Notes to Consolidated Financial Statements
(Unaudited)
Note 1: Description of Business and Basis of Presentation
Description of Business
MusclePharm Corporation, or the Company, was incorporated in Nevada in 2006. The Company is a scientifically driven, performance lifestyle company
that develops, manufactures, markets and distributes branded nutritional supplements. The Company is headquartered in Denver, Colorado and, as of March 31, 2016, had the following wholly-owned operating subsidiaries: MusclePharm Canada
Enterprises Corp (MusclePharm Canada), BioZone Laboratories, Inc. (BioZone), MusclePharm Ireland Limited (MusclePharm Ireland) and MusclePharm Australia Pty Limited (MusclePharm Australia).
On August 24, 2015, the Board of Directors approved a restructuring plan for the Company. The approved restructuring plan was designed to reduce costs
and to better align the Companys resources for profitable growth. Specifically, through March 31, 2016, the restructuring plan resulted in: 1) reducing the Companys workforce; 2) the Company abandoning certain leased
facilities; 3) the Company renegotiating or terminating a number of contracts with endorsers in a strategic shift away from such arrangements and toward more cost effective marketing and advertising efforts; 4) the Company discontinuing a
number of stock keeping units (SKUs) and writing down inventory to estimated sales price, or to zero as the product was discontinued; and 5) writing off certain assets. Management is continuing to execute on the approved
restructuring plan, and as such, additional restructuring charges may be necessary. See Note 8 to the consolidated financial statements for further detail.
Managements Plans with Respect to Liquidity and Capital Resources
The Companys management believes the recently implemented restructuring, reduction in ongoing operating costs and expense controls and the planned sale
of BioZone, as further described in Note 16, will create opportunities for the Company to be profitable. However, the Company may need to continue to raise capital. There can be no assurance that such capital will be available on acceptable terms or
at all.
As of March 31, 2016, the Company had an accumulated deficit of $154.1 million and recurring losses from operations. The Company may
incur additional losses until such time it can generate significant revenues and/or reduce operating costs. In September 2014, the Company borrowed $8.0 million under a line of credit with a bank. In February 2015, the Company entered into
a term loan agreement with the same bank and borrowed $4.0 million. In December 2015, the Company received $6.0 million upon the issuance of a convertible note with a related party. In January 2016, the Company entered into a secured borrowing
arrangement and received $23.1 million in gross borrowings during the three months ended March 31, 2016, of which $17.5 million was subsequently repaid on, or prior to March 31, 2016. The Company has the ability to borrow up to $10.0 million
subject to sufficient amounts of accounts receivable to secure the loan.
As of March 31, 2016, the Company had approximately $9.1 million in cash
and $27.4 million in working capital deficit.
The accompanying consolidated financial statements for the three months ended March 31, 2016 were
prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that would be
necessary should the Company be required to liquidate its assets. The Company has not established an ongoing source of revenue sufficient to cover its operating costs for at least the next 12 months and allow it to continue as a going concern.
The ability of the Company to meet its total liabilities of $73.1 million as of March 31, 2016, and to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable.
The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate
capital, it could be forced to cease operations or substantially curtail its commercial activities. These conditions raise substantial doubt as to the Companys ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.
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).
10
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The
consolidated financial statements include the accounts of MusclePharm Corporation and its wholly-owned subsidiaries. Acquisitions are included in the consolidated financial statements from the date of the acquisition. All significant intercompany
balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP. In our opinion, the unaudited interim
consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2016, our results of operations for the three months ended March 31,
2016 and 2015, and our cash flows for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected
for the year ending December 31, 2016.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 17, 2016.
Use of Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not
limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory and tax assets, the assessment of useful lives and recoverability of long-lived assets, likelihood and range of possible losses on
contingencies, valuations of equity securities and intangible assets, fair value of derivatives, warrants and options, among others. Actual results could differ from those estimates.
Stock-Based Compensation
The Company estimates
the fair value of employee stock option on the date of grant using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by the Companys assumptions
regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and
projected employee stock option exercise behaviors and the contractual term of the awards. The Company recognizes stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based
on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
Recent Accounting
Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09,
Compensation Stock
Compensation (Topic 718)
(ASU 2016-09). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-09.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes Topic 840,
Leases
(ASU 2016-02). The
guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for
all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02.
In November 2015, the
FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU 2015-17), which requires that deferred tax assets and liabilities be classified as non-current in a classified statement of financial
position. The accounting standard is effective, either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented, for annual periods beginning after December 15, 2016, and interim periods therein.
Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this standard as of December 31, 2015 on a prospective basis.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(ASU
2015-11), which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price of inventory in the ordinary course of
business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently
evaluating the impact of the adoption of ASU 2015-11.
11
In April 2015, the FASB issued ASU No. 2015-03,
Interest Imputation of Interest (Subtopic 835-30)
Simplifying the Presentation of Debt Issuance Costs
(ASU 2015-03), which provides guidance on simplifying the presentation of debt issuance costs, requiring that debt issuance costs related to a recognized debt liability be
presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No, 2015-15,
Interest Imputation of Interest (Subtopic
835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting
(ASU 2015-15), which
further clarifies ASU 2015-03 as it relates to presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 allows an entity deferring and presenting debt issuance costs related to line-of-credit
arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Both ASU
2015-03 and ASU 2015-15 require retrospective adoption and are effective for financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-03
and ASU 2015-15 as of March 31, 2016, and the adoption of these standards did not have a material effect on its consolidated financial statements or disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU 2014-15). ASU 2014-15 explicitly requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entitys ability to continue as a going concern within one year
after the financial statements are issued (or available to be issued when applicable), and to provide related footnote disclosure in certain circumstances. ASU 2014-15 is effective for the Company in the first annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Earlier adoption is permitted. The Company early adopted this standard as of December 31, 2015.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which provides guidance for revenue
recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic
605,
Revenue Recognition
, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35,
Revenue Recognition- Construction-Type and Production-Type Contracts
. ASU 2014-09s core
principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates than under todays guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(ASU 2015-14),
which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for the Company in the first
quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. The Company has not yet selected a transition method nor
has determined the effect of ASU 2014-09 on its ongoing financial reporting.
Note 3: Fair Value of Financial Instruments
Management believes the fair value of the obligation under secured borrowing arrangement and convertible note with a related party
approximates carrying value because the debt carries market rates of interest. The Companys remaining financial instruments consisted primarily of accounts receivable, accounts payable, accrued liabilities, and accrued restructuring charges,
all of which are short-term in nature with fair values approximating carrying value.
12
Note 4: Capstone Nutrition Agreements
The Company entered into a series of agreements with Capstone Nutrition (Capstone) effective March 2, 2015, including an
amendment (the Amendment) to a Manufacturing Agreement dated November 27, 2013 (the Manufacturing Agreement). Pursuant to the Amendment, Capstone shall be the Companys nonexclusive manufacturer of dietary
supplements and food products sold or intended to be sold by the Company. The Amendment includes various agreements including amended pricing terms. The initial term ends January 1, 2022, and may be extended for three successive 24-month terms,
and includes renewal options.
The Company agreed to pay to Capstone a non-refundable sum of $2.5 million to be used by Capstone solely in connection with
the expansion of its facility necessary to fulfill anticipated Company requirements under the Manufacturing Agreement and Amendment. The Company paid Capstone this $2.5 million during 2015.
The Company and Capstone entered into a Class B Common Stock Warrant Purchase Agreement (Warrant Agreement) whereby the Company may purchase
approximately 19.9% of Capstones parent company, INI Parent, Inc. (INI), on a fully-diluted basis as of March 2, 2015. Pursuant to the Warrant Agreement, INI issued to the Company a warrant (the Warrant) to
purchase shares of INIs Class B common stock, par value $0.001 per share at an exercise price of $0.01 per share (the Warrant Shares). The warrant may be exercised if the Company is in compliance with the terms and conditions of
the Amendment.
The Company utilized the Black-Scholes valuation model to determine the value of the warrants and recorded an asset of $977,000, which was
accounted for under the cost method and assessed for impairment. The warrant is included in long-term investments on the consolidated balance sheet as of March 31, 2016. The Company also recorded $1.5 million of prepaid expenses and other
assets on the consolidated balance sheet as of March 31, 2016, which is being amortized over the remaining life of the Manufacturing Agreement of 6.5 years.
The Company and INI also entered into an option agreement (the Option Agreement). Subject to additional provisions and conditions set forth in the
Option Agreement, at any time on or prior to June 30, 2016, the Company shall have the right to purchase for cash all of the remaining outstanding shares of INIs common stock not already owned by the Company after giving effect to the
exercise of the Warrant, based on an aggregate enterprise value, equal to $200.0 million. The fair value of the option was deemed de minimus as of the transaction date.
The Company is engaged in a dispute with Capstone concerning amounts allegedly owed under the Manufacturing Agreement. Capstone claims that it is owed
approximately $22.0 million of outstanding accounts payable, of which $20.8 million was included in the Companys accounts payable balance as of March 31, 2016. The companies are working to reconcile the $1.2M variance which relates to
invoices not received by the Company as well as questions about shipping and receiving documentation to support potentially open invoices as claimed by Capstone. The Company claims that Capstone owes the Company at least $13.5 million in losses
caused by, among other things, Capstones failure to timely manufacture and supply the Companys products. On February 12, 2016, Capstone requested a mediation with the American Arbitration Association. As of the date of this report,
the mediation is scheduled for May 2016 in New York.
Note 5: Balance Sheet Components
Inventory
Inventory consisted
of the following as of March 31, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
1,362
|
|
|
$
|
1,385
|
|
Work-in-process
|
|
|
56
|
|
|
|
22
|
|
Finished goods
|
|
|
7,195
|
|
|
|
11,142
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
8,613
|
|
|
$
|
12,549
|
|
|
|
|
|
|
|
|
|
|
The Company writes down inventory for obsolete and slow moving inventory based on the age of the product as determined by the
expiration date. Products within one year of their expiration dates are considered for write-off purposes. Historically, the Company has had minimal returns with established customers. Other than write-down of inventory during restructuring
activities, the Company incurred insignificant inventory write-offs during the three months ended March 31, 2016 and 2015.
As disclosed further in Note
8, the Company executed a restructuring plan in August 2015 and wrote down inventory related to discontinued products. The write-down of inventory of $1.7 million is included as a component of cost of revenue in the accompanying consolidated
statements of operations for three months ended March 31, 2016. There were no such write-downs for the three months ended March 31, 2015. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.
13
Property and Equipment
Property and equipment consisted of the following as of March 31, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Furniture, fixtures and equipment
|
|
$
|
3,619
|
|
|
$
|
3,621
|
|
Leasehold improvements
|
|
|
3,182
|
|
|
|
3,227
|
|
Manufacturing and lab equipment
|
|
|
1,666
|
|
|
|
1,659
|
|
Vehicles
|
|
|
958
|
|
|
|
1,146
|
|
Displays
|
|
|
486
|
|
|
|
483
|
|
Website
|
|
|
463
|
|
|
|
463
|
|
Construction in process
|
|
|
324
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
10,698
|
|
|
|
10,653
|
|
Less: accumulated depreciation and amortization
|
|
|
(4,294
|
)
|
|
|
(3,960
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
6,404
|
|
|
$
|
6,693
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $427,000 and $382,000 for the three months ended
March 31, 2016 and 2015, respectively, which is included in the selling, general, and administrative expense in the accompanying consolidated statements of operations.
As disclosed further in Note 8, the Company executed a restructuring plan in August 2015 and wrote-off certain long-lived assets, primarily leasehold
improvements, related to the abandonment of certain leased facilities. The write-off of long-lived assets of $26,000 is included as a component of restructuring and other charges in the accompanying consolidated statements of operations for the
three months ended March 31, 2016. There were no such write-offs for the three months ended March 31, 2015.
Intangible Assets
Intangible assets consist of the following (in thousands) and include the BioZone asset acquisition and MusclePharms apparel rights reacquired from
Worldwide Apparel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
|
Gross Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Weighted-
Average
Useful Lives
(years)
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,130
|
|
|
$
|
(470
|
)
|
|
$
|
2,660
|
|
|
|
15.0
|
|
Non-compete agreements
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
Patents
|
|
|
2,158
|
|
|
|
(608
|
)
|
|
|
1,550
|
|
|
|
8.0
|
|
Trademarks
|
|
|
934
|
|
|
|
(170
|
)
|
|
|
764
|
|
|
|
6.7
|
|
Brand
|
|
|
4,020
|
|
|
|
(582
|
)
|
|
|
3,438
|
|
|
|
10.5
|
|
Domain name
|
|
|
54
|
|
|
|
(33
|
)
|
|
|
21
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
10,365
|
|
|
$
|
(1,932
|
)
|
|
$
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Gross Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Weighted-
Average
Useful Lives
(years)
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,130
|
|
|
$
|
(417
|
)
|
|
$
|
2,713
|
|
|
|
15.0
|
|
Non-compete agreements
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
Patents
|
|
|
2,158
|
|
|
|
(540
|
)
|
|
|
1,618
|
|
|
|
8.0
|
|
Trademarks
|
|
|
933
|
|
|
|
(133
|
)
|
|
|
800
|
|
|
|
6.7
|
|
Brand
|
|
|
4,020
|
|
|
|
(522
|
)
|
|
|
3,498
|
|
|
|
10.5
|
|
Domain name
|
|
|
54
|
|
|
|
(31
|
)
|
|
|
23
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
10,364
|
|
|
$
|
(1,712
|
)
|
|
$
|
8,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Intangible assets amortization expense for the three months ended March 31, 2016 and 2015 was $220,000 and
$225,000, respectively, which is included in the selling, general, and administrative expense in the accompanying consolidated statements of operations.
As of March 31, 2016, the estimated future amortization expense of intangible assets is as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
The remainder of 2016
|
|
$
|
809
|
|
2017
|
|
|
1,071
|
|
2018
|
|
|
1,063
|
|
2019
|
|
|
1,061
|
|
2020
|
|
|
1,043
|
|
2021
|
|
|
1,010
|
|
Thereafter
|
|
|
2,376
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
8,433
|
|
|
|
|
|
|
Note 6: Other Expense, net
During the three months ended March 31, 2016 and 2015, other expense, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Other expense, net:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(519
|
)
|
|
$
|
(125
|
)
|
Foreign currency transaction gain (loss)
|
|
|
103
|
|
|
|
(64
|
)
|
Other
|
|
|
(296
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(712
|
)
|
|
$
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
Note 7: Debt
As of March 31, 2016 and December 31, 2015, the Companys debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Revolving line of credit
|
|
$
|
|
|
|
$
|
3,000
|
|
Term loan
|
|
|
|
|
|
|
2,949
|
|
Convertible note with a related party, net of discount
|
|
|
5,964
|
|
|
|
5,952
|
|
Obligations under secured borrowing arrangement
|
|
|
5,713
|
|
|
|
|
|
Other
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
11,698
|
|
|
|
11,922
|
|
Less: current portion
|
|
|
(11,698
|
)
|
|
|
(5,970
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
|
|
|
$
|
5,952
|
|
|
|
|
|
|
|
|
|
|
In September 2014, the Company entered into a line of credit facility with ANB Bank for up to $8.0 million of borrowings.
The line of credit originally matured in September 2017, and accrued interest at the prime rate plus 2%. The line of credit was secured by inventory, accounts receivable, intangible assets and equipment. As of December 31, 2015, the
outstanding borrowings under the line of credit was $3.0 million. The Company was not in compliance with certain financial covenants under the line of credit as of December 31, 2015, which limited further borrowings. The Company repaid its
outstanding principal and accrued interest under the line of credit in full in January 2016 in conjunction with the Companys secured borrowing arrangement as described below. As of March 31, 2016, the Company had no outstanding borrowings
under the line of credit facility.
In February 2015, the Company entered into a $4.0 million term loan agreement with ANB Bank. The term loan
carried a fixed interest rate of 5.25% per annum, was repayable in 36 equal monthly installments of principal and interest, and originally matured in February 2018. The term loan contained various events of default, including cross default
provisions related to the line of credit, which could have required repayments of the term loan. The Company was not in compliance with certain financial covenants under the term loan as of December 31, 2015, and received various waivers from
the lender during the year ended December 31, 2015. As of December 31, 2015, the outstanding borrowings under the term loan was $2.9 million. The Company repaid its outstanding principal and accrued interest under the term loan in full in
January 2016 in conjunction with the Companys secured borrowing arrangement as described below, and as of March 31, 2016, the Company had no outstanding borrowings under the term loan.
15
On October 9, 2015, the Company entered into loan modification agreements with ANB Bank under the line of credit
and term loan to: (i) change the maturity date of the loans to January 15, 2016, (ii) prohibit the loans to be declared in default prior to December 10, 2015, except for defaults resulting from failure to make timely payments, and (iii)
delete certain financial covenants from the line of credit. In consideration for these modifications, Ryan Drexler, Interim Chief Executive Officer, Interim President and Chairman of the Board of Directors, and a family member provided their
individual guaranty for the remaining balance of the term loan and line of credit of $6.2 million. In consideration for executing his guaranty, the Company issued to Mr. Drexler 28,571 shares of the Companys common stock with a grant date
fair value of $80,000 (based upon the closing price of common stock on the date of issuance).
In December, 2015, the Company entered into a convertible
secured promissory note agreement with Mr. Drexler, pursuant to which he loaned the Company $6.0 million. Proceeds from the note were used to fund working capital requirements. The convertible note is secured by all assets and properties
of the Company and its subsidiaries whether tangible or intangible. The convertible note carries an interest at 8% per annum, or 10% in the event of default. Both the principal and the interest under the convertible note are due in
January 2017, unless converted earlier. The holder can convert the outstanding principal and accrued interest into shares of common stock (2,608,695 shares) for $2.30 per share at any time. The Company may prepay the convertible note at the
aggregate principal amount therein plus accrued interest by giving the holder between 15 and 60 day-notice, depending upon the specific circumstances, provided that the holder may convert the note during the notice period. The Company recorded the
convertible note of $6.0 million as a liability in the balance sheet and also recorded a beneficial conversion feature of $52,000 as a debt discount upon issuance of the convertible note, which is being amortized over the term of the convertible
debt using the effective interest method. The beneficial conversion feature was calculated based on the difference between the fair value of common stock and the effective conversion price of the convertible note. As of March 31, 2016 and
December 31, 2015, the convertible note had an outstanding principal balance of $6.0 million.
On January 11, 2016, the Company entered into a
Purchase and Sale Agreement (the Agreement) with Prestige Capital Corporation (Prestige) pursuant to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the
Company (Accounts). Under the terms of the Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total
borrowings of $10.0 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the assigned Accounts, less any chargeback, disputes, or other amounts due to
Prestige. Prestiges purchase of the assigned Accounts from the Company will be at a discount fee which varies based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts. In addition, the
Company granted Prestige a continuing security interest in and lien upon all accounts receivable, inventory, fixed assets, general intangibles and other assets. The Agreement has an initial term of six months with options to extend. Prestige may
cancel the Agreement with 30-day notice.
During the three months ended March 31, 2016, the Company sold to Prestige Accounts with an aggregate face
amount of approximately $28.9 million and Prestige paid to the Company approximately $23.1 million in cash, of which $17.5 million was subsequently repaid to Prestige on, or prior to March 31, 2016. The proceeds from the initial assignment to
Prestige under this secured borrowing arrangement were primarily utilized to pay off the balance of the existing line of credit and term loan with ANB Bank.
Other
Other debt primarily consists of debt in
default, which was immaterial, as of March 31, 2016 and December 31, 2015 and is included as a component of short-term debt. Debt in default is related to convertible debt issued during the year ended December 31, 2012 and prior where the
convertible debt was never converted to common stock, nor was the principal repaid. The Company is in the process of contacting the remaining debt holders and negotiating settlement of the debt.
Note 8: Restructuring
As part of an effort to better focus and align the Companys resources toward profitable growth, on August 24, 2015, the Board of
Directors authorized the Company to undertake steps to commence a restructuring of the business and operations, which continued through the current quarter. The Company closed certain facilities, reduced headcount, discontinued products, and
renegotiated certain contracts resulting in restructuring and other charges of $17.9 million, of which $1.3 million was included in cost of revenue and $16.6 million was included in operating expenses in the consolidated statements of
operations, during the third quarter of 2015 and $3.3 million, of which $1.6 million was included in cost of revenue and $1.7 million was included in operating expenses in the consolidated statements of operations, during the fourth
quarter of 2015.
For the three months ended March 31, 2016, the Company incurred additional restructuring and other charges of $2.3 million, of
which $1.7 million related to write-down of inventory was included in cost of revenue and $0.6 million was included in operating expenses in the consolidated statements of operations. The restructuring and other charges of
$0.6 million comprises of: (i) $431,000 to be paid in cash, of which $410,000 related to employee severance costs and $21,000 related to abandoned leased facilities; and (ii) $143,000 for other non-cash charges, of which $117,000
related to acceleration of stock-based compensation of terminated employees and $26,000 related to write-off of long-lived assets related to the abandonment of certain lease facilities. The Company anticipates possible additional restructuring
charges in 2016 to continue to move the business toward profitable operations.
As of March 31, 2016, the restructuring charges to be paid in cash totaled
$9.1 million, which are comprised of: (i) $334,000 related to severance and termination benefit costs related to terminated employees; (ii) $8.0 million related to cancellation of certain contracts and sponsorship agreements,
which are payable through December 2016; (iii) $350,000 related to purchase commitment of discontinued inventories not yet received by the Company, which remained accrued as of March 31, 2016; and (iv) $375,000 for costs associated
with permanently vacating certain leased facilities.
16
The following table illustrates the provision of the restructuring charges and the accrued restructuring charges
balance as of March 31, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
Costs
|
|
|
Contract
Termination
Costs
|
|
|
Purchase
Commitment of
Discontinued
Inventories
Not Yet Received
|
|
|
Abandoned
Leased
Facilities
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Expensed
|
|
|
1,353
|
|
|
|
6,979
|
|
|
|
350
|
|
|
|
467
|
|
|
|
9,149
|
|
Cash payments
|
|
|
(845
|
)
|
|
|
(949
|
)
|
|
|
|
|
|
|
(56
|
)
|
|
|
(1,850
|
)
|
Reclassification from accounts payable to cancellation of certain contracts and sponsorship
agreements
|
|
|
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
508
|
|
|
|
8,150
|
|
|
|
350
|
|
|
|
411
|
|
|
|
9,419
|
|
Expensed
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
431
|
|
Cash payments
|
|
|
(584
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
(757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
334
|
|
|
$
|
8,034
|
|
|
$
|
350
|
|
|
$
|
375
|
|
|
$
|
9,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total future payments under the restructuring plan as of March 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder
of 2016
|
|
|
Year Ending December 31,
|
|
|
|
|
Outstanding Payments
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Contract termination costs
|
|
$
|
8,034
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,034
|
|
Purchase commitment of discontinued inventories not yet received
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
Employee severance costs
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334
|
|
Abandoned leased facilities
|
|
|
96
|
|
|
|
100
|
|
|
|
85
|
|
|
|
87
|
|
|
|
7
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future payments
|
|
$
|
8,814
|
|
|
$
|
100
|
|
|
$
|
85
|
|
|
$
|
87
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
9,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9: Commitments and Contingencies
Operating Leases
The Company
leases office and warehouse facilities under operating leases which expire at various dates through 2029. The amounts reflected in the table below are for the aggregate future minimum lease payments under non-cancelable facility operating leases.
Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the three months ended March 31, 2016 and 2015 amounted to $346,000 and $383,000.
17
As of March 31, 2016, future minimum lease payments are as follows (in thousands):
(1)
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2016
|
|
$
|
800
|
|
2017
|
|
|
856
|
|
2018
|
|
|
869
|
|
2019
|
|
|
708
|
|
2020
|
|
|
431
|
|
2021
|
|
|
292
|
|
Thereafter
|
|
|
2,089
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
6,045
|
|
|
|
|
|
|
(1)
|
The amounts in the table above exclude $0.5 million in operating lease liabilities resulting from the restructuring plan expensed through March 31, 2016 (see Note 8).
|
Capital Leases
In December 2014, the Company
entered into a capital lease agreement providing for approximately $1.8 million in credit to lease up to 50 vehicles as part of a fleet lease program. As of March 31, 2016, the Company leased 15 vehicles under the capital lease and the original
costs and accumulated depreciation of leased assets were $481,000 and $86,000, respectively, which are included in property and equipment in the consolidated balance sheets.
The Company also leases manufacturing and warehouse equipment under capital leases, which expire at various dates through February 2020. As of March 31, 2016
and December 31, 2015, short-term capital lease liabilities of $157,000 and $186,000, respectively are included as a component of current liabilities, and the long-term capital lease liabilities of $227,000 and $330,000, respectively are
included as a component of long-term liabilities in the consolidated balance sheets.
As of March 31, 2016, the Companys future minimum lease
payments under capital lease agreements are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2016
|
|
$
|
133
|
|
2017
|
|
|
135
|
|
2018
|
|
|
99
|
|
2019
|
|
|
45
|
|
2020
|
|
|
1
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
413
|
|
Less amounts representing interest
|
|
|
(29
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
384
|
|
|
|
|
|
|
Contingencies
In
the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated.
When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The
accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. As of March 31, 2016 and December 31, 2015, the Company was not
involved in any material legal proceedings, with the exception of the lawsuit with a former executive, as described below.
Third-Party Manufacturer
Dispute
The Company is engaged in a dispute with Capstone concerning amounts allegedly owed under the Manufacturing Agreement. Capstone claims
that it is owed approximately $22.0 million in outstanding payables, of which $20.8 million was included in the Companys accounts payable balance as of March 31, 2016. The companies are working to reconcile the $1.2M variance which
relates to invoices not received by the Company as well as questions about shipping and receiving documentation to support potentially open invoices as claimed by Capstone. The Company disputes Capstones claim, and claims that Capstone owes
the Company at least $13.5 million in losses caused by, among other things, Capstones failure to timely manufacture and supply the Companys products. On February 12, 2016, Capstone requested a mediation with the American
Arbitration Association. As of the date of this report, the mediation is scheduled for May 2016 in New York.
18
Supplier Complaint
On January 15, 2016, ThermoLife International LLC (ThermoLife), a supplier of nitrates to MusclePharm, filed a complaint against the Company
in Arizona state court. In its complaint, ThermoLife alleges that the Company failed to meet minimum purchase requirements contained in the parties supply agreement. On March 14, 2016, the Company filed an answer to ThermoLifes
complaint, denying the allegations contained in the complaint, and filed a counterclaim alleging that ThermoLife breached its express warranty to MusclePharm because ThermoLifes products were defective and could not be incorporated into the
Companys products. The action is pending.
Former Executive Lawsuit
On December 30, 2015, the Company accepted notice by Mr. Richard Estalella (Estalella) to terminate his employment as the Companys
President. Although Estalella sought to terminate his employment with the Company for Good Reason, as defined in Estalellas employment agreement with the Company (the Employment Agreement), the Company advised
Estalella that it deemed his resignation to be without Good Reason.
On February 3, 2016, Estalella filed a complaint in Colorado state court against
the Company and Ryan Drexler, Interim Chief Executive Officer, Interim President and Chairman of the Board of Directors, alleging, among other things, that the Company breached the Employment Agreement, and seeking certain equitable relief and
unspecified damages. The Company believes Estalellas claims are without merit. Estalella remains a member of the Companys Board of Directors.
As of the date of this report, the Company has evaluated the potential outcome of this lawsuit and recorded the liability consistent with our policy.
Endorser Dispute
The Company is engaged in a
dispute with ETW Corp. (ETW) concerning the validity of, and payments allegedly owed under, an endorsement agreement with professional golfer Tiger Woods, and amendments thereto (as amended, the Endorsement Agreement). ETW
claims that the Company owes it approximately $7.0 million under the Endorsement Agreement. The Company has the entire $7.0 million accrued for as of March 31, 2016. The Company, however, believes that it does not owe any amounts under the
Endorsement Agreement, and has demanded the return of payments previously made, as a result of, among other things, certain misrepresentations and omissions made by ETW and its representatives. The parties have agreed to mediate the dispute. The
mediation is scheduled for May 2016 in New York.
Shareholder Derivative Complaint
On October 27, 2015, Brian D. Gartner, derivatively and on behalf of MusclePharm Corporation, filed a verified shareholder derivative complaint in the 8th
District Court, State of Nevada, Clark County (No. A-15-726810-B) alleging, among other things, breaches of fiduciary duty as members of the Board of Directors and/or executive officers of the Company against Brad Pyatt, Lawrence S. Meer, Donald W.
Prosser, Richard Estalella, Jeremy R. Deluca, Michael J. Doron, Cory Gregory, L. Gary Davis, James J. Greenwell, John H. Bluher and Daniel J. McClory. Mr. Gartner alleges a series of accounting and disclosure failures resulted in the
filing of materially false and misleading filings with the SEC from 2010 through July 2014, resulting in settlement with the SEC requiring payment of $700,000 of civil penalties. Mr. Gartner seeks various remedies, including interpretation of bylaws
provisions, permanent injunctive relief, damages against the defendants for breaches of their fiduciary duty, corporate governance changes to ensure the Company maintain proper internal controls and SEC reporting procedures, as well as costs and
reasonable attorneys fees, accountants and experts fees, costs and expenses. The individual defendants seek removal of the action to federal court and a scheduling stipulation is contemplated. The case continues in Nevada District
Court with the most recent action being the filing of affidavits of service by the plaintiff.
SEC Settlement
In September 2015, the Companys proposal regarding final settlement of an ongoing SEC investigation was accepted, and all aspects of the
investigation related to the Company were terminated. The Company, without admitting or denying the SEC claims, agreed to a payment of $700,000 which was accrued for in 2014 and paid during 2015 and 2016. The Company also agreed to the appointment
of an independent consultant, mutually acceptable to the SEC and the Company, for a 12-month period to monitor the Companys reporting practices and internal controls.
Insurance Carrier Lawsuit
On February 12,
2015, the Company filed a complaint in the District Court, City and County of Denver, Colorado against Liberty Insurance Underwriters, Inc. (Liberty) claiming wrongful and unreasonable denial of coverage for the cost and expenses that
the Company incurred in connection with the SEC investigation and related matters under the Companys Directors and Officers insurance policies.
19
Sponsorship and Endorsement Contract Liabilities
The Company has various non-cancelable endorsement and sponsorship agreements with terms expiring through 2022. The total value of future contractual payments
as of March 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
Remainder
of 2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
Outstanding Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endorsement
(1)
|
|
$
|
1,898
|
|
|
$
|
2,580
|
|
|
$
|
2,500
|
|
|
$
|
4,167
|
|
|
$
|
5,000
|
|
|
$
|
6,667
|
|
|
$
|
22,812
|
|
Sponsorship
|
|
|
3,639
|
|
|
|
2,294
|
|
|
|
2,404
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
9,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future payments
|
|
$
|
5,537
|
|
|
$
|
4,874
|
|
|
$
|
4,904
|
|
|
$
|
5,152
|
|
|
$
|
5,000
|
|
|
$
|
6,667
|
|
|
$
|
32,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts in the table above include $22.5 million in connection with the endorsement agreement with Marine MP, LLC (Arnold Schwarzenegger) that will not be due as the agreement was terminated in May 2016 (see
Note 16).
|
Note 10: Stockholders Equity
Common Stock
For the three
months ended March 31, 2016, the Company issued common stock including restricted stock awards, as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Type
|
|
Quantity
(Shares)
|
|
|
Valuation
($)
|
|
|
Range of
Value per
Share
|
|
Stock issued to employees, executives and directors
|
|
|
145,245
|
|
|
$
|
756
|
|
|
$
|
1.89-2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
145,245
|
|
|
$
|
756
|
|
|
$
|
1.89-2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015, the Company issued common stock including restricted stock awards, as follows (in
thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Type
|
|
Quantity
(Shares)
|
|
|
Valuation
($)
|
|
|
Range of
Value per
Share
|
|
Stock issued to employees, executives and directors
|
|
|
51,805
|
|
|
$
|
2,523
|
|
|
$
|
3.48 8.60
|
|
Stock issued in conjunction with energy drink agreement
|
|
|
150,000
|
|
|
|
1,198
|
|
|
|
7.99
|
|
Stock issued in conjunction with MusclePharm apparel rights acquisition
|
|
|
170,000
|
|
|
|
1,394
|
|
|
|
8.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
371,805
|
|
|
$
|
5,115
|
|
|
$
|
3.48 8.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.
Common stock outstanding as of March 31, 2016 and December 31, 2015 has been adjusted to include shares legally outstanding even if subject to future
vesting.
Treasury Stock
For the three months
ended March 31, 2016 and 2015, the Company did not repurchase any shares of its common stock and held 875,621 shares in treasury as of March 31, 2016 and December 31, 2015. As of December 31, 2015, 860,900 of the Companys shares held in
treasury were subject to a pledge with a lender in connection with a term loan. As of March 31, 2016, these shares were returned to treasury as the term loan was paid off in January 2016.
20
Note 11: Stock-Based Compensation
The Companys stock-based compensation for the three months ended March 31, 2016 consist primarily of restricted stock awards. The
activity of restricted stock awards granted to employees, executives and board members was as follows:
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock Awards
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Unvested balance December 31, 2015
|
|
|
1,025,999
|
|
|
$
|
12.34
|
|
Granted
|
|
|
145,245
|
|
|
|
1.99
|
|
Vested
|
|
|
(810,245
|
)
|
|
|
12.40
|
|
Cancelled
|
|
|
(10,000
|
)
|
|
|
13.00
|
|
|
|
|
|
|
|
|
|
|
Unvested balance March 31, 2016
|
|
|
350,999
|
|
|
$
|
7.91
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock awards granted to employees and board members for the three months ended
March 31, 2016 and 2015 was $289,000 and $75,000. As of March 31, 2016 and December 31, 2015, the total unrecognized expense for unvested restricted stock awards, net of expected forfeitures, was $1.8 million and $8.5 million,
respectively, which is expected to be amortized over a weighted-average period of 2.8 and 3.0 years, respectively.
Accelerated Vesting of
Restricted Stock Awards Related to Brad Pyatts, Former Chief Executive Officer, Termination of Employment Agreement
On March 15, 2016, Brad
Pyatt, the Companys former Chief Executive Officer, terminated his employment with the Company. Pursuant to the terms of the separation agreement with the Company, in exchange for a release of claims, the Company agreed to pay severance in the
amount of $1.1 million, payable over a 12-month period, a lump sum of $250,000 and reimbursement of COBRA premiums. In addition, the remaining unvested restricted stock awards held by Brad Pyatt of 500,000 shares vested in full upon his termination
in accordance with the original grant terms. In connection with the accelerated vesting of these restricted stock awards, the Company recognized stock compensation expense of $3.9 million, which is included in the salaries and benefits expense in
the accompanying consolidated statement of operations for the three months ended March 31, 2016.
Stock Options
In February 2016, the Company issued options under the 2015 Equity Incentive Plan to purchase 137,362 shares of the Companys common stock to
Mr. Drexler, the Companys Interim Chief Executive Officer, Interim President and Chairman of the Board of Directors, and 54,945 to Michael Doron, the Lead Director of the Board of Directors. These stock options have a contractual term of
10 years and a grant date fair value of $294,000, which is amortized on a straight-line basis over the vesting period of 2 years. The Company determined the fair value of the stock options using the Black-Scholes model. For the three months
ended March 31, 2016, the Company recorded stock compensation expense of $14,000. There were no options granted in the three months ended March 31, 2015.
Restricted Stock Awards Related to Energy Drink Agreement
In January 2015, the Company entered into an energy drink agreement with Langer Juice and Creative Flavor Concepts to expand into a new product line. In
connection with the agreement, the Company issued a total of 150,000 shares of its restricted common stock with trade restrictions for a period of three years. The restricted stock awards issued had a grant date fair value of approximately $1.2
million, which was initially included as a component of prepaid stock compensation and additional paid-in capital in the consolidated balance sheets upon issuance. The prepaid stock compensation was originally amortized over the performance period
of ten years. In connection with the restructuring plan disclosed further in Note 8, the Company discontinued this product and wrote off the unamortized prepaid stock compensation of $1.1 million in August 2015.
Agreements with Worldwide Apparel, LLC Muscle Pharm Apparel Rights
In February 2015, the Company entered into an agreement with Worldwide Apparel, LLC (Worldwide) to terminate Worldwides right to use
MusclePharms brand images in apparel effective March 28, 2015. The brand rights were originally licensed in May 2011, and amended in March 2014 prior to the termination. The consideration related to the acquisition of the MusclePharm Apparel
from Worldwide consists of a cash consideration of $850,000 and 170,000 shares of MusclePharm common stock with an aggregated fair value of $1.4 million. The total cost of the MusclePharm apparel acquisition of $2.2 million was included in the
caption brand within intangible assets, net, in the accompanying consolidated balance sheet, and is subject to amortization over a period of seven years.
Restricted Stock Awards Issued Related to Attempted Financing Agreement
In May 2015, the Company negotiated the termination of an attempted financing agreement with a lending institution and issued 50,000 shares of its common
stock. The fair value of the common stock was $325,000 based upon the closing price of common stock on the date of issuance, and was recorded as selling, general and administrative expense.
Restricted Stock Awards Issued Related to Consulting/Endorsement Agreement
In May 2015, the Company entered into consulting and endorsement agreements with William Phillips. In connection with the endorsement agreements, the
Company agreed to issue a total of 50,000 shares of its restricted common stock. The restricted common stock issued had a grant date fair value of $292,000, which was included as a component of prepaid stock compensation and additional paid-in
capital in the consolidated balance sheets upon issuance. The prepaid stock compensation was originally amortized over the performance period of three years. In connection with the restructuring disclosed in Note 8, the Company terminated the
consulting and endorsement agreements with William Phillips and wrote-off the unamortized prepaid stock compensation of $268,000 in August 2015.
In
connection with the consulting agreement, the Company also agreed to issue restricted shares worth $25,000 (based upon the weighted average stock price during the 15-day-period prior to issuance) within 10 days after each subsequent three-month
period
21
term. In July 2015, the Company issued 5,189 shares of its common stock to William Phillips. The fair value of the common stock was $28,000 based upon the closing price of common stock on
the date of issuance, and was recorded as advertising and promotion expense. No additional common stock will be issued to William Phillips under this agreement.
Restricted Stock Awards Issued to Ryan Drexler, Interim Chief Executive Officer, Interim President and Chairman of the Board of Directors, Related to
Loan Modification
In October 2015, the Company entered into loan modification agreements with the banking institution under its line of
credit and term loan to: (i) change the maturity date of the loans to January 15, 2016, (ii) prohibit the loans to be declared in default prior to December 10, 2015, except for defaults resulting from failure to make timely payments, and
(iii) delete certain financial covenants from the line of credit. In consideration for these modifications, Ryan Drexler, Interim Chief Executive Officer, Interim President and Chairman of the Board of Directors, and a family member, provided their
individual guaranty for the remaining balance of the loans ($6.2 million). In consideration for executing his guaranty, the Company issued to Mr. Drexler 28,571 shares of common stock with a grant date fair value of $80,000 (based upon the
closing price of common stock on the date of issuance).
Restricted Stock Awards to Non-Employees
In July 2014, in connection with an endorsement agreement, the Company issued 446,853 shares of its restricted common stock to ETW Corp with an aggregate
market value of $5.0 million, as further described in Note 13. In September 2014, the Company entered into a consulting agreement with a third-party service provider and issued 30,000 shares of its restricted common stock with an aggregate
market value of $402,000. These restricted stock awards granted to non-employees were initially included as a component of prepaid stock compensation and additional paid-in capital in the consolidated balance sheet upon issuance. The prepaid stock
compensation was originally amortized over the performance period. In connection with the restructuring plan disclosed further in Note 8, the Company wrote-off the unamortized prepaid stock compensation related to these restricted stock awards to
non-employees of $3.8 million in August 2015.
Note 12: Net Loss per Share
Basic net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock outstanding during
each period. Diluted net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the
treasury stock method to determine whether there is a dilutive effect of outstanding option and warrant contracts.
The following table sets forth the
computation of the Companys basic and diluted net loss per share for the periods presented (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(6,605
|
)
|
|
$
|
(7,479
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in computing net loss per share, basic and diluted
|
|
|
13,896,876
|
|
|
|
13,333,868
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
The following securities were excluded from the computation of diluted net loss per share for the periods presented because
including them would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock options (exercise price - $1.89 - $425/share)
|
|
|
192,307
|
|
|
|
472
|
|
Warrants (exercise price - $11.90/share)
|
|
|
100,000
|
|
|
|
|
|
Unvested restricted stock
|
|
|
350,999
|
|
|
|
2,273,766
|
|
Convertible note (exercise price - $2.30/share)
|
|
|
2,608,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stock equivalents
|
|
|
3,252,001
|
|
|
|
2,274,238
|
|
|
|
|
|
|
|
|
|
|
22
Note 13: Endorsement Agreements
Arnold Schwarzenegger
In
July 2013, the Company entered into an Endorsement Licensing and Co-Branding Agreement by and among, the Company, Arnold Schwarzenegger, Marine MP, LLC, and Fitness Publications, Inc. Under the terms of the agreement, Mr. Schwarzenegger was
co-developing a special Arnold Schwarzenegger product line being co-marketed under Mr. Schwarzeneggers name and likeness.
In connection with this
agreement, the Company also issued to Marine MP, LLC fully vested restricted shares of common stock with an aggregate market value of $8.5 million. As of March 31, 2016 and December 31, 2015, the amount of unamortized stock compensation expense
related to this agreement was $0.9 million and $1.6 million, respectively. The shares are being amortized over the original three-year term of the agreement. The full amount of unamortized stock compensation is included as a component of prepaid
stock compensation, current portion in the consolidated balance sheets. As disclosed in Note 16, this agreement has been terminated effective May 6, 2016.
On March 8, 2016, the Company received a demand notice for $2.7 million. The Company has expensed these costs in 2015 and they remained accrued as of March
31, 2016.
Tiger Woods
On July 1, 2014,
the Company entered into an Endorsement Agreement with ETW Corp. Under the terms of the agreement, Tiger Woods agreed to endorse certain of the Companys products and use a golf bag during all professional golf play which prominently displayed
the MusclePharm name and logo.
In conjunction with this agreement, on July 3, 2014, the Company issued 446,853 shares of the Companys
restricted common stock to ETW Corp with an aggregate market value of $5.0 million. The shares were amortized over the original four-year term of the agreement. The current and non-current portions of the unamortized stock compensation were
initially included as a component of prepaid stock compensation in the consolidated balance sheets. The amount of unamortized stock compensation expense of $3.5 million related to this agreement was written off in connection with the restructuring
plan disclosed further in Note 8.
The Company is engaged in a dispute with ETW Corp. concerning the validity of, and payments allegedly owed under,
amendments to the Endorsement Agreement. ETW Corp. claims that the Company owes approximately $7.0 million under the agreement. The Company has the entire $7.0 million accrued for as of March 31, 2016. The Company, however, believes that it does not
owe any amounts under the agreement and has demanded the return of payments previously made. The parties have agreed to mediate the dispute. The mediation is scheduled for May 2016 in New York.
Johnny Manziel
On July 15, 2014, the Company
entered into an Endorsement Agreement for the services of Johnny Manziel. As part of this agreement, the Company issued a warrant to purchase 100,000 shares of MusclePharm common stock at an exercise price of $11.90 per share. The warrants vest
monthly over a period of 24 months beginning August 15, 2014, and have a five-year contractual term. For the three months ended March 31, 2016 and 2015, the Company recognized stock-based compensation expense of $3,000 and $33,000,
respectively, related to these warrants, which is included as a component of advertising and promotion expense in the accompanying consolidated statements of operations. The Company used the Black-Scholes model to determine the estimated fair value
of the warrants, with the following assumptions: contractual life of five years, risk free interest rate of 1.7%, dividend yield of 0%, and expected volatility of 55%. In connection with the restructuring disclosed in Note 8, the Company
notified Johnny Manziel of its intention to terminate the endorsement agreement; however, Johnny Manziel disputes the termination notice. As of March 31, 2016, 83,338 shares were vested under the warrant.
Note 14: Income Taxes
The Company recorded an income tax provision of $131,000 and $12,000 for the three months ended March 31, 2016 and 2015,
respectively, related to foreign income taxes and federal and state minimum taxes.
Income taxes are provided for the tax effects of transactions reported
in the consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the
assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The
ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income
tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has established a full valuation allowance as it is more likely than not that the tax benefits
will not be realized as of March 31, 2016.
23
Note 15: Geographical Information
The Companys chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating
resources and evaluating financial performance. As such, the Company currently has a single reporting segment and operating unit structure. In addition, substantially all of the Companys revenue and long-lived assets are attributable to
operations in the U.S. for all the periods presented.
Revenue, net by geography is based on the company addresses of the customers. The following table
sets forth revenue, net by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
29,692
|
|
|
$
|
31,588
|
|
International
|
|
|
13,220
|
|
|
|
9,734
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
$
|
42,912
|
|
|
$
|
41,322
|
|
|
|
|
|
|
|
|
|
|
Note 16: Subsequent Events
Sale of BioZone Subsidiary
In
April 2016, the Company entered into an agreement to sell its wholly-owned subsidiary, BioZone, for cash of approximately $9.8 million, of which $1.5 million is subject to an earn-out based on the financial performance of BioZone for the twelve
months following the closing of the transaction. The Company agrees at the closing of the sale to purchase a minimum of $3.0 million of products from BioZone annually for an initial term of three years. In addition, MusclePharm agrees to pay down
$350,000 of BioZones accounts payables which will be deducted from the purchase price. As part of the transaction, the Company agrees to sell to the purchaser 200,000 shares of its common stock for $50,000. The agreement provides that if the
Company is unable to obtain certain concessions from a landlord at one of BioZones facilities, BioZone may cause the Company to assume the lease of that facility. The transaction is expected to close in the second fiscal quarter of 2016.
Termination of Marine MP, LLC (Arnold Schwarzenegger) Agreement
On May 3, 2016 the Company received written notice from Marine MP, LLC (lender), Arnold Schwarzenegger (endorser), and Fitness Publications (collectively
referred to as the Parties) that the Parties were terminating the endorsement licensing and co-branding agreement with the Company effective May 6, 2016. The agreement was subject to an auto-renewal clause which the Company did not
expect to achieve and, therefore, the agreement would have expired on July 25, 2016.
Included in Note 9, footnote 1, is $22.5 million of future
contractual payments related to this endorsement agreement which the Company will no longer be committed to with the termination of this agreement between the Parties.
24