration in 14 countries. The mark has been granted final trademark registration
in six countries, and we believe the remaining registrations will be granted within the next several months.
The “MP” logo has been filed
and registration granted in one country. The application for protection of the logo is expected to be filed in the near future
in 26 additional countries. Going forward, we expect to seek trademark registration for our best-selling international products.
Competition
We compete with many companies engaged
in selling nutritional supplements. The sports nutrition business is highly competitive. Most of our competitors have significantly
more financial and human resources than we do, and have operating histories longer than ours. We seek to differentiate our products
and marketing from our competitors based on our product quality, the use of sports celebrity endorsers and through our marketing
program. Competition is based primarily on quality and assortment of products, marketing support, and availability of new products.
Currently, our main competitors are three private companies: Optimum Nutrition, Inc., or Optimum, Iovate Health Sciences, Inc.,
or IHS, and Bio-Engineered Supplements and Nutrition, Inc., or BSN. Optimum is a wholly owned subsidiary of Glanbia Nutritionals,
Inc., an international nutritional ingredients group. Optimum owns and operates two brands of nutritional supplements (Optimum
Nutrition and American Body Building), providing a line of products across multiple categories. IHS is a nutritional supplement
company that delivers a range of products to the nutritional marketplace. Headquartered in Oakville, Ontario, Canada, IHS’s
line of products can be found in major retail stores and include such brands as Hydroxy-Cut™, Cell-Tech™, Six Star
Nutrition™. BSN is also a sports nutrition leader whose top products include No-Explode™ and Syntha Six Protein™.
The retail market for nutritional supplements
is characterized by a few dominant national companies, including GNC, Vitamin World, Vitamin Shoppe, and Great Earth Vitamin Stores.
Others have a presence within local markets, such as Vitamin Cottage in Denver, Colorado. Four companies dominate the online channel—bodybuilding.com,
vitamins.com (owned by Puritan’s Pride), GNC.com and vitaminshoppe.com, the latter two having retail sales locations as well.
Major competitors in the sports nutrition
and weight-loss markets consist of companies such as EAS, Inc., Weider Nutrition International, Inc. and Twinlab Corporation, which
dominate the market with such products as Myoplex (EAS), Body Shaper (Weider) and Ripped Fuel (Twinlab).
We also compete with a number of large
direct selling firms selling nutritional, diet, health, personal care and environmental products, and numerous small competitors.
The principal direct selling competitors are Amway Corporation, Nature’s Bounty, Inc., Sunrider Corporation, New Vision USA,
Inc., Herbalife International of America, Inc., USANA, Inc., and Melaleuca, Inc.
We intend to compete by aggressively marketing
our brand, emphasizing our relationships with professional athletes, and maximizing our relationships with those athletes, retail
outlets and industry publications that align with our vision.
Our Manufacturers
We are committed to producing and selling
highly efficacious products that are trusted for their quality and safety. To date, our products have been outsourced to a third
party manufacturer where the products are manufactured in full compliance with the current good manufacturing practice, or cGMP,
standards set by the U.S. Food and Drug Administration, or FDA.
We use four non-affiliated principal manufacturers
for the components of our products, and multiple vendors for packaging and labeling. We have an agreement in place with our primary
manufacturer. This agreement was designed to support our growth and ensure consistence in production and quality. Our primary manufacturer
purchases all needed raw materials from suppliers. Additionally, our primary manufacturer is responsible for acquisition and storage
of all product inventory (at both on and off-site facilities). We do not take title to our products until time of shipment to retailers.
The three non-primary manufacturers are governed by purchase order terms and can be terminated at any time.
Our relationship with any of our manufactures
may be terminated upon proper notice. We have established relationships with other manufacturers that we believe can satisfy our
needs if our relationship with any manufacturer terminates.
Product Delivery
All of our products shipped out of the
United States are shipped by our manufacturers directly to our retailers. Our manufacturers collect sales tax on products based
upon the address of the consumer to whom products are sent regardless of how the order is placed. Products sold by MuscleCharm
Canada are shipped from our inventory held in Canada. We collect sales tax on products when applicable.
Regulatory Matters
Government Regulation and Statutes –
Product Regulation
Domestic
The manufacture, packaging, labeling, advertising,
promotion, distribution and sale of our products are subject to regulation by one or more federal agencies, including the FDA,
Consumer Product Safety Commission, or CPSC, and the U.S. Department of Agriculture, or USDA. Advertising and other forms of promotion
and methods of marketing are subject to regulation primarily by the U.S. Federal Trade Commission, or FTC, which regulates these
activities under the Federal Trade Commission Act, or FTCA. The foregoing matters regarding our products are also regulated by
various state and local agencies as well as those of each foreign country to which we distribute our products.
The Dietary Supplement Health and Education
Act of 1994, or DSHEA, amended the Federal Food, Drug, and Cosmetic Act, or FFDC Act, to establish a new framework governing the
composition, safety, labeling, manufacturing and marketing of dietary supplements. All of the products we market are regulated
as dietary supplements under the FFDC Act.
Generally, under the FFDC Act, dietary
ingredients that were marketed in the United States prior to October 15, 1994 may be used in dietary supplements without notifying
the FDA. “New” dietary ingredients (i.e., dietary ingredients that were “not marketed in the United States before
October 15, 1994”) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient
has been “present in the food supply as an article used for food” without being “chemically altered”. A
new dietary ingredient notification must provide the FDA with evidence of a “history of use or other evidence of safety”
establishing that use of the dietary ingredient “will reasonably be expected to be safe”. A new dietary ingredient
notification must be submitted to the FDA at least 75 days before it is initially marketed. The FDA may determine that a new dietary
ingredient notification does not provide an adequate basis to conclude that the ingredient is reasonably expected to be safe. Such
a determination could prevent the marketing of the dietary ingredient. The FDA recently issued draft guidance governing the notification
for new dietary ingredients. Although FDA guidance is not mandatory, and companies are free to use an alternative approach if the
approach satisfies the requirements of applicable laws and regulations, FDA guidance is a strong indication of the FDA’s
“current thinking” on the topic discussed in the guidance, including its position on enforcement. At this time, it
is difficult to determine whether the draft guidance, if finalized, would have a material impact on our operations. However, if
the FDA were to enforce the applicable statutes and regulations in accordance with the draft guidance as written, this manner of
enforcement could require us to incur additional expenses, which could be significant, and negatively impact our business in several
ways, including, but not limited to, enjoining the manufacturing of our products until the FDA determines that we are in compliance
and can resume manufacturing, which could increase our liability and reduce our growth prospects.
The Dietary Supplement Labeling Act of
2011, which was introduced in July 2011 (S1310), would amend the FFDC Act to, among other things, (i) require dietary supplement
manufacturers to register the dietary supplements that they manufacture with the FDA (and provide a list of the ingredients in
and copies of the labels and labeling of the supplements), (ii) mandate the FDA and the Institute of Medicine (a non-governmental,
nonprofit organization that provides advice to the public and decision makers, such as the FDA, concerning health issues) to identify
dietary ingredients that cause potentially serious adverse effects, (iii) require warning statements for dietary supplements containing
potentially unsafe ingredients and (iv) require that the FDA define the term “conventional food”. If the bill is reintroduced
and enacted, it could restrict the number of dietary supplements available for sale, increase our costs, liabilities and potential
penalties associated with manufacturing and selling dietary supplements, and reduce our growth prospects.
The Dietary Supplement Safety Act (S3002)
was introduced in February 2010 and would repeal the provision of DSHEA that permits the sale of all dietary ingredients sold in
dietary supplements marketed in the United States prior to October 15, 1994, and instead permit the sale of only those dietary
ingredients included on a list of Accepted Dietary Ingredients to be issued and maintained by the FDA. The bill also would allow
the FDA to: impose a fine of twice the gross profits earned by a distributor on sales of any dietary supplement found to violate
the law; require a distributor to submit a yearly report on all non-serious adverse event reports received during the year to the
FDA; and allow the FDA to recall any dietary supplement it determines with “a reasonable probability” would cause serious
adverse health consequences or is adulterated or misbranded. The bill also would require any dietary supplement distributor to
register with the FDA and submit a list of the ingredients in and copies of the labels of its dietary supplements to the FDA and
thereafter update such disclosures yearly and submit any new dietary supplement product labels to the FDA before marketing any
dietary supplement product. If this bill is reintroduced and enacted, it could severely restrict the number of dietary supplements
available for sale and increase our costs and potential penalties associated with selling dietary supplements.
The FDA or other agencies could take actions
against products or product ingredients that in its determination present an unreasonable health risk to consumers that would make
it illegal for us to sell such products. In addition, the FDA could issue consumer warnings with respect to the products or ingredients
in such products at the point they are sold to end users. Such actions or warnings could be based on information received through
FFDC Act-mandated reporting of serious adverse events. The FDA in recent years has applied these procedures to require that consumers
be warned to stop using certain dietary supplements. For businesses that have been subjected to these regulatory actions, sales
have been reduced and the businesses have been required to pay refunds for recalled products.
In general, we seek representations and
warranties, indemnification and/or insurance from our vendors. However, even with adequate insurance and indemnification, any claims
of non-compliance could significantly damage our reputation and consumer confidence in our products. In addition, the failure of
such products to comply with applicable regulatory and legislative requirements could prevent us from marketing the products or
require us to recall or remove such products from the market, which in certain cases could materially and adversely affect our
business, financial condition and results of operations.
Under the current provisions of the FFDC
Act, there are four categories of claims that pertain to the regulation of dietary supplements. First are health claims that describe
the relationship between a nutrient or dietary ingredient and a disease or health related condition and can be made on the labeling
of dietary supplements if supported by significant scientific agreement and authorized by the FDA in advance via notice and comment
rulemaking. Second are nutrient content claims which describe the nutritional value of the product and may be made if defined by
the FDA through notice and comment rulemaking and if one serving of the product meets the definition. Third are statements of nutritional
support or product performance. The FFDC Act permits “statements of nutritional support” to be included in labeling
for dietary supplements without FDA pre-market approval. These statements must be submitted to the FDA within 30 days of marketing
and may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the
mechanism of action by which a dietary ingredient may affect body structure, function or well-being, but may not expressly or implicitly
represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease. A company that uses a statement
of nutritional support in labeling must possess scientific evidence substantiating that the statement is truthful and not misleading.
The fourth category are drug claims, representations that a product is intended to diagnose, mitigate, treat, cure or prevent a
disease, are prohibited from use in the labeling of dietary supplements, and we make no drug claims regarding our products.
We may make claims for our dietary supplement
products regarding three of the four categories, that are statements of nutritional support, health claims and nutrient content
claims when authorized by the FDA, or that otherwise are allowed by law. The FDA’s interpretation of what constitutes an
acceptable statement of nutritional support may change in the future, thereby requiring that we revise our labeling. These regulatory
activities include those discussed above concerning products marketed before October 15, 1994 or afterwards, and the requirements
of 75 days advance notice to the FDA before marketing products containing new dietary ingredients. There is no assurance that the
FDA will accept the evidence of safety for any new dietary ingredients that we may wish to market, and the FDA’s refusal
to accept that evidence could prevent the marketing of the new dietary ingredients and dietary supplements containing a new dietary
ingredient. If the FDA determines that a particular statement of nutritional support is an unacceptable drug claim, conventional
food claim or an unauthorized version of a “health claim”, or, if the FDA determines that a particular claim is not
adequately supported by existing scientific data or is false or misleading, we would be prevented from using the claim.
In addition, DSHEA provides that so-called
“third-party literature”, e.g., a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient
with health benefits, may be used “in connection with the sale of a dietary supplement to consumers” without the literature
being subject to regulation as labeling. The literature: (1) must not be false or misleading; (2) may not “promote”
a particular manufacturer or brand of dietary supplement; (3) must present a balanced view of the available scientific information
on the subject matter; (4) if displayed in an establishment, must be physically separate from the dietary supplements; and (5)
should not have appended to it any information by sticker or any other method. If the literature fails to satisfy each of these
requirements, we may be prevented from disseminating such literature with our products, and any dissemination could subject our
product to regulatory action as an illegal drug.
Our dietary supplements must also comply
with the Dietary Supplement and Nonprescription Drug Consumer Protection Act, which became effective on December 22, 2007. This
law amends the FFDC Act to mandate that we report to the FDA any reports of serious adverse events that we receive. Under the law,
an “adverse event” is any health-related event associated with the use of a dietary supplement that is adverse, and
a “serious adverse event” is any adverse event that results in death, a life-threatening experience, inpatient hospitalization,
a persistent or significant disability or incapacity, or a congenital anomaly or birth defect, or requires, based on reasonable
medical judgment, a medical or surgical intervention to prevent one of these outcomes. Serious adverse event reports received through
the address or phone number on the label of a dietary supplement, as well as all follow-up reports of new medical information received
within one year after the initial report, must be submitted to the FDA no later than 15 business days after the report is received.
The law also requires recordkeeping for reports of non-serious adverse events as well as serious adverse events for six years following
the event, and these records are subject to FDA inspection.
In June 2007, pursuant to the authority
granted by the FFDC Act as amended by DSHEA, the FDA published detailed current good manufacturing practice, or cGMP, regulations
that govern the manufacturing, packaging, labeling and holding operations of dietary supplement manufacturers. The cGMP regulations,
among other things, impose significant recordkeeping requirements on manufacturers. The cGMP requirements are in effect for all
manufacturers, and the FDA is conducting inspections of dietary supplement manufacturers pursuant to these requirements. There
remains considerable uncertainty with respect to the FDA’s interpretation of the regulations and their actual implementation
in manufacturing facilities. The failure of a manufacturing facility to comply with the cGMP regulations renders products manufactured
in such facility “adulterated”, and subjects such products and the manufacturer to a variety of potential FDA enforcement
actions.
The FDA has also announced its intention
to promulgate new cGMPs specific to dietary supplements, to fully enforce DSHEA and monitor compliance with the Bioterrorism Act
of 2002. We intend to comply with the new cGMPs once they are adopted. The new cGMPs, predicted to be finalized shortly, would
be more detailed and stringent than the cGMPs that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged, produced and held in compliance with regulations similar to the cGMP regulations
for drugs. There can be no assurance that, if the FDA adopts cGMP regulations for dietary supplements, we will be able to comply
with the new regulations without incurring a substantial expense.
In addition, under the Food Safety Modernization
Act, or FSMA, which was enacted on January 4, 2011, the manufacturing of dietary ingredients contained in dietary supplements will
be subject to similar or even more burdensome manufacturing requirements, which will likely increase the costs of dietary ingredients
and will subject suppliers of such ingredients to more rigorous inspections and enforcement. The FSMA will also require importers
of food, including dietary supplements and dietary ingredients, to conduct verification activities to ensure that the food they
might import meets applicable domestic requirements.
The FDA has broad authority to enforce
the provisions of federal law applicable to dietary supplements, including powers to issue a public warning or notice of violation
letter to a company, publicize information about illegal products, detain products intended for import, require the reporting of
serious adverse events, require a recall of illegal or unsafe products from the market, and request the Department of Justice to
initiate a seizure action, an injunction action or a criminal prosecution in the U.S. courts. The FSMA expands the reach and regulatory
powers of the FDA with respect to the production and importation of food, including dietary supplements. The expanded reach and
regulatory powers include the FDA’s ability to order mandatory recalls, administratively detain domestic products, require
certification of compliance with domestic requirements for imported foods associated with safety issues and administratively revoke
manufacturing facility registrations, effectively enjoining manufacturing of dietary ingredients and dietary supplements without
judicial process. The regulation of dietary supplements may increase or become more restrictive in the future.
Our failure to comply with applicable FDA
regulatory requirements could result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines
and criminal prosecutions.
Our advertising of dietary supplement products
is subject to regulation by the FTC under the FTCA. Section 5 of the FTCA empowers the FTC to prohibit unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce. Section 12 of the FTCA provides that the dissemination of any
false advertisement for the purpose of inducing, directly or indirectly, the purchase of drugs or foods, which would include dietary
supplements, is an unfair or deceptive act or practice. Additionally, under the FTC’s Substantiation Doctrine, an advertiser
is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately
substantiate claims may also be considered an unfair or deceptive practice. Pursuant to this FTC requirement, we are required to
have adequate substantiation for all material advertising claims made for our products.
On November 18, 1998, the FTC issued “Dietary
Supplements: An Advertising Guide for Industry.” This guide provides marketers of dietary supplements with guidelines for
applying FTC law to dietary supplement advertising and reiterates and explains the FTC’s “reasonable basis” determination.
It includes examples of the principles that should be used when interpreting and substantiating dietary supplement advertising.
Although the guide provides additional explanation, it does not substantively change the FTC’s existing policy that all supplement
marketers have an obligation to ensure that claims are presented truthfully and to verify that such claims are adequately substantiated.
The FTC has a variety of processes and
remedies available to it for enforcement, both administratively and judicially, including compulsory process, cease and desist
orders and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising,
consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. Any violation
could have a material adverse effect on our business, financial condition and results of operations.
As a result of our efforts to comply with
applicable statutes and regulations in the United States and elsewhere, we have from time to time reformulated, eliminated or relabeled
certain of our products and revised certain advertising claims. We cannot predict the nature of any future laws, regulations, interpretations
or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. They could, however, require the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products not capable of reformulation, additional record keeping, expanded documentation
of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements
could have a material adverse effect on our business, financial condition and results of operations.
Advertising and labeling for dietary supplements
and conventional foods are also regulated by state, county and other local governmental authorities. Some states also permit these
laws to be enforced by private attorney generals. These private attorney generals may seek relief for consumers, seek class action
certifications, seek class-wide damages, seek class-wide refunds and product recalls of products sold by us. There can be no assurance
that state and local authorities will not commence regulatory action, which could restrict the permissible scope of our product
advertising claims, or products that can be sold in the future.
Foreign
Our products which we sell or may make
plans to sell in foreign countries are also subject to regulation under various national, local and international laws that include
provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of
dietary supplements and over-the-counter drugs. These regulations may prevent or delay entry into the market or prevent or delay
the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations
is generally the responsibility of our distributors for those countries. These distributors are independent contractors over whom
we have limited control.
Possible New Legislation or Regulation
Legislation may be introduced which, if
passed, would impose substantial new regulatory requirements on dietary supplements. For example, although not yet reintroduced
in this session of Congress, bills have been repeatedly proposed in past sessions of Congress which would subject the dietary ingredient
dehydroepiandrosterone, or DHEA, to the requirements of the Controlled Substances Act, which would prevent the sale of products
containing DHEA. In March 2009, the General Accounting Office, or GAO, issued a report that made four recommendations to enhance
the FDA’s oversight of dietary supplements. The GAO recommended that the Secretary of the Department of Health and Human
Services direct the Commissioner of the FDA to: (1) request authority to require dietary supplement companies to identify themselves
as a dietary supplement company and update this information annually, provide a list of all dietary supplement products they sell
and a copy of the labels and update this information annually, and report all adverse events related to dietary supplements, not
just serious adverse events; (2) issue guidance to clarify when an ingredient is considered a new dietary ingredient, the evidence
needed to document the safety of new dietary ingredients, and appropriate methods for establishing ingredient identity; (3) provide
guidance to industry to clarify when products should be marketed as either dietary supplements or conventional foods formulated
with added dietary ingredients; and (4) coordinate with stakeholder groups involved in consumer outreach to identify additional
mechanisms for educating consumers about the safety, efficacy, and labeling of dietary supplements, implement these mechanisms,
and assess their effectiveness. These recommendations could lead to increased regulation by the FDA or future legislation concerning
dietary supplements.
We cannot determine what effect additional
domestic or international governmental legislation, regulations, or administrative orders, when and if promulgated, would have
on our business in the future. New legislation or regulations may require the reformulation of certain products to meet new standards,
require the recall or discontinuance of certain products not capable of reformulation, impose additional record keeping or require
expanded documentation of the properties of certain products, expanded or different labeling or scientific substantiation.
Employees
We believe that our success will depend
significantly on our ability to identify, attract, and retain capable employees. As of March 29, 2013, we had 47 full time employees.
Our employees are not represented by any collective bargaining unit, and we believe our relations with our employees are good.
We have recently completed staffing for the in-house medical and physiology center on-site in our training facilities.
Insurance
We maintain commercial liability, including
product liability coverage, and property insurance. Our policy provides for a general liability of $1.0 million per occurrence,
and $2.0 million annual aggregate coverage which includes our main corporate facility. We carry property coverage on our main office
facility to cover our legal liability, tenant’s improvements, business property, and inventory. We maintain product liability
insurance with an aggregate cap on retained loss of $5.0 million.
Item 1A. Risk Factors
Set forth below are risks with respect
to our Company. Readers should review these risks, together with the other information contained in this report. The risks and
uncertainties we have described in this report are not the only ones we face. There may be additional risks and uncertainties that
are not presently known to us, or that we presently deem immaterial, that may become material and also adversely affect our business.
If any of the following risks develop into actual events, our business, financial conditions or results of operations could be
material and adversely affected. See “Forward-Looking Statements” at the beginning of this report for additional risks.
Risks Related to Our Business and Industry
Our business and operations are experiencing rapid growth.
If we fail to effectively manage our growth, our business and operating results could be harmed.
We have experienced and expect to continue
to experience rapid growth in our operations, which has placed, and will continue to place, significant demands on our management,
and our operational and financial infrastructure. If we do not effectively manage our growth, we may fail to attain operational
efficiencies we are seeking, timely deliver products to our customers in sufficient volume or the quality of our products could
suffer, which could negatively affect our operating results. To effectively manage this growth, we expect we will need to hire
additional persons, particularly in sales and marketing, and we will need to continue to improve significantly our operational,
financial and management controls and our reporting systems and procedures. These additional employees, systems enhancements and
improvements will require significant capital expenditures and management resources. Failure to implement these proposed growth
objectives would likely hurt our ability to manage our growth and our financial position.
As of the date of this report, management
has taken over the shipping of most product, other than drop shipments, to our customers from our 152,000 square foot distribution
center in Franklin, Tennessee. We have hired a warehouse manager, and relocated two shipping logistic individuals from our Denver,
Colorado office to manage shipping. We also hired several local warehouse individuals to manage this process. We believe this efficiency
will improve our shipping time and reduce our overall cost of goods sold.
Additionally, the Company has hired six
new sales and marketing individuals to continue the expansion and growth of sales. The finance team has added four new staff members
and our board of directors appointed a new Chief Financial Officer on July 1, 2012. New controls and procedures have been implemented
over sales orders and discounting as well as new financial controls, budgeting processes, daily and monthly monitoring reports
along with dashboard reporting for aiding management in making good decisions.
The Company has appointed a five member
Board of Directors, three of which are independent by the board. The Company has also appointed an audit committee, and compensation
committee. Regular board meetings are held and task lists are reviewed and checked off with members of outside counsel to mitigate
issues and promote further improvements around internal controls and reporting which the Company believes is much improved but
not yet complete.
Our failure to respond appropriately to competitive challenges,
changing consumer preferences and demand for new products could significantly harm our customer relationships and product sales.
The nutritional sports supplement industry
is characterized by intense competition for product offerings and rapid and frequent changes in consumer demand. Our failure to
predict accurately product trends could negatively impact our products and cause our revenues to decline.
Our success with any particular product
offering (whether new or existing) depends upon a number of factors, including our ability to:
| · | deliver products in a timely manner in sufficient volumes; |
| · | accurately anticipate customer needs and forecast accurately to our manufacturers in an expanding business; |
| · | differentiate our product offerings from those of our competitors; |
| · | competitively price our products; and |
Products often have to be promoted heavily
in stores or in the media to obtain visibility and consumer acceptance. Acquiring distribution for products is difficult and often
expensive due to slotting and other promotional charges mandated by retailers. Products can take substantial periods of time to
develop consumer awareness, consumer acceptance and sales volume. Accordingly, some products may fail to gain or maintain sufficient
sales volume and as a result may have to be discontinued. In a highly competitive marketplace it may be difficult to have retailers
open stock-keeping units (sku’s) for new products.
Our management has determined that
certain disclosure controls and procedures may be ineffective, even though they have been improved upon, which could result in
material misstatements in our financial statements.
Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. As
of December 31, 2012, our management determined that some of our disclosure controls and procedures were ineffective due to weaknesses
in our financial closing process.
We intend to implement remedial measures
designed to address the ineffectiveness of our disclosure controls and procedures, such as hiring several individuals with significant
accounting, auditing and financial reporting experience and segregating our internal and external financial reporting among our
larger financing and accounting staff, implementing more specific segregation of our accounting software and providing historical
information more timely, such as monthly budgeting analysis and cash reporting. We have also adopted and implemented written procedures
to document purchase orders, product discounts and product transition flow as well as analysis of our cost of goods sold. If these
remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures, or if material weaknesses
or significant deficiencies in our internal control are discovered or occur in the future and the ineffectiveness of our disclosure
controls and procedures continues, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial
statements may contain material misstatements, we could be required to restate our prior period financial results, our operating
results may be harmed, we may be subject to class action litigation, and if we gain a listing on a stock exchange, our common stock
could be delisted from that exchange. Any failure to address the ineffectiveness of our disclosure controls and procedures could
also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over
financial reporting and our disclosure controls and procedures that are required to be included in our annual report on Form 10-K.
Internal control deficiencies and ineffective disclosure controls and procedures could also cause investors to lose confidence
in our reported financial information. We can give no assurance that the measures we plan to take in the future will remediate
the ineffectiveness of our disclosure controls and procedures or that any material weaknesses or restatements of financial results
will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate
disclosure controls and procedures or circumvention of these controls. In addition, even if we are successful in strengthening
our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities
or errors or to facilitate the fair presentation of our consolidated financial statements.
If we fail to comply with the rules
under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and
other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital
could be more difficult.
If we fail to comply with the rules under
the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover additional material weaknesses
and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising
capital could be more difficult. Moreover, effective internal controls are necessary for us to produce reliable financial reports
and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business
and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price
of our common stock could drop significantly. In addition, we cannot be certain that additional material weaknesses or significant
deficiencies in our internal controls will not be discovered in the future.
Our industry is highly competitive,
and our failure to compete effectively could adversely affect our market share, financial condition and future growth.
The nutritional supplement industry is
highly competitive with respect to:
| · | shelf space and store placement; |
| · | brand and product recognition; |
| · | new product introductions; and |
Most of our competitors are larger more
established and possess greater financial, personnel, distribution and other resources than we have. We face competition in the
health food channel from a limited number of large nationally known manufacturers, private label brands and many smaller manufacturers
of dietary supplements.
We rely on a limited number of customers
for a substantial portion of our sales, and the loss of or material reduction in purchase volume by any of these customers would
adversely affect our sales and operating results.
For the year ended December 31, 2012, two
of our customers accounted for approximately 45% of our sales. Our largest customer for the year ended December 31, 2012, accounted
for 33% of our sales. For the year ended December 31, 2011, two customers accounted for approximately 55% of our sales and our
largest customer represented 41% of our sales. The loss of any of our major customers, a significant reduction in purchases by
any major customer, or, any serious financial difficulty of a major customer, could have a material adverse effect on our sales
and results of operations.
Adverse publicity or consumer perception
of our products and any similar products distributed by others could harm our reputation and adversely affect our sales and revenues.
We believe we are highly dependent upon
positive consumer perceptions of the safety and quality of our products as well as similar products distributed by other sports
nutrition supplement companies. Consumer perception of sports nutrition supplements and our products in particular can be substantially
influenced by scientific research or findings, national media attention and other publicity about product use. Adverse publicity
from these sources regarding the safety, quality or efficacy of nutritional supplements and our products could harm our reputation
and results of operations. The mere publication of news articles or reports asserting that such products may be harmful or questioning
their efficacy could have a material adverse effect on our business, financial condition and results of operations, regardless
of whether such news articles or reports are scientifically supported or whether the claimed harmful effects would be present at
the dosages recommended for such products.
We rely on highly skilled personnel
and, if we are unable to retain or motivate key personnel, hire qualified personnel, we may not be able to grow effectively.
Our performance largely depends on the
talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization, particularly sales and marketing. Competition in
our industry for qualified employees is intense. In addition, our compensation arrangements, such as our bonus programs, may not
always be successful in attracting new employees or retaining and motivating our existing employees. Our continued ability to compete
effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
If we are unable to retain key personnel,
our ability to manage our business effectively and continue our growth could be negatively impacted.
Our management employees include Brad J.
Pyatt, L. Gary Davis, John H. Bluher, Jeremy R. DeLuca and Cory J. Gregory. These key management employees are primarily responsible
for our day-to-day operations, and we believe our success depends in large part on our ability to retain them and to continue to
attract additional qualified individuals to our management team. Currently, we have executed employment agreements with our key
management employees. The loss or limitation of the services of any of our key management employees or the inability to attract
additional qualified personnel could have a material adverse effect on our business and results of operations.
Our operating results may fluctuate,
which makes our results difficult to predict and could cause our results to fall short of expectations.
Our operating results may fluctuate as
a result of a number of factors, many of which may be outside of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
Our quarterly, year-to-date, and annual expenses as a percentage of our revenues may differ significantly from our historical or
projected rates. Our operating results in future quarters may fall below expectations. Each of the following factors may affect
our operating results:
| · | our ability to deliver products in a timely manner in sufficient volumes; |
| · | our ability to recognize product trends; |
| · | our loss of one or more significant customers; |
| · | the introduction of successful new products by our competitors; and |
| · | adverse media reports on the use or efficacy of nutritional supplements. |
Because our business is changing and evolving,
our historical operating results may not be useful to you in predicting our future operating results.
The continuing effects of the most
recent global economic crisis may impact our business, operating results, or financial condition.
The global economic crisis that began in
2008 has caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and
has impacted levels of consumer spending. These macroeconomic developments could negatively affect our business, operating results,
and financial condition. For example, if consumer spending decreases, this may result in lower sales.
We may be exposed to material product
liability claims, which could increase our costs and adversely affect our reputation and business.
As a marketer and distributor of products
designed for human consumption, we could be subject to product liability claims if the use of our products is alleged to have resulted
in injury. Our products consist of vitamins, minerals, herbs and other ingredients that are classified as dietary supplements and
in most cases are not subject to pre-market regulatory approval in the United States or internationally. Previously unknown adverse
reactions resulting from human consumption of these ingredients could occur.
We have not had any product liability claims
filed against us, but in the future we may be subject to various product liability claims, including among others that our products
had inadequate instructions for use, or inadequate warnings concerning possible side effects and interactions with other substances.
The cost of defense can be substantially higher than the cost of settlement even when claims are without merit. The high cost to
defend or settle product liability claims could have a material adverse effect on our business and operating results.
Our insurance coverage or third party
indemnification rights may not be sufficient to cover our legal claims or other losses that we may incur in the future.
We maintain insurance, including property,
general and product liability, and workers’ compensation to protect ourselves against potential loss exposures. In the future,
insurance coverage may not be available at adequate levels or on adequate terms to cover potential losses, including on terms that
meet our customer’s requirements. If insurance coverage is inadequate or unavailable, we may face claims that exceed coverage
limits or that are not covered, which could increase our costs and adversely affect our operating results.
Our intellectual property rights
are valuable, and any inability to protect them could reduce the value of our products and brand.
We have invested significant resources
to protect our brands and intellectual property rights. However, we may be unable or unwilling to strictly enforce our intellectual
property rights, including our trademarks, from infringement. Our failure to enforce our intellectual property rights could diminish
the value of our brands and product offerings and harm our business and future growth prospects.
We may be subject to intellectual
property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to sell some of
our products.
Our industry is characterized by vigorous
pursuit and protection of intellectual property rights, which has resulted in protracted and expensive litigation for several companies.
Third parties may assert claims of misappropriation of trade secrets or infringement of intellectual property rights against us
or against our end customers or partners for which we may be liable.
As our business expands, the number of
products and competitors in our markets increases and product overlaps occur, infringement claims may increase in number and significance.
Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and
we cannot be certain that we would be successful in defending ourselves against intellectual property claims. Further, many potential
litigants have the capability to dedicate substantially greater resources than we can to enforce their intellectual property rights
and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires
us to pay substantial damages or prevents us from distributing products or performing certain services.
An increase in product returns could
negatively impact our operating results and profitability.
We permit the return of damaged or defective
products and accept limited amounts of product returns in certain instances. While such returns have historically been nominal
and within management’s expectations and the provisions established, future return rates may differ from those experienced
in the past. Any significant increase in damaged or defective products or expected returns could have a material adverse effect
on our operating results for the period or periods in which such returns materialize.
We have no manufacturing capacity
and anticipate continued reliance on third-party manufacturers for the development and commercialization of our products.
We do not currently operate manufacturing
facilities for production of our products. We lack the resources and the capabilities to manufacture our products on a commercial
scale. We do not intend to develop facilities for the manufacture of products in the foreseeable future. We rely on third-party
manufacturers to produce bulk products required to meet our sales needs. We plan to continue to rely upon contract manufacturers
to manufacture commercial quantities of our products.
Our contract manufacturers’ failure
to achieve and maintain high manufacturing standards, in accordance with applicable regulatory requirements, or the incidence of
manufacturing errors, could result in consumer injury or death, product shortages, product recalls or withdrawals, delays or failures
in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers
often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified
personnel. Our existing manufacturers and any future contract manufacturers may not perform as agreed or may not remain in the
contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable
to replace a third-party manufacturer in a timely manner and the production of our products would be interrupted, resulting in
delays, additional costs and reduced revenues.
A shortage in the supply of key raw
materials could increase our costs or adversely affect our sales and revenues.
All of our raw materials for our products
are obtained from third-party suppliers. Since all of the ingredients in our products are commonly used, we have not experienced
any shortages or delays in obtaining raw materials. If circumstances changed, shortages could result in materially higher raw material
prices or adversely affect our ability to have a product manufactured. Price increases from a supplier would directly affect our
profitability if we are not able to pass price increases on to customers. Our inability to obtain adequate supplies of raw materials
in a timely manner or a material increase in the price of our raw materials could have a material adverse effect on our business,
financial condition and results of operations.
Because we are subject to numerous
laws and regulations, and we may become involved in litigation from time to time, we could incur substantial judgments, fines,
legal fees and other costs.
Our industry is highly regulated. The manufacture,
labeling and advertising for our products are regulated by various federal, state and local agencies as well as those of each foreign
country to which we distribute. These governmental authorities may commence regulatory or legal proceedings, which could restrict
the permissible scope of our product claims or the ability to manufacture and sell our products in the future. The U.S. Food and
Drug Administration, or FDA, regulates our products to ensure that the products are not adulterated or misbranded. Failure to comply
with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and
criminal prosecutions. Our advertising is subject to regulation by the Federal Trade Commission, or FTC, under the Federal Trade
Commission Act. In recent years the FTC has initiated numerous investigations of dietary supplement and weight loss products and
companies. Additionally, some states also permit advertising and labeling laws to be enforced by private attorney generals, who
may seek relief for consumers, seek class action certifications, seek class wide damages and product recalls of products sold by
us. Any of these types of adverse actions against us by governmental authorities or private litigants could have a material adverse
effect on our business, financial condition and results of operations.
A member of our management team has
been involved in a bankruptcy proceeding and other failed business ventures that may expose us to assertions that we are not able
to effectively manage our business, which could have a material adverse effect on our business and your investment in our securities.
Our chief executive officer and co-chairman
of our board of directors, Brad J. Pyatt, has been involved in a personal bankruptcy and other failed business ventures. This may
expose us to assertions by others that our management team may not know how to effectively run a business. To address this risk,
our board of directors has devoted significant time and energy to bolstering our management team with individuals who have public
company experience and financial expertise, as well as adding independent board members. Notwithstanding these efforts, if our
business partners and investors do not have confidence in our management team, it could have a material adverse effect on our business
and your investment in our company.
Because certain of our stockholders
control a significant number of shares of our common stock, they may have effective control over actions requiring stockholder
approval.
As of March 29, 2013, our directors, executive
officers, and their respective affiliates, beneficially own approximately 8.2% of our outstanding shares of common stock. Also,
two of our executive officers own 51 shares of our Series B Preferred Stock, which has voting control of the Company. As a result,
these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for
approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.
In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company.
Accordingly, this concentration of ownership might harm the market price of our common stock by:
| · | delaying, deferring or preventing a change in corporate control; |
| · | impeding a merger, consolidation, takeover or other business combination involving us; or |
| · | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain
control of us. |
The conversion reset provision relating
to our Series D Preferred Stock could result in difficulty for us to obtain future equity financing.
Because the conversion price reset provisions
relating to our Series D Preferred Stock discussed above are so significant and to the potential detriment of common stockholders,
it may make it more difficult for us to raise any future equity capital. This potential difficulty should be reviewed in light
of our existing levels of little capital and significant working capital deficit. As of the date of issuance of this report approximately
76% of the preferred stock issued in the Series D offering has been converted to common stock, greatly reducing this risk.
We may, in the future, issue additional
shares of common stock, which would reduce investors’ percent of ownership and may dilute our share value.
Our articles of incorporation, as amended,
authorize the issuance of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, of which (i) 5,000,000 shares
have been designated as Series A Convertible Preferred Stock, (ii) 51 shares have been designated as Series B Preferred Stock,
(iii) 500 shares have been designated as Series C Convertible Preferred Stock and (iv) 1,600,000 shares have been designated as
Series D Convertible Preferred Stock. The articles of incorporation authorize our board of directors to prescribe the series and
the voting powers, designations, preferences, limitations, restrictions and relative rights of any undesignated shares of our preferred
stock. The future issuance of common stock and preferred stock may result in substantial dilution in the percentage of our common
stock held by our then existing stockholders. We may value any common stock or preferred stock issued in the future on an arbitrary
basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting
the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
We may issue additional shares of
preferred stock in the future that may adversely impact your rights as holders of our common stock.
Our articles of incorporation, as amended,
authorize us to issue shares of preferred stock in various series. Currently, we have 51 shares of Series B Preferred Stock issued
and outstanding, which shares have voting control of the Company. Each share of our Series A Preferred Stock is convertible into
200 shares of our common stock although no shares of this series are outstanding. Each shares of our Series D Convertible Preferred
Stock is convertible into two shares of our common stock. In addition, our board of directors has the authority to fix and determine
the relative rights and preferences of our authorized but undesignated preferred stock, as well as the authority to issue shares
of such preferred stock, without further stockholder approval. As a result, our board of directors could authorize the issuance
of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred stock,
together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of
preferred stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your
ownership interests in us. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change
in control or make removal of management more difficult, which may not be in your interest as a holder of common stock.
Our common stock is quoted on the
OTCBB which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTCBB.
The OTCBB is a significantly more limited market than the New York Stock Exchange or the NASDAQ Stock Market. The quotation of
our shares on the OTCBB may result in a less liquid market available for existing and potential stockholders to trade shares of
our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability
to raise capital in the future.
Nevada corporations laws limit the
personal liability of corporate directors and officers and require indemnification under certain circumstances.
Section 78.138(7) of the Nevada Revised
Statutes provides that, subject to certain very limited statutory exceptions or unless the articles of incorporation provide for
greater individual liability, a director or officer of a Nevada corporation is not individually liable to the corporation or its
stockholders for any damages as a result of any act or failure to act in his or her capacity as a director or officer, unless it
is proven that the act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and such
breach involved intentional misconduct, fraud or a knowing violation of law. We have not included in our articles of incorporation
any provision intended to provide for greater liability as contemplated by this statutory provision.
In addition, Section 78.7502(3) of the
Nevada Revised Statutes provides that to the extent a director or officer of a Nevada corporation has been successful on the merits
or otherwise in the defense of certain actions, suits or proceedings (which may include certain stockholder derivative actions),
the corporation shall indemnify such director or officer against expenses (including attorneys’ fees) actually and reasonably
incurred by such director or officer in connection therewith.
Item 2. Properties
Our corporate headquarters is located in
Denver, Colorado. This commercial office building is 30,302 square feet and includes, a full performance training center, medical
laboratory and a 96-seat theatre room. The term of the lease is 65 months, expiring on December 31, 2015. We currently pay approximately
$13,500 in lease payments per month.
We lease an office and distribution warehouse
in Boise, Idaho. The warehouse is 6,035 square feet and expired in February 2013. We currently pay approximately $3,500 per month
in rent. The office is 4,776 square feet with a term of two years, expiring October 31, 2014. We currently pay approximately $4,400
per month for this lease.
We lease a 64,000 square foot warehouse
facility in Franklin, Tennessee. The term of the lease is through August 31, 2015. We currently pay approximately $9,450 per month
for rent.
Through our Ontario, Canada subsidiary,
Canada MusclePharm Enterprises Corp., we lease a 10,000 square foot office and warehouse facility in Hamilton, Ontario, Canada.
The term of the lease expires on March 31, 2013. We currently pay 6,655 in Canadian dollars (or the U.S. dollar equivalent of about
$6,544) per month for rent.
Item 3. Legal Proceedings
From time to time, we have 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 our management and others on our behalf. Although
there can be no assurance, based on information currently available, we believe that the outcome of legal proceedings that are
pending or threatened against us will not have a material effect on our financial condition. However, the outcome of any of these
matters is neither probable nor reasonably estimable.
The legal proceedings information set forth
under “Commitments, Contingencies and Other Matters” in Note 9(B) to the accompanying consolidated financial statements
included in this Annual Report on Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table shows the reported
high and low bid quotations per share for our common stock based on information provided by the OTCBB. Our common is quoted on
the OTCBB under the symbol “MSLP.OB”. These prices reflect the 1-for-850 reverse stock split of our common stock that
we effected on November 26, 2012.
| |
High | | |
Low | |
2012 | |
| | | |
| | |
Fourth Quarter | |
$ | 6.21 | | |
$ | 3.40 | |
Third Quarter | |
$ | 17.43 | | |
$ | 5.02 | |
Second Quarter | |
$ | 31.88 | | |
$ | 10.20 | |
First Quarter | |
$ | 31.03 | | |
$ | 5.10 | |
| |
| | | |
| | |
2011 | |
| | | |
| | |
Fourth Quarter | |
$ | 22.10 | | |
$ | 5.95 | |
Third Quarter | |
$ | 33.15 | | |
$ | 11.90 | |
Second Quarter | |
$ | 68.85 | | |
$ | 21.25 | |
First Quarter | |
$ | 110.50 | | |
$ | 30.60 | |
Quotations on the OTCBB reflect bid and
ask quotations, may reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.
The Company’s transfer agent is Corporate
Stock Transfer, Inc. Their business address is 3200 Cherry Creek Drive South, Suite 430 Denver, CO 80209.
As of March 29, 2013, there were approximately
420 holders of record of our common stock. This figure does not take into account those stockholders whose certificates are held
in street name by brokers and other nominees. We estimate that such holders number approximately 3,700.
At March 29, 2013 the Company’s issued
and diluted shares were as follows:
Shares issued and outstanding at December 31, 2012 | |
| 2,747,308 | |
Series D Preferred Stock converted to Common Stock through March 29, 2013 | |
| 2,352,250 | |
Net shares issued through March 29, 2013 | |
| 1,667,089 | |
Shares issued and outstanding at March 29, 2013 | |
| 6,776,647 | |
Series D Preferred Stock not yet converted | |
| 647,750 | |
Shares awaiting authorization for issuance | |
| 307,506 | |
Unvested executive stock awards | |
| 86,275 | |
Fully Diluted as of March 29, 2013 | |
| 7,818,178 | |
Unregistered Sale of Securities
Series D Preferred Stock Issuances
Between January 16, 2013 and February 4,
2013, the Company issued an aggregate of 1,500,000 shares of Series D Preferred Stock for aggregate gross proceeds of approximately
$12 million.
Common Stock Issuances
Between October and November 2012 the Company
issued 16,908 shares of common stock in accordance with consulting agreements valued at $106,200.
In December 2012 the Company issued 50,000
shares of common stock valued at $549,950 for interest on debt.
Between February and March 2013 the Company
issued 2,352,250 shares of common stock pursuant to the conversion of 1,176,125 shares of Series D preferred stock.
In March 2013 the Company issued 142,282
shares of common stock pursuant to the ratchet provisions in the July 2012 securities purchase agreements which are valued at $853,692.
In March 2013 the Company issued an aggregate
741,017 shares of common stock pursuant consulting agreements valued at approximately $6,297,694.
In March 2013 the Company issued an aggregate
43,137 shares of common stock pursuant the vesting of stock awards valued at $294,167.
In March, 2013, the Company an aggregate
705,883 shares of common stock through a private placement to several investors for $6,000,000.
Dividend Policy
We have never declared dividends on our
common stock, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect
to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the foregoing, the payment
of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors
as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of
directors.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should
be read together with our consolidated financial statements and the related notes thereto reflected in the index to the consolidated
financial statements in this report. This discussion contains forward-looking statements reflecting our current expectations that
involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and
assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed
in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere
in this report. All share amounts and per share amounts in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” reflect the 1-for-850 reverse stock split of our common stock that we effected on November 26,
2012.
Plan of Operation
We develop, market and sell athlete-focused,
high quality nutritional supplements primarily to specialty resellers. Our propriety and award winning products address active
lifestyles including muscle building, weight loss, and maintaining general fitness through a daily nutritional supplement regimen.
Our products are available in over 10,500 U.S. retail outlets, including Dick’s Sporting Goods, GNC, Vitamin Shoppe and Vitamin
World. We also sell our products in over 100 online channels, including bodybuilding.com, amazon.com, gnc.com and vitacost.com.
Internationally, our nutritional supplements are sold in approximately 90 countries, and we expect that international sales will
be a significant part of our sales for the foreseeable future.
Our primary growth strategy is to:
| (1) | increase our product distribution and sales through increased market penetrations both domestically
and internationally; |
| (2) | increase our margins by focusing on streamlining our operations and seeking operating efficiencies
in all areas of our operations; |
| (3) | continue to conduct additional testing of the safety and efficacy of our products and formulate
new products; and |
| (4) | increase awareness of our products by increasing our marketing and branding opportunities through
endorsements, sponsorships and brand extensions. |
Our core marketing strategy is to brand
MusclePharm as the “must have” fitness brand for workout enthusiasts and elite athletes. We seek to be known as The
Athletes Company®, run by athletes who create their products for other athletes both professional and otherwise. We believe
that our marketing mix of endorsers, sponsorships and providing sample products for our retail resellers to use is an optimal strategy
to increase sales.
Results of Operations
Year ended December 31, 2012 compared to the year ended
December 31, 2011.
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
| |
| | |
| |
Sales – net | |
$ | 67,055,215 | | |
$ | 17,212,636 | |
Cost of sales | |
| 52,726,934 | | |
| 14,845,069 | |
Gross profit | |
| 14,328,281 | | |
| 2,367,567 | |
General and administrative expenses | |
| 23,064,092 | | |
| 18,587,727 | |
Loss from operations | |
| (8,735,811 | ) | |
| (16,220,160 | ) |
Other expense | |
| (10,216,984 | ) | |
| (7,060,790 | ) |
Net loss | |
| (18,952,795 | ) | |
| (23,280,950 | ) |
Net loss per share – basic and diluted | |
$ | (13.00 | ) | |
$ | (70.30 | ) |
Weighted average number of common shares outstanding during the period – basic and diluted | |
| 1,458,757 | | |
| 331,159 | |
Revenues
Our net revenues increased 290% to approximately
$67.1 million for the year ended December 31, 2012, compared to approximately $17.2 million for the year ended December 31, 2011.
Sales during the year ended December 31, 2012 increased due to increased awareness of our product brand. We have focused on an
aggressive marketing plan to penetrate the market, as such, significant expenditures related to advertising and promotions have
been experienced. The sales increase was also the result of capital spent on marketing and brand recognition with distributors
along with endorsements and sponsorships. The Company’s many efforts for growth included hiring new managers, additional
sales and marketing staff, along with adding new products in an effort to continue to expand our customer base. Another growth
area was sales in the international markets. International sales are included in the results of operations and increased approximately
$16.2 million or 405% to $20.2 million for the year ended December 31, 2012, compared to $4.0 million for the year ended December
31, 2011.
Overall as a direct result of our aggressive
marketing plan, our products are currently being offered in more retail stores, both domestically and internationally, receiving
better shelf placement, and receiving recognized awards compared to the prior period. The Company has an exclusive marketing arrangement
with the UFC, Ultimate Fighting Championships, which has called out MusclePharm as the Supplement of Choice for the UFC and at
the 2012 Bodybuilding.com Supplement Awards, we received three Awards of Excellence; (i) the “Brand of the Year” award,
(ii) the “Packaging of the Year” award, and (iii) the “Pre-Workout Supplement of the Year” award for Assault
TM .
Gross Profit
Gross profit for the year ended December
31, 2012 was approximately $14.3 million or 21% of revenue, compared to approximately $2.4 million or 14% of revenue for the year
ended December 31, 2011. The increase was primarily due to the reduction to discounts as a percentage of sales and favorable terms
for manufacturing improvements in product pricing. For the year ended December 31, 2012, the discounts and allowances as a percentage
of sales was 14% compared to the year ended December 31, 2011 which was 19%. We expect our focus on streamlining operations will
increase our operating efficiencies and will further improve our gross profit percentage.
General and Administrative Expenses
General and administrative expenses for
the year ended December 31, 2012 increased to $23.1 million, compared to $18.6 million for the year ended December 31, 2011. Our
290% sales growth necessitated substantial increases in our general and administrative expenses and included $2.2 million in advertising
and promotions and $2.4 million in sponsorship and endorsements all used to promote brand and product awareness. We expect as we
continue to promote our brand and products, these areas and levels of promotion will hold steady or increase relative to overall
efforts to increase product awareness and sales. Salaries and benefits, excluding executive bonuses, also increased by $1.3 million;
however, these were approximately 5% of sales for 2012 compared to approximately 11% of sales in the 2011 period.
Increases in investment advisory and legal
fees of $3.1 million were a result of efforts required to obtain financing and dispute resolutions along with two consulting contracts
that require us to issue 8.4% of our common stock on an ongoing, fully diluted basis.
The increase in all other general administrative
areas of $4.3 million along with significant items listed above, were partially offset by the decrease in stock based compensation
of approximately $8.6 million.
The following table provides an overview
of expense categories and percentage of net revenue:
| |
2012 ($) | | |
% of Revenue | | |
2011 ($) | | |
% of Revenue | |
Advertising Expense | |
$ | 8,430,401 | | |
| 12.6 | % | |
$ | 5,241,585 | | |
| 30.5 | % |
Operating Expense | |
| 5,512,197 | | |
| 8.2 | % | |
| 5,277,500 | | |
| 30.7 | % |
Professional & R&D Expense | |
| 4,524,964 | | |
| 6.7 | % | |
| 888,695 | | |
| 5.1 | % |
Salary and Wage Expense | |
| 4,596,530 | | |
| 6.9 | % | |
| 7,179,947 | | |
| 41.7 | % |
Total G&A Expense | |
$ | 23,064,092 | | |
| 34.4 | % | |
$ | 18,587,727 | | |
| 108 | % |
Operating Loss
Operating loss for the year ended December
31, 2012 was approximately $8.7 million, compared to approximately $16.2 million for the year ended December 31, 2011.
Interest Expense
Interest expense for the year ended December
31, 2012 was approximately $7.3 million, as compared to approximately $3.7 million for the year ended December 31, 2011. The increase
in interest expense primarily relates to increased interest on debt of $0.6 million, increased amortization of debt issuance costs
of $0.1 million and increased amortization of debt discounts of $2.9 million during the year ended December 31, 2012.
Other Expense
Other expenses for the year ended December
31, 2012 were approximately $10.2 million, compared to approximately $7.1 million for the year ended December 31, 2011, an increase
of 44.7%. The components of our other expense are as follows:
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Derivative expense | |
$ | (4,409,214 | ) | |
$ | (4,777,654 | ) |
Change in fair value of derivative liabilities | |
| 5,899,968 | | |
| 5,162,100 | |
Loss on settlement of accounts payable, debt and conversion of Series C preferred stock (2012 only) | |
| (4,447,732 | ) | |
| (3,862,458 | ) |
Interest expense | |
| (7,335,070 | ) | |
| (3,711,278 | ) |
Foreign currency transaction gain | |
| 15,030 | | |
| - | |
Licensing income | |
| 10,000 | | |
| 250,000 | |
Other income (expense) | |
| 50,034 | | |
| (121,500 | ) |
| |
$ | (10,216,984 | ) | |
$ | (7,060,790 | ) |
Net Loss
Net loss for the year ended December 31,
2012 was approximately $19 million, or $(13.00) per share, compared to the net loss of approximately $23.3 million or $(70.30)
per share, for the year ended December 31, 2011. Inflation did not have a material impact on our operations for the years ended
December 31, 2012 and 2011.
Liquidity and Capital Resources
The following table summarizes total current
assets, liabilities and working deficit at December 31, 2012, compared to December 31, 2011:
| |
At December 31, 2012 | | |
At December 31, 2011 | | |
Increase/(Decrease) | |
| |
| | |
| | |
| |
Current Assets | |
$ | 4,949,881 | | |
$ | 4,016,833 | | |
$ | 933,048 | |
Current Liabilities | |
| 16,520,456 | | |
| 17,710,100 | | |
| (1,189,644 | ) |
Working Deficit | |
$ | (11,570,575 | ) | |
$ | (13,693,267 | ) | |
$ | (2,122,692 | ) |
Our primary source of operating cash has
been from the sale of equity, the issuance of convertible secured promissory notes and other short-term debt as discussed below.
Company’s management believes that
with increased sales expansion and the opening of the Franklin, Tennessee distribution center, there will be opportunities to increase
sales; however, the Company may need to continue to raise capital in order execute the business plan, which includes buying more
inventory and broadening the sales platform. There can be no assurance that such capital will be available on acceptable terms
or at all.
On December 4, 2012, we entered into a
$1.0 million bridge loan to provide us with short-term financing. In connection with the bridge loan, we entered into
a subscription agreement with six subscribers pursuant to which we issued an aggregate $1.0 million principal amount of promissory
notes and 50,000 shares of common stock to the subscribers. The promissory notes were repaid in January 2013. Additionally,
we granted the subscribers “piggy-back” registration rights for the shares of common stock in certain circumstances.
At December 31, 2012, we had cash of $0
and a working capital deficit of approximately $11.6 million, compared to cash of approximately $0.7 million and a working capital
deficit of approximately $13.7 million at December 31, 2011. The working capital deficit decrease of approximately $2.1 million
was primarily due to a net decrease in derivative liabilities of approximately $7.0 million, an increase in accounts receivable
of approximately $.7 million, offset by an increase in customer deposits of approximately $0.3 million, an increase in the current
portion of debt of approximately $3.2 million and an increase in accounts payable and accrued liabilities of approximately $2.4million.
Cash used in operating activities was approximately
$0.7 million for the year ended December 31, 2012, as compared to cash used in operating activities of approximately $5.8 million
for the year ended December 31, 2011. The decrease in cash used in operating activities of approximately $5.1 million was primarily
due to a decrease in net loss of approximately $4.3 million, an increased payables and customer deposits of approximately $4.3
million, an increase in depreciation and amortization of approximately $0.3 million, a decrease in accounts receivable of approximately
$1.5 million and an increase in amortization expense of approximately $2.3 offset by a decrease in stock and warrants issued for
services of approximately $3.4 million, a decrease in losses related to repayments and conversions of debt of approximately $0.6
million, a decrease in derivative expense and fair value changes of approximately $1.1 million and a increases in prepaids, inventory,
and other assets of approximately $1.2 million.
Cash used in investing activities increased
to $965,327 from $831,511 for the year ended December 31, 2012 and 2011, respectively, due to slightly higher spending on fixed
assets. Future investments in property and equipment, as well as further development of our Internet presence will largely depend
on available capital resources.
Cash flows provided by financing activities
were approximately $1 million for the year ended December 31, 2012, compared to cash flows provided by financing activities of
approximately $7.2 million for the year ended December 31, 2011. The approximately $6.2 million decrease was due to primarily to
the approximately $5.8 million in repayment of debt and approximately $0.5 million for the purchase of treasury stock offset by
an increase in proceeds from issuance of debt of approximately $0.8 million offset by an increase in proceeds from issuance of
common stock and warrants of approximately $0.7 million.
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Proceeds from issuance of debt | |
$ | 5,823,950 | | |
$ | 6,612,900 | |
Repayment of debt | |
| (5,847,575 | ) | |
| (75,285 | ) |
Debt issuance costs | |
| (234,450 | ) | |
| (263,283 | ) |
Repurchase of common stock | |
| (460,978 | ) | |
| - | |
Proceeds from issuance of preferred stock | |
| - | | |
| 100,000 | |
Proceeds from issuance of common stock and warrants – net of recapitalization payment | |
| 1,660,760 | | |
| 875,000 | |
Cash overdraft | |
| 69,370 | | |
| - | |
Net Cash (Used In) Provided By Financing Activities | |
$ | 1,011,077 | | |
$ | 7,249,332 | |
Financing
Our primary source of operating cash had
been through the sale of equity and debt which included the issuance of secured and unsecured promissory notes, some debt had conversion
rights to equity and a recent bridge loan in the fourth quarter of 2012.
In the fourth quarter of 2012, the Company
filed a Form S-1 registration statement whereby the Company offered preferred stock for $8.00 that was convertible into two shares
of common stock, subject to adjustment. This registration was not fully completed until February 4, 2013; whereby, the Company
issued 1.5 million shares of Series D Convertible Preferred Stock in exchange for gross proceeds of $12 million. The Company’s
net proceeds from the offering were approximately $10.8 million after placement agent discounts, and other offering expenses of
$1.2 million.
On March 26, 2013, the Company entered
into subscription agreements with non-affiliated accredited investors for the issuance of 705,882 shares of common stock pursuant
to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $8.50 per share.
The gross proceeds to the Company of $6.0 million were reduced by commissions and issuance costs of $115,000.
Company management believes that with increased
sales expansion and the opening of the Franklin, Tennessee distribution center, there will be opportunities to increase sales;
however, the Company may need to continue to raise capital in order execute the business plan, which includes buying more inventory
and broadening the sales platform. There can be no assurance that such capital will be available on acceptable terms or at all
Off-Balance Sheet Arrangements
Other than the operating leases detailed
below, as of December 31, 2012, the company did not have any off-balance sheet arrangements. The Company is obligated under an
operating lease for the rental of office space and a 152,000 square foot distribution center in Franklin, Tennessee. Future minimum
rental commitments with a remaining term in excess of one year as of December 31, 2012 are summarized as follows:
Years Ending December 31, | |
| | |
2013 | |
$ | 333,902 | |
2014 | |
| 436,688 | |
2015 | |
| 311,209 | |
Total minimum lease payments | |
$ | 1,081,799 | |
Critical Accounting Policies and Estimates
The preparation of financial statements
in conformity with U.S. Generally Accepted Accounting Principles (“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. Our company operations are subject to significant risk and uncertainties including
financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Principles of Consolidation
All intercompany accounts and transactions have been eliminated
in consolidation.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable represents trade obligations
from customers that are subject to normal trade collection terms. The company evaluates monthly the collectability of our 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.
Management performs ongoing evaluations
of the company’s customers’ financial condition and generally do not require collateral. Some international customers
are required to pay for their orders in advance of shipment. Management reviews accounts receivable monthly 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.
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 all past due customers to request payment.
Fair Value of Financial Instruments
We measure assets and liabilities at fair
value based on an expected exit price as defined by the authoritative guidance on fair value measurements, 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 our 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 following are the major categories
of liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011, using quoted prices in active markets
for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level
3):
| |
As of December 31, | |
| |
2012 | | |
2011 | |
Derivative liabilities (Level 2) | |
$ | - | | |
$ | 7,061,238 | |
Revenue Recognition
We record 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. We record sales allowances and discounts as
a direct reduction of sales.
We have 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 – Implementation Guidance and Illustrations). 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.
We have an informal seven day right to
return products. There were nominal returns at the years ended December 31, 2012 and 2011.
Foreign Currency
We 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 United States 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 expense on the statements
of operations and comprehensive income. 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 a transaction is complete and the actual realized gain or loss is recognized.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, we record a “beneficial conversion feature” (“BCF”) and related
debt discount.
When we record a BCF, the relative fair
value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would
be amortized to interest expense over the life of the debt.
Derivative Liabilities
Fair value accounting requires bifurcation
of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their
fair value for accounting purposes. In determining the appropriate fair value, we use the Black-Scholes option-pricing model. In
assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible
debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional
convertible debt, we will continue our evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities
are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being 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 the Black-Scholes option-pricing model.
Debt Issue Costs and Debt Discount
We may pay debt issue costs, and record
debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life
of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts
is immediately expensed.
Original Issue Discount
For certain convertible debt issued, we
provide the debt holder with an original issue discount. The original issue discount is recorded to debt discount and additional
paid in capital at an amount not to exceed gross proceeds raised, reducing the face amount of the note and is amortized to interest
expense over the life of the debt.
Share-Based Payments
Generally, all forms of share-based payments,
including stock option grants, warrants, 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.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04 “Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (“IFRS”).
ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04
requires reporting entities to disclose additional information for fair value measurements categorized within Level 3 of the fair
value hierarchy. In addition, ASU 2011-04 requires reporting entities to make disclosures about amounts and reasons for all transfers
in and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual
reporting periods beginning after December 15, 2011. This pronouncement has been implemented in the Company’s financial statements
for the year ended December 31, 2012 without impact.
Item 8. Consolidated Financial Statements and Supplementary
Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
MusclePharm Corporation
Denver, Colorado
We have audited the accompanying consolidated
balance sheet of MusclePharm Corporation and subsidiary (the "Company") as of December 31, 2012, and the related
consolidated statements of operations and comprehensive income, stockholders' equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements and assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of MusclePharm Corporation and
subsidiary as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ EKS&H LLLP
March 29, 2013
Denver, Colorado
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
MusclePharm Corporation
We have audited the accompanying consolidated
balance sheets of MusclePharm Corporation and Subsidiary as of December 31, 2011, and the related consolidated statements of operations,
stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of MusclePharm Corporation and Subsidiary as
of December 31, 2011, and the results of its operations and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has a net loss of $23,280,950 and net cash used in operations of $5,801,761 for the year ended December 31, 2011; and has
a working capital deficit of $13,693,267, and a stockholders’ deficit of $12,971,212 at December 31, 2011. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regards to
these matters is also described in Note 2.
Berman & Company, P.A.
Boca Raton, Florida
April 13, 2012 except for Note 1 as to which the date is June
28, 2012
551 NW 77th Street Suite 201 Ÿ
Boca Raton, FL 33487
Phone: (561) 864-4444 Ÿ
Fax: (561) 892-3715
www.Bermancpas.com Ÿ
info@Bermancpas.com
Registered with the PCAOB Ÿ
Member AICPA Center for Audit Quality
Member American Institute of Certified
Public Accountants
Member Florida Institute of Certified
Public Accountants
MusclePharm Corporation and Subsidiary
Consolidated Balance Sheets
| |
December 31, | |
| |
2012 | | |
2011 | |
Assets | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash | |
$ | - | | |
$ | 659,764 | |
Cash – restricted | |
| 9,148 | | |
| - | |
Accounts receivable – net | |
| 3,302,344 | | |
| 2,569,092 | |
Inventory | |
| 257,975 | | |
| - | |
Prepaid giveaways | |
| 358,800 | | |
| - | |
Prepaid stock compensation | |
| 44,748 | | |
| 534,456 | |
Prepaid sponsorship fees | |
| 6,249 | | |
| 203,333 | |
Deferred equity costs | |
| 698,500 | | |
| - | |
Other | |
| 272,117 | | |
| 50,188 | |
Total current assets | |
| 4,949,881 | | |
| 4,016,833 | |
Property and equipment – net | |
| 1,356,364 | | |
| 907,522 | |
Debt issue costs – net | |
| 335,433 | | |
| 68,188 | |
Other assets | |
| 125,049 | | |
| 53,585 | |
Total assets | |
$ | 6,766,727 | | |
$ | 5,046,128 | |
Liabilities and Stockholders’ Deficit | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 11,721,205 | | |
$ | 9,359,073 | |
Customer deposits | |
| 336,211 | | |
| 8,047 | |
Debt – net | |
| 4,463,040 | | |
| 1,281,742 | |
Derivative liabilities | |
| - | | |
| 7,061,238 | |
Total Current Liabilities | |
| 16,520,456 | | |
| 17,710,100 | |
Long Term Liabilities: | |
| | | |
| | |
Debt – net | |
| 4,523 | | |
| 307,240 | |
Total Liabilities | |
$ | 16,524,979 | | |
$ | 18,017,340 | |
Commitments and contingencies: | |
| | | |
| | |
Stockholders’ Deficit: | |
| | | |
| | |
Preferred stock, $0.001 par value, Series A Convertible Preferred Stock, 5,000,000 shares authorized, none issued and outstanding | |
| - | | |
| - | |
Preferred stock, $0.001 par value, Series B Preferred Stock, 51 shares authorized, 51 shares issued and outstanding | |
| - | | |
| - | |
Preferred stock, $0.001 par value, Series C Convertible Preferred Stock, 500 shares authorized, 190 and 190 issued none and 190 outstanding | |
| - | | |
| - | |
Common Stock, $0.001 par value; 100,000,000 shares authorized, 2,778,404 and 712,860 issued and 2,747,308 and 712,860 outstanding | |
| 2,778 | | |
| 713 | |
Treasury Stock, at cost; 31,096 and zero shares | |
| (460,978 | ) | |
| - | |
Additional paid-in capital | |
| 54,817,341 | | |
| 32,184,756 | |
Accumulated deficit | |
| (64,109,476 | ) | |
| (45,156,681 | ) |
Accumulated other comprehensive loss | |
| (7,917 | ) | |
| - | |
Total Stockholders’ Deficit | |
| (9,758,252 | ) | |
| (12,971,212 | ) |
Total Liabilities and Stockholders’ Deficit | |
$ | 6,766,727 | | |
$ | 5,046,128 | |
The accompanying notes are an integral part
of these consolidated financial statements.
MusclePharm Corporation and Subsidiary
Consolidated Statements of Operations
and Comprehensive Income
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Sales - net | |
$ | 67,055,215 | | |
$ | 17,212,636 | |
Cost of sales | |
| 52,726,934 | | |
| 14,845,069 | |
Gross profit | |
| 14,328,281 | | |
| 2,367,567 | |
General and administrative expenses | |
| 23,064,092 | | |
| 18,587,727 | |
Loss from operations | |
| (8,735,811 | ) | |
| (16,220,160 | ) |
Other expense | |
| | | |
| | |
Derivative expense | |
| (4,409,214 | ) | |
| (4,777,654 | ) |
Change in fair value of derivative liabilities | |
| 5,899,968 | | |
| 5,162,100 | |
Loss on settlement of accounts payable, debt and conversion of Series C preferred stock (2012 only) | |
| (4,447,732 | ) | |
| (3,862,458 | ) |
Interest expense | |
| (7,335,070 | ) | |
| (3,711,278 | ) |
Foreign currency transaction gain | |
| 15,030 | | |
| - | |
Licensing income | |
| 10,000 | | |
| 250,000 | |
Other income (expense) | |
| 50,034 | | |
| (121,500 | ) |
Total other expense | |
| (10,216,984 | ) | |
| (7,060,790 | ) |
| |
| | | |
| | |
Net loss | |
$ | (18,952,795 | ) | |
$ | (23,280,950 | ) |
| |
| | | |
| | |
Net loss available to common stockholders | |
| | | |
| | |
Net loss | |
| (18,952,795 | ) | |
| (23,280,950 | ) |
Series C Preferred Stock dividend | |
| - | | |
| (293 | ) |
Net loss available to common stockholders | |
$ | (18,952,795 | ) | |
$ | (23,280,657 | ) |
Net income (loss) per share available to common stockholders – basic and diluted | |
$ | (13.00 | ) | |
$ | (70.30 | ) |
Weighted average number of common shares outstanding during the period – basic and diluted | |
| 1,458,757 | | |
| 331,158 | |
| |
| | | |
| | |
Other comprehensive income | |
| | | |
| | |
Net change in Foreign currency translation | |
| (7,917 | ) | |
| - | |
Total other comprehensive income (loss) | |
| (7,917 | ) | |
| - | |
Total comprehensive income (loss) | |
$ | (18,960,712 | ) | |
$ | (23,280,657 | ) |
The accompanying notes are an integral part
of these consolidated financial statements.
MusclePharm Corporation and Subsidiary
Consolidated Statement of Stockholders’
Deficit
Years ended December 31, 2012 and
2011
| |
Series A Convertible
Preferred Stock | | |
Series B Preferred Stock | | |
Series C Convertible Preferred Stock | | |
Common Stock | | |
Additional Paid- | | |
Treasury | | |
Accumulated | | |
Accumulated | | |
Total Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
in Capital | | |
Stock | | |
Deficit | | |
Translation | | |
Deficit | |
Balance - December 31, 2010 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| 139,585 | | |
$ | 140 | | |
$ | 20,130,631 | | |
$ | - | | |
$ | (21,875,438 | ) | |
$ | - | | |
$ | (1,744,667 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common and preferred stock: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible debt | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 298,897 | | |
| 299 | | |
| 4,268,558 | | |
| - | | |
| - | | |
| - | | |
| 4,268,857 | |
Conversion of secured/unsecured debt | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47,386 | | |
| 47 | | |
| 857,905 | | |
| - | | |
| | | |
| - | | |
| 857,952 | |
Cash | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 96,471 | | |
| 96 | | |
| 874,904 | | |
| - | | |
| - | | |
| - | | |
| 875,000 | |
Cash | |
| - | | |
| - | | |
| - | | |
| - | | |
| 100 | | |
| - | | |
| - | | |
| - | | |
| 100,000 | | |
| - | | |
| - | | |
| - | | |
| 100,000 | |
Services - third parties | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 54,731 | | |
| 55 | | |
| 1,199,789 | | |
| - | | |
| - | | |
| - | | |
| 1,199,844 | |
Services - third parties | |
| - | | |
| - | | |
| - | | |
| - | | |
| 90 | | |
| - | | |
| - | | |
| - | | |
| 90,000 | | |
| - | | |
| - | | |
| - | | |
| 90,000 | |
Services - third parties - future services | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,706 | | |
| 5 | | |
| 214,245 | | |
| - | | |
| - | | |
| - | | |
| 214,250 | |
Extension of debt maturity date | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 11,030 | | |
| 11 | | |
| 161,239 | | |
| - | | |
| - | | |
| - | | |
| 161,250 | |
Settlement of accounts payable | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 64,172 | | |
| 64 | | |
| 3,646,655 | | |
| - | | |
| - | | |
| - | | |
| 3,646,719 | |
Cancellation of shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,118 | ) | |
| (4 | ) | |
| 4 | | |
| - | | |
| - | | |
| - | | |
| - | |
Share based payments - related parties | |
| - | | |
| - | | |
| 51 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Dividends on Series C Convertible Preferred Stock
- related parties | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (293 | ) | |
| - | | |
| (293 | ) |
Reclassification of derivative liability to additional
paid in capital | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 640,826 | | |
| - | | |
| | | |
| - | | |
| 640,826 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (23,280,950 | ) | |
| - | | |
| (23,280,950 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - December 31, 2011 | |
| - | | |
| - | | |
| 51 | | |
| - | | |
| 190 | | |
| - | | |
| 712,860 | | |
| 713 | | |
| 32,184,756 | | |
| - | | |
| (45,156,681 | ) | |
| - | | |
| (12,971,212 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common and preferred stock: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of preferred shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| (190 | ) | |
| - | | |
| 22,353 | | |
| 22 | | |
| 614,962 | | |
| - | | |
| - | | |
| - | | |
| 614,984 | |
Conversion of secured/unsecured debt | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 290,961 | | |
| 290 | | |
| 1,420,132 | | |
| - | | |
| | | |
| - | | |
| 1,420,422 | |
Cash | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 199,422 | | |
| 199 | | |
| 1,660,561 | | |
| - | | |
| - | | |
| - | | |
| 1,660,760 | |
Interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 58,945 | | |
| 58 | | |
| 334,040 | | |
| - | | |
| - | | |
| - | | |
| 334,098 | |
Services - third parties | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 113,740 | | |
| 113 | | |
| 1,107,605 | | |
| - | | |
| - | | |
| - | | |
| 1,107,718 | |
Executive/board compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 431,034 | | |
| 431 | | |
| 4,686,083 | | |
| - | | |
| - | | |
| - | | |
| 4,686,514 | |
Warrant conversions/settlements | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 853,082 | | |
| 853 | | |
| 7,294,914 | | |
| - | | |
| - | | |
| - | | |
| 7,295,767 | |
Forbearance of agreement terms | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 95,528 | | |
| 95 | | |
| 1,239,939 | | |
| - | | |
| - | | |
| - | | |
| 1,240,033 | |
Treasury shares purchased | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (31,096 | ) | |
| | | |
| | | |
| (460,978 | ) | |
| - | | |
| - | | |
| (460,978 | ) |
Additional shares from roundup of split shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 479 | | |
| 4 | | |
| (4 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Employee stock awards | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 149,966 | | |
| - | | |
| - | | |
| - | | |
| 149,966 | |
Reclassification of derivative liability to additional
paid in capital | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,124,387 | | |
| - | | |
| | | |
| | | |
| 4,124,387 | |
Translation gain/loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| (7,917 | ) | |
| (7,917 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (18,952,795 | ) | |
| | | |
| (18,952,795 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - December 31, 2012 | |
| - | | |
$ | - | | |
| 51 | | |
$ | - | | |
| - | | |
$ | - | | |
| 2,747,308 | | |
$ | 2,778 | | |
$ | 54,817,341 | | |
$ | (460,978 | ) | |
$ | (64,109,476 | ) | |
$ | (7,917 | ) | |
$ | (9,758,252 | ) |
The accompanying notes are an integral part
of these consolidated financial statements.
MusclePharm Corporation
and Subsidiary
Consolidated Statements of Cash Flows
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net loss | |
$ | (18,952,795 | ) | |
$ | (23,280,950 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 475,320 | | |
| 171,587 | |
Bad debt | |
| 9,490 | | |
| 120,477 | |
Warrants issued for services – third parties | |
| - | | |
| 1,989,982 | |
Stock issued for services – third parties | |
| - | | |
| 1,289,844 | |
Stock issued to extend maturity date of debt | |
| - | | |
| 161,250 | |
Amortization of prepaid stock compensation and athlete endorsement stock payments | |
| 715,661 | | |
| 1,745,705 | |
Amortization of debt discount | |
| 6,122,006 | | |
| 3,237,219 | |
Amortization of debt issue costs | |
| 394,964 | | |
| 229,499 | |
Amortization of deferred compensation | |
| 149,966 | | |
| - | |
Loss on settlement of accounts payable | |
| - | | |
| 2,123,129 | |
Additional consideration given for early debt retirement | |
| 779,500 | | |
| - | |
Loss on conversion of debt | |
| 351,021 | | |
| 1,739,329 | |
Loss on conversion of preferred shares | |
| 614,984 | | |
| - | |
Loss on conversion of warrants | |
| 315,364 | | |
| - | |
Loss on repayment of debt | |
| 1,196,321 | | |
| - | |
Derivative expense | |
| 4,409,214 | | |
| 4,777,654 | |
Executive compensation | |
| 231,833 | | |
| - | |
Change in fair value of derivative liabilities | |
| (5,899,968 | ) | |
| (5,162,100 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Restricted cash balance | |
| (9,148 | ) | |
| - | |
Accounts receivable | |
| (742,742 | ) | |
| (2,262,808 | ) |
Prepaid and other | |
| (16,098 | ) | |
| (203,333 | ) |
Deferred equity costs | |
| (698,500 | ) | |
| - | |
Inventory and prepaid giveaways | |
| (616,775 | ) | |
| - | |
Other | |
| - | | |
| 7,877 | |
Increase (decrease) in: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
| 10,144,621 | | |
| 7,581,564 | |
Customer deposits | |
| 328,164 | | |
| (67,686 | ) |
Net Cash Used In Operating Activities | |
| (697,597 | ) | |
| (5,801,761 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (924,162 | ) | |
| (831,511 | ) |
Purchase of other assets | |
| (41,165 | ) | |
| - | |
Net Cash Used In Investing Activities | |
| (965,327 | ) | |
| (831,511 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Proceeds from issuance of debt | |
| 5,823,950 | | |
| 6,612,900 | |
Debt issuance costs | |
| (234,450 | ) | |
| (263,283 | ) |
Repayment of debt | |
| (5,847,575 | ) | |
| (75,285 | ) |
Repurchase of common stock (treasury stock) | |
| (460,978 | ) | |
| - | |
Proceeds from issuance of preferred stock | |
| - | | |
| 100,000 | |
Proceeds from issuance of common stock and warrants – net of recapitalization payment | |
| 1,660,760 | | |
| 875,000 | |
Cash overdraft | |
| 69,370 | | |
| - | |
Net Cash Provided by Financing Activities | |
$ | 1,011,077 | | |
$ | 7,249,332 | |
| |
| | | |
| | |
Effects of foreign currency translation: | |
| | | |
| | |
Foreign currency translation loss | |
| (7,917 | ) | |
| - | |
Net (decrease) increase in cash | |
| (659,764 | ) | |
| 616,060 | |
Cash at beginning of period | |
| 659,764 | | |
| 43,704 | |
Cash at end of period | |
$ | - | | |
$ | 659,764 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 501,165 | | |
$ | 28,806 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash investing and financing activities: | |
| | | |
| | |
Stock issued for future services - third parties | |
$ | 1,107,719 | | |
$ | 214,250 | |
Non cash increase in accounts payable related to future services to be paid for with common stock | |
$ | - | | |
$ | 100,000 | |
Warrants issued in conjunction with debt issue costs | |
$ | 427,759 | | |
$ | - | |
Debt discount recorded on convertible and unsecured debt accounted for as a derivative liability | |
$ | 3,554,672 | | |
$ | 5,473,291 | |
Stock issued to settle accounts payable and accrued interest – third parties | |
$ | 1,392,143 | | |
$ | 1,440,779 | |
Conversion of convertible debt and accrued interest for common stock | |
$ | 1,069,402 | | |
$ | 3,387,480 | |
Stock issued for interest | |
$ | 334,099 | | |
$ | - | |
Stock issued to settle accrued executive compensation | |
$ | 4,667,764 | | |
$ | - | |
Stock issued for board member compensation | |
$ | 18,750 | | |
$ | - | |
Reclassification of derivative liability to additional paid in capital and warrant settlements (2012 only) | |
$ | 9,784,748 | | |
$ | 640,826 | |
Stock issued to acquire equipment | |
$ | - | | |
$ | 82,811 | |
Auto acquired through financing | |
$ | - | | |
$ | 26,236 | |
Dividends on Series C Preferred Stock – related parties | |
$ | - | | |
$ | 293 | |
Stock issued to settle contracts | |
$ | 3,932 | | |
$ | - | |
Stock issued to settle accrued liabilities | |
$ | 384,500 | | |
$ | - | |
The accompanying notes
are an integral part of these consolidated financial statements.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Note 1: Nature of Operations and Basis of Presentation
Nature of Operations
MusclePharm Corporation and consolidated
subsidiary (the “Company”, “we”, “our”, or “MP”) was incorporated in the State
of Nevada on August 4, 2006, under the name Tone in Twenty, for the purpose of engaging in the business of providing personal fitness
training using isometric techniques. The Company is headquartered in Denver, Colorado.
MusclePharm currently manufactures and markets a wide-ranging
variety of high-quality sports nutrition products.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and the rules and regulations of the United States Securities and Exchange Act of 1934.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of MusclePharm Corporation and its wholly-owned subsidiary MusclePharm Canada Enterprises Corp(“MusclePharm
Canada”). MusclePharm Canada began operations in April of 2012. All intercompany accounts and transactions between Musclepharm
Corporation and MusclePharm Canada have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate
could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly
from estimates.
Risks and Uncertainties
The Company operates in an industry that
is subject to rapid change and intense competition. The Company’s operations will be subject to significant risk and uncertainties
including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Management’s Plans with Respect
to Liquidity and Capital Resources
The Company’s management believes
that with increased sales expansion and the opening of the Franklin, Tennessee distribution center, there will be opportunities
to increase sales; however, the Company may need to continue to raise capital in order execute the business plan, which includes
buying more inventory and broadening the sales platform. There can be no assurance that such capital will be available on acceptable
terms or at all. See Note 12 for subsequent events related to the Company’s capital raising efforts.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Cash and Cash Equivalents
The Company considers all highly liquid
instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. At December
31, 2012 and 2011, the Company had no cash equivalents.
The Company minimizes its credit risk associated
with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally
insured limits. At December 31, 2012, there were no balances that exceeded the federally insured limit. At December
31, 2011, there was one account that had a balance that exceeded the federally insured limit by approximately $378,000.
Accounts Receivable and Allowance for
Doubtful Accounts
Accounts receivable represents trade obligations
from customers that are subject to normal trade collection terms. The accounts receivable are sent directly to the Company’s
third party manufacturer and netted with any outstanding liabilities to the manufacturer. Liabilities to the manufacturer totaled
$4,224,562 and $2,100,214 at December 31, 2012 and 2011, respectively, and are included in accounts payable and accrued liabilities.
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 received by quarter end.
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. Accounts receivable
consisted of the following at December 31, 2012 and 2011:
| |
As of December 31, 2012 | | |
As of December 31, 2011 | |
Accounts receivable | |
$ | 4,416,193 | | |
$ | 2,766,776 | |
Less: allowance for discounts | |
| (1,088,720 | ) | |
| - | |
Less: allowance for doubtful accounts | |
| (25,129 | ) | |
| (197,684 | ) |
Accounts receivable – net | |
$ | 3,302,344 | | |
$ | 2,569,092 | |
At December 31, 2012 and 2011, the Company had the following
concentrations of accounts receivable with customers:
Customer | |
2012 | | |
2011 | |
A | |
| 24 | % | |
| 36 | % |
B | |
| 20 | % | |
| 7 | % |
C | |
| 6 | % | |
| 12 | % |
D | |
| 1 | % | |
| 10 | % |
Inventory
Inventory is valued at the lower of cost or market value. Product-related
inventories are primarily maintained using the average cost method.
Prepaid Giveaways
Prepaid giveaways represents non-inventory sample items which
are given away to aid in promotion of the brand.
Prepaid Sponsorship Fees
Prepaid sponsorship fees represents fees paid in connection
with future advertising to be received.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Prepaid Stock Compensation
Prepaid stock compensation represents amounts paid with stock
in connection with future contractual benefits to be received. The Company amortizes these contractual benefits over the life of
the contracts using the straight-line method.
Property and Equipment
Property and equipment are stated at cost
and depreciated to their estimated residual value over their estimated useful lives. When assets are retired or otherwise disposed
of, the assets and related accumulated depreciation are relieved from the accounts and the resulting gains or losses are included
in operating income in the statements of operations. Repairs and maintenance costs are expensed as incurred. Depreciation is provided
using the straight-line method for all property and equipment.
Deferred Equity Costs
Costs associated with equity offerings
are initially classified as deferred equity costs until moneys are received from the sale of equity shares. Upon receipt of funds,
the Company nets any deferred equity costs against the gross proceeds recorded as equity.
Website Development Costs
Costs incurred in the planning stage of
a website are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated useful life
of the asset.
Long-Lived Assets
The Company reviews long-lived assets for
impairment whenever events or changes in circumstances, such as service discontinuance or technological obsolescence, indicate
that the carrying amount of the long-lived asset may not be recoverable. When such events occur, the Company compares the carrying
amount of the asset to the undiscounted expected future cash flows related to the asset. If the comparison indicates that impairment
is present, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair
value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash
flows attributable to the asset. During the years ended December 31, 2012 and 2011, the Company recorded no impairment expense.
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. |
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
| · | 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 following are the major categories
of liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011, using quoted prices in active markets
for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level
3):
| |
As of December 31, | |
| |
2012 | | |
2011 | |
Derivative liabilities (Level 2) | |
$ | - | | |
$ | 7,061,238 | |
The Company’s financial instruments
consisted primarily of accounts receivable, accounts payable, accrued liabilities and debt. The Company’s debt approximates
fair value based upon current borrowing rates available to the Company for debt with similar maturities. The carrying amounts of
the Company’s financial instruments generally approximated their fair values as of December 31, 2012 and 2011, respectively,
due to the short-term nature of these instruments.
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 one of our largest domestic customers
(See customer “B” below under concentrations), which represents 12% and 14% of our total revenue for the year ended
December 31, 2012 and 2011, revenue is recognized upon delivery.
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 – Implementation Guidance and Illustrations). 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 store support, giveaways,
sales allowances and discounts as a direct reduction of sales. The Company grants volume incentive rebates to certain customers
based on contractually agreed percentages once certain thresholds have been met. These volume incentive rebates are recorded as
a direct reduction to sales.
Sales for the years ended December 31,
2012 and 2011 are as follows:
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Sales | |
$ | 77,768,138 | | |
$ | 21,197,518 | |
Discounts | |
| (10,712,923 | ) | |
| (3,984,882 | ) |
Sales – Net | |
$ | 67,055,215 | | |
$ | 17,212,636 | |
The Company has an informal 7-day right
of return for products. There were nominal returns for the years ended December 31, 2012 and 2011.
For the years ended December 31, 2012 and
2011, the Company had the following concentrations of revenues with customers:
CONCENTRATIONS | |
Year Ended December 31, | |
Customer | |
2012 | | |
2011 | |
A | |
| 33 | % | |
| 41 | % |
B | |
| 12 | % | |
| 14 | % |
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Licensing Income and Royalty Revenue
On May 5, 2011, the Company granted an
exclusive indefinite license to a third party for $250,000. The licensee may market, manufacture, design and sell the Company’s
existing apparel line. The licensee is obligated to pay the Company a 10% net royalty based on its net income at the end of each
fiscal year. To date, no royalty revenue has been earned.
Cost of Sales
Cost of sales represents costs directly related to the production,
manufacturing and freight of the Company’s products.
Shipping and Handling
Domestic products sold are shipped directly
to the customer from the manufacturer. Costs associated to the shipments are recorded in cost of sales. For Canadian sales, the
product is shipped from our Canadian warehouse to our customers and the costs associated with the shipments are recorded as shipping
in cost of sales.
Advertising
The Company expenses advertising costs when incurred.
Advertising expense for the years ended December 31, 2012 and
2011, are as follows:
| |
Year Ended December 31, | |
| |
2012 | | |
2011 | |
Advertising | |
$ | 8,430,401 | | |
$ | 5,241,585 | |
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 for the years ended December 31,
2012 and 2011.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
and related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is
amortized to interest expense over the life of the debt.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Significant Customers
In the years ended December 31, 2012 and
2011, the Company has relied on two customers for a substantial portion of its sales making up 45% and 55% of total sales, respectively.
MusclePharm’s sales for the years ended December 31, 2012 and 2011 to Bodybuiding.com were 33% and 41%, respectively and
to GNC 2012 and 2011 were 12% and 14%, respectively.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities
consists of the Company’s Trade Payables as well as amounts estimated by management for future liability payments that relate
to the current accounting period. Management reviews these estimates periodically to determine their reasonableness and fair presentation.
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 4 for further disclosure debt liabilities.
Derivative Liabilities
Fair value accounting requires bifurcation
of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their
fair value. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the
convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and
further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible
debt, the Company continues its evaluation process of these instruments as derivative financial instruments.
Once derivative liabilities 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 the Black-Scholes option-pricing model. Once a derivative liability ceases
to exist any remaining fair value is reclassified to additional paid in capital.
Deferred Equity Costs
The Company may pay costs related to the
underwriting and offering of equity securities. These costs are treated as a reduction to equity capital raised and recorded in
equity when the share issuances are recorded. Until the shares are recorded or until offering is aborted, these costs will be held
on the balance sheet as a deferred asset.
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs, and
record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over
the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized
amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the
Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount and
additional paid-in capital at an amount not to exceed gross proceeds raised, reducing the face amount of the debt, and is amortized
to interest expense over the life of the debt.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
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.
Earnings (Loss) Per Share
Net earnings (loss) per share is computed
by dividing net income (loss) less preferred dividends for the period by the weighted average number of common stock outstanding
during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the
period by the weighted average number of common stock, common stock equivalents and potentially dilutive securities outstanding
during each period.
Since the Company reflected a net loss
for the years ended December 31, 2012 and 2011, respectively, the effect of considering any common stock equivalents, if exercisable,
would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
The Company has the following common stock
equivalents as of December 31, 2012 and 2011, respectively:
| |
As of December 31, | |
| |
2012 | | |
2011 | |
Stock options (exercise price – $425/share) | |
| 1,847 | | |
| 1,903 | |
Warrants (exercise price – $12.75 - $1,275/share) | |
| 89 | | |
| 72,584 | |
Convertible Series C Preferred Stock (conversion price $8.50/share) | |
| - | | |
| 23 | |
Convertible debt (conversion price – $1.70- $17/share) | |
| - | | |
| 527,757 | |
Total common stock equivalents | |
| 1,936 | | |
| 602,267 | |
In the above table, some of the outstanding
instruments from 2011 contain ratchet provisions that would cause variability in the exercise price at the balance sheet date.
As a result, common stock equivalents could change.
Foreign Currency
MusclePharm began operations in Canada
in April 2012. The Canadian Dollar was determined to be the functional currency as the majority of the transactions related to
the day to day operations of the business are exchanged in Canadian Dollars. At the end of the period, the financial results of
the Canadian operation are translated into the U.S. Dollar, which is the reporting currency, and added to the U.S. operations for
consolidated company financial results. The revenue and expense items are translated using the average rate for the period and
the assets and liabilities at the end of period rate. Transactions that have completed the accounting cycle and resulted in a gain
or loss related to translation are recorded in realized gain or loss due to foreign currency translation under other income 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 in the net cash used in operating activities section of the statement of cash flows to conform to the current period
presentation. These reclassifications were for presentation purposes had no effect net cash used in operating activities for the
periods presented.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards
Board issued Accounting Standards Update (“ASU”) No. 2011-04 “Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in GAAP and IFRS”. ASU 2011-04 includes common requirements for measurement of and disclosure
about fair value between GAAP and the International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires reporting
entities to disclose additional information for fair value measurements categorized within Level 3 of the fair value hierarchy.
In addition, ASU 2011-04 requires reporting entities to make disclosures about amounts and reasons for all transfers in and out
of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting
periods beginning after December 15, 2011. This pronouncement has been implemented in the Company’s financial statements
for the year ended December 31, 2012 without impact.
Note 3: Property and Equipment
Property and equipment consisted of the
following at December 31, 2012 and 2011:
| |
2012 | | |
2011 | | |
Estimated Useful Life |
Furniture, fixtures and gym equipment | |
$ | 1,323,998 | | |
$ | 781,786 | | |
3 years |
Leasehold improvements | |
| 563,204 | | |
| 244,770 | | |
From 42 to 64 months |
Vehicles | |
| 100,584 | | |
| 37,068 | | |
5 years |
Displays | |
| 32,057 | | |
| 32,057 | | |
5 years |
Website | |
| 11,462 | | |
| 11,462 | | |
3 years |
Total | |
| 2,031,305 | | |
| 1,107,143 | | |
|
Less: Accumulated depreciation and amortization | |
| (674,941 | ) | |
| (199,621 | ) | |
|
| |
$ | 1,356,364 | | |
$ | 907,522 | | |
|
Note 4: Debt
At December 31, 2012 and 2011, debt consists of the following:
| |
2012 | | |
2011 | |
Convertible debt - secured | |
$ | - | | |
$ | 1,749,764 | |
Less: debt discount | |
| - | | |
| (1,395,707 | ) |
Convertible debt - net | |
| - | | |
| 354,057 | |
Auto loan - secured | |
| 15,380 | | |
| 26,236 | |
Unsecured debt | |
| 4,452,183 | | |
| 2,380,315 | |
Less: debt discount | |
| - | | |
| (1,171,626 | ) |
Unsecured debt - net | |
| 4,452,183 | | |
| 1,208,689 | |
Total debt | |
| 4,467,563 | | |
| 1,588,982 | |
Less: current portion | |
| (4,463,040 | ) | |
| (1,281,742 | ) |
Long term debt | |
$ | 4,523 | | |
$ | 307,240 | |
Debt in default of $64,600 and $505,600 at December 31, 2012
and 2011, respectively, is included as a component of short-term debt.
Future annual principal payments for the above debt is as follows:
Years Ending December 31, | |
| |
2013 | |
$ | 4,463,040 | |
2014 | |
| 4,523 | |
Total annual principal payments | |
$ | 4,467,563 | |
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Convertible Debt – Secured – Derivative Liabilities
During years ended December 31, 2012 and
2011, the Company issued convertible debt totaling $519,950 and $4,679,253, respectively. The convertible debt includes the following
terms:
| |
| |
Year Ended December 31, | |
| |
| |
2012 | | |
2011 | |
| |
| |
Amount of | | |
Amount of | |
| |
| |
Principal Raised | | |
Principal Raised | |
Interest Rate | |
| |
| 8% - 10% | | |
| 0% - 18% | |
Default interest rate | |
| |
| 0% - 20% | | |
| 0% - 25% | |
Maturity | |
| |
| January 3, 2012 to
October
11, 2014 | | |
| June 30, 2011 to
June 29,
2015 | |
| |
| |
| | | |
| | |
Conversion terms 1 | |
Lesser of (1) a fifty percent (50%) discount to the
two lowest closing bid prices of the five days trading days immediately preceding the date of conversion or (ii) twenty one
dollars and twenty five cents ($21.25) per share | |
$ | - | | |
$ | 525,000 | |
Conversion terms 2 | |
200% - The “market price” will be equal to the average
of (i) the average of the closing price of Company’s common stock during the 10 trading days immediately preceding the
date hereof and (ii) the average of the 10 trading days immediately subsequent to the date hereof. | |
| - | | |
| 537,600 | |
Conversion terms 3 | |
200% of face. Average of the trading price 10 trading days immediately
preceding the closing of the transaction | |
| - | | |
| 177,000 | |
Conversion terms 4 | |
200% of face. Fixed conversion price of $17.00 | |
| - | | |
| 105,000 | |
Conversion terms 5 | |
300% of face. Fixed conversion price of $17.00 | |
| - | | |
| 15,000 | |
Conversion terms 6 | |
35% of the three lowest trading prices for previous 10 trading days | |
| | | |
| 250,000 | |
Conversion terms 7 | |
45% of the three lowest trading prices for previous 10 trading days | |
| - | | |
| 327,500 | |
Conversion terms 8 | |
50% of average closing prices for 10 preceding trading days | |
| - | | |
| 76,353 | |
Conversion terms 9 | |
50% of lowest trade price for the last 20 trading days | |
| - | | |
| 45,000 | |
Conversion terms 10 | |
50% of the 3 lowest trades for previous 20 trading days | |
| - | | |
| 33,000 | |
Conversion terms 11 | |
50% of the lowest closing price for previous 5 trading days | |
| - | | |
| 250,000 | |
Conversion terms 12 | |
60% multiplied by the average of the lowest 3 trading prices for
common stock during the ten trading days prior to the conversion date | |
| - | | |
| 233,000 | |
Conversion terms 13 | |
62% of lowest trade price for the last 7 trading days | |
| 100,000 | | |
| 40,000 | |
Conversion terms 14 | |
65% of the lowest trade price in the 30 trading days previous to
the conversion | |
| 19,950 | | |
| 335,000 | |
Conversion terms 15 | |
65% of the three lowest trading price for previous 30 trading days | |
| - | | |
| 153,800 | |
Conversion terms 16 | |
70% of lowest average trading price for 30 trading days | |
| - | | |
| 1,366,000 | |
Conversion terms 17 | |
No fixed conversion option | |
| - | | |
| 35,000 | |
Conversion terms 18 | |
35% multiplied by the average of the lowest three (3) trading prices
(as defined below) for the common stock during the ten (10) trading day period ending on the latest complete trading day prior
to the conversion date. | |
| 400,000 | | |
| 75,000 | |
Conversion terms 19 | |
Fixed conversion price of $25.50 | |
| - | | |
| 100,000 | |
| |
| |
$ | 519,950 | | |
$ | 4,679,253 | |
The debt holders are entitled, at their
option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at the conversion
prices and terms discussed above. The Company classifies embedded conversion features in these notes as a derivative liability
due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required
to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 5 regarding accounting for
derivative liabilities.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
During the year ended December 31, 2012,
the Company converted debt and accrued interest, totaling $1,420,422 into 290,961 shares of common stock. The resulting loss on
conversion of $351,021 is included in the $4,447,732 loss on settlement of accounts payable and debt as shown in the consolidated
statement of operations. During the year ended December 31, 2011, the Company converted debt and accrued interest, totaling $5,126,809
into 346,282 shares of common stock resulting in a loss on conversion of $1,739,329
During the year ended December 31, 2012,
$14,000 of convertible notes matured without conversion. These notes became demand loans and were reclassified as unsecured debt.
Derivative liabilities associated with these notes were eliminated given the expiration of the embedded conversion option. During
the year ended December 31, 2011, $585,000 of convertible notes matured without conversion. These notes became demand loans and
were reclassified as unsecured debt. Derivative liabilities associated with these notes were eliminated given the expiration of
the embedded conversion option.
(A) Convertible Debt
Convertible debt consisted of the following activity and terms:
| |
| | |
Interest
Rate | |
Maturity |
Balance - December 31, 2010 | |
$ | 605,000 | | |
| |
|
Borrowings during the year ended December 31, 2011 | |
| 4,652,900 | | |
0% - 18 | % |
January 30,2011 to
June 29, 2015 |
Reclassifications from convertible notes to unsecured demand notes | |
| (585,000 | ) | |
| |
|
Conversion of debt to into 298,897 shares
of common stock with a valuation of $4,268,857 ($2.72 - $85.85/share) | |
| (2,923,136 | ) | |
| |
|
Balance - December 31, 2011 | |
| 1,749,764 | | |
| |
|
Borrowings during the year ended December 31, 2012 | |
| 519,950 | | |
8% - 10 | % |
January 3, 2012 to
October 11, 2014 |
Conversion of debt into 246,744 shares of common stock with a valuation
of $950,739 ($2.98 - $8.08/share) | |
| (759,095 | ) | |
| |
|
Repayment of convertible debt | |
| (2,518,343 | ) | |
| |
|
Interest and accrued interest (Included in total repayment) | |
| 15,632 | | |
| |
|
Loss on repayment (Included in total repayment) | |
| 1,006,092 | | |
| |
|
Expiration of conversion option | |
| (14,000 | ) | |
| |
|
Balance – December 31, 2012 | |
$ | - | | |
| |
|
(B) Secured Debt
Secured debt consisted of the following activity and terms:
| |
| |
Interest Rate | |
Maturity |
Secured Debt balance as of December 31, 2010 | |
$ | 187,500 | |
| 0 | % |
May 18, 2010 -
May 26, 2010 |
Conversion of debt to into 8,824 shares
of common stock with a valuation of $437,500 ($49.30 - $50.15/share) | |
| (187,500 | ) |
| | |
|
Balance as of December 31, 2011 | |
| - | |
| | |
|
Borrowings during the year ended December 31, 2012 | |
| - | |
| | |
|
Secured Debt balance as of December 31, 2012 | |
$ | - | |
| | |
|
(C) Unsecured Debt
Unsecured debt consisted of the following activity and terms:
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
| |
| | |
Interest Rate | |
Maturity |
Unsecured Debt balance as of December 31, 2010 | |
$ | 78,249 | | |
| |
|
Borrowings during the year ended December 31, 2011 | |
| 1,960,000 | | |
8% - 15 | % |
February 8, 2011 -
June 21, 2014 |
Reclassifications from convertible notes to unsecured demand notes | |
| 585,000 | | |
| |
|
Conversion of debt to into 38,562 shares of common stock with a
valuation of $420,452 ($8.50 - $42.50/share) | |
| (167,649 | ) | |
| |
|
Repayments | |
| (75,285 | ) | |
| |
|
Balance – December 31, 2011 | |
| 2,380,315 | | |
| |
|
Borrowings during the year ended December 31, 2012 | |
| 5,304,000 | | |
15% - 110 | % |
January 13, 2012 –
October 1, 2013 |
Conversion of debt into 44,208 shares of common stock with a valuation
of $469,683 ($8.08 - $13.60/share) | |
| (150,000 | ) | |
| |
|
Repayments | |
| (3,318,374 | ) | |
| |
|
Convertible debt added upon expiration of option | |
| 14,000 | | |
| |
|
Balance adjustments | |
| 117 | | |
| |
|
Interest and accrued interest (Included in total repayment) | |
| 31,896 | | |
| |
|
Loss on repayment (Included in total repayment) | |
| 190,229 | | |
| |
|
Balance – December 31, 2012 | |
$ | 4,452,183 | | |
| |
|
(D) Vehicle Loan
Vehicle loan account consisted of the following activity and
terms:
| |
| | |
Interest Rate | | |
Maturity |
Balance - December 31, 2010 | |
$ | - | | |
| | | |
|
Non-Cash fixed asset additions during the year ended December 31, 2011 | |
| 32,568 | | |
| 6.99 | % | |
36 payments of $1,008 |
Repayments | |
| (6,332 | ) | |
| | | |
|
Balance - December 31, 2011 | |
| 26,236 | | |
| 6.99 | % | |
24 payments of $1,008 |
Repayments | |
| (10,856 | ) | |
| | | |
|
Balance – December 31, 2012 | |
$ | 15,380 | | |
| | | |
|
(E) Debt Issue Costs
During the years ended December 31, 2012
and 2011, the Company paid debt issue costs totaling $662,209 and $263,283, respectively.
For the year ended December 31, 2012, the
Company issued 22,633 warrants as cost associated with a debt raise. The initial derivative liability value of $427,759 was recorded
as debt issue costs and derivative liability.
The following is a summary of the Company’s
debt issue costs for the years ended December 31, 2012 and 2011:
| |
2012 | | |
2011 | |
Debt issuance costs | |
$ | 851,923 | | |
$ | 305,283 | |
Accumulated amortization of debt issuance costs | |
| (516,490 | ) | |
| (237,095 | ) |
Debt issuance costs – net | |
$ | 335,433 | | |
$ | 68,188 | |
During the years ended December 31, 2012
and 2011, the Company amortized $394,964 and $229,499, respectively in debt issuance costs.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
(F) Debt Discount
During the years ended December 31, 2012
and 2011, the Company recorded debt discounts totaling $3,554,673 and $5,473,291, respectively.
The debt discounts recorded in 2012 and
2011 pertain to convertible debt and warrants that contain embedded conversion options that are required to be bifurcated and reported
at fair value.
The Company amortized $6,122,006 and $3,237,219
to interest expense in the years ended December 31, 2012 and 2011 as follows:
Debt discount – December 31, 2010 | |
$ | 5,804,552 | |
Amortization of debt discount – year ended December 31, 2011 | |
| (3,237,219 | ) |
Debt discount – December 31, 2011 | |
| 2,567,333 | |
Additional debt discount – year ended December 31, 2012 | |
| 3,554,673 | |
Amortization of debt discount – year ended December 31, 2012 | |
| (6,122,006 | ) |
Debt discount – December 31, 2012 | |
$ | - | |
Note 5: Derivative Liabilities
The Company identified conversion features
embedded within convertible debt, warrants and Series C Preferred Stock issued in 2012, 2011 and (see Notes 4 and 8). The Company
has determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative
liability as the Company could not determine if a sufficient number of shares would be available to settle all transactions.
The fair value of the conversion feature
is summarized as follows:
Derivative liability - December 31, 2010 | |
$ | 622,944 | |
Fair value at the commitment date for convertible instruments | |
| 6,590,351 | |
Fair value at the commitment date for warrants issued | |
| 5,650,576 | |
Fair value at the commitment date for Series A, Preferred Stock issued | |
| 293 | |
Fair value mark to market adjustment for convertible instruments | |
| (2,293,164 | ) |
Fair value mark to market adjustment for warrants | |
| (2,868,818 | ) |
Fair value mark to market adjustment for Series A, Preferred Stock issued | |
| (118 | ) |
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability | |
| (640,826 | ) |
Derivative liability - December 31, 2011 | |
| 7,061,238 | |
Fair value at the commitment date for debt instruments | |
| 1,096,808 | |
Fair value at the commitment date for warrants issued | |
| 7,526,671 | |
Fair value mark to market adjustment for debt instruments | |
| (1,579,663 | ) |
Fair value mark to market adjustment for warrants | |
| (4,345,916 | ) |
Fair value mark to market adjustment for Series C Preferred Stock issued | |
| (59 | ) |
Reclassification to additional paid-in capital for financial instruments conversions and maturities | |
| (4,124,387 | ) |
Warrant settlements | |
| (5,634,692 | ) |
Derivative liability – December 31, 2012 | |
$ | - | |
The Company recorded the debt discount
to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross
proceeds of the note. The Company recorded a derivative expense of $4,409,214 and $4,777,654 for the years ended December 31, 2012
and 2011, respectively.
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2012:
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
| |
Commitment Date |
| |
Re-measurement Date |
Expected dividends | |
0 |
% | |
N/A |
Expected volatility | |
228% -251 |
% | |
N/A |
Expected term: | |
6 months – 4 years |
| |
N/A |
Risk free interest rate | |
0.09% - 0.72 |
% | |
N/A |
The fair value at the commitment and re-measurement dates for
the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2011:
| |
Commitment Date | | |
Re-measurement Date | |
Expected dividends | |
| 0 | % | |
| 0 | % |
Expected volatility | |
| 150% -226 | % | |
| 150% -226 | % |
Expected term: | |
| 0.02 – 5 years | | |
| 0.02 – 5 years | |
Risk free interest rate | |
| 0.06% - 2.76 | % | |
| 0.09% - 0.31 | % |
Note 6: Restricted Stock Units
In November 2012, the Company granted the
COO, John H. Bluher, 70,589 restricted stock units through a restricted stock unit agreement. 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 $245,400 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 will vest in tranche of 23,529 on January 1, 2013 and two tranches
of 23,530 shares on January 1, 2014 and December 1, 2014. As of December 31, 2012, no restricted stock units have vested
and the unamortized portion of this award is $163,600.
In November 2012, the Company granted the
CFO, L. Gary Davis, 58,824 restricted stock units through a restricted stock unit agreement. 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 $204,500 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 will vest in three tranches of 19,608 shares on January 1, 2013
and 2014, and December 1, 2014. As of December 31, 2012, no restricted stock units have vested and the unamortized portion
of this award $136,333.
Note 7: Income Taxes
Income taxes are provided for the tax effects
of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences
between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when
the assets or liabilities are recovered or settled.
At December 31, 2012, the Company has a
net operating loss carry-forward of approximately $23,940,000 available to offset future taxable income expiring through 2032.
Utilization of future net operating losses may be limited due to potential ownership changes under Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”).
The valuation allowance at December 31,
2011 was approximately $8,570,000. The net change in valuation allowance during the year ended December 31, 2012 was an increase
of approximately $5,087,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough
uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation
allowance as of December 31, 2012.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
The effects of temporary differences that gave rise to significant
portions of deferred tax assets at December 31, 2012 and 2011, are approximately as follows:
| |
December 31, 2012 | | |
December 31, 2011 | |
Net operating loss carry forward | |
$ | 8,871,000 | | |
$ | 6,061,000 | |
Amortization of debt discount and debt issue costs | |
| 3,732,000 | | |
| 1,465,000 | |
Stock options and warrants | |
| 971,000 | | |
| 971,000 | |
Depreciation | |
| 74,000 | | |
| - | |
Bad debt | |
| 9,000 | | |
| 73,000 | |
Valuation allowance | |
| (13,657,000 | ) | |
| (8,570,000 | ) |
Net deferred tax asset | |
$ | - | | |
$ | - | |
There was no income tax expense for the
years ended December 31, 2012 and 2011, due to the Company’s net losses.
The Company’s tax expense differs
from the “expected” tax expense for the years ended December 31, 2012 and 2011, (computed by applying the federal corporate
tax rate of 34% to loss before taxes and 4.63% for Colorado State Corporate Taxes, the blended rate used was 37.1%), are approximately
as follows:
| |
December 31, 2012 | | |
December 31, 2011 | |
Federal tax benefit at statutory rate | |
$ | (6,493,000 | ) | |
$ | (7,916,000 | ) |
State tax benefit – net of federal tax effect | |
| (418,000 | ) | |
| (501,000 | ) |
Derivative expense | |
| 1,499,000 | | |
| 1,625,000 | |
Change in fair value of derivative liability | |
| (2,006,000 | ) | |
| (1,755,000 | ) |
Loss on settlement of accounts payable | |
| 1,495,000 | | |
| 1,313,000 | |
Non-deductible stock compensation | |
| 791,000 | | |
| 1,091,000 | |
Other non-deductible expenses | |
| 46,000 | | |
| 68,000 | |
Change in valuation allowance | |
| 5,086,000 | | |
| 6,075,000 | |
Income tax benefit | |
$ | - | | |
$ | - | |
Note 8: Stockholders’ deficit
The Company has four separate series of
authorized preferred stock:
On November 26, 2012, the Company (i) effected
a 1-for-850 reverse stock split of our common stock, including a proportionate reduction in the number of authorized shares of
our common stock from 2.36 billion shares to 2.8 million shares of common stock, and (ii) amended our articles of incorporation
to increase the number of authorized shares of common stock (post reverse stock split) from 2,941,177 to 100 million effective
November 27, 2012. All share and per share amounts in this document have been changed to give effect to the reverse stock
split
(A) Series A Convertible Preferred Stock
The shares of Series A have the following
provisions:
| · | Convertible into 200 shares of common stock. |
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31, 2012 and 2011)
(B) Series B Preferred
Stock (Related Parties)
In August 2011, the Company issued an aggregate
51 shares of Series B Preferred Stock to two of its officers and directors. The Company accounted for the share issuance at par
value as there was no future economic value that could be associated with the issuance.
The shares of Series B have the following
provisions:
| · | Voting rights entitling the holders to an aggregate 51% voting control; |
| · | Initially no rights to dividends; |
| · | Stated value of $0.001 per share; |
| · | Liquidation rights entitle the receipt of net assets on a pro-rata basis; and |
(C) Series C Convertible
Preferred Stock
In October 2011, the Company issued 190
shares of Series C Convertible Preferred Stock, having a fair value of $190,000. Of the total shares issued, 100 shares were issued
for $100,000 ($1,000 /share). The remaining 90 shares were issued for services rendered having a fair value of $90,000 ($1,000
/share), based upon the stated value per share. In March 2012, all 190 shares were converted into 22,353 common shares at a conversion
price of $0.0085 per share and a loss of $614,984.
The shares of Series C have the following
provisions:
| · | Stated Value - $1,000 per share; |
| · | Liquidation rights entitle an amount equal to the stated value, plus any accrued and unpaid dividends; |
| · | As long as any Series C, convertible preferred stock is outstanding, the Company is prohibited from executing various corporate
actions without the majority consent of the holders of Series C Convertible Preferred Stock authorization; and |
| · | Convertible at the higher of (a) $8.50 or (b) such price that is a 50% discount to market using the average of the low 2 closing
bid prices, 5 days preceding conversion. |
Due to the existence of an option to convert
at a variable amount, the Company treated this series of preferred stock as a derivative liability due to the potential for settlement
in a variable quantity of shares. Additionally, the Company computed the fair value of the derivative liability at the commitment
date and remeasurement date, which was $293 and $175, respectively, using the Black-Scholes valuation model. This transaction is
analogous to a dividend with a direct charge to retained earnings.
(D) Series D Convertible Preferred Stock
In January 2013 the Board of Directors authorized 1,600,000
shares of Series D convertible preferred stock.
The shares of Series D have the following
provisions:
| · | Voting rights based on number of common shares of conversion option; |
| · | Initially no rights to dividends; |
| · | Liquidation rights entitle the receipt of net assets on a pro-rata basis; and |
| · | Convertible into 2 shares of common stock, subject to adjustment. |
Subsequent to year end, the Company issued
1,500,000 shares of Series D preferred stock. Refer to Note 12 for details on this transaction.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
(E) Common Stock
During the year ended December 31, 2012,
the Company issued the following common stock:
Transaction Type | |
Quantity | | |
Valuation ($) | | |
Loss on
Settlement
($) | | |
Range of Value per Share ($) | |
Conversion of convertible debt | |
| 246,753 | | |
| 950,739 | | |
| 61,124 | | |
| 2.98 - 8.08 | |
Conversion of unsecured/secured debt | |
| 44,208 | | |
| 469,683 | | |
| 289,897 | | |
| 8.08 - 13.60 | |
Forbearance of agreement terms | |
| 95,528 | | |
| 1,240,032 | | |
| - | | |
| 7.14 - 27.54 | |
Cash and warrants | |
| 199,422 | | |
| 1,660,760 | | |
| - | | |
| 7.59 - 8.50 | |
Executive compensation (1) | |
| 431,034 | | |
| 4,686,514 | | |
| - | | |
| 8.93 - 17.71 | |
Stock issued for future services | |
| 113,740 | | |
| 1,107,719 | | |
| - | | |
| 4.75 - 21.25 | |
Conversion of Series C Preferred Stock to common stock | |
| 22,353 | | |
| 614,984 | | |
| 614,984 | | |
| 27.51 | |
Warrant Conversions/Settlements | |
| 853,082 | | |
| 7,295,768 | | |
| 1,505,906 | | |
| 5.44 - 15.73 | |
Stock issued in lieu of interest | |
| 58,945 | | |
| 334,099 | | |
| - | | |
| 5.50 – 10.62 | |
Additional shares due to roundup provision of certificates upon reverse split | |
| 561 | | |
| - | | |
| - | | |
| - | |
Total | |
| 2,065,626 | | |
| 18,360,298 | | |
| 2,471,911 | | |
| 0.00 – 27.54 | |
| (1) | Represents common stock issued for prior year 2011 accrued compensation of $4,667,764 settled in 2012 and directors awards. |
During the year ended December 31, 2011,
the Company issued the following common stock:
Transaction Type | |
Quantity | | |
Valuation ($) | | |
Range of Value per Share ($) | |
Conversion of convertible debt | |
| 298,897 | | |
| 4,268,857 | | |
| 2.55-85.00 | |
Conversion of unsecured/secured debt | |
| 47,386 | | |
| 857,952 | | |
| 42.50-51.00 | |
Settlement of accounts payable and accrued expenses (4) | |
| 64,172 | | |
| 3,646,719 | | |
| 25.50-102.00 | |
Extension of debt maturity date | |
| 11,030 | | |
| 161,250 | | |
| 14.45-17.00 | |
Services – rendered | |
| 54,731 | | |
| 1,199,844 | | |
| 0.00-977.50 | |
Cash and warrants | |
| 96,471 | | |
| 875,000 | | |
| 25.50 | |
Services – prepaid stock compensation (2) | |
| 4,706 | | |
| 214,250 | | |
| 42.50-68.00 | |
Cancelled shares (3) | |
| (4,118 | ) | |
| - | | |
| 25.50 | |
Total | |
| 573,275 | | |
| 11,223,872 | | |
| 0.00-977.50 | |
The fair value of all stock issuances above
is based upon the quoted closing trading price on the date of issuance, except for stock and warrants issued for cash, which is
based on the cash received.
(1) Settlement of Warrants to Purchase
Common Stock
In September 2012, the Company began the
settlement of all outstanding valued warrant contracts in an effort to reduce financial statement fluctuations due to these instruments.
The Company issued 512,631 shares of common stock to several accredited investors pursuant to conversions of warrants to purchase
an aggregate of 723,746 shares of common stock in September and issued 3,677 shares of common stock pursuant to conversions of
a warrant to purchase 4,902 shares of common stock in December 2012. Related to these efforts, the Company did not have any valued
warrant contracts outstanding at December 31, 2012.
(2) Prepaid Stock Compensation
The following represents the allocation
of prepaid stock compensation as of December 31, 2012 and 2011:
MusclePharm
Corporation and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
Prepaid stock compensation – December 31, 2010 | |
| 1,965,911 | |
Prepaid stock compensation additions during the year ended December 31, 2011 | |
| 214,250 | |
Non cash increase in accounts payable related to future services to be paid for with common stock | |
| 100,000 | |
Amortization of prepaid stock compensation | |
| (1,745,705 | ) |
Prepaid stock compensation – December 31, 2011 | |
| 534,456 | |
Prepaid stock compensation additions during the year ended December 31, 2012 | |
| 110,000 | |
Amortization of prepaid stock compensation | |
| (599,708 | ) |
Prepaid stock compensation – December 31, 2012 | |
$ | 44,748 | |
The following represents the allocation
of prepaid stock compensation at December 31, 2012:
Prepaid expense that will be amortized in 2013 | |
$ | 44,748 | |
(3) Cancelled Shares
The Company cancelled 4,118 shares during
the year ended December 31, 2011, valued at par ($0.001). The Company has disputed the issuance of these shares due to non-performance
by a consultant. These shares were originally issued in 2010 as a component of stock issued for services rendered.
(4) Settlement of Accounts Payable and
Accrued Expenses and Loss on Settlement
The Company settled $1,523,590 in accounts
payable and recorded a loss on settlement of $2,123,129.
Loss on settlement of accounts payable and accrued expenses | |
$ | 2,123,129 | |
Loss on settlement of debt (Note 4) | |
| 1,739,329 | |
Total loss on settlement | |
$ | 3,862,458 | |
(F) Stock Options
On February 1, 2010,
the Company's board of directors and shareholders approved the 2010 Stock Incentive Plan ("2010 Plan"). The 2010 Plan
allows the Company to grant incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units
and stock appreciation rights to key employees, directors consultants, advisors and service providers of the Company or its subsidiaries.
Any stock option granted in the form of an incentive stock option will be intended to comply with the
requirements of Section 422 of the Code.
Only stock options granted to employees qualify for incentive stock option treatment. No incentive stock option shall be granted
after February 1, 2020, which is 10 years from the date the 2010 Plan was initially adopted. A stock option may be exercised in
whole or in installments, which may be cumulative. Shares of common stock purchased upon the exercise of a stock option must be
paid for in full at the time of the exercise in cash or such other consideration determined by the compensation committee. Payment
may include tendering shares of common stock or surrendering of a stock award, or a combination of methods.
The 2010 Plan is administered by the Compensation
Committee. The Compensation Committee has full and exclusive power within the limitations set forth in the 2010 Plan to make all
decisions and determinations regarding the selection of participants and the granting of awards; establishing the terms and conditions
relating to each award; adopting rules, regulations and guidelines; and interpreting the 2010 Plan. The Compensation Committee
will determine the appropriate mix of stock options and stock awards to be granted to best achieve the objectives of the 2010 Plan.
The 2010 Plan may be amended by the Board or the compensation committee, without the approval of stockholders, but no such amendments
may increase the number of shares issuable under the 2010 Plan or adversely affect any outstanding awards without the consent of
the holders thereof. The total number of shares that may be issued shall not exceed 5,883, subject to adjustment in the event of
certain recapitalizations, reorganizations and similar transactions.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
On April 2, 2010, the Company issued 3,255
stock options, having a fair value of $630,990, which was expensed immediately since all stock options vested immediately. These
stock options expire on April 2, 2015.
The Company applied fair value accounting
for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes assumptions used when the options were issued in the year ended December 31, 2010 are as
follows:
Exercise price | |
$ | 425 | |
Expected dividends | |
| 0 | % |
Expected volatility | |
| 74.8 | % |
Risk fee interest rate | |
| 1.4 | % |
Expected life of option | |
| 5 years | |
Expected forfeiture | |
| 0 | % |
The following is a summary of the Company’s stock option
activity:
| |
Options | | |
Weighted Average Exercise
Price | | |
Weighted Average Remaining Contractual
Life | |
Aggregate Intrinsic
Value | |
Balance – December 31, 2010 | |
| 3,255 | | |
$ | 425.00 | | |
4.25 years | |
| | |
Granted | |
| - | | |
| - | | |
| |
| | |
Exercised | |
| - | | |
| - | | |
| |
| | |
Forfeited/Cancelled | |
| (1,353 | ) | |
$ | 425.00 | | |
| |
| | |
Balance – December 31, 2011 | |
| 1,902 | | |
$ | 425.00 | | |
3.25 years | |
| - | |
Granted | |
| - | | |
| | | |
| |
| | |
Exercised | |
| - | | |
| | | |
| |
| | |
Forfeited/Cancelled | |
| (55 | ) | |
$ | 425.00 | | |
| |
| | |
Balance – December 31, 2012 – outstanding | |
| 1,847 | | |
$ | 425.00 | | |
2.5 years | |
| - | |
Balance – December 31, 2012 – exercisable | |
| 1,847 | | |
$ | 425.00 | | |
2.5 years | |
| - | |
| |
| | | |
| | | |
| |
| | |
Outstanding options held by related parties
– 2012 | |
| 1,847 | | |
| | | |
| |
| | |
Exercisable options held by related parties
– 2012 | |
| 1,847 | | |
| | | |
| |
| | |
Outstanding options held by related parties
– 2011 | |
| 1,177 | | |
| | | |
| |
| | |
Exercisable options held by related parties
– 2011 | |
| 1,177 | | |
| | | |
| |
| | |
(F) Stock Warrants
All warrants issued during years ended
December 31, 2012 and 2011 were accounted for as derivative liabilities. See Note 5.
During the year ended December 31, 2012,
the Company entered into convertible note and unsecured note agreements. As part of these agreements, the Company issued warrants
to purchase 500,721 shares of common stock. Each warrant vests six months after issuance and expire July 13, 2014 – October
16, 2014, with exercise prices ranging from $10.20 - $12.75. All warrants contain anti-dilution rights, and are treated as derivative
liabilities. All warrants issued during the year ended December 31, 2012, were converted in 2012.
During 2011, the Company entered into convertible
and unsecured note agreements. As part of these agreements, the Company issued warrants to purchase 191,045 shares of common stock.
Each warrant vests six month after issuance and expire July 14, 2013 – June 28, 2016, with exercise prices ranging from $12.75
- $51.00.
During 2011, the Company issued 141,412
warrants for services performed. The warrants have a vesting range of immediate to six months after issuance and expire February
28, 2014 – April 15, 2016, with exercise prices ranging from $1.70 - $85.00. The value of the warrants, $1,989,982, calculated
using the below black-scholes assumptions, was expensed as compensation with the offset being recorded to derivative liabilities,
since the Company applied the provisions of ASC No. 815, pertaining to the potential settlement in a variable amount of shares.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
A summary of warrant activity for the Company for the years
ended December 31, 2012 and 2011 is as follows:
| |
Number of Warrants | | |
Weighted Average Exercise Price | |
Balance at December 31, 2010 | |
| 883 | | |
| 1,275 | |
Granted | |
| 332,457 | | |
| 17.00 | |
Exercised | |
| - | | |
| - | |
Balance at December 31, 2011 | |
| 333,340 | | |
| 20.33 | |
Granted | |
| 500,721 | | |
| 10.20 | |
Exercised | |
| (37,648 | ) | |
| 7.57 | |
Converted | |
| (796,324 | ) | |
| 10.20 | |
Balance at December 31, 2012 | |
| 89 | | |
| 1,275.00 | |
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 | | |
| 2.79 | | |
$ | 1,275 | | |
| 89 | | |
$ | 1,275 | | |
| - | |
(G) Treasury Stock
During the year ended December 31, 2012,
the Company repurchased 31,096 shares of its common stock for the total sum of $460,978 or an average of $14.82 per share. The
Company recorded the value of its common stock held in treasury at cost. The Company has not cancelled or retired these shares,
and they remain available for re-issuance. The Company has a stock repurchase plan in place, but has been suspended it indefinitely.
Note 9: Commitments, Contingencies and Other Matters
(A) Operating Lease
The Company has various non-cancelable
leases with terms expiring through 2015.
Future minimum annual lease payments for
the above leases are approximately as follows:
Years Ended December 31, | |
| | |
2013 | |
$ | 333,902 | |
2014 | |
| 436,688 | |
2015 | |
| 311,209 | |
Total minimum lease payments | |
$ | 1,081,799 | |
Rent expense for the years ended December 31, 2012 and 2011,
was $337,584 and $154,155, respectively.
(B) Factoring Agreement
In April 2010, the Company entered into
a factoring agreement and sold its accounts receivable. During 2010, the Company was subject legal proceedings with
the factor, as a result of the Company’s customers not remitting funds directly to the factor. At December 31, 2010, the
Company no longer factored its accounts receivable.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31,
2012 and 2011)
A settlement, of $96,783, was reached.
During 2010, the Company repaid $25,000, leaving a balance of $71,783 due to factor. In 2011, the Company paid $10,000.
On February 28, 2011, the remaining $65,930,
inclusive of fees and interest, was settled with the issuance of 2,574 shares of common stock, having a fair value of $131,206
($51.00/share), based upon the quoted closing trading price. The Company recorded a loss on settlement of accounts payable $65,330.
(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.
The Company was party to the following
legal matters as of December 31, 2011:
| · | Plaintiff alleged the Company use of Creatine Nitrate in product infringed on a patent held by the Plaintiff. The Company settled
this claim in 2012 for a nominal amount. |
| · | Plaintiff alleges the Company’s use of the tagline "Train like an unchained beast" infringes on their mark
"Beast" for dietary supplements. The Company settled this claim in 2012 for no consideration and agreed to modify its
tagline. |
| · | Plaintiff had filed notices of intent to commence litigation on over 200 sports nutrition and dietary supplement companies
in the US and Canada, including the Company. Plaintiff alleged violations of California's Proposition 65. The Company considers
this case without merit and merely an attempt by a commercial plaintiff to pressure settlements. The Company had recorded an accrual
in the amount of $121,500 as of December 31, 2011 and subsequently settled this claim for $52,000 in 2012. |
| · | Beginning in October 2009, the Company engaged in various business dealings regarding the manufacturing, sale and distribution
of products with Fit Foods Manufacturing, Ltd. and Fit Foods Distribution, Inc. Jointly, "Fit Foods"). MusclePharm and
Fit Foods subsequently became involved in a business dispute regarding their respective obligations and filed claims against each
other in District Court. The Parties settled their dispute on December 22, 2010. The Company issued 16,456 shares of common stock
having a fair value of $676,980 ($41.14/share), based upon the quoted closing trading price which settled outstanding accounts
payable of $333,666, resulting in a loss on settlement of $343,314 All settlement payments have been made and the case was dismissed
on July 1, 2011. |
As of December 31, 2012, the Company is
a party defendant in the following legal proceeding, which the Company: (a) believes is without merit; and (b) intends to defend
vigorously:
| · | William Bossung and Bishop Equity Partners LLC v. MusclePharm Corporation, Clark County, Nevada District Court. Date
instituted: January 17, 2012. Plaintiff alleges that additional monetary payments are due in respect of a settlement for outstanding
warrants. |
| · | The Tawnsaura Group, LLC v MusclePharm Corporation, Case No: 8:12-cv-01476-JVS-RNB
in the United States District Court for the Central District of California. Date instituted: September 12, 2012.
Plaintiff alleges patent infringement for MusclePharm's use of Citrulline Malate in its products. To date, Plainitiff
has filed against over 70 different manufacturers of dietary supplements and sports nutrition products. MusclePharm is part of
a joint defense group and believes this case is without merit due to the existence of prior art. |
MusclePharm Corporation and Subsidiary
Notes to Consolidated Financial Statements
(December 31, 2012 and 2011)
As of December 31, 2012, the Company is a party plaintiff in
the following legal matter:
| · | MusclePharm Corporation v. Swole Sports Nutrition,
LLC, United States District Court for the Southern District of Florida. Date instituted: March 15, 2012. The Company filed
this action for trademark infringement after the Defendant started marketing and selling a dietary supplement named “Turbo
Shred”. The Company has sold “Shred Matrix” since April 2, 2008, and the mark “MusclePharm Shred Matrix”
was granted registration by the USPTO on September 21, 2010. |
(D) Payroll Taxes
As of December 31, 2012 and 2011, accounts
payable and accrued expenses included approximately $143,000 and $168,000, respectively, pertaining to accrued payroll taxes. The
taxes represent employee withholdings that have yet to be remitted to the taxing agencies.
(E) Product Liability
As a manufacturer of nutritional supplements
and other consumer products that are ingested by consumers, the Company has been and is currently subject to various product liability
claims. Although the effects of these claims to date have not been material, it is possible that current and future product liability
claims could have a material adverse effect on our business or financial condition, results of operations or cash flows. The Company
currently maintains product liability insurance with a deductible/retention of$10,000 per claim with an aggregate cap on retained
loss of $5,000,000. At December 31, 2012, the Company had not recorded any accruals for product liabilities.
(F) Sponsorship
and Endorsement Contract Liabilities
The Company has various non-cancelable
endorsement and sponsorship agreements with terms expiring through 2013. The total value of outstanding payments as of December
31, 2012.
(G) Other Liabilities
Subsequent to December 31, 2012, the Company
determined that it may have potential liabilities related to the filing of certain informational returns required by governmental
authorities. Management has developed a plan to address these matters and does not currently expect a significant adverse
impact on its financial position or results of operations.
Note 10: Defined Contribution Plan
The Company has a 401(k) defined contribution
plan, in which all eligible employees may participate. The 401(k) plan is a contributory plan. Matching contributions are based
upon the amount of the employees’ contributions. Beginning January 1, 2012, the Company may make an additional discretionary
401(k) plan matching contribution to eligible employees. During years ended December 31, 2012 and 2011, the Company’s matching
contribution were $42,800 and $0, respectively.
Note 11: Restricted Cash
A restricted cash fund was established
in compliance with the unsecured debt agreements. At December 31, 2012, the restricted cash fund had a balance of $9,148. This
fund is used to pay principal and interest for the unsecured debt agreements which had a principal balance of $3,387,586 as of
December 31, 2012. Ten percent of all cash receipts from operations are put into this fund under the terms of certain debt agreements.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31, 2012 and 2011)
Note 12: Subsequent Events
Share Issuances
Series D Preferred Stock Offering
On January 16, 2013, the Company entered
into a placement agency agreement (the “Placement Agency Agreement”) with GVC Capital LLC (the “Placement Agent”)
pursuant to which the Placement Agent agreed to use its best efforts to arrange for the sale of up to an aggregate of 1,500,000
shares of Series D Convertible Preferred Stock (the “Preferred Shares”) in a registered direct offering (the “Offering”).
The Preferred Shares offered pursuant to
the Offering were registered under a registration statement on Form S-1 (Registration No. 333-184625), which the Securities and
Exchange Commission declared effective on January 16, 2013.
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 of the date of this report, 1,176,125 Series D shares have
been converted into 2,352,250 shares of the Company’s common stock and 323,875 shares of Series D preferred stock remain
outstanding.
Common Stock Issuances
In March 2013 the Company issued 142,282
shares of common stock pursuant to the ratchet provisions in the July 2012 securities purchase agreement which are valued at $853,692.
In March 2013 the Company issued an aggregate
741,017 shares of common stock pursuant consulting agreements valued at approximately $6,297,694.
In March 2013 the Company issued an aggregate
43,137 shares of common stock pursuant the vesting of stock awards valued at $294,167.
Private Placement of Common Stock
On March 26, 2013, the Company entered
into subscription agreements with non-affiliated accredited investors for the issuance of 705,882 shares of common stock pursuant
to exemptions from registration under federal and state securities laws. The shares of common stock were sold for $8.50 per share.
The gross proceeds to the Company of $6.0 million were reduced by commissions and issuance costs of $115,000.
MusclePharm Corporation
and Subsidiary
Notes to Consolidated
Financial Statements
(December 31, 2012 and 2011)
An unaudited pro-forma balance sheet showing the effect of these
capital raises is shown below:
| |
December 31,
2012 | | |
Total
Adjustment
(unaudited) | | |
Pro Forma
(unaudited) | |
Assets | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | |
Cash | |
$ | - | | |
$ | 6,296,669 | | |
$ | 6,296,669 | |
Current assets | |
| 4,949,881 | | |
| - | | |
| 4,949,881 | |
Non-current assets | |
| 1,816,846 | | |
| - | | |
| 1,816,846 | |
Total assets | |
$ | 6,766,727 | | |
$ | 6,296,669 | | |
$ | 13,063,396 | |
Liabilities and Stockholders’ Deficit | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | |
Current liabilities | |
$ | 16,520,456 | | |
$ | (8,238,165 | ) | |
$ | 8,282,291 | |
Non-current liabilities | |
| 4,523 | | |
| - | | |
| 4,523 | |
Total Liabilities | |
$ | 16,524,979 | | |
$ | (8,238,165 | ) | |
$ | 8,286,814 | |
Stockholders’ Deficit: | |
| | | |
| | | |
| | |
Series A, Convertible Preferred Stock | |
| - | | |
| - | | |
| - | |
Series B, Preferred Stock | |
| - | | |
| - | | |
| - | |
Series C, Convertible Preferred Stock | |
| - | | |
| - | | |
| - | |
Series D, Convertible Preferred Stock | |
| - | | |
| 324 | | |
| 324 | |
Common Stock | |
| 2,778 | | |
| 2,972 | | |
| 5,750 | |
Treasury Stock, at cost | |
| (460,978 | ) | |
| - | | |
| (460,978 | ) |
Additional paid-in capital | |
| 54,817,341 | | |
| 16,698,755 | | |
| 71,516,096 | |
Accumulated deficit | |
| (64,109,476 | ) | |
| (2,167,217 | ) | |
| (66,276,693 | ) |
Accumulated other comprehensive income | |
| (7,917 | ) | |
| - | | |
| (7,917 | ) |
Total Stockholders’ Deficit | |
| (9,758,252 | ) | |
| 14,534,834 | | |
| 4,776,582 | |
Total Liabilities and Stockholders’ Deficit | |
$ | 6,766,727 | | |
$ | 6,296,669 | | |
$ | 13,063,396 | |
At March 29, 2013 the Company’s issued
and diluted shares were as follows:
Shares issued and outstanding at December 31, 2012 | |
| 2,747,308 | |
Series D Preferred Stock converted to Common Stock through March 29, 2013 | |
| 2,352,250 | |
Net shares issued through March 29, 2013 | |
| 1,667,089 | |
Shares issued and outstanding at March 29, 2013 | |
| 6,776,647 | |
Series D Preferred Stock not yet converted | |
| 647,750 | |
Shares awaiting authorization for issuance | |
| 307,506 | |
Unvested executive stock awards | |
| 86,275 | |
Fully Diluted as of March 29, 2013 | |
| 7,818,178 | |
Repurchase of Shares of Common Stock
Pursuant to Settlement Agreement
On January 31, 2013, the Company entered
into a settlement agreement with an investor regarding a dispute with registration of certain shares of common stock. Pursuant
to the settlement agreement, the Company repurchased 18,824 shares of common stock in exchange for $210,000.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Changes in Registrant’s Certifying Accountant
On September 14, 2012, following a competitive
process undertaken by our audit committee in accordance with its charter, the audit committee approved the appointment of EKS&H
LLLP, effective September 14, 2012, as our independent registered public accounting firm for the fiscal year ended December 31,
2012. On September 14, 2012, EKS&H LLLP accepted the engagement.
During our fiscal year ended December 31,
2011, and the subsequent interim period prior to the engagement of EKS&H LLLP, the Company did not consult EKS&H LLLP regarding
(1) the application of accounting principles to a specific completed or contemplated transaction, (2) the type of audit opinion
that might be rendered on our financial statements, or (3) any matter that was either the subject of a “disagreement”
(as such term is described in Item 304(a)(1)(iv) of Regulation S-K) or a “reportable event” with Berman & Company,
P.A. (as such term is described in Item 304(a)(1)(v) of Regulation S-K).
On September 18, 2012, our audit committee
approved the dismissal of Berman & Company, P.A. as our independent registered public accounting firm.
Berman & Company, P.A.’s report
on the financial statements for the fiscal years ended December 31, 2011 and 2010, contained no adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that the report contained
a modification to the effect that there was substantial doubt as to the Company’s ability to continue as a going concern.
During the fiscal years ended December 31, 2011 and 2010, and through September 18, 2012, there were no “disagreements”
(as such term is described in Item 304(a)(1)(iv) of Regulation S-K) with Berman & Company, P.A. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to
the satisfaction of Berman & Company, P.A., would have caused it to make reference thereto in their reports on the consolidated
financial statements for such years.
During the fiscal years ended December
31, 2010 and 2011 and through September 18, 2012, there were no “reportable events” (as such term is defined in Item
304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures
In accordance with Rule 13a-15(b) of the
Exchange Act, our Chief Executive Officer, Chief Financial Officer and other members of management evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of December 31, 2012. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and
Chief Financial Officer concluded that some disclosure controls and procedures were ineffective as of December 31, 2012, in ensuring
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required
to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and
principal financial officers to allow timely discussion regarding required disclosure.
(b) Management’s Report on Internal
Control over Financial Reporting
The management of MusclePharm Corporation
and its subsidiary is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements of
external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations of internal
control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation
of effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2012 using criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management
determined that some of our disclosure controls and procedures were ineffective due to weaknesses in our financial closing process.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial
reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the year ended December
31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial.
Item 9B. Other Information
Not applicable
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
Directors and Executive Officers of
the Registrant
The following table sets forth certain
information as of March 29, 2013, regarding our directors and named executive officers:
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
|
|
Brad J. Pyatt |
|
32 |
|
Co-Chairman of the Board, Chief Executive Officer and President |
|
|
L. Gary Davis |
|
59 |
|
Chief Financial Officer |
|
|
John H. Bluher |
|
55 |
|
Co-Chairman of the Board and Executive Vice President – Chief Operating Officer |
|
|
Jeremy R. DeLuca |
|
34 |
|
Executive Vice President – Chief Marketing Officer |
|
|
Cory J. Gregory |
|
34 |
|
Executive Vice President |
|
|
Michael J. Doron |
|
51 |
|
Director |
|
|
James J. Greenwell |
|
53 |
|
Director |
|
|
Donald W. Prosser |
|
63 |
|
Director |
|
|
Brad J. Pyatt has served as our
Chief Executive Officer and Director since February 18, 2010 and as our President since October 2012. Prior to our acquisition
of Muscle Pharm, LLC, Mr. Pyatt was President and Chief Executive Officer of Muscle Pharm, LLC, since its inception in April 2008.
His background includes seven years of experience as a professional athlete, and more than five years of experience in the sports
nutrition arena. Mr. Pyatt played in National Football League for the Indianapolis Colts during the 2003, 2004, and 2005 NFL seasons
as well for the Miami Dolphins during the 2006 NFL season. Mr. Pyatt played in the Arena Football League for the Colorado Crush
during the 2007 and 2008 AFL seasons. Mr. Pyatt attended the University of Kentucky from 1999 to 2002, where he studied kinesiology
exercise science, as well the University of Northern Colorado, from 2002 to 2003. Mr. Pyatt filed for protection under Chapter
7 of the federal bankruptcy laws in 2008. He received a discharge relating to the matter in 2009.
L. Gary Davis has served as our
Chief Financial Officer since July 2012. From January, 2010 prior to joining us, Mr. Davis worked as a certified public accountant
for various clients, specializing in mergers and acquisitions, and has extensive experience in finance with public traded companies.
From November, 2004 to January, 2010, Mr. Davis served as Executive Vice President and Chief Financial Officer of Bodybuilding.com,
a sports, fitness and nutritional supplement on-line retail store. He previously was Vice President and Chief Financial Officer
of U.S. Ecology Corporation, and was previously a director of finance of Fortune 500 Company, Morrison-Knudsen and Vice-President
of Finance within Micron Technology. Mr. Davis has a Bachelor’s Degree in Accounting from Boise State University and worked
towards a Master’s Degree in Finance from Rochester Institute of Technology. He is a licensed certified public accountant
in multiple states.
John H. Bluher has served as our
Executive Vice President – Chief Operating Officer since September 2011 and as Co-Chairman of our board of directors since
July 2012. From February 2011 to August 2012, he served on the board of directors of Targeted Medical Pharma, Inc. From August
2010 to September 2011, he was managing director of AFH Holdings & Advisory LLC, a business consulting company. From December
2009 to August 2010, Mr. Bluher assisted in raising capital, marketing and co-managed Coachman Energy Funds at Caddis Capital,
LLC, a private equity portfolio focused on oil and gas investments. From February 2010 to August 2010, Mr. Bluher acted as investment
banker and special financial advisor to the AARP Mutual Fund Board of Trustees in a platform divestiture. From December 2007 to
May 2009, Mr. Bluher served as managing director and general counsel at Lehman Brothers, Inc.’s investment management division.
Mr. Bluher also served as global chief legal and compliance officer and managing director of Neuberger Berman during this period.
From August 2004 to June 2007, Mr. Bluher served as general counsel and director of risk and Janus Capital, Inc. From June 2002
to July 2004, Mr. Bluher served as executive vice president, general counsel and corporate secretary and director of risk management
of Knight Trading Group. From January 2001 to May 2002, Mr. Bluher served as senior vice president and global chief compliance
officer for Prudential Securities, Inc. From October 1997 to January 2001, Mr. Bluher served as general counsel and chief compliance
officer of Sun America, Inc., later AIG. From 1992 through 1997, Mr. Bluher served as Senior Vice President, Regional and Divisional
Counsel at Prudential Securities, Inc. From 1987 to 1992, Mr. Bluher was senior counsel for the Division of Enforcement at the
Securities and Exchange Commission. Mr. Bluher holds a Bachelor of Science and a J.D. degree from the University of Wyoming and
holds FINRA Series 7, Series 24 and Series 14 licenses. He has served on the boards of ICI Mutual Insurance Company, the NASDAQ
Chairman’s Advisory Board, Cherry Hills Founders Group, Inc., Safe Communications, Inc., and the University of Wyoming Foundation
Board, and College of Law Advisory Board.
Jeremy R. DeLuca has been our Senior
Vice President and Chief Marketing Officer (former President and Chief Marketing Officer) since November 2010. Prior to joining
the Company, from April 1999 to November 2010, Mr. DeLuca served as the President of Bodybuilding.com, an online sports nutrition
and supplements company, which he co-founded in 1999. There, Mr. DeLuca was actively involved in all aspects of Bodybuilding.com’s
business, with a focus on marketing, sales, and e-commerce. Mr. DeLuca’s responsibilities also included managing vendor relations,
marketing strategies, sales promotions, store content and store site development. During Mr. DeLuca’s tenure, Bodybuilding.com
experienced significant growth, achieving annual sales of over $200 million in 2010. In August 2012, Mr. DeLuca was fined $600,000
by the FDA in connection with a plea agreement on six misdemeanor counts relating to the FDA’s investigation into allegations
that Bodybuilding.com misbranded five dietary supplements. In connection with the plea, Mr. DeLuca agreed to serve three
years of probation.
Cory J. Gregory has served as an
executive officer of Muscle Pharm, LLC, since its inception in 2008 and our Senior Vice President (formerly Senior President) since
May 2010. Prior to joining us, Mr. Gregory served as President, managing member, and owner of T3 Personal Training LLC, or T3,
from April 2009 until November 2011. T3 was a personal training service that managed and oversaw over 40 clients using seven trainers
over a ten-year period. During the same period, Mr. Gregory served as President of the Ohio Natural Bodybuilding Federation, a
federation founded by Mr. Gregory in 2004 which hosted 14 bodybuilding competitions over a six-year period. He consulted for Agile
Enterprises, a nutritional supplement company from January 2006 through January 2008. In 2004, Mr. Gregory purchased the Old School
Gym, located in Pataskala, Ohio, which he continues to own at present day.
Michael J. Doron has served as a
director since November 5, 2012. He has been the Managing Director of DDR & Associates, LLC since January 2009, and Evolution
Capital Partners, LLC since October 2009. From January 2007 to December 2008, he served as Chief Operating Officer and director
of Toyshare, Inc. From February 2006 to January 2007, Mr. Doron served as Chief Operating Officer and Chief Financial Officer of
Frontgate Sundance Alliance. From September 2005 to January 2007, he served as Vice President – Private Banking of the Bank
of the West. Mr. Doron earned a BA from the University of Maryland and a Masters of Science from American University.
James J. Greenwell has served as
a director since October 15, 2012. Since 2000, he has been the Chief Executive Officer of Datria Systems Inc., a speech recognition
application software company. He has also served as the Datria Systems’ Chairman since 2002. In prior employment, he served
as a technology executive in a number of private and public companies .He has served on the Board of the Cherry Creek School Foundation
since September 2010. He was a founding member of Friends of Denver Fire and served on its Board from 2007 through 2010. Mr. Greenwell
served on the Board of the Denver Chapter of the American Heart Association from 2002 through 2008 and was Chairman of the board
in 2007. He also served on the Board of Trustees of the Bonfils Blood Center Foundation from 1999 through 2003. Mr. Greenwell earned
a BS from the College of Business at Michigan State University and an MBA degree from Saint Mary’s College.
Donald W. Prosser has served as
a director on our board of directors since July 2012 and has been the principal executive officer of Arête Industries, Inc.
since January 2011 and a director of Arête since September, 2003. Arête is a voluntary filer with the SEC under the
Securities Exchange Act of 1934. Mr. Prosser owns a certified public accounting firm, Donald W. Prosser, P.C., specializing in
tax services and accounting and has represented a number of private and public companies serving in the capacity of accountant,
member of boards of directors, and as chief financial officer. From 1997 to 1999, Mr. Prosser served as Chief Financial Officer
and Director for Chartwell International, Inc., a public company publishing high school athletic information and providing athletic
recruiting services. From 1999 to 2000, he served as Chief Financial Officer and Director for Anything Internet, Inc. and from
2000 to 2001, served as Chief Financial Officer and Director for its successor, Inform Worldwide Holdings, Inc., a publicly traded
company. From November 2002 through June 2008, Mr. Prosser served as CFO of VCG Holding Corp., a public company. From July 2008
through August 2009 Mr. Prosser was Chief Financial Officer of Iptimize, Inc., a provider of broadband and data services that filed
a petition under federal bankruptcy laws in October 2009. He also has served on the board of directors of Veracity Management Global,
Inc., a publicly traded company, since January, 2008. Mr. Prosser has been a certified public accountant since 1975. Mr. Prosser
attended the University of Colorado from 1970 to 1971 and Western State College of Colorado from 1972 to 1975, where he earned
a Bachelor’s Degree in Accounting and History (1973) and a Master’s Degree in Accounting – Income Taxation (1975).
Advisory Board
We have established an Advisory Board currently
consisting of nine members, which serves to advise management with respect to product formulations, product ideas, marketing and
related matters. Members of the Advisory Board do not meet on a formal or regular basis. Our management team consults with one
or more members of the Advisory Board as needed, from time to time, by means of meetings or telephone conference calls.
Following is a brief description of the
background of our advisory board members:
Dr. Eric Serrano –
Chief Formulator Medical Advisor. Dr. Serrano has been practicing medicine in the State of Ohio for over 22 years and is
considered one of the leading sports nutrition doctors in the country. His clients include a wide array of athletes from the NFL,
NHL, and MLB, in addition to many elite amateur athletes. Dr. Serrano was a professor of family practice medicine at Ohio State
University, where he was awarded Professor of The Year and Preceptor of The Year. Dr. Serrano currently lectures across the country
to universities, medical groups and health and fitness conferences on the topics of sports nutrition, performance enhancement,
and injury prevention. He has formulated numerous nutritional supplements for some of the leading nutritional companies on the
market and also been a contributing writer for some of the leading U.S. health and fitness magazines, including Muscle &
Fitness. Dr. Serrano has been involved in the formulations for each of our products. Dr. Serrano received his B.A. from Kansas
State University in Biology, his M.A. from Kansas State University in Exercise Physiology, and his M.D. from the University of
Kansas Medical School.
Dr. Mauro Di Pasquale – Director
of Product Development and Research. Dr. Di Pasquale brings five decades of personal, clinical and university teaching
and learning, combined with leadership gained from medical directorships of important sports organizations to us. Dr. Di Pasquale
has written over a dozen books on athletic performance, focusing mainly on diet and supplementation, most notably his books, The
Anabolic Diet and The Metabolic Diet. He has received an Honors M.D., Honors B.Sc. (majoring in genetics and molecular
biochemistry), both from the University of Toronto. He has also published 1,000 articles in magazines such as Muscle & Fitness,
Flex and Powerlifting USA.
Dr. Roscoe M. Moore, Jr.
– Chief Scientific Director. A Former U.S. Assistant Surgeon General, Dr. Moore served with the United States Department
of Health and Human Services (HHS) and was for the last 12 years of his career there the principal person responsible for global
development support within the Office of the Secretary, HHS, with primary emphasis on Continental Africa and other less developed
countries of the world. He was the principal liaison person between the HHS and Ministries of Health in Africa with regard to the
development of infrastructure and technical support for the delivery of preventive and curative health needs for the continent.
Dr. Moore received his undergraduate and Doctor of Veterinary Medicine degrees from Tuskegee Institute; his Master of Public Health
degree in Epidemiology from the University of Michigan; and his Doctor of Philosophy degree in Epidemiology from the Johns Hopkins
University. He was awarded the Doctor of Science degree (Honoris Causa) in recognition of his distinguished public health career
by Tuskegee University. Dr. Moore was a career officer within the Commissioned Corps of the United States Public Health Service
(USPHS) entering with the U.S. National Institutes of Health and rising to the rank of Assistant United States Surgeon General
(Rear Admiral, USPHS) within the Immediate Office of the Secretary, HHS. He was selected as Chief Veterinary Medical Officer, USPHS,
by Surgeon General C. Everett Koop.
Dr. Phillip Frost –
Member of MusclePharm Scientific Advisory Board. Dr. Frost has served as the CEO and Chairman of OPKO Health, Inc. since on
March 27, 2007. Dr. Frost was named the Chairman of the Board of Teva Pharmaceutical Industries, Limited, or Teva, (NYSE:TEVA)
in March 2010 and had previously been Vice Chairman since January 2006 when Teva acquired IVAX Corporation, or IVAX. Dr. Frost
had served as Chairman of the Board of Directors and Chief Executive Officer of IVAX Corporation since 1987. He was Chairman of
the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach, Florida from 1972 to 1986. Dr. Frost was
Chairman of the Board of Directors of Key Pharmaceuticals, Inc. from 1972 until the acquisition of Key Pharmaceuticals by Schering
Plough Corporation in 1986. Dr. Frost was named Chairman of the Board of Ladenburg Thalmann Financial Services Inc. (NYSE Amex:LTS),
an investment banking, asset management, and securities brokerage firm providing services through its principal operating subsidiary,
Ladenburg Thalmann & Co. Inc., in July 2006 and has been a director of Ladenburg Thalmann from 2001 until 2002 and again since
2004. Dr. Frost also serves as Chairman of the board of directors of PROLOR Biotech, Inc. (NYSE Amex: PBTH), a development stage
biopharmaceutical company. He serves as a member of the Board of Trustees of the University of Miami and as a Trustee of each of
the Scripps Research Institute, the Miami Jewish Home for the Aged, and the Mount Sinai Medical Center. Dr. Frost is also a director
of Castle Brands (NYSE Amex:ROX), a developer and marketer of premium brand spirits. Dr. Frost previously served as a director
for Continucare Corporation, Northrop Grumman Corp., Ideation Acquisition Corp., Protalix Bio Therapeutics, Inc., and SafeStitch
Medical Inc., and as Governor and Co-Vice-Chairman of the American Stock Exchange (now NYSE Amex).
Dr. Frost has successfully founded several
pharmaceutical companies and overseen the development and commercialization of a multitude of pharmaceutical products. This combined
with his experience as a physician and chairman and/or chief executive officer of large pharmaceutical companies has given him
insight into virtually every facet of the pharmaceutical business and drug development and commercialization process. He is a demonstrated
leader with keen business understanding and is uniquely positioned to help guide our Company through its transition from a development
stage company into a successful, multinational biopharmaceutical and diagnostics company.
Dr. Richard Ogden (CSCS) –
Medical Advisor. Dr. Odgen’s career in clinical research and development spans nearly 40 years. After earning a Ph.D.
from Cambridge University, his career started with postdoctoral research studying ribonucleic acid transcription and processing.
Following that, he undertook independent research, funded by the National Science Foundation. In 1984, he joined Agouron Pharmaceuticals,
Inc. as one of its founding scientists. Following Agouron’s merger with Pfizer, he served as a Senior Director and was the
scientific liaison for the Agouron/Pfizer commercial and corporate organizations. In 2006, Dr. Ogden, co-founded RORR Inc., a medical,
scientific consulting and education company with clients in the U.S. and Europe. In addition to publication in numerous medical
journals, he is co-editor of two books relating to AIDS therapy.
Dr. Michael R. Stevens –
Director of Therapeutic Nutrition. Dr. Stevens has over 20 years of well-diversified experience in the healthcare and pharmaceutical
industry. Dr. Stevens spent 17 years at Bristol-Myers Squibb, where he held positions of increasing responsibility in the areas
of Market Research (Oncology and HIV), Marketing (Oncology), and Medical Affairs (HIV). In addition served as a member of the Executive
Council for the Forum for Collaborative HIV Research — a public-private partnership facilitating discussion on emerging issues
in HIV clinical research and working to translate research results into patient care. He has also served on 15 Protocol Committees
within the Adult AIDS Clinical Trials Group (ACTG). Michael received his B.S. Pharmacy and Doctor of Pharmacy degrees from Purdue
University.
Dr. Ron Sekura – Director
of Therapeutic Research. Dr. Sekura is the former Chief of the Pharmaceutical and Regulatory Affairs Branch of the Division
of AIDS at The National Institute of Allergy and Infectious Diseases (NIAID) of the National Institute of Health (NIH) as well
as a former Research Chemist at The National Institutes of Child Health and Human Development (NICHD) at the NIH and the Center
for Biologics Evaluation and Research (CBER). He received his Bachelor of Science and Master of Science in Biochemistry degrees
at Pennsylvania State University and his PhD at Cornell University. Dr. Sekura is the author of over 60 scientific publications.
Mariel Selbovitz –
Director of Global Therapeutics Product Procurement Development. Ms. Selbovitz is a graduate of Cornell University and received
her Master’s in Public Health at the Johns Hopkins University Bloomberg School of Health. She worked as the Client Intake
Specialist at Positive Health Project and Syringe Exchange Program Coordinator at the Foundation for Research on Sexually Transmitted
Diseases and is a partner in BioEquity Partners. Selbovitz is a member of the Cornell AIDS Clinical Trials Group Community Advisory
Board and AIDS Treatment Advocacy Coalition.
James Sapirstein, R.Ph., MBA
– Strategic Advisor. Mr. Sapirstein has been the Chief Executive Officer of Alliqua Inc. since October 2012. He was the
President and Chief Executive Officer of Tobira Therapeutics, Inc., or Tobira, from August 2007 through April 2011 and founded
Tobira in October 2006. Prior to Tobira, Mr. Sapirstein worked at Paramount BioCapital from May 2005 to September 2006 in the company
creation group. Mr. Sapirstein was the Executive Vice President of the Metabolic and Endocrinology Business Unit from 2002 through
April 2005. Mr. Sapirstein was the Director of Global Marketing at Gilead Sciences from July 2000 through May 2002, where he was
responsible for the global launch of Viread®. He was the head of the international infectious disease marketing
teams during his time at Bristol-Myers Squibb from August 1996 to July 2000. Mr. Sapirstein was with Hoffmann-LaRoche from October
1987 to July 1996, where he worked in a variety of capacities ranging from marketing and sales positions to international posts.
Prior to working at Hoffmann LaRoche, he worked at Eli Lilly and Company in a sales capacity from June 1984 to October 1987. Mr.
Sapirstein earned his Bachelor of Science in Pharmacy from the Ernest Mario School of Pharmacy at Rutgers University and an MBA
from Farleigh Dickinson University.
Michael Kim, D.O. – Executive
Director of Medicine, Research and Education. Dr. Kim has been our Executive Director of Medicine, Research and Education since
August 2011. He oversees our research. He analyzes formulations, research protocols and strength and performance protocols. He
also advises our athlete endorsers regarding nutrient, diet and supplementation. He received a B.A. in Economics from University
of California – Davis, and a Doctor of Osteopathy degree from Touro University.
Corporate Governance
Director Independence
Each director and named executive officer
is obligated to disclose, on an annual basis, any transactions with our Company and any of its subsidiaries in which a director
or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Following completion
of these disclosures, our board of directors make a determination as to the independence of each director using the current standards
for “independence” that satisfy both the criteria for the NASDAQ Stock Market and the NYSE MKT.
As of November 5, 2012, our board of directors
conducted an annual review and affirmatively determined that Messrs. Doron, Greenwell and Prosser are “independent”
as that term is defined in the NASDAQ listing standards.
Committees and Meetings of the Board
During 2012, our board of directors held
nine meetings. Each director attended at least 75% of the meetings (held during the period that such director served) of the Board
and the committees on which such director served in 2012.
In addition, the board acts from time to
time by unanimous written consent in lieu of holding a meeting. During 2012, the board effected several actions by unanimous written
consent. Members of our board are encouraged to attend our annual meeting of shareholders.
The following table sets forth the three
standing committees of our board and the members of each committee and the number of meetings held by our board and the committees
during 2012:
Director |
|
Board |
|
Audit Committee |
|
Compensation Committee |
|
Nominating and Corporate Governance Committee |
Brad J. Pyatt |
|
Co-Chair |
|
|
|
|
|
|
John H. Bluher |
|
Co-Chair |
|
|
|
|
|
|
Michael J. Doron |
|
X |
|
X |
|
X |
|
Chair |
James J. Greenwell |
|
X |
|
X |
|
Chair |
|
X |
Donald W. Prosser |
|
X |
|
Chair* |
|
X |
|
X |
Cory J. Gregory (1) |
|
X |
|
|
|
|
|
|
Mark E. Groussman (2) |
|
X |
|
X |
|
X |
|
X |
Gordon G. Burr (3) |
|
X |
|
X |
|
X |
|
X |
Meetings in 2012: |
|
9 |
|
2 |
|
3 |
|
1 |
| * | Audit Committee Financial Expert. |
(1) |
Mr. Gregory resigned from the board of directors on July 19, 2012. |
(2) |
Mr. Groussman resigned from the board of directors on October 18, 2012. |
(3) |
Mr. Burr resigned from the board of directors on November 5, 2012 |
To assist it in carrying out its duties,
the board has delegated certain authority to an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance
Committee as the functions of each are described below.
Audit Committee
Messrs. Doron, Greenwell and Prosser serve
on our Audit Committee. Our Audit Committee’s main function is to oversee our accounting and financial reporting processes,
internal systems of control, independent auditor relationships and the audits of our financial statements. The Audit Committee’s
responsibilities include:
| · | selecting, hiring, and compensating our independent auditors; |
| · | evaluating the qualifications, independence and performance
of our independent auditors; |
| · | overseeing and monitoring the integrity of our financial
statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; |
| · | approving the audit and non-audit services to be performed
by our independent auditor; |
| · | reviewing with the independent auditor the design, implementation,
adequacy and effectiveness of our internal controls and our critical accounting policies; and |
| · | preparing the report that the SEC requires in our annual
proxy statement. |
The board of directors has adopted an Audit
Committee Charter. The Audit Committee members meet NASDAQ’s financial literacy requirements, and the board has further determined
that Mr. Prosser (i) is an “audit committee financial expert” as such term is defined in Item 407(d)
of Regulation S-K promulgated by the SEC and (ii) also meets NASDAQ’s financial sophistication requirements.
Compensation Committee
Messrs. Doron, Greenwell and Prosser serve
on the Compensation Committee. Our Compensation Committee’s main functions are assisting our board of directors in discharging
its responsibilities relating to the compensation of outside directors, the Chief Executive Officer and other executive officers,
as well as administering any stock incentive plans we may adopt. The Compensation Committee’s responsibilities include the
following:
| · | reviewing and recommending to our board of directors the
compensation of our Chief Executive Officer and other executive officers, and the outside directors; |
| · | conducting a performance review of our Chief Executive
Officer; |
| · | reviewing our compensation policies; and |
| · | if required, preparing the report of the Compensation Committee
for inclusion in our annual proxy statement. |
The board of directors has adopted a Compensation
Committee Charter.
The Compensation Committee’s policy
is to offer our executive officers competitive compensation packages that will permit us to attract and retain highly qualified
individuals and to motivate and reward these individuals in an appropriate fashion aligned with the long-term interests of our
Company and our stockholders.
Compensation Committee Risk Assessment.
We have assessed our compensation programs and concluded that our compensation practices do not create risks that are reasonably
likely to have a material adverse effect on us.
Nominating and Corporate Governance
Committee
Messrs. Doron, Greenwell and Prosser serve
on our Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee’s responsibilities
include:
| · | identify qualified individuals to serve as members of the
Company’s board of directors; |
| · | review the qualifications and performance of incumbent
directors; |
| · | review and consider candidates who may be suggested by
any director or executive officer or by any stockholder of the Company; |
| · | review considerations relating to board composition, including
size of the board, term and age limits, and the criteria for membership on the board; |
| · | review periodically the management succession plan of; |
| · | review and recommend corporate governance policies; and |
| · | monitor, oversee and review compliance with the Company’s
code of ethics. |
The board of directors has adopted a Nominating
and Corporate Governance Committee Charter.
Corporate Governance Materials
The full text of the charters of our Audit,
Nominating and Corporate Governance, and Compensation Committees and our Business Conduct and Code of Ethics can be found at www.musclepharm.com.
Copies of these documents also may be obtained from our Corporate Secretary.
Board of Directors Diversity
The board does not have a formal diversity
policy. The board considers candidates that will make the board as a whole reflective of a range of talents, skills, diversity
and expertise.
Code of Ethics
Our board of directors has adopted a Code
of Ethics (“Code of Ethics”), which provides general statements of our expectations regarding ethical standards that
we expect our directors, officers and employees to adhere to while acting on our behalf. Among other things, the Code of Ethics
provides that:
| · | We will comply with all laws, rules and regulations; |
| · | Our directors, officers, and employees are to avoid conflicts
of interest and are prohibited from competing with the Company or personally exploiting our corporate opportunities; |
| · | Our directors, officers, and employees are to protect our
assets and maintain our confidentiality; |
| · | We are committed to promoting values of integrity and fair
dealing; and |
| · | We are committed to accurately maintaining our accounting
records under generally accepted accounting principles and timely filing our periodic reports and tax returns. |
Our Code of Ethics also contains procedures
for employees to report, anonymously or otherwise, violations of the Code of Ethics.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Exchange Act, requires
the Company’s directors and named executive officers, and persons who beneficially own more than ten percent of our common
stock, to file initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities
with the SEC. As a practical matter, the Company assists its directors and officers by monitoring transactions and completing and
filing Section 16 reports on their behalf. Based solely on a review of the copies of such forms in our possession and on written
representations from reporting persons, we believe that during 2012 all of our named executive officers and directors filed the
required reports on a timely basis under Section 16(a) of the Exchange Act, except that one Form 3 was filed for Mr. Burr on November
9, 2012 with respect to becoming a director on July 19, 2012; one Form 4 was filed for Mr. Burr on November 9, 2012 with respect
to transactions occurring on September 17, 2012 one Form 4 was filed for Mr. Bluher on November 20, 2012 with respect to transactions
occurring on August 15, 2012; and one Form 4 was filed for Mr. Bluher on November 20, 2012 with respect to transactions occurring
on September 26, 2012.
Item 11. Executive Compensation
Summary Compensation Table for 2012
(as amended)
The following summary compensation tables
sets forth all compensation awarded to, earned by, or paid to each person serving as a named executive officer of the Company during
the year ended December 31, 2012.
| |
| | |
| | |
| | |
| | |
| | |
As Amended | | |
As Amended | |
Name and Principal Position | |
Year | | |
Salary
($) | | |
Bonus ($) | | |
Stock Awards (1)
($) | | |
Option Awards (1)
($) | | |
All Other
Compensation ($) | | |
Total ($) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Brad J. Pyatt | |
| 2012 | | |
| 322,022 | | |
| 160,000 | (14) | |
| - | | |
| - | | |
| 105,984 | (11) | |
| 588,006 | |
Chief Executive Officer and President | |
| 2011 | | |
| 250,000 | | |
| 140,099
| (2) | |
| 1,555,921 | (2)
(3) | |
| - | | |
| 66,000 | (12) | |
| 2,012,020 | |
| |
| 2010 | | |
| 194,821 | | |
| - | | |
| 2,650,000 | (4) | |
| - | | |
| 25,700 | (13) | |
| 2,870,521 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
L. Gary Davis | |
| 2012 | | |
| 65,000 | | |
| 75,000 | | |
| 204,500 | (5) | |
| - | | |
| 390 | (11) | |
| 344,890 | |
Chief Financial Officer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
John H. Bluher | |
| 2012 | | |
| 182,292 | | |
| 130,000 | | |
| 245,400 | (5) | |
| - | | |
| 13,300 | (11) | |
| 570,992 | |
Executive Vice President and COO | |
| 2011 | | |
| 36,458 | | |
| 50,000 | | |
| - | | |
| - | | |
| 965 | (12) | |
| 87,423 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jeremy R. DeLuca | |
| 2012 | | |
| 187,500 | | |
| 130,000 | | |
| - | | |
| - | | |
| 60,331 | (11) | |
| 352,399 | |
Executive Vice President and CMO | |
| 2011 | | |
| 65,833 | | |
| 140,099 | (6) | |
| 1,555,921 | (7) | |
| - | | |
| 19,277 | (12) | |
| 1,781,130 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cory J. Gregory | |
| 2012 | | |
| 201,796 | | |
| 130,000 | | |
| - | | |
| - | | |
| 43,190 | (11) | |
| 374,986 | |
Executive Vice President | |
| 2011 | | |
| 150,000 | | |
| 140,099 | (8) | |
| 1,555,921 | (8)
(9) | |
| - | | |
| 38,615 | (12) | |
| 1,884,536 | |
| |
| 2010 | | |
| 78,892 | | |
| - | | |
| 2,650,000 | (10) | |
| - | | |
| 8,759 | (13) | |
| 2,737,651 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Larry S. Meer(14) | |
| 2012 | | |
| 120,000 | | |
| 31,797 | | |
| - | | |
| - | | |
| 6,146 | (11) | |
| 157,943 | |
Chief Financial Officer and Treasurer | |
| 2011 | | |
| 74,400 | | |
| - | | |
| - | | |
| - | | |
| 15,661 | (12) | |
| 90,061 | |
(former) | |
| 2010 | | |
| 75,493 | | |
| - | | |
| 228,000 | (10) | |
| - | | |
| 300 | (13) | |
| 303,793 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Leonard Armenta(14) | |
| 2012 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Chief Operating Officer (former) | |
| 2011 | | |
| 86,400 | | |
| - | | |
| - | | |
| - | | |
| 19,877 | (12) | |
| 106,277 | |
| |
| 2010 | | |
| 83,215 | | |
| - | | |
| 228,000 | (10) | |
| - | | |
| 1,800
| (13) | |
| 313,015 | |
| (1) | Amounts reflect the aggregate grant date fair value of
stock awards computed in accordance with FASB ASC Topic 718. The grant date fair value of each stock award is measured based on
the closing price of our common stock on the date of grant. |
| (2) | Reflects the amount returned to the Company in July 2012
as a result of restated revenues for the years ended December 31, 2011 and 2010. Mr. Pyatt voluntarily returned (i) $30,311 of
his cash bonus and (ii) $303,109 worth of his stock bonus (equal to a total of 31,009 shares of common stock). |
| (3) | Mr. Pyatt received a stock award of $1,704,104, equal
to 174,333 shares of common stock, at a price per share of $9.78, which was the closing price of our common stock on February
1, 2012, the date of grant. |
| (4) | Mr. Pyatt received a stock award of 5,883 shares of common
stock at a price per share of $450.45, which was the closing price of our common stock on October 18, 2010, the date of grant. |
| (5) | Reflects the full grant date fair value of restricted
stock unit award granted in 2012 calculated in accordance with FASB ASC Topic 718 based on the closing price of the common stock
of $3.48 and $9.61 (after adjustment for the reverse split of 1-for-850) on the date of grant. |
| (6) | Reflects the amount returned to the Company in July 2012
as a result of restated revenues for the years ended December 31, 2011 and 2010. Mr. DeLuca voluntarily returned (i) $30,311 of
his cash bonus (which had not yet been paid to him) and (ii) $303,109 worth of his stock bonus (equal to a total of 31,009 shares
of common stock). |
| (7) | Mr. DeLuca received a stock award of $1,704,104, equal
to 174,333 shares of common stock, at a price per share of $9.78, which was the closing price of our common stock on February
1, 2012, the date of grant. |
| (8) | Reflects the amount returned to the Company in July 2012
as a result of restated revenues for the years ended December 31, 2011 and 2010. Mr. Gregory voluntarily returned (i) $30,311
of his cash bonus and (ii) $303,109 worth of his stock bonus (equal to a total of 31,009 shares of common stock). |
| (9) | Mr. Gregory received a stock award of $1,704,104, equal
to 174,333 shares of common stock, at a price per share of $9.78, which was the closing price of our common stock on February
1, 2012, the date of grant. |
| (10) | Mr. Gregory received a stock award of 5,883 shares of
common stock at a price per share of $450.45, which was the closing price of our common stock on October 18, 2010, the date of
grant. |
| (11) | Amounts under "All Other Compensation" for 2012
include the following Company 401(k) matching contributions, life insurance premiums paid by the Company on behalf of the executive
officers and perquisites: |
| |
Pyatt ($) | | |
Davis ($) | | |
Bluher ($) | | |
Deluca ($) | | |
Gregory ($) | | |
Meer ($) | |
Company 401(k) Matching Contributions | |
| 10,667 | | |
| - | | |
| 6,683 | | |
| 5,750 | | |
| 1,333 | | |
| 2,700 | |
Apparel and Products (a) | |
| 609 | | |
| 300 | | |
| 300 | | |
| 300 | | |
| 1,356 | | |
| 300 | |
Automobile Expenses (b) | |
| 2,187 | | |
| - | | |
| - | | |
| 6,250 | | |
| 4,982 | | |
| 165 | |
Club Fees and Expenses (c) | |
| 54,595 | | |
| - | | |
| - | | |
| 9,377 | | |
| 852 | | |
| - | |
Healthcare Costs (d) | |
| 80 | | |
| - | | |
| - | | |
| - | | |
| 1,050 | | |
| - | |
Life Insurance Premiums | |
| 360 | | |
| 90 | | |
| 180 | | |
| 180 | | |
| 180 | | |
| 360 | |
Meals and Entertainment (e) | |
| 3,915 | | |
| - | | |
| - | | |
| 6,925 | | |
| 6,059 | | |
| - | |
Phone (f) | |
| - | | |
| - | | |
| 3,695 | | |
| 3,125 | | |
| - | | |
| - | |
Retreat Attendance (g) | |
| 5,031 | | |
| - | | |
| 2,442 | | |
| 6,261 | | |
| 5,650 | | |
| 2,621 | |
Personal Travel (h) | |
| 13,015 | | |
| - | | |
| - | | |
| 22,163 | | |
| 21,728 | | |
| - | |
Miscellaneous (i) | |
| 15,525 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
TOTAL | |
| 105,984 | | |
| 390 | | |
| 13,300 | | |
| 60,331 | | |
| 43,190 | | |
| 6,146 | |
(a) These
amounts include payments by the Company for apparel and Company and competitor products for the executive officers. The Company
provides the executives with Company and competitor products at Company expense for purposes of evaluation and comparison.
(b) We
provided an automobile allowance for Mr. Deluca and Mr. Gregory and the use of a Company car for Mr. Pyatt. For the Company car
provided to Mr. Pyatt, the Company insures the car under its insurance programs, pays all registration, license, taxes and other
fees on the car, pays for all repairs and reimburses Mr. Pyatt for all gas and maintenance costs on the car. The amount disclosed
for Mr. Pyatt represents that portion of the total annual cost to the Company for the automobile provided to Mr. Pyatt attributable
to his personal use.
(c) Represents
payments for club memberships for Mr. Pyatt, Mr. Deluca and Mr. Gregory, including monthly dues, initiation costs, golf guest
fees, meals and entertainment costs at the clubs and other personal expenses incurred by the executive officers at the clubs,
including apparel. The $54,595 paid on behalf of Mr. Pyatt for 2012 represents a $28,500 initiation fee, $7,620 in monthly dues,
$12,550 in meals and entertainment expenses incurred at the clubs, $2,335 in guest fees for golf, and $3,590 in miscellaneous
club charges, including apparel, golf equipment and other miscellaneous charges. The $9,377 paid on behalf of Mr. Deluca for 2012
represents $3,876 in annual dues and $5,501 in meals, entertainment, guest fees and other miscellaneous charges. Of the meals,
guest fees, apparel, equipment and entertainment expenses paid for on behalf of Mr. Pyatt and Mr. Deluca, the Company believes
a portion of those expenses represented business-related expenditures. However, because of our inability to quantify with certainty
the portion of these expenses that were for personal use, we have included all of such expenses paid by the Company as perquisites
in the table.
(d) Represents
payment of medical expenses by the Company for the executive officer or his family.
(e) Represents
meals, entertainment, event tickets and other incidental expenses (such as parking) paid in connection with the executive officers'
or his spouse's participation in community and business entertainment functions. The Company believes a portion of these expenses
represented business-related expenditures. However, because of our inability to quantify with certainty the portion of these expenses
that were for personal use, we have included all of such expenses paid by the Company for which we cannot verify a business purpose
as perquisites in the table. Because of the sports-oriented nature of the business, it is important for executives to attend a
wide variety of sporting events. In addition to events for which we purchase tickets to facilitate attendance by our executives
and their spouses, we also provide our executives and/or their spouses with event tickets that are provided to the Company [free
of charge] through its various sponsorship relationships in order to facilitate the Company’s business interests and the
executives' role as Company representatives at events related to the Company's business and sponsorship and athlete relationships.
There is typically no incremental cost to the Company of providing these tickets. Where there was an incremental cost to the Company
of the executive's or the spouse's attendance, we have included the cost of such tickets in this total.
Because
of the sports-oriented nature of the Company’s business, the Company maintains a fully-functioning gym at several of its
locations and provides use of the gym free of charge for any and all employees, including the executives. Although use of the
Company's gym facilities is a perquisite, there is no incremental cost to the Company of providing this gym access to the executives,
and thus no amounts are included in relation to such gym facilities.
(f) Represents
payments for cellular phone monthly fees and usage costs and the cost of replacement cellular phones.
(g) Spouses
were invited to attend a Board of Directors and executive retreat in Cabo San Lucas, Mexico. These
amounts include airfare for spouses, hotel expenses for extra nights stayed by the executives following the retreat, meals and
entertainment expenses during the retreat for the executives and their family members, and leisure activities during the retreat
for the executives and their spouses (including golf and spa expenses). The cost of air travel attributed to each executive's
spouse was calculated based on the price per airline ticket (for commercial air travel) or based on the total cost of the aircraft
charter (divided by the total number of passengers) for charter air travel.
(h) During
2012 we made numerous payments on behalf of the executive officers for travel for which we cannot verify a business purpose. Because
of our inability to quantify with certainty the portion of these travel expenses that were for personal use, we have included
all such travel expenses paid by the Company for which we cannot verify a business purpose as perquisites in the table. These
amounts include airfare for the executive and/or his spouse and family, cost for airline upgrades, hotel expenses, meals, entertainment
and leisure activities for the executive and/or his spouse and luggage charges during trips taken during 2012. The cost of air
travel for the executive and/or his spouse (and, for Mr. Pyatt, his children) was calculated based on the price per airline ticket
(for commercial travel) or based on the total cost of the aircraft charter for charter air travel.
(i) This
amount represents a cash withdrawal from an ATM using a Company credit card during two trips taken by Mr. Pyatt during 2012. While
the amounts withdrawn by Mr. Pyatt were used by Mr. Pyatt for business meal and entertainment purposes during those trips, because
of our inability to substantiate the use of these funds for business purposes, we have included all of such amounts as perquisites
in the table.
| (12) | Amounts under "All Other Compensation" for 2011
include the following life insurance premiums paid by the Company on behalf of the executive officers and perquisites: |
| |
Pyatt ($) | | |
Meer ($) | | |
Armenta ($) | | |
Gregory ($) | | |
Deluca ($) | | |
Bluher ($) | |
Apparel and Products (a) | |
| 4,226 | | |
| 800 | | |
| 1032 | | |
| 748 | | |
| 300 | | |
| 300 | |
Automobile Expenses (b) | |
| 11,935 | | |
| 12,000 | | |
| - | | |
| 1,786 | | |
| 750 | | |
| - | |
Club Fees and Expenses (c) | |
| 17,188 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Health Expenses (d) | |
| 3,378 | | |
| 462 | | |
| - | | |
| 11,890 | | |
| - | | |
| - | |
Life Insurance Premiums | |
| 360 | | |
| 360 | | |
| 360 | | |
| 180 | | |
| 180 | | |
| 180 | |
Meals and Entertainment (e) | |
| 6,342 | | |
| - | | |
| - | | |
| 675 | | |
| 1,125 | | |
| - | |
Personal Travel (f) | |
| 10,401 | | |
| - | | |
| - | | |
| 18,657 | | |
| 16,062 | | |
| - | |
Phone (g) | |
| - | | |
| 1,554 | | |
| - | | |
| 1,314 | | |
| 375 | | |
| - | |
Professional Fees (h) | |
| 8,000 | | |
| - | | |
| - | | |
| 1,000 | | |
| - | | |
| - | |
Severance (i) | |
| - | | |
| - | | |
| 18,000 | | |
| - | | |
| - | | |
| - | |
Gifts (j) | |
| 485 | | |
| 485 | | |
| 485 | | |
| 2,365 | | |
| 485 | | |
| 485 | |
Miscellaneous (k) | |
| 3,685 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
TOTAL | |
| 66,000 | | |
| 15,661 | | |
| 19,877 | | |
| 38,615 | | |
| 19,277 | | |
| 965 | |
(a) These
amounts include payments by the Company for apparel and Company and competitor products for the executive officers. The Company
provides the executives with Company and competitor products at Company expense for purposes of evaluation and comparison. For
Mr. Pyatt, the amount includes payments by the Company for apparel and jewelry.
(b) We
provided an automobile allowance for Mr. Meer, Mr. Gregory and Mr. Deluca and the use of a Company car for Mr. Pyatt. For the
Company car provided to Mr. Pyatt, the Company insures the car under its insurance programs, pays all registration, license, taxes
and other fees on the car, pays for all repairs and reimburses Mr. Pyatt for all gas and maintenance costs on the car. The amount
disclosed for Mr. Pyatt represents that portion of the total annual cost to the Company for the automobile provided to Mr. Pyatt
attributable to his personal use. For 2011, this amount also includes towing expenses.
(c) Represents
payments for club memberships for Mr. Pyatt, including monthly dues, golf guest fees, meals and entertainment costs at the clubs
and other personal expenses incurred by him at the clubs, including apparel. The $17,188 paid on behalf of Mr. Pyatt for 2011
represents $4,071 in monthly dues, $8,015 in meals and entertainment expenses incurred at the club, $2,780 in guest fees for golf,
and $2,322 in miscellaneous club charges, including apparel, golf equipment and other miscellaneous charges. Of the meals, guest
fees and entertainment expenses paid for on behalf of Mr. Pyatt, the Company believes a portion of those expenses represented
business-related expenditures. However, because of our inability to quantify with certainty the portion of these expenses that
were for personal use, we have included all of such expenses paid by the Company as perquisites in the table.
(d) Represents
the payment of medical expenses. For Mr. Gregory, this represents payments for family related surgery costs.
(e) Represents
meals, entertainment, event tickets and other incidental expenses (such as parking) paid in connection with the executive officers'
or his spouse's participation in community and business entertainment functions. The Company believes a portion of these expenses
represented business-related expenditures. However, because of our inability to quantify with certainty the portion of these expenses
that were for personal use, we have included all of such expenses paid by the Company for which we cannot verify a business purpose
as perquisites in the table. Because of the sports-oriented nature of the business, it is important for executives to attend a
wide variety of sporting events. In addition to events for which we purchase tickets to facilitate attendance by our executives
and their spouses, we also provide our executives and/or their spouses with event tickets that are provided to the Company [free
of charge] through its various sponsorship relationships in order to facilitate the Company’s business interests and the
executives' role as Company representatives at events related to the Company's business and sponsorship and athlete relationships.
There is typically no incremental cost to the Company of providing these tickets. Where there was an incremental cost to the Company
of the executive's or the spouse's attendance, we have included the cost of such tickets in this total.
Because
of the sports-oriented nature of the Company’s business, the Company maintains a fully-functioning gym at several of its
locations and provides use of the gym free of charge for any and all employees, including the executives. Although use of the
Company's gym facilities is a perquisite, there is no incremental cost to the Company of providing this gym access to the executives,
and thus no amounts are included in relation to such gym facilities.
(f) During
2011 we made numerous payments on behalf of the executive officers for travel for which we cannot verify a business purpose. Because
of our inability to quantify with certainty the portion of these travel expenses that were for personal use, we have included
all such travel expenses paid by the Company for which we cannot verify a business purpose as perquisites in the table. These
amounts include airfare for the executive and/or his spouse, cost for airline upgrades, hotel expenses, meals, entertainment and
leisure activities for the executive and/or his spouse and luggage charges during trips taken during 2011. The cost of air travel
was calculated based on the price per airline ticket and all air travel was on commercial airlines.
(g) Represents
payments for cellular phone monthly fees and usage costs for the executive and cost of replacement cellular phones.
(h) Represents
payment by the Company of amounts for personal financial planning and tax preparation for Mr. Gregory. For Mr. Pyatt, represents
payment by the Company of amounts for personal financial planning and tax preparation ($5,000) and personal legal representation
($3,000)
(i) Represents
severance payable to Mr. Armenta in connection with his termination of employment in September of 2011, which severance was paid
over the six month period following his termination.
(j) Represents
the value of an iPad given to the executives by the Company and, with respect to Mr. Gregory, the value of golf and computer equipment
purchased by the Company for him.
(k) Represents
numerous payments that appear to be expenditures for which we cannot verify a business purpose. These payments include furniture,
luggage and a parking ticket paid by the Company for personal use.
| (13) | Amounts under "All Other Compensation" for 2010
include the following perquisites: |
| |
Pyatt ($) | | |
Armenta ($) | | |
Gregory ($) | | |
Meer ($) | |
Apparel and Products (a) | |
| 733 | | |
| 300 | | |
| 300 | | |
| 300 | |
Automobile Expenses (b) | |
| 5,318 | | |
| - | | |
| - | | |
| - | |
Club Fees and Expenses (c) | |
| 14,404 | | |
| - | | |
| - | | |
| - | |
Healthcare Costs (d) | |
| - | | |
| - | | |
| 882 | | |
| - | |
Meals and Entertainment (e) | |
| 512 | | |
| - | | |
| 225 | | |
| - | |
Personal Travel (f) | |
| 2,483 | | |
| - | | |
| 6,696 | | |
| - | |
Professional Fees (g) | |
| 2,250 | | |
| - | | |
| - | | |
| - | |
Home Office Equipment (h) | |
| - | | |
| 1,500 | | |
| - | | |
| - | |
Miscellaneous (i) | |
| - | | |
| - | | |
| 656 | | |
| - | |
TOTAL | |
| 25,700 | | |
| 1,800 | | |
| 8,759 | | |
| 300 | |
(a) These
amounts include payments by the Company for apparel and Company and competitor products for the executive officers. The Company
provides the executives with Company and competitor products at Company expense for purposes of evaluation and comparison.
(b) We
provide the use of a Company car for Mr. Pyatt. For the Company car provided to Mr. Pyatt, the Company insures the car under its
insurance programs, pays all registration, license, taxes and other fees on the car, pays for all repairs and reimburses Mr. Pyatt
for all gas and maintenance costs on the car. The amount disclosed for Mr. Pyatt represents that portion of the total annual cost
to the Company for the automobile provided to Mr. Pyatt attributable to his personal use. For 2010, this amount also includes
towing expenses.
(c) Represents
payments for club memberships for the named executive officer, including monthly dues, golf guest fees, meals and entertainment
costs at the clubs and other personal expenses incurred by him at the clubs, including apparel. The $14,404 paid on behalf of
Mr. Pyatt for 2010 represents $4,072 in monthly dues, $8,377 in meals and entertainment expenses incurred at the clubs, $555 in
guest fees for golf, and $1,400 in miscellaneous club charges, including apparel, golf equipment and other miscellaneous charges.
Of the meals, guest fees and entertainment expenses paid for on behalf of Mr. Pyatt, the Company believes a portion of those expenses
represented business-related expenditures. However, because of our inability to quantify with certainty the portion of these expenses
that were for personal use, we have included all of such expenses paid by the Company as perquisites in the table.
(d) Represents
payment of medical expenses by the Company for the named executive officer or his family.
(e) Represents
meals, entertainment, event tickets and other incidental expenses (such as parking) paid in connection with the executive officers'
or his spouse's participation in community and business entertainment functions. The Company believes a portion of these expenses
represented business-related expenditures. However, because of our inability to quantify with certainty the portion of these expenses
that were for personal use, we have included all of such expenses paid by the Company for which we cannot verify a business purpose
as perquisites in the table. Because of the sports-oriented nature of the business, it is important for executives to attend a
wide variety of sporting events. In addition to events for which we purchase tickets to facilitate attendance by our executives
and their spouses, we also provide our executives and/or their spouses with event tickets that are provided to the Company [free
of charge] through its various sponsorship relationships in order to facilitate the Company’s business interests and the
executives' role as Company representatives at events related to the Company's business and sponsorship and athlete relationships.
There is typically no incremental cost to the Company of providing these tickets. Where there was an incremental cost to the Company
of the executive's or the spouse's attendance, we have included the cost of such tickets in this total.
Because
of the sports-oriented nature of the Company’s business, the Company maintains a fully-functioning gym at several of its
locations and provides use of the gym free of charge for any and all employees, including the executives. Although use of the
Company's gym facilities is a perquisite, there is no incremental cost to the Company of providing this gym access to the executives,
and thus no amounts are included in relation to such gym facilities.
(f) During
2010 we made numerous payments on behalf of the executive officers for travel for which we cannot verify a business purpose. Because
of our inability to quantify with certainty the portion of these travel expenses that were for personal use, we have included
all such travel expenses for which we cannot verify a business purpose as perquisites in the table. These amounts include airfare
for the executive and/or his spouse, cost for airline upgrades, hotel expenses, meals, entertainment and leisure activities for
the executive and/or his spouse and luggage charges during trips taken during 2010. The cost of air travel was calculated based
on the price per airline ticket and all air travel was on commercial airlines.
(g) This
amount represents payments by the Company for personal financial planning and tax preparation.
(h) This
amount represents home office equipment purchased for the executive by the Company.
(i) This
amount represents the payment by the Company of finance charges and late fees due by the executive under his personal credit card.
| (14) | Included in the $160,000 bonus for Mr. Pyatt is $9,696
that was previously recorded as an Other Receivable. |
Outstanding Equity Awards at Year End
The following table provides information
concerning the holdings of stock option and restricted stock unit awards by our named executive officers as of December 31, 2012.
This table includes unexercised (both vested and unvested) stock option awards and unvested restricted stock unit awards with vesting
conditions that were not satisfied as of December 31, 2012. Each equity grant is shown separately for each named executive officer.
The vesting schedule for each outstanding equity award is shown in the footnotes following this table.
Outstanding Equity Awards at Year End
| |
| | |
Option Awards | | |
Stock Awards | |
Name | |
Grant Date | | |
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | |
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | |
Option
Exercise
Price ($) | | |
Option
Expiration
Date | | |
Number
of
Shares or Units
of Stock that
Have Not
Vested (1)
(#) | | |
Market
Value of
Shares or Units
of Stock that
Have Not
Vested (2)
($) | |
Brad J. Pyatt | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
L. Gary Davis | |
| 11/16/2012 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 58,824 | | |
| 250,002 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
John H. Bluher | |
| 11/16/2012 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 70,589 | | |
| 300,003 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jeremy R. DeLuca | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cory J. Gregory | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| (1) | The table below shows the
vesting dates for the respective unvested restricted stock units listed in the above Outstanding Equity Awards at Year-End for
2012 Table: |
Vesting Date | |
Mr. Davis | | |
Mr. Bluher | |
01/01/2013 | |
| 19,608 | | |
| 23,530 | |
01/01/2014 | |
| 19,608 | | |
| 23,530 | |
12/01/2014 | |
| 19,608 | | |
| 23,529 | |
| (2) | Market value of the restricted
stock units represents the product of the closing price of our common stock as of December 31, 2012 (the last trading day of the
year), which was $4.25, and the number of shares underlying each such award. |
Employment Arrangements
On October 18, 2012, and amended on January
4, 2013 to reduce the base salary of each executive officer at the request of such executive officer, the Company entered into
amended and restated employment agreements (except for Mr. Davis, which was an initial employment agreement) with the following
executive officers of the Company, which include its principal executive officer, principal financial officer and other named executive
officers:
Name |
|
Position |
|
|
|
Brad J. Pyatt |
|
Chief Executive Officer and President |
L. Gary Davis |
|
Chief Financial Officer |
John H. Bluher |
|
Executive Vice President – Chief Operating Officer |
Jeremy R. DeLuca |
|
Executive Vice President – Chief Marketing Officer |
Cory J. Gregory |
|
Executive Vice President |
The employment agreements were executed
based upon a form employment agreement approved by the Compensation Committee of the board. The employment agreements are for an
initial term ending December 31, 2014. However, the employment agreements entered into with Mr. Pyatt and Mr. DeLuca provide for
an initial term ending December 31, 2015.
Under the terms of the employment agreements,
each officer will receive an annual base salary in the amount set forth below, subject to any increase the Compensation Committee
may deem appropriate from time to time.
Name | |
Annual Base Salary | |
| |
| |
Brad J. Pyatt | |
$ | 250,000 | |
L. Gary Davis | |
$ | 130,000 | |
John H. Bluher | |
$ | 200,000 | |
Jeremy R. DeLuca | |
$ | 225,000 | |
Cory J. Gregory | |
$ | 130,000 | |
In addition, the officers will be eligible
to receive one or more annual cash bonuses and grants of stock options, restricted stock or other equity-related awards from the
Company’s various equity compensation plans, as determined by the Compensation Committee.
If the employment of an officer is terminated
due to the officer’s death or inability to perform, the employment agreements provide for payment to the officer of any unpaid
portion of the Officer’s base salary and benefits accrued through the date of death or inability to perform and, at the discretion
of the Compensation Committee, a bonus. The officer or his representatives will also be entitled to receive a reimbursement of
up to 12 months of Consolidated Omnibus Reconciliation Act, or COBRA, premiums, if the officer or his representatives timely elect
and remain eligible for COBRA. If the officer’s employment is terminated due to inability to perform, the officer will also
be entitled to (i) a lump sum payment equal to the greater of (A) the target bonus payable to the Officer for the year in
which the date of termination occurs or if no target bonus has been set, the officer’s most recent annual bonus, and (B)
a bonus for such year as may be determined by the Compensation Committee in its sole discretion; and (ii) a severance payment (payable
over six months) equal to six months of the officer’s base salary in effect as of the date of termination.
If the officer’s employment is terminated
for “cause” or if an Officer terminates his employment without “good reason” (as such terms are defined
in the employment agreement), the officer will not be entitled to a severance payment or any other termination benefits. However,
the Company will pay the officer any unpaid portion of the officer’s base salary and benefits accrued through the date of
such termination.
Upon a termination of an officer’s
employment (except for Mr. Pyatt) by the Company without cause and without a change in control or by the officer for good reason
without a change in control, the employment agreements provide that such officer will be entitled to (i) any unpaid portion of
the officer’s base salary and benefits accrued through the date of termination; (ii) an amount payable over three months
and equal to the lesser of (A) nine months of the officer’s base salary in effect as of the date of termination, or (B) the
officer’s base salary remaining under the term of his employment agreement; (iii) a lump sum payment equal to 25% of the
officer’s target bonus (or if no target bonus has been set, the Officer’s most recent annual bonus) if the termination
is between January 1 and June 30 or 50% of the Officer’s target bonus (or if no target bonus has been set, the Officer’s
most recent annual bonus) if the termination is between July 1 and December 31; (iv) acceleration of the officer’s outstanding
equity awards, unless otherwise provided in the equity award agreement for a particular equity award; and (v) the officer will
also be entitled to receive a reimbursement of up to 12 months of COBRA premiums, if the officer timely elects and remains eligible
for COBRA.
Upon a termination of Mr. Pyatt’s
employment by the Company without cause and without a change in control or by Mr. Pyatt for good reason without a change in control,
Mr. Pyatt’s employment agreement provides that he will be entitled to (i) any unpaid portion of his base salary and benefits
accrued through the date of termination; (ii) an amount payable over three months and equal to two times his base salary on the
date of termination; (iii) a lump sum payment equal to the greater of (A) two times his target bonus for the for the year in which
the date of termination occurs or if no target bonus has been set, then two times Mr. Pyatt’s most recent annual bonus, and
(B) a bonus for such year as may be determined by the Compensation Committee in its sole discretion; (iv) acceleration of
his outstanding equity awards, unless otherwise provided in the equity award agreement for a particular equity award; and (v) he
will also be entitled to receive a reimbursement of up to 12 months of COBRA premiums, if he timely elects and remains eligible
for COBRA.
Upon a termination of an officer’s
employment (except for Mr. Pyatt) by the Company without cause and with a change in control or by the officer for good reason after
a change in control, the employment agreement provides that such officer will be entitled to (i) any unpaid portion of the officer’s
base salary and benefits accrued through the date of termination; (ii) a severance payment (payable over 12 months) equal to 12
months of the officer’s base salary in effect as of the date of termination; (iii) a lump sum payment equal to the greater
of (A) 100% of the officer’s target bonus in the year of termination or if no target bonus has been set, then 100% of the
officer’s most recent annual bonus, and (B) a bonus for such year as may be determined by the Committee in its sole discretion;
(iv) a severance payment of $500,000 (payable within 30 days of the date of termination); (v) acceleration of the officer’s
outstanding equity awards; and (vi) the officer will also be entitled to receive a reimbursement of up to 12 months of COBRA premiums,
if the officer timely elects and remains eligible for COBRA.
Upon a termination of Mr. Pyatt’s
employment by the Company without cause and with a change in control or by Mr. Pyatt for good reason after a change in control,
Mr. Pyatt’s employment agreement provides that he will be entitled to (i) any unpaid portion of his base salary and benefits
accrued through the date of termination; (ii) a severance payment (payable over 12 months) equal to three times his base salary
in effect as of the date of termination; (iii) a severance payment of $2 million (payable within 30 days of the date of termination);
(v) acceleration of Mr. Pyatt’s outstanding equity awards; and (vi) he will also be entitled to receive a reimbursement of
up to 12 months of COBRA premiums, if he timely elects and remains eligible for COBRA.
The employment agreements also contain
customary confidentiality, non-competition and non-solicitation provisions. Under the non-compete provisions, during the term of
his employment agreement and for a period of six months after termination of employment, the officer is prohibited from, directly
or indirectly, engaging in or becoming interested financially in, as a principal, employee, partner, contractor, shareholder, agent,
manager, owner, advisor, lender, guarantor, officer or director, any business that is engaged in the nutritional supplement industry
and/or related products, subject to certain exceptions for passive investments.
Additionally, the non-solicitation provisions
of the employment agreements prohibit the officer from soliciting for employment any employee of the Company or any person who
was an employee of the Company in the 90-day period before such solicitation. This prohibition applies during the officer’s
employment with the Company and for 12 months following the termination of the officer’s employment.
Change in Control Payments
The Employment Agreements referenced in the above provide for
payments upon termination or employment after a change in control in certain situations.
Director Compensation
Director Compensation for 2012
The following table sets forth the aggregate
compensation paid to our non-employee directors during 2012.
Name | |
Fees Earned or Paid In Cash ($) | | |
Stock Awards(1)(2) ($) | | |
Total ($) | |
Michael J. Doron | |
| 10,000 | | |
| 2,233 | | |
| 12,223 | |
James J. Greenwell | |
| 10,000 | | |
| 2,223 | | |
| 12,223 | |
Donald W. Prosser | |
| 24,000 | | |
| 2,223 | | |
| 26,233 | |
(1) |
Reflects the full grant date fair value of restricted stock awards granted in 2012 calculated in accordance with FASB ASC Topic 718 based on the closing price of the common stock of $4.1652 (after adjustment for the reverse split of 1-for-850) on November 16, 2012, the date of grant. |
(2) |
Reflects the full grant date fair value of restricted stock awards granted for 2012 calculated in accordance with FASB ASC Topic 718 based on the closing price of the common stock of $6.00 on February 14, 2013, the date of grant, to make-up for the shortfall in the number of shares. |
2012 Non-Employee Director Compensation Program
In October 2012, our board of directors
adopted a non-employee director compensation program. Directors who are employees of the Company receive no additional compensation
for their services as directors. Non-employee directors are compensated for their service on our board of directors as described
below. The following table describes the components of compensation for non-employee directors in effect beginning October 2012:
Compensation Element | |
2012 Compensation Program ($) | |
Annual Cash Retainer | |
| 20,000 | |
Annual Equity Retainer Award | |
| 25,000 | |
Board Meeting Fees | |
| 1,000 | |
Audit Committee Chair Committee Meeting Fee | |
| 1,000 | |
New Director Fee (one-time equity grant) | |
| 2,000 | |
Annual Cash Retainer and Meeting
Fees. Beginning in October 2012, each non-employee director who continues to serve as a director will receive an annual
cash retainer fee of $20,000 per year, pro rata for service less than one year. Non-employee directors will also receive $1,000
per meeting attended for all in-person and telephonic meetings of the Board subject to a $6,000 per-year cap on meeting fees. Further,
the Audit Committee Chair will receive $1,000 per Audit Committee meeting.
Annual Equity Retainer Award.
Beginning in January 2013 and pro-rata for the fourth quarter of 2012, each non-employee director will receive $25,000 of the annual
board retainer fee in the form of restricted common stock with the number of shares of restricted common stock determined by dividing
that dollar amount by the closing price of our common stock on the date of grant. These shares of restricted common stock will
vest in four equal quarterly installments. The restricted common stock awards will be forfeitable during that vesting period, though
directors who leave the board during the year will receive any vested restricted common stock. On February 14, 2013, we granted
each non-employee director a restricted stock award for 6,252 restricted shares of common stock that vests as to 1,563 shares on
a quarterly basis beginning March 31, 2013.
New Director Fee (one-time equity
grant). Beginning in October 2012, each non-employee director will receive a one-time equity grant of restricted common
stock with a value of approximately $2,000 with the number of shares of restricted common stock determined by dividing that dollar
amount by the closing price of our common stock on the date of grant. These shares of restricted common stock will be fully vested
upon grant. On November 16, 2012, we issued 353 shares to our three non-employee directors as their one-time equity grant. On February
14, 2013, we issued an additional 132 shares to our three non-employee directors because the number of shares received by each
director on November 16, 2012 was less than the approximate value of $2,000 for the initial grant.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The following table sets forth information
known to MusclePharm with respect to the beneficial ownership of our common stock, $0.001 par value per share, as of March 29,
2013, unless otherwise noted, by:
| · | each stockholder known to MusclePharm to own beneficially more than 5% of MusclePharm’s common
stock; |
| · | each of MusclePharm’s directors; |
| · | each of MusclePharm’s named executive officers; and |
| · | all of MusclePharm’s current directors and named executive officers as a group. |
We have determined beneficial ownership
in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished
to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares
of common stock or Series B Preferred Stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based
on 6,766,647 shares of common stock and 51 shares of Series B Preferred Stock outstanding at March 29, 2013. For purposes of computing
total voting percentage, each share of Series B Preferred Stock has 138,292.98 votes, resulting in total outstanding shares for
purposes of calculating voting percentages of 51%. Except as set forth below, the address of the beneficial owner listed in the
table below is c/o MusclePharm Corporation, 4721 Ironton Street, Building A, Denver, Colorado 80239.
| |
Shares Beneficially Owned | | |
| |
| |
Common Stock (1) | | |
Series B Preferred Stock (1) | | |
Total Voting | |
Name of Beneficial Owner | |
Shares | | |
% (2) | | |
Shares | | |
% (3) | | |
% (4) | |
Named Executive Officers: | |
| | | |
| | | |
| | | |
| | | |
| | |
Brad J. Pyatt | |
| 165,418 | | |
| 2.4 | % | |
| 31 | | |
| 60.78 | % | |
| 32.2 | % |
L. Gary Davis | |
| 19,678 | | |
| | * | |
| - | | |
| - | | |
| | * |
John H. Bluher | |
| 43,118 | | |
| | * | |
| - | | |
| - | | |
| | * |
Jeremy R. DeLuca | |
| 143,325 | | |
| 2.1 | % | |
| - | | |
| - | | |
| 1.0 | % |
Cory J. Gregory | |
| 155,658 | | |
| 2.3 | % | |
| 20 | | |
| 39.22 | % | |
| 21.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Non-Employee Directors: | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael J. Doron | |
| 6,737 | | |
| | * | |
| - | | |
| - | | |
| | * |
James J. Greenwell | |
| 11,737 | | |
| | * | |
| - | | |
| - | | |
| | * |
Donald W. Prosser | |
| 6,737 | | |
| | * | |
| - | | |
| - | | |
| | * |
Officers and Directors as a Group (eight persons): | |
| 552,408 | | |
| 8.2 | % | |
| 51 | | |
| 100 | % | |
| 54.99 | % |
* |
Represents less than one percent. |
(1) |
This column lists beneficial ownership of voting securities as calculated under SEC rules. Otherwise, except to the extent noted below, each director, named executive officer or entity has sole voting and investment power over the shares reported. The shares are not subject to any pledge. Standard brokerage accounts may include nonnegotiable provisions regarding set-offs or similar rights. |
(2) |
Percent of class based on 6,776,647 shares of common stock outstanding as of March 29, 2013. This percentage does not include preferred stock ownership. |
(3) |
Percent of Series B Preferred Stock based on 51 shares of Series B Preferred Stock outstanding as of March 29, 2013. |
(4) |
Percentage of total voting power represents voting power with respect to all shares of our common stock and Series B Preferred Stock voting together as a single class. The holders of our Series B Preferred Stock are entitled to 138,292.98 votes per share, and holders of our common stock are entitled to one vote per share. |
Beneficial Owners of More than Five
Percent
The following table shows the number of
shares of our common stock, as of March 29, 2013, held by persons known to us to beneficially own more than five percent of our
outstanding common stock.
| |
Shares Beneficially Owned | | |
| |
| |
Common Stock (1) | | |
Series B Preferred Stock (1) | | |
Total Voting | |
Name of Beneficial Owner | |
Shares | | |
% (2) | | |
Shares | | |
% (3) | | |
% (4) | |
GRQ Consultants Inc. (5) | |
| 416,247 | | |
| 6.1 | % | |
| - | | |
| - | | |
| 3.0 | % |
Melechdavid, Inc. (6) | |
| 353,821 | | |
| 5.2 | % | |
| - | | |
| - | | |
| 2.6 | % |
(1) |
This column lists beneficial ownership of voting securities as calculated under SEC rules. Otherwise, except to the extent noted below, each director, named executive officer or entity has sole voting and investment power over the shares reported. The shares are not subject to any pledge. Standard brokerage accounts may include nonnegotiable provisions regarding set-offs or similar rights. |
(2) |
Percent of class based on 6,776,647 shares of common stock outstanding as of March 29, 2013. This percentage does not include preferred stock ownership. |
(3) |
Percent of Series B Preferred Stock based on 51 shares of Series B Preferred Stock outstanding as of March 29, 2013. |
(4) |
Percentage of total voting power represents voting power with respect to all shares of our common stock and Series B Preferred Stock voting together as a single class. The holders of our Series B Preferred Stock are entitled to 138,292.98 votes per share, and holders of our common stock are entitled to one vote per share. |
(5) |
Mr. Barry C. Honig is the President of GRQ Consultants, Inc. and in such capacity holds voting and dispositive power over shares held by such entity. The principal place of business for GRQ is 4400 Biscayne Boulevard, Miami FL 33137. |
(6) |
Mr. Mark E. Groussman is the President of Melechdavid, Inc. and in such capacity holds voting and dispositive power over shares held by such entity. The principal place of business for Melechdavid is 4400 Biscayne Boulevard, Miami, Florida 33137. |
Equity Compensation Plan Information
The following table provides information
as of December 31, 2012, regarding compensation plans (including individual compensation arrangements) under which our equity securities
are authorized for issuance. The table includes information regarding the MusclePharm 2010 Stock Incentive Plan.
PLAN CATEGORY | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1) | | |
Weighted average exercise price of outstanding options, warrants and rights (b) | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c) (1) | |
Equity compensation plans approved by security holders: | |
| 1,847 | | |
$ | 425.00 | | |
| 1,409 | |
Equity compensation plans not approved by security holders: | |
| - | | |
| - | | |
| - | |
Total | |
| 1,847 | | |
$ | 425.00 | | |
| 1,409 | |
(1) |
Reflects the 1-for-850 reverse stock split of our common stock that we effected on November 26, 2012. |
Item 13. Certain Relationships,
Related Transactions and Director Independence
In addition to the named executive officer
and director compensation arrangements discussed in “Executive Compensation”, below we describe transactions since
January 1, 2012, to which we have been a participant, in which the amount involved in the transaction exceeds or will exceed $120,000
and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate family
member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.
Consulting Agreements
On November 23, 2011, we entered into a
consulting agreement with El Chichon Partners, LLC and Gordon G. Burr, a former director, prior to Mr. Burr becoming a director
of the Company. The consulting agreement provides that Mr. Burr will identify potential financing sources for us. The amount paid
under this agreement in the year ended December 31, 2011 was $200,000, which was paid in the form of a warrant issued in the name
of El Chichon Partners, LLC and exercisable for 117,648 shares of common stock at an exercise price of $10.20 per share of common
stock. Further, this agreement was amended on April 20, 2012 and added an additional warrant issued in the name of El Chichon Partners,
LLC and exercisable for 35,295 shares of common stock at an exercise price of $12.75 per share of common stock. Each warrant has
a lock-up of one year after exercise thereof. The shares of common stock underlying each warrant have demand registration rights
after 12 months and piggy-back registration rights.
On July 12, 2012, we entered into a consulting
agreement with Melechdavid, Inc. (“Melechdavid”), an affiliate of Mark E. Groussman, a former director, prior to Mr.
Groussman becoming a director of the Company. The consulting agreement provides that Melechdavid will provide consulting services
to us related to strategic acquisitions, capital restructuring and Mr. Groussman will serve as a member of the board of directors.
Mr. Groussman was appointed to our board of directors on July 19, 2012, and resigned from our board effective October 18, 2012.
The consulting agreement provides that we will issue to Melechdavid shares of common stock in an amount equal to 4.2% of our outstanding
common stock on a fully diluted (as-converted) basis. Further, until July 12, 2014, we are required to ensure that Melechdavid
shall maintain its 4.2% fully diluted equity position. The term of the consulting agreement is 12 months.
On July 12, 2012, we entered into a consulting
agreement with GRQ Consultants, Inc. (“GRQ”), an affiliate of Barry C. Honig. The consulting agreement provides that
GRQ will provide consulting services to us related to banking relationships, strategic acquisitions and capital restructuring.
The consulting agreement provides that we will issue to GRQ shares of common stock in an amount equal to 4.2% of our outstanding
common stock on a fully diluted (as-converted) basis. Further, until July 12, 2014, we are required to ensure that GRQ shall maintain
its 4.2% fully diluted equity position. The term of the consulting agreement is 12 months.
Indemnification Agreements
We have entered into indemnification agreements
with each of our directors and named executive officers. The indemnification agreements and our bylaws will require us to indemnify
our directors to the fullest extent permitted by Nevada law.
Warrant Conversion
On September 20, 2012, we entered into
a warrant conversion agreement with Mr. Bluher, our Executive Vice President and Chief Operating Officer, for the conversion of
warrants to purchase 29,412 shares of our common stock into 19,589 shares of our common stock.
On September 12, 2012, we entered into
a warrant conversion agreement with El Chichon Partners, LLC (an entity affiliated with Mr. Burr, a former director of the Company)
for the conversion of warrants to purchase 152,942 shares of our common stock into 101,859 shares of our common stock.
On September 30, 2012, we entered into
a warrant conversion agreement with Mr. Groussman, a former director of the Company, at the time, for the conversion of warrants
to purchase 4,412 shares of our common stock into 3,750 shares of our common stock.
Review, Approval or Ratification of
Transactions with Related Parties
We intend to adopt a written related person
transactions policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than
5% of our common stock, and any members of the immediate family of and any entity affiliated with any of the foregoing persons,
are not permitted to enter into a material related person transaction with us without the review and approval of our audit committee,
or a committee composed solely of independent directors in the event it is inappropriate for our audit committee to review such
transaction due to a conflict of interest. We expect the policy to provide that any request for us to enter into a transaction
with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of our common stock or
with any of their immediate family members or affiliates, in which the amount involved exceeds $120,000 will be presented to our
audit committee for review, consideration and approval. In approving or rejecting any such proposal, we expect that our audit committee
will consider the relevant facts and circumstances available and deemed relevant to the audit committee, including, but not limited
to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the
same or similar circumstances and the extent of the related person’s interest in the transaction.
Although we have not had a written policy
for the review and approval of transactions with related persons, our board of directors has historically reviewed and approved
any transaction where a director or officer had a financial interest, including all of the transactions described above. Prior
to approving such a transaction, the material facts as to a director’s or officer’s relationship or interest as to
the agreement or transaction were disclosed to our board of directors. Our board of directors would take this information into
account when evaluating the transaction and in determining whether such transaction was fair to us and in the best interest of
all of our stockholders.
Item 14. Principal Accountant Fees and Services
The Audit Committee of the board of directors
has retained EKS&H LLLP (“EKS&H”) as our independent public accounting firm (our independent auditor). EKS&H
audited our financial statements for the year ended December 31, 2012. The audit reports of EKS&H on our consolidated financial
statements as of and for the year ended December 31, 2012 did not contain an adverse opinion or disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope or accounting principles.
Audit Committee Pre-Approval Policies
and Procedures
To help assure independence of the independent
auditor, the Audit Committee has established a policy whereby all audit, review, attest and non-audit engagements of the principal
auditor or other firms must be approved in advance by the Audit Committee; provided, however, that de minimis non-audit services
may instead be approved in accordance with applicable SEC rules. This policy is set forth in our Audit Committee Charter. Of the
fees shown above in the table, which were paid to our independent auditor, 100% were approved by the Audit Committee.
Fees Paid to Independent Registered
Public Accountants
The following is a summary and description
of fees for services for the fiscal years ended December 31, 2012 and 2011.
Services | |
2012 | | |
2011 | |
Audit Fees | |
$ | 160,286 | | |
$ | 211,328 | |
Audit-Related Fees | |
| 222,454 | | |
| - | |
Tax Fees | |
| | | |
| - | |
All Other Fees | |
| | | |
| - | |
Total | |
$ | 382,740 | | |
$ | 211,328 | |
Audit Fees. Audit
fees relate to professional services rendered in connection with the audit of our annual financial statements, quarterly review
of financial statements included in our quarterly reports on Form 10-Q and audit services provided in connection with other statutory
and regulatory filings.
Audit-Related Fees. This category includes the
aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent auditors that
are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under
“Audit Fees,” and generally consist of fees for accounting consultation and audits of employee benefit plans.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Exhibit |
|
|
|
Incorporated by Reference |
|
Filed |
|
Furnished |
No. |
|
Description |
|
Form |
|
SEC File No. |
|
Exhibit |
|
Filing Date |
|
Herewith |
|
Herewith |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
Agreement Concerning the Exchange of Securities by and Among Tone in Twenty and Muscle Pharm, LLC and the Security Holders of Muscle Pharm, LLC, dated February 1, 2010. |
|
8-K |
|
000-53166 |
|
2.1 |
|
February 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Articles of Incorporation of MusclePharm Corporation, as amended. |
|
10-K |
|
000-53166 |
|
3.1 |
|
April 1, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
Bylaws of MusclePharm Corporation (successor to Tone In Twenty). (Amended on March 1, 2010 to change fiscal year end to December 31 – set forth on Form 8-K filed on 03-03-2010.) |
|
SB-2 |
|
333-147111 |
|
3.2 |
|
November 2, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Specimen of certificate for MusclePharm Corporation Series D Convertible Preferred Stock. |
|
8-K |
|
000-53166 |
|
4.1 |
|
January 28, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
Specimen of certificate for MusclePharm Corporation Common Stock. |
|
S-1/A |
|
333-184625 |
|
4.4 |
|
December 28, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
Form of Promissory Note, dated July 13, 2012, issued by MusclePharm Corporation in favor of TCA Global Credit Master Fund LP. |
|
8-K |
|
000-53166 |
|
4.1 |
|
July 20, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
Form of Promissory Note. |
|
8-K |
|
000-53166 |
|
4.2 |
|
December 10, 2012 |
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
Purchasing Agreement with General Nutrition Corporation dated December 16, 2009. |
|
8-K |
|
000-53166 |
|
10.2 |
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
10.2 |
|
Order Approving Stipulation for Settlement of Claim, dated December 8, 2010, between MusclePharm Corporation and Socius CG II, Ltd. |
|
8-K |
|
000-53166 |
|
10.1 |
|
December 9, 2010 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
10.3 |
|
Endorsement Agreement, dated July 20, 2011, between MusclePharm Corporation and Michael Vick, individually. |
|
8-K |
|
000-53166 |
|
10.1 |
|
July 22, 2011 |
|
|
|
|
|
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|
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|
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|
10.4 |
|
Convertible Promissory Note between MusclePharm Corporation and Brad J. Pyatt, dated November 18, 2010. |
|
S-1/A |
|
333-176771 |
|
4.2 |
|
September 27, 2011 |
|
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|
10.5 |
|
Convertible Promissory Note between MusclePharm Corporation and Brad J. Pyatt, dated November 23, 2010. |
|
S-1/A |
|
333-176771 |
|
4.3 |
|
September 27, 2011 |
|
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|
10.6 |
|
Amended and Restated Employment Agreement, dated November 14, 2011, between MusclePharm Corporation and Brad J. Pyatt. |
|
10-Q |
|
000-53166 |
|
10.6 |
|
November 14, 2011 |
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|
10.7 |
|
Amended and Restated Employment Agreement, dated November 14, 2011, between MusclePharm Corporation and Cory J. Gregory. |
|
10-Q |
|
000-53166 |
|
10.7 |
|
November 14, 2011 |
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|
10.8 |
|
Employment Agreement, dated September 15, 2011, by and between MusclePharm Corporation and John H. Bluher. |
|
10-Q |
|
000-53166 |
|
10.4 |
|
November 14, 2011 |
|
|
|
|
10.9 |
|
Employment Agreement, dated November 14, 2011, by and between MusclePharm Corporation and Jeremy R. DeLuca. |
|
10-Q |
|
000-53166 |
|
10.5 |
|
November 14, 2011 |
|
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|
10.10 |
|
Securities Purchase Agreement, dated July 10, 2012, between MusclePharm Corporation and Subscribers set forth therein. |
|
8-K |
|
000-53166 |
|
10.1 |
|
July 19, 2012 |
|
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10.11 |
|
Consulting Agreement, dated July 12, 2012, between MusclePharm Corporation and Melechdavid, Inc. |
|
8-K |
|
000-53166 |
|
10.2 |
|
July 19, 2012 |
|
|
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|
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|
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|
10.12 |
|
Consulting Agreement, dated July 12, 2012, between MusclePharm Corporation and GRQ Consultants, Inc. |
|
8-K |
|
000-53166 |
|
10.3 |
|
July 19, 2012 |
|
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|
10.13 |
|
Form of Committed Equity Facility Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
|
8-K |
|
000-53166 |
|
10.1 |
|
July 20, 2012 |
|
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|
10.14 |
|
Form of Registration Rights Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
|
8-K |
|
000-53166 |
|
10.1 |
|
July 20, 2012 |
|
|
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|
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|
|
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|
|
|
|
|
|
10.15 |
|
Form of Security Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
|
8-K |
|
000-53166 |
|
10.1 |
|
July 20, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
10.16 |
|
Form of Indemnification Agreement. |
|
8-K |
|
000-53166 |
|
10.1 |
|
August 27, 2012 |
|
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|
10.17 |
|
Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Brad J. Pyatt. |
|
8-K |
|
000-53166 |
|
10.1 |
|
October 23, 2012 |
|
|
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|
|
|
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|
|
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|
|
|
|
10.18 |
|
Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and L. Gary Davis. |
|
8-K |
|
000-53166 |
|
10.2 |
|
October 23, 2012 |
|
|
|
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|
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|
|
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|
|
|
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|
10.19 |
|
Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and John H. Bluher. |
|
8-K |
|
000-53166 |
|
10.3 |
|
October 23, 2012 |
|
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|
|
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|
|
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|
10.20 |
|
Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Jeremy R. DeLuca. |
|
8-K |
|
000-53166 |
|
10.4 |
|
October 23, 2012 |
|
|
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|
|
|
|
|
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|
|
|
|
|
10.21 |
|
Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Cory J. Gregory. |
|
8-K |
|
000-53166 |
|
10.5 |
|
October 23, 2012 |
|
|
|
|
|
|
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|
|
|
10.22 |
|
Form of Restricted Stock Unit Award. |
|
8-K |
|
000-53166 |
|
10.1 |
|
November 21, 2012 |
|
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|
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|
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|
10.23 |
|
Subscription Agreement dated November 30, 2012 between MusclePharm Corporation and the subscribers listed therein. |
|
8-K |
|
000-53166 |
|
10.1 |
|
December 10, 2012 |
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
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|
10.24 |
|
Form of Escrow Agreement. |
|
POS AM |
|
333-184625 |
|
10.24 |
|
January 8, 2013 |
|
|
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|
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|
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|
10.25 |
|
Form of Subscription Agreement. |
|
8-K |
|
000-53166 |
|
10.1 |
|
January 28, 2013 |
|
|
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|
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|
10.26 |
|
Form of Restricted Stock Award |
|
8-K |
|
000-53166 |
|
10.1 |
|
|
|
|
|
|
14.1 |
|
Code of Ethics |
|
8-K |
|
000-53166 |
|
14 |
|
April 23, 2012 |
|
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|
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|
21 |
|
Subsidiary of the Registrant. |
|
S-1 |
|
333-184625 |
|
21 |
|
October 26, 2012 |
|
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|
23.1 |
|
Consent of EKS&H LLLP |
|
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|
X |
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|
23.2 |
|
Consent of Berman & Company, P.A. |
|
10-K |
|
000-53166 |
|
23.2 |
|
April 1, 2013 |
|
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|
24.1 |
|
Power of Attorney (included on the signature page hereof). |
|
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|
X |
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|
31.1 |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
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|
X |
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31.2 |
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
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|
X |
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32.1 |
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Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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X |
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32.2 |
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Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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X |
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101.INS |
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INS XBRL Instance Document. |
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10-K |
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000-53166 |
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101.INS |
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April 1, 2013 |
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101.SCH |
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SCH XBRL Schema Document. |
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10-K |
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000-53166 |
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101.SCH |
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April 1, 2013 |
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101.CAL |
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CAL XBRL Calculation Linkbase Document. |
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10-K |
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000-53166 |
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101.CAL |
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April 1, 2013 |
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101.DEF |
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DEF XBRL Definition Linkbase Document. |
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10-K |
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000-53166 |
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101.DEF |
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April 1, 2013 |
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101.LAB |
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LAB XBRL Label Linkbase Document. |
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10-K |
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000-53166 |
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101.LAB |
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April 1, 2013 |
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101.PRE |
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PRE XBRL Presentation Linkbase Document. |
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10-K |
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000-53166 |
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101.PRE |
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April 1, 2013 |
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Signatures
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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MUSCLEPHARM CORPORATION (the “Registrant”) |
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Dated: October 31, 2014 |
By: |
/s/ Brad J. Pyatt |
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Brad J. Pyatt, Chief Executive Officer and President |
(Power of Attorney)
KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints BRAD J. PYATT his true and lawful attorney or attorneys-in-fact and
agents, with full power to act with or without the others with full power of substitution and resubstitution, to execute in his
name, place and stead, in any and all capacities, any or all amendments to this annual report on Form 10-K/A for the year ended
December 31, 2012, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority
to do and perform in the name of and on behalf of the undersigned, in any and all capacities, each and every act and thing necessary
or desirable to be done in and about the premises, to all intents and purposes and as fully as they might or could do in person,
hereby ratifying, approving and confirming all that said attorneys-in-fact and agents or their substitutes may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature |
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Title |
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Date |
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/s/ Brad J. Pyatt |
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Principal Executive Officer and Director |
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October 31, 2014 |
Brad J. Pyatt |
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/s/ Donald W. Prosser |
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Principal Financial Officer and |
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October 31, 2014 |
Donald W. Prosser |
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Principal Accounting Officer |
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/s/ Richard F. Estalella |
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President and Director |
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October 31, 2014 |
Richard F. Estalella |
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/s/ Michael J. Doron |
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Director |
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October 31, 2014 |
Michael J. Doron |
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/s/ Daniel J. McClory |
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Director |
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October 31, 2014 |
Daniel J. McClory |
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/s/ Gregory Macosko |
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Director |
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October 31, 2014 |
Gregory Macosko |
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/s/ Andrew Lupo |
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Director |
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October 31, 2014 |
Andrew Lupo |
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EXHIBIT INDEX
Exhibit |
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Incorporated by Reference |
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Filed |
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Furnished |
No. |
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Description |
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Form |
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SEC File No. |
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Exhibit |
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Filing Date |
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Herewith |
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Herewith |
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2.1 |
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Agreement Concerning the Exchange of Securities by and Among Tone in Twenty and Muscle Pharm, LLC and the Security Holders of Muscle Pharm, LLC, dated February 1, 2010. |
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8-K |
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000-53166 |
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2.1 |
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February 2, 2010 |
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3.1 |
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Articles of Incorporation of MusclePharm Corporation, as amended. |
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10-K |
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000-53166 |
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3.1 |
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April 1, 2013 |
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3.2 |
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Bylaws of MusclePharm Corporation (successor to Tone In Twenty). (Amended on March 1, 2010 to change fiscal year end to December 31 – set forth on Form 8-K filed on 03-03-2010.) |
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SB-2 |
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333-147111 |
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3.2 |
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November 2, 2007 |
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4.1 |
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Specimen of certificate for MusclePharm Corporation Series D Convertible Preferred Stock. |
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8-K |
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000-53166 |
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4.1 |
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January 28, 2013 |
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4.2 |
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Specimen of certificate for MusclePharm Corporation Common Stock. |
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S-1/A |
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333-184625 |
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4.4 |
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December 28, 2012 |
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4.3 |
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Form of Promissory Note, dated July 13, 2012, issued by MusclePharm Corporation in favor of TCA Global Credit Master Fund LP. |
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8-K |
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000-53166 |
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4.1 |
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July 20, 2012 |
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4.4 |
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Form of Promissory Note. |
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8-K |
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000-53166 |
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4.2 |
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December 10, 2012 |
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10.1 |
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Purchasing Agreement with General Nutrition Corporation dated December 16, 2009. |
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8-K |
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000-53166 |
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10.2 |
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February 24, 2010 |
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10.2 |
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Order Approving Stipulation for Settlement of Claim, dated December 8, 2010, between MusclePharm Corporation and Socius CG II, Ltd. |
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8-K |
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000-53166 |
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10.1 |
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December 9, 2010 |
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10.3 |
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Endorsement Agreement, dated July 20, 2011, between MusclePharm Corporation and Michael Vick, individually. |
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8-K |
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000-53166 |
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10.1 |
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July 22, 2011 |
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10.4 |
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Convertible Promissory Note between MusclePharm Corporation and Brad J. Pyatt, dated November 18, 2010. |
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S-1/A |
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333-176771 |
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4.2 |
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September 27, 2011 |
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10.5 |
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Convertible Promissory Note between MusclePharm Corporation and Brad J. Pyatt, dated November 23, 2010. |
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S-1/A |
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333-176771 |
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4.3 |
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September 27, 2011 |
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10.6 |
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Amended and Restated Employment Agreement, dated November 14, 2011, between MusclePharm Corporation and Brad J. Pyatt. |
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10-Q |
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000-53166 |
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10.6 |
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November 14, 2011 |
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10.7 |
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Amended and Restated Employment Agreement, dated November 14, 2011, between MusclePharm Corporation and Cory J. Gregory. |
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10-Q |
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000-53166 |
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10.7 |
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November 14, 2011 |
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10.8 |
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Employment Agreement, dated September 15, 2011, by and between MusclePharm Corporation and John H. Bluher. |
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10-Q |
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000-53166 |
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10.4 |
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November 14, 2011 |
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10.9 |
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Employment Agreement, dated November 14, 2011, by and between MusclePharm Corporation and Jeremy R. DeLuca. |
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10-Q |
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000-53166 |
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10.5 |
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November 14, 2011 |
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10.10 |
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Securities Purchase Agreement, dated July 10, 2012, between MusclePharm Corporation and Subscribers set forth therein. |
|
8-K |
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000-53166 |
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10.1 |
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July 19, 2012 |
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10.11 |
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Consulting Agreement, dated July 12, 2012, between MusclePharm Corporation and Melechdavid, Inc. |
|
8-K |
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000-53166 |
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10.2 |
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July 19, 2012 |
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10.12 |
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Consulting Agreement, dated July 12, 2012, between MusclePharm Corporation and GRQ Consultants, Inc. |
|
8-K |
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000-53166 |
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10.3 |
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July 19, 2012 |
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10.13 |
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Form of Committed Equity Facility Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
|
8-K |
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000-53166 |
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10.1 |
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July 20, 2012 |
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10.14 |
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Form of Registration Rights Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
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8-K |
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000-53166 |
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10.1 |
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July 20, 2012 |
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10.15 |
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Form of Security Agreement, dated July 13, 2012, between MusclePharm Corporation and TCA Global Credit Master Fund LP. |
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8-K |
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000-53166 |
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10.1 |
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July 20, 2012 |
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10.16 |
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Form of Indemnification Agreement. |
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8-K |
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000-53166 |
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10.1 |
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August 27, 2012 |
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10.17 |
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Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Brad J. Pyatt. |
|
8-K |
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000-53166 |
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10.1 |
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October 23, 2012 |
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10.18 |
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Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and L. Gary Davis. |
|
8-K |
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000-53166 |
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10.2 |
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October 23, 2012 |
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10.19 |
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Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and John H. Bluher. |
|
8-K |
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000-53166 |
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10.3 |
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October 23, 2012 |
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10.20 |
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Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Jeremy R. DeLuca. |
|
8-K |
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000-53166 |
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10.4 |
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October 23, 2012 |
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10.21 |
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Amended and Restated Employment Agreement, dated October 18, 2012, between MusclePharm Corporation and Cory J. Gregory. |
|
8-K |
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000-53166 |
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10.5 |
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October 23, 2012 |
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10.22 |
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Form of Restricted Stock Unit Award. |
|
8-K |
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000-53166 |
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10.1 |
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November 21, 2012 |
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10.23 |
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Subscription Agreement dated November 30, 2012 between MusclePharm Corporation and the subscribers listed therein. |
|
8-K |
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000-53166 |
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10.1 |
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December 10, 2012 |
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10.24 |
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Form of Escrow Agreement. |
|
POS AM |
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333-184625 |
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10.24 |
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January 8, 2013 |
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10.25 |
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Form of Subscription Agreement. |
|
8-K |
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000-53166 |
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10.1 |
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January 28, 2013 |
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10.26 |
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Form of Restricted Stock Award |
|
8-K |
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000-53166 |
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10.1 |
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14.1 |
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Code of Ethics |
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8-K |
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000-53166 |
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14 |
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April 23, 2012 |
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21 |
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Subsidiary of the Registrant. |
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S-1 |
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333-184625 |
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21 |
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October 26, 2012 |
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23.1 |
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Consent of EKS&H LLLP |
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X |
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23.2 |
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Consent of Berman & Company, P.A. |
|
10-K |
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000-53166 |
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23.2 |
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April 1, 2013 |
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24.1 |
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Power of Attorney (included on the signature page hereof). |
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X |
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31.1 |
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
X |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
X |
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32.1 |
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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|
X |
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32.2 |
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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|
X |
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|
101.INS |
|
INS XBRL Instance Document. |
|
10-K |
|
000-53166 |
|
101.INS |
|
April 1, 2013 |
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|
101.SCH |
|
SCH XBRL Schema Document. |
|
10-K |
|
000-53166 |
|
101.SCH |
|
April 1, 2013 |
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|
101.CAL |
|
CAL XBRL Calculation Linkbase Document. |
|
10-K |
|
000-53166 |
|
101.CAL |
|
April 1, 2013 |
|
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|
101.DEF |
|
DEF XBRL Definition Linkbase Document. |
|
10-K |
|
000-53166 |
|
101.DEF |
|
April 1, 2013 |
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101.LAB |
|
LAB XBRL Label Linkbase Document. |
|
10-K |
|
000-53166 |
|
101.LAB |
|
April 1, 2013 |
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101.PRE |
|
PRE XBRL Presentation Linkbase Document. |
|
10-K |
|
000-53166 |
|
101.PRE |
|
April 1, 2013 |
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We hereby consent to the incorporation
by reference in Registration Statements on Forms Nos. 333-178427, 333-179515, and 333-184625 of MusclePharm Corporation and Subsidiary
(the “Company”) of our report dated March 29, 2013 relating to our audit of the consolidated financial statements of
the Company, which appears in this Annual Report on Form 10-K/A of MusclePharm Corporation and Subsidiary as of and for the year
ended December 31, 2012.
EKS&H LLLP
October 31, 2014
Denver, Colorado
EXHIBIT 31.1
CERTIFICATION
I, Brad J. Pyatt, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K/A of MusclePharm
Corporation; |
| 2. | Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have: |
| a. | Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
|
/s/ Brad J. Pyatt |
|
Brad J. Pyatt |
|
Chief Executive Officer |
|
October 31, 2014 |
EXHIBIT 31.2
CERTIFICATION
I, Donald W. Prosser, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K/A of MusclePharm
Corporation; |
| 2. | Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have: |
| a. | Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
/s/ Donald W. Prosser |
|
Donald W. Prosser |
|
Chief Financial Officer |
|
October 31, 2014 |
EXHIBIT 32.1
CERTIFICATION
I, Brad J. Pyatt, certify that:
In connection with the Annual Report on Form 10-K/A of MusclePharm
Corporation (the “Company”) for the year ended December 31, 2012, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Brad J. Pyatt, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley of 2002, that:
| 1. | The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Brad J. Pyatt |
|
Brad J. Pyatt |
|
Chief Executive Officer |
|
October 31, 2014 |
| * | The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. |
EXHIBIT 32.2
CERTIFICATION
I, Donald W. Prosser, certify that:
In connection with the Annual Report on Form 10-K/A of MusclePharm
Corporation (the “Company”) for the year ended December 31, 2012, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Donald W. Prosser, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley of 2002, that:
| 1. | The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Donald W. Prosser |
|
Donald W. Prosser |
|
Chief Financial Officer |
|
October 31, 2014 |
| * | The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. |
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