UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
One)
☒
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the Fiscal Year Ended December 31, 2019
OR
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the Transition Period from
to
Commission
File Number – 000-53166
MusclePharm Corporation
(Exact name of registrant as specified in its charter)
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Nevada
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77-0664193
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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4400 Vanowen St.
Burbank, CA
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91505
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(Address of principal executive offices)
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(Zip code)
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(800) 292-3909
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol(s)
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Name
of each exchange on which registered
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N/A
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Securities registered pursuant to Section 12(g) of the
Act:
Title of each class
Common Stock,
Par Value $0.001 Per Share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes
☒ No
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files) Yes ☐ No
☒
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
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☐ |
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Accelerated filer
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☐ |
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Non-accelerated
filer
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☒ |
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Smaller reporting company
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☒ |
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Emerging
growth company
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☐ |
If
an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Aggregate
market value of the common equity held by non-affiliates of the
registrants as of June 30, 2020, the last business day of the most
recently completed second fiscal quarter: $1.9
million.
Number of shares of the registrant’s common stock
outstanding at August 18, 2020:
33,101,866 (excludes
875,621 shares of common stock held in
treasury).
MusclePharm Corporation
Form 10-K
For the Year Ended December 31, 2019
TABLE OF CONTENTS
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Page
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PART I
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1
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5
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12
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12
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13
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15
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PART II
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16
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17
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17
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31
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31
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31
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32
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35
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PART III
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36
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39
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43
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45
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47
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PART IV
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48
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48
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49
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About this Report
This
Annual Report on Form 10-K relates to the Company’s (as defined
below) fiscal year ended December 31, 2019. As previously indicated
by the Company, it has been delinquent in its filings with the
Securities and Exchange Commission (the “SEC”) and is making this
filing after its due date. Simultaneously with making this filing,
the Company also is filing its delinquent filings on Form 10-Q for
the quarterly periods ended March 31, 2019, June 30, 2019 and
September 30, 2019.
Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements. All
statements contained in this Annual Report on Form 10-K other than
statements of historical fact, including statements regarding our
future results of operations and financial position, our business
strategy and plans, and our objectives for future operations, are
forward-looking statements. The words “believe,” “may,” “will,”
“estimate,” “continue,” “anticipate,” “intend,” “expect,” and
similar expressions are intended to identify forward-looking
statements. We base these forward-looking statements largely on our
current expectations and projections about future events and trends
that we believe may affect our financial condition, results of
operations, business strategy, short-term and long-term business
operations and objectives, and financial needs.
These forward-looking statements are subject to a
number of risks, uncertainties and assumptions, including those
described in Part I, Item 1A, “Risk Factors” in this Annual
Report on Form 10-K. Moreover, we operate in a very competitive and
rapidly changing environment. In particular, we have
experienced a slowdown in sales from our retail customers
due to the ongoing COVID-19 pandemic,
and we cannot predict the ultimate impact of the COVID-19 pandemic
on our business. New risks may emerge from time to time. It is not
possible for our management to predict all risks, nor can we assess
the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements we may make. In light of these risks, uncertainties and
assumptions, the future events and trends discussed in this Annual
Report on Form 10-K may not occur and actual results could differ
materially and adversely from those anticipated or implied in the
forward-looking statements.
We
undertake no obligation to revise or publicly release the results
of any revision to these forward-looking statements, except as
required by law. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements.
Note Regarding Trademarks
We
have proprietary rights to a number of registered and unregistered
trademarks worldwide that we believe are important to our business,
including, but not limited to: “MusclePharm” and “FitMiss”. We
have, in certain cases, omitted the ®, © and ™ designations for
these and other trademarks used in this Annual Report on Form 10-K.
Nevertheless, all rights to such trademarks are reserved. These and
other trademarks referenced in this Annual Report on Form 10-K are
the property of their respective owners.
PART I
MusclePharm
Corporation was incorporated in Nevada in 2006. Except as otherwise
indicated herein or the context requires otherwise, the terms
“MusclePharm,” the “Company,” “we,” “our” and “us” refer to
MusclePharm Corporation and its subsidiaries. The Company is a
scientifically-driven, performance lifestyle company
that develops, manufactures, markets and distributes
branded sports nutrition products and nutritional
supplements. Our portfolio of
recognized brands, including MusclePharm®
and FitMiss®,
is marketed and sold in more than 100 countries
globally. The Company is headquartered in Burbank,
California and, as of December 31, 2019, had the following
wholly-owned operating subsidiaries: MusclePharm Canada Enterprises
Corp., MusclePharm Ireland Limited and MusclePharm Australia Pty
Limited.
Products
The
MusclePharm brand product portfolio is designed for athletes of all
levels and anyone who pursues an active lifestyle. We offer a broad
range of performance powders, capsules, tablets and gels that
satisfy the needs of enthusiasts and professionals alike. Our
products are marketed in multiple performance and active lifestyle
distribution channels that reach athletes of all types and
demographics. Our goal is to serve the needs of our customers,
while fueling the engine of sport for all ages and genders. Our
portfolio of products targets every type of fitness enthusiast and
professional, from combat sport, weight training, bodybuilding,
running, and all team and individual sports, as well as individuals
who lead an active lifestyle.
We
place considerable emphasis on transparency, high-quality
ingredients, innovation and science. Products are placed
through rigorous third-party independent testing to ensure safe,
quality ingredients to support all levels of athletic
ability. Tests performed on products include banned substance
testing and protein verification, among others.
Sport Series -
Scientifically-advanced,
performance-driven sports nutrition items that cover the needs of
athletes. This line of award-winning, independently-tested products
helps to fuel athletes safely by increasing strength, energy,
endurance, recovery and overall athletic performance. Sport Series’
lineup includes products like Combat Protein Powder, a top selling
five-protein blend on the market, and the award winning Combat
Crunch Protein Bars.
Essentials Series -
To meet the day-in and day-out demands
of fitness and sport, the Essentials Series (formerly known as the
Core Series) line of supplements exists for athletes to take daily.
These products include daily staples for a healthy body, such as
BCAA, creatine, glutamine, carnitine, CLA, fish oil, a
multi-vitamin and more.
Natural Series - A natural,
non-genetically modified organism (“non-GMO”) sports performance
line, made for a growing consumer base that seeks organic, vegan
and plant-based nutritional product and supplement options. We
created the Natural Series with USDA-certified organic ingredients,
plant-based protein and natural caffeine sources, in clean and
delicious formats, to power all stages of the workout.
FitMiss® - Designed and formulated
specifically for the female body, FitMiss sports nutrition products
are complementary to any active female’s diet. In seeking a
stronger, more balanced foundation, FitMiss ingredients support
women in areas of weight management, lean muscle mass, body
composition, and general health and wellness.
On-the-Go – As more and more consumers are seeking healthier
and convenient snacking options, retailers across multiple channels
are capitalizing on this emerging trend by aggressively expanding
their assortments to accommodate this demand. The On-the-Go
portfolio of ready to eat products includes the award winning
Combat Crunch, Protein Crisp, Organic Protein and Protein
Cookie.
Sales
and Marketing
Our
goal is to position MusclePharm as the “must have” brand for elite
athletes and fitness enthusiasts, alike, who are on a journey to
holistically better themselves and achieve their maximum potential.
Our marketing is focused on our most prominent products and
includes brand partnerships, focusing on grass-roots marketing and
advertising efforts with athletes and retail outlets close to our
core audience. Our marketing includes digital marketing, sampling,
public relations, athlete/influencer marketing, event marketing,
trade activity, paid media, advertising, SEO/SEM, and affiliate
marketing. Our roster of elite athletes, influencers and brand
ambassadors play a role in our marketing. New product innovation is
also a key component of driving incremental sales.
Distribution Channels
MusclePharm brands are marketed across major
global retail distribution channels – Specialty, International and
Food, Drug, and Mass (“FDM”). Our largest customers, Costco
Wholesale Corporation (“Costco”), Amazon.com, Inc. (“Amazon”), and
iHerb, LLC (“iHerb”) accounted for approximately 33%, 13% and 17%
of our 2019 net revenue, respectively. Costco, Amazon and iHerb
accounted for approximately 29%, 13% and 13% of our 2018 net
revenue, respectively. For further information concerning our
customer concentration, see Note 2 to the accompanying Consolidated
Financial Statements.
Specialty:
This channel is comprised of
brick-and-mortar sales and e-commerce. Due to high competition
within this market, we continually seek to respond to customer
trends and shifts by adjusting the mix of existing product
offerings, developing new innovative products and influencing
preferences through our marketing. We experienced significant
growth in online sales in 2019, primarily through our Amazon
and iHerb distribution channels.
International:
Our international reach touches every
relevant market in the world. We seek to further grow our
international sales by continuing to offer new products in key
markets as well as opening new distribution channels in select
regions of the world. We also are evaluating the benefits of
developing expanded manufacturing partnerships outside of North
America to take advantage of local
opportunities.
FDM:
This channel is primarily served by
our direct sales force, as well as our network of brokers. We
believe direct relationships with retail partners provide us an
opportunity to expand our distribution into additional discount
warehouses and national retailers.
Below
is a table of net revenue by our major distribution
channel:
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For the Years Ended December 31,
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Distribution
Channel
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Specialty
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$35,812
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45%
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$35,690
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41%
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International
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22,691
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28%
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32,143
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36%
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FDM
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21,164
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27%
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20,280
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23%
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Total
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$79,667
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100%
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$88,113
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100%
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Product Research, Development and Quality Control
Customers’
belief in the safety and efficacy of our products is
critical. Continued innovation in delivery techniques and
ingredients, new product line extensions, and new product offerings
are important in order to sustain existing and create new market
opportunities, meet consumer demand, and strengthen consumer
relationships. To support our research and development
efforts, we invest in formulation, processing and packaging
development, perform product quality and stability studies, and
conduct consumer market research to sample consumer opinions on
product concepts, design, packaging, advertising, and marketing
campaigns.
We
are committed to science and sport being equal in our product
development. We believe real-world applications are essential. Our
state-of-the-art, 20,000 square-foot professional training and
performance facility in Burbank, California is dedicated to
optimizing the performance of our products for all ranges of
athletes. Collecting feedback from athletes in our facility helps
our team strive to improve our products and to continue to be
innovative. Our product lines have been developed through a
stringent protocol to ensure that all formulations promote quality
and safety for our customers. Our quality control team follows
detailed supplier selection and certification processes, validation
of raw material verification processes, analytical testing, process
audits, and other quality control procedures. Our products are also
subject to extensive shelf life stability testing. We also engage
third-party laboratories to routinely evaluate and validate our
internal testing processes on every MusclePharm
product.
We
qualify ingredients, suppliers, and facilities by performing site
assessments and conducting on-going performance and process
reviews. Dedicated quality teams regularly audit and assess
manufacturing facilities for compliance with Good
Manufacturing Practices (“GMPs”), as regulated by the United
States Food and Drug Administration (“FDA”), to ensure our
compliance with all MusclePharm, regulatory, and certification
standards and requirements. To ensure overall consistency, our
quality assurance team adheres to strict written procedures. From
the raw ingredient stage to the finished product stage, we
monitor and perform quality control checks. Before distributing our
products, we place our products under quarantine to test
for environmental contaminants and verify that the finished product
meets label claims. Once a product has successfully
passed quality assurance testing and conforms to specifications for
identity, purity, strength, and composition, we then
conduct testing with third-party laboratories for added
label claim verification. Multi-level practices are part of our
product development process to ensure athletes and our consumers
receive what we believe to be the most scientifically
innovative and safest products on the market. Post-distribution, we
have standard operating procedures in place for investigating and
documenting any adverse events or product quality complaints. We
are committed to the process of having all of our products
certified to be banned-substance-free before they are available to
consumers. Informed Choice, a globally recognized leader in sports
testing, conducts all of our third-party banned substance testing,
ensuring that all MusclePharm products are free of banned
substances.
Manufacturing and Distribution
We
have relationships with multiple third-party manufacturers. Certain
of our vendors supply in excess of 10% of our products. Once a
product is manufactured, it is sent to our distribution center in
Spring Hill, Tennessee, or shipped directly to the customer. All of
the third-party manufacturing facilities that we source from and
distribution facilities are designed and operated to meet current
GMP standards as promulgated by the FDA.
The
manufacturing process performed by our third-party manufacturers
generally consists of the following operations: (i) qualifying
ingredients for products; (ii) testing of all raw ingredients;
(iii) measuring ingredients for inclusion in production;
(iv) granulating, blending and grinding ingredients into a
mixture with a homogeneous consistency; (v) encapsulating or
filling the blended mixture into the appropriate dosage form using
either automatic or semiautomatic equipment; and (vi) testing
finished products prior to distribution.
We
maintain and operate a system that integrates distribution,
warehousing, and quality control. This provides real-time lot and
quality tracking of raw materials, work in progress and finished
goods. We employ a supply chain staff that works with sales,
marketing, product development, and quality control personnel to
ensure that only products that meet all specifications are produced
and released to customers.
Our Competitors
The
sports nutrition market is very competitive, and the range of
products is diverse and subject to rapid and frequent changes in
consumer demand. Competitors use price, shelf space and store
placement, brand and product recognition, new product
introductions, and raw materials to capture market share. We
believe that retailers look to partner with suppliers who
demonstrate brand development, market intelligence, customer
service, and produce high quality products with proven science. We
believe we are competitive in all of these areas.
Our
competitors include numerous nutritional companies that are highly
fragmented in terms of geographic market coverage, distribution
channels, and product categories. In addition, we compete with
large pharmaceutical companies and packaged food and beverage
companies. Many of these competitors have greater financial and
distribution resources available to them than us and some compete
through vertical integration. Private label entities have gained a
foothold in many nutrition categories and also are direct
competitors. Our principal competitors are: Glanbia Performance
Nutrition (Optimum Nutrition), Nutrabolt, (Cellucor C4), Dymatize
Enterprises LLC, and Iovate Health Sciences International Inc. As
many of our competitors are either privately held or divisions
within larger organizations, it is difficult to fully gauge their
size and relative ranking.
Government Regulation
The
formulation, manufacturing, packaging, labeling, advertising,
distribution, storage, and sale of each of our product groups are
subject to regulation by one or more governmental agencies. The
most active of these is the FDA, which regulates our products under
the Federal Food, Drug and Cosmetic Act (“FDCA”) and regulations
promulgated thereunder. The FDCA defines the terms “food” and
“dietary supplement” and sets forth various requirements that,
unless complied with, may constitute adulteration or misbranding of
such products. The FDCA has been amended several times with respect
to dietary supplements, most recently by the Nutrition Labeling and
Education Act of 1990 (the “NLEA”) and the Dietary Supplement
Health and Education Act of 1994.
FDA
regulations relating specifically to foods and dietary supplements
for human use are set forth in Title 21 of the Code of Federal
Regulations. These regulations include basic labeling requirements
for both foods and dietary supplements. Additionally, FDA
regulations require us and our third-party manufacturers to meet
relevant good manufacturing practice regulations for the
preparation, packaging and storage of our food and dietary
supplements.
Our
business practices and products are also regulated by the Federal
Trade Commission (“FTC”), the Consumer Product Safety Commission,
the United States Department of Agriculture (“USDA”) and the
Environmental Protection Agency. Our activities, including our
direct selling distribution activities, are also regulated by
various agencies of the states, localities and foreign countries in
which our products are sold.
In
foreign markets, prior to commencing operations and initiating or
permitting sales of our products in the market, we may be required
to obtain an approval, license or certification from the country’s
ministry of health or comparable agency. Prior to entering a new
market in which a formal approval, license or certificate is
required, we work extensively with local consultants and
authorities in order to obtain the requisite approvals. We
must also comply with product labeling and packaging regulations
that vary from country to country. Our failure to comply with
these regulations can result in a product being removed from sale
in a particular market, either temporarily or
permanently.
Intellectual Property
We
regard our trademarks and other proprietary rights as valuable
assets and believe that protecting our intellectual property is
crucial to the continued successful implementation of our business
strategy. Since we regard our intellectual property as a crucial
element of our business with significant value in the marketing of
our products, our policy is to rigorously pursue registrations for
all trademarks associated with our products.
We
have over 55 trademark applications in the United States, 53 of
which are currently registered with the United States Patent and
Trademark Office. Our registered trademarks include
registrations of our house marks, as well as marks associated with
our core product lines.
We
also have filed for protection of various marks throughout the
world and are committed to a significant long-term strategy to
build and protect the MusclePharm brand globally. We have
applied for the “MusclePharm” mark effective in 37 countries,
including the United States. The mark has been granted final
trademark registration effective in all 37 of those
countries.
Seasonality
Our
business does not typically experience seasonal variations, but
revenue may fluctuate based upon promotions.
Employees
As of December 31, 2019, we had 45
total employees, all of whom were full
time. None of the employees are represented by a union. Management
considers its relations with our employees to be good and to have
been maintained in a normal and customary
manner.
Corporate Information
Our principal executive offices are located at
4400 Vanowen St., Burbank, CA 91505 and our telephone number is
(800) 292-3909. We were incorporated in the State of Nevada in
2006. Our Internet addresses are www.musclepharm.com
and www.musclepharmcorp.com.
The information contained on our
websites is not incorporated herein.
Available Information
Our corporate website is
www.musclepharmcorp.com. We post the following filings as soon as
reasonably practicable after they are electronically filed with or
furnished to the SEC: our Annual Report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on
Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as amended. All such filings are available free of charge on
the Investor Relations section of our website, or from the SEC’s
website at www.sec.gov. Information on our website does not
constitute part of this report. Also available on the Investor
Relations section of our website are the charters of the committees
of our Board, as well as our corporate governance guidelines and
code of ethics.
Certain factors may have a material adverse effect on our business,
financial condition and results of operations. You should consider
carefully the risks and uncertainties described below, in addition
to other information contained in this Annual Report on Form 10-K,
including our consolidated financial statements and related notes.
The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties that we are unaware of,
or that we currently believe are not material, may also become
important factors that adversely affect our business. If any of the
following risks actually occurs, our business, financial condition,
results of operations and future prospects could be materially and
adversely affected. In that event, the trading price of our common
stock could decline, and you could lose part or all of your
investment.
Risks
Related to Our Business and Industry
We have a history of losses from operations, there is uncertainty
as to when we may become profitable, and our current indebtedness
may limit our operating flexibility, which raise substantial doubt
about the Company’s ability to continue as a going
concern.
The
Company has incurred significant losses and experienced negative
cash flows since inception. As of December 31, 2019, we had a
working capital deficit of $29.4 million, a stockholders’ deficit
of $28.0 million and recurring losses from operations including an
accumulated deficit of $195.9 million resulting from losses from
operations. During 2019, we incurred an additional substantial
loss. As a result of our history of losses and financial condition,
there is substantial doubt about our ability to continue as a going
concern.
As of
December 31, 2019, we had outstanding indebtedness of $10.2
million. For a description of our indebtedness, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital
Resources.”
The
ability to continue as a going concern is dependent upon us
achieving profitable operations in the future and/or obtaining the
necessary financing to meet our obligations and repay our
liabilities when they come due. Management is on an ongoing basis
evaluating strategies to obtain financing to fund our expenses and
achieve a level of revenue adequate to support our current cost
structure. There is no assurance that we will be able to obtain
additional financing on acceptable terms or at all or to generate
an adequate level of revenues.
Our
indebtedness, and history of losses, could have important
consequences to us. For example, it could:
●
make us more
vulnerable to general adverse economic and industry conditions,
including effects of the ongoing COVID-19 pandemic;
●
limit our ability
to obtain additional financing for working capital, capital
expenditures, acquisitions and other general corporate
requirements; and
●
limit our
flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate.
In
addition, our ability to pay or refinance our debt depends on our
successful financial and operating performance, cash flows and
capital resources, which in turn depend upon prevailing economic
conditions and certain financial, business and other factors, many
of which are beyond our control. These factors include, among
others:
●
economic and demand
factors affecting our industry;
●
increased operating
costs;
●
competitive
conditions; and
●
other operating
difficulties.
If our
cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay operating
or capital expenditures, sell material assets or operations, seek
to obtain additional capital, or restructure our debt.
We may
incur additional indebtedness in the future. Our incurrence of
additional indebtedness would intensify the risks described
above.
Our operating results may fluctuate, which makes them difficult to
predict and they may fall short of expectations.
Our
operating results may fluctuate due to a number of factors, many of
which are outside of our control. As a result, comparing our
operating results on a period-to-period basis may not be
meaningful, and you should not rely on our past results as an
indication of our future performance. Our quarterly, year-to-date,
and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Our operating
results in future quarters may not meet expectations.
Each of
the following factors, as well as others, may affect our operating
results:
●
our loss of one or
more significant customers;
●
the introduction of
successful new products by our competitors;
●
the effects of the
ongoing COVID-19 pandemic; and
●
adverse media
reports on the use or efficacy of nutritional
supplements.
Because
our business is changing and evolving, our historical operating
results may not be useful to you in predicting our future operating
results.
We will likely be required to raise additional financing to fund
our operations.
We will
likely be faced with the need to raise additional funds in the
future. There can be no assurance that we will be able to obtain
debt or equity financing on acceptable terms, or at
all.
Mr. Drexler’s stock ownership gives him the ability to
substantially influence the strategic direction of the Company and
to direct the outcome of matters requiring stockholder
approval.
Mr.
Ryan Drexler, our Chairman of the Board, Chief Executive Officer
and President, owns approximately 55.7% of our outstanding shares
of common stock. As a result, Mr. Drexler is able to substantially
influence the strategic direction of the Company and the outcome of
matters requiring approval by our stockholders. Mr. Drexler’s
interests may not be, at all times, the same as those of our other
stockholders, and his control may delay, deter or prevent acts that
may be favored by our other stockholders.
We rely on a limited number of customers for a substantial portion
of our sales, and the loss of or material reduction in purchase
volume by any of these customers would adversely affect our sales
and operating results.
During
2019, our largest customers, Costco, Amazon, and iHerb individually
accounted for approximately 33%, 13% and 17%, respectively, of our
net revenue. Net revenue is equal to our gross revenue less product
discounts, customer rebates and incentives. The loss of any of our
major customers, a significant reduction in purchases by any major
customer, price pressure from any of our major customers or any
serious financial difficulty of a major customer may have a
material adverse effect on our sales and operating
results.
The Company’s retail customers have been and may continue to be
affected by outbreaks of disease, such as epidemics or pandemics,
including the ongoing COVID-19 pandemic.
The
Company’s retail customers have been and continue to be affected by
the ongoing global COVID-19 pandemic and the resulting volatility
and uncertainty it has caused in the U.S. and international
markets. Store closures and social distancing have adversely
impacted the Company’s sales to retailers. The COVID-19 pandemic
also has the potential to significantly impact our supply chain if
the facilities of our third- party manufacturers, the distribution
centers where our inventory is managed or the operations of our
logistics and other service providers are disrupted, temporarily
closed or experience worker shortages. We may also see disruptions
or delays in shipments of certain materials or
products.
As a
result of the ongoing COVID-19 outbreak, the Company has
transitioned the majority of its workforce to a temporary remote
working model, which may result in the Company experiencing lower
work efficiency and productivity, which in turn may adversely
affect the Company’s business. As Company employees work from home
and access the Company’s system remotely, the Company may be
subject to heightened security risks, including the risks of
cyberattacks. Additionally, if any of the Company’s key management
or other employees are unable to perform his or her duties for a
period of time, including as the result of illness, the Company’s
results of operations or financial condition could be adversely
affected.
The
Company cannot reasonably estimate the length or severity of the
COVID-19 pandemic or the related responses, or the extent to which
the disruption may materially impact the Company’s business,
consolidated financial position, consolidated results of operations
or consolidated cash flows.
Our failure to respond appropriately to competitive challenges,
changing consumer preferences and demand for new products could
significantly harm our customer relationships and product
sales.
The
sports nutrition market is very competitive, and the range of
products is diverse and subject to rapid and frequent changes in
consumer demand. Our failure to accurately predict product trends
could negatively impact our results and cause our revenues to
decline. Our success with any product offering (whether new or
existing) depends upon a number of factors, including our ability
to:
●
deliver quality
products in a timely manner in sufficient volumes;
●
accurately
anticipate customer needs and forecast accurately to our
manufacturers;
●
differentiate our
product offerings from those of our competitors;
●
competitively price
our products; and
Furthermore,
products often have to be promoted heavily in stores or in the
media to obtain visibility and consumer acceptance. Acquiring
distribution for products is difficult and often expensive due to
slotting and other promotional charges mandated by retailers.
Products can take substantial periods of time to develop consumer
awareness, consumer acceptance and sales volume. Accordingly, some
products may fail to gain or maintain sufficient sales volume and
as a result may have to be discontinued. In a highly competitive
marketplace, it may be difficult to have retailer’s open SKU’s for
new products.
Our industry is highly competitive, and our failure to compete
effectively could adversely affect our market share, financial
condition, and future growth.
The
sports nutrition market is highly competitive with respect
to:
●
shelf space and
store placement;
●
brand and product
recognition;
●
new product
introductions; and
Many of
our competitors are larger, more established companies and possess
greater financial strength and other resources than we have. We
face competition in the supplement market from a number of large
nationally known manufacturers, private label brands and many
smaller manufacturers.
Our industry is highly regulated. We may in the future incur
increased compliance costs and/or incur substantial judgments,
fines, legal fees, and other costs.
The
manufacturing, packaging, labeling, advertising, distribution,
storage and sale of our products are regulated by various federal,
state, and local agencies as well as those of each foreign country
to which we distribute. Our compliance costs may increase in the
future, and those increases could be material. In addition,
governmental authorities may commence regulatory or legal
proceedings, which could restrict the permissible scope of our
product claims or the ability to manufacture and sell our products
in the future. For example, the FDA regulates our products to
ensure that the products are not adulterated or misbranded. Failure
to comply with FDA requirements may result in, among other things,
warning or untitled letters, injunctions, product withdrawals,
recalls, product seizures, fines, and criminal
proceedings.
Our
advertising is subject to regulation by the FTC under the Federal
Trade Commission Act. In recent years, the FTC has initiated
numerous investigations of dietary supplement and weight loss
products and companies. Additionally, some states also permit
advertising and labeling laws to be enforced by private attorney
generals, who may seek relief for consumers, seek class action
certifications, seek class wide damages, and product recalls. Any
of these types of actions could have a material adverse effect on
our business, financial condition, and results of
operations.
Adverse publicity or consumer perception of our products and any
similar products distributed by others could harm our reputation
and adversely affect our sales.
We are
highly dependent upon positive consumer perceptions of the safety
and quality of our products as well as similar products distributed
by other sports nutrition supplement companies. Consumer perception
of sports nutrition supplements and our products in particular can
be substantially influenced by scientific research or findings,
national media attention and other publicity about product
use.
Adverse
publicity from these sources regarding the safety, quality, or
efficacy of our products or nutritional supplements could seriously
harm our reputation and results of operations. The mere publication
of news articles or reports asserting that such products may be
harmful or questioning their efficacy could have a material adverse
effect on our business, financial condition, and results of
operations, regardless of whether such news articles or reports are
scientifically supported or whether the claimed harmful effects
would be present at the dosages recommended for such
products.
We may be exposed to material product liability claims, which could
increase our costs and adversely affect our reputation and
business.
As a
marketer and distributor of products designed for human
consumption, we could be subject to product liability claims if the
use of our products is alleged to have resulted in injury or
undesired results. Our products consist of vitamins, minerals,
herbs, and other ingredients that are classified as dietary
supplements and in most cases are not subject to pre-market
regulatory approval in the United States or internationally.
Previously unknown adverse reactions resulting from human
consumption of these ingredients could occur.
We have
not had any significant product liability claims filed against us
but, in the future, we may be subject to various product liability
claims, including due to tampering by unauthorized third parties,
product contamination, and claims that our products had inadequate
instructions for use, or inadequate warnings concerning possible
side effects and interactions with other substances. The cost of
defense can be substantially higher than the cost of settlement
even when claims are without merit. The high cost to defend or
settle product liability claims could have a material adverse
effect on our business, financial condition and results of
operations, and our insurance, if any, may not be
adequate.
In
addition, the perception of our products resulting from a product
liability claim also could have a material adverse effect on our
business, financial condition and results of
operations.
Our insurance coverage or third-party indemnification rights may
not be sufficient to cover our legal claims or other losses that we
may incur in the future.
We
maintain insurance at what we believe are adequate levels for
property, general product liability, product recall, director’s and
officer’s liability, and workers’ compensation to protect ourselves
against potential loss exposures. In the future, insurance coverage
may not be available at adequate levels or on adequate terms to
cover potential losses, including on terms that meet our customer’s
or manufacturer’s requirements. If insurance coverage is inadequate
or unavailable, we may face claims that exceed coverage limits or
that are not covered, which could increase our costs and adversely
affect our operating results.
If we are unable to retain key management personnel or hire
qualified personnel, our ability to manage our business effectively
and grow could be negatively impacted.
Over
the last few years, the Company has had significant management
turnover. Our future success depends in part on our ability to
identify, hire, develop, motivate and retain key skilled management
personnel and employees for all areas of our organization,
particularly sales and marketing. Competition in our industry for
qualified employees has been intense. The loss or limitation of the
services of any of our key management employees, including as a
result of illness, or our inability to hire qualified employees
could have a material adverse effect on our business, financial
condition and results of operations.
Changes in the economies of the markets in which we do business may
affect consumer demand for our products.
Consumer spending
habits, including spending for our products, are affected by, among
other things, prevailing economic conditions, levels of employment,
fuel prices, changes in exchange rates, salaries and wages, the
availability of consumer credit, consumer confidence and consumer
perception of economic conditions. Economic slowdowns in the
markets in which we do business and an uncertain economic outlook
may adversely affect consumer spending habits, which may result in
lower sales of our products in future periods.
Beginning in April
2020, we began experiencing a slowdown in sales to our retail
customers, including our largest customer. However, we are
experiencing growth in our largest online customer, which has
offset this decline, although there can be no assurances that such
growth will continue, or that we will have the financial resources
to produce the additional quantities required by this customer. A
prolonged global or regional economic downturn could have a
material negative impact on our business, financial condition,
results of operations and cash flows.
If we fail to effectively manage our growth, our business and
operating results could be harmed.
Growth
in our business will place significant demands on our management,
and our operational and financial infrastructure. To effectively
manage growth, we expect that we will need to continue to improve
our operational, financial and management controls and our
reporting systems and procedures. To accomplish these objectives,
we may need to hire additional employees, make certain enhancements
to our technology systems, make capital expenditures, and utilize
management resources. Failure to implement these measures could
have a material adverse effect on our business, financial condition
and results of operations.
Our intellectual property rights are valuable, and any inability to
protect them could reduce the value of our products and
brand.
We have
invested significant resources to protect our brands and
trademarks. However, we may be unable or unwilling to strictly
enforce our intellectual property rights, including our brands and
trademarks, from infringement. Our failure to enforce our
intellectual property rights could diminish the value of our brands
and product offerings and harm our business and future growth
prospects.
We may be subject to intellectual property rights claims, which are
costly to defend, could require us to pay damages and could limit
our ability to sell some of our products.
Our
industry is characterized by vigorous pursuit and protection of
intellectual property rights, which has resulted in protracted and
expensive litigation for several companies. Third parties may
assert claims of misappropriation of trade secrets or infringement
of intellectual property rights against us or against our end
customers or partners for which we may be liable. Intellectual
property lawsuits are subject to inherent uncertainties due to the
complexity of the technical issues involved, and we cannot be
certain that we would be successful in defending ourselves against
intellectual property claims.
Further, many
potential litigants have the capability to dedicate substantially
greater resources than we can to enforce their intellectual
property rights and to defend claims that may be brought against
them. Furthermore, a successful claimant could secure a judgment
that requires us to pay substantial damages or prevents us from
distributing products or performing certain services.
Product returns could negatively impact our operating results and
profitability.
We
permit the return of damaged or defective products and accept
limited amounts of product returns in certain instances. While such
returns from established customers have historically been nominal
and within management’s expectations and the provisions
established, future return rates may differ from those experienced
in the past. Any significant increase in damaged or defective
products or accepted returns could have a material adverse effect
on our operating results for the period or periods in which such
returns materialize.
We rely on third-party manufacturers for the production of our
products.
We rely
on third-party manufacturers to produce products required to meet
our quality and market needs, and plan to continue to do so. If our
contract manufacturers fail to maintain high manufacturing
standards and processes, it could harm our business. In the event
of a natural disaster or business failure, including due to
bankruptcy of a contract manufacturer, we may not be able to secure
a replacement of our products on a timely or cost-effective basis,
which could result in delays, additional costs and reduced
revenues. Additionally, our third-party manufacturers have been and
may continue to be negatively affected by the ongoing COVID-19
pandemic.
A shortage in the supply of key raw materials or price increases
could increase our costs or adversely affect our
sales.
All of
our raw materials for our products are obtained from third-party
suppliers. Since all of the ingredients in our products are
commonly used, we have not experienced shortages or delays in
obtaining raw materials. If circumstances change, shortages could
result in materially higher raw material prices or adversely affect
our ability to have a product manufactured. Prices for our raw
materials can and do fluctuate. Price increases from a supplier
would directly affect our profitability if we are not able to pass
price increases on to customers. Our inability to obtain adequate
supplies of raw materials in a timely manner or a material increase
in the price of our raw materials could have a material adverse
effect on our business, financial condition and results of
operations. Additionally, our third-party suppliers have been and
may continue to be negatively affected by the ongoing COVID-19
pandemic.
Our share price has been and may continue to be
volatile.
The
market price of our common shares is subject to significant
fluctuations in response to a multitude of factors, including
variations in our quarterly operating results and financial
condition. Factors other than our financial results that may affect
our share price include, but are not limited to, market
expectations of our performance, market perception or our industry,
the activities of our managers, customers, and investors, and the
level of perceived growth in the industry in which we participate,
general trends in the markets for our products, general economic
business and political conditions in the countries and regions in
which we conduct our business, and changes in government regulation
affecting our business, many of which are not within our control.
In addition, like many companies of our size with low trading
volume, our stock price may fluctuate significantly for reasons
unrelated to our business.
We may, in the future, issue additional shares of common stock
and/or preferred stock, which would reduce investors’ percent of
ownership and may dilute our share value.
Our
articles of incorporation, as amended, authorize the issuance of
100,000,000 shares of common stock and 10,000,000 shares of
preferred stock. As of December 31, 2019, 33,000,412 shares of our
common stock were outstanding, and we did not have any outstanding
shares of preferred stock. As of August 18, 2020, 33,101,866 shares
of our common stock were outstanding. The future issuance of common
stock and preferred stock may result in substantial dilution in the
percentage of our common stock held by our then existing
stockholders. The issuance of common stock for future services or
acquisitions or other corporate actions may have the effect of
diluting the value of the shares held by our investors and might
have an adverse effect on any trading market for our common
stock.
We may issue shares of preferred stock in the future that may
adversely impact your rights as holders of our common
stock.
Our
Board has the authority to fix and determine the relative rights
and preferences of our authorized but undesignated preferred stock,
as well as the authority to issue shares of such preferred stock,
without further stockholder approval. As a result, our Board could
authorize the issuance of a series of preferred stock that would
grant to holders preferred rights to our assets upon liquidation,
the right to receive dividends before dividends are declared to
holders of our common stock, and the right to the redemption of
such preferred stock, together with a premium, prior to the
redemption of the common stock.
To the
extent that we do issue such additional shares of preferred stock,
your rights as holders of common stock could be impaired thereby,
including, without limitation, dilution of your ownership interests
in us. In addition, shares of preferred stock could be issued with
terms calculated to delay or prevent a change in control or make
removal of management more difficult, which may not be in your
interest as a holder of common stock.
Our inventory financing and convertible promissory note agreements
contain covenants that limit our ability to incur additional debt
and grant liens on assets.
Our
convertible promissory note agreement that we have entered into
with Mr. Drexler and our inventory financing contain restrictive
covenants that limit our ability to, among other things, incur
additional debt and grant liens on assets. If we fail to comply
with the restrictions in this debt instruments, a default may allow
the debtor to accelerate the related debt and to exercise his
remedies under the agreement, which includes the right to declare
the principal amount of that debt, together with accrued and unpaid
interest and other related amounts, immediately due and payable,
and to exercise any remedies he may have to foreclose on assets
that are subject to liens securing that debt.
For
additional details regarding our indebtedness, see Note 8 to the
accompanying Consolidated Financial Statements.
Our common stock is quoted on the OTCQB, which may have an
unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTCQB Marketplace (“OTCQB”). The
OTCQB is an automated quotation service operated by OTC Markets,
LLC. The quotation of our shares on the OTCQB may result in a less
liquid market available for existing and potential stockholders to
trade shares of our common stock, in part because of the inability
or unwillingness of certain investors to acquire shares of common
stock not traded on a national securities exchange, and could
depress the trading price of our common stock and have a long-term
adverse impact on our ability to raise capital in the
future.
Nevada corporation laws limit the personal liability of corporate
directors and officers and require indemnification under certain
circumstances.
Section
78.138(7) of the Nevada Revised Statutes provides that, subject to
certain very limited statutory exceptions or unless the articles of
incorporation provide for greater individual liability, a director
or officer of a Nevada corporation is not individually liable to
the corporation or its stockholders for any damages as a result of
any act or failure to act in his or her capacity as a director or
officer, unless it is proven that the act or failure to act
constituted a breach of his or her fiduciary duties as a director
or officer and such breach involved intentional misconduct, fraud
or a knowing violation of law. We have not included in our articles
of incorporation any provision intended to provide for greater
liability as contemplated by this statutory provision.
In
addition, Section 78.7502(3) of the Nevada Revised Statutes
provides that to the extent a director or officer of a Nevada
corporation has been successful on the merits or otherwise in the
defense of certain actions, suits or proceedings (which may include
certain stockholder derivative actions), the corporation shall
indemnify such director or officer against expenses (including
attorneys’ fees) actually and reasonably incurred by such director
or officer in connection therewith.
We have ongoing material weaknesses and may in the future fail to
maintain effective systems of internal control over financial
reporting and disclosure controls and procedures, any of which
could, among other things, result in significant additional costs
being incurred, cause a loss of confidence in our financial
reporting, and adversely affect the trading price of our common
stock.
We have
concluded that our internal controls over financial reporting were
not effective as of December 31, 2018 due to the existence of
material weaknesses in such controls, and we have also concluded
that our disclosure controls and procedures were not effective as
of December 31, 2019, all as described in Item 9A, “Controls and
Procedures,” of this Annual Report on Form 10-K. Remediation
efforts to address the identified weaknesses are just beginning.
Continuing costs to remedy these material weaknesses and to address
inquiries from regulators may be significant and may require
significant time from our management and other personnel, and we
cannot assure you that we will be able to remedy the material
weaknesses.
The
incurrence of significant additional expense, or the requirement
that management and other personnel devote significant time to
these matters could reduce the time available to execute on our
business strategies and could have a material adverse effect on our
business, financial condition and results of operations. We also
cannot assure you that additional material weaknesses in our
internal control over financial reporting will not arise or be
identified in the future. If our remediation measures are
insufficient to address the identified deficiencies, or if
additional deficiencies in our internal control over financial
reporting are discovered or occur in the future, our consolidated
financial statements may contain material misstatements and we
could be required to restate our financial results and may be
unable to make our filings with the SEC on a timely basis.
Moreover, because of the inherent limitations of any control
system, material misstatements due to error or fraud may not be
prevented or detected on a timely basis, or at all.
If we
are unable to provide reliable and timely financial reports in the
future, our business and reputation may be further harmed. Failures
in internal controls may negatively affect investor confidence in
our management and the accuracy of our financial statements and
disclosures, or result in adverse publicity and concerns from
investors and commercial customers, any of which could have a
negative effect on the price of our shares, subject us to
regulatory investigations and penalties and/or shareholder
litigation, and materially adversely impact our business and
financial condition.
Item 1B. Unresolved Staff
comments
None.
As of
December 31, 2019, we operated in leased office and warehouse
facilities across the United States totaling approximately 53,000
square feet, including approximately 27,000 square feet for
our corporate headquarters and MP Sports Science Center in Burbank,
California. We do not own any real property.
Our
current office space and locations can be seen in the below
table.
|
Location
|
|
Function
|
|
|
|
|
|
Burbank,
CA
|
|
Company
Headquarters, MP Sports Science Center
|
|
27,226
|
September 30,
2022
|
$38,620
|
|
Spring
Hill, TN
|
|
Warehouse and
distribution
|
|
52,740
|
June
30, 2020*
|
$24,176
|
|
Denver,
CO
|
|
Former
Company Headquarters
|
|
30,302
|
December
31,2020
|
$11,616
|
|
Centennial,
CO
|
|
Denver
Administrative Office
|
|
10,289
|
July
30, 2020
|
$8,318
|
The
Company subleased the properties in Denver, CO and Centennial, CO
(through July 30, 2020). The Company does not intend to extend the
lease terms expiring in 2020.
*MusclePharm made
additional month-to-month lease payments on the Tennessee warehouse
for the months of July and August, 2020.
Item 3. Legal Proceedings
In the
normal course of business or otherwise, we may become involved in
legal proceedings. We 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
December 31, 2019, we were involved in the following material legal
proceedings described below. These are not the only legal
proceedings in which we are involved. We are involved in additional
legal proceedings in the ordinary course of our business and
otherwise.
ThermoLife International
In
January 2016, ThermoLife International LLC (“ThermoLife”), a
supplier of nitrates to MusclePharm, filed a complaint against us
in Arizona state court. ThermoLife alleged that we failed to meet
minimum purchase requirements contained in the parties’ supply
agreement. In March 2016, we filed counterclaims alleging that
ThermoLife’s products were defective. Through orders issued in
September and November 2018, the court dismissed MusclePharm’s
counterclaims and found that the Company was liable to ThermoLife
for failing to meet its minimum purchase requirements.
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 as of December 31, 2018. In the
interim, the Company filed an appeal, which is in the process of
being briefed, and has 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 fees of $12,500 was paid by the
Company.
The
Company intends to continue to vigorously pursue its defenses on
appeal.
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 MusclePharm and its directors
(collectively 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 MusclePharm to 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 MusclePharm, a permanent injunction against the exercise of
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 MusclePharm
executive, 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 MusclePharm’s auditor,
Plante & Moran PLLC (“Plante Moran”). MusclePharm has moved to
dismiss the Second Amended Complaint. That motion has not yet been
fully briefed.
Along
with its complaint, the White Winston Plaintiffs also filed a
motion for a temporary restraining order (“TRO”) and preliminary
injunction enjoining the exercise of 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 the White Winston Plaintiffs’ request for a
preliminary injunction, finding, among other things, that the White
Winston Plaintiffs 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, MusclePharm 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 MusclePharm $56,000 in fees and costs. The
White Winston Plaintiffs have appealed that award.
On June
17, 2019, the White Winston Plaintiffs moved for the appointment of
a temporary receiver over MusclePharm, citing Plante Moran’s
resignation. The court granted the White Winston Plaintiffs’
request to hold an evidentiary hearing on the motion, but the date
for that hearing was not set as of the date hereof.
On July
30, 2019, the White Winston Plaintiffs filed an action in the
Superior Court of the State of California in and for the County of
Los Angeles, seeking access to MusclePharm’s books and records.
MusclePharm has answered the petition, asserting as a defense that
the request does not have a proper purpose. A trial on the petition has been set
for February 25, 2021.
The
Company intends to vigorously defend these actions.
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 our current and historical loss position, the proposed
adjustments would have no material impact on our Federal income
tax. On October 5, 2016, the IRS commenced an audit of our
employment and withholding tax liability for 2014. The IRS contends
that we 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 is
proposing certain penalties associated with our filings. On April
4, 2017, we 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 asserts that we owe information
reporting penalties of approximately $2.0 million.
Our
counsel has submitted a formal protest to the IRS disputing on
several grounds all of the proposed adjustments and penalties on
our behalf, and we have been pursuing 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 $2.0 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 in dispute in this matter involves the fair market
value of restricted stock units in the Company granted to certain
of its former officers (the “Former Officers”) under Internal
Revenue Code § 83. The Company and the IRS disagree as to the value
of the restricted stock on the date of the grants, i.e., October 1,
2014. The Company and the IRS have exchanged expert valuation
reports on the fair market value of the stock and have had
extensive negotiations on this issue. The parties, however, have
not been able to reach an agreement with respect to the value of
the stock. The IRS has also made parallel claims regarding the
restricted stock units against the Former Officers of the Company.
The IRS has 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 outcome of these settlement negotiations will be relevant to
the Company’s case. The Company is closely monitoring the
settlement discussions between the IRS and the Former Officers. The
Tax Court has ordered the Former Officers to file status reports
regarding progress of their settlement negotiations with the IRS on
or before October 22, 2020.
Due
to the uncertainty associated with determining our liability for
the asserted taxes and penalties, if any, and to our inability to
ascertain with any reasonable degree of likelihood, as of the date
of this report, the outcome of the IRS appeals process, we have not
recorded an estimate for its potential liability, if any,
associated with these taxes.
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 a valuation
firm named in the action for failing to properly value the 2014
restricted stock grants for tax purposes. The Company is waiting on
next steps from the court and will continue to vigorously litigate
the matter.
4Excelsior Matter
On
March 18, 2019, 4Excelsior, a manufacturer of MusclePharm products,
filed an action against MusclePharm 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 January 27, 2020, MusclePharm
filed a counterclaim against 4Excelsior seeking unidentified
damages relating to, among other things, 4Excelsior’s failure to
fulfill a purchase order. MusclePharm also moved to strike
4Excelsior’s consequential damages on the grounds that they are
unrecoverable under the Uniform Commercial Code. The court
denied that motion, and the action has proceeded to discovery. The
Company recognized a liability of $5.3 million (past due invoices
plus interest) as of December 31, 2019. Trial has not yet been set,
although a Trial Setting Conference has been set for September 21,
2020.
The
Company intends to vigorously defend this action.
Nutrablend
Matter
On
February 27, 2020, Nutrablend, a manufacturer of MusclePharm
products, filed an action against MusclePharm in the United States
District Court for the Eastern District of California, claiming
approximately $3.1 million in allegedly unpaid
invoices. The amount is currently recorded as a liability as
of December 31, 2019. Trial has been set for November 17,
2020. The Company intends to vigorously defend this
action.
Item 4. Mine Safety
Disclosures
None.
PART
II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock is quoted on the OTCQB, which is operated by the OTC
Markets Group, under the symbol “MSLP.” Our transfer agent is
Corporate Stock Transfer, Inc., which is located at 3200 Cherry
Creek Drive South, Suite 430, Denver, Colorado
80209.
Holders
of Record
As of
August 18, 2020, the closing price of our common stock was $0.18,
as provided by the OTCQB, and we had 33,101,866 shares of common
stock outstanding, held by approximately 295 holders of record
of our common stock. The number of holders does not include
individuals or entities who beneficially own shares but whose
shares are held of record by a broker or clearing agency, but does
include each such broker or clearing agency as one record
holder.
Unregistered
Sale of Securities
During
the fiscal year ended December 31, 2019, the Company issued
1,014,021 shares of restricted stock to purchase 1,014,021 shares
of common stock, with $0 exercise price per share, to members of
its Board. The issuances of such securities were not registered
under the Securities Act of 1933, as amended (the “Securities
Act”), because the securities were offered and sold in transactions
not involving a public offering, exempt from registration under the
Securities Act pursuant to Section 4(a)(2).
The
Securities Enforcement and Penny Stock Reform Act of
1990
The
Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure and documentation related to the market for
penny stock and for trades in any stock defined as a penny stock.
Unless we can trade at over $5.00 per share on the bid, it is more
likely than not that our securities, for some period of time, would
be defined under that Act as a “penny stock.” As a result, those
who trade in our securities may be required to provide additional
information related to their eligibility to trade our shares. These
requirements present a substantial burden on any person or
brokerage firm that plans to trade our securities and could thereby
make it unlikely that any liquid trading market would ever result
in our securities so long as the provisions of this Act are
applicable to our securities.
Any
broker-dealer engaged by the purchaser for the purpose of selling
his or her shares in us will be subject to Rules 15g-1 through
15g-10 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Rather than creating a need to comply with those
rules, some broker-dealers will refuse to attempt to sell penny
stock.
The
penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from those rules, to deliver
a standardized risk disclosure document prepared by the SEC,
which:
●
contains a
description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading; contains a
description of the broker’s or dealer’s duties to the customer and
of the rights and remedies available to the customer with respect
to a violation to such duties or other requirements of the Exchange
Act;
●
contains a brief,
clear, narrative description of a dealer market, including “bid”
and “ask” prices for penny stocks and the significance of the
spread between the bid and ask price;
●
contains a
toll-free telephone number for inquiries on disciplinary
actions;
●
defines significant
terms in the disclosure document or in the conduct of trading penny
stocks; and
●
contains such other
information and is in such form (including language, type, size and
format) as the SEC shall require by rule or
regulation.
The
broker-dealer also must provide, prior to effecting any transaction
in a penny stock, to the customer:
●
the bid and offer
quotations for the penny stock;
●
the compensation of
the broker-dealer and its salesperson in the
transaction;
●
the number of
shares to which such bid and ask prices apply, or other comparable
information relating to the depth and liquidity of the market for
such stock; and
●
monthly account
statements showing the market value of each penny stock held in the
customer’s account.
In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules; the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability
statement. These disclosure requirements will have the effect of
reducing the trading activity in the secondary market for our stock
because it will be subject to these penny stock rules. Therefore,
stockholders may have difficulty selling their
securities.
Dividend
Policy
We have
never declared dividends on our common stock, and currently do not
plan to declare dividends on shares of our common stock in the
foreseeable future. We expect to retain our future earnings, if
any, for use in the operation and expansion of our business.
Subject to the foregoing, the payment of cash dividends in the
future, if any, will be at the discretion of our Board and will
depend upon such factors as restrictions in debt agreements,
earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our
Board.
ITEM 6. SELECTED FINANCIAL
DATA
The
Company qualifies as a smaller reporting company as defined in Item
10(f)(1) of SEC Regulation S-K, and is not required to provide the
information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from
those discussed below. See “Forward Looking Statements” and “Item
1A. Risk Factors.” Except as otherwise indicated herein, the terms
“MusclePharm,” “Company,” “we,” “our” and “us” refer to MusclePharm
Corporation and its subsidiaries.
Overview
MusclePharm is a
scientifically-driven, performance lifestyle company that develops,
manufactures, markets and distributes branded sports nutrition
products and nutritional supplements. We offer a broad range of performance powders,
capsules, tablets, gels and on-the-go ready to eat snacks that
satisfy the needs of enthusiasts and professionals alike.
Our portfolio of recognized brands, MusclePharm® and FitMiss®, is
marketed and sold in more than 100 countries globally. The Company
is headquartered in Burbank, California and, as of December 31,
2019, had the following wholly-owned operating subsidiaries:
MusclePharm Canada Enterprises Corp., MusclePharm Ireland Limited
and MusclePharm Australia Pty Limited.
Our
offerings are clinically developed through a six-stage research
process, and all of our manufactured products are rigorously vetted
for banned substances by the leading quality assurance program,
Informed-Choice. While we initially drove growth in the Specialty
retail channel, in recent years we have expanded our focus to drive
sales and retailer growth across leading e-commerce, Food Drug
& Mass (“FDM”), and Club retail channels, including Amazon,
Costco, Kroger, Walgreens, 7-Eleven, and many others. Our primary
distribution channels are Specialty,
International and FDM.
Our
consolidated financial statements are prepared using the accrual
method of accounting in accordance with generally accepted
accounting principles in the United States (“GAAP”) and have been
prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the
normal course of business. The Company has incurred significant
losses and experienced negative cash flows since inception. In
response to the Company’s continued losses, in 2018, management
implemented the following plans to improve the Company’s operating
costs:
1)
reduced our
workforce;
2)
renegotiated or
terminated a number of contracts with endorsers in a strategic
shift away from such arrangements and toward more cost-effective
marketing and advertising efforts; and
3)
discontinued a
number of stock keeping units (“SKUs”) and wrote down inventory to
net realizable value, or to zero in cases where the product was
discontinued.
In
addition, during the fourth quarter of 2019, management implemented
the following additional measures to improve gross
margin:
1)
reduced or
eliminate sales to low or negative margin customers;
2)
reduced product
discounts and promotional activity;
3)
implemented a more
aggressive SKU reduction; and
4)
formed a pricing
committee to review all orders to better align gross margin
expectations with product availability.
As a
result of these measures, as well as a reduction in protein prices,
the Company realized increased gross margins in the fourth quarter
of 2019, a trend which continued through the first and second
quarters of 2020. Beginning in April 2020, the Company began to
experience a slowdown in sales from its retail customers, including
its largest customer. This decline has been offset by a growth in
sales to our online customers, including our largest online
customer, although there can be no assurances that such growth will
continue, or that the Company will have the financial resources to
produce the additional quantities required by this customer.
Management believes reductions in operating costs, and continued
focus on gross margin, primarily pricing controls and a reduction
in product discounts and promotional activity with the Company’s
customers, will allow us to ultimately achieve profitability,
however, we can give no assurances that this will
occur.
See
“Liquidity and Capital Resources” for a further discussion of
management’s plans.
COVID-19
Our
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 has increased that level of volatility and uncertainty and
has created economic disruption. As COVID-19 infections have been
reported throughout the United States, certain federal, state and
local governmental authorities have issued stay-at-home orders,
proclamations and/or directives aimed at minimizing the spread of
the infection. Additionally, more restrictive proclamations and/or
directives may be issued in the future.
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.
While
we expect our revenue for 2020 to be down compared to 2019, there
are multiple factors contributing to this decline. While revenue
for April 2020 was lower due to COVID-19, as evidenced by a decline
in the Company’s FDM sales, sales in other months were in line with
the Company’s expectations. 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.
Outlook
As we
continue to execute our growth strategy and focus on our core
products, we believe that we can, over time, continue to improve
our operating margins and expense structure. In addition, we have
implemented plans focused on cost containment, customer
profitability, product and pricing controls that we believe will
improve our gross margin and reduce our losses.
We
expect that our advertising and promotion expense will continue to
decrease as we focus on reducing our
expenses and
shifting our promotional costs, in part, from general branding and
product awareness to acquiring
customers and
driving sales from existing customers. We expect that our discounts
and allowances will continue to decrease, both overall and as a
percentage of revenue, as we further reduce certain discretionary
promotional activity that does not result in a commensurate
increase in revenues. In addition, we expect our gross margin to
increase in future periods due to a decrease in protein prices
which began in the fourth quarter of 2019, although protein prices
will continue to fluctuate.
Results
of Operations
Comparison
of the Year Ended December 31, 2019 to the Year Ended December
31, 2018
|
($
in thousands)
|
For the Years Ended
December 31,
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
$79,667
|
$88,113
|
$(8,446)
|
(10)%
|
|
Cost
of revenue
|
70,979
|
69,719
|
1,260
|
2
|
|
Gross
profit
|
8,688
|
18,394
|
(9,706)
|
(53)
|
|
Operating
expenses:
|
|
|
|
|
|
Advertising
and promotion
|
2,487
|
2,939
|
(452)
|
(15)
|
|
Salaries
and benefits
|
7,910
|
8,328
|
(418)
|
(5)
|
|
Selling,
general and administrative
|
8,899
|
11,610
|
(2,711)
|
(23)
|
|
Research
and development
|
893
|
751
|
142
|
19
|
|
Professional
fees
|
3,606
|
2,598
|
1,008
|
39
|
|
Total
operating expenses
|
23,795
|
26,226
|
(2,431)
|
(9)
|
|
Loss
from operations
|
(15,107)
|
(7,832)
|
7,275
|
93
|
|
Other
(expense) income:
|
|
|
|
|
|
(Loss)
gain on settlement of obligations
|
(125)
|
1,074
|
(1,199)
|
(112)
|
|
Interest
and other expense, net
|
(3,609)
|
(3,897)
|
(288)
|
(7)
|
|
Loss
before provision for income taxes
|
(18,841)
|
(10,655)
|
8,186
|
77
|
|
Provision
for income taxes
|
86
|
100
|
(14)
|
(14)
|
|
Net
loss
|
$(18,927)
|
$(10,755)
|
$8,171
|
76%
|
The following table presents our operating results as a percentage
of revenue, net for the periods presented:
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
Revenue,
net
|
100%
|
100%
|
|
Cost
of revenue
|
89
|
79
|
|
Gross
profit
|
11
|
21
|
|
Operating
expenses:
|
|
|
|
Advertising
and promotion
|
3
|
3
|
|
Salaries
and benefits
|
10
|
9
|
|
Selling,
general and administrative
|
11
|
13
|
|
Research
and development
|
1
|
1
|
|
Professional
fees
|
5
|
3
|
|
Total
operating expenses
|
30
|
29
|
|
Loss
from operations
|
(19)
|
(8)
|
|
Other
(expense) income:
|
|
|
|
(Loss)
gain on settlement obligations
|
—
|
1
|
|
Interest
and other expense, net
|
(5)
|
(4)
|
|
Loss
before provision for income taxes
|
(24)
|
(11)
|
|
Provision
for income taxes
|
—
|
—
|
|
Net
loss
|
(24)%
|
(11)%
|
Revenue, net
We
derive our revenue through the sales of our various branded sports
nutrition products and nutritional supplements. Revenue is
recognized when control of a promised good is transferred to a
customer in an amount that reflects the consideration the Company
expects to be entitled to in exchange for the good. This usually occurs when finished goods are
delivered to the Company’s customers or when finished goods are
picked up by a customer or a customer’s
carrier.
Net
revenue reflects the transaction prices for contracts, which
includes goods shipped at selling list prices reduced by variable
consideration. We record sales incentives as a direct reduction of
revenue for various discounts provided to our customers, consisting
primarily of promotional related credits. We accrue for sales
discounts over the period they are earned. Sales discounts are
a significant part of our marketing plan to our customers as they
help drive increased sales and brand awareness with end users
through promotions that we support through our distributors and
re-sellers.
MusclePharm brands
are marketed across major global retail distribution channels –
Specialty, International, and Food, Drug, and Mass (“FDM”). Below
is a table of net revenue by our major distribution
channel:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
Distribution
Channel
|
|
|
|
|
|
Specialty
|
$35,812
|
45%
|
$35,690
|
41%
|
|
International
|
22,691
|
28%
|
32,143
|
36%
|
|
FDM
|
21,164
|
27%
|
20,280
|
23%
|
|
Total
|
$79,667
|
100%
|
$88,113
|
100%
|
Net
revenue decreased $8.4 million, or 10%, to $79.7 million for the
year ended December 31, 2019, compared to $88.1 million for the
year ended December 31, 2018. Net revenue from our
international customers decreased by $9.5 million, or 29%, year
over year. The decrease in international sales related primarily to
a general shift to domestic and online marketing. Net revenue from
FDM increased $0.9 million, or 4%, and net revenue from Specialty
lines increased $0.1 million, or 0.3%, year over year. The increase
in Specialty was due to increased promotional activity with iHerb
and Amazon, resulting in higher revenues. The increase in FDM was
due to an increase in Costco domestic sales, the result of an
additional promotional event in 2019 as compared to 2018. During
2019, we lowered our sales price to select customers, including
certain large customer, contributing to the revenue decline. The
Company significantly increased expenditures on partnerships
advertising, online impressions and click advertising with its
online customers, while reducing end-aisle and front of the store
promotions with its retail customers. Despite these measures, gross
revenues declined as the Company did not realize a significant
increase in its online revenues. Finally, we continue to monitor
the profitability of each customer, and in the event
that customers have negative or low margins, sales
activities with such customers are reduced.
Discounts and sales
allowances decreased to 25% of gross revenue, or $26.9 million, for
the year ended December 31, 2019 from 28% of gross revenue, or
$33.5 million for 2018. Discounts and sales allowance fluctuate
based on customer mix and changes in discretionary promotional
activity. Further, we will continue to monitor our discounts and
reduce where practical to ensure we continue to meet our gross
margin expectations.
During
the year ended December 31, 2019, our largest customers, Costco,
Amazon, and iHerb, accounted for approximately 33%, 13%, and 17%,
respectively, of our net revenue. During the year ended December
31, 2018, our largest customers, Costco, Amazon, and iHerb
accounted for approximately 29%, 13%, and 13% respectively, of our
net revenue.
Cost of Revenue and Gross Margin
Cost of
revenue for MusclePharm products is directly related to the
production, manufacturing, and freight-in of the related products
purchased from third-party contract manufacturers. We mainly ship
customer orders from our distribution center in Spring Hill
Tennessee. The facility is operated with our equipment and
employees, and we own the related inventory. We also use contract
manufacturers to drop ship products directly to our
customers.
Our
gross profit fluctuates due to several factors, including sales
incentives, new product introductions and upgrades to existing
product lines, changes in customer and product mixes, the mix of
product demand, shipment volumes, our product costs, pricing, and
inventory write-downs. Cost of revenue will continue to fluctuate,
primarily due to changes in protein prices, which prices are
impacted, in part, by our ability to negotiate better pricing with
our manufacturers. Protein prices increased for most of 2019, only
declining at the end of the year.
Costs
of revenue increased 2% to $71.0 million for the year ended
December 31, 2019, compared to $69.7 million for 2018. Accordingly,
gross profit for the year ended December 31, 2019 decreased $9.7
million to $8.7 million compared to $18.4 million for 2018. Gross
profit margin was 11% and 21% for the years ended December 31, 2019
and 2018, respectively. Our gross margin decreased for the year
ended December 31, 2019, compared to 2018 due to a significant
increase in protein prices, lower sales prices, partially offset by
a decrease in discounts and allowances as a percentage of
revenues.
Operating Expenses
Operating expenses
for the year ended December 31, 2019 were $23.8 million,
compared to $26.2 million 2018. Our
operating expenses were 30% and 29% of net revenue for the years
ended December 31, 2019 and 2018, respectively. We continue to
focus on reducing our operating expenses in response to our
continued losses, including as discussed in “--Outlook.”
Changes to operating expenses in 2019 were as follows:
Advertising and Promotion
Our
advertising and promotion expense consists primarily of digital,
print and media advertising, athletic endorsements and
sponsorships, promotional giveaways, trade show events and various
partnering activities with our trading partners. Historically,
advertising and promotions were a large part of both our growth
strategy and brand awareness, in particular strategic partnerships
with sports athletes and fitness enthusiasts through endorsements,
licensing, and co-branding agreements. Additionally, we
co-developed products with sports athletes and teams. In connection
with our restructuring plan, we terminated the majority of these
contracts in a strategic shift away from such costly arrangements,
and moved toward more cost-effective brand partnerships as well as
grass-roots marketing and advertising efforts. We expect our
advertising and promotion expenses to remain relatively constant in
future periods as we continue to leverage existing brand
recognition and move towards lower cost advertising outlets
including social media and trade advertising.
Advertising and
promotion expense decreased $0.5 million or 15% to $2.5 million for
the year ended December 31, 2019, or 3.0% of net revenue, compared
to $2.9 million, or 3% of net revenue, for 2018. Advertising and
promotion expense for the years ended December 30, 2019 and 2018
included expenses related primarily to advertising, sponsorships
and endorsements and trade shows. The decrease in spending for the
year ended December 31, 2019 primarily included decreases to trade
shows and events of $0.6 million, decreases to sponsorship fees of
$0.3 million, decreases to other advertising of $0.2 million,
offset by increased print advertising of $0.6 million.
Salaries and Benefits
Salaries and
benefits consist primarily of salaries, bonuses, benefits and
stock-based compensation paid or provided to our
employees.
Salaries and
benefits continued to decrease due to additional headcount
reductions and limited headcount additions, as well as a reduction
of restricted stock awards and a reduction in amortization of
existing stock-based grants through the end of 2019.
Salaries and
benefits decreased by $0.4 million or 5% to $7.9 million, or 9% of
net revenue, for the year ended December 31, 2019 compared to $8.3
million, or 10% of revenue, for 2018. Stock-based compensation
expense decreased $0.2 million and bonuses and commissions
decreased by $0.6 million, partially offset by increased severance
costs of $0.4 million. Bonus expense decreased compared to the year
ended December 31, 2018, as we eliminated most discretionary
bonuses due to our continued losses.
Selling, General and Administrative
Our
selling, general and administrative expenses consist primarily of
depreciation and amortization, information technology equipment and
network costs, facilities related expenses, director’s fees, which
include both cash and stock-based compensation, insurance, rental
expenses related to equipment leases, supplies, legal settlement
costs, broker fees and other corporate expenses.
Selling, general
and administrative expenses decreased by 23% to $8.9 million, or
11% of net revenue, for the year ended December 31, 2019 compared
to $11.6 million, or 13% of net revenue, for the same period in
2018. The decrease was primarily due to lower provisions for bad
debts of $1.8 million, lower freight expense of $0.4 million, lower
travel expenses of $0.2 million and lower depreciation of $0.2
million. These expenses were partially offset by an increase of
$0.2 million in rent expense.
Research and Development
Research and
development expenses consist primarily of R&D personnel
salaries, bonuses, benefits, and stock-based compensation, product
quality control, which includes third-party testing, and research
fees related to the development of new products. We expense
research and development costs as incurred.
Research and
development expenses increased 19% to $0.9 million, or 1% of net
revenue, for the year ended December 31, 2019 compared to $0.8
million, also 1% of net revenue, for 2018. The increase was
primarily due to an increase in R&D related salaries and
benefits.
Professional Fees
Professional fees
consist primarily of legal fees, accounting and audit fees,
consulting fees, which include both cash and stock-based
compensation, and investor relations costs.
Professional fees
increased 39% to $3.6 million, or 5% of net revenue, for the year
ended December 31, 2019, compared to $2.6 million, or 3% of net
revenue, for the same period in 2018. The increase was
primarily due to an increase in legal fees of $0.8 million and an
increase in accounting fees of $0.2 million. The significant increase in legal
fees is as a result of increased litigation and costs related to
the restatement of our 2017 and 2018 financial
results.
To the
extent our ongoing legal matters are reduced, in addition to this
resulting in a reduction in professional fees, we expect to see a
further decline in legal costs for specific settlement activities.
We intend to continue to invest in strengthening our governance,
internal controls, and process improvements, which is expected to
require support from third-party service providers.
Settlement of obligations
For the
year ended December 31, 2019, we recorded settlement expenses of
$0.1 million compared to a gain of $1.1 million for the year ended
December 31, 2018.
Interest and other expense, net
For the
years ended December 31, 2019 and 2018, “Interest and other
expense, net” consisted of the following (in
thousands):
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Interest expense,
related party
|
$(1,597)
|
$(2,160)
|
|
Interest expense,
related party debt discount
|
(60)
|
(60)
|
|
Interest expense,
other
|
(894)
|
(486)
|
|
Interest expense,
secured borrowing arrangement
|
(1,205)
|
(1,094)
|
|
Foreign
currency transaction loss
|
(236)
|
(115)
|
|
Other
|
383
|
18
|
|
Total
interest and other expense, net
|
$(3,609)
|
$(3,897)
|
“Other”
for 2019 includes sublease income and interest income.
Interest and other
expense, net for the year ended December 31, 2019 decreased 7%, or
$0.3 million, compared to 2018. The decrease in interest and other
expense, net was primarily related to reduced interest on a related
party note together with an increase in other income, primarily due
to sublease income, partially offset by increased other
interest.
Provision for income taxes
Provision for
income taxes consists primarily of federal and state income taxes
in the U.S. and income taxes in foreign jurisdictions in which we
conduct business. Due to uncertainty, as to the realization of
benefits from our deferred tax assets, including net operating loss
carryforwards, research and development and other tax credits, we
have a full valuation allowance reserved against such assets. We
expect to maintain this full valuation allowance at least in the
near term.
Liquidity
and Capital Resources
The
Company has incurred significant losses and experienced negative
cash flows since inception. As of December 31, 2019, we had cash of
$1.5 million, a decline of $0.8 million from the December 31, 2018
balance of $2.3 million. This decline is due to a net loss of $18.9
million, offset by non-cash adjustments of $2.0 million, cash
provided by a change in operating assets and liabilities of $10.4
million and cash provided by financing activities of $5.7 million.
As of December 31, 2019, we had a working capital deficit of $29.4
million, a stockholders’ deficit of $28.0 million and an
accumulated deficit of $195.9 million resulting from losses from
operations. During 2019, we incurred an additional substantial
loss. 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
ability to continue as a going concern is dependent upon us
achieving profitable operations in the future and/or obtaining the
necessary financing to meet our obligations and repay our
liabilities when they come due. Management is on an ongoing basis
evaluating strategies to obtain financing to fund our expenses and
achieve a level of revenue adequate to support our current cost
structure. Financing strategies may
include, but are not limited to, private placements of capital
stock, debt borrowings, partnerships and/or collaborations.
There is no assurance that we will be able to obtain additional
financing on acceptable terms or at all or to generate an adequate
level of revenues.
In
response to the Company’s continued losses, in 2018, management
implemented the following plans to improve the Company’s operating
costs:
1)
reduced our
workforce;
2)
renegotiated or
terminated a number of contracts with endorsers in a strategic
shift away from such arrangements and toward more cost-effective
marketing and advertising efforts; and
3)
discontinued a
number of stock keeping units (“SKUs”) and wrote down inventory to
net realizable value, or to zero in cases where the product was
discontinued.
Despite
these measures, during 2019, the Company continued to incur
substantial losses.
In
addition, during the fourth quarter of 2019, management implemented
the following additional measures to improve gross
margin:
1)
reduced or
eliminate sales to low or negative margin customers;
2)
reduced product
discounts and promotional activity;
3)
implemented a more
aggressive SKU reduction; and
4)
formed a pricing
committee to review all orders to better align gross margin
expectations with product availability.
As a
result of these measures, as well as a reduction in protein prices,
the Company realized increased gross margins in the fourth quarter
of 2019, a trend which continued through the first and second
quarters of 2020. Beginning in April 2020, the Company began to
experience a slowdown, which has continued to date, in sales from
its retail customers, including its largest customer. This decline
has been offset by growth in online customers, including sales to
our largest online customer, although there can be no assurances
that such growth will continue, or that the Company will have the
financial resources to produce the additional quantities required
by this customer.
Management believes
reductions in operating costs, and continued focus on gross margin,
primarily pricing controls and a reduction in product discounts and
promotional activity with the Company’s customers, will allow us to
ultimately achieve profitability, however, we can give no
assurances that this will occur.
Cash Flows
Our net
consolidated cash flows are as follows (in thousands):
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
Consolidated
Statements of Cash Flows Data:
|
|
|
|
Net
cash (used in) provided by operating activities
|
$(6,524)
|
$1,981
|
|
Net
cash used in investing activities
|
(13)
|
(132)
|
|
Net
cash provided by (used in) financing activities
|
5,742
|
(5,726)
|
|
Effect
of exchange rate changes on cash
|
10
|
(34)
|
|
Net
change in cash
|
$(785)
|
$(3,911)
|
Operating Activities
Our
cash (used in) provided by operating activities is driven primarily
by sales of our products and vendor-provided credit limits. Our
primary uses of cash from operating activities have been for
inventory purchases, advertising and promotion expenses,
personnel-related expenditures, manufacturing costs, professional
fees (including legal fees), and costs related to our facilities.
Our cash flows from operating activities is expected to continue to
be affected principally by results of operations and the extent to
which we increase spending on personnel expenditures, sales and
marketing activities, and our working capital
requirements.
Our operating cash outflows were $8.5 million
higher for the year ended December 31, 2019, due to net cash used
in operating activities of $6.5 million for the year ended December
31, 2019, compared to a net cash provided of $2.0 million for
2018. The variance primarily relates to net loss of $18.9
million, adjusted for non-cash charges, which resulted in a use of
cash of $16.9 million for the year ended December 31, 2019 compared
to a use of cash of $7.7 million for the same period in 2018. This
variance also includes a net change in net operating assets and
liabilities, which resulted in a source of cash of $10.4 million
for the year ended December 31, 2019 compared to a source of cash
of $9.7 million for 2018.
The
source of cash of $10.4 million provided by net operating assets
and liabilities was the result of a decrease in our inventory
balance of $8.9 million, a decrease in our accounts receivable
balance of $1.4 million, and a decrease in prepaid expenses and
other assets of $0.2 million, which together provided a source of
cash, partially offset by a decrease in our accounts payable and
accrued liabilities balance of $0.1 million, which reduced cash
flows. During the year ended December 31, 2018, the source of cash
of $9.7 million provided by net operating assets and liabilities
included a decrease in accounts receivable of $1.9 million, a
decrease in prepaid expenses and other assets of $0.4 million, and
an increase in accounts payable and accrued liabilities of $11.5
million, resulting in a source of cash, offset in part by an
increase in our inventory balance, which decreased cash flows by
$3.9 million. For the year ended December 31, 2018, our accounts
payable provided a use of cash due to an increase in our past due
accounts payable
Investing Activities
Cash
used in investing activities was $13,000 for the year ended
December 31, 2019 for the purchases of property and
equipment.
Cash
used in investing activities was $0.1 million for the year ended
December 31, 2018 for the purchases of property and
equipment.
Financing Activities
Cash
provided by financing activities was
$5.7 million for the year ended December 31, 2019, primarily
due to net borrowings from our line of credit of $2.7 million, net
borrowings from our secured borrowing arrangement of $3.2 million
less repayments on equipment financing of $0.1
million.
Cash
used in financing activities was
$5.7 million for the year ended December 31, 2018, primarily
due to repayments of $1.5 million on our line of credit, $4.1
million in net repayments on our secured borrowing arrangement, and
repayments on equipment financing of $0.1 million.
To
manage cash flow, we have entered into numerous financing
arrangement outlined below.
Indebtedness Agreements
Related-Party
Refinanced Convertible Note
On November 3, 2017, the Company entered into the
refinancing with Mr. Ryan Drexler, the Company’s Chairman of the
Board of Directors, Chief Executive Officer and President
(the “Refinancing”). As part of the
Refinancing, the Company issued to Mr. Drexler an amended and
restated convertible secured promissory note (the “Refinanced
Convertible Note”) in the original principal amount of $18,000,000,
which amended and restated (i) a convertible secured promissory
note dated as of December 7, 2015, amended as of January 14, 2017,
in the original principal amount of $6,000,000 with an interest
rate of 8% prior to the amendment and 10% following the amendment
(the “2015 Convertible Note”), (ii) a convertible secured
promissory note dated as of November 8, 2016, in the original
principal amount of $11,000,000 with an interest rate of 10% (the
“2016 Convertible Note”) , and (iii) a secured demand promissory
note dated as of July 27, 2017, in the original principal amount of
$1,000,000 with an interest rate of 15% (the “2017 Note”, and
together with the 2015 Convertible Note and the 2016 Convertible
Note, collectively, the “Prior Notes”). The due date of the 2015
Convertible Note and the 2016 Convertible Note was November 8,
2017. The 2017 Note was due on demand.
The
$18.0 million Refinanced Convertible Note bears interest at the
rate of 12% per annum. Interest payments are due on the last day of
each 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 note or by converting such interest amount into an
equivalent amount of the Company’s common stock. Any interest not
paid when due shall be capitalized and added to the principal
amount of the Refinanced 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 the interest under the Refinanced
Convertible Note were due on December 31, 2019, unless converted
earlier. Mr. Drexler may convert the outstanding principal and
accrued interest into shares of the Company’s common stock at a
conversion price of $1.11 per share at any time. The Company may
prepay the Refinanced Convertible Note by giving Mr. Drexler
between 15 and 60 days’ notice depending upon the specific
circumstances, subject to Mr. Drexler’s conversion
right.
The
Refinanced 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, interest will accrue at the rate of 14% per annum. In
addition, following an event of default, any conversion,
redemption, payment or prepayment of the Refinanced Convertible
Note will be at a premium of 105%. The Refinanced 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 Refinanced
Convertible Note. The Refinanced Convertible Note is subordinated
to certain other indebtedness of the Company.
As
part of the Refinancing, the Company and Mr. Drexler entered into a
restructuring agreement (the “Restructuring Agreement”) pursuant to
which the parties agreed to amend and restate the security
agreement, resulting in a Third Amended and Restated Security
Agreement (the “Amended Security Agreement”) in which the Prior
Notes were secured by all of the assets and properties of the
Company and its subsidiaries whether tangible or intangible.
Pursuant to the Restructuring Agreement, the Company agreed to pay,
on the effective date of the Refinancing, all outstanding interest
on the Prior Notes through November 8, 2017 and certain fees and
expenses incurred by Mr. Drexler in connection with the
Restructuring.
On
September 16, 2019, Mr. Ryan Drexler, the Chief Executive Officer,
President and Chairman of the Board of Directors of MusclePharm
Corporation, a Nevada corporation (the “Company”), delivered a
notice to the Company and its independent directors of his election
to convert, effective as of September 16, 2019 (the “Notice Date”),
$18,000,000 of the amount outstanding under that certain Amended
and Restated Convertible Secured Promissory Note, dated as of
November 8, 2017 (the “Note”), issued by the Company to Mr.
Drexler, into shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock”), at a conversion price of
$1.11 per share, pursuant to the terms and conditions of the Note
(the “Partial Conversion”). As of the Notice Date, the total amount
outstanding under the Note (including principal and accrued and
unpaid interest) was equal to $19,262,910. Pursuant to the terms of
the Note, the Company instructed the transfer agent for its shares
to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its
Common Stock in respect of the Partial Conversion.
The
outstanding principal and the interest, due on December 31, 2019,
were refinanced under a new agreement on July 1, 2020. See
additional information in “Note 17. Subsequent
Events.”
For
the years ended December 31, 2019 and 2018, interest expense,
including the amortization of debt discount, related to the related
party convertible secured promissory notes was $1.7 million and
$2.2 million, respectively. During the years ended December 31,
2019 and 2018, $0.8 million and $1.9 million, respectively, in
interest was paid in cash to Mr. Drexler.
Related-Party
Revolving Note
On
October 4, 2019, we entered into a secured revolving promissory
note (the “Revolving Note”) with Mr. Drexler. Under the terms of
the Revolving Note, we can borrow up to $3.0 million. The Revolving
Note bears interest at the rate of 12% annually. The use of funds
will be solely for the purchase of whey protein to be used in the
manufacturing of MusclePharm products. We may repay the Revolving
Note by giving Mr. Drexler one days’ written notice.
The
Revolving 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, Mr.
Drexler is entitled to accelerate the entire indebtedness under the
Revolving Note. The Revolving 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.
The Revolving Note is subordinated to certain other indebtedness of
the Company held by Crossroads.
In
connection with the Revolving Note, the Company and Mr. Drexler
entered into a security agreement dated October 4, 2019
pursuant to which the Revolving Note is secured by all of the
assets and properties of the Company and its subsidiaries whether
tangible or intangible. As of December
31, 2019, the outstanding balance on the revolving note was $1.2
million. Both the outstanding principal and all accrued
interest, which became due on March 31, 2020, were refinanced under
a new agreement on July 1, 2020. The revolving note is included in
“Line of credit” in the consolidated balance sheets. See additional
information in “Note 17. Subsequent Events.”
Related-Party
Note Payable
The
Company entered into a collateral
receipt and security agreement with Mr. Drexler, dated December 27,
2019 pursuant to which Mr. Drexler agreed to post bond relating to
the judgment ruled on the ThermoLife case, pending the appeal. The
amount paid by Mr. Drexler on behalf of the Company, including
fees, was $0.3 million. The amount, which was outstanding as of
December 31, 2019, was refinanced under a new agreement on
July 1, 2020. The note payable is included in “Convertible note
with a related party, net of discount” in the consolidated balance
sheets. See additional information in “Note 17. Subsequent
Events.”
Line
of Credit - Inventory Financing
On
October 6, 2017, the Company entered into a Security Agreement with
Crossroads. Pursuant to the Security Agreement, the Company may
borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly
Liquidation Value (each as defined in the Security Agreement), up
to a maximum amount of $3.0 million at an interest rate of 1.5% per
month, subject to a minimum monthly fee of $22,500. The Security
Agreement contains customary events of default, including, among
others, the failure to make payments on amounts owed when due,
default under any other material agreement or the departure of Mr.
Drexler. The Security Agreement also contains customary
restrictions on the ability of the Company to, among other things,
grant liens, incur debt and transfer assets.
Under
the Security Agreement, the Company has agreed to grant Crossroads
a security interest in all our present and future accounts, chattel
paper, goods (including inventory and equipment), instruments,
investment property, documents, general intangibles, intangibles,
letter of credit rights, commercial tort claims, deposit accounts,
supporting obligations, documents, records and the proceeds
thereof. As of December 31, 2019 and 2018, we owed Crossroads $3.0
million and $1.5 million, respectively, and the amount is included
in “Line of credit” in the consolidated balance
sheets.
On
April 1, 2019, the Company and Crossroads amended the terms of the
agreement. The agreement was extended until March 31, 2020, the
rate was modified to 1.33% per month, and the amount the Company
can borrow was increased from $3.0 million to $4.0
million.
On
February 26, 2020, the Company and Crossroads further amended the
terms of the agreement. The agreement was extended until April 1,
2021 and the amount the Company can borrow was decreased from $4.0
million to $3.0 million.
Secured
Borrowing Arrangement
In
January 2016, we entered into the Purchase and Sale Agreement with
Prestige Capital Corporation (“Prestige”) pursuant to which we
agreed to sell and assign and Prestige agreed to buy and accept,
certain accounts receivable owed to us (“Accounts”). Under the
terms of the Purchase and Sale Agreement, upon the receipt and
acceptance of each assignment of Accounts, Prestige will pay us
80% of the net face amount of the assigned Accounts, up to a
maximum total borrowings of $12.5 million subject to sufficient
amounts of accounts receivable to secure the loan. The remaining
20% will be paid to us 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 us 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, we granted Prestige a continuing security interest in and
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. The Purchase and Sale Agreement’s term previously
was extended to April 1, 2020 and renews automatically for
successive one-year periods unless either party receives written
notice of cancellation from the other, at minimum, thirty-days
prior to the expiration date. At December 31, 2019 and 2018,
we had outstanding borrowings of
approximately $4.4 million and $1.3 million,
respectively.
On
April 10, 2019, the Company and Prestige amended the terms of the
agreement. The agreement was extended until April 1, 2020.
Thereafter the agreement shall renew itself automatically 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. The new agreement also modified certain rates
and allows for increased borrowing on foreign
borrowings.
For the
years ended December 31, 2019 and 2018, the Company assigned to
Prestige, accounts with an aggregate face amount of approximately
$55.1 million and $46.2 million, respectively, for which Prestige
paid to the Company approximately $44.1 million and $36.9 million,
respectively, in cash. During the years ended December 31, 2019 and
2018, $40.9 million and $41.0 million, respectively, was
repaid to Prestige, including fees and interest.
HSBF
Note
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. No payments are due on the
Note until November 16, 2020 (the “Deferment Period”). However,
interest will continue to accrue during the Deferment Period. The
Note will mature on May 16, 2022. The Note includes forgiveness
provisions in accordance with the requirements of the Paycheck
Protection Program, Section 1106 of the Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”). The Company has not
determined the amount of forgiveness in connection with the loan,
partly due to the ongoing routine changes in the method of
calculating the amount.
Off-Balance Sheet
Arrangements
We did
not have any off-balance sheet arrangements as of December 31,
2019.
Non-GAAP
Adjusted EBITDA
In
addition to disclosing financial results calculated in accordance
with GAAP, this Form 10-K discloses Adjusted EBITDA, which is net
loss adjusted for stock-based compensation, gain on settlement of
accounts payable, loss on disposal of property and equipment,
amortization of prepaid sponsorship fees, interest and other
expense, net, depreciation of property and equipment, amortization
of intangible assets, provision for doubtful accounts, settlement
related charges (including legal) and taxes.
Management uses
Adjusted EBITDA as a supplement to GAAP measures to further
evaluate period-to-period operating performance, as well as the
Company’s ability to meet future working capital requirements. The
exclusion of non-cash charges, including stock-based compensation
and depreciation and amortization, is useful in measuring the
Company’s cash available for operations and performance of the
Company. Management believes these non-GAAP measures
will provide investors with important additional perspectives in
evaluating the Company’s ongoing business performance.
The
GAAP measure most directly comparable to Adjusted EBITDA is net
loss. The non-GAAP financial measure of Adjusted EBITDA should not
be considered as an alternative to net loss. Adjusted EBITDA is not
a presentation made in accordance with GAAP and has important
limitations as an analytical tool and should not be considered in
isolation or as a substitute for analysis of our results as
reported under GAAP. Because Adjusted EBITDA excludes some, but not
all, items that affect net loss and is defined differently by
different companies, our definition of Adjusted EBITDA may not be
comparable to similarly titled measures of other
companies.
Set
forth below are reconciliations of our reported GAAP net loss to
Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
Net loss
|
$(18,927)
|
$(10,755)
|
|
|
|
|
|
Non-GAAP
adjustments:
|
|
|
|
Stock-based
compensation
|
284
|
496
|
|
Loss
on disposal of property and equipment
|
5
|
—
|
|
Interest
and other expense, net
|
3,609
|
3,897
|
|
Depreciation
and amortization of property and equipment
|
339
|
529
|
|
Amortization
of intangible assets
|
320
|
320
|
|
Bad
debt expense
|
21
|
1,848
|
|
Income
taxes
|
86
|
100
|
|
|
|
|
|
Adjusted EBITDA
|
$(14,263)
|
$(3,565)
|
Critical
Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance
with GAAP and form the basis for the following discussion and
analysis on critical accounting policies and estimates. The
preparation of the consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We evaluate our estimates and
assumptions on a regular basis. We base our estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results could differ from these estimates and those
differences could have a material effect on our business, financial
condition and results of operations.
Inventory
MusclePharm
products are produced through third party manufacturers, and the
cost of product inventory is recorded using a standard cost
methodology. This standard cost methodology closely approximates
actual cost. Inventory is valued at the lower of cost or net
realizable value. Adjustments to reduce the cost of inventory to
its net realizable value are made, if required, and estimates are
made for obsolescence, excess or slow-moving inventories,
non-conforming inventories and expired inventory. These estimates
are based on management’s assessment of current future product
demand, production plan, and market conditions.
Revenue Recognition
Our revenue represents sales of
finished goods inventory and is recognized when control of
the promised goods is transferred to the Company’s customers in an
amount that reflects the consideration the Company expects to be
entitled to in exchange for those goods or services. The reserves for trade promotions and
product discounts, including sales incentives, are established
based on our best estimate of the amounts necessary to settle
future and existing credits for product sold as of the balance
sheet date.
All such costs are netted against
sales. These costs include end-aisle or other in-store
displays, contractual advertising fees and product discounts, and
other customer specific promotional activity. We provide
reimbursement to our customers for such amounts as credits against
amounts owed. To determine the appropriate timing of
recognition of consideration payable to a customer, all
consideration payable to our customers is reflected in the
transaction price at inception and reassessed
routinely.
For the
years ended December 31, 2019 and 2018, our revenue is recorded net
of discounts, and to a lesser degree, sales returns, where
discounts for each year total $26.9 million and $33.5 million,
respectively. Total discounts accounted for 25% and 28% of gross
revenue in each period, respectively.
Share-Based Payments and Stock-Based Compensation
Share-based
compensation awards, including stock options and restricted stock
awards, are recorded at estimated fair value on the awards’ grant
date, based on the estimated number of shares that are expected to
vest. The grant date fair value is amortized on a straight-line
basis over the time in which the awards are expected to vest, or
immediately if no vesting is required. Share-based compensation
awards issued to non-employees for services are also recorded at
fair value on the grant date. The fair value of restricted stock
awards is based on the fair value of the stock underlying the
awards on the grant date as there is no exercise
price.
The
fair value of stock options is estimated 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 our
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. We recognize 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.
Intangible Assets
Acquired intangible
assets are recorded at estimated fair value, net of accumulated
amortization, and costs incurred in obtaining certain trademarks
are capitalized, and are amortized over their related useful lives,
using a straight-line basis consistent with the underlying expected
future cash flows related to the specific intangible asset.
Expected future cash flows are subject to management estimation.
Costs to renew or extend the life of intangible assets are
capitalized and amortized over the remaining useful life of the
asset. Amortization expenses are included as a component of
“Selling, general and administrative” expenses in the consolidated
statements of operations.
Leases
A lease
is defined as a contract, or part of a contract, that conveys the
right to control the use of identified assets for a period of time
in exchange for consideration. An entity controls the use when it
has a right to obtain substantially all of the benefits from the
use of the identified asset and has the right to direct the use of
the asset. The Company determines if an arrangement is a lease at
contract inception. For all classes of underlying assets, the
Company includes both the lease and non-lease components as a
single component and accounts for it as a lease. Lease liabilities
are recognized based on the present value of the lease payments
over the lease term at the commencement date.
MusclePharm
calculates and uses the rate implicit in the lease if the
information is readily available, or if not available, the Company
uses its incremental borrowing rate in determining the present
value of lease payments. Lease right-of-use ("ROU") assets are
based on the lease liability, subject to adjustments, such as lease
incentives. The ROU assets also include any lease payments made at
or before the commencement date. MusclePharm excludes variable
lease payments in measuring lease assets and lease liabilities,
other than those that depend on an index or a rate or are in
substance fixed payments.
MusclePharm’s lease
terms include options to extend or terminate the lease when it is
reasonably certain that such options will be exercised. Operating
leases are included in "Operating lease right-of-use assets",
"Operating lease liability, current" and "Operating lease
liability, long-term" on the consolidated balance sheets. Finance
leases are included in "Property and equipment, net", "Accrued and
other liabilities" and "Other long-term liabilities”
on the
consolidated balance sheets.
Advertising and Promotion
Our
advertising and promotion expenses consist primarily of digital,
print and media advertising, athletic endorsements and
sponsorships, promotional giveaways, trade show events and various
partnering activities with our trading partners, and are expensed
as incurred. For major trade shows, the expenses are recognized
within a calendar year over the period in which we recognize
revenue associated with sales generated at the trade show. Some of
the contracts provide for contingent payments to endorsers or
athletes based upon specific achievement in their sports, such as
winning a championship. We record expense for these payments if and
when the endorser achieves the specific achievement.
Contingencies
The
Company records loss contingencies when management determines that
the outcome of future events is probable of occurring and when the
amount of the loss can be reasonably estimated. Gain contingencies
are recognized in the consolidated financial statements when they
are realized. The determination of an accrual for a loss
contingency is based on management’s judgment and estimates with
respect to the likely outcome of the matter. Liabilities are
recorded or adjusted when events or circumstances cause these
judgments or estimates to change.
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.
See
additional information in “Note 9. Commitment and
Contingencies.”
Recently
Issued Accounting Pronouncements
See
Note 2 to the to the accompanying Consolidated Financial Statements
for a discussion of recent accounting pronouncements or changes in
accounting pronouncements that are of significance, or potential
significance, to us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company
qualifies as a smaller reporting company as defined in Item
10(f)(1) of SEC Regulation S-K, and is not required to provide the
information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
See the
Consolidated Financial Statements set forth on the “Index to
Financial Statements” on Page 54 of this Form 10-K, which
Consolidated Financial Statements are incorporated by reference
into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
Background.
Prior
to filing this Form 10-K, we have not issued audited financial
statements or filed Annual Reports on Form 10-K or Quarterly
Reports on Form 10-Q, since our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2018. As disclosed in our Current
Report on Form 8-K filed on March 14, 2019, our previously filed
Quarterly Report on Form 10-Q as of and for the three and nine
months ended September 30, 2018 should no longer be relied
upon.
In
February 2019, management was made aware, as part of the year-end
sales cut-off testing procedures performed during the Company’s
2018 annual audit, by its then independent auditors, Plante &
Moran, PLLC, that sales transactions may have been recognized as
revenue prematurely which could have a material impact on revenue
recognition for the year ended December 31, 2018. Upon such
notification, management reviewed the Company’s revenue recognition
reporting system, practices and underlying documents supporting the
appropriateness of revenue under the Company’s previously
established accounting policies for each quarterly period in the
year ended December 31, 2018. In addition to the 2018 year-end
period, management initially concluded that a potential material
misstatement in revenue recognition was isolated to the previously
issued quarterly financial statements for the three and nine months
ended September 30, 2018.
Audit Committee Investigation
In
March 2019, following management’s presentation of their initial
assessment of the revenue recognition issue, the Audit Committee of
the Board of Directors engaged legal counsel and a forensic
accountant to conduct an investigation and to work with management
to determine the potential impact on accounting for revenues. The
investigation included the review of management’s initial
assessment, interviews with key personnel, correspondence and
document review, among other procedures. In April 2019, as a result
of the findings of the Audit Committee's investigation to date, the
Company determined that certain of its employees had engaged in
deliberate inappropriate conduct, which resulted in revenue being
intentionally recorded in periods prior to the criteria for revenue
recognition under GAAP being satisfied. Further, the investigation
discovered that revenue had been prematurely recorded in prior
periods as well as the periods initially identified by
management.
The
investigation revealed that certain customer orders had been
invoiced, triggering revenue recognition, prior to the actual
shipment leaving the Company’s control. Such orders from customers
had been marked as fulfilled in the Company’s enterprise reporting
platform (“ERP”), thereby triggering the generation of an invoice
and the recognition of revenue, in advance of shipments from both
the Company’s distribution center in Tennessee and for orders that
were drop-shipped directly to key customers from certain contract
manufacturers. In addition, it was discovered during the
investigation that certain orders had been moved to third-party
locations at the respective cut-off periods and not actually
shipped to the end customer until after the cut-off period
resulting in the premature issuance of invoices to customers and
recognition of revenue.
As a
result of the Audit Committee's investigation, certain employees
were terminated, and others received written reprimands related to
their conduct as a result of their behavior. In connection with the
improprieties identified during the investigation resulting in the
restatement of previously reported financial statements, the
Company identified control deficiencies in its internal control
over financial reporting that constitute material
weaknesses.
The
investigatory adjustments are further described in Note 16.
“Changes and Correction of
Errors in Previously Reported Consolidated Financial
Statements” located in Item 8 of this Form
10-K.
Other Adjustments Resulting from Reconsidering Previously Issued
Financial Statements
As a
result of issues identified during the Audit Committee
investigation, management reconsidered the Company’s previously
issued consolidated financial statements and as a result additional
corrections to the Company’s previously issued consolidated
financial statements for each of the quarterly reporting periods
ended September 30, 2018 and for the year ended December 31, 2017
were identified. These errors, for each period presented below,
were primarily due to the following:
●
Improper
classification of trade promotions, payable to the Company’s
customers, as operating expenses instead of a reduction in
revenue;
●
Improper cut-off
related to sales transactions recorded prior to transfer of control
to customers in 2018 and risk of loss transferred to the customer
in 2017;
●
Corrections of
estimates of the expected value of customer payments, in the form
of credits, issued to customers;
●
Untimely recording
of the change in the estimated useful life of leasehold
improvements and an asset retirement obligation related to a
modification to the lease of the Company’s former
headquarters;
●
Improper recording
of a debt discount in connection with the 2017 Refinanced
Convertible Note; and
●
Other period end
expense cutoff.
Other
adjustments include, but are not limited to the following; purchase
price variances, accrual for legal fees, payroll tax adjustment on
restricted stock, rebate receivable and recognizing revenue on a
net versus gross basis.
Accumulated
deficit has been adjusted to reflect changes to net loss, for each
period restated.
Evaluation of Disclosure Controls and
Procedures
The
principal executive officer and principal financial officer have
evaluated the Company’s disclosure controls and procedures as of
December 31, 2019. Based on this evaluation, they concluded that
because of the material weaknesses in our internal control over
financial reporting discussed below, the disclosure controls and
procedures were not effective as required under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Disclosure controls and procedures are designed to
ensure that the information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms and to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal
executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure. Remediation efforts to address the
identified weaknesses are ongoing and we were not able to remediate
our material weaknesses in internal controls as of December 31,
2018, and as our remediation efforts are ongoing, we are not be
able to conclude that such controls are effective as of December
31, 2019.
Management’s
Report on Internal Control over Financial
Reporting
Management of the
Company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Exchange
Act Rule 13a-15(f). The Company’s internal control over financial
reporting is a process affected by the Company’s management to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial statements
for external purposes in accordance with GAAP.
In
designing and evaluating our internal controls and procedures, our
management recognized that internal controls and procedures, no
matter how well conceived and operated, can provide only a
reasonable, not absolute, assurance that the objectives of the
internal controls and procedures are met. In addition, any
evaluation of the effectiveness of internal controls over financial
reporting in future periods is subject to risk that those internal
controls may become inadequate because of changes in conditions or
the degree of compliance with the policies or procedures may
deteriorate. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis.
The
Company’s management assessed the effectiveness of its internal
control over financial reporting as of December 31, 2019. In making
this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission’s 2013
Internal Control-Integrated Framework. Based on its assessment, as
well as factors identified during the Audit Committee investigation
and subsequent audit process, management has concluded that the
Company’s internal control over financial reporting as of December
31, 2019 was not effective due to the existence of the material
weaknesses in internal control over financial reporting described
below.
Material Weaknesses Identified in connection with the Audit
Committee Investigation
Based
on the principal findings of the investigation conducted by the
Audit Committee, management has concluded that it did not maintain
an appropriate control environment, inclusive of structure and
responsibility including proper segregation of duties, and risk
assessment and monitoring activities which led to revenue
recognition and “tone at the top” concerns and which constituted
the following material weaknesses:
|
A.
|
Pressure to achieve
sales targets gave rise to the premature and/or inappropriate
recognition of revenues, typically occurring at or near the end of
financial reporting periods;
|
|
|
|
|
B.
|
The
Company’s internal controls failed and/or were not adequate to
ensure that there was effective testing of period end sales cutoff,
including a proper review and comparison of invoice dates and
related proof of delivery; and
|
|
C.
|
Inadequate
segregation of duties, allowing for an improper alignment of sales
and operations under common leadership.
|
Material Weaknesses Resulting from Reconsidering Previously Issued
Financial Statements
As
described above, management reconsidered the Company’s previously
issued financial statements resulting in corrections to our
unaudited consolidated financial statements for each of the
quarterly periods ended September 30, 2018 and our audited
consolidated financial statements as of and for the year ended
December 31, 2017, which are contained in Note 16. “Changes and Correction of Errors in
Previously Reported Consolidated Financial Statements”
located in Item 8 of this Form 10-K.
Material Weaknesses
We have
identified the following material weaknesses in connection with
these issues:
Control Environment and Control Activities
●
Management
did not maintain an effective control environment, including
ensuring that required accounting methodologies, policies, and
technical accounting personnel were in place. This control
deficiency led to a series of corrections related to the years 2018
and 2017 and resulted in a restatement to the respective previously
issued financial statements.
●
The
Company did not properly classify payments to customers, primarily
for promotional activity, as a reduction in the transaction price
with its customers, instead treating such payments as an
advertising and promotions activity, a component of operating
expense.
●
The
Company reported certain sales transactions prior to transfer of
control of goods, inconsistent with customer sales agreements and
the Company’s customary practices.
●
The
Company did not properly estimate the expected value of customer
payments, in the form of credits, at each quarter period end in
2018. In addition, the Company understated its accrual for
customers credits for the year ended December 31,
2017.
●
The
Company did not adjust the estimated useful life of its leasehold
improvements nor an asset retirement obligation in the proper
period for its former headquarters.
●
The Company improperly recorded debt
discount in connection with the 2017 Refinanced Convertible
Note.
●
The Company did not
properly record accruals for expenses at the end of
2017.
The Company Does Not Maintain Adequate Internal Control
Documentation and Testing Procedures
●
The
Company lacks the proper internal control documentation and
testing, and therefore internal controls were not consistently
performed. Management has concluded that the foregoing was
attributable to several factors including the lack of finance
leadership, not retaining a third-party professional Sarbanes-Oxley
(“SOX”) testing consultant, and significant management turnover.
Therefore, management has not documented and enforced an
appropriate level of review and controls, including properly
documented entity level, information technology general controls
including appropriate user access controls, and business process
controls.
Remediation
Our
remedial actions to date and remediation plans to be undertaken in
response to the findings of the Audit Committee’s investigation and
the material weaknesses on internal control over financial
reporting and our conclusions reached in evaluating the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting as of December 31, 2019,
are described below.
●
Terminations and reprimands
The
Company terminated certain employees directly responsible in the
deliberate inappropriate conduct and other employees received
written reprimands as a result of their behavior.
●
Implementation of enhanced quarterly sales cut-off
procedures
The
Company has implemented internal controls and procedures to conduct
enhanced revenue recognition cutoff testing on a quarterly
basis.
●
Mandatory training for the sales and operations
department.
The
Company has commenced a series of compliance outreach and training
for its sales and operations departments relating to potential
improper customer transactions identified by the internal
investigation. These trainings will also include a review of the
Company’s Code of Business Conduct and Ethics (the “Code of
Conduct”) and the Employee Complaints & Whistleblower Policy
(the “Whistleblower Policy”).
●
Company-wide training about compliance matters, including with
respect to employee complaints and concerns and enhancement of the
customer contracting process.
The Company has commenced
Company-wide training sessions. These sessions will focus on a
number of areas related to sensitivity training/tonal concerns,
including increased promotion and training around the Code of
Conduct and the Whistleblower Policy. The Company will design and
implement a more formalized compliance program with the goal of
sustaining a culture of compliance.
●
Consider appropriate employment actions relating to certain
employees
The Company
implemented a senior leadership reorganization pursuant to which,
among other things, the Company retained an experienced Chief
Financial Officer with public company reporting expertise, hired a
controller with fifteen years of assurance experience as a member
of two Big 4 multinational accounting firms, as well as engaging
third-party accounting personnel with the requisite skill set to
strengthen the financial reporting structure and internal control
over financial reporting. The Company is conducting a search for an
industry knowledgeable operating officer to work closely with the
Company’s Chief Executive Officer and Chief Financial
Officer.
●
Establishment of a disclosure committee
The
Company has implemented a disclosure committee to assist the Chief
Executive Officer and Chief Financial Officer in preparing the
disclosures required under the Securities Exchange Committee (SEC)
rules and to help ensure that the Company’s disclosure controls and
procedures are properly implemented.
●
Enhancing the internal compliance and legal functions, and
authorizing management to retain the appropriate individual or
individuals.
As part
of the senior leadership reorganization referred to above, the
Company engaged an outside firm which is in the process of
revamping our internal control documentation and testing. In
addition, the Company will continue to review the qualifications of
our internal financial organization to ensure our personnel have
the appropriate technical and SOX related expertise.
The
Company has enhanced its Whistleblower Policy by including our
Audit Committee Chair in the investigation, documentation, and
resolution process.
We are
committed to continuing to improve our internal control processes
related to these matters and will continue to review our financial
reporting controls and procedures. As we continue to evaluate and
work to improve our internal control over financial reporting, we
may take additional measures to address deficiencies or modify
certain of the remediation measures described above.
We
expect that our remediation efforts, including design and
implementation, will continue through fiscal year 2020, with the
goal to fully remediate all remaining material weaknesses by
year-end.
Other
than the ongoing remediation efforts described above, there have
been no changes during the year ended December 31, 2019 in the
Company’s internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Notwithstanding the
material weaknesses described in this Item 9A, our management has
concluded that the consolidated financial statements and related
financial information included in this Form 10-K presents fairly,
in all material respects, our financial position, results of
operations and cash flows for the periods presented in conformity
with GAAP. Management’s position is based on a number of factors,
including, but not limited to:
●
The completion of
the Audit Committee’s investigation and the substantial resources
expended (including the use of external consultants) and the
resulting adjustments we made to our previously issued financial
statements, including the restatement of our 2017 audited financial
statements and our unaudited quarterly financial statements for the
periods ended September 30, 2018, June 30, 2018 and March 31,
2018;
●
The reconsideration
of significant accounting policies and accounting practices
previously employed by the Company, resulting in other adjustments
to previously issued consolidated financial statements;
and
●
Based on the
actions described above, we have updated, and in some cases
corrected, our accounting policies and have applied those to our
consolidated financial statements for all periods
presented.
ITEM 9B.
OTHER INFORMATION
None.
PART
III
Item 10. Directors, Executive
Officers and Corporate Governance
EXECUTIVE
OFFICERS AND DIRECTORS
The
names of our directors and executive officers, their ages and
certain other information about them are set forth below. There are
no family relationships among any of our directors or executive
officers.
|
|
|
Age
|
|
|
|
Ryan Drexler
|
|
49
|
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
|
Allen
Sciarillo
|
|
55
|
|
Chief
Financial Officer
|
|
William
Bush
|
|
55
|
|
Director
|
|
John J.
Desmond
|
|
70
|
|
Director
|
RYAN DREXLER – CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS
Ryan
Drexler was appointed to serve as our Chief Executive Officer and
President on November 18, 2016. Prior to that, Mr. Drexler served
as our Interim Chief Executive Officer, President and Chairman of
the Board of Directors since March 15, 2016. Mr. Drexler
has served as Chairman of our Board of Directors since
August 26, 2015. Mr. Drexler is currently the Chief
Executive Officer of Consac, LLC (“Consac”), a privately-held firm
that invests in the securities of publicly-traded and venture-stage
companies. Previously, Mr. Drexler served as President of
Country Life Vitamins, a family-owned nutritional supplements and
natural products company that he joined in 1993. In addition to
developing strategic objectives and overseeing acquisitions for
Country Life, Mr. Drexler created new brands that include the
BioChem family of sports and fitness nutrition products.
Mr. Drexler negotiated and led the process which resulted in
the sale of Country Life in 2007 to the Japanese conglomerate
Kikkoman Corp. Mr. Drexler graduated from Northeastern
University, where he earned a B.A. in political science. Because of
his experience in running and developing nutritional supplement
companies, we believe that Mr. Drexler is well qualified to serve
on our Board of Directors.
ALLEN SCIARILLO – CHIEF FINANCIAL
OFFICIER
Allen
Sciarillo was appointed to serve as Chief Financial Officer on
April 20, 2020. Before joining the Company, Mr. Sciarillo served as
Director of Finance of The Crypto Company, a public company in the
blockchain sector, from July 2018 to December 2019. Before that, he
served as Regional Chief Financial Officer of Electro Rent
Corporation, a provider of rental, leasing and sales of electronic
test and measurement equipment, from February 2015 to March 2018.
He previously served as Controller of Electro Rent from April 2006
to February 2015. Mr. Sciarillo earned his Bachelor of Science in
Accounting from California State University, Northridge. In
connection with his appointment, it is expected that Mr. Sciarillo
will enter into the Company’s standard form of indemnification
agreement, the form of which has been filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on August 27, 2012. The Company expects that it
will enter into an employment agreement with Mr. Sciarillo.
The Company will file an amendment to its
Form 8-K disclosing the terms of any such employment
agreement within four business days after it has been finalized.
Because of his extensive financial reporting and operational
accounting experience in various senior management positions at
public and private companies, we believe that Mr. Sciarillo is well
qualified to serve on our Board of Directors.
WILLIAM BUSH – DIRECTOR
William
Bush joined our Board of Directors as an independent director in
May 2015 and serves as lead director, as chair of the Compensation
Committee, as a member of the Audit Committee and as Chair of the
Nominating & Corporate Governance Committee. Since November
2016, Mr. Bush serves as chief financial officer of Stem, Inc., a
leading software-driven energy storage provider. From January 2010
to November 2016, Mr. Bush served as the chief financial
officer of Borrego Solar Systems, Inc., which is one of the
nation’s leading financiers, designers and installers of commercial
and industrial grid-connected solar systems. From October 2008 to
December 2009, Mr. Bush served as the chief financial officer
of Solar Semiconductor, Ltd., a private vertically integrated
manufacturer and distributor of photovoltaic modules and systems
targeted for use in industrial, commercial and residential
applications, with operations in India, helping it reach $100
million in sales in its first 15 months of operation. Prior to
that, Mr. Bush served as chief financial officer and corporate
controller for a number of high growth software and online media
companies as well as being one of the founding members of
Buzzsaw.com, Inc., a spinoff of Autodesk, Inc. Prior to his work at
Buzzsaw.com, Mr. Bush served as corporate controller for
Autodesk, Inc. (NasdaqGM: ADSK), the fourth largest software
applications company in the world. Because of his significant
experience in finance, we believe that Mr. Bush is well qualified
to serve on our Board of Directors.
JOHN J. DESMOND –DIRECTOR
John J.
Desmond joined our Board of Directors as an independent director in
July 2017 and serves as chair of the Audit Committee, a member of
the Nominating & Corporate Governance Committee, and a member
of the Compensation Committee. Previously, Mr. Desmond was
Partner-in-Charge of the Long Island (New York) office of Grant
Thornton LLP from 1988 through his retirement from the firm in
2015, having served over 40 years in the public accounting
profession. At Grant Thornton LLP, Mr. Desmond's experience
included among other things, serving as lead audit partner for many
public and privately-held global companies. Mr. Desmond was elected
by the U.S. Partners of Grant Thornton LLP to their Partnership
Board from 2001 through 2013. The Partnership Board was responsible
for oversight of many of the firm's activities including strategic
planning, the performance of the senior leadership team and
financial performance. Mr. Desmond currently serves on the Board of
Directors of The First of Long Island (Nasdaq: FLIC) and its wholly
owned bank subsidiary, The First National Bank of Long Island,
and has been a director since October 2016. Mr. Desmond also
serves or has served as a Board member of a number of
not-for-profit entities. Mr. Desmond holds a B.S. degree in
Accounting from St. John's University and is a Certified Public
Accountant. Because of his significant experience in corporate
governance, banking, strategic planning, business leadership,
organizational management and business operations, accounting and
financial reporting, finance, mergers and acquisitions, legal
and regulatory, we believe that Mr. Desmond is well qualified to
serve on our Board of Directors.
DELINQUENT
SECTION 16(a) REPORTS
Section 16(a)
of the Exchange Act, requires our directors and named executive
officers, and persons who beneficially own more than 10% of our
common stock, to file initial reports of ownership and reports of
changes in ownership of our common stock and our other equity
securities with the SEC. As a practical matter, we assist our
directors and officers by monitoring transactions and completing
and filing Section 16 reports on their behalf. Based solely on
a review of the copies of such forms in our possession and on
written representations from reporting persons, we believe that
during 2019, all of our named executive officers and directors
filed the required reports on a timely basis under
Section 16(a) of the Exchange Act, except for as
follows:
|
Name
|
|
Date of
Award
|
|
Date
Filed
|
|
StockAwards
|
|
William
J. Bush
|
|
7/1/2019
|
|
9/16/2019
|
|
238,095
|
|
|
|
|
|
|
|
|
|
John J.
Desmond
|
|
7/1/2019
|
|
9/16/2019
|
|
357,143
|
CODE
OF CONDUCT
Our
Board of Directors established a Code of Conduct applicable to our
officers and employees. The Code of Conduct is accessible on our
website at www.musclepharmcorp.com. If we make any substantive
amendments to the Code of Conduct or grant any waiver, including
any implicit waiver, from a provision of the Code of Conduct to our
officers, we will disclose the nature of such amendment or waiver
on our website or in a current report on Form 8-K.
CORPORATE
GOVERNANCE OVERVIEW
Our
business, assets and operations are managed under the direction of
our Board of Directors. Members of our Board of Directors are kept
informed of our business through discussions with our Chief
Executive Officer, our external counsel, members of management and
other Company employees as well as our independent auditors, and by
reviewing materials provided to them and participating in meetings
of the Board of Directors and its committees.
Our
corporate governance program features the following:
●
a Board of
Directors that is nominated for election annually;
●
charters for each
of the Boards committees, which clearly establish the roles and
responsibilities of each such committee;
●
regular executive
sessions among our non-employee and independent
directors;
●
a Board of
Directors that enjoys unrestricted access to our management,
employees and professional advisers;
●
a Code of Conduct,
Insider Trading Policy, Corporate Communications Policy and
Corporate Governance Guidelines; and
●
no board member is
serving on an excessive number of public company
boards.
BOARD COMMITTEES
Our
Board of Directors has established an Audit Committee, a
Compensation Committee, Nominating & Corporate Governance
Committee and, each of which have the composition and
responsibilities described below. Members serve on these committees
until their resignations or until otherwise determined by our Board
of Directors. The Board of Directors has further determined that
Messrs. Desmond and Bush, chair and member, respectively, of
the Audit Committee of the Board of Directors, are each an “Audit
Committee Financial Expert,” as such term is defined in
Item 407(d)(5) of Regulation S-K promulgated by the SEC, by
virtue of their relevant experience listed in their respective
biographical summaries provided above in the section entitled
“Executive Officers and Directors.” Each of our committees have a
written charter. Current copies of the charters of the Audit
Committee, Compensation Committee, and Nominating &
Corporate Governance Committee are available on our website at
ir.musclepharmcorp.com/governance-documents. As necessary, the
Board of Directors may establish special committees to address
issues not directly under the governance of the established
committees.
Audit Committee
The
Audit Committee reviews the work of our internal accounting and
audit processes and the Independent Registered Public Accounting
Firm. The Audit Committee has sole authority for the appointment,
and oversight of our Independent Registered Public Accounting Firm
and to approve any significant non-audit relationship with the
Independent Registered Public Accounting Firm. The Audit Committee
is also responsible for preparing the report required by the rules
of the SEC to be included in our annual proxy statement. The Audit
Committee is currently comprised of Mr. Desmond and
Mr. Bush. The Company’s Board of Directors has determined that
Mr. Desmond is an “Audit Committee financial expert” within the
meaning of Item 407 of Regulation S-K. Additionally, Mr. Desmond
serves as chair of the Audit Committee. Each of Messrs. Desmond and
Bush are independent for Audit Committee purposes, as determined
under Exchange Act rules. Mr. Bush joined the Audit Committee
in May 2015; Mr. Desmond joined the Audit Committee in July 2017.
During 2019, the Audit Committee held 3 meetings.
Compensation Committee
The
Compensation Committee approves our goals and objectives relevant
to compensation, stays informed as to market levels of compensation
and, based on evaluations submitted by management, recommends to
our Board of Directors compensation levels and systems for the
Board of Directors and our officers that correspond to our goals
and objectives. The Compensation Committee, with the assistance of
Longnecker, also produces an annual report on executive
compensation for inclusion in our proxy statement. The Compensation
Committee is currently comprised of Mr. Bush, as chair, and
Mr. Desmond, as a member. Mr. Desmond joined the
Compensation Committee in July 2017 and Mr. Bush joined as a
member in May 2015. During 2019, the Compensation Committee held
four meetings.
Nominating & Corporate Governance Committee
The Nominating & Corporate Governance
Committee is responsible for recommending to our Board of Directors
individuals to be nominated as directors and committee members.
This includes evaluation of new candidates as well as evaluation of
current directors. In evaluating the current directors, the
Nominating & Corporate Governance Committee conducted a
thorough self-evaluation process, which included the use of
questionnaires and a third-party expert that interviewed each of
the directors and provided an analysis of the results of the
interviews to the committee. This committee is also responsible for
developing and recommending to the Board of Directors our corporate
governance guidelines, as well as reviewing and recommending
revisions to the guidelines on a regular basis. The
Nominating & Corporate Governance Committee is currently
comprised of Mr. Bush, as chair, and Mr. Desmond, as a member.
During 2019, the Nominating & Corporate Governance
Committee held no meetings.
Board
of Directors Role in Risk Management
The Board of Directors oversees an enterprise-wide approach to risk
management, designed to support the achievement of organizational
objectives, including strategic objectives, to improve long-term
organizational performance and enhance stockholder value. Risk
management includes not only understanding company specific risks
and the steps management implements to manage those risks, but also
the level of risk acceptable and appropriate for us. Management is
responsible for establishing our business strategy, identifying and
assessing the related risks and implementing appropriate risk
management practices. Our Board of Directors reviews our business
strategy and management’s assessment of the related risk, and
discusses with management the appropriate level of risk for us. For
example, the Board of Directors meets with management at least
quarterly to review, advise and direct management with respect to
strategic business risks, risks related to our new product
development and financial risks, among others. The Board of
Directors also delegates oversight to Board committees to oversee
selected elements of risk.
The Audit Committee oversees financial risk exposures, including
monitoring the integrity of our financial statements, internal
controls over financial reporting, and the independence of our
Independent Registered Public Accounting Firm. The Audit Committee
reviews periodic internal controls and related assessments from our
finance department. The Audit Committee also assists the Board of
Directors in fulfilling its oversight responsibility with respect
to compliance matters and meets at least quarterly with our finance
department, Independent Registered Public Accounting Firm and
internal or external legal counsel to discuss risks related to our
financial reporting function. In addition, the Audit Committee
ensures that our business is conducted with the highest standards
of ethical conduct in compliance with applicable laws and
regulations by monitoring our Code of Business Conduct and our
Corporate Compliance Hotline, and the Audit Committee discusses
other risk assessment and our risk management policies periodically
with management.
The Compensation Committee participates in the design of the
compensation program and helps create incentives that do not
encourage a level of risk-taking behavior that is inconsistent with
our business strategy.
The Nominating & Corporate Governance Committee oversees
governance-related risks by working with management to establish
corporate governance guidelines applicable to us, and making
recommendations regarding director nominees, the determination of
director independence, Board of Directors leadership structure and
membership on Board committees.
Item 11. Executive
Compensation
Overview
We are
eligible to take advantage of the rules applicable to a “smaller
reporting company,” as defined in the Exchange Act, for the fiscal
year ended December 31, 2019. As a “smaller reporting company” we
are permitted, and have opted, to comply with the scaled back
executive compensation disclosure rules applicable to a “smaller
reporting company” under the Exchange Act. Only two individuals
served as executive officers, as defined in Rule 3b-7 under the
Exchange Act, during the fiscal year ended December 31, 2019. The
following discussion relates to the compensation of those executive
officers, who we refer to as our “named executive officers” or
“NEOs” in this Annual Report on Form 10-K. For the fiscal year
ended December 31, 2019, our NEOs were:
●
Ryan Drexler –
Chief Executive Officer, President and Chairman of the Board of
Directors; and
●
Brian Casutto –
Executive Vice President of Sales and Operations.
Mr.
Casutto resigned from all his current roles with the Company on May
1, 2020.
Our
executive compensation program is designed to attract, motivate and
retain talented executives that will drive Company growth and
create long-term shareholder value. The Compensation Committee
oversees and administers our executive compensation program, with
input and recommendations from our Chief Executive
Officer.
Elements
of Executive Compensation
Our
executive compensation program has three main components: base
salary, cash bonuses and incentive equity awards. Our named
executive officers also receive employee benefits that are made
available to our salaried employees generally, are eligible to
receive certain compensation and benefits in connection with a
change in control or termination of employment, and receive certain
perquisites, in each case, as described below.
Base Salary
The
Compensation Committee determines the initial base salary for each
of our named executive officers and each year determines whether to
approve any base salary adjustments based upon the Company’s
performance, the named executive officer’s individual performance,
changes in duties and responsibilities of the named executive
officer and the recommendations of our Chief Executive Officer
(other than with respect to his own base salary). For 2019, our
named executive officers’ base salaries were as
follows:
|
|
|
|
Ryan
Drexler
|
$700,000
|
|
Brian
Casutto
|
$400,000
|
Cash Bonuses
Pursuant to their
employment agreements, each of our named executive officers was
eligible to earn a cash bonus, with a target amount established by
the Compensation Committee, based on the achievement of specified
performance goals. For 2019, there was no target bonuses for Mr.
Casutto. Mr. Drexler was eligible to receive cash bonuses of up to
$250,000 based on the achievement of specified performance goals.
For 2019, Messrs. Drexler and Casutto earned no cash bonuses, as
set out in the amounts set forth in the “Summary Compensation
Table” below.
Incentive Equity Awards
Incentive equity awards granted by the Company have historically
been in the form of restricted stock awards. The Company also has
granted stock options from time to time. The Compensation Committee
believes that equity-based awards can be an effective retention
tool that also align our executives’ interests with those of our
stockholders. In 2019, none of our named executive officers were
granted equity-based awards.
Employment Agreements
We entered into employment agreements
with each of Mr. Drexler and Mr. Casutto that include certain
severance and change in control payments. These agreements
are described under “Narrative Disclosure to Summary Compensation
Table” below.
Employee Benefit Plans and Perquisites
We
maintain a 401(k) Savings/Retirement Plan for eligible employees of
the Company and certain affiliates, including our named executive
officers. The 401(k) Plan permits eligible employees to defer up to
the maximum dollar amount allowed by law. The employee’s elective
deferrals are immediately vested upon contribution to the 401(k)
Plan. We currently make discretionary matching contributions to the
401(k) Plan in an amount equal to 100% of each eligible employee’s
deferrals up to 4% of his or her qualifying compensation, subject
to a total employer contribution maximum of $19,000 and limits
imposed by applicable law. We do not maintain any other defined
benefit, defined contribution or deferred compensation plans for
our employees.
Our
named executive officers are eligible to participate in all of our
employee benefit plans, such as medical, dental, vision, group life
and disability insurance, in each case on the same basis as other
employees, subject to applicable law. We also provide vacation and
other paid holidays to all employees, including our executive
officers. In addition, we provide certain highly-compensated
employees, including our named executive officers, with life
insurance and supplemental long-term disability coverage. We also
provide certain perquisites, as described and quantified in the
Summary Compensation Table below under “All Other
Compensation.”
Summary
Compensation Table
The
following summary compensation tables sets forth all compensation
awarded to, earned by, or paid to our named executive officers for
2019 and 2018, in respect of their employment with the
Company.
Name and
Principal Position
|
|
|
|
|
|
All
Other
Compensation ($)
|
|
|
|
|
|
|
|
|
|
|
|
Ryan
Drexler (1)
|
|
|
|
|
|
|
|
|
Chairman of the
Board,
|
2019
|
700,000
|
—
|
—
|
—
|
600(3)
|
700,600
|
|
Chief
Executive Officer and President
|
2018
|
681,250
|
709,690
|
—
|
—
|
1,900(4)
|
1,392,840
|
|
|
|
|
|
|
|
|
|
Brian
Casutto(2)
|
2019
|
400,000
|
—
|
—
|
—
|
61,000(3)
|
461,000
|
|
Executive Vice
President of Sales and Operations
|
2018
|
400,000
|
244,542
|
—
|
—
|
71,129(4)
|
715,671
|
(1)
For information
regarding certain transactions between Mr. Drexler and the Company,
see Note 8 to the Consolidated Financial Statements
below.
(2)
On May 1, 2020, Mr.
Casutto resigned from all of his current roles with the
Company.
(3)
Amounts under All
Other Compensation for 2019 include Company 401(k) matching
contributions, insurance premiums paid by the Company on behalf of
our named executive officers, perquisites and severance payments,
as follows:
(4)
Amounts
under All Other Compensation for 2018 include Company 401(k)
matching contributions, insurance premiums paid by the Company on
behalf of our named executive officers, perquisites and severance
payments, as follows:
|
|
|
|
|
Miscellaneous
(a)
|
$—
|
$—
|
|
Automobile Expenses
(b)
|
—
|
12,000
|
|
Housing
Costs(c)
|
—
|
38,500
|
|
Insurance
Premiums
|
600
|
10,500
|
|
TOTAL
|
$600
|
$61,000
|
|
|
|
|
|
Miscellaneous (a)
|
$1,900
|
$10,559
|
|
Automobile Expenses (b)
|
—
|
10,223
|
|
Housing Costs(c)
|
—
|
40,700
|
|
Insurance
Premiums
|
—
|
9,647
|
|
TOTAL
|
$1,900
|
$71,129
|
(a)
These
amounts include amounts paid by the Company for miscellaneous
expenses, including Company-provided matching contributions to
health savings accounts for our named executive officer and amounts
paid for expenses incurred by our named executive officers that
were not adequately substantiated or did not qualify as a
reimbursable business expense under our expense reimbursement
policy.
(b)
We
provided an automobile allowance for Mr. Casutto, and the use of a
Company car by Mr. Drexler and Mr. Casutto while they were in
Colorado (the location of our prior headquarters). For the Company
car provided to Mr. Casutto, the Company insures the car under its
insurance programs, pays all registration, license, taxes and other
fees on the car, pays for all repairs and reimburses for all gas
and maintenance costs on the car. The amount disclosed in the table
above for Mr. Cassuto represents one-half of the total annual cost
to the Company for the Company car.
(c)
We paid
for temporary for housing for Mr. Casutto for his apartment in
California as his residency remains out of the State. The amounts
disclosed in the table above represents rent and utility costs
billed by the landlord for this temporary housing.
Narrative
Disclosure to Summary Compensation Table
We entered into employment agreements with each of Mr. Drexler and
Mr. Casutto that include certain severance and change in control
payments, in each case, as described below. As used below, the
terms “without cause,” “good reason,” “qualifying sale,” “aggregate
purchase price,” “performance bonus,” “cash-based incentives,” and
“change in control” are defined in the applicable
agreements.
Mr.
Drexler.
Mr. Drexler is party to an employment agreement with the
Company, which was entered into as of February 11, 2016 and
has subsequently been amended and restated, most recently effective
as of February 1, 2018. Subject to earlier termination as provided
therein, the term of his agreement runs through February 1, 2021
and automatically renews for successive one-year terms thereafter,
unless either party provides at least three months’ written notice
of its or his intention not to renew. Under his employment
agreement, Mr. Drexler was entitled to a base salary of
$700,000 per year for 2018 and 2019, which was increased to
$750,000 per year effective January 1, 2020, in each case, subject
to increase by the board. For 2019, Mr. Drexler was eligible
to receive cash-based incentives of up to $250,000 based on the
achievement of specified performance goals and, under his amended
and restated agreement, was eligible to receive a 2018 performance
bonus equal to 75% of his annual base salary, subject to the
Company’s achievement of specified performance conditions unless
otherwise determined by the Board. Under his amended and restated
employment agreement, Mr. Drexler is also eligible to receive
additional cash-based incentives of up to $350,000 based on the
achievement of specified performance goals.
Concurrently with entering into the amended and restated employment
agreement in February 2018, Mr. Drexler and the Company entered
into a transaction bonus agreement, which provides that, upon the
occurrence of a qualifying sale, and provided that at the time of
the qualifying sale Mr. Drexler is an owner of at least 20% of the
shares of the Company, Mr. Drexler will be entitled to a
transaction bonus equal to 10% of the aggregate purchase price, if
such price is in excess of $50 million. Mr. Drexler is entitled to
this transaction bonus regardless of whether the qualifying
transaction occurs during his employment or at any time
thereafter.
If Mr. Drexler’s employment is
terminated for any reason, each equity award granted to him will
fully vest and he will be entitled to any unpaid performance bonus
or cash-based incentives (as described above), to the extent earned
as of the date of such termination, in addition to any amounts
required by law or Company policy. In addition, if Mr. Drexler’s
employment is terminated by the Company without cause or by Mr.
Drexler for good reason prior to (but not in connection with) a
qualifying sale, Mr. Drexler will be entitled to receive (i) 12
months’ of base salary continuation, (ii) up to 12 months’ of
Company-subsidized COBRA premiums, and (iii) a lump sum payment of
the performance bonus for the year his employment terminates. If
Mr. Drexler’s employment is terminated by the Company without cause
or by Mr. Drexler for good reason within 12 months following (or prior
to, but in connection with or anticipation of) a qualifying
sale, Mr. Drexler will be entitled to receive, in lieu of
the amounts described in the preceding sentence, (i) a lump sum payment equal to 200% of his
annual base salary, (ii) up to 18 months’ of Company-subsidized
COBRA, and (iii) a lump sum payment equal to 200% of the
performance bonus for the year his employment terminates.
The severance payable to Mr. Drexler on a termination of his
employment by the Company without cause or by Mr. Drexler for good
reason is subject to his execution (and non-revocation) of a
release of claims in favor of the Company.
Under the employment agreement, Mr. Drexler agreed to certain
restrictions on solicitation of employees, which continue for 12
months following the termination of his employment, if his
employment is terminated due to disability, by him for good reason
or by the Company with or without cause, due to expiration of the
employment period by notice of non-renewal or due to termination of
his employment upon a notice of termination. The employment
agreement also contains restrictions with respect to disclosure of
the Company’s confidential information.
Mr. Casutto. Mr. Casutto is party to an
employment agreement with the Company, which was entered into as of
July 15, 2015 and was amended and restated as of January 1, 2018.
The original term of the employment agreement ended on December 31,
2018 and was extended to December 31, 2019. Under his employment
agreement, Mr. Casutto was entitled to a base salary of
$400,000 per year. In addition, Mr. Casutto was eligible to receive
cash bonuses based on performance criteria to be adopted by the
Compensation Committee, with a potential bonus pool of up to
$350,000 per year. Under his employment agreement, he was entitled
to a monthly vehicle allowance of $1,000 and a miscellaneous
expense allowance of up to $5,000 per year.
If Mr.
Casutto’s employment is terminated without cause or he resigns for
good reason, he was be entitled to receive (i) base salary
continuation for the lesser of 12 months and the remainder of the
term of the employment agreement, (ii) a bonus equal to the greater
of 25% of his target bonus for the year (or 50%, if the termination
of employment occurs between July 1 and December 31 of the year)
and the bonus for the year of termination of employment, as
determined by the Compensation Committee at its discretion, and
(iii) reimbursement of COBRA premiums for up to 12 months. In
addition, unless otherwise provided in an equity award agreement,
all equity awards held by Mr. Casutto would vest in full. All
severance payable to Mr. Casutto under his employment agreement is
subject to his execution (and non-revocation) of a release of
claims in favor of the Company.
Under
the employment agreement, Mr. Casutto agreed to certain
restrictions on competition and solicitation, which continue for 12
months following the termination of his employment. The employment
agreement also contained restrictions with respect to disclosure of
the Company’s confidential information.
On May
1, 2020, Mr. Casutto resigned from all of his current roles with
the Company. In connection with Mr. Casutto’s resignation from the
Company, the Company and Mr. Casutto entered into a Separation and
Release Agreement (the “Separation Agreement”), dated May 1, 2020.
In lieu of any severance or other amounts under his employment
agreement, the Agreement provides that the Company will pay Mr.
Casutto an aggregate of $100,000 (the equivalent of three months
base salary), with payments of $16,666.66 made every two weeks,
beginning on May 15, 2020 and ending on July 17, 2020. The
Separation Agreement includes customary provisions contained in
agreements of this nature including, mutual non-disparagement and a
general release of any and all claims.
Outstanding
Equity Awards at Year End
As of
December 31, 2019, there were no outstanding equity awards made to
our named executive officers.
Director Compensation
Non-Employee Director Compensation Arrangements
Mr.
Bush and Mr. Desmond earn annual cash retainer fees of $140,000 and
$100,000, respectively, and are granted, on an annual basis,
restricted shares having a grant date fair value of $100,000 and
$150,000, respectively. Our non-employee directors also
receive an additional cash payment to compensate them for taxes
payable in respect of their restricted share grants, described
below.
All
cash retainers are prorated for partial years of service. We pay
annual cash retainer fees to our non-employee directors quarterly.
We also reimburse our non-employee directors for their travel and
out of pocket expenses. Members of the Board of Directors who also
are our employees do not receive any compensation for their service
as directors. Our directors do not receive Board meeting
fees.
For
2019, each of our non-employee directors received awards of
restricted common stock having a grant date value as described
above, which were vested in quarterly installments. The number of
shares for each quarterly vesting was determined by dividing the
dollar value above by the average closing price of MusclePharm’s
common stock for the fifteen trading days preceding the grant date.
For 2019, our non-employee directors also received additional cash
payments to compensate them for taxes payable in respect of their
restricted share awards.
2019 Director
Compensation.
The
table below sets forth the compensation paid to each non-employee
member of the Board of Directors during the fiscal year ended
December 31, 2019. Messrs. Drexler and Casutto received no
additional compensation for their service as a director, and,
consequently, are not included in this table. The compensation
received by Messrs. Drexler and Casutto in respect of their
employment is set forth in the “Summary Compensation Table”
above.
|
Name
|
Fees Earned
or Paid in Cash ($)
|
|
All
Other Compensation (2)
($)
|
|
|
John J.
Desmond
|
$100,000
|
$150,000
|
$91,800
|
$341,800
|
|
William
J. Bush
|
140,000
|
100,000
|
70,300
|
310,300
|
(1)
Stock awards
represent restricted stock units awarded on July 1, 2019. The grant
date fair value of stock awards was calculated in accordance with
FASB ASC Topic 718, disregarding the effects of estimated
forfeitures, based upon the closing price of a share of our common
stock on the date of grant. During 2019 Mr. Desmond was awarded
357,143 restricted stock units and Mr. Bush was awarded 238,095
restricted stock units.
(2)
Amounts under “All
Other Compensation” for 2019 include tax gross-up adjustments
related to vested restricted stock units.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth information with respect to the
beneficial ownership of shares of our common stock by (i) each
current director and (ii) each named executive officer, as of
August 18, 2020.
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
|
|
Named
Executive Officers:
|
|
|
|
Ryan
Drexler (3)
|
18,516,023
|
55.7%
|
|
Brian
Casutto
|
125,000
|
*
|
|
Non-Employee
Directors:
|
|
|
|
William
Bush
|
492,181
|
1.5%
|
|
John J.
Desmond
|
587,357
|
1.8%
|
|
Officers and
Directors as a Group (four persons):
|
19,720,561
|
59.3%
|
*
Represents less
than 1%.
|
(1)
|
This
column lists beneficial ownership of voting securities as
calculated under SEC rules which generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power or investment power with respect to those securities
and includes shares of our common stock issuable pursuant to the
exercise of stock options, warrants, preferred stock or other
securities that are immediately exercisable or convertible or
exercisable or convertible within 60 days of August 18, 2020.
Otherwise, except to the extent noted below, each director, named
executive officer or entity has sole voting and investment power
over the shares reported. Standard brokerage accounts may include
nonnegotiable provisions regarding set-offs or similar
rights.
|
|
(2)
|
Percent
of total voting power represents voting power with respect to
33,101,866 shares of common stock
outstanding as of August 18, 2020, plus 137,362 options to purchase
common shares as if these options were exercised (33,239,228 common
shares).
|
|
(3)
|
Ryan
Drexler, the Company’s Chief Executive Officer, President and
Chairman of the Board of Directors is the sole member of Consac,
LLC, and as such has voting and investment power over the
securities owned by the stockholder. These shares are also included
in the beneficial owners of more than five percent table
below.
|
Beneficial
Owners of More than Five Percent
The
following table shows the number of shares of our common stock, as
of August 18, 2020 held by persons known to us to beneficially own
more than five percent of our outstanding common
stock.
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
|
|
Wynnefield Capital
(3)
|
1,931,305
|
5.8%
|
|
Ryan
Drexler (4)
|
18,516,023
|
55.7%
|
|
Amerop
Holdings, Inc. (5)
|
3,648,355
|
11.0%
|
|
(1)
|
This
column lists beneficial ownership of voting securities as
calculated under SEC rules which generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power or investment power with respect to those securities
and includes shares of our common stock issuable pursuant to the
exercise of stock options, warrants, preferred stock or other
securities that are immediately exercisable or convertible or
exercisable or convertible within 60 days of August 18, 2020.
Otherwise, except to the extent noted below, each director, named
executive officer or entity has sole voting and investment power
over the shares reported. Standard brokerage accounts may include
nonnegotiable provisions regarding set-offs or similar
rights.
|
|
(2)
|
Percent
of total voting power represents voting power with respect to
33,101,866 shares of common stock
outstanding as of August 18, 2020. To compute the percentage of
outstanding shares of common stock held by each person and unless
otherwise noted, any share of common stock which such person has
the right to acquire pursuant to the exercise of stock options
exercisable within 60 days of August 18, 2020 or upon conversion of
convertible debt is deemed to be outstanding, but is not deemed to
be outstanding for the purpose of computing the percentage
ownership of any other person.
|
|
(3)
|
Joshua
Landes and Nelson Obus may be deemed to hold an indirect beneficial
interest in these shares, which are directly beneficially owned by
Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners
Small Cap Value, L.P. I, Wynnefield Small Cap Value Offshore Fund
and Wynnefield Capital, Inc. Profit Sharing Plan because they are
co-managing members of Wynnefield Capital Management, LLC and
principal executive officers of Wynnefield Capital, Inc. The
principal place of business for Wynnefield Capital is 450 Seventh
Avenue, Suite 509, New York, New York 10123. This information is
based on a Schedule 13D/A filed on August 22, 2019 with the SEC.
|
|
(4)
|
Ryan
Drexler, the Company’s Chief Executive Officer, President and
Chairman of the Board of Directors, and as such has voting and
investment power over the securities owned by the stockholder.
These shares are also included in the Named Executive Officers
portion of the Management Beneficial Ownership table above. Mr.
Drexler disclaims such beneficial ownership except to the extent of
his pecuniary interests therein.
|
|
(5)
|
Amerop Holdings, Inc. and Leonard P.
Wessell III may be deemed to hold an indirect beneficial interest
to 1,463,839 of these shares. White Winston Select Asset Funds,
LLC, Todd M. Enright, Mark Blundell, Donald Feagan, and Robert
Mahoney may be deemed to hold an indirect beneficial interest in
these shares. White Winston Select Asset Fund Series Fund MP-18,
LLC reported sole voting power with respect to 3,648,355 shares.
The address of White Winston Select Asset Funds Series Fund MP-18,
LLC is 265 Franklin St., Suite 1702, Boston, MA 02110. This
information is based on a Schedule 13D filed on November 8, 2019 with the SEC.
|
|
EQUITY
COMPENSATION PLAN INFORMATION
In
2015, we adopted the MusclePharm Corporation 2015 Incentive
Compensation Plan (the “2015 Plan”). The 2015 Plan was approved by
our stockholders. The following table sets forth the number and
weighted-average exercise price of securities to be issued upon
exercise of outstanding options, warrants and rights, and the
number of securities remaining available for future issuance under
all of our equity compensation plans, at December 31,
2019:
|
PLAN
CATEGORY
|
Number of securities
to be issued upon exercise of
outstanding options
|
Weighted average
exercise price of outstanding options
|
Number of securities remaining
available for future issuance under equity compensation
plans
|
|
Equity
compensation plans approved by security holders:
|
|
|
|
2015
Incentive Compensation Plan
|
171,703
|
$1.89
|
576,494
|
|
Total
|
171,703
|
$1.89
|
576,494
|
Item 13. Certain Relationships and
Related Transactions, and Director Independence
RELATED
PARTY TRANSACTIONS
Refinanced Convertible Note
On November 3, 2017, the Company entered into the
refinancing with Mr. Ryan Drexler, the Company’s Chairman of the
Board of Directors, Chief Executive Officer and President
(the “Refinancing”). As part of the
Refinancing, the Company issued to Mr. Drexler an amended and
restated convertible secured promissory note (the “Refinanced
Convertible Note”) in the original principal amount of $18,000,000,
which amended and restated (i) a convertible secured promissory
note dated as of December 7, 2015, amended as of January 14, 2017,
in the original principal amount of $6,000,000 with an interest
rate of 8% prior to the amendment and 10% following the amendment
(the “2015 Convertible Note”), (ii) a convertible secured
promissory note dated as of November 8, 2016, in the original
principal amount of $11,000,000 with an interest rate of 10% (the
“2016 Convertible Note”) , and (iii) a secured demand promissory
note dated as of July 27, 2017, in the original principal amount of
$1,000,000 with an interest rate of 15% (the “2017 Note”, and
together with the 2015 Convertible Note and the 2016 Convertible
Note, collectively, the “Prior Notes”). The due date of the 2015
Convertible Note and the 2016 Convertible Note was November 8,
2017. The 2017 Note was due on demand.
The
$18.0 million Refinanced Convertible Note bears interest at the
rate of 12% per annum. Interest payments are due on the last day of
each 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 note or by converting such interest amount into an
equivalent amount of the Company’s common stock. Any interest not
paid when due shall be capitalized and added to the principal
amount of the Refinanced 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 the interest under the Refinanced
Convertible Note were due on December 31, 2019, unless converted
earlier. Mr. Drexler may convert the outstanding principal and
accrued interest into shares of the Company’s common stock at a
conversion price of $1.11 per share at any time. The Company may
prepay the Refinanced Convertible Note by giving Mr. Drexler
between 15 and 60 days’ notice depending upon the specific
circumstances, subject to Mr. Drexler’s conversion
right.
The
Refinanced 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, interest will accrue at the rate of 14% per annum. In
addition, following an event of default, any conversion,
redemption, payment or prepayment of the Refinanced Convertible
Note will be at a premium of 105%. The Refinanced 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 Refinanced
Convertible Note. The Refinanced Convertible Note is subordinated
to certain other indebtedness of the Company.
As
part of the Refinancing, the Company and Mr. Drexler entered into a
restructuring agreement (the “Restructuring Agreement”) pursuant to
which the parties agreed to amend and restate the security
agreement, resulting in a Third Amended and Restated Security
Agreement (the “Amended Security Agreement”) in which the Prior
Notes were secured by all of the assets and properties of the
Company and its subsidiaries whether tangible or intangible.
Pursuant to the Restructuring Agreement, the Company agreed to pay,
on the effective date of the Refinancing, all outstanding interest
on the Prior Notes through November 8, 2017 and certain fees and
expenses incurred by Mr. Drexler in connection with the
Restructuring.
On
September 16, 2019, Mr. Ryan Drexler, the Chief Executive Officer,
President and Chairman of the Board of Directors of MusclePharm
Corporation, a Nevada corporation (the “Company”), delivered a
notice to the Company and its independent directors of his election
to convert, effective as of September 16, 2019 (the “Notice Date”),
$18,000,000 of the amount outstanding under that certain Amended
and Restated Convertible Secured Promissory Note, dated as of
November 8, 2017 (the “Note”), issued by the Company to Mr.
Drexler, into shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock”), at a conversion price of
$1.11 per share, pursuant to the terms and conditions of the Note
(the “Partial Conversion”). As of the Notice Date, the total amount
outstanding under the Note (including principal and accrued and
unpaid interest) was equal to $19,262,910. Pursuant to the terms of
the Note, the Company instructed the transfer agent for its shares
to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its
Common Stock in respect of the Partial Conversion.
The
outstanding principal and the interest, due on December 31, 2019,
were refinanced under a new agreement on July 1, 2020. See
additional information in “Note 17. Subsequent
Events.”
For
the years ended December 31, 2019 and 2018, interest expense,
including the amortization of debt discount, related to the related
party convertible secured promissory notes was $1.7 million and
$2.2 million, respectively. During the years ended December 31,
2019 and 2018, $0.8 million and $1.9 million, respectively, in
interest was paid in cash to Mr. Drexler.
Revolving Note
On
October 4, 2019, the Company entered into a secured revolving
promissory note (the “Revolving Note”) with Mr. 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%
annually.
The
use of funds will be solely for the purchase of whey protein to be
used in the manufacturing of MusclePharm products. The Company may
prepay the Revolving Note by giving Mr. Drexler one days’ written
notice.
The Revolving 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, Mr. Drexler is entitled to accelerate the entire
indebtedness under the Revolving Note. The Revolving 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. The Revolving Note is subordinated to
certain other indebtedness of the Company held
by Crossroads.
In connection with the Revolving Note, the Company
and Mr. Drexler entered into a security agreement dated October 4,
2019 pursuant to which the Revolving Note is secured by all of the
assets and properties of the Company and its subsidiaries whether
tangible or intangible. As of December 31, 2019, the outstanding
balance on the revolving note was $1.2 million. Both the
outstanding principal and all accrued interest, which became due on
March 31, 2020, were refinanced under a new agreement on July 1,
2020. The revolving note is included in “Line of credit” in the
consolidated balance sheets. See additional information in “Note
17. Subsequent Events.”
Note Payable
The
Company entered into a collateral
receipt and security agreement with Mr. Drexler, dated December 27,
2019 pursuant to which Mr. Drexler agreed to post bond relating to
the judgment ruled on the ThermoLife case, pending the appeal. The
amount paid by Mr. Drexler on behalf of the Company, including
fees, was $0.25 million. The amount, which was outstanding as of
December 31, 2019, was refinanced under a new agreement on
July 1, 2020. The note payable is included in “Convertible note
with a related party, net of discount” in the consolidated balance
sheets. See additional information in “Note 17. Subsequent
Events.”
Review,
Approval or Ratification of Transactions with Related
Parties
We have
a written related person transactions policy that our executive
officers, directors, nominees for election as a director,
beneficial owners of more than 5% of our common stock, and any
members of the immediate family of and any entity affiliated with
any of the foregoing persons, are not permitted to enter into a
material related person transaction with us without the review and
approval of our Audit Committee, or a committee composed solely of
independent directors in the event it is inappropriate for our
Audit Committee to review such transaction due to a conflict of
interest. The policy provides that any request for us to enter into
a transaction with an executive officer, director, nominee for
election as a director, beneficial owner of more than 5% of our
common stock or with any of their immediate family members or
affiliates, in which the amount involved exceeds $120,000 will be
presented to our Audit Committee for review, consideration and
approval.
In
approving or rejecting any such proposal, we expect that our Audit
Committee will consider the relevant facts and circumstances
available and deemed relevant to the Audit Committee, including,
but not limited to, whether the transaction is on terms no less
favorable than terms generally available to an unaffiliated third
party under the same or similar circumstances and the extent of the
related persons interest in the transaction.
DIRECTOR
INDEPENDENCE
The
rules of NASDAQ generally require that a majority of the members of
a listed company’s Board of Directors be independent. In addition,
the listing rules generally require that, subject to specified
exceptions, each member of a listed company’s audit, compensation,
and governance committees be independent. Although we are an
over-the-counter listed company, we have nevertheless opted under
our Corporate Governance Guidelines to comply with certain NASDAQ
corporate governance rules requiring director independence. The
Board of Directors has determined that all of the Company’s
directors, other than Mr. Drexler, are each independent
directors as such term is defined in NASDAQ Marketplace Rule
5605(a)(2). Additionally, we have Compensation, Nominating and
Corporate Governance, and Audit committees comprised solely of
independent directors.
Audit
Committee members must also satisfy the independence criteria set
forth in Rule 10A-3 under the Exchange Act. In order to be
considered independent for purposes of Rule 10A-3, a member of an
audit committee of a listed company may not, other than in his or
her capacity as a member of the audit committee, the Board of
Directors, or any other board committee: accept, directly or
indirectly, any consulting, advisory, or other compensatory fee
from the listed company or any of its subsidiaries; or be an
affiliated person of the listed company or any of its
subsidiaries.
Our
Board of Directors has determined that none of our non-employee
directors has a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director and that each of these directors is independent as that
term is defined under the rules of NASDAQ. Our Board of Directors
has also determined that directors who comprise our Audit
Committee, Compensation Committee, and our Nominating and Corporate
Governance Committee satisfy the independence standards for those
committees established by applicable SEC rules, NASDAQ rules and
applicable rules of the Internal Revenue Code of 1986, as
amended.
Item 14. Principal Accountant Fees
and Services
Fees
Paid to Independent Registered Public Accounting Firm(1)
The
following table shows fees and expenses that we paid (or accrued)
for professional services rendered by SingerLewak LLP for the years
ended December 31, 2019 and 2018:
|
|
|
|
|
Audit
fees (1)
|
$438,000
|
$559,000
|
|
(1)
|
Represents the
aggregate fees billed for the audit of the Company’s financial
statements.
|
Audit
Committee Pre-Approval Policies
Before
an Independent Registered Public Accounting Firm is engaged by us
or our subsidiaries to render audit or non-audit services, the
Audit Committee shall pre-approve the engagement. Audit Committee
pre-approval of audit and non-audit services will not be required
if the engagement for the services is entered into pursuant to
pre-approval policies and procedures established by the Audit
Committee regarding our engagement of the Independent Registered
Public Accounting Firm, provided the policies and procedures are
detailed as to the particular service, the Audit Committee is
informed of each service provided and such policies and procedures
do not include delegation of the Audit Committees responsibilities
under the Exchange Act to our management. The Audit Committee may
delegate to one or more designated members of the Audit Committee
the authority to grant pre-approvals, provided such approvals are
presented to the Audit Committee at a subsequent meeting. If the
Audit Committee elects to establish pre-approval policies and
procedures regarding non-audit services, the Audit Committee must
be informed of each non-audit service provided by the Independent
Registered Public Accounting Firm.
Audit
Committee pre-approval of non-audit services (other than review and
attest services) also will not be required if such services fall
within available exceptions established by the SEC. All non-audit
services provided by the Company’s independent auditors during
fiscal years 2019 and 2018, were pre-approved by the Audit
Committee in accordance with the pre-approval policy described
above.
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
|
A.
|
Financial
Statements and Financial Statement Schedules.
|
The
list of the Consolidated Financial Statements and report of the
independent registered public accounting firm set forth on the
Index to Financial Statements on Page 54 of this Form 10-K and are
required by this Item are included in Part II, Item 8.
|
|
2.
|
Financial Statement
Schedules.
|
No
financial statement schedules are applicable to this
filing.
The
list of Exhibits required by Item 601 of Regulation S-K is provided
in the Exhibit Index on pages 56 to 59 of this Form 10-K, which is
incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not
applicable.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
MUSCLEPHARM
CORPORATION (the “Registrant”)
|
|
|
|
|
|
|
|
Dated: August 24,
2020
|
By:
|
/s/
Allen
Sciarillo
|
|
|
|
|
Chief Financial
Officer
|
|
|
|
|
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Ryan
Drexler
|
|
Chief Executive
Officer, President and Chairman of the Board of
Directors
|
|
August 24,
2020
|
|
Ryan
Drexler
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Allen
Sciarillo
|
|
Chief Financial
Officer |
|
August 24,
2020
|
|
Allen
Sciarillo
|
|
(Principal
Financial Officer and Principal Accounting
Officer)
|
|
|
|
|
|
|
|
|
|
/s/
John J.
Desmond
|
|
Director
|
|
August 24,
2020
|
|
John J.
Desmond
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William
Bush
|
|
Director
|
|
August 24,
2020
|
|
William
Bush
|
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS
|
Financial
Statements:
|
|
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-7
|
|
|
F-8
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Stockholders and the Board of Directors of MusclePharm
Corporation
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of
MusclePharm Corporation and its subsidiaries (collectively, the
Company) as of December 31, 2019 and 2018, the related consolidated
statements of operations, comprehensive loss, stockholders’ deficit
and cash flows for the years then ended, and the related notes to
the consolidated financial statements (collectively, the financial
statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Going Concern Matter
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring
losses from operations, accumulated deficit and its total
liabilities exceed its total assets. This raises substantial doubt
about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters also are described in
Note 1. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Change in Accounting Method Related to Leases and
Revenue
As
discussed in Notes 2 and 6 to the financial statements, the Company
has changed its method of accounting for leases as a result of the
adoption of Accounting Standards Codification (“ASC”) 842,
“Leases,” effective January 1, 2019 under the modified
retrospective approach.
As
discussed in Note 2 to the financial statements, the Company has
changed its method of accounting for revenue from contracts with
customers as a result of the adoption of ASC 606, “Revenue from
Contracts with Customers,” effective January 1, 2018 under the
modified retrospective approach.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
SingerLewak LLP
We
have served as the Company’s auditor since 2019.
Los
Angeles, California
August
24, 2020
Consolidated
Balance Sheets
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$1,532
|
$2,317
|
|
Accounts
receivable, net
|
4,807
|
6,273
|
|
Inventory
|
4,720
|
13,661
|
|
Prepaid
expenses and other current assets
|
1,104
|
576
|
|
Total
current assets
|
12,163
|
22,827
|
|
Property and
equipment, net
|
216
|
513
|
|
Intangible assets,
net
|
676
|
997
|
|
Operating lease
right-of-use assets
|
1,175
|
—
|
|
Other
assets
|
310
|
264
|
|
TOTAL
ASSETS
|
$14,540
|
$24,601
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current
liabilities:
|
|
|
|
Obligation under
secured borrowing arrangement
|
$4,443
|
$1,285
|
|
Line of
credit
|
4,204
|
1,500
|
|
Operating lease
liability, current
|
624
|
—
|
|
Convertible note
with a related party, net of discount
|
1,287
|
17,940
|
|
Accounts
payable
|
26,178
|
24,797
|
|
Accrued
and other liabilities
|
4,805
|
6,543
|
|
Accrued
restructuring charges, current
|
—
|
493
|
|
Total
current liabilities
|
41,541
|
52,558
|
|
Accrued
restructuring charges, long-term
|
—
|
30
|
|
Operating lease
liability, long-term
|
723
|
—
|
|
Other
long-term liabilities
|
228
|
208
|
|
Total
liabilities
|
42,492
|
52,796
|
|
Commitments and
contingencies (Note 9)
|
|
|
|
Stockholders'
deficit:
|
|
|
|
Common
stock, par value of $0.001 per share; 100,000,000 shares
authorized, 33,876,033 and 16,190,288 shares issued as of December
31, 2019 and December 31, 2018, respectively; 33,000,412 and
15,314,667 shares outstanding as of December 31, 2019 and December
31, 2018, respectively
|
31
|
15
|
|
Additional paid-in
capital
|
177,914
|
158,944
|
|
Treasury stock, at
cost; 875,621 shares
|
(10,039)
|
(10,039)
|
|
Accumulated other
comprehensive loss
|
—
|
(238)
|
|
Accumulated
deficit
|
(195,858)
|
(176,877)
|
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
(27,952)
|
(28,195)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$14,540
|
$24,601
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Consolidated
Statements of Operations
(In thousands, except share and per share data)
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Revenue,
net
|
$79,667
|
$88,113
|
|
Cost
of revenue
|
70,979
|
69,719
|
|
Gross
profit
|
8,688
|
18,394
|
|
Operating
expenses:
|
|
|
|
Advertising
and promotion
|
2,487
|
2,939
|
|
Salaries
and benefits
|
7,910
|
8,328
|
|
Selling,
general and administrative
|
8,899
|
11,610
|
|
Research
and development
|
893
|
751
|
|
Professional
fees
|
3,606
|
2,598
|
|
Total
operating expenses
|
23,795
|
26,226
|
|
Loss
from operations
|
(15,107)
|
(7,832)
|
|
Other
(expense) income:
|
|
|
|
(Loss)
gain on settlement of obligations
|
(125)
|
1,074
|
|
Interest
and other expense, net
|
(3,609)
|
(3,897)
|
|
Loss
before provision for income taxes
|
(18,841)
|
(10,655)
|
|
Provision
for income taxes
|
86
|
100
|
|
Net
loss
|
$(18,927)
|
$(10,755)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$(0.92)
|
$(0.72)
|
|
|
|
|
|
Weighted
average shares used to compute net loss per share, basic and
diluted
|
20,475,313
|
15,023,872
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Consolidated
Statements of Comprehensive Loss
(In thousands)
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
Net
loss
|
$(18,927)
|
$(10,755)
|
|
Other
comprehensive loss:
|
|
|
|
Change
in foreign currency translation adjustment
|
(184)
|
(88)
|
|
Comprehensive
loss
|
$(19,111)
|
$(10,843)
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Consolidated
Statements of Changes in Stockholders’ Deficit
(In thousands, except share data)
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Balance—December
31, 2017 (as restated)
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14,983,554
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$14
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$158,396
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$(10,039)
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$(150)
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$(165,069)
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$(16,848)
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Adjustment
due to adoption of ASC 606 (Note 2)
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—
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—
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—
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—
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—
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(1,053)
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(1,053)
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Balance—December
31, 2017 (as restated)
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14,983,554
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$14
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$158,396
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$(10,039)
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$(150)
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$(166,122)
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$(17,901)
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Stock-based
compensation for issuance and amortization of restricted stock
awards to employees, executives and directors
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250,000
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1
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479
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—
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—
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—
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480
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Stock-based
compensation for issuance of stock options to an executive and a
director
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—
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—
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16
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—
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—
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—
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16
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Issuance
of shares of common stock related to the payment of interest on a
related party note
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81,113
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—
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53
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—
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—
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— |