Notes
to Consolidated Financial Statements
(Unaudited)
Note
1. Description of Business
Description
of Business
MusclePharm
Corporation, together with its subsidiaries (the “Company” or “MusclePharm”) is a scientifically-driven, performance
lifestyle company that develops, markets and distributes branded sports nutrition products and nutritional supplements that are manufactured
by the Company’s co-manufacturers. Our portfolio of recognized brands, including MusclePharm and FitMiss, is marketed and sold
globally.
The
Company has historically incurred significant losses and experienced negative cash flows since inception. As of September 30, 2021, the
Company had cash of $0.4 million, a decline of $1.6 million from the December 31, 2020 balance of $2.0 million. As of September 30, 2021,
the Company had a working capital deficit of $26.7 million, a stockholders’ deficit of $29.8 million and an accumulated deficit
of $199 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there
is substantial doubt about our ability to continue as a going concern.
The
Company’s ability to continue as a going concern is dependent upon it generating profits in the future and/or obtaining the necessary
financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The Company is evaluating
different strategies to obtain financing to fund its operations to cover expenses and focus on achieving a level of revenue adequate
to support its current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock,
debt borrowings, partnerships and/or collaborations.
The
Company has been focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product
discounts and promotional activity, along with reducing the number of SKU’s and negotiate pricing for raw materials. In addition,
the Company has worked to negotiate lower production costs with its co-manufacturers. Although these steps improved gross margins through
the first quarter of 2021, with the recent increases in commodity prices, primarily protein, the Company’s gross margins
have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2020.
In
2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive.
The Company launched three flavors of MP Combat Energy in September for domestic distribution and three additional flavors for
international distribution. The Company believes with the launch of its new energy products, reductions in operating costs and continued
focus on gross profit and top line sales growth will allow it to ultimately achieve sustained profitability. However, the Company can
give no assurances that this will occur, especially with the cost to launch new energy products along with the recent increase in the
cost of protein, which may have a material impact on the Company’s profitability. Additionally, the Company’s profitability
may be materially impacted by the ability of our third-party manufacturers to meet our customers’ demands. Although, the Company
believes entering the functional energy space will help to increase sales and gross margin, and reduce exposure to commodity prices,
the Company can give no assurances that this will occur. To manage cash flow, the Company has entered into multiple financing arrangements.
The
Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business
confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic contributes
to that level of volatility and uncertainty and has created economic disruption. The Company is actively managing its business to respond
to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may
emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or
the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced
operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business,
financial condition and results of operations. Management continues to monitor the business environment for any significant changes that
could impact the Company’s operations. The Company has taken proactive steps to manage costs and discretionary spending, such as
remote working and reducing facility related expense.
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, these statements do not include all the information and notes required by U.S. GAAP for complete financial
statements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The
Company’s management believes the unaudited interim consolidated financial statements include all adjustments of a normal recurring
nature necessary for the fair presentation of the Company’s financial position as of September 30, 2021, results of operations
for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be
expected for the year ended December 31, 2021.
These
unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related
notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 29,
2021.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. 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 deferred tax assets,
the assessment of useful lives, recoverability and valuation of long-lived assets, likelihood and range of possible losses on contingencies,
present value of lease liabilities, among others. Actual results could differ from those estimates.
Shipping
and Handling
The
Company accounts for shipping and handling costs as fulfillment activities, which are therefore recognized upon shipment of the goods.
For
the three and nine months ended September 30, 2021, the Company incurred $0.4
million and $1.4
million, respectively, of inbound shipping and
handling costs. For the three and nine months ended September 30, 2020, the Company incurred $0.2
million and $0.9
million, respectively, of inbound shipping
and handling costs. Shipping and handling costs related to inbound purchases of raw material and finished goods are included in cost
of revenue in our consolidated statements of operations.
For
the three and nine months ended September 30, 2021, the Company incurred $0.7
million and $2.3
million, respectively, of shipping and handling
costs related to shipments to our customers. For the three and nine months ended September 30, 2020, the Company incurred $0.6
million and $1.7
million, respectively, of shipping and handling
costs related to shipments to our customers. Shipping and handling costs related to shipments to our customers is included in “Selling,
general and administrative” expense in our consolidated statements of operations.
Sales
Discounts and Returns
The
Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes. During the three months ended September
30, 2021 and 2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $1.9
million and $4.1
million, respectively, which accounted for 13.9%
and 20.4%
of gross revenue in each period, respectively.
During
the nine months ended September 30, 2021, and 2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $6.3
million and $11.7
million, respectively, which accounted for 13.5%
and 19.1%
of gross revenue in each period, respectively.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution.
The Company maintains its cash balance at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000. There was an aggregate uninsured cash balance of $0.1 million as of September 30, 2021. Management
believes the financial risk associated with these balances is minimal and has not experienced any losses to date.
Significant
customers are those that represent more than 10% of the Company’s revenue, net or accounts receivable for each period presented.
For
the three months ended September 30, 2021, the Company had one customer who individually accounted for 50%
of net revenue. For the nine months ended September
30, 2021, the Company had three customers who individually accounted for 44%,
12%,
and 11%
of net revenue. Two customers accounted for 51%,
10%
of accounts receivable, net as of September 30,
2021.
For
the three months ended September 30, 2020, the Company had two customers who individually accounted for 46% and 10% of net revenue. For
the nine months ended September 30, 2020, the Company had three customers who individually accounted for 37%, 19% and 13% of net revenue.
Three customers accounted for 37%, 20% and 11% of accounts receivable, net as of September 30, 2020.
The
Company uses a limited number of non-affiliated suppliers for contract manufacturing of its products. For the three months ended September
30, 2021, the Company had three suppliers who individually accounted for approximately 19%,
16%
and 12%
of its purchases with contract manufacturers
and raw material providers. For the nine months ended September 30, 2021, the Company had three suppliers who individually accounted
for approximately 22%,
17%
and 15%
of its purchases with contract manufacturers
and raw material providers. Three vendors accounted for 26%,
19%,
10%
of accounts payable as of September 30, 2021.
For
the three months ended September 30, 2020, the Company had two suppliers who individually accounted for approximately 37%
and 10%
of its purchases with contract manufacturers
and raw material providers. For the nine months ended September 30, 2020, the Company had three suppliers who individually accounted
for approximately 26%,
23%
and 22%
of its purchases with contract manufacturers
and raw material providers.
Recent
Accounting Pronouncements
In
July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which requires the measurement of all expected credit losses of financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions
and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 is effective for periods beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently
evaluating the impact this ASU may have on its consolidated financial statements.
In
August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU eliminates the beneficial conversion and cash conversion
accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that
are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular
convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. This guidance
is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption
is permitted, but not earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to
adopt the guidance in an interim period. The Company is currently evaluating the impact this ASU may have on its consolidated financial
statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU addresses
issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment
is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.
Recently
Adopted Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was expected
to reduce cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles
in Topic 740 in U.S. GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception
to the incremental approach for intra-period tax allocation; exceptions to accounting for basis differences when there are ownership
changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated
losses. The ASU also simplifies U.S. GAAP for: franchise taxes that are partially based on income; transactions with a government that
result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted
changes in tax laws in interim periods. The Company adopted this ASU effective January 1, 2021, with certain provisions applied retrospectively
and other provisions applied prospectively. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated
balance sheet, statements of operations, or cash flows.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period financial statement presentations, including classification
of certain labilities and operating expenses. These changes in presentation did not have a material impact on the Company’s financial
condition or results of operations. The Company has updated its Consolidated Statements of Operations to be presented by function, which
did not change total operating expenses or gross margins.
Note
3. Inventory
Inventory
consisted solely of finished goods and raw materials used to manufacture our products by one of our co-manufacturers (in thousands):
Schedule of Inventory
|
|
|
As of
September 30, 2021
|
|
|
As of
December 31, 2020
|
|
|
Raw materials
|
|
$
|
754
|
|
|
$
|
332
|
|
|
Finished goods, net
|
|
|
835
|
|
|
|
700
|
|
|
Inventory, net
|
|
$
|
1,589
|
|
|
$
|
1,032
|
|
Note
4. Accrued and Other Liabilities
As
of September 30, 2021 and December 31, 2020, the Company’s accrued and other liabilities consisted of the following (in thousands):
Schedule of Accrued and Other Liabilities
|
|
|
As of
September 30, 2021
|
|
|
As of
December 31, 2020
|
|
|
Accrued professional fees
|
|
$
|
216
|
|
|
$
|
242
|
|
|
Accrued interest
|
|
|
756
|
|
|
|
644
|
|
|
Accrued payroll and bonus
|
|
|
578
|
|
|
|
738
|
|
|
Settlements – short-term (Nutrablend and 4Excelsior)
|
|
|
2,230
|
|
|
|
2,005
|
|
|
Accrued expenses - ThermoLife
|
|
|
1,364
|
|
|
|
1,364
|
|
|
Accrued and other short-term liabilities
|
|
|
1,784
|
|
|
|
1,201
|
|
|
Accrued and other liabilities
|
|
$
|
6,928
|
|
|
$
|
6,194
|
|
Note
5. Interest and other income (expense), net
For the three and nine months ended September 30, 2021 and 2020, “Interest
and other income (expense), net” consisted of the following (in thousands):
Schedule of Interest and Other Expense, Net
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
For the
Three Months
Ended September 30,
|
|
|
For the
Nine Months
Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, related party
|
|
$
|
(161
|
)
|
|
$
|
(76
|
)
|
|
$
|
(429
|
)
|
|
$
|
(228
|
)
|
|
Interest expense, other
|
|
|
(235
|
)
|
|
|
(249
|
)
|
|
|
(693
|
)
|
|
|
(581
|
)
|
|
Interest expense, secured borrowing arrangement
|
|
|
(287
|
)
|
|
|
(312
|
)
|
|
|
(710
|
)
|
|
|
(1,060
|
)
|
|
Foreign currency transaction loss
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
22
|
|
|
|
(20
|
)
|
|
Other income
|
|
|
228
|
|
|
|
183
|
|
|
|
666
|
|
|
|
350
|
|
|
Total interest and other expense, net
|
|
$
|
(465
|
)
|
|
$
|
(456
|
)
|
|
$
|
(1,144
|
)
|
|
$
|
(1,539
|
)
|
Note
6. Leases
A
summary of the Company’s lease portfolio as of September 30, 2021 and December 31, 2020 is presented in the table below (in thousands):
Schedule of Supplemental Balance Sheet Information
|
|
|
Balance Sheet Classification
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
ROU assets, net
|
|
$
|
271
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability - current
|
|
$
|
446
|
|
|
$
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability - long term
|
|
|
-
|
|
|
|
343
|
|
|
Total lease liabilities
|
|
|
|
$
|
446
|
|
|
$
|
724
|
|
Supplemental
cash flow information related to leases was as follows:
Schedule of Supplemental Cash Flow Information
|
|
|
Nine months ended September 30, 2021
|
|
|
Nine months ended September 30, 2020
|
|
|
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
277
|
|
|
$
|
506
|
|
|
Operating cash flows from finance leases
|
|
|
-
|
|
|
|
1
|
|
|
Financing cash flows from finance leases
|
|
|
-
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining lease term was as follows:
|
|
|
|
|
|
|
|
|
|
Operating leases (in years)
|
|
|
1.0
|
|
|
|
1.8
|
|
|
Finance leases (in years)
|
|
|
-
|
|
|
|
-
|
|
|
The weighted average discount rate was as follows:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
18
|
%
|
|
|
18
|
%
|
|
Finance leases
|
|
|
-
|
|
|
|
5
|
%
|
Note
7. Other Long-Term Liabilities
As
of September 30, 2021, and December 31, 2020, the Company’s other long-term liabilities consisted of the following (in thousands):
Schedule of Other Long-Term Liabilities
|
|
|
As of
September 30, 2021
|
|
|
As of
December 31, 2020
|
|
|
Settlements – long-term (Nutrablend and 4Excelsior)
|
|
|
2,741
|
|
|
|
3,906
|
|
|
Paycheck Protection Program loan
|
|
|
820
|
|
|
|
965
|
|
|
Other
|
|
|
-
|
|
|
|
200
|
|
|
Other long-term liabilities
|
|
$
|
3,561
|
|
|
$
|
5,071
|
|
Note
8. Debt
Related-Party
Refinanced Convertible Note
On
November 29, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, the Company’s Chairman of the Board
of Directors and Chief Executive Officer (the “November 2020 Refinancing”), in which the Company issued to Mr. Drexler a
convertible secured promissory note (the “November 2020 Convertible Note”) in the original principal amount of $2,871,967 ,
which amended and restated a convertible secured promissory note dated as of August 21, 2020. The $2,871,967
million November 2020 Convertible Note bears
interest at the rate of 12%
per annum. Unless earlier converted or repaid,
all outstanding principal and any accrued but unpaid interest under the November 2020 Convertible Note was due and payable on July 1,
2021; however, the Company and Mr. Drexler agreed to an extension until July 14, 2022. Any interest
not paid when due shall be capitalized and added to the principal amount of the November 2020 Convertible Note and bear interest on the
applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.
Mr.
Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price of $0.23 per share. At the election of the Company, one-sixth of the interest may
be paid in kind (“PIK Interest”) by adding such amount to the principal amount of the note, or through the issuance of shares
of the Company’s common stock to Mr. Drexler. The PIK Interest is convertible to common stock at the closing price per share on
the last business day of each calendar quarter. In no event will the conversion price of such PIK Interest be less than $0.10. The Company
may prepay the Note by giving Mr. Drexler between 15- and 60-days’ notice depending upon the specific circumstances, subject to
Mr. Drexler’s conversion right. The Company intends to pay all interest due on the Convertible Note to Mr. Drexler at the end of
each calendar quarter.
The
November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur
indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated
to the secured borrowing arrangement the Company entered into with Prestige Capital Corporation (“Prestige”).
The
convertible note balance as of September 30, 2021 and December 31, 2020 was $2,871,967.
Related-Party
Secured Revolving Promissory Note/Related-Party Convertible Note
On
October 15, 2020, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Ryan Drexler.
Under the terms of the Revolving Note, the Company can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12%
per annum. The funds were used for the purchase of whey protein and other general corporate purposes. Both the outstanding principal,
if any, and all accrued interest under the Revolving Note were due on March 31, 2021;
On
August 13, 2021, the Company issued to Ryan Drexler (the “Holder”) a convertible secured promissory note (the “August
2021 Convertible Note”) in the original principal amount of $2,457,549
and cancelled the Revolving Note.
The
August 2021 Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each calendar
quarter. At the Company’s option (as determined by its independent directors), the Company may repay up to one sixth of any interest
payment by either adding such amount to the principal amount of the August 2021 Convertible Note or by converting such interest amount
into an equivalent amount of the Company’s common stock, $0.001 par value per share (the “Common Stock”). Any interest
not paid when due shall be capitalized and added to the principal amount of the August 2021 Convertible Note and bear interest on the
applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. Both
the principal and any accrued but unpaid interest under the August 2021 Convertible Note will be due on July 14, 2022, unless converted
or repaid earlier.
The
Holder may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price equal to the closing price of the common stock on October 15, 2021. The Company may
prepay the August 2021 Convertible Note by giving the Holder between 15 and 60 days’ notice depending upon the specific circumstances,
subject to the Holder’s conversion right.
The
August 2021 Convertible Note contains customary events of default, including, among others, the failure by the Company to make a payment
of principal or interest when due. Following an event of default, at the option of the Holder and upon written notice to the Company,
or automatically under certain circumstances, all outstanding principal and accrued interest will become due and payable. The August
2021 Convertible Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur
indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the August 2021 Convertible Note. The August 2021 Convertible Note is subordinated
to certain other indebtedness of the Company.
The convertible note balance as of September 30,
2021 was $2,457,549 and December 31, 2020 was zero.
The revolver balance of September 30, 2021 was zero
and December 31,2020 was $0.7 million
For the three months ended September 30, 2021
and 2020, interest expense related to the total related party debt was $0.2 million and $0.1 million respectively.
For the nine months ended September 30, 2021 and
2020, interest expense related to the total related party debt was $0.4 million and $0.2 million, respectively.
Secured
Borrowing Arrangement
In
January 2016, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with 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 Purchase and Sale 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 borrowing of $12.5 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 chargebacks (including chargebacks for any customer amounts that remain outstanding for over 90 days), disputes,
or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which
varies from 0.7% to 4%, 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 first priority lien upon all accounts receivable, inventory,
fixed assets, general intangibles, and other assets. Prestige will have no recourse against the Company if payments are not made due
to the insolvency of an account debtor within 90 days of invoice date, with the exception of international
and certain domestic customers. On April 10, 2019, the Company and Prestige amended the terms of the agreement. The agreement
was extended until April 1, 2020 and automatically renews for one (1) year periods unless either party receives written notice of cancellation
from the other, at minimum, thirty (30) days prior to the expiration date thereafter.
On
June 14, 2021 , Prestige advanced the Company $1 million with a six-month term, 15% interest rate and 2% accommodation fee.
On
July 26, 2021, Prestige advanced the Company $1 million with a six month term and a 15% interest rate. In addition, there was an accommodation
fee equal to 1% of the amount advanced plus 18,750 stock options.
As
of September 30, 2021, and December 31, 2020, the Company had outstanding borrowings under the secured borrowing arrangement (including
the 2 advances) of approximately $6.1
million and $7.1
million, respectively.
On Oct 12th, the June 14th and July 26th Prestige
$2 million advance was extended to the date of the termination of the $7.0 million senior secured note offering.
During
the three months ended September 30, 2021 and 2020, the Company assigned to Prestige, accounts with an aggregate face amount of approximately
$15 million and $14.6 million, respectively, for which Prestige paid to the Company approximately $12 million and $11.6 million, respectively,
in cash. During the three months ended September 30, 2021 and 2020, $11.2 million and $11.6 million, respectively, was repaid to Prestige,
including fees and interest.
During
the nine months ended September 30, 2021 and 2020, the Company assigned to Prestige, accounts with an aggregate face amount of approximately
$47.8 million and $41 million, respectively, for which Prestige paid to the Company approximately $38.2 million and $32.8 million, respectively,
in cash. During the nine months ended September 30, 2021 and 2020, $39.3 million and $34.3 million, respectively, was repaid to Prestige,
including fees and interest.
Paycheck
Protection Program Loan
Due
to economic uncertainty as a result of the ongoing pandemic (COVID-19), on May 14, 2020, the Company received an aggregate principal
amount of $964,910 pursuant to the borrowing arrangement (“Note”) with Harvest Small Business Finance, LLC (“HSBF”)
and agreed to pay the principal amount plus interest at a 1% fixed interest rate per year, on the unpaid principal balance. The Note
includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act.
The
Note is expected to mature on May 16, 2025. Payments were due by November 16, 2020 (the “Deferment Period”) and interest
was accrued during the Deferment Period. However, the Flexibility Act, which was signed into law on June 5, 2020, extended the Deferment
Period to the date that the forgiven amount is remitted by the United States Small Business Administration (“SBA”) to HSBF.
The Company is in the process of filling out the forgiveness application form. As of September 30, 2021, the Company owed approximately
$1.0 million (principal plus accrued interest), which $0.1 million is classified as “short-term” and the remaining amount
is recorded within “Other long-term liabilities.”
On
October 25th, 2021, the Company received a letter from HSBF notifying the Company that its SBA PPP loan has
been forgiven in full
by HSBF. The Company has $965K
loan liability and $13K
in accrued interest that will be eliminated from the general ledger in October.
Change Capital Holdings I, LLC Merchant and Purchase Agreement
On August 31, 2021 the company entered into a merchant receivables
and purchase securities agreement with Change Capital Holdings I, LLC (“Change Capital”). The company received funding of
$1 million for purchase of protein and other components. The agreement term is 1 year but can be paid back at any time.
On October 12th, 2021 the company repaid the outstanding
balance to Change Capital Holdings I, LLC.
Note
9. Commitments and Contingencies
Settlements
Manchester
City Football Group
The
Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning
amounts allegedly owed by the Company under a sponsorship agreement with CFG (the “Sponsorship Agreement”).
On
July 28, 2017, the Company approved a Settlement Agreement (the “CFG Settlement Agreement”) with CFG effective July 7, 2017.
The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement,
the Company agreed to pay CFG a sum of $3 million, which was recorded as accrued expenses in 2017. The settlement consists of a $1 million
payment that was advanced by a related party on July 7, 2017, a $1 million installment paid on July 7, 2018 and a subsequent $1 million
installment payment to be paid by July 7, 2019. Of this amount, the Company has remitted $0.3 million.
During
the three months ended September 30, 2021 and 2020, the Company recorded a charge of $19,000
and $19,000,
respectively and during the nine months ended September 30, 2021 and 2020, the Company recorded a charge of $57,000
and $57,000,
respectively. This charge, representing imputed interest, is included
in “Interest and other expense, net” in the Company’s consolidated statements of operations.
Nutrablend
Matter
On
February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against the Company in the United States District
Court for the Eastern District of California, claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate
to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods.
On
September 25, 2020, the parties successfully mediated the case to a settlement (the “Nutrablend Agreement”) and the Company
agreed to (i) pay approximately $3.1 million (“Owed Amount”) in monthly payments (“Monthly Payments”) from September
1, 2020 through June 30, 2023 and (ii) issue monthly purchase orders (“Purchase Orders”) at minimum amounts accepted by Nutrablend.
The
Company agreed to issue Purchase Orders in a combined total amount of at least (i) $1,500,000 from September 1, 2020 through November
30, 2020; (ii) $1,800,000 from December 1, 2020 through February 28, 2021; (iii) $2,100,000 from March 31, 2021 through May 31, 2021;
(iv) $2,100,000 from June 1, 2021 through August 31, 2021; and (v) $1,400,000 from September 1, 2021 through October 30, 2021. Beginning
on November 1, 2021, the Company will be required to issue monthly Purchase Orders to Nutrablend in a minimum amount of $700,000 until
the Owed Amount is paid in full to Nutrablend. In the event that the Company pays the Owed Amount in full before September 1, 2021, it’s
entitled to a rebate on all completed Purchase Orders. Further, once the monthly payments, and any additional payments that the Company
has made on the Owed Amount, reduce the outstanding balance of the Owed Amount to below $2.0 million, the Company is eligible for an
extension of a line of credit from Nutrablend in an amount of up to $3.0 million.
On
July 7, 2021, the Company commenced an action against Nutrablend in the Central District of California, seeking (i) a declaration that
the Nutrablend Agreement purchase order provisions have been terminated due to Nutrablend’s failure to provide the Company with
reasonable assurances of its ability to fulfill its purchase orders; (ii) a declaration that approximately $2.0 million in purchase orders
that the Company placed in July and August 2020 were intended to and do count towards the minimums set forth in the Nutrablend Agreement;
and (iii) damages based on Nutrablend’s failure to fulfill purchase orders. The case is ongoing.
As
of September 30, 2021, the Company determined that approximately $1.1
million dollars of the Owed Amount was due within
a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated balance sheets. The present value
of the remaining Owed Amount that was due after a year was $0.7
million, and the amount was recorded in “Other
long-term liabilities” in the consolidated balance sheets. The Company made payments of $1.0
million as of September 30, 2021.
During
the three and nine months ended September 30, 2021, the Company recorded interest of $0.1
million and $0.2
million, respectively. This charge, representing
imputed interest, is included in “Interest and other expense, net” in the Company’s consolidated statements of operations.
On
September 23, 2021, the Company entered into an Amendment to a Settlement Agreement that was originally entered into on September 25,
2020. Pursuant to the Amended Agreement, the Company is no longer obligated to issue Purchase Orders to Nutrablend as stated in the Settlement
Agreement, which, as stated in the Form 8-K dated September 25, 2020, consisted of at least (i)
$1,500,000
from
September 1, 2020 through November 30, 2020; (ii) $1,800,000
from
December 1, 2020 through February 28, 2021; (iii) $2,100,000
from
March 1, 2021 through May 31, 2021; (iv) $2,100,000
from
June 1, 2021 through August 31, 2021; and (v) $1,400,000
from
September 1, 2021 through October 30, 2021. The
Monthly Payments provision of the Settlement Agreement remains unchanged.
4Excelsior
Matter
On
March 18, 2019, Excelsior Nutrition, Inc. (“4Excelsior”), a manufacturer of MusclePharm products, filed an action against
the Company in the Superior Court of the State of California for the County of Los Angeles, claiming approximately $6.2 million in damages
relating to allegedly unpaid invoices, as well as approximately $7.8 million in consequential damages.
On
December 16, 2020, the Company and 4Excelsior entered into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant
to which the parties resolved and settled the civil action pending in the Superior Court of the State of California for the County of
Los Angeles (the “Litigation”). The parties agreed to a mutual general release of claims and to jointly file within 10 business
days of the effective date of the Agreement a stipulation and proposed order of dismissal, dismissing with prejudice all claims and counterclaims
asserted in the Litigation. The Company agreed to pay $4.75 million (the “Settlement Amount”) in four monthly payments of
$70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million until the Settlement Amount is fully paid. The
Company may prepay all or any portion of the Settlement Amount at any time without penalty or premium. The Agreement provides that, in
the event of a Default (as defined in the Agreement) by the Company, the entire outstanding balance of the Settlement Amount will become
immediately due and payable, plus accrued interest at a rate of 18% per annum, commencing from the date of default.
The
Company determined that approximately $1.1
million dollars of the Settlement Amount was
due within a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated balance sheets. The
present value of the remaining Settlement Amount that was due after a year was $2.0
million, and the amount was recorded in “Other
long-term liabilities” in the consolidated balance sheets. The Company made payments of $0.8
million as of September 30, 2021.
During
the three and nine months ended September 30, 2021, the Company recorded interest expense of $0.1
million and $0.3
million, respectively, in the consolidated
statements of operations.
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. The
Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may
be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the
nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the
experience gained from similar cases. As of September 30, 2021, the Company was involved in the following material legal proceedings
described below.
ThermoLife
International
In
January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to the Company, filed a complaint against
the Company in Arizona state court. ThermoLife alleged that the Company failed to meet minimum purchase requirements contained in the
parties’ supply agreement. The court held a bench trial on the issue of damages in October 2019, and on December 4, 2019, the court
entered judgment in favor of ThermoLife and against the Company in the amount of $1.6
million, comprised of $0.9
million in damages, interest in the amount of
$0.3
million and attorneys’ fees and costs in
the amount of $0.4
million. The Company recorded $1.6
million in accrued expenses in 2018. As of September
30, 2021, the total amount accrued, including interest, was $1.9
million. The Company has filed an appeal
and posted bonds in the total amount of $0.6
million in order to stay execution on the judgment
pending appeal. Of the $0.6
million, $0.25
million (including fees) was paid by Mr. Drexler
on behalf of the Company. See “Note 8. Debt” for additional information. The balance of $0.35
million was secured by a personal guaranty from
Mr. Drexler, while the associated annual fee of $12,500
has been paid by the Company. On April 27, 2021,
the appellate court issued a decision largely affirming the trial court judgement, except vacating the judgement’s $0.3
million prejudgment interest award and remanding
for a recalculation of prejudgment interest. On May 18, 2021, ThermoLife filed a motion asking the trial court to increase the Company’s
appeal bond to the full amount of the judgment, or $1.9
million, which the Court denied on June 2,
2021.
For
both the three months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was $67,025
and for both the nine months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was
$66,000.
The
Company intends to vigorously continue pursuing its defenses. On June 25, 2021, the Company filed a petition for review in the Arizona
Supreme Court requesting that the Court accept review of the appeal affirming the judgment against the Company. ThermoLife opposed the
petition for review on July 26, 2021. The Arizona Supreme Court has not yet ruled on the Company’s petition for review.
White
Winston Select Asset Fund Series MP-18, LLC et al., v. MusclePharm Corp., et al., (Nev. Dist. Ct.; Cal. Superior Court; Colorado Dist.
Ct.; Mass. Super. Ct.)
On
August 21, 2018, White Winston Select Asset Fund Series MP-18, LLC and White Winston Select Asset Fund, LLC (together “White Winston”)
initiated a derivative action against the Company and its directors (the “director defendants”). White Winston alleges that
the director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by the
Company to Mr. Drexler (the “Amended Note”) in exchange for $18.0 million in loans. White Winston alleges that this refinancing
improperly diluted their economic and voting power and constituted an improper distribution in violation of Nevada law. In its complaint,
White Winston sought the appointment of a receiver over the Company, a permanent injunction against the exercise of Mr. Drexler’s
conversion right under the Amended Note, and other unspecified monetary damages. On September 13, 2018, White Winston filed an amended
complaint, which added a former executive of the Company, as a plaintiff (together with White Winston, the “White Winston Plaintiffs”).
On December 9, 2019, the White Winston Plaintiffs filed a Second Amended Complaint, in which they added allegations relating to the resignation
of the Company’s auditor, Plante & Moran PLLC (“Plante Moran”). the Company has moved to dismiss the Second Amended
Complaint. That motion has not yet been fully briefed.
Along
with its complaint, White Winston also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction
enjoining the exercise of Mr. Drexler’s conversion right under the Amended Note. On August 23, 2018, the Nevada district court
issued an ex parte TRO. On September 14, 2018, the court let the TRO expire and denied White Winston’s request for a preliminary
injunction, finding, among other things, that White Winston did not show a likelihood of success on the merits of the underlying action
and failed to establish irreparable harm. Following the court’s decision, the Company filed a motion seeking to recoup the legal
fees and costs it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded the Company $56,000
in fees and costs.
Due
to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable degree
of likelihood, as of the date of this report, the outcome of the trial, the Company has not recorded an estimate for its potential liability.
On
June 17, 2019, White Winston moved for the appointment of a temporary receiver over the Company, citing Plante Moran’s resignation.
The court granted White Winston’s request to hold an evidentiary hearing on the motion, but subsequently stayed the action pending
the parties’ attempts to resolve their dispute. Although the parties have been unable to reach a resolution, the litigation has
not yet resumed. On July 30, 2019, White Winston filed an action in the Superior Court of the State of California in and for the County
of Los Angeles, seeking access to the Company’s books and records and requesting the appointment of an independent auditor for
the company. On February 25, 2021, the court ordered the Company to produce certain documents, denied White Winston’s request for
an auditor, and ordered the Company to pay a $1,500 penalty. On July 20, 2021 the California court awarded White Winston $92,942 in attorneys’
fees and cost relating to the books-and-records action. The Company paid the amounts due on July 30, 2021, and on August 4, 2021 White
Winston submitted a filing acknowledging that the California court’s judgment has been fully satisfied.
IRS
Audit
On
April 6, 2016, the Internal Revenue Service (“IRS”) selected our 2014 Federal Income Tax Return for audit. As a result of
the audit, the IRS proposed certain adjustments with respect to the tax reporting of our former executives’ 2014 restricted stock
grants. Due to the Company’s current and historical loss position, the proposed adjustments would have no material impact on the
Company’s Federal income tax. On October 5, 2016, the IRS commenced an audit of our employment and withholding tax liability for
2014. The IRS contended that the Company inaccurately reported the value of the restricted stock grants and improperly failed to provide
for employment taxes and Federal tax withholding on these grants. In addition, the IRS proposed certain penalties associated with the
Company’s filings. On April 4, 2017, the Company received a “30-day letter” from the IRS asserting back taxes and penalties
of approximately $5.3 million, of which $4.4 million related to withholding taxes, specifically, income withholding and Social Security
taxes, and $0.9 million related to penalties. Additionally, the IRS asserted that the Company owes information reporting penalties of
approximately $2.0 million.
The
Company’s counsel submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties
on the Company’s behalf, and the Company pursued this matter vigorously through the IRS appeal process. An Appeals Conference was
held with the IRS in Denver, Colorado on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s
claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At
the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit
penalties should be conceded by the IRS. The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s
claims have been reduced from approximately $7.3 million to about $5.3 million.
The
remaining issue involved the fair market value of restricted stock units the Company granted to certain former officers (the “Former
Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagreed as to the value of the restricted
stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS exchanged expert valuation reports on the fair market
value of the stock and had extensive negotiations on this issue. The IRS also made parallel claims regarding the restricted stock units
against the Former Officers of the Company. The IRS asserted that the Former Officers received ordinary income from the stock grants,
and that they owe additional personal income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike
the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging
the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers
have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also
involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers
who are directly and principally liable for the amount of any tax due, and not the Company.
The
Former Officers cases were scheduled for trial in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February
4, 2020. The basis for the continuance was that the IRS and the Former Officers had made progress toward a settlement of the valuation
issue involving the grants of the restricted stock. The Tax Court ordered the Former Officers to file status reports regarding progress
of their settlement negotiations with the IRS on or before February 28, 2021. The IRS and the Former Officers filed status reports with
the Tax Court on February 26, 2021. After receiving the status reports, the Tax Court issued an order directing the parties to file further
status reports on or before July 9, 2021. The Tax Court has not set a trial dates in the cases of the Former Officers.
On
June 29, 2021, an IRS Appeals Officer confirmed that the tax matter had exceeded the applicable statute of limitations and was deemed
closed from any further assessment by the IRS.
On
August 22, 2018, Richard Estalella filed an action against us and two other defendants in the Colorado District Court for the County
of Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014 restricted stock
grants. We have answered Estalella’s complaint, asserted counterclaims against Estalella for his failure to ensure that all withholding
taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against two valuation firms named in the
action (as well as their principals) for failing to properly value the 2014 restricted stock grants for tax purposes. Trial in the matter
has been scheduled for February 7, 2022. There are no amounts accrued related to this matter.
The
Company engaged in mediation with all parties to Estalella’s lawsuit on November 2, 2021. Following mediation, on November 3, 2021,
the Company approved a global settlement with the parties to Mr. Estalella’s lawsuit. The parties are currently in the process
of negotiating, finalizing, and executing the settlement agreement. This settlement agreement, upon finalization by the parties and dismissal
of the litigation by the Court, will constitute a full and final settlement of Mr. Estalella’s claims against all parties to the
litigation, including the Company, as well as of the Company’s claims against the two valuation firms.
Note
10. Stock-Based Compensation
Restricted
Stock
For
the three and nine months ended September 30, 2021, the Company recorded $0.0 million of stock-based compensation expense related to
restricted stock.
For
the three and nine months ended September 30, 2020, the Company recorded $0.0 and $0.2 million, respectively, of stock-based compensation
expense related to restricted stock.
Transaction
Equity Bonus
On
April 5, 2021, with the appointment of the Company’s President and Chief Financial Officer, the Company granted an award where
upon the occurrence of a sale of the Company, the President and Chief Financial Officer will receive 2% of the fully diluted equity of
the Company. The grant will vest upon the one-year anniversary and if a sale transaction has not occurred by the two-year anniversary,
then the President and Chief Financial Officer shall have the option to convert the transaction equity bonus into common shares. The
fair value of this grant is approximately $1.0 million, which is being expensed on a straight-line basis over one-year.
For
the three and nine months ended September 30, 2021, the Company recorded $0.2 and $0.5 million of stock-based compensation expense related
to transaction awards.
For
the three and nine months ended September 30, 2020, the Company recorded no expense related to transaction awards.
Stock
Options
On
May 12, 2021, the Company entered into an Agreement (the “Agreement”) with Joseph Cannata (“Cannata”),
pursuant to which the Company has engaged Cannata on a non-exclusive basis to assist with the growth of the Company’s energy beverage
product line.
In
connection with entry into the Agreement, the Company issued to Cannata an option to purchase 1,673,994 shares of the Company’s
common stock at a price per share of $1.12. The option has an exercise term of 10 years (subject to potential acceleration upon a sale
of the Company) and will vest in two equal tranches upon the achievement of certain net revenue milestones related to the Company’s
energy beverage products with the determination in the second quarter of 2021 that it is probable the performance criteria related to
the grants will be achieved. The estimated fair value of this grant is $1.9 million and was determined by using the Black-Scholes valuation
model with a term of 7.5 years; annual volatility rate of 205%; discount rate of 1.34%; and 0% for dividend rate. The fair value of performance-based
restricted stock awards is recognized over the derived requisite vesting period beginning in the period in which they are deemed probable
to vest.
On July 26, 2021, the
Company entered into a Modification Agreement (the “Modification”) with Prestige Capital Finance, LLC (“Prestige”),
providing a second over-advance from the purchase and sale agreement dated January 2016. The over-advance provided $1 million of funding
to the Company, to be repaid within the earlier of six months from the date of the agreement, or when the Company arranges additional
funding. In connection with the Modification, the Company will grant options to Prestige to purchase 18,750 shares of the Company’s
common stock.
On August 12, 2021, the
Company entered into an Agreement (the “Agreement”) with T.J. Dillashaw (“Dillashaw”), pursuant to which the
Company has engaged Dillashaw on a non-exclusive basis to promote the Company’s energy beverage product line. In connection with
entry into the Agreement, the Company will issue to Dillashaw an option to purchase 50,000 shares of the Company’s common stock.
On September 1, 2021,
the Company will provide a stock option grant to an employee to be vested after two years of continuous employment. In connection with
option grant, the Company will issue to the employee an option to purchase 25,000 shares of the Company’s common stock.
For
the three and nine months ended September 30, 2021, the Company recorded approximately $0.2
million
and $0.2
of stock-based compensation expense related
to stock options.
For
the three and nine months ended September 30, 2020, the Company recorded no expense related to stock options.
Note
11. Net Loss per Share
Basic
net loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding
during each period.
The
following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented (in
thousands, except share and per share data):
Schedule of Basic and Diluted Net Income (loss) Per Share
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net Income (loss)
|
|
$
|
(3,933
|
)
|
|
$
|
678
|
|
|
$
|
(6,090
|
)
|
|
$
|
365
|
|
|
Weighted average common shares used in computing net loss per share,
basic
|
|
|
33,386,200
|
|
|
|
33,008,189
|
|
|
|
33,134,933
|
|
|
|
32,746,147
|
|
|
Potentially dilutive securities
|
|
|
-
|
|
|
|
16,089,406
|
|
|
|
-
|
|
|
|
16,089,406
|
|
|
Weighted average common shares used in computing net loss per share,
diluted
|
|
|
33,386,200
|
|
|
|
49,097,595
|
|
|
|
33,134,933
|
|
|
|
48,835,553
|
|
|
Net Income (loss) per share, basic
|
|
$
|
(0.12
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.01
|
|
|
Net Income (loss) per share, diluted
|
|
$
|
(0.12
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.01
|
|
Diluted
net loss per share is computed by dividing net loss for the period by the weighted average number of 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 potentially dilutive securities, and the if-converted method to assess the dilutive
effect of the convertible notes.
There
was no dilutive effect for the outstanding awards for the three and nine months ended September 30, 2021 the Company reported net loss
for three and nine periods presented. However, if the Company had net income for the nine months ended September 30, 2021,
the potentially dilutive securities included in earnings per share computation would have been 17,922,541.
The
following securities were excluded from the computations of diluted Net Income (loss) per share, as the effect of the securities would
be anti-dilutive:
Schedule of Outstanding Potentially Dilutive Securities
|
|
|
As of September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock options
|
|
|
1,673,994
|
|
|
|
171,703
|
|
|
Warrants
|
|
|
—
|
|
|
|
1,289,378
|
|
|
Unvested restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
Convertible notes
|
|
|
16,154,795
|
|
|
|
—
|
|
|
Total common stock equivalents
|
|
|
17,828,789
|
|
|
|
1,461,081
|
|
Note
12. Income Taxes
The
Company recorded a tax provision of $32,000 and $20,000 for the three months ended September 30, 2021, and 2020, respectively, and $40,000
and $64,000 for the nine months ended September 30, 2021 and 2020, respectively.
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 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 September 30, 2021.
Note
13. Segments, Geographical Information
The
Company’s 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 long-lived assets are attributable to operations in the U.S. for both 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):
Schedule of Revenue, Net by Geographic Area
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Revenue, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,541
|
|
|
$
|
10,072
|
|
|
$
|
28,719
|
|
|
$
|
35,433
|
|
|
International
|
|
|
2,430
|
|
|
|
6,013
|
|
|
|
11,281
|
|
|
|
13,876
|
|
|
Total revenue, net
|
|
$
|
11,971
|
|
|
$
|
16,085
|
|
|
$
|
40,000
|
|
|
$
|
49,309
|
|
The
MusclePharm brands are marketed across major global retail distribution channels. Below is a table of revenue, net by our major distribution
channel (in thousands):
Schedule of Revenue, Net by Major Distribution Channel
|
|
|
For the Three Months Ended September 30,
|
|
|
|
|
2021
|
|
|
% of
Total
|
|
|
2020
|
|
|
% of
Total
|
|
|
Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
$
|
4,211
|
|
|
|
35
|
%
|
|
$
|
4,770
|
|
|
|
30
|
%
|
|
International
|
|
|
2,430
|
|
|
|
20
|
%
|
|
|
6,013
|
|
|
|
37
|
%
|
|
FDM
|
|
|
5,330
|
|
|
|
45
|
%
|
|
|
5,302
|
|
|
|
33
|
%
|
|
Total
|
|
$
|
11,971
|
|
|
|
100
|
%
|
|
$
|
16,085
|
|
|
|
100
|
%
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
% of
Total
|
|
|
2020
|
|
|
% of
Total
|
|
|
Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
$
|
14,324
|
|
|
|
36
|
%
|
|
$
|
21,739
|
|
|
|
44
|
%
|
|
International
|
|
|
11,281
|
|
|
|
28
|
%
|
|
|
13,876
|
|
|
|
28
|
%
|
|
FDM
|
|
|
14,395
|
|
|
|
36
|
%
|
|
|
13,694
|
|
|
|
28
|
%
|
|
Total
|
|
$
|
40,000
|
|
|
|
100
|
%
|
|
$
|
49,309
|
|
|
|
100
|
%
|
Note
14. Subsequent Events
On
October 13, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors as purchasers. Pursuant
to the Securities Purchase Agreement, the Company sold, and the Investors purchased, $7,050,000
million in principal amount of senior notes and
warrants. The Company received net proceeds of $6,202,763.
The
Senior Notes were issued with an original issue discount of 14%, bear no interest and mature after 6 months, on April 13, 2022. To secure
its obligations thereunder and under the Securities Purchase Agreement, the Company has granted a security interest over substantially
all of its assets to the collateral agent for the benefit of the Investors, pursuant to a pledge and security agreement.
The
maturity date of the Senior Notes may be extended to May 28, 2022 if no event of default has occurred and is continuing and cash flows
from operating and investing activities (but not cash flows from financing activities) of the Company and its subsidiaries was positive
for March 2022 and no event of default is reasonably expected to occur on or before April 30, 2022 and the sum of cash flows from operating
and investing activities (but not from financing activities) of the Company and its subsidiaries will be positive for April 2022. The
maturity date of the Senior Notes also may be extended under other circumstances specified therein. If the maturity date is extended,
interest will accrue on and from April 13, 2022 at 18% per annum until the Senior Notes are paid in full.
The
Warrants are exercisable for five (5) years to purchase 17,355,700 shares of the Company’s common stock, par value $0.001 per share,
at an exercise price of $0.78, subject to adjustment under certain circumstances described in the Warrants.
In
addition, each of the directors and officers of the Company entered into lock-up agreements, which prohibit sales of the Common Stock
until after April 11, 2022, subject to certain exceptions.
|
|
2.
|
Entry
into a Material Definitive Agreement.
|
On
October 28, 2021, the Company entered into an Agreement with Jason May, pursuant to which the Company has engaged May on a non-exclusive
basis to assist with the growth of the Company’s energy beverage product line.
In
connection with entry into the Agreement, the Company issued to May an option to purchase 1,673,994 shares of the Company’s common
stock at a price per share of $0.70. The option has an exercise term of 10 years (subject to potential acceleration upon a sale of the
Company) and will vest in two equal tranches upon the achievement of certain net revenue milestones related to the Company’s energy
beverage products.
In
addition, the Company agreed to make quarterly payments to May during the term of the Agreement in amounts equal to 17.5% of the gross
profit attributable to the applicable products, excluding products sold through certain excluded sales channels.
The
Agreement continues in effect unless terminated by the mutual agreement of the parties, upon the sale of the Company and upon other specified
termination events.
On
October 25th, 2021, the Company received a letter from HSBF notifying the Company that its SBA PPP loan has
been forgiven in full
by HSBF. The Company has $965K
loan liability and $13K
in accrued interest that will be eliminated from the general ledger in October.
On October 12th, 2021 the company
repaid the outstanding balance for Change Capital I, LLC.
|
|
5.
|
Secured
Borrowing Arrangement
|
On October 12th, 2021 the June
14th and July 26th Prestige $2 million advance was extended to the maturity date of the $7.0 million senior secured
note offering.
|
|
6.
|
Former
Executive Lawsuit
|
On November 3, 2021, the Company approved
a global settlement agreement with the parties to Mr. Estalella’s lawsuit. This settlement agreement, upon finalization by the
parties and dismissal of the litigation by the Court, will constitute a full and final settlement of Mr. Estalella’s claims against
all parties to the litigation, including the Company, as well as of the Company’s claims against the two valuation firms.